Cicel (Beijing) Sci. & Tech. Co. v. Misonix, Inc.

• Decision Date: 20 January 2022
• Docket Number: 17-CV-1642 (GRB)
• Parties: CICEL (BEIJING) SCIENCE & TECHNOLOGY CO., LTD., Plaintiff, v. MISONIX, INC., Defendant.
• Court: U.S. District Court — Eastern District of New York

581 F.Supp.3d 454

CICEL (BEIJING) SCIENCE & TECHNOLOGY CO., LTD., Plaintiff,

v.MISONIX, INC., Defendant.

17-CV-1642 (GRB)

United States District Court, E.D. New York.

Signed January 20, 2022

Jennifer L. Achilles, Inbal Garrity, Nicholas Robert Tambone, Blank Rome LLP, Alejo R. Cabranes, Jonathan P. Gordon, Reed Smith LLP, New York, NY, for Plaintiff.

Alexander S. Zolan, Joseph G. Petrosinelli, Pro Hac Vice, Simon Latcovich, Pro Hac Vice, Tian Huang, Pro Hac Vice, Williams & Connolly LLP, Washington, DC, for Defendant.

MEMORANDUM & ORDER

GARY R. BROWN, United States District Judge:

Some things are just easy.

Notwithstanding four years of hard-fought litigation, numerous court rulings, hundreds of filings encompassing thousands of pages, and a summary judgment motion that fills a bookshelf, this case turns on three questions that, properly phrased, almost answer themselves. First, upon discovering that Cicel, its main distributor in China, was likely engaged in bribery of government employees in connection with the sale of its products, did Misonix have to continue its relationship with Cicel? Second, did Misonix defame Cicel by accurately disclosing this information in its SEC filings? Third, did Misonix have the right to secretly purloin Cicel's customer lists and pricing information?

The answer is, uniformly, no. As such, Misonix's motion is largely granted. The only vestige of this overly litigated dispute is Cicel's trade secret claim, leaving one interesting question that must be answered by the parties: is the game worth the candle?

DISCUSSION

Misonix's motion for summary judgment is decided under the oft-repeated and well understood standard for review of such matters, as discussed in Bartels v. Inc. Vill. of Lloyd Harbor , 97 F. Supp. 3d 198, 211 (E.D.N.Y. 2015), aff'd sub nom. Bartels v. Schwarz , 643 F. App'x 54 (2d Cir. 2016), which discussion is incorporated by reference herein. The procedural and factual background set forth in Judge Spatt's October 7, 2017 Memorandum and Order (dismissing all counts other than the breach of contract count), Judge Locke's April 11, 2019 Memorandum and Order (granting a protective order in connection with an internal investigation)¹ and Judge Spatt's January 23, 2020 Memorandum and Order is referentially incorporated herein.

1. Discovery and Disclosure of Bribery Allegations and the Termination of the Distribution Agreement

The undisputed facts conclusively evidence Cicel's involvement in illegal conduct, first raised by David Battles,² a former Misonix employee. In April 2016, he wrote to the CFO, stating:

China is a country that is notorious for corruption, the head of the company is reported as having many high-ranking contacts in government (including government hospitals) and, they have been known for engaging in possible bribery (paying a now dismissed, Misonix representative as a consultant, presumably for favoritism in pricing, etc.). Cicel is also known to charge unrealistically high prices for our products (approximately a 10x markup in some cases, where most international distributors are happy with a 1.7x markup). Please note that I have no evidence that there actually has been any violations of the FCPA by our distributor in China, I am only raising this to your attention because certain things seem to fit the profile that was included in the training materials I was recently given, which stated that I should report any similar situations to either the CFO or the CEO.

DE 177-7 at 5. A few days later, following a conversation with May Lee, the owner of Cicel, Battles added:

I told her that one observation that was causing concern was the unusually high sales prices for our BoneScalpel (reported in some cases to be in the $300,000 to $400,000 range which would have reflected more than a 30x markup. Ms. Li [sic] acknowledged that there had been sales in that price range but that the presence of other similar technologies in the marketplace had since driven these prices down to around $185,000 (since our prices have been raised to $22,500, that would be an 8.2x markup.) However, as Ms. Li explained, virtually all BoneScalpel sales involve at least a year's supply to [sic] tubing (50) and blades (30).

Ms. Li further explained to me the way medical equipment sales are conducted in China. Cicel sells directly to hospital in only about 30% of cases. In these cases, the doctor does not expect any payment for himself, but rather he seeks funding and support for his department. Examples might be; [sic] a requirement that Cicel support research projects for the next five years, or that Cicel would provide funding so that the surgeons can visit meetings and conferences for the next five years, etc. In virtually all cases of direct sales, there are extensive extra benefits that Cicel must provide and therefore calculate into the price charged for the device. Apparently these funds are channeled through third parties to avoid the appearance that cash is going to enrich the doctors personally.

