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Hess v. Biomet, Inc.

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

March 20, 2019

CHARLES HESS, et al., Plaintiffs,
v.
BIOMET, INC., et al., Defendants.

          OPINION AND ORDER

          JON E. DEGUILIO JUDGE UNITED STATES DISTRICT COURT

         This case arises out of a dispute over distributorship agreements between Biomet, Inc., which sells medical devices, and six individual plaintiffs. In the early 1980s, when it was still in its infancy, Biomet hired each of the plaintiffs away from its established competitor and granted them exclusive distributorships within prescribed territories. As an incentive to move to a less-established company, which would result in a drop in pay in the near term, Biomet offered each of the plaintiffs lifetime commissions on products sold within their distributorships once they retired. Each of the plaintiffs retired between 1996 and 1999, at which time Biomet began making those payments.

         In 2015, around the time Biomet was merging with Zimmer, Inc., the parties discussed proposals for Biomet to buy out the plaintiffs' rights to future commission payments. Those discussions brought to the fore a dispute over the scope of the retirement commissions. In particular, the parties disagree over whether the commissions are due only on products sold by the plaintiffs' distributorships at the time they retired-as Biomet interprets the agreements and has been paying the plaintiffs for many years-or apply more broadly to all Biomet products (and now Zimmer products too), even those that the plaintiffs did not and were not authorized to sell within their distributorships.

         The six plaintiffs filed this suit in April 2016 against Biomet and the new post-merger entity, Zimmer Biomet Holdings, Inc. (which the Court need not mention further). They asserted breach of contract claims on three separate grounds. They also asserted a claim for criminal deception based on commission statements that Biomet provided over the years. The case was first assigned to Judge Lozano, who granted a motion to dismiss as to two of the three breach of contract claims. The case continued through discovery, during which time it was transferred to the undersigned. Following the close of fact discovery, the plaintiffs moved to reconsider the order dismissing two of their breach of contract claims, and asked in the alternative for leave to amend their complaint to replead those claims. Both sides also moved for summary judgment.

         As explained below, the Court denies the motion to reconsider or amend-as a motion for reconsideration, it is unfounded, and as a motion for leave to amend, it is untimely. The Court also denies the motions for summary judgment as to the breach of contract claim at the core of the parties' dispute, but grants the motions in part in other respects.

         I. FACTUAL BACKGROUND

         The plaintiffs in this case are six individuals who formerly worked as distributors for Zimmer, Inc., which sells medical devices. At the time the plaintiffs worked for Zimmer, Zimmer was an established company and the plaintiffs were successful salesmen. In the early 1980s, Biomet was a new company attempting to enter the medical device field in competition to Zimmer. It approached each of the six plaintiffs and asked them to join Biomet Inc. as independent distributors. At that time, Biomet was still a fledgling company and sold only a limited catalog of products, consisting of joint-replacement devices.

         Because Biomet's sales did not yet compare to Zimmer's, moving to Biomet would result in a drop in compensation at least in the short term, as the distributors were paid on commission and Biomet could not afford to offer large up-front compensation. In order to induce them to make that transition, Biomet offered each of the plaintiffs not only commissions on the sales they made as distributors, but also lifetime commissions on sales made after their retirement. Between September 1980 and June 1983, each of the six plaintiffs accepted those offers and signed contracts giving them exclusive distributorships in their respective territories. Robert McCormick covered Louisiana; Charles Hess and Ronald Papa jointly covered Oklahoma and Arkansas; Al Tornquist covered Kansas and Missouri; Marty Higgins covered two counties in Massachusetts; and Frank Shera covered most of Indiana and part of Kentucky. (The Court refers to the six plaintiffs collectively as the Distributors except when necessary to refer to them individually.)

