809 F.2d 90 (1st Cir. 1986), 86-1211, Turner v. Johnson & Johnson

Docket Nº:86-1211, 86-1212.
Citation:809 F.2d 90
Party Name:Robert B. TURNER, et al., Plaintiffs, Appellants, v. JOHNSON & JOHNSON, et al., Defendants, Appellees. Robert B. TURNER, et al., Plaintiffs, Appellees, v. JOHNSON & JOHNSON, et al., Defendants, Appellees. Johnson & Johnson and Charles M. Hartman, Defendants, Appellants.
Case Date:December 31, 1986
Court:United States Courts of Appeals, Court of Appeals for the First Circuit
 
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809 F.2d 90 (1st Cir. 1986)

Robert B. TURNER, et al., Plaintiffs, Appellants,

v.

JOHNSON & JOHNSON, et al., Defendants, Appellees.

Robert B. TURNER, et al., Plaintiffs, Appellees,

v.

JOHNSON & JOHNSON, et al., Defendants, Appellees.

Johnson & Johnson and Charles M. Hartman, Defendants, Appellants.

Nos. 86-1211, 86-1212.

United States Court of Appeals, First Circuit

December 31, 1986

Argued Sept. 9, 1986.

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[Copyrighted Material Omitted]

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Joseph M. Alioto, San Francisco, Cal., and Daniel R. Shulman with whom Gray, Plant, Mooty, Mooty & Bennett, Minneapolis, Minn., Alioto & Alioto, San Francisco, Cal., Jerry Cohen, Cohen & Burg, Boston, Mass., and Joseph S. Iandiorio, Waltham, Mass., were on briefs for Robert B. Turner, et al.

Frederick T. Davis with whom Lynn P. Freedman, Howard S. Schrader, New York City, Riemer & Braunstein, Boston, Mass., and Patterson, Belknap, Webb & Tyler, New York City, were on brief for Johnson & Johnson and Charles M. Hartman.

Before COFFIN, Circuit Judge, WISDOM [*] and ALDRICH, Senior Circuit Judges.

COFFIN, Circuit Judge.

This case arises from defendant Johnson & Johnson's purchase of an electronic thermometer business from plaintiffs. A jury awarded plaintiffs $4 million on their claim of common law fraud arising from the sale, but the district court ruled or found for Johnson & Johnson and several of its executives on all other claims, including one for statutory fraud. Each side appeals the decisions adverse to them. We conclude that defendants are entitled to prevail on all but one aspect of the appeals, and as to this we remand for a new trial. 1

I.

The essence of plaintiffs' claim is that they were induced into selling their thermometer business at far below its value by various misrepresentations and omissions made by Johnson & Johnson during the negotiations process. Plaintiffs claim that Johnson & Johnson defrauded them in order to eliminate plaintiffs' thermometer as a competitor to another thermometer in which Johnson & Johnson had an interest. We begin by examining in some detail the facts surrounding the transaction between the two parties.

Johnson & Johnson Acquires AMEC.

Plaintiffs are the three principals of American Medical Electronics Corporation (AMEC). Robert Turner, an inventor, founded AMEC in 1971 to manufacture and distribute an electronic thermometer called Meditemp. 2 Gordon Ramsey was AMEC's principal attorney, a corporate director, a shareholder and, at times, an officer. Charles Johnston is an investor who, in 1975, held a majority of AMEC's stock.

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These three men represented AMEC in its negotiations with Johnson & Johnson.

Johnson & Johnson, which sells a variety of disposable products to hospitals and doctors' offices through its patient care division, learned of Meditemp in September 1975 and explored the possibility of acquiring an interest in the product. By that time, AMEC was deeply in debt and unable to pay its bills, although it had a backlog of orders for the Meditemp thermometer. The parties engaged in extensive negotiations from January through June 1976. Their contact included face-to-face meetings, telephone calls, memos, and the exchange of several versions of a contract. A final agreement was signed on June 17, 1976.

The agreement provided plaintiffs with a lump sum cash payment of about $1 million, guaranteed minimum royalties of $300,000 paid out in $75,000 installments, and, if Johnson & Johnson marketed Meditemp, additional royalties on the sale of probe covers used with the thermometer. Johnson & Johnson also had the option, within a certain period of time, of reassigning the original assets to AMEC in lieu of the remaining royalty payments. Section 12.1 of the contract specified that Johnson & Johnson had no obligation to market Meditemp. That section stated, in part:

J & J ... makes no representation or warranty that it will market a thermometer hereunder, or, if J & J does market a thermometer hereunder or ... that such product will be the exclusive means by which J & J attempts to enter or participate in the temperature-taking field. J & J shall not be obligated to use its best efforts in marketing a thermometer hereunder. All business decisions, including without limitation the design, manufacture, sale, price and promotion of a product or products marketed under this Agreement shall be within the sole discretion of J & J.