The other 70% of Cicel's sales go through sub-distributors. Cicel performs all the sales and promotion and after-sale service in these cases and the sub-dealer is only there to handle the financial transaction – to effectively facilitate an illegal payment to the doctor. In fact; [sic] approximately half of the sub-distributors that Cicel works with are owned by the surgeon who is purchasing the device. In all sub-distributor transactions, the surgeon names the price and the specific sub-distributor that he wants to work with.

DE 177-8 at 3.

Misonix's investigation of these allegations yielded incontrovertible proof, mainly in the form of emails authored by Cicel's management. In August 2013, a Cicel employee wrote:

we have to admit that the market environment in China now is very complicated, many businesses under the counter. People are alwasy [sic] seeking for money and benefit, from top to bottom, which is beyond our control. Then in such cases, we definitely seek cooperation with sub-dealers or other sources. On one hand, to be honest, we have no idea in what way they will manage everything; on the other hand, we could not be responsible for any behaviors by sub-dealers.

DE 178-7 at 3. A September 2014 email from another Cicel employee states:

You may notice that most of the products were sold by distributors. As you know, there are many deals under the table, which Cicel could not handle by itself, so we have to seek for partners in such a situation. We will make direct sales only when there is a firm connections [sic] between Cicel and hospitals, or hospitals will ask us to make direct sales with them.

DE 178-8 at 4. Later that month, another Cicel employee informed the Company's owner, May Lee, that:

As you may know, APD [a Cicel sub-distributor] has good experiences [sic] on handling business under the table. Sometimes, it's very helpful, but sometimes it could be very danderous [sic]. So for big cities, such as Shanghai and Guangzhou, we could not take the risk. We would rather be safe. But for some small place, where under table business is very popular and well accepted, APD may help, or may be [sic] we could cooperate with them on some specific project. But we should be very careful about the territory and we should have full supervision for their behaviors during the whole process, which we believe it's [sic] best for our mutual benefit.

DE 178-9 at 3. Three months later, a Cicel employee noted:

In China, the surgeons usually get a low salary, so they prefer incentive sales, which stimulates the growth of a large demand of under-table deals. This is our national situation. Cicel never do [sic] these deals, we have to go through our sub-dealers if we want to do the business.

DE 178-3 at 3. Finally, in January 2015, an email from May Lee, Cicel's owner, stated:

Indeed, China government has made some big movements on anti-corruption, but such hidden rules still exist in medical industry, especially orthopedics. You may make the investigation through Angie or your resources on the bribes in orthopedics, which is appalling. Cicel is not able to handle this kind of matters, so we have to find partners (sub distributors) to help us. They may do some promotion, but Cicel will be the only one to provide training and service to our end customers.

DE 178-2 at 3. Taken together, this undisputed³ evidence establishes that Cicel was using illegal methods in connection with the contract.

But there's more. As a result of the investigation, Misonix learned that Cicel had been fined by the Chinese Government in 2014 for commercial bribery and failed to disclose this fact. While counsel for Cicel endeavors to mischaracterize the incident, the Chinese language document plainly indicates that Cicel "us[ed] property or other means to bribe to sell or purchase goods." DE 89-1 at 10 (imposing fine of 150,00 yuan, approximately $24,000). While this activity may not have involved Misonix's products, see Oct. 27, 2021 Hr. Tr. at 14:10-13, the imposition of this sanction during the agreement and its concealment from Misonix further supports defendants’ case.

Unsurprisingly, given the existential threat to public companies posed by potential⁴ Foreign Corrupt Practices Act (FCPA) violations,⁵ Misonix quickly terminated its agreement with Cicel and commenced an internal investigation, voluntary self-reporting and public disclosure.⁶ "[D]efendants certainly had a right and an obligation to act promptly to protect themselves from FCPA liability." Fabri v. United Techs. Int'l, Inc. , 387 F.3d 109, 123 (2d Cir. 2004). Under New York law, the well-documented illegal conduct here renders the contract unenforceable. McConnell v. Commonwealth Pictures Corp. , 7 N.Y.2d 465, 471, 199 N.Y.S.2d 483, 166 N.E.2d 494 (1960) ("a party will be denied recovery even on a contract valid on its face, if it appears that he has resorted to gravely immoral and illegal conduct in accomplishing its performance"). This holds true for...