Zhu et al v. Boston Scientific Corporation et al

Filing 147

MEMORANDUM OPINION. Signed by Judge Sue L. Robinson on 3/15/2016. (nmfn)

IN THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF DELAWARE
DR. QINGSHENG ZHU and DR. JULIO
SPINELLI, acting jointly as the
Stockholder Representative Committee
for Action Medical, Inc.,
Plaintiffs,
v.
BOSTON SCIENTIFIC CORPORATION
and CARDIAC PACEMAKERS, INC.,

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Civ. No. 14-542-SLR

Defendants.

R. Montgomery Donaldson, Esquire of Polsinelli PC, Wilmington, Delaware. Counsel
for Plaintiff. Of Counsel: Patrick J. McElhinny, Esquire and Christopher M. Verdini,
Esquire of K&L Gates LLP, Pittsburg, Pennsylvania.
Karen L. Pascale, Esquire and Pilar G. Kraman, Esquire of Young Conaway Stargatt
& Taylor LLP, Wilmington, Delaware. Counsel for Defendants. Of Counsel: Matthew
M. Wolf, Esquire, Edward Han, Esquire, Amy DeWitt, Esquire, Tara Williamson,
Esquire and James Kaiser, Esquire of Arnold & Porter LLP, Washington, DC.

MEMORANDUM OPINION

Dated: March _li_, 2016
Wilmington, Delaware

I.

INTRODUCTION

In 2009, defendants Boston Scientific Group and its indirect, wholly owned
subsidiary Cardiac Pacemakers, Inc. (collectively, "BSC") acquired Action Medical, Inc.
("Action Medical") pursuant to an Agreement and Plan of Merger (the "Merger
Agreement"). (D.I. 1 Ex. A) Plaintiffs Dr. Qingsheng Zhu and Dr. Julio Spinelli
(collectively, "plaintiffs") comprise the Stockholder Representative Committee of Action
Medical. (Id.§ 2.5) The Merger Agreement is governed by Delaware law and grants
plaintiffs authority to enforce certain rights. (Id. §§ 2.5, 10.7)
On April 24, 2014, plaintiffs filed suit against BSC alleging breaches of contract
and breaches of the implied covenant of good faith and fair dealing. (D.I. 1) Plaintiffs'
claims are based on BSC's purported failure to spend a contractually required minimum
amount towards the development and commercialization of Action Medical's technology
(the "Technology"), thereby depriving plaintiffs of contingent milestone payments. (Id.

11111, 93-99,

111-126) Plaintiffs also claim that once BSC decided to no longer pursue

the Technology, it failed to promptly return that technology as required by the Merger
Agreement. (Id. 1111100-110)
Currently before the court are the following motions filed by BSC: (i) motion for
summary judgment (D.I. 97); (ii) motion to preclude expert opinions and testimony of Dr.
Julio Spinelli (D.I. 83); (iii) motion to preclude expert opinions and testimony of Stan
Myrum (D.I. 86); and (iv) motion to strike the "Supplemental Sub-Analysis" opinions of
Stan Myrum (D.I. 90). The court has subject matter jurisdiction over this action pursuant

to 28 U.S.C. § 1332(a), and personal jurisdiction over the defendants pursuant to
Section 10.8(a) of the Merger Agreement.
II.

BACKGROUND
A.

Merger

In 2005, Dr. Zhu formed Action Medical as a vehicle to further develop the
Technology, which he also invented. (/d.1117) The Technology provides a patented
approach to pacing that uses a specific waveform called "Xstim" delivered at or near the
"His bundle" region of the heart. (D.I. 11122) After performing clinical studies in 2005
and 2006, Action Medical approached BSC for an investment and/or partnership to help
further develop and commercialize the Technology. (/d.111127, 31-32) BSC is in the
business of developing, manufacturing, and marketing medical devices including
implantable devices commonly known as "pacemakers." (Id. 1110) Dr. Zhu was
particularly interested in a partnership with BSC because he previously worked at
Guidant Corporation, which was acquired by BSC and made into its Cardiac Rhythm
Management division. (D.I. 121 at 2) Thus, Dr. Zhu had a personal history with the
decision makers he approached at BSC for an investment. In 2007, BSC paid $6.5
million for an 18% stake in Action Medical. (D.I. 1, 1136) In April 2009, BSC paid
another $16 million to acquire all of Action Medical. (D.11, 1151)

B.

