Advanced Medical, Inc. v. Arden Medical Systems, Inc.
| Decision Date | 29 January 1992 |
| Docket Number | No. 90-1745,90-1745 |
| Citation | 955 F.2d 188 |
| Parties | ADVANCED MEDICAL, INC. v. ARDEN MEDICAL SYSTEMS, INC., Ortho Diagnostic Systems, Inc. and Johnson & Johnson and Johnson & Johnson Professional Diagnostics, Inc., Appellants. |
| Court | U.S. Court of Appeals — Third Circuit |
Arlin M. Adams (argued), Alan M. Lieberman, Carl A. Solano, Schnader, Harrison, Segal & Lewis, Philadelphia, Pa., for appellants.
Lee A. Rosengard (argued), Jeffrey A. Lutsky, Stradley, Ronon, Stevens & Young, Philadelphia, Pa., for appellee.
Before: BECKER, NYGAARD and HIGGINBOTHAM, Circuit Judges.
Following a jury trial in the district court for the Eastern District of Pennsylvania on claims of breach of contract and intentional interference with contractual relations, plaintiff Advanced Medical, Inc. ("Advanced"), a medical products distributor, won a large compensatory damages verdict against four defendants: Arden Medical Systems, Inc. ("Arden"), a manufacturer of medical technology; Ortho Diagnostic Systems, Inc. ("Ortho"), a distributor of medical products; Johnson & Johnson, Inc. ("Johnson & Johnson"), Ortho's parent and the subsequent owner of Arden; and Johnson & Johnson Professional Diagnostics, Inc. ("JJPD"), a Johnson & Johnson subsidiary. Advanced was also awarded a huge punitive damages against the latter three defendants ("the Johnson & Johnson defendants"). The trial concerned Advanced's claim that Arden had breached their distribution agreement and that the Johnson and Johnson defendants had encouraged the breach by subterfuge and deceit. Defendants now appeal and allege numerous trial errors including (1) misapplication of the parol evidence rule, (2) faulty instruction of the jury on mitigation of damages, and (3) improper molding of the jury verdict. For the reasons that follow, we will reverse the judgment of the district court and remand for a new trial.
During the early 1980s, Arden invented and manufactured a desk-top machine that could rapidly perform clinical blood chemistry profiles. Arden called the machine the ChemPro 1000 Clinical Chemistry Analyzer ("ChemPro 1000") and marketed it to physicians and clinics through a California company named Circadian, Inc. ("Circadian").
In 1986, Arden commenced discussions with other independent medical distributors to market the ChemPro 1000 nationwide to other health care providers, notably hospitals. Among the distributors approached was Advanced, a distributor of high-tech medical products. The two companies entered into negotiations, which were principally conducted by Advanced's president and sole shareholder, John T. Sasso, and by Arden's national sales manager, Ronald L. Drylie, both of whom were experienced businessmen. The negotiations stalled for some period over the degree to which Advanced would be made the "exclusive" distributor of the ChemPro 1000 in its designated territory (Pennsylvania, New Jersey, New York, and Delaware). 1 On October 29, 1986, Advanced and Arden, apparently satisfied, entered into a standard form Dealership Agreement ("the Agreement"), which was tailored somewhat to reflect the parties' negotiations. The term of the Agreement was three years.
Arden's co-founder and president, Dr. Mark Knudson, was contemporaneously engaged in negotiations with Ortho, which was interested in buying Arden and entering the clinical blood chemistry market. Ortho's parent, Johnson & Johnson, ultimately agreed to acquire Arden. On December 7, 1986, the day before the scheduled signing and public announcement of its acquisition of Arden, Johnson & Johnson learned that Arden had entered into "exclusive" distribution agreements with Advanced and thirteen other distributors. Johnson & Johnson's attorneys thereupon drafted a last-minute addendum to the merger documents which required Arden's co-founders, Knudson and Walter Sembrowich, to use their best efforts "to terminate or make nonexclusive" these pre-existing distribution agreements. The addendum also specified that the future compensation of those Arden officers who remained after the merger could be reduced to offset the costs of terminating or making nonexclusive the distribution agreements. On December 29, 1986, Johnson & Johnson acquired Arden for $24,400,000 and made Arden its wholly owned subsidiary.
