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Precimed Inc. v. ECA Medical Instruments

United States District Court, Second Circuit

January 28, 2014

PRECIMED INC. d/b/a Greatbatch Medical, Plaintiff,
v.
ECA MEDICAL INSTRUMENTS, Defendant.

REPORT AND RECOMMENDATION

HUGH B. SCOTT, Magistrate Judge.

I. INTRODUCTION

Pending before the Court are three consolidated motions (Dkt. No. 16) by plaintiff Precimed Inc. ("Precimed" or "Greatbatch") for three different categories of relief. Precimed seeks a declaratory judgment, under 28 U.S.C. § 2201 and Rule 57 of the Federal Rules of Civil Procedure ("FRCP"), that the Exclusive Distribution Agreement (the "Agreement") that the parties entered on January 3, 2012 includes custom products and pricing for those products. Precimed seeks dismissal of defendant ECA Medical Instruments's ("ECA") third through sixth counterclaims under Rule 12(b)(6); Precimed asserts that these counterclaims duplicate the breach of contract counterclaim and are barred by the comprehensive nature of the Agreement. Finally, and under Rule 12(f), Precimed wants certain language stricken from ECA's counterclaims-language pertaining to prior litigation and Precimed's alleged financial state that Precimed considers irrelevant and inflammatory.

ECA opposes each of Precimed's motions. ECA argues that the Agreement defines standard and custom products separately and does not contemplate custom products within the marketing framework setup for standard products. ECA opposes deletion of any language from its counterclaims because the language helps establish Precimed's history of poor contractual conduct and motive for breaching the Agreement. Finally, ECA asserts that its various tort-based counterclaims are valid as long as the Agreement does not cover custom products.

The Court held oral argument on December 19, 2013. On January 24, 2014, the Court received supplemental briefing from the parties in response to an order that the Court issued posing them additional questions. (Dkt. No. 24.) Specifically, the Court has received and has carefully considered the following items and thanks the parties for providing them: Precimed's supplemental brief (Dkt. No. 26) and supplemental affidavits from Robert Moore (Dkt. No. 27), Douglas Slomski (Dkt. No. 28), and Robert Vento (Dkt. No. 29); and ECA's supplemental brief (Dkt. No. 25) and supplemental affidavit from James Schultz (Dkt. No. 30).

For the reasons below, the Court respectfully recommends 1) denying Precimed's motion for declaratory judgment; 2) granting Precimed's motion to dismiss ECA's third through sixth counterclaims; and 3) denying without prejudice Precimed's motion to strike.

II. BACKGROUND

This case concerns two medical equipment companies that are trying to blame each other for disappointing sales and sales commissions. ECA manufactures motorized orthopedic surgery instruments, such as drills, screwdrivers, and bone saws. Traditionally, manufacturers designed orthopedic surgery instruments for repeated use, but durable instruments are expensive and difficult to maintain. To address the cost and difficulty of maintaining durable instruments, ECA developed surgical instruments consisting of multiple-use power bases to which surgeons could attached disposable saw blades, screwdriver heads, or other tools. The new disposable instruments strike a balance between the strength necessary to carry out an operation and a low enough cost to justify disposal after one use. As the supplemental materials demonstrate-and the Court will cite important background information without compromising sensitive information filed under seal-ECA's instruments come with standard technical specifications and a range of standard tips, colors, and etching options. Customers, however, are not discouraged from proposing variations that go beyond the standard range of options for any given instrument. "ECA Medical Instruments is also happy to discuss your custom torque limiting requirements. We will walk you through our custom specification and development process that will be the highest velocity to market in the industry." (Dkt. No. 29 at 6.) Both sides acknowledge that sometimes, discussions and efforts about a customization request did not require building a custom product from scratch; in those instances, ECA would use a standard product as a "baseline" and then work with the customer on deviations from that baseline.

Precimed also manufactures various medical instruments, but its manufacturing operations are not relevant to this case. Precimed's relevant operations consist of the marketing, sales, and distribution of medical instruments.

Precimed and ECA entered the Agreement on January 3, 2012 to benefit from each other's strengths. Precimed wanted a chance to sell ECA instruments to new and existing customers, given ECA's general reputation in the field and the novelty of disposable instrument technology. In turn, ECA wanted to tap into Precimed's marketing and sales expertise to expand the market for its disposable and other instruments. The Agreement (Dkt. No. 1-1) contains numerous provisions establishing a manufacturing and distributing relationship between the companies; the Court highlights those portions of the Agreement that bear on the pending motions:

