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PFIZER, INC. v. STRYKER CORPORATION

November 24, 2004.

PFIZER, INC., et ano., Plaintiffs,
v.
STRYKER CORPORATION, et ano., Defendants.



The opinion of the court was delivered by: LEWIS KAPLAN, District Judge

MEMORANDUM OPINION

In 1998, Pfizer, Inc. and MTG Divestitures, Inc. (collectively "Pfizer") sold its prosthetic joint and implant business to Stryker Corp. and Howmedica Osteonics Corp. (collectively "Stryker") for $1.6 billion. The pertinent agreements provided, broadly speaking, that Pfizer would retain liability for third party product liability claims arising in respect of prosthetic joints sold prior to the closing, while Stryker would be responsible for claims relating to joints sold after the closing. Once the deal closed, however, the parties each sought to shift responsibility to the other with respect to a particular prosthetic joint, the Duracon Uni-Compartmental Knee, on a variety of theories. Discovery having concluded, Pfizer moves for partial summary judgment of liability on certain of its claims. Both sides move for summary judgment on certain of Stryker's counterclaims.

  I

  A. The Duracon Uni-Compartmental Knee

  The Duracon Uni-Compartmental Knee system ("DUK") is a prosthetic knee implant that was manufactured by Howmedica, Inc., a former Pfizer subsidiary, and used to replace a part or a condyle of a knee.*fn1 The DUK has two components, a femoral piece made of cobalt chrome and a tibial component made of ultra high molecular weight polyethylene ("UHMWPE") packaged in standard atmospheric conditions and sterilized through a process of gamma sterilization in air, also known as conventional radiation sterilization.*fn2

  The DUK first was approved by the FDA in 1993. The tibial components were manufactured in Limerick, Ireland, between May and September of 1993 and shipped to Pfizer's Rutherford, New Jersey warehouse for distribution in the United States.*fn3 As a result of Pfizer's effort to redesign the femoral component, however, the DUKs were not distributed in the United States until May of 1997.*fn4

  UHMWPE degrades over time when not implanted.*fn5 In accordance with FDA regulations, Pfizer adopted a policy in 1996 that all conventionally radiation sterilized UHMWPE products should not be sold for implementation more than five years after their manufacture.*fn6 Pfizer's policy also prohibited distribution of UHMWPE products more than four years after their manufacture, although the scope of this aspect of the policy is unclear.*fn7

  In order to implement this five year rule, Howmedica created a computer program, known as the SPCS or Poly Filter File, to track UHMWPE products and ensure that none were shipped after its shelf-life had expired.*fn8 Although the SPCS was primarily responsible for tracking UHMWPE products, some Pfizer warehouse employees testified that they were supposed to check the labels of devices and manually remove those that had been manufactured more than five years earlier.*fn9

  In late 1996 or early 1997, Howmedica decided to sell the DUK in the United States and put together a team to launch the product and repackage the tibial components. As part of this effort, the team redesigned the label to indicate the date on which the components were manufactured.*fn10 Certain members of the Howmedica team had concerns about marketing the DUK so close to the time at which it no longer could be implanted.*fn11 For example, Paul Amregian, a packaging engineer for Howmedica, expressed concerned that the product was being released too close to the date after which it no longer should have been distributed.*fn12 Other employees expressed concerns about the timing of the release as well, specifically with regard to the Pfizer policy that UHMWPE products not be distributed more than four years after being manufactured.*fn13 In any event, Howmedica began to market the products in May of 1997 and reordered new products from Ireland for sale after the tibial components manufactured in 1993 were too old to be used.*fn14 None of the DUK components manufactured in 1993 was entered into the SPCS.*fn15 In a memo dated March 11, 1997, Robert Blair Harvey, then manager of regulatory compliance at Howmedica, requested that Douglas O'Connor, a Howmedica employee who worked on the development of the SPCS,*fn16 enter the catalog numbers of the DUK products into the SPCS.*fn17 Mr. Harvey never followed up on this request and Mr. O'Connor cannot recall receiving such a request, although he has had no reason to suspect that he did not.*fn18 Mr. O'Connor testified that he did not know why the DUKs were never entered into the system and surmised that it was oversight.*fn19 Similarly, Elizabeth Staub, an employee of Howmedica Osteonics Corporation, testified, on the basis of corporate documents she had reviewed, that she could find no reason why the DUKs would have been excluded from the tracking system.*fn20 Although Mr. O'Connor testified that the system had been tested thoroughly, he acknowledged that it was limited in scope and, at the time in question, did not include products manufactured outside the United States.*fn21

