Johnson & Johnson v. Coopervision, Inc.

• Decision Date: 17 August 1989
• Docket Number: Civ. A. No. 88-715-JLL.
• Citation: 720 F. Supp. 1116
• Court: U.S. District Court — District of Delaware
• Parties: JOHNSON & JOHNSON, Plaintiff, v. COOPERVISION, INC. and the Cooper Companies, Inc., Defendants.

720 F. Supp. 1116

JOHNSON & JOHNSON, Plaintiff, v. COOPERVISION, INC. and the Cooper Companies, Inc., Defendants.

Civ. A. No. 88-715-JLL.

United States District Court, D. Delaware.

August 17, 1989.

William Prickett and Elizabeth M. McGeever of Prickett, Jones, Elliott, Kristol & Schnee, Wilmington, Del., and J. Nelson Happy and Richard Savage of Patterson, Belknap, Webb & Tyler, New York City, of counsel, for plaintiff.

Henry N. Herndon, Jr. of Morris, James, Hitchens & Williams, Wilmington, Del., and Edward V. Anderson, Patricia H. McCall and Barbara R. Shufro of Pillsbury, Madison & Sutro, San Jose, Cal., of counsel, for defendants.

MEMORANDUM OPINION

LATCHUM, Senior District Judge.

I. INTRODUCTION

Plaintiff Johnson & Johnson brought this diversity action against defendants CooperVision, Inc. and The Cooper Companies, Inc., alleging fraud and breach of contract. (See Docket Item "D.I." 1.) The dispute arises out of a Purchase Agreement executed on December 31, 1986. (See D.I. 8, Ex. A; D.I. 12, Ex. A.) Under the terms of the Purchase Agreement, Johnson & Johnson (as purchaser) acquired the ophthalmic pharmaceutical business of CooperVision, Inc. and CooperVision Pharmaceuticals, Inc. (sellers).

Plaintiff alleges that defendant The Cooper Companies, Inc., is the corporate successor of CooperVision, Inc. and CooperVision Pharmaceuticals, Inc. (D.I. 1 at ¶ 2; D.I. 12 at ¶ 2.) Throughout this Opinion the various Cooper entities—namely, CooperVision, Inc., CooperVision Pharmaceuticals, Inc., and The Cooper Companies, Inc. —shall be referred to collectively as "Cooper." All three of the Cooper entities are (or were) Delaware corporations. (D.I. 1 at ¶ 2; D.I. 8, Ex. A at 1.) Johnson & Johnson is a New Jersey corporation. (D.I. 1 at ¶ 1; D.I. 8, Ex. A at 1.)

Presently before the Court are certain motions filed by Cooper. (See D.I. 4.) First, Cooper moves to dismiss this action pursuant to Rule 12(b)(7), Fed.R.Civ.P., because of Plaintiff's failure to join Iolab, Inc. ("Iolab"), a Johnson & Johnson subsidiary which Cooper maintains is an indispensable party under Rule 19(b). Similarly, Cooper requests dismissal claiming that this action was not brought in the name of the real party in interest: Iolab. See Rule 17(a), Fed.R.Civ.P. Finally Cooper moves, in the alternative, that this case be transferred to the United States District Court for the Northern District of California pursuant to 28 U.S.C. § 1404(a).

For the reasons set forth in this Opinion, the Court concludes that Iolab is an indispensable party within the meaning of Rule 19(b). This action cannot, "in equity and good conscience," proceed in Iolab's absence. Iolab is a Delaware corporation (D.I. 11 at 5; D.I. 12 at ¶ 8; D.I. 12, Ex. D at 1), the joinder of which would destroy the Court's subject matter jurisdiction, which is based solely upon diversity of citizenship. (See D.I. 1 at ¶ 3; 28 U.S.C. § 1332(a)(1).) Accordingly, Cooper's motion to dismiss for failure to join an indispensable party will be granted. The Court need not and does not reach Cooper's alternative arguments.

II. BACKGROUND FACTS

As stated previously, this dispute grew out of the sale of Cooper's pharmaceutical business to Johnson & Johnson. Among the assets conveyed by Cooper as part of the pharmaceutical business were its trade accounts receivable. (D.I. 8, Ex. A, § 2(b)(ix) at p. 9.) The gist of Johnson & Johnson's Complaint is that Cooper, in the year preceding its sale of the business, entered into numerous promotional sales deals pursuant to which customers were sold large quantities of pharmaceutical products on generous price and refund terms outside of the ordinary course of business. (D.I. 1 at ¶¶ 10-12; D.I. 11 at 4.) Johnson & Johnson alleges that Cooper intentionally concealed the existence of these promotional deals. (D.I. 1 at ¶¶ 23-27; D.I. 11 at 4.) According to Johnson & Johnson, Cooper's alleged concealment was both fraudulent¹ and in breach of the terms of the Purchase Agreement.²

Moreover, Johnson & Johnson avers that Cooper failed to account properly for the promotional sales deals, thereby breaching the Purchase Agreement.³ (D.I. 1 at ¶¶ 6-8, 10-19, 30-32; D.I. 11 at 4-5.) Such failure caused Cooper's 1986 financial statements—which were furnished to, and allegedly relied upon by Johnson & Johnson—to overstate sales, inflate trade receivables, and understate the liability to provide cash refunds to customers.⁴ The misstated financial statements, in turn, allegedly induced Johnson & Johnson to pay more for the pharmaceutical business than it otherwise would have. (D.I. 11 at 5.) Johnson & Johnson seeks damages, measured as the amount by which cash refunds paid to customers (following Johnson & Johnson's acquisition of the business but relating to pre-acquisition promotional sales of pharmaceutical products) exceeded the balance in the reserve account. (D.I. 1 at ¶¶ 15, 20-21, 26-29; D.I. 11 at 6-7.) More simply put, plaintiff seeks to recover the amount by which Cooper understated its refund liability.⁵ (D.I. 11 at 5.) Johnson & Johnson calculated its damages to be $2.61 million as of the commencement of this lawsuit. (D.I. 1 at ¶¶ 15, 21, 35.) Additionally, it requests an award of punitive damages because of the alleged fraud. (D.I. 1 at 10; D.I. 22 at 16.)