1. Section 2.1 defines the term "Products" as follows: "The term Products' as set forth in this Agreement shall include those specific Single Procedure, Multiple Procedure Torque Limiting, Ratcheting and Fixed Surgical Devices, and Sterile Single Procedure Surgical Delivery Systems manufactured by [ECA] under one or more of its trademarks, all such surgical devices and delivery systems as more specifically set forth on Exhibit A' attached hereto, as it may be amended by the parties from time to time."
2. Section 1.1 gives Precimed "the exclusive right to promote, market, distribute and sell the Products in the Territory in the field of orthopaedics (the Exclusive Field'). [Precimed] hereby accepts such exclusive appointment and agrees to use commercially reasonable efforts to promote, distribute, market, and sell the Products in the Territory during the Term, in accordance with the terms and conditions of this Agreement. Notwithstanding the foregoing, until January 1, 2012 [ECA] retains the right to sell the Products for specific pre-established accounts (a House Account') in the Territory and all such House Accounts and their products are listed on Exhibit B, and [ECA] retains the right to promote, market and advertise the Products in the Territory, and retains the right to promote, distribute, market and advertise, and sell similar products outside of the Exclusive Field in the Territory. As of January 1, 2012, [ECA] will offer to transfer any or all of such House Accounts to [Precimed] and [Precimed] may, but need not accept, any or all of such transfers. However, subject to the terms of this Agreement, [ECA] agrees to provide all future sales leads and opportunities in the Territory and Exclusive Field to [Precimed].
3. Section 4.1 sets forth a procedure by which Precimed "shall submit purchase orders for the Products" to ECA.
4. Section 4.2 sets forth an invoicing scheme for "each shipment of Product."
5. Section 5.2 states that, unless Precimed agrees to other arrangements in writing, "all Products supplied under this Agreement will be manufactured in accordance with" various quality standards including those of the International Standards Organization ("ISO").
6. Section 5.4 states that ECA promises not to make any "Substantive Change" to the specifications, processing, manufacturing, and other aspects of the Products without advance notice. This section defines "Substantive Change" as "a change that would (i) affect registrations or approvals, (ii) affect the form, fit or function of the Product, (iii) alter any clinical indication, contraindication or intended use of the Product, (iv) require a change of the Product configuration, (v) alter the production location, (vi) be visible to the end-user of the Product (and be material), including labeling, sterile packaging or instruction for use, or (vii) require a submission to a conformity assessment or regulatory body or authority."
7. Sections 5.5 and 5.6 require ECA to maintain compliance with the provisions of 21 C.F.R. § 820 "for each batch, lot, or unit" of Product manufactured.
8. Section 5.9 sets forth how Precimed and ECA will work together to handle any recall of "any product which incorporates the Product."
9. Section 5.10 establishes ECA as "the legal manufacturer of the Products" and gives ECA the responsibility for any regulatory registrations and approvals "as required by applicable laws in connection with the Products."
10. Section 6.1 requires Precimed to "use reasonable commercial efforts to promote, distribute, market and advertise, and sell the Products" within the defined sales territory.
11. Section 6.2 requires Precimed to maintain "a sufficient number of its own sales and service personnel who have adequate experience and ability to fulfill" its sales and marketing responsibilities.
12. Section 6.4 reads in its entirety as follows: "Each party may be requested from time to time to provide promotional and sales support for the Products to the other party, and in each case the non-requesting party shall use reasonable efforts to accommodate such requests. All reasonable out-of-pocket expenses resulting from such requested promotional and sales support will be reimbursed fully by the requesting party. The parties agree to participate in teleconferences or face-to-face meetings to discuss promotional, marketing and advertising, sales and operational plans for the previous period and the upcoming period (the Business Reviews'). The Business Reviews will be held monthly for the first six months after the Effective Date and quarterly thereafter. During the Business Reviews, both parties will discuss custom products that [Precimed's] customers have requested, competitive marketing information, new customer requirements, estimated sales forecasts, Product lead times, customer complaints and other information determined by both parties to facilitate effective execution of this Agreement."
13. Section 7.1 sets forth minimum purchases of "Product available" that Precimed had to make from ECA during each of the first five years of the Agreement.
14. Section 7.2 states that if Precimed failed to make the minimum purchases described in Section 7.1 then ECA would provide written notice of non-compliance. Precimed then would have 30 days to catch up with minimum purchases or would forfeit the exclusive right to promote, distribute, market, advertise, and sell the Products into designated sales territory. The catch-up requirement and the forfeiture of exclusivity rights "constitute [ECA's] sole and exclusive remedy and [Precimed's] sole obligation with respect to a breach of Section 7.1 by [Precimed]."
15. Article 9 in general sets forth certain warranties regarding the Products, including warranties pertaining to defects, mislabeling, trademark infringement, regulatory compliance, and free and clear title.
16. Section 14.1 states that "[t]his Agreement and all sales and commission transactions pursuant hereto shall be governed by the laws of Delaware, but without reference to the choice of law provisions thereof."
17. Section 14.4 states that the written Agreement constitutes the entire agreement and understanding of the parties, and that the Agreement "may not be modified except in writing, signed by both of the parties hereto."
18. Exhibit A to the Agreement consists of several pricing tables. One pricing table lists prices for customer samples, or sample instruments provided to prospective customers. A note under this table discloses that "Custom Designs will be quoted separately on an as needed basis." Two other tables, titled "Market Based Pricing Commitment" and "Volume Based Pricing Table, " list market prices and profit margins for nine specific models of instruments that ECA manufactures. The next four tables list technical specifications for 15 models of instruments that ECA manufactures. On note under each table states as follows: "Features specified are standard for each model.... Deviation(s) from above standard features may effect [sic] unit cost." The last table in the Exhibit A is titled ...

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