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Spectramed v. Gould

October 16, 1998

SPECTRAMED INC., PLAINTIFF-APPELLANT,
v.
GOULD INC., DEFENDANT-APPELLEE.



The opinion of the court was delivered by: Justice Hartman

Appeal from the Circuit Court of Cook County.

Honorable Lester D. Foreman, Judge Presiding.

Spectramed Inc. (Spectramed) purchased the assets of a medical products business owned by Gould Inc. (Gould) including certain patents owned by Gould. Two patent infringement claims involving Gould products were made against Spectramed and it filed a declaratory action against Gould seeking recovery of litigation and settlement losses in defending these claims. Spectramed appeals the circuit court's grant of summary judgment in favor of Gould, and presents as issues whether: Spectramed was entitled to summary judgment since Gould was responsible for defending and paying the infringement claims because they arose before the closing of the Gould-Spectramed Asset Purchase Agreement (Agreement); Gould breached three warranties found in section 4.07 of the Agreement; Spectramed was required to prove reasonable reliance on a Gould warranty; and the court should have given effect to a Gould letter purporting to agree to Spectramed's indemnification.

Gould, interested in selling its Medical Products Group (Group) in 1985, prepared an offering memorandum for prospective purchasers describing the Group as a "leading manufacturer of physiological monitoring devices *** addressing the worldwide hospital market." Two of the Group's products were reusable and disposable blood pressure transducers, the subjects of the present patent infringement claims. The Gould memorandum asserted that "[p]atents are held [by Gould] for key design features" of the transducers.

Douglas R. Hillier, employed intermittently by Gould and its predecessor corporation between 1971 and 1986, was in charge of marketing Gould's medical products, including transducers. He later became Gould's director of operations for manufacturing transducers and other products, but left Gould in November 1983 to work for a predecessor of Baxter Healthcare Corporation (Baxter), where he became familiar with transducers manufactured by Baxter. Hillier returned to Gould in May 1984 as president of the Group's Cardiovascular Products Division, and there directed the routine evaluation of competitors' transducers.

When Gould announced its intention to sell the Group, some 35 of the Group's managers (Managers), including Hillier, expressed their interest in its acquisition. R.J. Aplin, a Group vice-president, consulted Kelso & Company (Kelso), an investment banking firm that specialized in leveraged buyout transactions, and negotiated the purchase by the Managers, with the assistance of the buyers' attorneys and Kelso's financial advisors. The Managers invested approximately $1 million in the $100 million acquisition, the remainder of which was financed by Kelso, other investors, and bank loans.

On April 25, 1986, Kelso issued a written offer on its own behalf and on behalf of Aplin and all the Managers, to purchase the Group's assets and businesses, "subject to specified liabilities." The offer provided that, upon its acceptance, Kelso and the Managers would form a new company and prepare the Agreement, which would include indemnity provisions "with respect to, among other things, all events arising on or prior to the closing, litigation, tax liabilities, product performance, product liability and qualified benefit plans." Gould accepted the offer on May 6, 1986.

The closing date for the Agreement was October 10, 1986. The buyer was identified as MPG Acquisition Corporation, subsequently renamed Spectramed. Aplin became chairman of the board, president and chief executive officer, and Hillier became division president and corporate officer. Other Managers also became Spectramed officers and directors.

One week before the closing, on October 3, 1986, Utah Medical Products, Inc. (Utah Med), sent a letter to Hillier in his capacity as a Gould officer, advising him of its September 1986 receipt of a patent (Wallace patent) for transducers. Hillier forwarded the letter to B. Moran, a Group vice-president, who was in charge of patent matters, and also told Aplin about the letter. On October 6, Moran forwarded the letter to Spectramed's patent attorney, who subsequently advised Spectramed that its transducers did not infringe the Wallace patent. This advice was reduced to writing in December 1986. A second law firm agreed that the Wallace patent was invalid, and suggested that Spectramed either ignore the Utah Med letter, send the company a letter expressing its belief that the patent was invalid, or file for reexamination or declaratory judgment to invalidate the patent. Based upon this advice, Moran suggested to Hillier that Spectramed file for reexamination.