From this point, the parties' versions of the facts differ markedly. The record, read in the light most favorable to the verdict winner, suggests that after acquiring Arden, Johnson & Johnson wanted the ChemPro 1000 marketed nationally by Ortho and by JJPD, a newly-created subsidiary of Johnson & Johnson. Ortho was to concentrate on sales of the ChemPro 1000 to hospitals, while JJPD, through its own sales force and a network of non-exclusive subdistributors, would concentrate on sales to the remainder of the market, particularly physicians' offices. Johnson & Johnson, Arden, Ortho, and JJPD targeted April 1, 1987, as the date by which Arden's prior distribution agreements were to be terminated or rendered nonexclusive and the new marketing network was to be in place. Pursuant to this plan, Arden succeeded between January and April, 1987 in negotiating settlements terminating all its prior distribution agreements except for the Agreement with Advanced.
According to Advanced's version of events, because its "exclusive" rights under the Agreement were far more valuable, and hence more costly to buy out than those of the other distributors, 2 the Johnson & Johnson defendants employed a variety of "hardball" tactics to force Advanced out of the Agreement without compensation. Specifically, the hardball strategy included the following:
(1) Undercutting Advanced's sales of the ChemPro 1000 by marketing a nearly identical, but less expensive machine, the ChemPro 500, which was not made available to Advanced;
(2) Selling the ChemPro 1000 and ChemPro 500 to medical supply houses--which Advanced terms "alternate site distributors"--which in turn resold the analyzers to physicians' offices in Advanced's four-state region; and
(3) Redirecting the attention of Arden's regional managers away from providing support to Advanced's sales staff and towards establishing an Ortho/JJPD marketing network.
In the wake of these actions by the Johnson & Johnson defendants, relations between the parties deteriorated. In March 1987, Steven Bush, Arden's Vice President of Sales & Marketing, and James Hobbs, Ortho's Director of Alternate Site Testing, met with Sasso in an apparent attempt to resolve the impasse. According to Sasso, Hobbs repeatedly during this meeting promised him that regional sales manager support would be restored and that the defendants had every intention of honoring Advanced's distributorship rights under the Agreement. In Sasso's view, Hobbs lied. After the meeting, Hobbs's tune changed dramatically. According to Bush's trial testimony, Hobbs told him shortly after the meeting that they would forcibly drive Advanced out of the contract. Bush testified that Hobbs stated:
[I]t was obvious that Advanced Medical was going to be a hard one to terminate and that they weren't going to go easily and that if they tried to fool with Johnson & Johnson, they would crush [Sasso].
Advanced characterizes this statement as evidence of the hardball strategy.
Despite the assurances proffered during the meeting, relations continued to deteriorate. According to Advanced, events culminated on March 31, 1987, when Arden's regional sales manager, William Ovecka, informed an Advanced salesman during a phone conversation that he could not provide sales assistance any longer because Advanced had been terminated as a distributor of the ChemPro 1000.
On May 21, 1987, Advanced filed the present complaint asserting jurisdiction on both diversity of citizenship and federal question grounds. The complaint charged the defendants with breach of contract, tortious interference with existing and prospective contractual relations, violations of the Sherman and Robinson-Patman Acts and the civil RICO statute, conspiracy, unfair competition, and fraudulent inducement to enter into the contract. By the time of trial, Advanced had abandoned or the court had disposed of by summary judgment all claims except those for breach of contract, tortious interference, and civil RICO. During trial, the RICO counts charging tortious interference with prospective business relations and civil RICO violations were eliminated on a motion for directed verdict.
At trial, Advanced attempted to demonstrate that the defendants had engaged in the hardball tactics described above to force Advanced out of the Agreement. Advanced argued that these tactics constituted breaches of the written terms of the Agreement and, to the extent that the written terms did not legally reflect the drafters' discussions and understandings, constituted breaches of the oral agreement initially negotiated between Arden and Advanced. To this end, Advanced presented the testimony not only of its president, Sasso, but also of Arden's former national sales manager Drylie, who had had a falling out with the defendants. Drylie corroborated Sasso's account of the specifics of the initial Agreement and the ways in which the defendants' post-merger activities had breached the Agreement.
The defendants, while not seriously denying that they had engaged in the so-called hardball tactics, strenuously denied that any of the tactics constituted a breach of the express terms of the Agreement. Rather, they argued that Advanced was attempting to vary the clear terms of the integrated and written Agreement by introducing inadmissible parol evidence of prior, inconsistent oral understandings, including evidence related to agreements that Advanced had made with Arden about rights to distribution that were left out of the written agreement. The defendants moved in limine, and at several...
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