         The distributorship agreements that each of the Distributors signed were identical as relevant here. The contracts were entered between each Distributor and “Biomet Inc.” [E.g., 158-2]. The contracts granted each Distributor “the exclusive rights to the distribution and sale of Biomet products in [their] territory(s) and to the receipt of commissions for same[.]” Id. § 1. Section 2 of the contracts outlined the commission percentages that the Distributors would receive on various categories of products, and also set a floor for commissions on any items added to Biomet's product line that were not covered by those categories. Id. § 2(b). The contracts also set sales quotas and explained that the territories could be changed or the distributorships could be terminated under certain conditions. Id. §§ 3-5. They also included a non-compete provision. That provision applied only to products sold by Biomet within each Distributors' territory; it allowed the Distributors to sell other products “so long as these items are not sold or distributed or offered for sale” by Biomet within their territory. Id. § 6. However, if Biomet added any products or product categories to its line, the Distributors would have to cease selling any competing products. Id.

         The claims in this case focus on Section 9 of the contracts, which established a long-term commission program. Id. § 9. The Distributors would be vested in that program upon working for Biomet for ten years and reaching the age of 55, and the payments would commence upon their retirements. Id. § 9(a). Payments under that program were calculated as percentages of the “total ‘net sales'”: one and one-quarter percent of the first $4 million in net sales per year, and one-half of one percent of all further net sales, with no maximum. Id. § 9(d). The contracts then defined the term “net sales”:

The term “net sales” shall be defined as gross sales made within the subject distributorship at the time this program is initiated and actually collected by Biomet less returns and allowances and less adjustments for nonpayment of invoices as provided herein.

Id. § 9(e). Those payments would continue for the Distributors' lifetimes (or for a minimum of 10 years). Id. § 9(g). Section 9 also included a non-compete agreement for the term of the long-term commission program. In particular, it prohibited the Distributors' involvement in “any business similar to the type of business conducted by Biomet at the time of the initiation and during the term of this program, within the territory(s) then assigned to the distributor.” Id. § 9(h).

         After signing those contracts, the Distributors began working for Biomet as distributors. The medical device industry is a relationship-driven business, and those positions entailed building relationships with surgeons and often attending surgeries to provide support while the surgeons were operating. The Distributors also provided feedback from the surgeons to Biomet's research and development department in order to assist in developing new products and instruments. The Distributors' contracts did not call for them to purchase any products from Biomet; in return for their services, the contracts entitled them to commissions on sales that Biomet made within their territories. In practice, however, the Distributors did purchase certain sample products and also maintained some inventory of products and instruments. The Distributors' business focused on selling reconstructive products, such as hip and knee implants, but they also sold some other products like pins used to fix bones after a trauma.

         Biomet as an organization expanded significantly over the years. Biomet expanded its reach beyond orthopedic products, which were the focus of the Distributors' distributorships, by acquiring other companies to enter new product categories. In 1987, it acquired Electro-Biology, Inc. (EBI), which made bone growth stimulators. EBI had its own sales force, and though some of the Distributors asked for distribution rights for EBI's products, they were not given authorization to distribute EBI products and were not paid commissions on sales of EBI's products. In 1990, Biomet acquired Arrow Surgical Technologies, which it renamed Arthrotek, and which sold sports medicine products. Some of the Distributors were authorized to distribute Arthrotek products, but they were granted that authorization through separate distributorship agreements that they entered with Arthrotek. In 1992, Biomet acquired Walter Lorenz Surgical, which sold microfixation products. Biomet also acquired other companies after the Distributors' retirements, including 3i Dental (which sells dental products), DePuy Trauma (trauma products) and Lanx, Inc. (spinal products).

