ORP Surgical, LLC v. Howmedica Osteonics Corp

• Decision Date: 10 May 2022
• Docket Number: Civil Action 1:20-cv-01450-RBJ
• Parties: ORP SURGICAL, LLP, a Colorado limited liability company, and LEE PETRIDES, Plaintiffs, v. HOWMEDICA OSTEONICS CORP, a New Jersey corporation, Defendant.
• Court: U.S. District Court — District of Colorado

ORP SURGICAL, LLP, a Colorado limited liability company, and LEE PETRIDES, Plaintiffs, v. HOWMEDICA OSTEONICS CORP, a New Jersey corporation, Defendant.

Civil Action No. 1:20-cv-01450-RBJ

United States District Court, D. Colorado

May 10, 2022

FINDINGS OF FACT, CONCLUSIONS OF LAW, AND ORDER OF JUDGMENT

R Brooke Jackson Senior United States District Judge

This case was tried to the Court beginning December 13, 2021 to December 17, 2021. After a COVID-imposed hiatus, the case concluded on March 1, 2, and 4, 2022. Plaintiffs ORP Surgical, LLP (ORP) and its primary owner, Lee Petrides brought suit against Howmedica Osteonics Corp., a subsidiary of Stryker Corp., for alleged wrongful actions done during the winding down of business relations between the two companies. Defendant, which I will refer to as “Stryker, ” brought counterclaims against ORP and Mr. Petrides.

I. BACKGROUND

This section summarizes the parties' relationship and lays out uncontroversial facts. I resolve the disputed factual questions in later sections. In describing the background and making my findings of fact, the Court has considered the reporter's certified transcript, the exhibits admitted into evidence, and the Court's own notes, recollections, and impressions of the evidence.

Stryker manufactures medical implants. The products relevant to this case fall into two categories: joint products, which are generally used in elective joint replacement surgeries, and trauma products, which are generally used in emergency surgeries after traumatic accidents. Selling these Stryker products requires a specialized skillset; sales representatives (“reps”) not only need to develop relationships with the surgeons to whom they sell, but they also need sufficient medical knowledge to advise and guide the surgeons in the use of Stryker products from inside the operating room. Effective sales reps are the lifeblood of this market.

Stryker employs some of its own sales reps in and around Colorado through Summit Surgical, a fully owned subsidiary. It also contracted with plaintiff ORP, an independent company with sales reps who sold Stryker products on commission. A substantial portion of Stryker's joint and trauma sales in the region had, until the events in this case, come through ORP; and the two companies appear to have enjoyed a close working relationship. Two documents comprised the bedrock of this relationship: the Joint Sales Representative Agreement (“joint SRA” or “joint contract”) and the Trauma Sales Representative Agreement (“trauma SRA” or “trauma contract”).^[1] Each of these contracts granted ORP the exclusive right to sell Stryker products in certain locations, specified which non-Stryker products ORP could and could not sell, and permitted either party to voluntarily terminate the contract so long as they complied with certain post-termination restrictions. Both contracts provided that, in the event of such a termination, ORP would have to sit on the sidelines for a year - the provisions prohibiting ORP from selling products competitive with Stryker would survive the contract by twelve months. In return, Stryker would have to pay ORP “restriction payments” equal to ORP's commissions from Stryker sales made in the twelve months before termination. Both contracts also contained one-year non-solicitation/non-divert provisions that would survive the contract.^[2]

The two companies' ties ran deeper than just contracts. Some ORP principals had previously worked for Stryker; Stryker helped train ORP sales reps; and ORP sales reps sold more products from Stryker than any other manufacturer - and were generously rewarded for their efforts.

The companies' relationship soured. Stryker brought in a new Area Vice President, Adam Jacobs, from its Houston office in October 2018. On March 27, 2019, Mr. Jacobs informed Mr. Petrides that Stryker was terminating the joint contract for “cause.” When Mr. Jacobs terminated the joint contract, Stryker took the position that ORP had materially breached the contract and, as a result, Stryker was not bound by the contract's terms and was not obligated to pay restriction payments. ORP took the position that Stryker did not have “cause” to terminate the joint contract, and that the voluntary termination payment obligations, sales restrictions, and non-solicit/non-divert covenants should have applied.

At the same time as it terminated the joint contract, Stryker offered ORP a deal: Stryker would still pay the restriction payments if ORP would waive the non-solicit/non-divert provision and allow Stryker to hire ORP sales rep James Demorest. ORP declined. A few months later, Stryker hired Mr. Demorest anyway.

