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Zimmer Inc. v. Beamalloy Reconstructive Medical Products, LLC

United States District Court, N.D. Indiana

August 2, 2017

ZIMMER INC., Plaintiff,
v.
BEAMALLOY RECONSTRUCTIVE MEDICAL PRODUCTS, LLC, and BEAMALLOY TECHNOLOGIES, INC. Defendants.

          OPINION AND ORDER

          THERESA L. SPRINGMANN CHIEF JUDGE

         This matter is before the Court on Plaintiff Zimmer, Inc.'s Motion to Dismiss Count III of the Counterclaim [ECF No. 11] for breach of fiduciary duty. This suit concerns a series of agreements the Plaintiff entered into with Beamalloy Reconstructive Medical Products, LLC (“Beamalloy Reconstructive”), under which Beamalloy Reconstructive was tasked with developing and licensing to the Plaintiff a coating, and a process for applying that coating to the Plaintiff's medical devices. On October 4, 2016, the Plaintiff filed its Complaint against the Defendants, Beamalloy Reconstructive, and Beamalloy Technologies, LLC, and filed its First Amended Complaint [ECF No. 5] on December 22, 2016. The Defendants filed their Answer to the Amended Complaint and First Counterclaim [ECF No. 8] on February 2, 2017. The Plaintiff filed its Motion and accompanying Brief in Support [ECF No. 12] on February 23, 2017. The Defendants filed their Amended Answer and Counterclaim [ECF No. 15] on March 8, 2017. On March 9, 2017, the Defendant filed its Response [ECF No. 18], to which the Plaintiff filed its Reply [ECF No. 21] on March 16, 2017. The Motion is now fully briefed and ripe for ruling.

         FACTUAL ALLEGATIONS

         The Plaintiff, a Delaware corporation with its principle place of business in Indiana, and Beamalloy Reconstructive, an Ohio corporation with its principle place of business in Ohio, [1]entered into a License and Supply Agreement (the “Agreement”), and several related agreements, on September 30, 2011. Under the Agreement, Beamalloy Reconstructive was to develop a process for coating medical devices known as ion beam enhanced deposition (the “IBED Process”). (Counterclaim ¶ 5, ECF No. 15; Agreement § 4.2, ECF No. 1-1.) The coating is intended as a solution for knee implant recipients who have allergies to nickel and chromium, which are present in Cobalt Chromium materials. (Id. ¶ 5.) Once Beamalloy Reconstructive developed the IBED Process to the Plaintiff's specifications (as provided for in the Agreement), the Plaintiff was to use Beamalloy Reconstructive as its exclusive supplier for the IBED Process. (Id. at ¶¶ 5-7.) Under this arrangement, the Agreement set forth minimum annual quantities that the Plaintiff agreed to order. (Id. ¶ 6, Agreement § 4.15.)

         Over the course of several years, the Plaintiff worked with Beamalloy Reconstructive to develop the IBED process in accordance with the Agreement. (Id. ¶ 7.) The Agreement set forth a series of “[t]echnical [m]ilestones, ” listed in Exhibit C, that Beamalloy Reconstructive was required to satisfy before triggering the supply commencement date.[2] Among the technical milestones listed, the scratch adhesion/cohesion values that Beamalloy Reconstructive was required to meet[3] were set by both the Plaintiff's research team and Beamalloy Reconstructive. But the Defendants allege that the Plaintiff then created an additional standard, the Zimmer Engineering Specification, which Beamalloy Reconstructive was required to meet in addition to the former requirement. The Defendants allege it met the requirements of the Zimmer Engineering Specification too. (Id. ¶ 7.)

         The Defendants allege that the Plaintiff thereafter presented data to the FDA on “the great resistance” of Beamalloy Reconstructive's “coating to scratching and the excellent adhesion to the metal substrate, ” and as a result, the Plaintiff received FDA approval for the IBED Process in December 2014. (Id.) The Plaintiff then presented to the orthopedic community a paper on the technique and results of the Beamalloy Reconstructive coating versus the world's coating leader, Oxinium. (Id.)