  The first DUK tibial components were sold in the United States in or around May of 1997.*fn22 The tibial components continued to be sold and implanted in patients until sometime in early 2000.*fn23 It is undisputed that some of the DUKs were sold and implanted more than five years after they had been manufactured and sterilized.*fn24

  B. The Purchase Agreement

  On August 13, 1998, Pfizer and Stryker entered into a written stock and asset purchase agreement pursuant to which Stryker bought Pfizer's specialty trauma and prosthetic joint business, which primarily took the form of the Howmedica Corporation.*fn25 On December 4, 1998, the deal closed and Howmedica changed its name to MTG Divestitures, Inc. The new business was incorporated into Stryker as the Howmedica Osteonics Corp. ("HOC").*fn26 Approximately 2,000 of the DUK tibial components that had been manufactured in Ireland in 1993 were transferred to Stryker as part of the sale.*fn27

  1. Liability for Third Party Claims The Purchase Agreement contains several provisions relating to the parties' liability for third party claims arising from the sale of medical devices. Section 2.5 provides:
"Assumption of Certain Obligations of the Business. Upon the terms and subject to the conditions of this Agreement, Purchaser agrees, effective at the Closing, to assume all Liabilities of the Seller Corporations to the extent relating to the Conveyed Assets or the Business and to cause the Conveyed Subsidiaries and their Subsidiaries to satisfy and discharge their respective Liabilities whether arising on, prior to or after the Closing Date, and whether accrued or fixed, known or unknown, absolute or contingent, matured or unmatured or determined or determinable as of the Closing Date, other than Retained Liabilities (all of the foregoing liabilities and obligations being herein collectively called the `Assumed Liabilities'). Except for Liabilities expressly within the definition of Retained Liabilities or as otherwise provided in this Agreement, Assumed Liabilities shall include, without limitation, the following:
(a) except as provided in Section 2.6(g), all lawsuits commenced and claims made after the Closing Date to the extent resulting from the conduct of the Business or the ownership of the Shares or the Conveyed Assets prior to, on or after the Closing Date;
* * *
(c) all Liabilities resulting from a claim by a third party for money or other compensation (beyond the cost of a particular product) in respect of injury allegedly due and owing as a result of the use or application of a product of the Business sold after the Closing Date, including, without limitation, warranty obligations and irrespective of legal theory asserted."*fn28
  Section 2.6 of the Purchase Agreement defined the Retained Liabilities of the Business for which Pfizer remains liable:
 
"Notwithstanding any provision in this Agreement, the Seller Corporations shall retain and be responsible for the following (the `Retained Liabilities'):
* * * "(c) Liabilities for which any Seller Corporation expressly has responsibility pursuant to the terms of this Agreement;
* * *
"(g) Liabilities resulting from a claim by a third party for money or other compensation (beyond the cost of a particular product) in respect of injury allegedly due and owing as a result of the use or application of a product of the Business sold on or prior to the Closing Date, including, without limitation, warranty obligations and irrespective of the legal theory asserted."*fn29
2. Indemnification
  The parties agreed also to indemnify each other in certain circumstances. Section 8.1 provides for indemnification by Pfizer:
 
"Pfizer agrees to defend, indemnify and hold harmless Purchaser and its Affiliates, and, if applicable, their respective directors, officers, agents, employees, successors and assigns from and against any and all claims, actions, causes of action, judgments, awards, liabilities, losses, costs or damages (collectively, a `Loss' or, the `Losses') claimed or arising directly from (i) any Retained Liability, . . . (iii) any breach by the Seller Corporations of any of its covenants or agreements contained in this Agreement or in any agreement, (iv) any breach of any representation and warranty of the Seller Corporations contained in this Agreement, it being understood that for purposes of this Article VIII, all materiality exceptions and qualifications set forth in any representation and warranty of Pfizer contained in this Agreement shall be disregarded, the materiality standard for Pfizer's obligations to indemnify Purchaser and its Affiliates, . . . in respect of a breach of a representation and warranty contained herein being set forth in Section 8.6 hereof."*fn30
Section 8.2 similarly provides for Stryker to defend, indemnify and hold harmless Pfizer against any and all Losses arising from, inter alia, "any Assumed Liability" and events occurring after the Closing Date.*fn31
  The materiality provision in Section 8.6 of the Agreement provides that neither party shall have any obligation to indemnify the other under either Section 8.1(a)(iv) or Section 8.2(a)(iii) for Losses, net of insurance:
"unless the aggregate of all such Losses for which either party would, but for this provision, be liable exceeds on a cumulative basis $17,500,000, but if such amount is exceeded, such party shall be required to pay only the amount of such Losses which in the aggregate exceed $17,500.000."*fn32
  Significantly, the parties agreed also to certain procedures for claiming indemnification with respect to third party lawsuits. Section 8.3 requires the party seeking indemnification to give notice of the claim and tender the defense of such action or suit.*fn33 Section 8.4 gives the indemnifying party the right, "but not the obligation, to conduct and control, through counsel of its choosing, any third party claim, action or suit."*fn34 It provides further that "[n]o Indemnified Party may compromise or settle any Third Party Claim for which it is seeking indemnification hereunder without the consent of the Indemnifying Party."*fn35

