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Johnson v. Guidant Corp.

August 29, 2007

JOHNSON & JOHNSON, A NEW JERSEY CORPORATION, PLAINTIFF,
v.
GUIDANT CORPORATION, AN INDIANA CORPORATION, BOSTON SCIENTIFIC CORPORATION, A DELAWARE CORPORATION, AND ABBOTT LABORATORIES, AN ILLINOIS CORPORATION, DEFENDANTS.



The opinion of the court was delivered by: Gerard E. Lynch, District Judge

OPINION AND ORDER

This case arises from a proposed merger that left plaintiff Johnson & Johnson ("J&J") with a broken heart. The object of J&J's affections, Guidant Corporation ("Guidant"), was instead acquired by defendant Boston Scientific Corporation ("BSC"), except for a piece of Guidant's business that was divested to defendant Abbott Laboratories ("Abbott"). J&J claims that a merger agreement between it and Guidant was violated when Guidant provided certain due diligence materials to Abbott. This allegedly improper information-sharing was shortly followed by Abbott's agreeing to purchase the portion of Guidant's business, which in turn cleared the way for BSC's successful bid to take over Guidant. J&J received a substantial termination fee when Guidant terminated the merger agreement, but J&J claims that it is entitled to further damages from Guidant (for providing the due diligence to Abbott) and from BSC and Abbott (for inducing it to do so). All three defendants move to dismiss.

The motion by defendant Abbott will be granted. The motion by defendants BSC and Guidant will be denied insofar as it seeks dismissal of the claim against Guidant for breach of contract, but granted insofar as it seeks dismissal of the claim against BSC for tortious interference with contract and the claim against Guidant for breach of an implied duty of good faith and fair dealing.

BACKGROUND

Guidant is an Indiana corporation that designs, develops and sells medical devices used in cardiovascular treatment. (Compl. ¶ 16.) On November 14, 2005, J&J and Guidant entered into an Amended and Restated Agreement and Plan of Merger (the "Agreement"*fn1 ) under which J&J agreed to acquire Guidant for $21.5 billion, revised from an earlier offer of $25.4 billion.*fn2 (Id. ¶ 28.)

The proposed merger gave rise to antitrust concerns. At the time, only two companies in the United States marketed the device known as a known as a "drug-eluting stent."*fn3 (Compl. ¶¶ 19, 20.) Three other companies - Abbott, Guidant, and a third company, Medtronic - were in the process of seeking regulatory approval to market drug-eluting stents. When J&J sought antitrust clearance with the Federal Trade Commission ("FTC"), the FTC expressed concern that a merger between J&J, one of the two actual competitors in the market, with Guidant, one of the three potential competitors, would lessen competition in the market. (Compl. ¶ 27.) To avoid regulatory problems, J&J involved Abbott in the proposed transaction. Specifically, J&J and Abbott entered a license agreement, which provided that if J&J acquired Guidant, J&J would grant Abbott a non-exclusive license to certain patents relating to drug-eluting stents. (Compl. ¶ 27.)

The Agreement contained a "No Solicitation" clause that is at the heart of this lawsuit. The clause provides:

[Guidant] shall not, nor shall it authorize or permit any of its Subsidiaries or any of their respective directors, officers or employees or any investment banker, financial advisor, attorney, accountant or other advisor, agent or representative (collectively, "Representatives") retained by it or any of its Subsidiaries to, directly or indirectly through another person, (i) solicit, initiate or knowingly encourage, or take any other action designed to, or which could reasonably be expected to, facilitate, any Takeover Proposal or (ii) enter into, continue or otherwise participate in any discussions or negotiations regarding, or furnish to any person any information, or otherwise cooperate in any way with, any Takeover Proposal. (Compl. ¶ 30; Agreement § 4.02(a).)

Importantly, the no-solicitation clause contained an exception that permitted Guidant to respond to an unsolicited takeover offer:

[A]t any time prior to obtaining . . . Shareholder Approval [of J&J's takeover proposal], in response to a bona fide written Takeover Proposal that the Board of Directors of the Company [Guidant] reasonably determines (after consultation with outside counsel and a financial advisor of nationally recognized reputation) constitutes or is reasonably likely to lead to a Superior Proposal, and which Takeover Proposal was not solicited after the date hereof and was made after the date hereof and did not otherwise result from a breach of this Section 4.02(a), the Company may . . . furnish information with respect to the Company and its Subsidiaries to the person making such Takeover Proposal (and its Representatives) . . . (Compl. ¶ 33; Agreement § 4.02(a).) The phrase "Superior Proposal" was defined in the same section as a "bona fide offer" by a third party that would be more financially favorable than J&J's offer, and that was "reasonably capable of being completed." (Id.) In short, the Agreement forbade Guidant to solicit a "Takeover Proposal," but allowed it to provide information to a third party making such a proposal, as long as the proposal was unsolicited.