While the only signatories to the Purchase Agreement are Johnson & Johnson and Cooper, another entity, Johnson & Johnson's Iolab subsidiary, is inextricably linked to the transaction. First and foremost, Iolab's close relationship to the transaction is apparent from the fact that many of the assets and liabilities of the pharmaceutical business were transferred to it. (D.I. 7 at 3-4; D.I. 11 at 6, 12; D.I. 12 at ¶ 9.)

The Purchase Agreement explicitly authorized Johnson & Johnson to assign its rights thereunder to one or more of its subsidiaries.⁶ This in fact was done, as Johnson & Johnson assigned some of its rights under the Purchase Agreement to Iolab. (D.I. 8, Ex. B at 1; D.I. 11 at 5-6.) Certain of the assets and liabilities of the pharmaceutical business were transferred to Johnson & Johnson (including the goodwill of the business), with the balance transferred to Iolab. (D.I. 11 at 5-6; D.I. 12 at ¶ 9.)

Under the heading "Acquired Assets," the Purchase Agreement sets forth those assets transferred by Cooper which comprise the pharmaceutical business. (D.I. 8, Ex. A, § 2(b) at pp. 4-10.) The allocation of those assets as between Johnson & Johnson and Iolab was accomplished by two related instruments. The first instrument, which was executed by Cooper and Johnson & Johnson and is entitled "Bill of Sale, Assignment and Assumption Agreement," shall be referred to herein as the "Johnson & Johnson Bill of Sale." (See D.I. 8, Ex. C.) It lists those assets of the pharmaceutical business transferred to Johnson & Johnson. (Id. at pp. 2-3.)

The second instrument was executed between Cooper and Iolab. It too is entitled "Bill of Sale, Assignment and Assumption Agreement," and will be referred to herein as the "Iolab Bill of Sale." (See D.I. 8, Ex. B.) It details those assets of the pharmaceutical business conveyed to Iolab. (Id. at pp. 2-7.) Most notable for present purposes, the Iolab Bill of Sale transferred to Iolab "all trade accounts receivable in existence as of the Closing arising out of the sale of Products by, or for the account of, Cooper in the United States." (Id. § 2(ix) at p. 7.) As indicated above, it is the alleged overstatement of these trade accounts receivable, and the concomitant understatement of the obligation to provide refunds to customers, which lies at the root of this lawsuit. Not only was Iolab the entity which received the accounts receivable of Cooper's pharmaceutical business, it was also Iolab which assumed the obligation to provide customer refunds, and which indeed paid the $2.61 million in alleged excess refunds. (See D.I. 11 at 5-6.)

It is noteworthy that the Johnson & Johnson Bill of Sale and the Iolab Bill of Sale were executed concurrently on December 31, 1986—the same date as the closing of the Purchase Agreement. Both the Johnson & Johnson Bill of Sale and the Iolab Bill of Sale specifically refer to one another (D.I. 8, Ex. B at 7-8, 14; D.I. 8, Ex. C at 3-4, 10), as well as to the Purchase Agreement. (D.I. 8, Ex. B at 1; D.I. 8, Ex. C at 1.) From all of the foregoing, it is patently obvious that the Purchase Agreement, the Johnson & Johnson Bill of Sale, and the Iolab Bill of Sale were not prepared in isolation. All three instruments are related components of a larger transaction.

Aside from the fact that the very same assets and liabilities which underlie this lawsuit were conveyed to Iolab, there are several other manifestations of Iolab's close involvement with this transaction. First, Iolab was represented in the negotiations which culminated in the sale of Cooper's pharmaceutical business. Plaintiff's own papers identify Mr. Terry Johnson, an Iolab officer, as one of the principal negotiators of the transaction. (See D.I. 1 at ¶ 22; D.I. 11 at 7; D.I. 12 at ¶ 6.) Second, of the $260 million total price tag for Cooper's pharmaceutical business, $70 million was paid directly to Cooper by Iolab. (D.I. 11 at 5; D.I. 12 at ¶ 8.) Finally, to the extent customer refunds paid by Iolab were excessive, Cooper maintains that this resulted not from any understatement of liabilities on the part of Cooper, but rather, from Iolab's mismanagement of the pharmaceutical business subsequent to its acquisition. (D.I. 17 at 1, 5, 9, 11; D.I. 22 at 4.) Evidence of Iolab's operation of the business thus may play a pivotal role in ultimately resolving this dispute on its merits.

Johnson & Johnson commenced this action on December 28, 1988, by filing its Complaint against Cooper in this Court. (See D.I. 1.) Plaintiff asserts subject matter jurisdiction on the basis of the parties' diversity of citizenship. Iolab was not named as a party plaintiff, nor could it have...