         According to the Defendants, the Plaintiff authorized Beamalloy Reconstructive to commence production in August 2015, triggering the supply commencement date. (Id. ¶ 8.) But by January 2016, the parties began to dispute whether Beamalloy Reconstructive had met its obligations under the Agreement, and thus, whether the Plaintiff's commitments under the agreement had been triggered in turn. (Id. ¶¶ 8-13.) The Defendants allege that without any warning, the Plaintiff required the Defendants to submit the IBED Process to additional subjective testing known as a “third body wear test, ” designed by the Plaintiff for “marketing purposes.” (Id. ¶ 8.) According to the Defendants, the FDA requires a scratch, adhesion/cohesion test for all coatings, but does not require third body wear testing. (Id. ¶ 8.) The Defendants allege that the Plaintiff had not previously used third body wear testing in knee implants, and that the third body wear test was not clinically relevant. (Id.)

         The Defendants allege that although the Plaintiffs acknowledged that Beamalloy Reconstructive had met all technical specifications as required under the Third Amendment of the Agreement, the Plaintiff was aware that when it signed the Third Amendment, the third body wear test for marketing purposes was ongoing and not completed. (Id. ¶ 9.) The Defendants allege that to alleviate concerns, Beamalloy Reconstruction recommended additional testing that the Plaintiff declined to execute, including comparative testing with Zimmer Biomet's TiNbN coating on the Vanguard Knee Replacement, testing with particles suspended in solution, testing with smaller metal particles, testing with fewer more clinically relevant particles, and additional testing with a buffed process that resulted in parts that passed the “marketing” third body wear test. (Id. ¶ 11.)

         The Defendants allege that the Plaintiff has failed and refused to pay Beamalloy Reconstructive the amounts owed to it under the Agreement, “in excess of” $9, 700, 000, based upon Beamalloy Reconstructive's alleged failure to pass the third body wear test. (Id. ¶ 12.) The Defendants allege that although the Plaintiff claims that the Defendants breached the safety and efficacy provision of the Agreement (section 4.15(c)), the Plaintiff has not specified what safety, efficacy, or liability issue exists with Beamalloy's product. (Id. ¶ 13.) The Defendants allege that Beamalloy Reconstructive has satisfied its obligations under the Agreement, specifically the commercialization and validation milestone provisions, and therefore, the Plaintiff was obligated to purchase the IBED Process services pursuant to the annual minimum unit requirements. (Id. ¶ 15). On November 17, 2016, the Plaintiff terminated the Agreement. (Id. ¶ 17.) The Defendants allege this was without cause.

         In Count Three of their Counterclaim, the Defendants allege that the Plaintiff concealed from Beamalloy Reconstructive its intention to seek other competing allergy solutions while it continued to require Beamlloy Reconstructive's products to undergo testing not enumerated in the Agreement and contemplated transaction. (Id. ¶ 37.) The Defendants also allege that the Plaintiff failed and refused to modify its testing parameters to represent clinically relevant conditions because the IBED coating may have indeed passed testing conditions. (Id.) According to the Defendants, the Plaintiff is currently pursuing another allergy solution, and has medical device products on the market in both Europe and the United States that could not pass the same third body wear test that Beamalloy Reconstructive was required to pass, and therefore, this test was overly burdensome for the Defendants.

         STANDARD OF REVIEW

         A motion to dismiss pursuant to Federal Rule of Civil Procedure 12(b)(6) tests the sufficiency of the complaint and not the merits of the suit. Gibson v. City of Chi., 910 F.2d 1510, 1520 (7th Cir. 1990). Requirements for stating a claim under the federal pleading standards are straight forward. A pleading that states a claim for relief must set forth “a short and plain statement of the grounds for the court's jurisdiction . . . a short and plain statement of the claim showing that the pleader is entitled to relief, ” and “a demand for relief sought.” Fed.R.Civ.P. 8(a). In considering motions to dismiss for failure to state a claim, the court presumes all well-pleaded allegations to be true, views them in the light most favorable to the plaintiff, and accepts as true all reasonable inferences to be drawn from the allegations. Whirlpool Fin. Corp. v. GN Holdings, Inc., 67 F.3d 605, 608 (7th Cir. 1995).

         Additionally, a complaint must contain sufficient factual matter to “state a claim to relief that is plausible on its face.” Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570 (2007). “A claim has facial plausibility when the pleaded factual content allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged.” Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009) (citing Twombly, 550 U.S. at 556). Although the court must accept as true all well-pleaded facts and draw all permissible inferences in the Plaintiff's favor, it need not accept as true “[t]hreadbare recitals of the elements of a cause of action, supported by mere conclusory statements.” Id. at 678 (citing Twombly, 550 U.S. at 555). Legal conclusions can provide a complaint's framework, but unless well-pleaded factual allegations move the claims from conceivable to plausible, they are insufficient to state a claim. Id. at 680. A ...


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