Moran and Hillier met with representatives of Utah Med on December 2, 1986. Utah Med proposed the grant of a license for the Wallace patent to Spectramed for between $250,000 and $400,000. Ten days later, Spectramed advised Gould of Utah Med's potential claim. It also asserted its belief that Gould was liable for any losses suffered by Spectramed pursuant to section 6.05 of the Agreement. Spectramed noted further that it had hired Gould's former attorneys to handle the matter, to which Gould was invited to object, and subsequently provided Gould with the legal opinion letters it had obtained from the attorneys on the validity of the Wallace patent. On February 5, 1987, Gould responded to Spectramed's letter, stating that its present patent lawyers found no infringement of any valid Utah Med claims; it did not object to Spectramed's choice of legal representation; and it agreed with Spectramed's interpretation of section 6.05 as to Spectramed's continued manufacture and sale of certain products existing as of October 10, 1986, but not to any modification of those products.

In March 1987, Spectramed requested federal Patent and Trademark Office reexamination of Utah Med's patent, a copy of which was forwarded to Gould. During the reexamination process, in December 1987, Baxter acquired Utah Med's rights to the Wallace patent. On June 21, 1988, Baxter received a reexamination certificate narrowing some of its original patent claims, and confirming that the remaining claims were patentable.

On February 23, 1989, Baxter filed suit against Spectramed in a California federal district court, alleging infringement of both the original and reexamined patents. On May 9, Spectramed informed Gould of the suit and also that Spectramed had been acquired by British Oxygen Corporation. Gould was invited to discuss these events with Spectramed's counsel. Gould responded that it was not liable either to Spectramed or Baxter.

A federal jury found the Wallace patent to be enforceable and that Spectramed's products infringed the patent. Notwithstanding the verdict, the district court granted Spectramed's motion for judgment as a matter of law, finding no patent infringement. The federal appellate court reversed, holding that Spectramed's products infringed the patent, and remanded the case to the district court for a determination of the patent's validity. Baxter Healthcare Corp. v. Spectramed, Inc., 49 F. 3d 1575 (Fed. Cir. 1995) (Baxter I).

During the litigation of the Wallace patent, on June 17, 1987, Spectramed was notified of a second claim for patent infringement by its transducers. The claim was based on another patent, the McCord patent, which had been granted on September 10, 1985. In two letters dated August 8 and August 20, 1987, Spectramed informed Gould of the McCord claim, citing the indemnity provisions of the Agreement. Gould responded that because the owner of the patent did not mark its products with a patent number, "there is no constructive notice of the patent" and therefore no liability for infringement. Gould declined to participate in the litigation of that claim.

Baxter acquired the McCord patent in 1990, and filed a second patent infringement complaint against Spectramed in a California federal district court on January 17, 1991 (Baxter II). Spectramed informed Gould of the Baxter II complaint in June. Through continuing correspondence, Spectramed updated Gould on the status of both cases and insisted that it was entitled to indemnification from Gould under their Agreement. Gould continued to deny any basis for liability. Gould's counsel stated, however, that in the event liability was established, Gould was "concerned not only about the manner in which the litigation has been controlled, but also that Gould Inc. may have been foreclosed on any settlement opportunities without knowledge thereof."

In the Baxter II litigation, the federal jury favored Baxter, finding that Spectramed's transducers infringed the McCord patent. The court thereafter issued a permanent injunction barring Spectramed's further manufacture or sale of the infringing transducers. Spectramed appealed. Following the appellate court's remand of the case in Baxter I and during the appeal of Baxter II, on January 11, 1996, Baxter and Spectramed settled all the patent infringement claims, which required Spectramed to make an initial payment of $15 million, and pay two million dollars per year for the next three years, plus royalties at the rate of six and one-half percent of the net sales price of transducers sold in the United States.

In July 1992, after Gould repeatedly refused to participate in the Baxter litigation, Spectramed filed the instant declaratory action in the circuit court. Count I sought damages for costs expended in the Wallace patent infringement case; count II asserted a claim for expenses incurred to defend against the McCord patent; and count III alleged that ...


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