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Depuy Orthopaedics, Inc. v. Orthopaedic Hospital

United States District Court, N.D. Indiana, South Bend Division

February 13, 2015

DePUY ORTHOPAEDICS, INC., Plaintiff,
v.
ORTHOPAEDIC HOSPITAL, Defendant.

OPINION AND ORDER

CHRISTOPHER A. NUECHTERLEIN, Magistrate Judge.

Hopeful that by sharing research and resources patentable orthopaedic products could be produced, the parties, DePuy Orthopaedics, Inc. ("DePuy"), an Indiana medical device manufacturer, and Orthopaedic Hospital ("the Hospital" or "OH"), a California research hospital, entered into two contracts, a Research Agreement and a Patent Rights and License Agreement ("the PRLA"). This case arose from disputes over the terms of the PRLA. Under the PRLA, DePuy agreed to assume financial responsibility for prosecuting, maintaining, and enforcing related patent rights; to develop and market products that used any of the new technology; and to pay the Hospital royalties on any net sales of products incorporating the new technology. In return, DePuy retained a license to use the technology before and after it was patented.

Now, almost sixteen years after executing the PRLA, the Hospital and DePuy have each presented this Court with a motion for partial summary judgment regarding the meaning and application of the PRLA. Having reviewed the parties' written and oral arguments, the Court issues the following opinion and order, denying the Hospital's motion and granting in part and denying in part DePuy's motion, pursuant to the consent of the parties and 28 U.S.C. § 636(c).

I. RELEVANT BACKGROUND

The following facts are primarily not in dispute. Where the facts are in dispute, this Court has determined that the disputes are either not material or has chosen to address such disputes in the Court's substantive analysis of the issues.

On March 1, 1999, the Hospital and DePuy executed two agreements, the Research Agreement [Doc. No. 83-3] and the PRLA [Doc. No. 78-1]. The two agreements memorialized the terms of the parties' relationship related to their joint efforts in researching, developing, and applying new technology that would improve the wear characteristics of polyethylene bearings in orthopaedic implants. While there were no patents in place when the agreements were executed, the parties drafted the PRLA anticipating that patent applications would result from their work together. As such, the PRLA contemplated and outlined the parties' rights and obligations related to the uncertain and undefined technology that might (or might not) have come into existence as a result of the parties' work under the Research Agreement.

The parties' agreements provided that any intellectual property rights resulting from the parties' joint research and development efforts would either be owned by the Hospital or coowned by the Hospital and DePuy. Regardless, DePuy accepted a license as to those rights, even related to co-owned rights, in exchange for royalty payments to the Hospital on sales of products incorporating claims from patents or patent applications. DePuy also agreed to prosecute any patent applications, and to maintain and enforce any patents obtained, on behalf of the Hospital.

In March 1999 when the agreements were executed, no patent applications had been filed related to the parties' research on polyethylene bearings and no patents had issued. By April 2001, however, the Hospital had filed an international patent application related to an oxidationresistant polyethylene and a method of making it. That application led the Hospital to file applications related to the same technology in the United States, Australia, Europe, and Japan. These applications are collectively referred to as the "110 cases." In compliance with the PRLA, DePuy worked with its own attorneys, outside counsel, and Dr. Harry McKellop of the Hospital to prosecute the patent applications related to the 110 cases for several years. After March 1, 2006, patents issued in Australia, Europe, and Japan. In February 2014, one of the U.S. applications, originally filed on May 24, 2007, issued as U.S. Patent No. 8, 658, 710 ("the 710 Patent"). In August 2014, a second U.S. application issued as U.S. Patent No. 8, 796, 347.

On February 16, 2012, however, two years before the U.S. patents issued, DePuy's Vice President for Medical Affairs, Tony Cutshall, sent a letter ("the Cutshall Letter") to Dr. Harry McKellop, the Hospital's Vice President of Research, informing him that the PRLA had expired on March 1, 2006, pursuant to Section 10.1, which provides for expiration of the PRLA after seven years if no patents had issued or the PRLA had not otherwise terminated. See Doc. No. 78-1 at 10 (PRLA § 10.1); Doc. No. 83-11 at 2 (the Cutshall Letter). In the Cutshall Letter, DePuy also informed the Hospital that it would not continue to pay the costs of patent prosecution or any royalties related to the PRLA. Doc. No. 83-11 at 2.

