Menn v. Conmed Corp.
| Decision Date | 30 June 2022 |
| Docket Number | 2017-0137-KSJM |
| Parties | PAVEL MENN, as representative of the former shareholders of ENDODYNAMIX, INC., Plaintiff, v. CONMED CORPORATION and ENDODYNAMIX, INC., Defendants. |
| Court | Court of Chancery of Delaware |
Submitted: March 14, 2022
A Thompson Bayliss, Daniel J. McBride, ABRAMS & BAYLISS LLP, Wilmington, Delaware; Nelson G. Apjohn, Eric P Magnuson, Melanie V. Woodward, NUTTER McCLENNEN & FISH LLP, Boston, Massachusetts; Counsel for Plaintiff Pavel Menn as Representative of the Former Stockholders of EndoDynamix, Inc.
John L. Reed, Peter H. Kyle, Kelly L. Freund, DLA PIPER LLP (US), Wilmington, Delaware; Jonathan B. Fellows, Suzanne M. Messer, Liza R. Magley, BOND, SCHOENECK & KING, PLLC, Syracuse, New York; Counsel for Defendants ConMed Corporation and EndoDynamix, Inc.
POST-TRIAL MEMORANDUM OPINION
This action arises from a stock purchase agreement by which ConMed Corporation acquired EndoDynamix, Inc., a start-up monoline company that was developing a clip applier product to be used in laparoscopic surgeries. The parties allocated the risk associated with the continued development of the clip applier through a contingent payment structure. ConMed agreed to pay the sellers $1.25 million up front, to make milestone payments of up to a total $10.25 million upon the product's achievement of four development objectives, and to make earn-out payments of $2 million upon the first sale and in the amount of 10% of the net sales generated for a period after the first sale.
Because the bulk of consideration to be paid to the sellers was contingent on the clip applier achieving development milestones and financial targets after ConMed acquired the company, the sellers obtained ConMed's agreement to use commercially best efforts to maximize the milestone and earn-out payments. The sellers further negotiated for the right to demand accelerated payment of the milestone and earn-out payments if ConMed permanently discontinued the development or sale of the clip applier products unless that determination was made for contractually specified reasons, including that the clip applier posed a risk of injury to patients.
Before the parties entered into the stock purchase agreement, ConMed identified safety issues in the clip appliers' design. As part of the stock purchase agreement, ConMed negotiated for the right to implement design changes to address those concerns. Those design changes were identified in a schedule to the agreement. After the parties closed on the agreement, ConMed devoted substantial resources to implementing those design changes and developing the clip applier in other ways. ConMed put the product through multiple animal lab studies and applied for and obtained FDA clearance. By October 2015, ConMed had made the up-front payment and three of the four milestone payments, for a total of $9 million in payments to sellers.
ConMed, however, continued to encounter problems in the product's development, including safety features identified in the schedule to the stock purchase agreement. In early 2016, ConMed tasked a newly acquired and highly experienced development team with reevaluating the product. They concluded that ConMed should scrap the product entirely in favor of developing a new clip applier. In May 2016, ConMed notified the sellers of ConMed's view that the clip applier posed a risk of injury to patients and that ConMed was seriously questioning whether to move forward with development of the product. Shortly after the report, ConMed's board determined to discontinue development of the product.
In response to the report, sellers' representative, Plaintiff Pavel Menn, demanded acceleration payments. ConMed declined to make the payments, and this lawsuit ensued.
The plaintiff claims that ConMed breached its obligation to use commercially best efforts to develop the clip applier and discontinued the product's development for reasons other than a risk of injury to patients. The parties presented extensive evidence throughout the course of a seven-day trial. Ultimately, the defendants proved that they discontinued development of the clip applier based on the determination that it posed a risk of injury to patients. And the plaintiff failed to prove that the defendants breached their commercially-best-efforts obligation prior to making the determination to discontinue development of the clip applier. This post-trial decision finds in favor of the defendants.
As reflected in the Schedule of Evidence submitted by the parties, the record comprises 529 joint trial exhibits, trial testimony from five fact and five expert witnesses, deposition testimony from nineteen fact and five expert witnesses, and stipulations of fact in the pre-trial order.[1] These are the facts as the court finds them after trial.
In 2008, Plaintiff Pavel Menn and non-party William Bookwalter founded EndoDynamix, Inc. for the primary purpose of developing a clip applier, which they called the "SureClip Clip Applier" (the "SureClip").[2]
Clip appliers are medical instruments used in minimally invasive surgical procedures (typically, laparoscopy) that apply clips to close off a duct, tube, or blood vessel in the body.[3] The process of closing off a duct, tube, or blood vessel is called "ligation."[4]Clips are small, titanium u-shaped objects with a rounded "shoulder" from which two straight prongs called "legs" extend.[5] A clip applier is composed of a handle and a shaft.[6]The shaft is also called the "cartridge."[7] Clips are pre-loaded into the shaft.[8] The end of the shaft features mechanical jaws that clamps the clip closed.[9] Generally, a surgeon holds the clip applier by the handle and uses its trigger to release a clip from the shaft into the jaws, which close the clip onto the vessel to be ligated.[10]
The SureClip shafts came in two sizes: a 5mm and a 10mm, designed to apply 5mm and 10mm clips, respectively.[11] Its handle was "universal" in the sense that it was compatible with both the 5mm and 10mm SureClip shafts.[12] The 5mm and 10mm shafts are collectively referred to as the "Clip Applier Products."[13] With the handle, they are referred to as the "Products."[14] None of the Products could be used with any other clip applier on the market.[15] When EndoDynamix began developing the SureClip, the clip applier market was dominated by two disposable clip appliers sold by Ethicon and Covidien, respectively.[16]Because these existing products were designed to be thrown away after a single use, some viewed their design as "cheap" or subpar.[17]
To differentiate the SureClip from other clip appliers, EndoDynamix designed the SureClip as a "reposable" clip applier, consisting of a reusable stainless-steel handle and a disposable single-use shaft.[18] The hope was that a reusable handle would capitalize on hospital initiatives to lower costs and reduce waste.[19]
Moreover, clip appliers generally had a history of patient safety-related performance issues. Menn testified during his deposition and at trial that clip appliers have been the subject of FDA Medical Device Reports ("MDRs") and recalls.[20]
Thus, to further distinguish the SureClip from other clip appliers, EndoDynamix's early marketing materials highlighted the most common reasons for the MDRs for clip appliers and stated that the SureClip had features that resolved these patient safety issues and had the following safety features and functionalities common to clip applier products:
Other design features of the SureClip further distinguished it from products on the market. For example, clips used in clip appliers had to be designed for two purposes: first, to ligate the tissue, and second, to "feed" down the shaft.[25] Products on the market satisfied the second function by having the clips push each other, like a train, head-to-tail down the shaft.[26] The established method of feeding clips was imperfect; clips often jammed in the shafts of disposable clip appliers.[27] The established method of feeding clips also required design tradeoffs that affected the clip's performance on the tissue.[28]
By contrast, the SureClip employed an "individual clip management" design, which meant that the shaft mechanics, and not the follow-on clips, advanced the clips down the shaft.[29] The SureClip's individual clip management also allowed EndoDynamix to design the clip itself with a sole focus on ligating the vessel.[30] Toward that end, EndoDynamix designed a clip with rounded "shoulders," which was intended to minimize irritation to the surrounding tissue once applied.[31] The clip also had a patented "double hard cross section" pattern on the inside of the legs intended to reduce the need for surgeons to use multiple clips to ligate a vessel.[32]
Further the SureClip had "atraumatic jaws," which meant that they...
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