Sharkey v. Zimmer U.S., Inc.

PETER F. SHARKEY and CHARLES LEINBERRY, JR., Plaintiffs, v. ZIMMER USA, INC. doing business as ZIMMER BIOMET, and ZIMMER KNEE CREATIONS, INC. Defendants.

No. 20 Civ. 8258 (JPC)

United States District Court, S.D. New York

August 9, 2021

OPINION AND ORDER

JOHN P. CRONAN, UNITED STATES DISTRICT JUDGE

Plaintiffs Dr. Peter F. Sharkey and Dr. Charles Leinberry sold the rights to their novel surgical invention to Defendants Zimmer USA, Inc. (“Zimmer”) and Zimmer Knee Creations Inc. (“ZKC”). In return, Defendants promised to pay Plaintiffs royalty payments based on a percentage of Defendants' sales of products incorporating this technology. Plaintiffs now allege that Defendants breached the implied covenant of good faith and fair dealing by taking actions that impeded these sales, including by altering their business strategy to focus on competing products and failing to protect confidential information related to Plaintiffs' invention. Plaintiffs also bring a claim of tortious interference with contract in connection with Zimmer's allegedly improper interference with the contractual relationship between ZKC and Plaintiffs.

Defendants now move to dismiss Plaintiffs' claims, arguing primarily that the implied obligations Plaintiffs seek to impose are at odds with the parties' contractual relationship. For reasons explained below, the Court agrees with Defendants and grants their motion to dismiss with prejudice.

I. Background

A. Factual Background

The factual allegations recited below are drawn from the Amended Complaint and the exhibits attached to it, including the various contracts relevant to this case. See DiFolco v MSNBC Cable L.L.C., 622 F.3d 104, 111 (2d Cir. 2010) (“In considering a motion to dismiss for failure to state a claim pursuant to Rule 12(b)(6), a district court may consider the facts alleged in the complaint, documents attached to the complaint as exhibits, and documents incorporated by reference in the complaint.”). For purposes of this motion, the Court assumes the truth of the well-pleaded factual allegations contained in the Amended Complaint. See id.

1. Plaintiffs' Invention and the 2008 Agreement

In 2005, Plaintiffs invented a surgical technology known as subchondroplasty (“SCP”), “a minimally-invasive surgical technique using bone marrow implants and related instrumentation for the treatment of osteoarthritis in the knee and other joints.” Dkt. 20 (“Am. Compl.”) ¶¶ 2-3, 22. In 2008, after filing a patent application covering a substantial part of this technology, Plaintiffs entered into an agreement with non-party Knee Creations, LLC (“Knee Creations”). Id. ¶¶ 4-5, 22, 24-25; Dkt. 20, Exh. A (“2008 Agreement”).

Pursuant to the 2008 Agreement, Plaintiffs transferred most of their rights in the SCP intellectual property^[1] to Knee Creations in return for $100, 000 and future royalty and milestone payments.^[2] Am. Compl. ¶¶ 25-26; 2008 Agreement ¶¶ 2.2, 3.1, 3.2, 3.3. Specifically, Plaintiffs were to receive royalty payments equal to 3% of Knee Creations' annual sales of products incorporating the SCP technology (the “SCP Products”), with each Plaintiff receiving 1.5%, until ten years after net sales of the SCP Products reached annual sales of at least ten million dollars. Am. Compl. ¶ 27; 2008 Agreement ¶ 3.2. Meanwhile, the 2008 Agreement tied the milestone payments to “specified events, ” which Knee Creations was obligated to “use its commercially reasonable best efforts to achieve” “as promptly as commercially reasonable after the execution of th[e] [2008 Agreement].” 2008 Agreement ¶ 3.1; see Am. Compl. ¶ 26. These events included: (1) completion of clinical studies related to the SCP technology and subsequent publication of the results; (2) approval by the U.S. Food and Drug Administration of an implant device using the SCP technology; and (3) the grant of a patent and trademark as to “instruments to be used in conjunction with” the SCP technology. 2008 Agreement ¶ 3.1(a)-(d). Plaintiffs were to be paid a fixed sum upon completion of each of these milestone events, with certain milestone payments to be offset from future royalty payments. Id.

Important for the present dispute, Knee Creations agreed in the 2008 Agreement to refrain from “directly or indirectly engag[ing] in research, development or marketing of any product competitive with the [SCP] Intellectual Property, except with the prior approval of [Plaintiffs] which shall not be unreasonably withheld or delayed.” 2008 Agreement ¶ 4.2(f); see Am. Compl. ¶ 29. The 2008 Agreement also obligated Knee Creations to “take all commercially reasonable actions to maintain and protect the [SCP intellectual property]” and “take reasonable security measures to protect the confidentiality” of the SCP technology. 2008 Agreement ¶¶ 4.2(a), 4.2(b); see Am. Compl. ¶ 28.