DePuy sent the Cutshall Letter about a month after it launched its AOX Antioxidant Polyethylene ("AOX"), a product used in artificial knees that the Hospital alleges incorporated technology from the 110 cases. On March 27, 2012, Dr. McKellop sent a letter to Cutshall disputing the expiration of the PRLA and asserting that DePuy's refusal to pay royalties on its AOX sales constituted breach of the PRLA. Doc. No. 83-12 at 2.

On June 11, 2012, DePuy filed its lawsuit in this Court seeking declaratory judgment as to its rights and obligations under the PRLA (Cause No. 3:12-cv-299, hereinafter "the 299 case"). Specifically, DePuy asked the Court to declare that the PRLA had expired on March 1, 2006, and that DePuy had not breached the PRLA by selling products incorporating parts made of its AOX polyethylene without paying royalties to the Hospital, or by any other act or omission. [299 case, Doc. No. 1 at 7].

On September 28, 2012, DePuy sent a second letter to the Hospital ("the Tomko Letter") reiterating its position in the February Cutshall Letter, but also providing, alternatively, formal notice under Section 6.5 of the PRLA that it was abandoning the 110 cases and transitioning their ownership to the Hospital. Doc. No. 83-13 at 2-3. Through the Tomko Letter, DePuy further emphasized that "the 110' cases are not subject to the [PRLA], that Orthopaedic Hospital is free to license those patents and patent applications to others, and that DePuy is not licensed under those patents and patent applications." Id. at 3.

On December 28, 2012, the Hospital filed its first lawsuit against DePuy in the Central District of California alleging that DePuy breached the PRLA in multiple ways, including failing to pay royalties and failing to prosecute, maintain, or enforce applicable patent applications or patents. (Cause No. 3:13-cv-384, hereinafter "the 384 case"). In the 384 case, the Hospital also asserted equitable and tort claims against DePuy related to its obligations under the PRLA. The Central District of California transferred the case to this Court, which consolidated it into the 299 case on June 18, 2013.

Despite these lawsuits, the Hospital continued to prosecute the patent applications related to the 110 cases on its own. In February 2014, the 710 patent issued. Based on the 710 patent, the Hospital filed its second lawsuit, a patent infringement action against DePuy, in the Central District of California on February 24, 2014. (Cause No. 3:14-cv-608, hereinafter "the 608 case"). In its responsive pleading filed on April 22, 2014, DePuy asserted an affirmative defense and a counterclaim that the 710 patent is invalid. [608 case; Doc. No. 31 at 5, 8]. Once again, the California court transferred the case to this Court, which consolidated it into the 299 case on June 15, 2014.

On September 19, 2014, with the agreement of the parties, the Court developed a phased litigation plan whereby the parties' would first submit motions for partial summary judgment as to the contract interpretation claims related to the PRLA. Specifically, the Court ordered DePuy to file a motion for partial summary judgment as to the meaning and application of Section 6.5 of the PRLA; and ordered the Hospital to file a motion for partial summary judgment as to whether DePuy is allowed to challenge the validity of the Hospital's patents. Doc. No. 74 at 2. DePuy and the Hospital timely filed these motions, which are now ripe and before the Court.

II. ANALYSIS

A. Summary Judgment Standard of Review

Summary judgment is proper where the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and the moving party is entitled to judgment as a matter of law. Fed.R.Civ.P. 56(c); Lawson v. CSX Transp., Inc., 245 F.3d 916, 922 (7th Cir. 2001). In determining whether a genuine issue of material fact exists, this Court must construe all facts in the light most favorable to the nonmoving party as well to draw all reasonable and justifiable inferences in favor of that party. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 255 (1986); Healy v. City of Chicago, 450 F.3d 732, 738 (7th Cir. 2006).

