Orp Surgical, LLC v. Howmedica Osteonics Corp.

92 F.4th 896

ORP SURGICAL, LLC, a Colorado limited liability company;Lee Petrides, Plaintiffs - Appellees/Cross-Appellants, v. HOWMEDICA OSTEONICS CORP.,a New Jersey corporation, Defendant - Appellant/Cross-Appellee.

No. 22-1430

No. 22-1455

United States Court of Appeals, Tenth Circuit

FILED February 6, 2024

Appeal from the United States District Court for the District of Colorado (D.C. No. 1:20-CV-01450-RBJ)

Marcy G. Glenn (Maureen R. Witt and Nicholas W. Katz, Holland & Hart LLP, Denver, Colorado, and Michael D. Wexler, Seyfarth Shaw LLP, Chicago, Illinois, with her on the briefs) of Holland & Hart LLP, Denver, Colorado, for Defendant - Appellant/Cross-Appellee.

Todd E. Mair (Christopher P. Carrington with him on the briefs) of Richards Carrington, LLC, Denver, Colorado, for Plaintiffs - Appellees/Cross-Appellants.

Before PHILLIPS, KELLY, and ROSSMAN, Circuit Judges.

PHILLIPS, Circuit Judge.

This litigation arises from the breakdown of a profitable business relationship that ended with a cohort of disgruntled employees jumping ship from one company to the other. At a bench trial, two corporations engaged in the medical-device-sales industry levied claims and crossclaims against each other for breach of their two sales agreements, governed by New Jersey law. After trial, the district court entered judgment for ORP Surgical, LLC (ORP), and awarded damages, attorneys' fees, sanctions, and costs against Howmedica Osteonics Corp., referred to throughout this litigation by the name of its parent company, Stryker.

Before this court, Stryker challenges the district court's rulings that Stryker breached the sales agreements and that ORP did not. Stryker also contests the attorneys' fees award, arguing that the district court misconstrued New Jersey law as requiring Stryker to indemnify ORP. On cross-appeal, ORP challenges the court's awarding mere nominal damages—not compensatory damages—for Stryker's breach of the non-solicitation/non-diversion provision under one of the agreements.

We affirm in part and reverse in part. As to the judgment entered for ORP on the breach-of-contract claims and all crossclaims and the award of nominal damages, we affirm. As to the attorneys' fees awarded under the indemnification provision, we reverse. We therefore vacate the attorneys' fees award and remand for further proceedings consistent with this opinion.

BACKGROUND

I. Factual Background

Stryker makes medical devices and sells them to hospital surgeons. ORP is a Colorado-based company that sells medical devices throughout the region. Lee Petrides is the sole Manager of ORP and a named plaintiff in this litigation.

In the early 2000s, ORP and Stryker entered into a successful business relationship in which ORP sold Stryker's products in the Colorado region on commission. Though Stryker also sold some products in the region through its own sales subsidiary, Summit Surgical, a substantial portion of the regional sales were carried out by ORP sales representatives ("ORP reps" or "the reps"). ORP reps "require[d] a specialized skillset" to sell Stryker's products. ORP Surgical, LLP v. Howmedica Osteonics Corp., No. 20-CV-01450, 2022 WL 4298189, at *1 (D. Colo. Aug. 15, 2022). Successful sales depended on the reps developing "relationships with the surgeons to whom they sell" and "sufficient medical knowledge to advise and guide the surgeons in the use of Stryker products from inside the operating room." Id. The upshot is that Stryker and ORP worked closely together. These companies and their employees knew each other intimately and relied on one another to succeed.

ORP sold two types of Stryker products: joint replacements and trauma devices. For each of the two product types, ORP and Stryker entered a sales contract, the Joint Sales Representative Agreement (JSRA) and the Trauma Sales Representative Agreement (TSRA), collectively, "the SRAs." These contracts mirror each other, particularly the sections at issue in this appeal.

The SRAs contain these provisions, summarized as follows:

• Section 2:

Either party may terminate the contract for "any reason, or no reason," with a 30-day written notice, and "in accordance with the provisions in Section 15." App. vol. 7, at 1475, 1500.

• Section 6.1:

ORP will "use best efforts" to promote Stryker's products and "develop [Stryker's] goodwill within the [sales territory]." Id. at 1476, 1501.

• Section 6.2:

ORP has the "right to determine the means, methods, and resources" it "deems appropriate to sell and promote" Stryker products in its designated sales territory, provided that ORP "conduct itself and perform such activities to the standards and satisfaction of Stryker." Id.

• Section 6.3:

ORP may not "directly or indirectly" promote or sell products competitive with any of Stryker's products, except for those included in a list of "Exempt Products" attached to the TSRA, which products ORP may sell to further Stryker's best interest in servicing the needs of its client hospitals and surgeons. Id.

