Carl Zeiss Meditec, Inc. v. Insight Photonics Sols.

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CARL ZEISS MEDITEC, INC., Plaintiff, v. INSIGHT PHOTONICS SOLUTIONS, INC., Defendant.

No. 20-cv-7667 (NSR)

United States District Court, S.D. New York

November 21, 2023

OPINION & ORDER

NELSON S. ROMAN, UNITED STATES DISTRICT JUDGE

Plaintiff Carl Zeiss Meditec, Inc. (“Plaintiff” or “Zeiss”) brings this action against Insight Photonics Solutions, Inc. (“Defendant” or “Insight”) (together, the “Parties”) alleging (1) breach of contract; (2) breach of implied covenant of good faith and fair dealing; and (3) contractual indemnification (Amend. Compl., ECF No. 52.)

Presently before the Court is Defendant's Motion for Summary Judgment as to all claims. (Def. Mem., ECF No. 61.) For the following reasons, Defendant's motion is GRANTED in part and DENIED in part.

BACKGROUND

I. FACTUAL BACKGROUND

The facts below are drawn from the Amended Complaint Defendant's Statement of Undisputed Material Facts pursuant to Local Civil Rule 56.1 (“Def. 56.1,” ECF No. 63); Plaintiff's Response to Defendant's Rule 56.1 Statement pursuant to Local Civil Rule 56.1 (“Pl. 56.1(c),” ECF No. 68), including Plaintiff's Statement of Additional Material Facts (“Pl. 56.1(b)”); the Parties' declarations;^[1] and corresponding exhibits.^[2] All rational inferences are drawn in the nonmoving party's favor.

A. The Parties' Transactions Pre-2017

Insight develops lasers for various uses in different fields. (Def. 56.1 ¶ 1; Pl. 56.1(c) ¶ 1.) Zeiss is a world-leading company that develops medical devices. (Def. 56.1 ¶ 2; Pl. 56.1(c) ¶ 2.) The Parties initially contracted in 2013 for Zeiss to fund Insight's initial development of 1060-nanometer-wavelenght laser chips meeting certain specifications (the “Zeiss Project”), which sought to solve a very difficult technical problem. (Def. 56.1 ¶¶ 3-4; Pl. 56.1(c) ¶¶ 3-4.) In 2014, the Parties signed a Development and Supply Agreement (“DSA”) wherein Insight agreed to (1) “develop and manufacture and supply exclusively for [Zeiss]” lasers for ophthalmological uses; (2) use “best efforts” to develop lasers meeting certain specifications; (3) “keep [Zeiss] advised of the progress of such development,” including any “material problems”; and (4) if the development were successful, manufacture and supply lasers to Zeiss. (Def. Ex. I at Recitals 4, §§ 2.1, 2.2 & art. 4; Def. 56.1 ¶ 5; Pl. 56.1(c) ¶ 5.) By early 2017, Insight was able to demonstrate a laser with a 100 kilohertz source on occasion for only a few minutes, but without the significant functionality it promised. (Def. 56.1 ¶ 6; Pl. 56.1(c) ¶ 6.)

B. The Parties' 2017 Transactions

i. Purchase Agreement

On February 24, 2017, the Parties restructured their relationship through a series of transactions (the “2017 Transactions”). (Def. 56.1 ¶ 7; Pl. 56.1(c) ¶ 7.) In the first transaction, Zeiss purchased 52% of Insight's subsidiary Ophthalmic Laser Engines, LLC (“OLE”) pursuant to a Limited Liability Company Interest Purchase Agreement (the “Purchase Agreement”). (Def. 56.1 ¶ 8; Pl. 56.1(c) ¶ 8.) The Parties agreed to a purchase price of $15,028,00. (Def. Ex. D § 2.02.) Pursuant to the agreement, the “purchase price was calculated as $19,500,000 minus the product of $8,600,000 multiplied by 0.52.”^[3] (Id.) Both Parties executed the agreement, and Insight conveyed 52% ownership to Zeiss, with Insight retaining 48% ownership. (Def. 56.1 ¶ 10; Pl. 56.1(c) ¶ 10.) The Parties referred to OLE as their “joint venture” or “JV.” (Def. 56.1 ¶ 15; Pl. 56.1(c) ¶ 15.)

At the time of Zeiss's purchase, OLE had no operations. (Def. 56.1 ¶ 8; Pl. 56.1(c) ¶¶ 8, 13.) Because OLE was an early-stage company with few employees, Zeiss and Insight decided that OLE should not hire administrative staff to prepare its monthly financial statements; perform human resources, payroll, and IT functions; or handle shipping and receiving. (Def. 56.1 ¶ 25; Pl. 56.1(c) ¶ 25.) Instead, in its budgets, the OLE board approved OLE making “G&A Resource” payments to Insight to compensate Insight for having its personnel perform administrative functions on OLE's behalf, as well as to reimburse Insight for OLE's proportional share of utilizing Insight's arrangements with its payroll vendor (ADP); 401(k) provider (Vanguard); liability and health insurers (Sentry Insurance, United Healthcare), and telecom providers (CenturyLink, Nitel). (Id.) OLE's G&A Resource payments totaled $426,025 over three years. (Wester Decl. ¶ 7 & Ex. A at 6.) Zeiss's former CFO Roberto Deger estimated OLE's G&A payments, which included expenses such as OLE's office rent and cost for auditing services, constituted approximately 10% of OLE's total spend. (Def. 56.1 ¶ 27; Pl. 56.1(c) ¶ 27; see also Def. 56.1 ¶ 24 (citing Wester Decl. ¶ 7 & Ex. A at 6; Deger Tr. 150:1-22).)

