Articles Posted in Business Disputes

This blog has recently discussed the matter of Johnson & Johnson’s faulty hip implants. The Articular Surface Replacement (ASR) was released in the United States in 2005 and recalled in 2010. It is now the subject of more than 10,000 lawsuits filed against Johnson & Johnson. The first of these to go to trial was in Los Angeles, California and the jury recently decided in favor of the plaintiff.

Loren Kransky, a retired prison guard, was not supposed to be the first of the 10,000 cases to go to trial. He was diagnosed with terminal cancer though, and his case was moved up. The jury deliberated for five days before finding the device faulty and awarding Mr. Kransky $338,000 for his medical bills and $8 million for his pain and emotional suffering. They decided against issuing punitive damages because they did not believe that DePuy acted with fraud or malice.
Johnson & Johnson says it will appeal the ruling and it disputed the decision that the device had a flawed design.

The all-metal device’s design caused the cup and ball to strike against each other as the patient moved, shedding metallic debris into the body as it did so. The debris inflamed and damaged the surrounding tissue and bone, causing pain and, in some cases, permanent injuries.
All-metal implants have become mostly obsolete because most of them suffered from similar flaws. However, data suggests that the ASR was much worse than competing products. An internal Johnson & Johnson document for example, showed that close to 40% of patients who received the ASR would need to undergo a second operation within five years to have the device removed or replaced.

Traditional artificial hips on the other hand, made of metal and plastic, are expected to last at least 15 years before needing replacement. The normal replacement rate for early unexpected failures after five years is about 5%.

Experts have speculated that Johnson & Johnson will spend billions to resolve all of these lawsuits. If juries continue to award damages in amounts similar to the one they gave Mr. Kransky, the speculations will no doubt prove accurate enough. Thousands of the individual cases have been consolidated into one large proceeding in a Federal District Court in Ohio. That should simplify matters somewhat and speed up the process. A resolution of that action could also provide a framework for settling the bulk of the cases and determining awards to patients.

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After the seller of a business sued the buyer to enforce a promissory note, signed as part of the sale, the buyer asserted a defense of fraudulent inducement in Bu v. Sunset Deli Park of NY Corp, et al. The buyer alleged that the seller misrepresented the weekly income of the business prior to the sale. The New York Supreme Court in Brooklyn denied the plaintiff’s motion for summary judgment, finding that the defendants had raised sufficient issues of fact as to their fraud defense.

The plaintiff, Su Nam Bu, sold her deli business to defendant In Suk Cho for $220,000 in September 2010. The stock purchase agreement executed by the parties stated that Cho would pay Bu $1,000 upon signing the agreement, and $49,000 at closing. Cho signed a promissory note on September 27, 2010 for the remaining $170,000, in which she would pay thirty-six monthly installments beginning in March 2011, plus a lump sum payment of $50,000 by September 15, 2012. A security agreement, or “chattel mortgage,” signed by the parties pledged the deli’s property, inventory, accounts receivable, equipment, and fixtures as collateral for the promissory note.

Cho made six payments on the note, but the seventh and eighth payments allegdly bounced. Bu filed suit to enforce the note. Cho answered with a fraudulent inducement defense, claiming that Bu represented the deli’s weekly income as $15,000 to $17,000 prior to the sale, but Cho found it to be an average of $11,000 to $12,000 upon taking over its operations.

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When things go wrong in the operating room, it can sometimes be difficult to discern who the real perpetrator is. In the case of thousands of hip implants designed and sold by Johnson & Johnson, the issue is with the company producing and selling the implants, not the hospital or the doctor. Andrew Ekdahl, appointed in 2011 to head the company’s troubled DePuy Orthopaedics division after the flawed implant had been recalled, tried at first to say that it was not the design that was flawed. Rather, he argued that the surgeons were not implanting them correctly.

However, there is much evidence which allegedly points to the contrary. Before it was sold in the U.S., the device (the Articular Surface Replacement, or A.S.R.) was used in other countries for an alternative hip replacement procedure called resurfacing. It was not used in the United States because the Food and Drug Administration would not pass it due to concerns about “high concentration of metal ions” found in the blood of patients who had received the device.
Mr. Ekdahl, head of the marketing team in charge of the device at the time, failed to disclose this information when marketing the device outside of the United States. When a news article appeared last year about the FDA’s ruling, Mr. Ekdahl issued a statement that any implication that the FDA had determined there were safety issues with the A.S.R. was “simply untrue”. In 2009, the FDA was still asking the company for more safety information regarding the hip implant version which was being used in the United States.

