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STULBERG v. INTERMEDICS ORTHOPEDICS

March 16, 1998

S. DAVID STULBERG and BERNARD N. STULBERG, Plaintiffs,
v.
INTERMEDICS ORTHOPEDICS, INC. and TECHMEDIA, INC., Defendants.



The opinion of the court was delivered by: WILLIAMS

 Plaintiffs Dr. S. David Stulberg and Dr. Bernard N. Stulberg ("the Stulbergs") move to enter judgment pursuant to arbitration and to add Sulzermedica USA, Inc. as a party to this action. Defendants Techmedica, Inc. and Intermedics Orthopedics, Inc. ("defendants") oppose the motion to enter judgment pursuant to arbitration and move the court to vacate the arbitration award. For the reasons set forth below, the court grants both of the Stulbergs' motions and denies defendants' motion.

 Background

 The Stulbergs are orthopedic surgeons specializing in joint reconstruction. Defendant Techmedica, Inc. manufactured and sold medical products using the Stulbergs' research and technology under the name Continuum Knee System ("the CKS knee system"). Defendant Intermedics Orthopedics, Inc. ("IOI") manufactured and sold similar medical products that competed directly with the Stulbergs' CKS knee system. At all relevant times, both Techmedica and IOI were subsidiaries of Sulzermedica USA, Inc.

 In June 1993, the Stulbergs entered into a license agreement that granted Techmedica the right to use plaintiffs' technology in exchange for royalties ("the license agreement"). (Mar. 31, 1997 Op. *fn1" at 2-5.) The license agreement required each party to "hold all Confidential Information as a fiduciary, in strict confidence and trust for the disclosing party." (License Ag. *fn2" P X.) The license agreement also provided that claims for breach of the agreement will be "finally settled" by an arbitrator and that judgment upon the award shall be "binding upon the parties." (License Ag. P R.)

 In August 1994, the Stulbergs brought this lawsuit after Techmedica allegedly breached the license agreement. (Defs.' Rep. *fn3" at 2.) The Stulbergs filed a seven count complaint against defendants Techmedica and IOI. Count I alleged that IOI tortiously interfered with contractual relations by inhibiting the Stulbergs' right to reap the benefits of their invention. Count II alleged that IOI tortiously interfered with contractual relations by disclosing confidential information. Count III alleged that IOI violated the Lanham Trademark Act based on misrepresentation. Count IV alleged that IOI violated the Lanham Trademark Act by creating confusion as to the source of their product. Count V alleged that IOI violated the Illinois Trade Secrets Act. Count VI sought to enjoin IOI from destroying documents. Count VII sought to enjoin Techmedica from destroying documents. (Mar. 31, 1997 Op. at 6.)

 Two months before filing this lawsuit, the Stulbergs invoked the arbitration clause of the license agreement and filed for arbitration against Techmedica and Sulzermedica USA in June, 1994. Former federal district court Judge Frank J. McGarr presided as the arbitrator. (Pls.' Mem. *fn4" at 2.) Both the arbitration before Judge McGarr and the lawsuit before this court proceeded simultaneously. (Defs.' Rep. at 4.) After several weeks of testimony and presentation of nearly 100 exhibits in the arbitration (Pls.' Mem. at 9 n.6), Judge McGarr issued an opinion resolving the dispute on January 30, 1997.

 Judge McGarr's comprehensive opinion detailed findings of fact, reached conclusions of law, and ruled in favor of the Stulbergs. Judge McGarr held that the Stulbergs established all of the necessary elements of tortious interference with contractual relations. (Arb. Judg. *fn5" at 24-25 PP 3-7.) Judge McGarr concluded that Sulzermedica USA brought about the willful breach of the license agreement's confidentiality provisions. (Arb. Judg. at 11, 17-18 PP 45, 76.) He found that Sulzermedica USA directed Techmedica to release confidential information to IOI. Judge McGarr concluded that these actions constituted "express violations of the obligations to maintain such information as a fiduciary, in strict confidence and trust for plaintiffs' benefit, as expressly required by Section X of the 1993 License and Royalty Agreement." ( Arb. Judg. at 20 P 80.) Judge McGarr also found that IOI advised Sulzermedica to "liquidate" Techmedica and to "eliminate the CKS Knee System from the marketplace." ( Arb. Judg. at 17 P 74.)

