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COMPUTERIZED RADIOLOGICAL SERVS. v. SYNTEX CORP.

October 22, 1984

COMPUTERIZED RADIOLOGICAL SERVICES, INC., Plaintiff, against SYNTEX CORPORATION and SYNTEX ANALYTICAL INSTRUMENTS, INC., Defendants.


The opinion of the court was delivered by: MCLAUGHLIN

MEMORANDUM AND ORDER

McLAUGHLIN, District Judge

 This civil action is among the oldest on the dockets of this court. It arose from the ashes of the "computerized tomographic scanning" industry, which was the darling of the medical profession during the last decade, but which, with the advent of nuclear magnetic resonance, will probably be relegated to the dustbin of fluoroscopes and head mirrors. The case was tried before me, without a jury, for a period extending over a year. Defendants manufactured computerized tomographic scanning equipment. The following constitute the Court's findings of fact and conclusions of law. Fed. R. Civ. P. 52.

 Findings of Fact

 Computerized Tomography ("CT") was introduced by EMI Ltd. of London in 1972 and was immediately hailed by doctors as the most revolutionary diagnostic tool since Roetgen discovered X-rays in 1895. The machine known as a CAT (Computerized Axial Tomography) Scanner takes thousands of individual X-rays that are unscrambled by computer into a single picture. Delicate difference in tissue density, clearly than on conventional X-ray film. The Scanner examines thin cross-sections of tissue at various depths within the body, enabling doctors for the first time to zero in on problem areas. Scanners not only help save lives, they also help physicians to monitor accurately the results of medication and surgery; they reduce patients' exposure to harmful radiation; and they curtail the need for the painful and hazardous diagnostic procedures used to make conventional X-rays more revealing.

 The significance of CAT Scanners was not lost upon the business community. By July 1975, EMI had received 200 orders for its $450,000 head scanner. Technicare had also entered the market, and by November 1975 had booked 115 orders for its unit. From January to July 1975, EMI's stock more than doubled and Technicare's more than tripled. Other companies hurried to enter the market. Among them were the defendants, Syntex Corporation *fn1" and its subsidiary, Syntex Analytical Instruments, Inc. ("SAI"), a major worldwide corporation in the health care field.

 Early in 1975, a group of radiologists on Long Island decided that computerized tomography on Long Island decided that computerized tomography would enhance their ability to offer diagnostic radiological services to attending physicians (e.g., neurologists) in Long Island. To this end they formed a corporation named Computerized Radiological Services, Inc. ("CRS"), the plaintiff in this action.

 Syntex and the plaintiff, CRS, had their first dealings at the annual meeting of the Radiological Society of North America ("RSNA"), which took place between November 29 and December 5, 1975, in Chicago. (See Plaintiff's Exhibit ("PX") 36). The exhibition by CAT Scanner manufacturers were the focus of the meeting and eclipsed all others. (Transcript of Trial ("Tr.") 2697, 2699-2700, 3136). Interest in them was so extensive that observers referred to it as "CAT fever." (Tr. 837).

 Three of the four CRS principals, Drs. Zwanger, Pesiri, and Kansler, attended the 1975 RSNA meeting. Kansler understood the electronics of X-ray equipment as well as its medical use. He had many contacts in the CT field to whom he spoke frequently and he read the CT literature thoroughly. (Tr. 1202, 1531; Kveton Deposition ("Dep.") 24-25). Kveton was the group's finance man. (Tr. 1308-09, 1481). Pesiri was its construction and architectural expert. (Tr. 1291-92, 1307, 1533). Zwanger, known by everyone as "Mr. Radiologist of Nassau County," (Tr. 1309), was apparently their public relations expert.

 Kansler and Zwanger were the real "emissaries" of the group; and they attended the meeting specifically to determine which CAT scanner to buy for CRS. Kansler hoped to find an alternative to the EMI scanner, which would have been his first choice except that it required a large down payment and took a long time for delivery. The Syntex scanner appealed to CRS because of its earlier delivery schedule and its lower deposit requirement. (Tr. 840-43, 1048-50).