  C. The Transitional Services Agreement

  The parties entered also into a Transitional Services Agreement (the "TSA") pursuant to which Stryker purchased from Pfizer services and the right to use necessary facilities so that the business at issue could continue to operate without interruption*fn36 during the period between the closing on December 4, 1998 and, so far as relevant here, December 31, 1999.*fn37 In performing those services, Pfizer "represent[ed] and warrant[ed] that they [would] . . . perform the services . . . hereunder in a competent, businesslike manner."*fn38

  The TSA contains its own liabilities and remedies provisions. It limits liabilities for breach to the greater of "(i) a refund of price paid for the particular Service or (ii) Buyer's incremental cost of performing the Service itself or (iii) Buyer's incremental cost of obtaining the Service from a third party."*fn39 In addition, it provides:
"Notwithstanding anything to the contrary herein, in no event shall Pfizer have any liability for loss of profit, diminution in value, loss of goodwill or consequential, incidental or punitive or other special damages as a result of provision of or failure to provide the services under the terms of this Agreement."*fn40
D. The DUK Third Party Litigation

  Beginning in late 2000, a series of products liability suits relating to the DUKs were brought against Pfizer, Stryker and HOC. The plaintiffs generally alleged that they received one or more UHMWPE tibial components that had been manufactured and sterilized more than five years prior to implantation.*fn41 On November 30, 2000, Stryker tendered the defense of all claims, whether they arose from products sold before or after December 4, 1998, to Pfizer.*fn42 Pfizer in turn tendered the defense of all claims arising from products sold after the closing to Stryker, which refused to assume the defense.*fn43 Pfizer asserts that it accepted Stryker's tender with respect to the claims relating to pre-closing sales,*fn44 although Stryker maintains that its counsel obtained its dismissal from several pre-closing actions.*fn45 It is undisputed that Pfizer provided counsel to defend Stryker in at least two suits and that the parties cooperated in several of the DUK cases pursuant to a joint defense agreement.*fn46

  One of the largest suits, entitled Orrick v. Stryker Corp., was a consolidation of approximately forty cases, including eleven pre-closing and twenty-nine post-closing cases.*fn47 Stryker there stipulated that the devices it sold were defective, that the defects proximately caused the plaintiffs' injuries, and that it was liable to the plaintiffs for breach of implied warranty of merchantability.*fn48 Stryker's counsel in the Orrick litigation informed Pfizer of its discussions with opposing counsel and provided Pfizer's counsel with a draft of the proposed stipulation, though the timing of this occurrence is disputed.*fn49 Stryker then obtained a voluntary dismissal from all forty Orrick cases. In 2002, Pfizer settled with the Orrick plaintiffs, including those whose cases arose from DUKs sold after the closing.*fn50

  The parties subsequently have been subjects of other suits involving old DUKs and now seek to resolve their rights to indemnification for their losses under the Purchase Agreement.