ii. Operating Agreement

Second, the Parties executed an Amended and Restated Limited Liability Company Agreement for OLE (the “Operating Agreement”), which required the Parties to each make an Initial Capital Contribution to OLE in proportion to each party's membership interest. (Def. 56.1 ¶ 12; Pl. 56.1(c) ¶ 12; Def. Ex. E § 3.01.) OLE's initial capitalization was $8,600,000: Zeiss contributed $4,472,000, or 52%, and Insight contributed $4,128,000, or 48%. (Def. 56.1 ¶ 14; Pl. 56.1(c) ¶ 14.) For any additional capital contributions, the Operating Agreement stated “[Zeiss and Insight] shall make additional Capital Contributions in cash, in proportion to their respective Limited Liability Company Interests.” (Def. Ex. E § 3.02(a).) The Board was to determine whether these additional Capital Contributions were “reasonably necessary” and to provide written notice to Zeiss and Insight. (Id.)

The Operating Agreement states that the purpose of OLE is to continue work on the Zeiss Project by: (1) “facilitating the design, development and manufacture” of lasers for sale to Zeiss, its affiliates, or any third-party in the ophthalmology field and (2) “engag[ing] in any and all activities necessary or incidental thereto.” (Def. Ex. E § 2.05(a).) Insight also granted OLE exclusive intellectual property and other contractual rights arising from Insight patents and Insight's rights under the DSA, including the right to be Zeiss's supplier. (Def. 56.1 ¶ 13; Pl. 56.1(c) ¶ 13.)

i. Supply Agreement

Third, Insight, Zeiss, and OLE executed a Supply Agreement, which set forth the conditions by which OLE will “exclusively” supply Zeiss with lasers for ophthalmological uses (the “Supply Agreement”). (Def. Ex. G; Def. 56.1 ¶ 18; Pl. 56.1(c) ¶ 18.) The Supply Agreement, together with the Development Agreement discussed infra, collectively replaced the DSA. (Def. Ex. G at Recitals 7.)

ii. Development Agreement

Finally, Insight, Zeiss, and OLE executed a Development Agreement (the “Development Agreement”) that set forth the terms and conditions by which Insight will “exclusively” develop lasers for ophthalmological uses for OLE “for integration into Zeiss' Products.” (Def. 56.1 ¶ 16; Pl. 56.1(c) ¶ 16; Def. Ex. F. at Recitals 5 & 7.) Insight agreed to “use its best efforts to expeditiously complete development of the [lasers] in a stable, commercially saleable form” and to keep OLE advised on the development's progress and any material problems that arise. (Def. Ex. F § 2.1(b)-(c).)

The agreement also outlines the “R&D Payments” agreed to by the Parties, stating the following:

(a) Development Costs. The Parties acknowledge that prior to the Effective Date, Zeiss paid to Insight certain fees in connection with the development of the [lasers] as described in the DSA and the related SOWs (the “Initial Development Fee”). The Parties expect future costs of development and manufacturing startup of the [lasers] through "Development included in JV funding" as set forth on Exhibit B hereto to equal, in the aggregate, eight million six hundred thousand dollars ($8,600,000) (the "Subsequent Development Costs").

(b) Overage. [Insight] shall be solely responsible for any costs and expenses in excess of the Subsequent Development Costs (the "Overage"). In the event that [Insight] has insufficient funds or is unwilling or otherwise unable to cover such Overage, Zeiss may elect to fund such Overage. For each two million five hundred thousand dollars ($2,500,000) in Overage funded by Zeiss, [OLE's] Managing Director (as defined in the LLC Agreement) shall amend the appropriate exhibit or schedule to the LLC Agreement to record Zeiss's receipt of an additional ten percent (10%) of one hundred percent (100%) of [OLE's] total outstanding membership interests as calculated at the time immediately prior to any such funding. In the event Zeiss provides less than two million five hundred thousand dollars ($2,500,000) in Overage funding, Zeiss' membership interest in [OLE] shall be adjusted on a pro rata basis (e.g., if Zeiss provides one million two hundred fifty thousand dollars ($1,250,000) in Overage funding, Zeiss' will receive an additional five percent (5%) of one hundred percent (100%) of [OLE's] total outstanding membership interests as calculated at the time immediately prior to any such funding).

(Id. § 2.2(a)-(b).) Pursuant to the Development Agreement, Insight is solely responsible for funding any manufacturing and development costs exceeding the Subsequent Development Costs, or $8.6 million. (Id.)

C. Parties' Financial Contributions Under the 2017 Transactions

In total, the Parties contributed to following as part of the 2017 Transactions (Def. Mem. at 3):

(1) Zeiss paid $19,500,000: (i) $15,028,000 to purchase OLE from Insight as part of the Purchase Agreement and (ii) $4,472,000 (52% of $8.6 million) in capital contributions to OLE pursuant to the Operating Agreement.

(2) Insight paid $4,128,000 (48% of $8.6 million) in capital contributions to OLE pursuant to the

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