         Each of the Distributors retired between 1995 and 1999, after their long-term commissions vested. Upon their retirements, Biomet began paying the long-term commissions to each of the Distributors on a bi-monthly basis. It paid those commissions based on the sales of orthopedic products, but did not include sales of the other business units it had acquired. (At some point, the orthopedic products were moved into a new entity, Biomet Orthopedics, Inc., and Biomet paid long-term commissions on all products sold through that business unit.) Each payment was accompanied by a commission statement, which would contain little information beyond the amount being paid and its calculation. By 2007, those commission statements began listing each item sold upon which the Distributors were receiving commissions. They did not report any sales that were made but upon which the Distributors were not receiving commissions, though. The Distributors claim that throughout that time, they were unaware that they were not being paid long-term commissions on products sold by the other business units.

         Around 2015, Biomet began undergoing a merger with Zimmer. Prior to completing the merger, Biomet made the Distributors offers to buy out their rights to future commission payments. The Distributors asserted at that time that they should be entitled to commissions not only on Biomet products, but also on any Zimmer products once the merger went through. Biomet disagreed. The Distributors also claim to have first discovered around that time that Biomet was paying them long-term commissions only on Biomet Orthopedic products, not sales from the other companies under the Biomet umbrella. The Distributors retained counsel and continued buy-out negotiations with Biomet, but those discussions fell through.

         The Distributors thus filed this suit in April 2016. Counts 1 through 3 asserted claims for breach of contract, each under a different theory. In Count 1, the Distributors argue that Biomet breached the contracts by paying long-term commissions only on Biomet Orthopedic products, not products sold through the other business units. In Count 3, the Distributors argue that, following the merger, the long-term commission payments apply to all Zimmer or Zimmer Biomet products, not just to Biomet products, and that Biomet breached the contracts by failing to pay those commissions. Count 2 apparently rejects the premise of Count 3 that the contracts apply to sales of those other brands, but it claims that Biomet breached the contracts by re-branding Biomet products as Zimmer or Zimmer Biomet products in order to avoid having to pay commissions on those sales. Finally, Count 4 asserted a claim for criminal deception, on the basis that the commission statements only reflected the sales of Biomet Orthopedic products for which Biomet was paying the long-term commissions, not the larger set of products on which the Distributors argue they were entitled to payment (as claimed in Count 1).[1]

         Biomet moved to dismiss the complaint in full for failure to state a claim. At that point, the case was assigned to Judge Lozano. In an order dated February 16, 2017, Judge Lozano granted the motion to dismiss as to Counts 2 and 3, but denied the motion as to Counts 1 and 4. By that time, discovery had already commenced and the magistrate judge had entered a scheduling order. Though Judge Lozano did not state that the dismissal of Counts 2 and 3 was with prejudice, and though the scheduling order still permitted the Distributors to file an amended complaint without even seeking leave of court, they did not do so. Discovery thus continued on the remaining claims, and the deadlines for the close of fact and expert discovery were extended on multiple occasions. In the meantime, the case was reassigned to the undersigned pursuant to General Order 2017-4, under which cases in this district were transferred to judges sitting in the division in which they were filed.

         Fact discovery finally closed on May 1, 2018. Shortly prior to the close of expert discovery on August 27, 2018, the Distributors filed a motion to reconsider the order dismissing Counts 2 and 3, the breach of contract claims relating to the merger with Zimmer. In the alternative, they asked for leave to amend their complaint to properly plead those claims. Shortly thereafter, both parties filed motions for summary judgment on the pending claims. The briefing on each of those motions and several related motions is now complete. The Court thus addresses the motion for reconsideration before turning to the motions for summary judgment.

         II. MOTION FOR RECONSIDERATION OR LEAVE TO AMEND

         The Distributors move for reconsideration of the order dismissing Counts 2 and 3. In the alternative, they request leave to amend their complaint to adequately plead those counts. In those counts, which arose from Biomet's merger with Zimmer, the Distributors sought to recover commission payments for products sold as Zimmer or Zimmer Biomet products. Judge Lozano granted Biomet's motion to dismiss those claims, holding that the Distributors had not adequately pled a breach of contract on the theories alleged in those counts.

