Nat. Patent Dev. Corp. v. AMERICAN HOSP. SUPPLY, 84 Civ. 3411 (EW).

• Decision Date: 21 November 1984
• Docket Number: No. 84 Civ. 3411 (EW).,84 Civ. 3411 (EW).
• Citation: 616 F. Supp. 114
• Parties: NATIONAL PATENT DEVELOPMENT CORPORATION, and NPDC Epic Systems, Inc., Plaintiffs, v. AMERICAN HOSPITAL SUPPLY CORPORATION, Defendant.
• Court: U.S. District Court — Southern District of New York

616 F. Supp. 114

NATIONAL PATENT DEVELOPMENT CORPORATION, and NPDC Epic Systems, Inc., Plaintiffs, v. AMERICAN HOSPITAL SUPPLY CORPORATION, Defendant.

No. 84 Civ. 3411 (EW).

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

November 21, 1984.

Winer, Neuburger & Sive, P.C., New York City, for plaintiffs; Mark A. Chertok, New York City, of counsel.

Walsh & Frisch, New York City, for defendant; Jerome K. Walsh, New York City, of counsel.

OPINION

EDWARD WEINFELD, District Judge.

This is another case where an inquiry propounded by this Court more than thirty years ago is still appropriate: "must the race necessarily be to the swift in a matter so involved and requiring extensive activity on the part of the respective parties?"¹ This action was commenced on May 15, 1984 by National Patent Development Corporation and its wholly owned subsidiary, NPDC Epic Systems, Inc., (collectively "National Patent" or "National") against American Hospital Supply Corporation ("American Hospital" or "American"). Several days earlier, American Hospital had instituted an action against National Patent in the Superior Court of the State of California for the County of Orange, which was removed to the United States District Court, Central District of California (the California action).² American Hospital now moves to stay this action pending determination of its California action or, alternatively, to transfer this action pursuant to 28 U.S.C. § 1404(a) to the District Court of California. National Patent cross-moves to stay the California action pending determination of this action, opposes American Hospital's section 1404(a) motion, and moves for partial summary judgment.

The plaintiffs herein are both Delaware corporations having their principal places of business in New York County, in the Southern District of New York. The defendant, American Hospital, is an Illinois corporation with its principal place of business in Evanston, Illinois, but much of its business is conducted through separately organized divisions, including McGaw Laboratories Division ("American McGaw"). American McGaw is engaged in manufacturing and distributing parenteral solutions, medical devices, and biomedical equipment, and its principal offices are located in Irvine, Orange County, California.

The claims advanced by both parties in their respective actions arise under a distribution and licensing agreement that they or their affiliated or predecessor companies³ entered into on October 5, 1979. In part, that agreement concerned the EpicR I.V. Flow Controller (the "Flow Controller"), a patented and trademarked device designed to control electronically the flow of fluids injected intravenously into patients. An important and integral part of the Flow Controller's design is an alarm system designed to signal when the flow rate of the fluid is too low or too high. The Flow Controller is also designed for portable use on intravenous poles and may be operated on battery as well as direct current. The Flow Controller, together with certain patented ancillary equipment used to administer the fluid (the "Administration Set"), comprise the "Epic System." Under the agreement, National granted American the exclusive right to sell the Flow Controller, the nondisposable hardware component of the Epic System, as well as the exclusive right to manufacture and distribute the Administration Set, the disposable component of the system. In return, American agreed to purchase a minimum of 4,000 Flow Controllers within a five-year period commencing when the product was first made available to it.⁴

Shipments of Flow Controllers by National to American commenced in early 1980. After some initial difficulties, hereafter discussed in greater detail, full-scale marketing was undertaken by American in about July 1980. However, soon thereafter, American suspended sales for a period allegedly because of complaints by various hospitals about malfunctioning alarm systems and other defects in the Flow Controllers. These alleged shortcomings were to be corrected by National either by a design modification or by retrofitting the Flow Controllers with additional components. American continued, despite continued problems with the product, to order and market the product in reliance upon National's assurances. In all, the total number of Flow Controllers shipped to and purchased by American up to December 1983 was 2,784. At that time, American advised National that it refused to purchase the additional 1,216 Flow Controllers as required under the contract. The parties then endeavored but failed to compromise their differences, following which the race to the courthouses began.