  II

  A. Summary Judgment Standard Summary judgment is appropriate if there is no genuine issue of material fact and the moving party is entitled to judgment as a matter of law.*fn51 The moving party has the burden of demonstrating the absence of a genuine issue of material fact*fn52 and the Court must view the facts in the light most favorable to the nonmoving party.*fn53 Where, as here, there are cross motions for summary judgment, a court need not "grant judgment as a matter of law for one side or the other," but "must evaluate each party's motion on its own merits, taking care in each instance to draw all reasonable inferences against the party whose motion is under consideration."*fn54

  B. The Parties' Claims

  Pfizer here seeks (1) a declaration that Stryker is obliged (a) to defend, indemnify and hold it harmless for any and all claims and actions arising as a result of any injury caused by the use of a product of the business sold after the closing date; (b) reimburse Pfizer for any and all litigation expenses accrued for products sold after the closing date; (c) reimburse Pfizer for all judgments, awards, liabilities or settlements it is obligated to pay as a result of any third party claims for any injury allegedly due to the use of a product sold after the closing date; and (d) reimburse Pfizer for all attorney's fees and litigation expenses in connection with its effort to enforce its rights to indemnification in this declaratory judgment action;*fn55 (2) damages for breach of contract as a result of Stryker's failure to indemnify and hold it harmless against claims arising from post-closing sales of the DUK;*fn56 and (3) summary judgment dismissing Stryker's counterclaims for a declaratory judgment, indemnification, breach of contract, and fraud.*fn57

  Stryker seeks summary judgment requiring Pfizer to indemnify it for all losses it has suffered as a result of the expired DUKs, which it asserts flow from Pfizer's breach of its representation and warranty in Section 5.9 of the Purchase Agreement, and dismissing Pfizer's amended complaint.*fn58

  C. Declaratory Judgment Action

  The parties advance competing interpretations of the Purchase Agreement in support of their conflicting views of their respective obligations with respect to third party claims relating to DUKs. As both seek summary judgment on their claims for relief, it is convenient to discuss the issue in one place.

  1. Indemnity for Third Party Claims

  Each party asserts that the other must indemnify it for all losses arising from DUKs sold after December 4, 1998. Stryker claims that it is entitled to indemnification by Pfizer as to all losses relating to DUKs, whenever sold, and that in defending against third party claims, it is entitled to attorneys of its own choosing, with costs borne by Pfizer.*fn59

  Pfizer's argument is simple: Stryker is obliged by Sections 2.5, 2.6(g) and 8.1 to indemnify Pfizer against any loss incurred as a result of DUKs sold after the closing date. It maintains that it is entitled to summary judgment for declaratory relief to that effect.*fn60

  Stryker's position is more complex. It begins by arguing that Pfizer shipped old DUKs prior to the closing and during the transition period and thus breached covenants and warranties contained in Sections 5.9(a), 7.2 and 7.18. At least some of the post-closing claims for which Pfizer seeks indemnification allegedly arose out of the implantation of outdated DUKs. These, in Stryker's view, therefore are Retained Liabilities — claims for which Pfizer retained responsibility under Section 2.6(c). Stryker then argues that the phrase "[n]otwithstanding any provision in this Agreement" at the outset of Section 2.6 overrides Sections 2.5(c) and 8.2, which in its absence would have made Stryker to be responsible for claims with respect to DUKs sold after the closing.*fn61 Accordingly, Stryker argues, Pfizer is obligated to defend and indemnify Stryker on these claims, as well as with respect to claims based on DUKs sold before the closing.*fn62

  Pfizer counters by arguing that Stryker misreads the agreement which, in its view, unambiguously makes Stryker responsible for all post-closing claims. While Pfizer acknowledges that it could be liable for a breach of covenant or warranty related to the DUKs, its liability would be subject to the $17.5 million materiality threshold contained in the Purchase Agreement.

  Under New York law,*fn63 the interpretation of an unambiguous contract is a question of law for the court.*fn64 When an agreement is ambiguous, however, its meaning is a question of fact. Whether a contract is unambiguous is a threshold question.*fn65 The existence of an ambiguity depends on whether there is a reasonable basis for difference of opinion as to the meaning of the contract.*fn66 A contractual provision is not ambiguous merely because the parties urge different interpretations of it.*fn67 Summary judgment is appropriate if the contract is unambiguous or if the language is ambiguous but there is relevant extrinsic evidence that creates no genuine issue of fact and permits interpretation of the agreement as a matter of law.*fn68

  Section 2.5 of the Purchase Agreement assigns liability to Stryker, except as otherwise provided in Section 2.6(g), for "all lawsuits commenced and claims made after the Closing Date to the extent resulting from the conduct of the Business or the ownership of the Shares or the Conveyed Assets prior to, on or after the Closing Date" and for liabilities resulting from products sold after the closing date.*fn69 Section 2.6(g) assigns responsibility to Pfizer for all claims arising from products sold on or prior to the closing. Hence, ...


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