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Alvarado Orthopedic Research, L.P. v. Linvatec Corp.

United States District Court, Ninth Circuit

May 24, 2013

LINVATEC CORP., et al., Defendants.


IRMA E. GONZALEZ, District Judge.

Before the Court is Defendant Linvatec, Inc.'s motion for summary judgment, which also requests sanctions. [Doc. No. 96.] For the reasons below, the Court hereby DENIES Defendant's motion in its entirety.


This is a breach of contract case arising from a dispute over royalty payments under a technology licensing agreement. In the 1980's, Dr. Thomas Peterson and metallurgical engineer Kenneth Holko developed surgical saw blade technology, including a nickel-based blade coating ("BRAZOL") and a "ribbed" blade shape, intended to reduce the accumulation of fine metal debris in open wounds during orthopedic surgery.

In 1989, Alvarado Orthopedic Research, Inc., a general partnership whose principal is Dr. Peterson, and the Hall Surgical Division of Zimmer, Inc. ("Zimmer"), entered into the subject license agreement, which gave Zimmer the right to sell products using the saw blade technology in exchange for a $12, 000 lump sum and prospective royalty payments. [ See Doc. No. 96-3 ("Agreement").] The written agreement provides for a 3% royalty to Alvarado for each unit of unribbed product sold, and a 6% royalty for each unit of ribbed product sold. [Agreement IV.A.2.]

"Product" is defined as "any Device the manufacture, use or sale of which would, but for this Agreement, infringe a Valid Claim or any Device incorporating, or the manufacture, use or sale of which utilizes the Technology." [Agreement I.F.]

"Device" is defined to as "a gall resistant surgical saw blade coated with a nickel-based material identified [as] BRAZOL..." [Agreement I.B.]

"Valid Claim" is defined as "a claim pending in an unexpired patent included within the Licensed Patents..." [Agreement I.D.]

"Technology" is defined as "all information, technical data or other know-how which relates to the manufacture, use or sale of the Device..." [Agreement I.E.]

When the license agreement was entered, no issued patents yet covered the rib and BRAZOL technologies. But the agreement's definition for "Licensed Patents" prospectively encompassed "the patent(s) and/or patent applications specified in Attachment B and any and all other patents and/or patent applications [] now or hereinafter during the term of the Agreement, " as well as, inter alia, "any and all... continuations, continuations-in-part..." [Agreement I.C.] And Attachment B listed, inter alia, three U.S. patent applications and corresponding foreign applications in, among other locales, Canada. [ See Doc. No. 96-3 at 22 ("Attachment B").]

The length of the obligation to pay royalties under the agreement hinged on whether patents ever issued. [Agreement XIV.A.] If no patents issued, the "obligation to pay royalties... [would] terminate five (5) years after the date of the first commercial sale of Product." [ Id. ] If patents did issue, the obligation would expire "upon the expiration of the last to expire of the [licensed] patents." [ Id. ]

In the early 1990's, five patents issued variously covering the rib and BRAZOL technologies:

• U.S. Patent No. 5, 002, 555 ("555 Patent")
• U.S. Patent No. 5, 133, 728 ("728 Patent")
• U.S. Patent No. 5, 135, 533 ("533 Patent")
• U.S. Patent No. 5, 149, 597 ("597 Patent")
• Canadian Patent No. 2, 008, 117 ("Canadien Patent")

In 1994, Zimmer began using other coatings, e.g., ME-92, with some of its blades in lieu of BRAZOL but still in combination with the licensed rib technology. In 1995, Linvatec, an affiliate of Zimmer, took over the obligation of issuing royalty payments to Alvarado under the license agreement.[1] In 1997, Zimmer formally assigned all of its rights and obligations under the license agreement to Linvatec.

In 2008, Alvarado contacted Linvatec with concerns that (1) Linvatec was not using the then-current list prices of blades to calculate royalties under the agreement and (2) Linvatec failed to include in its reports-and thus failed to pay royalties on-some of the blades it sold. Unsatisfied with Linvatec's assurances that any decrease in sales stemmed from normal fluctuations in the market, Alvarado requested that Linvatec disclose the actual list prices for each blade sold under the agreement. Upon this disclosure, Alvarado alleges that it discovered Linvatec had been calculating royalty payments based on discounted sales price rather than the advertised list price as required under the agreement.

From late 2008 through August 2009, Linvatec assured Alvarado that it would investigate these concerns, but Alvarado was left to rely on Linvatec's representations in quarterly reports because (1) calculating the royalty payments involved a substantial amount of sales data and (2) only Linvatec had possession of the underlying data.

On February 4, 2011, Plaintiffs Alvarado and Holko filed a complaint against Linvatec alleging four causes of action for: (1) breach of contract, (2) breach of fiduciary duty, (3) fraud, and (4) accounting. [Doc. No. 1.] On August 23, 2011, the Court granted Linvatec's motion to dismiss and dismissed without prejudice Plaintiffs' claims for fraud and breach of fiduciary duty and their request for punitive damages. [Doc. No. 14.]

On October 17, 2011, Linvatec filed an amended answer, alleging six counterclaims for: (1) declaratory judgment; (2) breach of the covenant of good faith and fair dealing; (3) unjust enrichment; (4) breach of contract; (5) accounting; and (6) negligent misrepresentation. [Doc. No. 21.] The Court dismissed the majority of Defendant's counterclaims on February 8, 2012. [Doc. No. 40.] On February 28, 2012, Defendant filed a second amended answer, alleging counterclaims for, inter alia, (1) declaratory judgment and (2) money had and received. [Doc. No. 44.]

On October 17, 2012, the Court granted the parties' joint motion for the voluntary dismissal of Plaintiff Holko's claims against Linvatec, but leaving Linvatec ...

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