Inter Med Supplies v. EBI Med Systems Inc.
| Decision Date | 28 June 1999 |
| Docket Number | No. 98-5158,INC,ELECTRO-BIOLOG,98-5158 |
| Citation | 181 F.3d 446 |
| Parties | (3rd Cir. 1999) INTER MEDICAL SUPPLIES, LTD. v. EBI MEDICAL SYSTEMS, INC.;; BIOMET, INC. v. ORTHOFIX, LTD. ORTHOFIX INTERNATIONAL, N.V. ORTHOFIX, INC.; ORTHOFIX S.R.L. v. EBI MEDICAL SYSTEMS, INC.;; BIOMET, INC. EBI MEDICAL SYSTEMS, INC.;; BIOMET, INC., APPELLANTS |
| Court | U.S. Court of Appeals — Third Circuit |
On Appeal from the United States District Court for the District of New Jersey (D.C. Civil No. 95-cv-06035) District Court Judge: Stephen M. Orlofsky, (D.C. Civil No. 95-06035) (D.C. Civil No. 96-01047) [Copyrighted Material Omitted]
[Copyrighted Material Omitted]
[Copyrighted Material Omitted] Donald R. Dunner Griffith B. Price, Jr. Don O. Burley Jeffrey B. Chasnow Howard A. Kwon Richard L. Rainey Finnegan, Henderson, Farabow, Garrett & Dunner Washington, D.C.
John J. Gibbons (Argued) David Fernandez Paul M. Hauge Gibbons, Del Deo, Dolan, Griffinger & Vecchione Newark, N.J.
Arthur P. Kalleres Thomas E. Hixdorf Ice Miller Donadio & Ryan Indianapolis, Ind. 46282 Attorneys for Appellants
Joel Schneider Archer & Greiner Haddonfield, N.J.
Dennis P. Orr Scott Mortman Mayer, Brown & Platt New York, N.Y.
Stephen J. Marzen (Argued) Wendy E. Ackerman Reginald R. Goeke Meredith Kolsky Lewis Roopal R. Shah Shearman & Sterling Washington, D.C. 20004 Attorneys for Appellee
Before: Sloviter, Garth, and MAGILL,* Circuit Judges
OPINION OF LTHE COURT
Following a lengthy trial, a jury found for plaintiff companies on all of the breach of contract and tort claims submitted to it and it returned a verdict of $48 million in compensatory damages and more than $100 million in punitive damages. The District Court denied the defendants' motions for judgment as a matter of law or for a new trial but granted a remittitur reducing the award of punitive damages to $50 million. Inter Med. Supplies, Ltd. v. EBI Med. Sys., Inc., 975 F. Supp. 681, 685 (D.N.J. 1997). On appeal, defendants focus on certain of the bases for recovery, but, understandably, direct their most vigorous critique to the sizable damages awards, primarily that for punitive damages. The role of gatekeeper over such punitive damages verdicts is one of the most challenging that has been placed upon appellate Judges in civil cases.
Orthofix S.r.l., an Italian company, manufactures medical devices, including a product known as an external bone fixator, which is used to hold severely fractured bones in alignment, thereby obviating the need for repeated surgery. It is wholly owned by Orthofix, N.V. of the Netherlands which itself owns Inter Medical Supplies, Ltd., a Cyprus-based company that is the worldwide distributor of the Orthofix bone fixators. These entities will be referred to collectively as "Orthofix."
Biomet, Inc., an Indiana company, manufactures orthopedic devices and owns Electro-Biology, Inc. Electro-Biology in turn owns EBI Medical Systems, Inc., a New Jersey-based corporation that sells external bonefixators. These entities will be referred to collectively as "EBI."
Beginning in 1983, EBI and Orthofix entered into a series of distributor agreements pursuant to which EBI served as the exclusive distributor in the United States, Canada, and the Caribbean Basin for various orthopedic devices, principally external bone fixators, manufactured by Orthofix. The last of these agreements went into effect on June 1, 1990, and expired on May 31, 1995 (the "Distributor Agreement"). For some eleven years, EBI and Orthofix shared what each agrees was a profitable business relationship, grossing approximately $30 million in sales annually and controlling one-third of the United States bone fixators market.
The present dispute arises out of the 1990 Distributor Agreement between the parties. Under paragraph 8 of the Agreement, Orthofix agreed to promptly supply EBI with "such quantities of the products as [were] ordered from time to time." In turn, EBI agreed under paragraph 6(k) to "maintain in its inventory, at all times, a quantity of Products reasonably necessary to meet [EBI's] resale requirements for at least two months." In paragraphs 6(f) and (g), EBI agreed to distribute and sell Orthofix's products in conjunction with the Orthofix trade name, but promised not to appropriate that name as part of its own corporate designation. Both parties agreed not to disclose proprietary information obtained from the other.
