Orthopedic Sys., Inc. v. Schlein
| Citation | 202 Cal.App.4th 529,135 Cal.Rptr.3d 200,2012 Daily Journal D.A.R. 12,12 Cal. Daily Op. Serv. 168 |
| Decision Date | 14 March 2012 |
| Docket Number | A126821.,Nos. A126374,s. A126374 |
| Court | California Court of Appeals Court of Appeals |
| Parties | ORTHOPEDIC SYSTEMS, INC., Plaintiff, Cross-defendant and Respondent, v. Allen SCHLEIN, Defendant, Cross-complainant and Appellant. Orthopedic Systems, Inc., Plaintiff, Cross-defendant and Appellant, v. Allen Schlein, Defendant, Cross-complainant and Respondent. |
202 Cal.App.4th 529
135 Cal.Rptr.3d 200
12 Cal. Daily Op. Serv. 168
2012 Daily Journal D.A.R. 12
ORTHOPEDIC SYSTEMS, INC., Plaintiff, Cross-defendant and Respondent,
v.
Allen SCHLEIN, Defendant, Cross-complainant and Appellant.
Orthopedic Systems, Inc., Plaintiff, Cross-defendant and Appellant,
v.
Allen Schlein, Defendant, Cross-complainant and Respondent.
Nos. A126374, A126821.
Court of Appeal, First District, Division 4, California.
Dec. 29, 2011.
Certified for Partial Publication.*
Review Denied March 14, 2012.
[135 Cal.Rptr.3d 201]Reed Smith, San Francisco, John S. Siamas, Karen A. Braje, Dennis Peter Maio, for appellant Orthopedic Systems, Inc.
REARDON, J.
[202 Cal.App.4th 531
The instant appeals involve the contract and tort claims of an orthopedic surgeon who had an agreement with an orthopedic products company regarding the creation and sale of a medical device that bore the surgeon's name. After paying royalties to the surgeon for more than a decade,
[202 Cal.App.4th 532]
the company renounced its obligations to pay anything further for the medical device even though it still sold a version of the product bearing the surgeon's name.
Orthopedic Systems, Inc. (OSI) and Allen Schlein, M.D., entered into an agreement in which OSI acknowledged receipt of a medical device called the “Schlein Shoulder Positioner,” and obligated itself to pay Dr. Schlein royalties on sales of the resulting product. After OSI stopped paying the royalties, Dr. Schlein threatened to sue for breach of contract, prompting OSI to file an action seeking a declaration of rights under the agreement. Dr. Schlein cross-complained for breach of contract, conversion, and commercial misappropriation of his name among other things. The jury found in favor of Dr. Schlein on his contract claim and awarded $616,043 in damages. The jury also awarded Dr. Schlein $750 in statutory damages for his misappropriation claim, and found that OSI earned $1,220,000 in profits attributable to the use of Dr. Schlein's name. The trial court, however, did not include the profits in the judgment.
Dr. Schlein appeals, challenging the exclusion of the profits from the judgment. OSI appeals the judgment, the denial of its judgment notwithstanding the verdict, and the postjudgment award of attorney fees.
We modify the judgment and otherwise affirm.
OSI was formed by Robert Moore, an experienced chiropractor, and his family in 1977 to develop, manufacture and sell orthopedic devices. Prior to forming OSI, Moore had invented several products to help his patients. In early 1980, Moore hired Steven Lamb to head up the engineering department at OSI.
Moore attended orthopedic trade shows and conferences, where he encouraged physicians to bring ideas and concepts to OSI in exchange for a royalty, telling them “If you have a problem, let me know, I will then try to develop a
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product or [way] of solving that [problem] to make your life easier and [to do] a better job for the patient and then we will pay you a royalty of five percent on that.”
Moore worked closely with the physicians who brought their problems to OSI, discussing possible improvements and modifications. The product would then “evolve from that interface or interaction.”
In lieu of legal formalities, Moore offered the physicians a “handshake agreement,” whereby OSI would pay a royalty to the physician for as long as OSI sold the product. Nothing other than Moore's word was required; he said OSI “would pay and [it] did.” Moreover, there was never any requirement that a physician [135 Cal.Rptr.3d 203]participate in the modification of a product in order to continue to receive the royalties.
2. OSI's Initial Collaboration with Dr. SchleinDr. Schlein, an experienced orthopedic surgeon and inventor, met Moore in the early 1980's at a medical conference. Dr. Schlein and Moore started working together shortly thereafter on a cast padding product that Dr. Schlein was already manufacturing through subcontractors. Moore agreed to distribute the product without any formal written agreement.
In 1986 or 1987, Dr. Schlein brought OSI another product called the “Dynafix,” which was a plastic external fixator for wrist fractures. Moore agreed to manufacture the product and sell it, and agreed to pay Dr. Schlein a royalty for as long as OSI continued to sell the product. There was no formal written agreement between OSI and Dr. Schlein when OSI initially agreed to sell the Dynafix.