 CRS was intent on owning the first private scanner in Nassau County, believing that its prestige and professional reputation would be enhanced by such a coup. (Tr. 769, 808, 1269, 1342, 1350; Zwanger Dep. 37-38, quoted at Zwanger Tr. 1499-1501; Tr. 2384-85).

 The coup was successful, at least initially. (Tr. 101). When CRS took delivery of a Syntex System 60 head-only scanner (the "System 60") is June, 1976, Long Island had only one CAT scanner, at the North Shore Medical Center, and no private CAT scanners. Following on CRS" heels, however, Dr. Ernest Mandel ("Mandel"), and his Nassau CT Group also installed a scanner. (Arthur D. Little Rep. (PX 364) 32). Thereafter, in 1976 and 1977, six more units were installed in Nassau and Suffolk Counties. (Kveton Dep. 37-43; Arthur D. Little Rep. (PX 364) 32). Given the close-knit nature of the Long Island radiological community (Tr. 554-57; Kansler Dep. 30), CRS was aware, well in advance, that this competition was on its way.

 CRS" rush to acquire a scanner was at least partially motivated by a desire to get one before Mandel. (Tr. 769, 808; 1501-02; 2384-85; Zwanger Dep. 37-38, quoted a Tr. 1501). Mandel's Nassau CT group, which had also bought a Syntex System 60 head-only scanner, and was located at Mineola, less than ten miles from CRS" Plainview facility (Kveton Dep. 89), was in close competition with CRS for referrals.

 Mandel acknowledged this competition by attempting "to work out a deal with [Syntex service representative, Ferdinand Russo ("Russo")] . . . to work evenings, to obtain -- so that we may come out with a tie, open the office at the same time. . . ." (Tr. 2385). As Russo put it, "[e]verybody wanted to be the first one on the block to have it." (Tr. 2384).

 This drive to be the first is understandable. The patients of radiologists, such as the CRS doctors, come to them entirely by referrals from attending physicians. Given the difficulty of breaking up established referral patterns, "the potential share of the CT volume that could be expected in any market was dependent upon how early the hospital or private practice could offer CT scanning service." (Johnson Rep. 39).

 Besides early delivery, another major goal of CRS in acquiring a scanner was to keep the price (including the initial deposit) down. Here, too, the Syntex scanner had an advantage over the competition: it required a deposit of only $10,000, as compared to EMI's down-payment of $100,000. (Kansler Dep. 39-40, quoted at Tr. 1050; Tr. 840-43). CRS hoped to make the smallest investment possible and to buy a unit that "could perform on a suitable level for a period of time, a couple of years, [so that] we could generate sufficient income to purchase another unit." (Zwanger Dep. 46, see Tr. 1439-40).

 Of course, CRS wanted to buy a scanner that represented the state of the art in 1975. To CRS, this meant that the machine had to be able to do whole body scans and not be limited just to head scans. At the very least, CRS wanted a scanner that could eventually be upgraded from head-only to whole-body scanning.

 There was ample reason for Syntex to represent at the 1975 RSNA meeting that it could sell CAT Scanners that would scan the entire body. After all, their competitors (EMI, Ohio Nuclear, and Acta, to name a few) had whole-body scanners on the market by December, 1975. (See PX 364, at 12 and passim). Syntex placed on the floor of the 1975 Radiological Society meeting a Syntex System 60 "configured for whole body scanning." (Tr. 719). This was Syntex's corporate jargon for a scanner that appeared to be a whole-body scanning." (Tr. 719). This was Syntex's corporate jargon for a scanner that appeared to be a whole-body scanner. As Sheldon Leonard, the former Syntex Sales Manager, testified in his deposition, the CAT Scanner Syntex displayed to the medical meeting was "mechanically a body scanner." (Leonard Dep., Vol. VI, at 63, 101). The unit on display had a wide aperture gantry, which suggested a body scanning capability. It did not contain a "water bag," which characterized the original EMI head scanner. (Id.)