The trauma contract remained in place, but Stryker informed ORP in October 2018 that it wanted to negotiate a mutually agreeable termination. Mr. Jacobs sent Mr. Petrides two offers.

The first would have made ORP a Stryker agent. ORP declined. The second was essentially a buyout; it offered $8 million to terminate the trauma contract, waive the restriction payments, and permit Stryker to solicit and hire ORP's sales force. Mr. Petrides met with Mr. Jacobs at a Starbucks and counteroffered: $13.6 million and a few other terms memorialized in shorthand on a sticky note. Plaintiffs claim that Mr. Jacobs accepted the offer on the spot. Stryker maintains that Mr. Jacobs agreed in principle to the bottom-line number but did not make a deal. In any case, Mr. Jacobs sent Mr. Petrides a proposal on March 31, 2020. This proposal partially tied the buyout price to Stryker hiring ORP sales reps. ORP would receive $8 million for terminating the contract and waiving the non-solicitation/non-divert, and it would receive additional money for each sales rep hired by Stryker. If Stryker hired all 14 ORP reps it wanted, ORP would receive the $13.6 million Mr. Petrides had requested.

This proposal deepened the fractures in the ORP-Stryker relationship. According to Mr. Petrides, Mr. Jacobs paired the proposal with a threat: sign it by Friday April 3 or Mr. Jacobs would terminate the trauma contract for “cause” and refuse to provide ORP the restriction payments. Mr. Petrides claimed to find the threat credible because, in his view, Mr. Jacobs had baselessly terminated the joint contract for “cause” just a few months earlier. Mr. Jacobs denies having issued any such threat.

What happened next, however, is undisputed - Mr. Petrides decided to voluntarily terminate the trauma contract himself. On April 3, 2020 Mr. Petrides provided Mr. Jacobs the requisite 30-day notice of termination. This notice did not release the parties from their contractual obligations, including the one-year non-solicit/non-divert. The trauma contract therefore ended at 11:59:59 p.m. on May 3, 2020. Stryker offered to hire at least 11 ORP reps within the first two hours after the contract ended. Within 48 hours, 12 ORP reps had been hired by Stryker. ORP alleges that Stryker impermissibly solicited and/or diverted these reps. Stryker denies the allegations.

ORP sued on May 21, 2020. ORP ultimately tried two claims before the Court: (1) corporate raiding; and (2) breach of contract, which included alleged breaches of both the joint and trauma contracts.^[3] Stryker brought four counterclaims: (1) breach of the joint contract; (2) breach of the trauma contract; (3) unfair trade practices; and (4) tortious interference. Before the bench trial commenced, ORP sued the individual sales reps hired by Stryker for breaching their employee non-compete clauses in state court. ORP Surgical, LLC v. Bakersky, 2020-cv-31839 (Denver Cnty. Dist. Ct. Mar. 24, 2022). Stryker paid the sales reps' legal fees in that litigation, which recently settled. Stryker has also sued a former Stryker employee who was also associated with ORP, Morgan Schilling, in New Jersey state court for allegations substantially similar to those made in its counterclaims, and that litigation is ongoing. See Howmedica Osteonics Corp., v. Morgan Schilling, 2:20-cv-09621-CCC-CLW (D.N.J.).

The present litigation has been characterized by vigorous advocacy, to say the least. Because of the volume and antagonistic nature of the discovery disputes that were occurring, the Court ultimately appointed a special master to assist in managing the discovery process. See ECF No. 107. That proved to be extremely helpful to the Court, but even by the time of trial there were pending appeals of certain special master rulings and, in particular, of his recommendation that Stryker and its counsel be severely sanctioned. The Court will address those issues in this order as well.

II. LIABILITY

A. Joint Contract

Three features of the joint contract bear on this case: its sales restrictions, restriction payments provision, and methods of termination. The contract prohibited ORP from selling all but a few “competitive products, ” that is, products that competed with a substantially similar product sold by Stryker. Joint Contract (Pl. Ex. 4) § 6.3. This sales restriction was to remain in force for 12 months after the contract's termination. Id. § 16.1.1. During those 12 months, Stryker would compensate ORP, as noted earlier in this order, with “restriction payments” equal to the commission ORP had received on Stryker sales in the previous year. Id. §16.3.

However Stryker would owe restriction payments - and ORP would be bound by the non-compete - if the contract were voluntarily terminated. See id. § 2 (permitting voluntary termination). ORP would lose its right to restriction payments only if it breached its duty of loyalty to Stryker, breached the agreement, or was terminated “for cause.” “Cause” included, inter alia, gross or persistent negligence, willful misconduct, willful failure to perform its duties,...