Relevant Contract Provisions

Section 1.6 of the Merger Agreement contains all of the provisions relevant to the
parties' litigation. Sections 1.6(a)-(d) required BSC to pay plaintiffs contingent
payments if certain events occurred with respect to any products incorporating the
Technology ("Contingent Payment Products"). The contingent payments were

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comprised of: (i) a $7 million milestone payment for regulatory approval in the EU; (ii) a
$16 million milestone payment for regulatory approval from the FDA; and (iii) annual
payments based upon a percentage of worldwide sales of Contingent Payment
Products. (Id. § 1.6 (a)-(d)) The parties expressly acknowledged in the Merger
Agreement that it was "uncertain" whether the qualifying events to receive any
contingent payments would occur and, therefore, it was "not assured" that BSC would
be required to make any milestone payments. (Id. § 1.6(e))
In Section 1.6(f), BSC agreed to spend a minimum of $15 million before April 22,
2013 "in connection with ... matters relating to" Contingent Payment Products. (Id. §
1.6(f)) The same section makes clear, however, that BSC had "sole discretion" over "all
decisions relating to any Contingent Payment Products." (Id.) BSC also had "sole
discretion" in how to spend the $15 million. (Id.) The Merger Agreement states that the
$15 million could be spent on, among other things, "development, manufacturing,
regulatory, marketing, and/or sales," but contains no specific commitments in this
regard. (Id.)
Section 1.6(f) also states that BSC's minimum spending obligation would
"immediately cease" if BSC achieved FDA approval or made a "determination that
further spending would not materially increase the level of feasibility of the product
and/or its commercial viability." (Id.) BSC was obligated to consult with plaintiffs before
making any determination and to send a written notice of its determination (a "Spending
Determination Notice"). (Id.) Delivery of the notice was at BSC's "sole discretion." (Id.)
Finally, plaintiffs' "sole and exclusive remedy for any claim arising out of delivery
... of a Spending Determination Notice" was the "Participating Rights Holders Option."

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(Id. § 1.6(g)) Under that option, plaintiffs had the right to form a new company to which

BSC would contribute the Technology. (Id.) In exchange, plaintiffs had to give BSC an
18% interest in the new company. (Id.)

C.

Development of the Medical Technology

Shortly after it acquired Action Medical, BSC conducted animal studies to
determine whether the Technology offered advantages over conventional pacing or His
bundle pacing using conventional waveforms. (0.1. 98 at 5; 0.1. 102 Exs. 5, 6, 8) BSC
also conducted a study in humans called the High Septal Pacing for Cardiac
Resynchronization Therapy Study ("HISTORY"). (0.1. 102 Ex. 14) HISTORY was
designed to test His bundle pacing, using Xstim and other waveforms, as an alternative
to conventional cardiac resynchronization in patients with heart failure. (Id.) Among
other things, HISTORY was intended to provide a head-to-head comparison of Xstim to
conventional unipolar and bipolar waveforms, which had not yet been studied. (0.1. 102
Exs. 4, 15)
The HISTORY trial began in Germany and expanded to additional sites in Hong
Kong, Spain, and Canada. (Id. Exs. 11, 12) The first patient was enrolled in September
2011. (/d. Ex. 13) Although BSC intended to enroll at least 50 patients, BSC stopped
the study in March 2012 having enrolled only 14 patients. (Id. 14; 0.1. 127 Ex. 7 i"J 178)
BSC claims that it stopped enrollment in the study because it did not want to risk patient
safety after the data from 14 patients was sufficient to detect a meaningful negative
trend. (0.1. 135 at 7) The final report on HISTORY was completed in July 2012. (0.1.
102 Ex. 16) BSC concluded from the study that Xstim was not superior to other
waveforms. (Id. Exs. 15, 16)