Section 12.2 stated that the company was not actively pursuing any other invention in the electronic thermometer field with two exceptions: the patient care division was attempting to develop a disposable probe for electronic thermometers and a subsidiary company was pursuing another electronic thermometer.

Johnson & Johnson began marketing Meditemp in mid-1978. In the fall of 1979, the patient care division decided to withdraw from the sale of Meditemp. Plaintiffs were notified and discussions ensued about the future of the Meditemp business, including whether plaintiffs or a third party would take it over. No agreement was reached, and in August 1980, Johnson & Johnson shut down the Meditemp plant despite demands from plaintiffs that Johnson & Johnson not do anything to interfere with Meditemp as a "going business." Johnson & Johnson assigned the original AMEC patents to plaintiffs, but withheld the physical assets as a setoff against the company's counterclaims in this lawsuit.

The Survalent Thermometer.

In 1974, a Johnson & Johnson subsidiary, Arbrook, Inc., had signed an option agreement for another electronic thermometer, called Survalent. Survalent is a large unit that uses a rechargeable battery and functions with a separate recharging unit. It is designed to be worn around the neck on a strap, allowing the numbers to be read easily by an observer. In these respects, Survalent resembles the IVAC thermometer, the leading electronic thermometer on the market. In contrast, Meditemp is a small, hand-held unit. Although Meditemp can be used with a neck strap, the digital display cannot be read by an observer while the unit is hanging around the neck because the display faces forward rather than up. Meditemp uses a disposable battery and has no separate recharging unit.

A similarity between the two thermometers emphasized by plaintiffs is the instruments' ability to allow nurses to monitor pulse rates while taking temperatures. This feature is possible because the digital display counts seconds during the 30-second interval in which the thermometer measures temperature.

Arbrook purchased Survalent in 1977 and began national distribution in January

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1979, six months after Johnson & Johnson launched Meditemp. The Survalent project was dropped later in 1979.

The Patent Interference Proceeding.

In February 1976, a Johnson & Johnson patent attorney noticed an apparent overlap between one claim of the Meditemp patent and a claim in the Survalent patent application; the overlap related to the pulse-counting feature of the thermometers. At that time, the Meditemp patent had been issued but the Survalent patent was still in application form. The Johnson & Johnson attorney brought the overlap to the attention of Survalent's attorneys, and Survalent's owners subsequently requested a patent interference, an administrative proceeding in which the Patent Office would determine who invented the pulse-counting function first and thus who was entitled to hold a patent on it.

By the time the patent proceeding began, in March 1977, Johnson & Johnson owned both patents. The company hired separate teams of lawyers to litigate each side in the interference. Although the Survalent application had been filed first, the Meditemp patent was awarded priority.

The Alleged Fraud.

Although plaintiffs raise a number of alleged fraudulent statements and omissions in their brief to us, we confine our consideration to the four specific statements and the series of nondisclosures on which the case went to the jury. 3 These deceptive practices allegedly took place during negotiations leading up to the contract signing, and on the day of the closing.

These statements and nondisclosures are:

(1) That Johnson & Johnson would "(a) promote the sale of the Meditemp thermometer, (b) offer it to customers, and (c) educate health care professionals on how to use it."

(2) That Johnson & Johnson had no interest in any other thermometer, with the exception of Arbrook's interest in an "IVAC-type" thermometer.

(3) That the Survalent thermometer was an "IVAC-type" thermometer.

(4) That Johnson & Johnson corporate policy prevented it from paying royalties on foreign sales.

(5) That Johnson & Johnson failed to tell plaintiffs that Survalent had a pulse-counting feature, that Survalent infringed part of the Meditemp patent, that Johnson & Johnson intended to "manipulate the outcome of a patent proceeding which it created," and that Johnson & Johnson "intended to suppress Meditemp so that it wouldn't be competition for Survalent."

Procedural Background.

Plaintiffs brought suit in federal court in Massachusetts in November 1979, alleging fraud, breach of contract, deceptive practices under Mass.Gen.Laws Ann. ch. 93A, and violation of federal antitrust law. The court dismissed the antitrust claim for lack of standing. A trial was held on the other claims, and the court directed a verdict for defendants on the contract claim at the conclusion of plaintiffs' case. The court, which heard plaintiffs' claim under chapter 93A, also found in favor of defendants on that issue. The jury returned a verdict for plaintiffs on the common law fraud claim, and awarded $4 million in damages. Although the court originally awarded prejudgment interest to...

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