• Section 6.4:

Except for the "Exempt Products" attached to the TSRA, ORP cannot sell any products that compete with Stryker's products, but "nothing contained herein in any way limits [ORP's] unfettered right to represent, market, distribute or sell products that are not competitive with any of [Stryker's products] or that do not conflict with the best interests of [Stryker]." Id. at 1477, 1502.

• Section 7.3:

ORP will ensure at its own expense that "all [ORP reps] acting on behalf of [Stryker] in the [sales territory] comply with any rules, regulations and policies imposed by [Stryker's] customers." Id. at 1478, 1503.

• Section 13.11:

ORP warrants that each ORP rep will "comply with all applicable laws, rules and regulations of any local, state, and federal governmental body, agency or board having jurisdiction." Id. at 1481, 1506.

• Section 15.1:

Either party may terminate the contract "upon the occurrence of any . . . breach of any provision of this Agreement that is not cured within ten (10) business days after receipt of written notice thereof from the other Party." Id. at 1484, 1509.

• Section 16.1:

For one year after the end or termination of the agreement, ORP agrees not to compete, that is, "participate, in any manner whatsoever, in the sale, promotion, marketing, distribution or delivery of medical device products to or for any person" in Stryker's sales territory, and ORP agrees not to solicit Stryker's customers or employees. Id. at 1485-86, 1510-11.

• Section 16.2 (non-solicitation/non-diversion provision):

Stryker agrees that for one year after termination of the agreement it will "not directly or indirectly divert or solicit, or attempt to divert or solicit, any current employee or independent contractor working for [ORP]." Id. at 1486, 1511.

• Section 16.3:

During the one-year noncompete period, Stryker will "make payments to [ORP] on a monthly basis (the '[r]estriction [p]ayments') in an amount equal to one-twelfth (1/12) of the aggregate commissions paid to [ORP] by [Stryker]" for twelve months before the agreement terminates. Id.

• Section 16.4:

Stryker is released from paying ORP the restriction payments if Stryker terminates the agreement for "cause," with "cause" defined as any breach of the terms or conditions in the agreement, among other things. Id.

• Section 18 (indemnification provision):

"Either party shall indemnify, defend, exonerate, and hold the other harmless" for "any and all claims, suits, liability, loss, costs, expenses (including . . . reasonable attorneys' fees and expenses)." Id. at 1487, 1512.

• Section 22 (non-waiver provision):

Either party's failure "to enforce any provision(s) of this Agreement shall not constitute or be construed as a waiver of the provision(s)." Id. at 1488, 1513.

This relationship began in 2001 and worked well for many years; in August 2018, the parties renewed the SRAs.

But everything started to go downhill in October 2018, when a Houston-based Stryker employee, Adam Jacobs, became Stryker's new Vice President of Sales for the Rocky Mountain region. In late March 2019, Jacobs terminated the JSRA for cause. Because the termination was for cause, Jacobs claimed that, under Section 16.4, Stryker needn't pay the restriction payments. In response, ORP denied any breach and insisted that Stryker pay the restriction payments.

In June 2019, Jacobs approached Petrides with new proposed terms for terminating the JSRA: Stryker would agree to pay ORP the twelve months of restriction payments if ORP agreed to waive the non-solicitation/non-diversion provision covering the reps. Stryker wanted ORP to waive the provision so that Stryker could hire James Demorset, an ORP sales rep. Petrides rejected the offer. But then, in October 2019, Stryker hired Demorset anyway.

Earlier, in September 2019, Jacobs emailed Petrides to initiate a "mutually agreeable termination" of the TSRA. App. vol. 7, at 1563. Jacobs pitched Petrides two alternatives for terminating the TSRA: (1) ORP would be subsumed as Stryker's agent; or (2) Stryker would buy out ORP for $8 million, pay no restriction payments, and be free of the non-solicitation/non-diversion provision.

At this point, Jacobs and Petrides met at a Starbucks to discuss the termination offer. During this meeting, Petrides wrote his terms on a sticky note, counteroffering to settle for $13.6 million. Petrides claims that Jacobs accepted the offer then and there; Jacobs claims that he told Petrides he was generally amenable to a deal but that he needed to consider the specific terms.

During the next few months, Jacobs frequently communicated with ORP reps through phone calls, dinners, and in-person meetings. Then, on March 31, 2020, Jacobs emailed Petrides with a proposal for $13.6 million, conditional on ORP's promise to waive the non-solicitation/non-diversion provision so that Stryker could hire fourteen ORP reps. To reach the $13.6 million sum, Stryker offered an initial $8 million for the cost of terminating the TSRA and ORP's waiving...