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Plaintiffs claim that the HISTORY study was "woefully inadequate," because the
design of the study and the analysis were inconsistent with industry standards. (D.I.
121 at 5) Specifically, according to plaintiffs:
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BSC took over a year to finalize the Clinical Investigation Plan, and then
took another year to enroll the first patient. (Id. at 5)

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BSC "engaged in meaningless preclinical testing." (Id. at 15)

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BSC "decided to stop HISTORY ... knowing it would not obtain
statistically significant data," because it enrolled only 14 of the 50 patients
sought. (Id.)

•

The results of the HISTORY study were "uninterpretable." (D.I. 121 at 16)

BSC factually disputes each of these assertions, but resolving those factual disputes is
not necessary to deciding the motion for summary judgment. It is sufficient to note that
BSC did engage in testing and development of the Technology.

D.

BSC's Spending Determination Notice

Around April 12, 2013, Dr. Douglas Daum (Vice President of Research and
Development at BSC) and Dr. Zhu discussed by telephone BSC's determination that it
was no longer going to pursue development of the Technology. (D.I. 125 Ex. 21)
Afterwards, Dr. Zhu sent an email summarizing his understanding of the conversation,
including that BSC had spent anywhere between $6 million to $60 million developing
the Technology, "depending on how BSC wants to attribute costs." (Id.) In response,
Dr. Daum elaborated that:
The amount we have spent developing the Action Medical technology
depends on what we attribute to be in the scope of our spending towards
technology development. This includes direct and indirect applicable
technology. Examples of direct spend would include clinical trials,
preclinical investigations, etc.
Indirect spend could include lead
evaluations that are required to implement the therapy but are also
applicable to other devices ....

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(Id.) Dr. Daum also stated that the "direct spend" would not equal $15 million or more. 1
(Id.) On April 16, 2013, BSC sent plaintiffs a formal written Spending Determination

Notice. (D.I. 125 Ex. 22)
Around May 10, 2013, plaintiffs sent BSC written notice that they were forming a
new company, called Act2 Medical, Inc. ("Act2"), into which BSC would be required to
contribute the Technology. (Id. Ex. 23) Although the parties have exchanged drafts of
the necessary transaction documents, Act2 has not yet been formed and the
Technology has not yet been transferred to Act2. (Id. Exs. 26, 30, 37) Both sides
accuse the other of causing the delay that has prevented the transaction from closing.
(D.I. 98 at 10-11; D.I. 121 at 6-7)
Regardless of who contributed most to the delay, on May 10, 2015, BSC sent
plaintiffs a set of transaction documents for execution. (D. I. 125 Ex. 37) Plaintiffs have
not signed those documents. Instead, plaintiffs' counsel emailed BSC that litigation has
already commenced and, therefore, any transaction between the parties must account
for the parties' conflict and BSC's breaches of the Merger Agreement. (Id. Ex. 38) In
their opposition brief, plaintiffs requested an order of "specific performance in the form
of transfer of the technology without BSC retaining an 18% interest." (D.I. 121at13 n.
5)

The actual amount spent is unclear. In their brief, plaintiffs claim that BSC spent
$4.5 million, but do not explain how they arrived at that number or what evidence in the
record supports it. (See D.I. 121 at 5). At oral argument, BSC said it spent a little more
than $5 million, but also does not explain how it arrived at that number. (Tr. 13).

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Ill.