         The Court begins with the motion for reconsideration. Courts have authority to amend their interlocutory orders prior to the entry of final judgment, Fed.R.Civ.P. 54(b), [2] but motions for reconsideration are seldom appropriate. Bank of Waunakee v. Rochester Cheese Sales, Inc., 906 F.2d 1185, 1191 (7th Cir. 1990). Motions for reconsideration are “not an appropriate forum for rehashing previously rejected arguments or arguing matters that could have been heard during the pendency of the previous motion.” Caisse Nationale de Credit Agricole v. CBI Indus., Inc., 90 F.3d 1264, 1269-70 (7th Cir. 1996). They should be used only in rare circumstances, such as where “the Court has patently misunderstood a party, or has made a decision outside the adversarial issues presented to the Court by the parties, or has made an error not of reasoning but of apprehension, ” or where there has been “a controlling or significant change in the law or facts.” Bank of Waunakee, 906 F.2d at 1191.

         There is another factor relevant to the motion for reconsideration here: the Distributors ask to reconsider an order entered by a previous judge in this case. The law of the case doctrine applies with even greater force in that circumstance. HK Sys., Inc. v. Eaton Corp., 553 F.3d 1086, 1089 (7th Cir. 2009) (“The doctrine of law of the case counsels against a judge's changing an earlier ruling that he made in the same case, or that his predecessor as presiding judge had made. The doctrine has greater force in the second type of case-when there is a change of judges during the litigation and the new judge is asked to revisit the rulings of his predecessor.” (citations omitted)). The Seventh Circuit has “advise[d] judges that, because litigants have a right to expect consistency even if judges change, the second judge should ‘abide by the rulings of the first judge unless some new development, such as a new appellate decision, convinces him that his predecessor's ruling was incorrect.'” Galvan v. Norberg, 678 F.3d 581, 587 (7th Cir. 2012) (quoting Fujisawa Pharm. Co. v. Kapoor, 115 F.3d 1332, 1339 (7th Cir.1997)).

         The Distributors point to no such new development here. The only legal argument they make in support of the viability of their dismissed claims is based on a decision that is neither “new” nor “appellate”-they rely on a decision by another district judge that not only predated Judge Lozano's order, but that Judge Lozano expressly addressed and distinguished in his order. The Distributors may disagree with Judge Lozano's reasoning, but that is not a ground for reconsideration. The Distributors also suggest that Judge Lozano was misled by the way in which their complaint characterized the contracts. Instead of attaching the contracts to the complaint or citing their relevant provisions, the complaint merely paraphrased the contracts.[3]The Distributors now concede that their characterization of a critical contractual term may have been misleading. [DE 159 p. 10 n.8]. But not only is that their own fault, it could have been easily and promptly cured through an amended complaint. It does not justify a motion for reconsideration filed nearly a year-and-a-half later, before a different judge, after discovery has closed.

         None of the new facts the Distributors cite warrant reconsideration, either. In support of their motion, the Distributors cite two pieces of “newly discovered evidence”: a contract Biomet entered with a different distributor in 2007, and testimony by a Biomet representative about the Distributors' agreements. To begin with, though, newly discovered evidence on a motion to dismiss is a contradiction in terms. Motions to dismiss evaluate the sufficiency of the allegations in a complaint. New evidence that was not pled in the complaint would not change the outcome of such a motion. At least where, as here, claims were not dismissed with prejudice, new evidence would not support a motion for reconsideration, but would need to be incorporated into an amended complaint.

         In addition, the new evidence the Distributors rely on is insubstantial. They first cite an agreement that Biomet Orthopedics, Inc. (not Biomet Inc., the party to their contract and the defendant in this case) entered in 2007 with Tim Weis, another distributor. Mr. Weis began as a distributor for Biomet in 1980, at which time he signed a distributorship agreement similar to the ones the Distributors here signed, including the long-term commission program. In 2007, Mr. Weis signed a revised distributorship agreement, and the long-term commission program in that revised agreement explicitly limits its scope to orthopedic products sold by Biomet Orthopedics, Inc.-the entity that currently sells the products on which Biomet argues the Distributors are entitled to commissions. The Distributors argue that because the 2007 Weis agreement explicitly spelled out that limitation, but their own agreements did not, that difference in language must mean that their own agreements are not so limited.