2. Zimmer's Purchase of Knee Creations and Amendments to the 2008 Agreement

The relationship between Knee Creations and Plaintiffs remained unchanged until 2013, when Zimmer purchased Knee Creations.^[3] Am. Compl. ¶ 37. To effectuate this acquisition, Zimmer incorporated Knee Creations into a separate entity, Defendant Zimmer Knee Creations, Inc. (“ZKC”), which it employed as its “internal distributing unit.” Id. Zimmer and Plaintiffs also entered into a contract that amended the 2008 Agreement. Id. ¶ 38; Dkt. 20, Exh. B (“2013 Amendment”). The 2013 Amendment assigned to Zimmer the same rights to the SCP technology as owned by Knee Creations under the 2008 Agreement. See 2013 Amendment p. 1. Zimmer also inherited Knee Creations' obligations under the 2008 Agreement, including the duty to pay Plaintiffs the royalty and milestone payments. Id. Notably, the 2013 Amendment “deleted, extinguished, and removed in their entirety” Sections 4.2(a) and 4.2(f) of the 2008 Agreement, 2013 Amendment ¶ 1(c), which, as mentioned above, prohibited Knee Creations from engaging in research, development, or marketing of products competing with the SCP technology and required Knee Creations to take commercially reasonable action to protect the SCP intellectual property, 2008 Agreement ¶¶ 4.2(a), 4.2(f). See Am. Compl. ¶ 41.

In 2014, Plaintiffs and ZKC entered into an agreement to clarify royalty payments to Plaintiffs in connection with the sale of SCP Products focused on “joints other than the knee.” Am. Compl. ¶ 43; Dkt. 20, Exh. C (“2014 Amendment”; collectively with the 2008 Agreement and the 2013 Amendment, the “Amended Agreement”).^[4] The 2014 Amendment also modified how the royalty payments would be divided between Plaintiffs. Am. Compl. ¶ 46; 2014 Amendment ¶ 1(b).^[5]

3. Increased Sales of the SCP Products and Zimmer's 2017 Changed Business Strategy

From 2008 to 2013, net sales of knee-related SCP Products gradually increased, reaching approximately five million dollars by 2013. Am. Compl. ¶ 33. In 2013, Zimmer's President, David Dvorak, told Plaintiffs “that Zimmer would strongly support the sales growth of [the SCP] Products through surgeon and sales force education, direct-to-consumer marketing and value-added commissions to representatives for sales of [the SCP] Products.” Id. ¶¶ 48-49. Plaintiffs allege that Defendants followed through with Dvorak's assurance and sales continued to rise, reaching $13.6 million in 2014, $23 million in 2015, $35 million in 2016, and $38 million in 2017. Id. ¶¶ 35, 51, 52. Plaintiffs also assert that the success of the SCP Products was in part due to their “considerable efforts, ” which included research, promotion of the products through publication of scientific articles and frequent lectures, and Plaintiffs' efforts in expanding the application of the SCP technology to joints other than the knee. Id. ¶¶ 34, 36.

This changed in late 2016, when Zimmer “and, at its direction, ZKC, began making major budget cuts in medical education and reduced sales commissions related to the [SCP] Products.” Id. ¶ 58. Plaintiffs allege that after Zimmer retained a new President in 2017, Zimmer “unilaterally reduced the educational budget” for SCP Products' sales commissions “and virtually eliminated direct-to-consumer marketing” of these products. Id. ¶ 60. As a result, the Amended Complaint alleges that annual sales of SCP Products related to both the knee and other joints decreased. Id.^[6]

Plaintiffs attribute this sudden change in Zimmer's promotional efforts to a conflict between the SCP technology, which “has been shown both to delay the need for knee replacement and prevent knee replacement for some patients, ” and Zimmer's “consulting and royalty relationships with many knee replacement surgeons, who have objected to the promotion of SCP technology because it competes with joint replacements and diminishes royalties paid to those joint replacement surgeons.” Id. ¶ 61. Plaintiffs claim that in 2017, “in an effort to maximize its profits, ” Zimmer decided to change its business strategy by promoting “certain joint replacement products, eliminating other joint replacement products, and suppressing the sale of [the SCP] Products to the knowing and intentional detriment of [Plaintiffs].” Id. ¶ 62. To affect this change, Zimmer “consolidated its manufacturing, ” “reduced the number of its employees, ” terminated its “Knee Creations division, which was responsible for the development and sale of [the SCP] Products as well as patient and surgeon education, ” and redirected its sales force to concentrate on joint replacement products over the SCP Products. Id. ¶¶ 62-63.

Thus Plaintiffs allege, Zimmer “began suppressing” the sales of knee-related SCP Products and “the development of complimentary SCP technologies for the treatment of arthritis pain in other joints.” Id. ¶¶ 63-65. Plaintiffs also claim that Defendants have permitted “various third-parties, ” including...