STANDARD OF REVIEW
"The court shall grant summary judgment if the movant shows that there is no

genuine dispute as to any material fact and the movant is entitled to judgment as a
matter of law." Fed. R. Civ. P. 56(a). The moving party bears the burden of
demonstrating the absence of a genuine issue of material fact. Matsushita E/ec. Indus.
Co. v. Zenith Radio Corp., 415 U.S. 475, 586 n. 10 (1986). A party asserting that a fact
cannot be-or, alternatively, is-genuinely disputed must support the assertion either by
citing to "particular parts of materials in the record," or by "showing that the materials
cited do not establish the absence or presence of a genuine dispute, or that an adverse
party cannot produce admissible evidence to support the fact." Fed. R. Civ. P.
56(c)(1 )(A) & (B). If the moving party has carried its burden, the nonmovant must then
"come forward with specific facts showing that there is a genuine issue for trial."
Matsushita, 415 U.S. at 587 (internal quotation marks omitted). The Court will "draw all
reasonable inferences in favor of the nonmoving party, and it may not make credibility
determinations or weigh the evidence." Reeves v. Sanderson Plumbing Prods., Inc.,
530 U.S. 133, 150 (2000).
To defeat a motion for summary judgment, the non-moving party must "do more
than simply show that there is some metaphysical doubt as to the material facts."
Matsushita, 475 U.S. at 586-87; see also Podohnik v. U.S. Postal Service, 409 F.3d
584, 594 (3d Cir. 2005) (stating that a party opposing summary judgment "must present
more than just bare assertions, conclusory allegations or suspicions to show the
existence of a genuine issue") (internal quotation marks omitted). Although the "mere
existence of some alleged factual dispute between the parties will not defeat an

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otherwise properly supported motion for summary judgment," a factual dispute is
genuine where "the evidence is such that a reasonable jury could return a verdict for the
nonmoving party." Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 247-48 (1986). "If the
evidence is merely colorable, or is not significantly probative, summary judgment may
be granted." Id. at 249-50 (internal citations omitted); see also Celotex Corp. v. Catrett,
477 U.S. 317, 322 (1986) (stating that entry of summary judgment is mandated "against
a party who fails to make a showing sufficient to establish the existence of an element
essential to that party's case, and on which that party will bear the burden of proof at
trial").

IV.

DISCUSSION
Plaintiffs allege four claims. In count I, plaintiffs claim that BSC breached the

Merger Agreement by failing to spend a minimum of $15 million to develop and
commercialize the Technology. (D.I. 1 ~ 97) In count II, plaintiffs claim that BSC
breached the Merger Agreement by not executing the documents necessary to transfer
the Technology to Act2. Count Ill recasts plaintiffs' count I breach of contract claim as a
breach of the implied covenant of good faith and fair dealing. Specifically, plaintiffs
allege that BSC breached the implied covenant by failing to take steps to pursue the
achievement of the contingent payment milestones, thereby depriving plaintiffs of the
benefit of those payments. (D.I. 1 ~~ 116-17) In count IV, plaintiffs allege that BSC
breached the implied covenant by delivering the Spending Determination Notice without
making a determination in good faith that further spending would not materially increase
the commercial viability of the Technology.

(Id.~

124) According to plaintiffs, this act or

omission also deprived plaintiffs of the benefits of the milestone payments. (Id.

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~

125)

A.

Count I - Breach of Contract

The parties do not agree on the exact amount BSC spent towards its minimum
spending obligation, but do agree that it was less than $15 million. Regardless of the
actual amount spent, plaintiffs have not shown that BSC breached an express obligation
of the Merger Agreement by spending less than $15 million before it sent the Spending
Determination Notice. Per the terms of the Merger Agreement, BSC had sole discretion
in how to develop the Technology and how to spend the $15 million. (See D.I. 1 Ex. A,