 Moreover, the System 60 was introduced at the 1975 RSNA as "A New CT Scanner For The Head and Body." (See PX 36, at 123). The materials distributed by Syntex at the meeting compared the Syntex equipment favorably with that of EMI, Ohio Nuclear and ACTA. In a matrix entitled, "Comparison of Tomographic Scanners" (PX 1A), Syntex compared the "Standard Design Features" of the various companies, stating that Ohio Nuclear, ACTA (Pfizer) and Syntex had "Dual-Purpose (head and boyd scanning) System[s] available." (Id.). Syntex's "standard unit -- head and body" units of Ohio Nuclear at $385,000 and ACTA at $340,000. Syntex also offered a "head only" unit for $295,000. (Id.).

 In discussions at the meeting, representatives of Syntex stressed that the Syntex System 60 was truly a "system," and not simply a scanner. (Tr. 75). It was a whole body scanning system with a "modular systems design" which supposedly made the Syntex equipment superior to the body scanning units available from other manufacturers. (PX 1B, 1C). The "modular systems design" overcame the obsolescence problem facing the purchasers of other manufacturers' equipment because the Syntex system was uniquely "upgradable." (Tr. 61-62, 75-76). This would allow the purchaser to keep pace with rapidly advancing technology at minimal expense. (See PX 1B, 1C).

 The CRS doctors were advised that the CT equipment offered by Syntex had all the advantages of competitors' whole body scanners. It was a dual-purpose system, i.e., it possessed head and body capabilities. (PX 1A). While the clinical work to date had been limited to head scans, the Syntex System 60 had been designed as a body scanner, and the "computer software for the body scanning was being developed." (See PX 1B, at 6). The scanning time on the head work was being done at 60 seconds; that time would shortly be reduced to under 30 seconds for body work. (Tr. 62-64). To protect a $50,000 discount that Syntex was offering to purchasers at the 1975 RSNA meeting, Syntex sales representative Oliver Wiley issued a quotation to Dr. Kansler during the meeting. (Tr. 82; see PX 9). This quotation, dated December 3, 1975, quoted the whole body system as follows: "Syntex 60 for Computerized Tomography of the Head $297,000.00 "Whole Body Scanning Adaptation Kit $50,000.00 "Total Price for the Scanner $347,000.00

 Under the $347,000 scanner quote were quotations for other "optional equipment." As Wiley testified, this quotation, like the one later issued to Dr. Kansler on December 16, 1975, was for a "whole body scanner." (Tr. 738-39). In response to a question as to why the scanner quotation was segmented in two items, "head" and "body adaptation," Wiley explained:

 The way the System 60 works, you figure you could buy a head only unit or you could upgrade -- it was strictly a marketing type of thing, so we could offer to somebody who was a neurologist a head unit and he would be perfectly satisfied. It was a marketing type thing.

 Q. The only way to write an order for the whole body scanner at that time was to include both sections which equalled the body scanner?

 A. That is correct.

 Tr. 738.

 Shortly after the RSNA meeting, Dr. Kansler and his CRS partners were invited to California for a two-day visit to Syntex's corporate headquarters. (Tr. 83, 1282). Dr. Kansler and Dr. Pesiri made the trip to Palo Alto on January 18, 1976. Mr. Edward Voboril, of Syntex, gave them a tour of the corporate research and development facilities. As the doctors noted, they were very impressed with both the research facilities and the "pure research" that was being done by Syntex. (Tr. 83, 1203-04).

 On the second day of the visit, Voboril took the two doctors to the Syntex plant at Cupertino, California where the CT equipment was actually constructed. They saw several CT scanners in various stages of construction (Tr. 1287), and Sheldon Leonard gave a presentation about Syntex"modular concept." (Tr. 84).

 Finally, they were taken to the Palo Alto V.A. Hospital "to see a patient being scanned on the instrument." (Tr. 84). There, for the first time, the CRS doctors saw the Syntex System 60 "configured" as a head only scanner. (Tr. 85, 1286). Unlike the CT scanner on display at the RSNA meeting, however, the machine at the V.A. Hospital had a small aperture; and it had a "water bag" similar to that on the original EMI head scanner. (Tr. 85-86, 88) (One purpose of a water bag is to render the patient's head immobile while it is being scanned.).