 In addition to the breach of confidentiality provisions, Judge McGarr found that certain "technology" should have been returned to plaintiffs upon termination of the license agreement. ( Arb. Judg. at 27-28 P 18; 29-30 PP 30, 32.) The "technology" to be returned included clinical data, product specifications, the CKS name, and the FDA approval. (Id.) As a results of defendants' conduct, Judge McGarr's January 30, 1997 arbitration award assessed damages in the amount of $ 5,224,436.00 (Arb. Judg. at 34.)

 Immediately after Judge McGarr's ruling, defendants raised several objections regarding the damage award. The parties briefed these issues, and Judge McGarr again ruled in the Stulbergs' favor. (Arb. Judg. at 2.) On March 19, 1997, Judge McGarr reissued his original opinion and entered a final order in favor of plaintiffs. On March 24, 1997, the Stulbergs petitioned this court to enter judgment pursuant to Judge McGarr's arbitration award and to add Sulzermedica USA as a party defendant in this lawsuit. (Pls.' Mem. at 2.)

 Throughout the arbitration proceedings, the Stulbergs and defendants Techmedica and IOI continued to litigate the lawsuit before this court. The Stulbergs attempted to halt the proceedings before this court by filing a motion to stay defendants' motion for summary judgment. (Defs.' Rep. at 3.) Defendants opposed the Stulbergs' motion to stay the proceedings, and the court ruled in defendants' favor, allowing defendants to pursue their motion for summary judgment. (Defs.' Rep. at 3-4.) Both parties moved for partial summary judgment on Count I, and defendants also sought summary judgment on Count III. (Defs.' Rep. at 4.) In our March 31, 1997 ruling, the court granted defendants' motion for summary judgment on Counts I and III and denied the Stulbergs' motion for summary judgment on Count I.

 As to Count I, the court found no evidence of a breach of contract related to the Stulbergs' right to reap the benefits of their invention. (Mar. 31, 1997 Op. at 14-15.) The court found that the factual record did not establish that the license agreement required defendants to return certain assets and "technology" to plaintiffs upon termination of the agreement. (Mar. 31, 1997 Op. at 11, 14.) The court therefore held that the Stulbergs failed to show evidence of the breach of contract element of their tortious interference claim in Count I.

 The court's conclusion in this respect was not consistent with Judge McGarr's preceding arbitration judgment. (Defs.' Rep. at 5, 11.) Specifically, Judge McGarr found that the license agreement did require defendants to return certain assets and technology to the Stulbergs upon the license agreement's termination. Thus, the court's summary judgment and the arbitration judgment conflict over whether the license agreement required defendants to return certain assets and technology upon termination of the agreement.

 The court's opinion only addressed the breach of contract issue in the context of Count I -- the "Stulbergs' right to reap the benefits of their invention." (Mar. 31, 1997 Op. at 9.) In contrast, Judge McGarr also examined the issue based on "Techmedica's leak of confidential information to IOI" as alleged in Count II. Analyzing the facts in that context, Judge McGarr concluded that defendants breached the license agreement by leaking confidential information and by failing to return certain assets and "technology" to the Stulbergs upon the license agreement's termination.

 Defendants Techmedica and IOI filed their opposition to the entry of judgment pursuant to arbitration and also filed a cross-motion to vacate the arbitration award. (Pls.' Mem. at 3.) Defendants do not contest the substantive grounds of Judge McGarr's arbitration judgment. In other words, defendants do not claim that Judge McGarr committed errors of law or fact that render his arbitration judgment incorrect. Instead, defendants argue that this court's March 31, 1997 ruling has preclusive effect on the previously rendered but unconfirmed arbitration judgment. (Defs.' Rep. at 11-12.) Thus, even though Judge McGarr issued the arbitration award before this court granted summary judgment on Counts I and III, defendants assert that this court's ruling precludes the court from entering judgment on the arbitration. (Defs.' Rep. at 11 n.7.)

 Analysis

 I. Standard of Review

 The court must first determine what law governs the standard of review of this arbitration judgment. Plaintiffs assert that California law provides the standard of review, and defendants argue that federal law applies. (Defs.' Rep. at 5.) While state law governs substantive issues, such as contractual liability, federal law governs procedural issues, such as standards of review. Myers v. County of Lake, Ind., 30 F.3d 847, 851 (7th Cir. 1994) (citing Mayer v. Gary Partners & Co., 29 F.3d 330 (7th Cir. 1994)). In particular, federal law sets forth extensive precedent for judicial review of arbitration awards. E.g., Baravati v. Josephthal Lyon & Ross, Inc., 834 F. Supp. 1023, 1027 (N.D. Ill. 1993), aff'd, 28 F.3d 704 (7th Cir. 1994). In this case, the standard of review is a procedural issue that governs the litigation ...


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