Since the A.S.R.’s introduction to the U.S. in 2005, more than 10,000 lawsuits have been filed against DePuy regarding the device. The first of these cases to go to trial is currently being fought in court in Los Angeles. Recently, portions of Mr. Ekdahl’s videotaped testimony was shown for the jury. In the video, when pressed as to whether DePuy decided to recall the A.S.R. due to safety issues, Ekdahl insisted that the company did it “because it did not meet the clinical standards we wanted in the marketplace.”

Despite that assertion, Mr. Ekdahl and other DePuy marketing executives all allegedly publicly stated at the time that the device was performing extremely well. Internal documents on the other hand, conflict with those statements. The documents have recently been made available to the public as a result of the litigation.

Included in these documents is a statement made in 2008 by Dr. William Griffin, a surgeon who served as one of DePuy’s top consultants. He allegedly told Mr. Ekdahl and two other DePuy marketing officials that he had concerns regarding the cup component of the A.S.R. and that he believed it should be “redesigned”.

Before the device was recalled in 2010, DePuy was aggressively promoting it in the U.S. as a breakthrough device and implanting it into thousands of patients. Yet internal DePuy projections estimated that it would allegedly fail in 40% of patients within five years, a rate eight times higher than normal.

According to Mr. Ekdahl’s testimony, he did participate in a meeting that resulted in a proposal to redesign the A.S.R.’s cup, but the plan was dropped. The reasoning used was that sales of the device did not justify the expense.

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With all the debate raging around healthcare these days, cases like this one must be particularly harmful to the reputation of companies like Hospital Corporation of America (HCA).

It is common practice for profitable hospital chains to buy community hospitals to convert to profit status. These purchases typically include an agreement for the purchaser to spend money to fix up the community hospitals and spend a certain amount on charitable care in the community.

In 2003, HCA purchased twelve hospitals in the Kansas City area from Health Midwest for $1.125 billion. As part of the deal, HCA agreed to spend $300 million in capital improvements to the hospitals in the first two years and an additional $150 million in the three years after that. The hospital chain also agreed to maintain the levels of care which had previously been provided to low-income members of the community for ten years.

The Health Care Foundation of Greater Kansas City is a nonprofit organization which was created from the proceeds of the sale of the hospital. When they received their first report from HCA in 2004, they allegedly realized the company was already behind in their promised payments.

Of the $300 million that was supposed to have been spent in the first two years, records allegedly indicated that only $50 million had been spent.

HCA’s reports also allegedly indicated that the amount of charitable care provided in their inner-city hospital had fallen while the level of charitable care provided at the more affluent suburban hospital had gone up dramatically.

The foundation repeatedly asked HCA for an explanation but, when they received none, they finally filed a lawsuit against the health care company in 2009.

In the trial, HCA argued that it had met its obligation to spend money on hospitals by building two new hospitals rather than repairing the older facilities. However, Judge John Torrence of Jackson County Circuit Court decided that the agreement had specifically called for improvements to the existing hospitals, not the construction of new hospitals. He therefore ruled that HCA stilled owed $162 million of the $300 million it had agreed to spend between 2003 and 2005. He then named a court-appointed forensic accountant to determine whether HCA had provided the charitable care it had agreed to provide.

In his ruling, the judge said HCA’s own written statements included “differing amounts” of money spent on charitable care. One HCA report said it had provided $48 million in charitable care to the community in 2009 while another report on its Web site claimed that it had provided more than $87 million. The annual report to the foundation, on the other hand, said it had provided $185 million in charitable care that year.

When asked about the widely differing numbers, neither the president of HCA’s Midwest division nor other HCA executives could offer an explanation.

The $162 million will be paid to the foundation, which will use it to create grants to provide care for uninsured and under-insured families in the area. It is unclear whether the spending on improvements for the local hospitals will take place.

But HCA may end up required to cough up even more than the $162 million paid to the foundation, depending of what the court-appointed accountant discovers. Paul Seyferth of Seyferth Blumenthal & Harris, which represents the foundation, speculates that the HCA will “have a tremendously difficult time convincing anybody that they spent what they claim they spent”.