"Takeover Proposal" is defined in the same section:

The term "Takeover Proposal" means any inquiry, proposal or offer from any person relating to, or that could reasonably be expected to lead to, any direct or indirect acquisition or purchase . . . of assets (including equity securities of any Subsidiary of the Company) or businesses that constitute 15% or more of the revenues, net income or assets of the Company and its Subsidiaries, taken as a whole . . . (Compl. ¶ 31; Agreement § 4.02(a) (emphasis added).) The parties agree that the portion of Guidant's business purchased by Abbott constituted more than 15% of Guidant's business. Abbott's prospective purchase, therefore, was sufficiently large to trigger the exemption, assuming the other conditions for the exemption were met. (See Oral Argument Tr., Feb. 28, 2007 ("Tr.") at 7-12; Abbott Reply 1 n.1.)

On December 5, 2005, BSC announced a bid for Guidant, offering $25 billion. (Guidant/BSC Mot. Ex. 3.) The December 2005 announcement mentioned BSC's intention to divest itself of a part of Guidant's operations, but did not identify any party to whom the businesses would be divested:

We have conducted a review of the antitrust issues that will be raised by the proposed transaction, and we are confident that we will be able to address those issues quickly. To that end, we are prepared to divest Guidant's vascular intervention and endovascular businesses, while retaining shared rights to Guidant's drug-eluting stent program. (Guidant/BSC Mot. Ex. 3 at 4.)

On January 8, 2006, BSC submitted a formal proposal to acquire Guidant. (Guidant/BSC Mot. Ex. 5; see Compl. ¶¶ 38-39.) In the January 2006 proposal, the divestiture party was identified as Abbott.*fn4 (Guidant/BSC Mot. Ex. 5 at 2; see Compl. ¶ 39.) The complaint alleges that without the divestiture to Abbott, the proposal would not have been acceptable to Guidant's board of directors or shareholders. (Compl. ¶ 8.) The complaint also alleges that Abbott agreed to make a substantial loan of $700 million to BSC as part of the Guidant transaction. (Id. ¶ 39.)

According to the complaint, in the course of a January 9, 2006 conference call with market analysts to discuss the BSC proposal, a representative of BSC made it clear that Guidant had provided certain information to Abbott. Larry Best, the CFO of BSC, stated that the Abbott divestiture agreement was critical to the proposed BSC merger, and that "Abbott had the opportunity to do a much deeper dive on due diligence," meaning that Abbott had gotten more information from Guidant than BSC. (Compl. ¶¶ 41-43.)

Later in January 2006, J&J wrote a letter to Guidant demanding to know how the provision of due diligence to Abbott could have been consistent with the Agreement. (Guidant/BSC Mot. Ex. 6.) J&J did not, however, seek to terminate the Agreement. Instead, it raised its offer, prompting a bidding war, which BSC eventually won with a $27 billion bid. (Compl. ¶¶ 50-51.) On January 17, 2006, Guidant's board announced that BSC's bid was a "Superior Proposal," and that it was terminating the Agreement with J&J. (Id. ¶ 51.) As required by the Agreement, Guidant paid J&J a $705 million termination fee. (Id.) J&J brought this action in September of 2006, seeking at least $5.5 billion in damages for Guidant's breach of the no-solicitation clause and an implied obligation of good faith and fair dealing, and BSC and Abbott's alleged tortious interference with the Agreement. (Compl. at 20-21.)

DISCUSSION

The defendants' basic argument, which has a strong equitable appeal, is that there was no material breach in this case because each party involved was treated fairly and received a fair benefit from the transaction. The agreement negotiated between J&J and Guidant explicitly recognized that the shareholders of Guidant should not be deprived of the benefit of a better bargain if one came along, but that if one did, J&J should receive compensation for its frustrated efforts. Consequently, the parties negotiated a provision that permitted Guidant to take a better offer, and agreed upon a sum of $705 million as fair compensation for J&J in that event. In essence, events followed the sequence anticipated in the Agreement, and all parties benefitted, if not to the extent they had hoped: the shareholders of Guidant got a higher price, BSC and Abbott got businesses they wanted, antitrust problems were avoided, and J&J got the $705 million it had negotiated as compensation. Defendants argue that J&J suffered no fundamental wrong - indeed, that it suffered no harm beyond that for which the Agreement provided an appropriate negotiated remedy.