3. Genesis of the Schlein Shoulder PositionerIn the mid–1980's, as arthroscopic surgery became a popular alternative to traditional surgery, Dr. Schlein found it difficult to perform arthroscopic shoulder surgery with a patient lying on the operating table.2 Then, in or about 1988, Dr. Schlein attended a meeting on arthroscopic surgery where another surgeon described performing shoulder surgery with a “beach chair” that elevated the patient into a seated position.
[202 Cal.App.4th 534]
Dr. Schlein thought the beach chair concept was a good one, and he went home and started to think about how he could create something like it. Although Dr. Schlein thought he could make one, he was having trouble creating a locking or “gatch” mechanism to support the backrest.3
When Dr. Schlein told Moore about his difficulty in crafting a mechanism to lock the device, Moore sent him one of OSI's radiolucent tilt tables. Dr. Schlein took the table apart and extracted the gatch mechanism. He bought some plastic and went home to make the back piece of the positioner. Dr. Schlein enlisted the help of a plastic prototype maker, who helped make the head piece. Dr. Schlein then combined all of the parts and tested the device in surgery.
Dr. Schlein then sent the prototype of the positioner to Moore. After multiple discussions regarding the device, Dr. Schlein and Moore decided to work together on manufacturing it for sale through OSI. Dr. Schlein and Moore also discussed the development of a disposable pad set or “patient care kit” to be used with the shoulder positioner that would provide cushioning for the patients.
Starting in or about 1989, Dr. Schlein and Moore worked collaboratively on the shoulder positioner. Dr. Schlein understood that his agreement with OSI would be the same as it was with the Dynafix—OSI would manufacture and sell the positioner and Dr. Schlein would receive a royalty for as long as OSI sold the product. Moore had the same understanding [135 Cal.Rptr.3d 204]about the arrangement. Indeed, in a handwritten note dated December 28, 1990, Moore noted that for the shoulder positioner “Schlein gets 5% royalty + Disp Pad Set.” Dr. Schlein was not required to work on any subsequent modifications of the product in order to receive the agreed upon royalties.
4. Sale of OSIIn or about March 1989, Moore and his family began to contemplate the sale of OSI. To that end, Moore engaged the services of a company that would assist in finding a purchaser for OSI. Once the prospective purchasers were found, Moore was required to document all of OSI's royalty agreements. As such, Moore drafted a form agreement to document the verbal handshake agreements he had with the physicians who sold products through OSI.
[202 Cal.App.4th 535]
In early 1992, Dr. Schlein received a one-page agreement from Moore regarding the Schlein Shoulder Positioner (1992 Agreement), which provided as follows:
“[OSI] of Hayward, CA has received a product improvement idea from Dr. Allen Schlein. It is called the Schlein Shoulder Positioner.
“[OSI] will manufacture (or have manufactured) the device and will market the device.
“In return, [OSI] will pay a royalty of 5% of the list price less discounts to the Adam David Schlein trust fund.
“It is understood that a disposable pad set is being investigated. Should OSI determine that a disposable set is desirable and markets the pad set, a 5% royalty on the list price less discounts will apply.
“The royalties will be paid the 30th day of the month following the calendar quarter.
“Dr. Schlein, or his representatives shall have any reasonable opportunity to audit the sales of the device at his expense, should he so desire.
“The device has been assigned a product number for sales and accounting purposes. The pad set will also be assigned a product [number].” 4
Dr. Schlein signed the agreement on January 10, 1992, and returned it to Moore.5 Dr. Schlein had nothing to do with the drafting of the 1992 Agreement. Dr. Schlein had no recollection of having any conversations with Moore either before or after he signed the written agreement.
In 1992, Moore and his family sold OSI to Marc Abramowitz and Allan Epstein. A portion of the sales agreement prepared by Moore and OSI expressly disclosed that as to the shoulder positioner, as well as other products, “[r]oyalties are payable for as long as OSI sells the product.”
5. Subsequent Sale of OSIIn 1995, Abramowitz and Epstein sold 51 percent of OSI's stock to Mizuho Ikakogyo Co., Ltd. In the stock purchase agreement, OSI represented
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that “[p]ursuant to a letter agreement dated January 10, 1992, Dr. Allen Schlein licenses OSI the Schlein Shoulder Positioner.”
Following subsequent litigation and Mizuho's eventual acquisition of the remaining 49 percent of OSI's stock, Abramowitz and Epstein agreed to refrain from making any competing products and from undermining the value of OSI. The Schlein [135 Cal.Rptr.3d 205]Shoulder Positioner was expressly identified as one of the products in the noncompetition agreement due to its economic value to OSI.
6. OSI Modifications to the Schlein Shoulder PositionerUntil 1999, OSI marketed and sold the shoulder positioner under the name “Schlein Shoulder Positioner” or “Schlein Shoulder Positioner SSP...
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