To overcome a motion for summary judgment, the nonmoving party cannot rest on the mere allegations or denials contained in its pleadings. Rather, the nonmoving party must present sufficient evidence to show the existence of each element of its case on which it will bear the burden at trial. Celotex v. Catrett, 477 U.S. 317, 322-23 (1986); Robin v. Espo Eng'g Corp., 200 F.3d 1081, 1088 (7th Cir. 2000). Where a factual record taken as a whole could not lead a rational trier of fact to find for the nonmoving party, there is no genuine issue for trial. Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 587 (1986). In other words, "[s]ummary judgment is not a dress rehearsal or practice run; it is the put up or shut up moment in a lawsuit, when a party must show what evidence it has that would convince a trier of fact to accept its version of the events." Hammel v. Eau Galle Cheese Factory, 407 F.3d 852, 859 (7th Cir. 2005) (quotations omitted).

B. Contract Interpretation Standard

Indiana law governs the contract interpretation issues raised in this case based on the parties' choice of law agreement reflected in Section 13.5 of the PRLA. "Summary judgment is particularly appropriate in cases involving the interpretation of contracts." Murphy v. Keystone Steel & Wire Co., a Div. of Keystone Consol. Indus., 61 F.3d 560, 564-65 (7th Cir. 1995); ECHO, Inc. v. Whitson Co., 52 F.3d 702, 705 (7th Cir. 1995).

Under Indiana law, the primary goal in contract interpretation is to ascertain and effectuate the intent of the parties in executing the contract. MPACT Constr. Group, LLC v. Superior Concrete Constructors, Inc., 802 N.E.2d 901, 906 (Ind. 2004). The parties' intent is determined by review of the parties' "expressions within the four corners of the written instrument." Roy A. Miller & Sons, Inc. v. Indus. Hardwoods Corp., 775 N.E.2d 1168, 1172 (Ind.Ct.App. 2002). In assessing the intent of the parties, the threshold question is whether the contract, or any relevant provision, is ambiguous. If the language of a contract is clear and unambiguous, the court must give the contract's language its plain and ordinary meaning as a matter of law without considering any extrinsic evidence. USA Life One Ins. Co. v. Nuckolls, 682 N.E.2d 534, 538 (Ind. 1997); Barclay v. State Auto Ins. Cos., 816 N.E.2d 973, 975 (Ind.Ct.App. 2004). "In applying this standard, courts will give a word or phrase its usual meaning unless the contract, when taken as a whole and considering its subject matter, makes clear that the parties intended another meaning." Trs. of First Union Real Estate Equity & Mortg. Invs. v. Mandell, 987 F.2d 1286, 1290 (7th Cir. 1993). In addition, "a contract will not be interpreted literally if doing so would produce absurd results, in the sense of results that the parties, presumed to be rational persons pursuing rational ends, are very unlikely to have agreed to seek." Beanstalk Grp., Inc. v. AM Gen. Corp., 283 F.3d 856, 860 (7th Cir. 2002). Moreover, courts must look beyond the literal meaning of a single provision to interpret the contract as a whole. Id.

However, a contract is not ambiguous simply merely because "each party favors a different interpretation." N. Ind. Commuter Transp. Dist. v. Chi. SouthShore & S. Bend R.R., 744 N.E.2d 490, 496 (Ind.Ct.App. 2001). Rather, "a contract is ambiguous only if reasonable persons would differ as to the meaning of its terms." IP of A W. 86th St. 1, LLC v. Morgan Stanley Mortg. Capital Holdings, LLC, 686 F.3d 361, 367-68 (7th Cir. 2012) (internal quotations omitted); see also Beam v. Wausau Ins. Co., 765 N.E.2d 524, 528 (Ind. 2002). If a contract is ambiguous, the court may consider extrinsic evidence to glean the parties' intent. Cummins v. McIntosh, 845 N.E.2d 1097, 1106 (Ind.Ct.App. 2006).

C. The Hospital's Motion for Partial Summary Judgment, Doc. No. 75

In its motion, the Hospital asks the Court to strike DePuy's affirmative defense and counterclaim alleging the invalidity of the 710 patent. The Hospital contends that DePuy is estopped from challenging the validity of the 710 patent based either on the theory of contractual estoppel or the equitable doctrine of judicial estoppel. Under its contractual estoppel theory, the Hospital alleges that the last sentence of Section 6.5 of the PRLA constitutes a "no challenge" provision that must be honored. Alternatively, the Hospital argues that even if the contractual provision does not constitute an explicit "no challenge" provision, DePuy should be judicially estopped from challenging the validity of the ...


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