If Abbott and BSC had made a joint bid or had each bid separately for complementary portions of Guidant, Guidant would clearly have been entitled to provide due diligence materials to Abbott. Thus, defendants argue that J&J's claim is based on no more than a technicality, and amounts to a bid to grab more compensation than the parties expressly provided was available. There is considerable force to that argument. The breach of contract claim survives, however, because the Agreement makes clear that Guidant was not allowed to solicit bids. It therefore makes a difference of substance, and not merely of form, whether Guidant provoked Abbott to get involved outside the conditions permitted by the contract. The complaint alleges that Guidant provided the due diligence without any inquiry from Abbott that permitted it to do so. At this point it cannot be said as a matter of law that this is not what happened. Accordingly, Guidant's motion to dismiss must be denied, at this stage of the litigation.

It is important to note, however, that this case may hinge on a factual question that the parties can surely answer with little difficulty: whether Guidant, BSC or Abbott first made the approach that resulted in Guidant's provision of due diligence information to Abbott.

Accordingly, discovery should focus on the timing and sequence of the bids by the various parties and Guidant's provision of due diligence, in light of the possibility that a clear picture of these events may quickly bring the case to a close.

I. Motion to Dismiss Standard

Under the notice pleading standard set forth in Rule 8(a) of the Federal Rules of Civil Procedure, complaints must include "a short and plain statement of the claim showing that the pleader is entitled to relief." Fed. R. Civ. P. 8(a)(2). The Supreme Court recently reconsidered the standard for motions to dismiss in Bell Atlantic Corp. v. Twombly, 127 S.Ct. 1955 (2007). In Twombly, the Court disavowed the well-known statement in Conley v. Gibson, 355 U.S. 41 (1957), referenced several times during the oral argument in this case, that "a complaint should not be dismissed for failure to state a claim unless it appears beyond doubt that the plaintiff can prove no set of facts in support of his claim which would entitle him to relief." Conley, 355 U.S. at 45-46. The Twombly Court stated that this language "is best forgotten as an incomplete, negative gloss on an accepted pleading standard: once a claim has been stated adequately, it may be supported by showing any set of facts consistent with the allegations in the complaint." Id. at 1969.*fn5

In the wake of Twombly, courts are to apply "a flexible 'plausibility standard,' which obliges a pleader to amplify a claim with some factual allegations in those contexts where such amplification is needed to render the claim plausible." Iqbal v. Hasty, 490 F.3d 143, 158 (2d Cir. 2007).*fn6 Under this standard, a complaint may be dismissed where it fails to plead "enough facts to state a claim to relief that is plausible on its face." Twombly, 127 S.Ct. at 1974. "[A] plaintiff's obligation to provide the grounds of his entitlement to relief requires more than labels and conclusions, and a formulaic recitation of the elements of a cause of actions will not do." Id. at 1965 (internal quotation marks omitted). In order to state a claim, the factual allegations "must be enough to raise a right to relief above the speculative level." Id. Where a plaintiff "ha[s] not nudged [its] claims across the line from conceivable to plausible, [its] complaint must be dismissed." Id. at 1974. It remains true, however, that "[s]pecific facts are not necessary; the statement need only give the defendant fair notice of what the claim is and the grounds upon which it rests." Erickson v. Pardus, 127 S.Ct. 2197, 2200 (2007) (internal alteration, citations and quotation marks omitted).

As always, the court must "accept[] all factual allegations in the complaint and draw[] all reasonable inferences in the plaintiff's favor." ATSI Commc'ns, Inc. v. Shaar Fund, Ltd., Nos. 05-5132-cv, 05-2593-cv, __ F.3d __, 2007 WL 1989336, at *5 (2d Cir. Jul. 11,2007). "In addition, [courts] may consider any written instrument attached to the complaint, statements or documents incorporated into the complaint by reference, legally required public disclosure documents filed with the SEC, and documents possessed by or known to the plaintiff and upon which it relied in bringing the suit." Id.

II. Breach of Contract

The Agreement is governed by Indiana law. (Agreement § 8.08.) Under Indiana law, "the construction of an unambiguous written contract is a question of law for the court." Allen v. Cedar Real Estate Group, LLP, 236 F.3d 374, 380 (7th Cir. 2001) (citation omitted). "A contract is ambiguous when it is susceptible to more than one interpretation and reasonably intelligent persons would honestly differ as to its meaning." Four Seasons Mfg., Inc. v. 1001 Coliseum, LLC, 870 N.E.2d 494, 501 (Ind. App. 2007).

"The contract is to be read as a whole when trying to ascertain the parties' intent, and we will make all attempts to construe the language in a contract so as not to render any words, phrases, or terms ineffective or meaningless." Id. "The court must accept an interpretation of the contract that harmonizes its provisions, as opposed to one that causes the provisions to conflict." Id.

A. Whether Abbott Was A "Representative" of BSC

Defendants argue that plaintiff's breach of contract claim fails because Abbott was a "Representative" of BSC within the meaning of the Agreement. As noted above, the Agreement allowed Guidant to provide due diligence to BSC and its "Representatives" once BSC's takeover proposal had been made, and so if Abbott was a representative of BSC, ...


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