Finally, EBI consented to restrictions on its ability to deal in competitive products. Specifically, in paragraph 6(d) EBI undertook "not to distribute, sell, promote the sale of, or in any way handle during the term of this Agreement and for one (1) year after its early termination by EBI any product which could reasonably be deemed competitive with the [Orthofix] Products."
Despite the excellent results from their mutual efforts, the business relationship between EBI and Orthofix deteriorated during the last year of the June 1990 Distributor Agreement. When EBI and Orthofix representatives met in June 1994 to negotiate a renewal, the relationship collapsed due to a dispute over the division of sales revenues. In anticipation of the termination of the Agreement, each party took steps in an effort to protect its own long-term business interests. Orthofix sought and located a new distributor, and on May 8, 1995, it announced that it had acquired American Medical Electronics, which became Orthofix, Inc. Upon the expiration of the Agreement with EBI in June 1995, Orthofix, Inc. became the exclusive United States distributor of the Orthofix fixator.
For its part, EBI responded to the impending severance of its relationship with Orthofix by beginning development of its own external fixator, "Dynafix," with sales of that fixator to begin after expiration of the Distribution Agreement. It is EBI's conduct in anticipation of and after termination that led to this litigation.
In November 1995, Inter Medical Supplies sued EBI in the United States District Court for the District of New Jersey for failure to pay for several shipments of products sold during that year. At approximately the same time, Orthofix, Inc. and Orthofix S.r.l. also filed suit against EBI in the United States District Court for the Northern District of Texas, alleging breach of contract of the 1990 Distributor Agreement; misappropriation of trade secrets; patent infringement, 35 U.S.C. § 271; violations of the Lanham Act, 15 U.S.C. §§ 1114, 1125(a); unfair competition under Texas law, Tex. Bus. & Com. Code Ann. § 16.29; fraud under the New Jersey Consumer Fraud Act, N.J. Stat. Ann. § 56:8-2; common law unfair competition; intentional interference with prospective contractual relations; defamation and trade libel; and injurious falsehood and product disparagement.
On EBI's motion, the Texas case was transferred to the New Jersey District Court. EBI then answered and counterclaimed for breach of contract, tortious interference with both the 1990 Distributor Agreement and EBI's other customer and business relationships, fraud, defamation, violation of the Lanham Act, breach of the distribution franchise on New Jersey statutory and common law grounds, and other breaches and torts arising from the parties' contractual relationship.
The parties proceeded with discovery and pretrial. In one significant in limine ruling on a key clause in paragraph 6(d) of the Distributor Agreement, the District Court ruled that the language of the clause prohibited EBI from developing during the term of the agreement any product competitive to those it was distributing for Orthofix. See Orthofix, Inc. v. EBI Med. Sys. Inc., Civ. Action No. 95-6035 (SMO), at 14 (D.N.J. Apr. 8, 1997) (hereafter In Limine Ruling).
The jury trial began on April 7, 1997, and lasted two months. At its Conclusion, the jury responded to special verdict questions by finding in favor of Orthofix on its claims for breach of contract, breach of the duty of good faith and fair dealing, tortious interference with prospective economic advantage, tortious interference with contract, defamation, unfair competition, and violation of the Lanham Act. EBI does not contend on appeal that the evidence was insufficient for the jury to find it liable for breach of contract. In fact, the District Court found, and we agree, that the jury could have concluded that EBI's plan involved the development and production of its own external bone fixator to compete directly with Orthofix following the end of the distributorship. Inter Med. Supplies, 975 F.Supp. at 685. Other evidence supported the Conclusion that EBI's strategy was to convert present Orthofix purchasers to the new EBI fixator and to drive Orthofix from the North American market. EBI started the process of bringing its own fixators to market in July 1994, although it did not formally place its product on the market until August 1995.
In addition to developing its new, competitive product, EBI ordered vast quantities of the Orthofix products and parts it was then distributing. From October 1994 to May 1995, EBI began ordering Orthofix product in amounts far in excess of its two-month inventory needs. It eventually stockpiled inventory sufficient to meet its needs for sixteen months. There was evidence that to achieve this result, EBI hid its stockpiling of Orthofix products by ordering and paying for products through third parties. For nearly one year EBI also failed to provide Orthofix with a series of required quarterly reports of its sales and inventory levels, further preventing Orthofix from promptly learning of EBI's excessive ordering.
Once the final Distributor Agreement terminated at the end of May 1995, EBI began to take advantage of the market it had earlier created for Orthofix products. There was evidence that in order to...
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