Tuesday, September 7, 2021
SDNY Rejects Lady Duff Argument, Knee-Capping Plaintiffs
In Sharkey v. Zimmer USA INC, the District Court for the Southern District of New York granted defendants’ motion to dismiss, notwithstanding Plaintiffs’ invocation of the seminal case, Wood v. Lucy, Lady-Duff Gordon.
Plaintiffs Sharkey and Leinberry (Plaintiffs) invented subchondroplasty (SCP), a minimally invasive surgical technique. In 2008, in exchange for $100,000 and a 3% royalty on sales of products using intellectual property related to SCP, Plaintiff’s transferred their SCP intellectual property rights to Knee Creations. Knee Creations was obligated under the 2008 Agreement to use its ‘best efforts” to achieve certain milestones relevant to the marketing of SCP. Knee Creations was also to refrain from engaging in research, development or marketing of any product competitive with the SCP intellectual property except with Plaintiffs’ prior approval.
In 2013, Defendant Zimmer USA INC (Zimmer) bought Knee Creations, incorporated it into its subsidiary, Zimmer Knee Creations (ZKC), and entered into a new contract with Plaintiffs, which amended the original 2008 agreement. This amendment deleted the provisions that had prohibited Knee Creations from engaging in research, development, or marketing of products competing with the SCP technology. It also eliminated the “best efforts” clause, except with respect to meeting the milestones.
The sale of SCP products went well under Knee Creations. It went even better during the first three years of the new partnership between Plaintiffs and ZKC, increasing from $5 million in sales in 2013 to $38 million in 2017. And then, in 2016, Zimmer had a change of heart.
According to the complaint, the problem with SCP, from Zimmer’s perspective, is that it is too effective in reducing the need for joint-replacement surgery. Zimmer, Plaintiffs allege, had relationships with surgeons eager to perform such surgeries, and Zimmer succumbed to market pressures and stopped promoting SCP products.
Plaintiffs filed their suit in 2020 claiming that Zimmer breached the covenant of good faith and fair dealing by not using best efforts to promote SCP products, by winding down its SCP-related operations, and by failing to protect SCP-related intellectual property and trade secrets.. The complaint also alleged that Zimmer tortiously interfered with Plaintiffs’ contractual relationship with ZKC by terminating ZKC’s employees and instructing it to focus on other products. Zimmer moved to dismiss Sharkey’s claims.
The court, applying New York law, held that Zimmer did not owe a duty to Plaintiffs to use its “best efforts” and sell the SCP products because the agreement as amended required only the use of “best efforts” in reaching the milestones, not in promoting and selling SCP products. For whatever reason, the Plaintiffs bargained away their right to complain that Zimmer was engaged in developing or marketing competitive products.
Plaintiffs largely relied on the implied covenant in Wood v. Lucy, Lady Duff-Gordon—but the court distinguished this case from Wood. In Wood, a reasonable person would have been justified in inferring that the agreement included a covenant that Wood would use his best reasonable efforts* to market Lady Duff-Gordon’s designs. Here, the agreement as amended entailed no duty on Zimmer’s part to to use its best efforts to promote and sell SCP products.
Next, regarding Plaintiffs’ allegations that Zimmer had breached its duty of good faith and fair dealing, the Court found no factual allegations in support of a claim that Zimmer was contractually precluded from phasing out the component of its business dedicated to marketing SCP products. Zimmer also did not violate a duty of good faith and fair dealing by allegedly failing to protect SCP-related intellectual property and trade secrets because it had no contractual obligation to do so. The court reasoned similarly with respect to Plaintiffs’ claims that Zimmer intentionally suppressed the sales of SCP-related products. The claim of intentional suppression was conclusory; if sales were suppressed as a result of a change in business strategy, that result was a foreseeable outcome of the parties’ contractual agreement.
The District Court granted Zimmer’s motion to dismiss with prejudice regarding all of Plaintiffs’ claims, including its tortious interference, which was dismissed because Zimmer’s conduct, which was contractually permitted, could not be considered tortious.
H/T to Alyssa Cross and (you guessed it!) @NY_Contracts
* Thanks to Charles Calleros for the helpful correction in the comments!
Thanks for that catch! Corrected above.
Posted by: Jeremy Telman | Sep 7, 2021 11:25:27 AM
Note that Cardozo found that Woods owed a duty to use reasonable efforts, not best efforts, the latter of which would have been a stretch as an implied-in-fact obligation. If you want best efforts, best to specify that in the contract or at least rely on a statutory default rule, such as UCC 2-306(2).
Posted by: Charles Calleros | Sep 7, 2021 10:54:32 AM