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It’s amazing how one person’s idea can turn into a patent war between two major companies. In the case of Carter Bryant, an idea for dolls which began with some sketches in 1998 while he was living with his parents in Missouri, later turned into a major battle. Bryant went to work for Mattel Inc., based in El Segundo, California, which claims they began work on designing the dolls with Bryant while he was working for them.

In 2000, MGA Entertainment, based in Van Nuys, California, made a deal with Bryant and, in 2001, the Bratz dolls were released. They were an immediate hit among “tweens” and threatened to de-throne the long-ruling queen of dolls, Mattel’s infamous Barbie. In 2004, Mattel sued Bryant for allegedly working with a competitor while also working with Mattel, and Mattel also sued MGA for alleged copyright infringement. The case against Bryant settled rather quickly but the battle with MGA rages on.

The case went back and forth in the courts. Initially, a jury agreed that Bryant had developed the concept while working with Mattel and thereby awarded the company $100 million.

The decision was overruled on appeal however when the 9th Circuit court overturned that decision and ordered a new trial.

MGA counter-sued, alleging Mattel had engaged in corporate espionage when some of their employees gained access to some of MGA’s designs at a toy fair. Mattel then allegedly used the information gained to try to keep Bratz dolls off the shelves and thereby participated in some illegal practices of their own.

In April 2011, a jury sided with MGA, awarding the entertainment company $3.4 for each of 26 instances they found of Mattel using misappropriated trade secrets, a total of $88.4 million. With fees and damages together, Mattel was ordered to pay $172 million in punitive damages in addition to the judge’s order of $137 million in legal fees and costs to defend against Mattel. This brought the entire award to over $309 million.

According to the U.S. District judge, the copyright case that Mattel was alleging was “stunning in scope and unreasonable in relief it requested.” He also said that the claims endangered free expression and competition.

A federal appeals court however has overturned the $172 million punitive damages ruling. The court decided that, as it is considering Mattel’s copyright infringement lawsuit against MGA, Mattel’s trade-secret thefts are irrelevant to the case. However, the court allowed the award of $137 million to cover legal fees and costs to remain. The case will now return to the courts.

MGA has said that it intends to file a new lawsuit to pursue their trade-theft claims against Mattel.

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Once again the issue of what is required to certify a class for class-action litigation has been battled in court. In this case it went up to the Montana Supreme Court, which sided with the plaintiffs and agreed to certify the class.

The case involves several property owners along the shoreline of the Flathead River in Montana who are going to court for erosion against the sides of the lake caused by the Kerr Dam keeping the lake at artificially high levels. According to the lawsuit, the lake reached peak elevation levels of 2,980 feet before the dam was built in 1938. Now the Dam keeps the lake at 2,983 feet, which is causing severe erosion to the sides of the lake and widening its “footprint” particularly during fall storms. While the amount of erosion caused by the high levels might be deemed reasonable when considering the recreational needs of shoreline property owners and businesses in the summer, the degree of erosion occurring when the lake’s level is kept artificially high into October and November could be deemed unreasonable.
Initially, Flathead District Judge Kitty Curtis denied certification of the class, saying that the cause of the erosion would need to be shown on a property-by-property basis around the lake and on parts of the Flathead River affected by the lake levels.

The state Supreme Court disagreed, saying that damage caused by the dam over the years has to be considered collectively because the lake can only be maintained at singular elevations, and those elevations cannot be changed for particular lakeshore properties. The liability of the defendants on the other hand, will have to be determined separately, as will the damages for each property. The two defendants are Montana Power Co. and PPL Montana. Shoreline easements granted to the dam operator when the dam was built provide protections for that operator.

The case has gone to the Supreme Court for review three times since litigation got under way in 1999. This most recent ruling defines the “class” as anyone who has owned property on the lake or certain portions of the river since November 1991. Due to that very large range, the class includes about 3,000 properties and could include multiple owners of each property.
Since the state Supreme Court’s ruling, the class-action lawsuit is going back to the Flathead District court, which will schedule hearings for 2013. Jamie Franklin, a Chicago-based attorney who is arguing the case on behalf of the plaintiffs, says he is ready for the hearings to proceed.
This ruling demonstrates another victory for class-action litigation. At a time when courts and judges across the country are finding reasons not to certify class actions and contracts are making it more difficult for consumers to bring class action litigation to the courts, decisions like these seem to be getting more rare.

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