         That conclusion does not follow. Contracts are typically construed together only if they relate to the same subject matter and were “executed at the same time.” Orthodontic Affiliates, P.C. v. Long, 841 N.E.2d 219, 22 (Ind.Ct.App. 2006). That is clearly not the case here. The 2007 Weis agreement was signed a quarter-century after the agreements at issue here. By that time, Biomet was a different and more sophisticated organization than it was in the early 1980s, and the 2007 Weis agreement is lengthier and more detailed in many respects than the original distributorship agreements. That Biomet Orthopedics, Inc. (which is not a party to this case) would draft a more detailed and precise agreement with Mr. Weis (who is not a party to this case either) at a different time and under different circumstances does not mean that the agreement must have a different meaning than the original distributorship agreements between Biomet and the Distributors. This sort of extrinsic evidence thus offers little, if any, insight into the meaning of the Distributors' agreements.

         Second, the Distributors cite testimony by a Rule 30(b)(6) witness for Biomet, Ashley Portz. When asked about the meaning of the contracts, Ms. Portz testified:

Biomet as a business evolved over time. So what Biomet looks like in the early '80s is not what it looked like in the mid-'90s and is not what it looked like into 2000 and beyond. So our -- our hindsight looking back can point to the fact that there were some details that were vague, that didn't -- today, if we had all the information that we had, it would have been great if they had put in those contracts “please only pay commission on Company 4.” That just wasn't the case in terms of what we know now versus what was included in the contract. I think that would have solved everyone's problem if we had -- if we had explicitly stated the parameters with which everything would have been defined.

[DE 159-4]. The Distributors see this as a smoking-gun admission that the contracts as written do not support Biomet's interpretation.

         This testimony strikes the Court, however, as entirely unremarkable. Any time two parties dispute the meaning of a contractual term, both sides likely wish the term had been drafted differently to more clearly dictate their side's interpretation. That is even more true when circumstances change over time to produce new situations that the contracts were not drafted to confront. For their part, the Distributors clearly wish the contracts had been drafted differently to better support their own interpretation-their summary judgment filings repeatedly assert that long-term commission payments are due on all net sales within their “territories, ” but that's not the language the contracts use. Ms. Portz's common-sense observation that it would be better if the contracts had been drafted so as to more clearly address this situation does not mean that Biomet's interpretation of the contract is wrong.[4] And more to the point, this extrinsic evidence that was not included in the Distributor's initial complaint does not warrant reconsideration of the dismissal of that complaint. Last, the Distributors argue that Biomet is continuing to engage in conduct that violates the contracts under the theories alleged in the dismissed counts. But that provides no reason to reconsider the dismissal of those counts. Accordingly, the Court denies the Distributors' motion to reconsider.

         The Court thus considers the Distributors' alternative request for leave to file an amended complaint to replead these two claims. Under Rule 15, district courts “should freely give leave [to amend] when justice so requires.” Fed.R.Civ.P. 15(a)(2). “‘The Supreme Court has interpreted this rule to require a district court to allow amendment unless there is a good reason-futility, undue delay, undue prejudice, or bad faith-for denying leave to amend.'” Liebhart v. SPX Corp., No. 18-1918, 2019 WL 1053618, at *9 (7th Cir. Mar. 6, 2019) (quoting Life Plans, Inc. v. Sec. Life of Denver Ins. Co., 800 F.3d 343, 357 (7th Cir. 2015)). The Seventh Circuit has stated that “delay by itself is normally an insufficient reason to deny a motion for leave to amend, ” but it ...


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