On May 11, 1984, American filed its summons and complaint in the Superior Court of California, Orange County. Copies were airmailed on May 14 to National's designated statutory agent for service who received them on May 17 and then forwarded the process to National, which did not receive it until May 21, 1984. In the meantime, on May 15, National commenced this action by filing its summons and complaint, personal service of which was made upon American on May 18 at its principal office in Evanston, Illinois.

There can be no doubt that whatever the parties' contentions under their variously pleaded claims, counterclaims, and defenses in their respective actions, all issues center about their distribution and license agreement. The essence of American's claim is that the Flow Controllers it received from National and later sold to hospitals as a component of the Epic System were defective; that National, when notified of the alleged deficiencies, undertook to correct and render marketable the Flow Controllers, upon which American relied in making further sales; that in fact National failed to remedy the defects in the Flow Controllers so as to render them marketable and has refused to do so; and that National was given timely notice by American of the breach of the agreement, which justified American's refusal to accept the balance of the Flow Controllers.

National, on the other hand, contends that it manufactured the Flow Controllers pursuant to specifications approved by American; that American manufactured the Administration Sets, which were sold for use with the Flow Controllers; and that any failure of the complete Epic System to function properly was caused solely by American's failure to exercise reasonable care in manufacturing the Administration sets and testing the system as a whole, or by American's failure to give proper instructions as to the care and usage of the system. National further contends that despite American's current allegations of defects in the Flow Controllers, American did not give due notice of any claimed breach of warranty, express or implied; and that, with one exception noted hereafter, American did not assert any claims until December 1983, when National charged American with repudiating the agreement by failing to accept the balance of the 4,000 Flow Controllers. National asserts that until this time, the only notice of any claimed defect in the Flow Controllers it received from American was in early 1980; that this defect involved an electronic "chip" that was corrected at no cost to American; and that American approved the resultant modification in about July 1980 when it undertook full-scale marketing of the product.

Thus, the basic issues are whether the Flow Controllers delivered to American McGaw were defective in design and manufacture; whether the alleged defects rendered them unmarketable and unfit for their intended use; whether National represented that the claimed defects could be cured and American continued to order and market the Flow Controllers in reliance upon that representation; whether the defects constituted a breach of National's obligation under the agreement, thereby relieving American of its obligations under the agreement; and whether American gave timely notice of the claimed defects to National or first advanced its claims in December 1983, when National charged that American had repudiated the agreement by failing to accept the balance of the 4,000 Flow Controllers. It is not open to dispute that all issues, whether advanced as claims, counterclaims, or affirmative defenses, can be resolved in either this or the California action or that a final judgment in either action would be conclusive upon all litigants. The evidence, testimonial and documentary, in support of the parties' respective claims cannot differ from action to action.

Initially, each party argues that its action was commenced first and therefore the second action, that of its adversary, should be stayed pending the disposition of its, the first, action. Each relies upon the general policy that where two actions embrace the same issues, as a matter of sound judicial administration, the first action should have priority absent special circumstances supporting a different result.⁵ The parties appear to recognize that more important than the claimed temporal priority of their respective actions is whether special circumstances displace the general rule.

American presses upon the Court that its California action, filed on May 11, is the "first filed" and thus is entitled to priority and a stay of this action. National, while perforce acknowledging that in point of time American's lawsuit was filed prior to this action, disputes that the California suit legally is the "first filed." It contends that American's filing was defective because American's complaint referred to exhibits that were not attached and that National did not receive until June 4, 1984, and that in personam jurisdiction in the California action initially⁶ was not acquired over it. Specifically, National asserts that mail service upon its statutory agent was ineffective because the agent did not execute the essential acknowledgement of receipt and that the agent's lack of acknowledgement was proper in view of the...