 When Dr. Kansler and Dr. Pesiri expressed their dismay at having been brought to California to see what they regarded as a primitive water bag head scanner, Syntex representatives explained that the water bag was only in the V.A. unit temporarily; and that the unit had been "working" as a "whole body scanner," but that "minor technical problems" with the body capability had caused it to be "take[n] off line." (Tr. 89, 1286). According to Voboril, the water bag was to be removed shortly after the minor technical problems were resolved. (Tr. 1286, 89).

 On the last evening in Palo Alto, Voboril took Drs. Kansler and Pesiri to dinner. In that final negotiation session (Tr. 90), Voboril discussed at length the attributes of the System 60. He told the doctors that the "basic system" -- an "air scanning system" -- would be delivered in "March or April." (Tr. 96). The "basic system" would provide air scanning of the head; a body scanning capability would be delivered to CRS "shortly" thereafter. Specifically addressing the question of scan time, Voboril told the doctors that the System 60 would either be delivered with a 30-second scan time or would "shortly" thereafter be converted to 30 seconds. (Tr. 91-92, 1289). According to Voboril, bringing the System 60 to 30-second scan time was a minor modification involving the change of a motor drive. Voboril indicated that a "Bodine" motor that had been obtained from Chicago would be used for that purpose and that the System 60 had been successfully tested at the 30-second scan time. (Tr. 1289).

 Based upon Mr. Voboril's representations, then, Dr. Kansler and Dr. Pesiri, on January 19, 1976, at the Palo Alto restaurant where they were having dinner, gave Voboril a $10,000 down payment for the purchase of a Syntex System 60 whole body scanning system. That down payment was reflected in an update of the quotation of December 16, 1975, which shows Syntex received $10,000 against the $347,000 of the whole body scanner cost, leaving a balance of $337,000 due on the Syntex System 60 head and body scanner. (See PX 11).

 The sales contract had already been signed by Dr. Kansler, for plaintiffs, on December 16, 1975. Under Paragraph 2 thereof it would become binding on defendant when it was signed by Voboril; and this occurred on March 1, 1976. *fn2"

 In mid-June 1976, Syntex delivered to CRS a small aperture, water bag, head scanner. Drs. Kansler, Pesiri and Zwanger testified about their anger and dismay in receiving, six months after their order, a water bag head scanner only. (Tr. 111-112, 1296-1297). All three doctors clearly understood from discussions with Ed Voboril, at the RSNA and, again, at Palo Alto, that the "basic system" was to be a wide aperture "air gap" scanner "configured" like the System 60 on display at the 1975 RSNA. As Dr. Pesiri testified:

 . . . We were supposed to get an air bag scanner. [Kansler] was irate. He was livid. And a long discussion occurred which continued for a couple of days between Dr. Kansler, his associates, myself and Dr. Zwanger. And the question of what to do with the equipment. Dr. Kansler wanted to send it back immediately. And Dr. Zwanger and I argued against it. And in as much as it was in the suite and we had been committed to the medical community that we were getting a CAT scanner in the area, and we had some faith in the Syntex Corporation, and that perhaps this was a temporary thing because we had been told that this was going to be taken care of tomorrow.

 (Tr. 1296).

 After several days of debate on whether to reject the water bag head scanner (Tr. 112, 1296), the doctors reluctantly agreed to accept it, but only upon the express representations of Mr. Voboril that the water bag would be removed and air scan capacity would be delivered within a few weeks (Tr. 111-12, 767, 1297), and that body scanning would follow "shortly thereafter." (Tr. 112, 771). Unhappily, this was never to occur -- hence, this litigation.

 Sometime in 1976 it began to dawn upon Syntex that its future in the CAT scan industry was less than assured. As Senior corporate officer with "line responsibility" for Syntex's subsidiary, SAI (Tr. 235), Fulton Collins went to the 1976 RSNA meeting to "take a look at what was happening . . . competitively" so he could "assess what our future course of action should be in our development program, as well as other ...


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