§ 1.6(f)) BSC had no contractual obligation, as plaintiffs argue, to "incrementally spend
money over the course of four years until it spent the entire $15 million." (D.I. 121at9)
Moreover, per the terms of the Merger Agreement, BSC's spending obligation
"immediately ceased" on April 16, 2013 when it determined that "further spending would
not materially increase the level of feasibility of the product and/or its commercial
viability" and sent plaintiffs a written notice to that effect. (See D.I. 1 Ex. A, § 1.6(f))
The fact that, at the time BSC sent the notice, it had 6 days left to spend approximately
$10 million does not affect the analysis. 2
Ultimately, plaintiffs cannot sustain a breach of contract claim where there is no
contractual underpinning for BSC's alleged obligations. See Airborne Health, Inc. v.
Squid Soap, LP, 984 A.2d 126, 145 (Del. Ch. 2009) (finding no breach of contract where

the contract provisions do not obligate the defendant to take the particular actions
plaintiffs sought); Riverside Fund V, L.P. v. Shyamsundar, 2015 WL 5004924, at *3

It would not be reasonable to infer in plaintiffs' favor that it was theoretically
impossible for a company reporting $5.631 billion in operating expenses to spend
0.18% of that amount in 6 days on a project requiring an estimated $100 million or more
to develop. (See SEC Form 10-K dated Dec. 31, 2015 at p. 34; D.I. Ex. 3 (estimating a
future R&D investment of $100-150 million to get the product to market))
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(Del. Super. Aug. 17, 2015) (holding that where the contract did not require defendant to
perform the specific act, plaintiff cannot sustain a breach of contract claim based on its
nonoccu rrence).

8.

Count II - Breach of Contract

BSC argues in support of its motion for summary judgment on count II that
plaintiffs failed to produce any evidence that they suffered damages from a delay in
returning the Technology. (D.I. 98 at 12-13) Plaintiffs do not dispute that they
presented no evidence on damages from the delay. Instead, they argue that count II
survives BSC's motion because plaintiffs also sought specific performance. (D.I. 121 at
12-13) Because plaintiffs have not shown that there is any dispute as to a material fact
regarding the lack of damages from the delay, summary judgment is awarded in BSC's
favor on that aspect of count II.
As for specific performance, the court cannot resolve that part of the parties'
dispute at this stage of the proceedings. Plaintiffs have crafted a request for specific
performance that they believe would fairly address the parties' conflict and compensate
them for BSC's purported breaches of the Merger Agreement. Specifically, plaintiffs
have asked that the court order a transfer of the Technology without BSC retaining an
18% interest. (D.I. 121at13 n. 5) Although the court recognizes that the parties are in
conflict, it has not found BSC in breach of the Merger Agreement. Moreover, "the Court
is required to limit the remedy of specific performance to the rights created by the
contract." Del. State Troopers' Lodge Fraternal Order of Police v. State, 1984 WL 8217,
at *6 (Del. Ch. June 13, 1984). Plaintiffs may have the right to some form of specific

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performance, but it is not clear at this time that the court is empowered to grant specific
performance in the form requested.

C.

Counts Ill and IV - Implied Covenant of Good Faith and Fair Dealing

In count Ill, plaintiffs allege that BSC breached the implied covenant of good faith
and fair dealing by failing to develop the Technology in a manner that would allow
plaintiffs to receive the benefit of the contingent payment milestones. (D. I. 1 1{1{ 116-17)
In count IV, plaintiffs allege that BSC breached the implied covenant by deciding in bad
faith to deliver the Spending Determination Notice, thereby depriving plaintiffs of the
benefits of the milestone payments. (Id. 1{ 124-25)
For several reasons, plaintiffs' claims do not fit within the rubric of the implied
covenant of good faith and fair dealing. To begin with, the implied covenant of good
faith and fair dealing is a "cautious enterprise" whereby the court will infer contractual
terms to address "unanticipated developments or to fill gaps in the contract's
provisions." Nemec v. Shrader, 991 A.2d 1120, 1125 (Del. 2010). When conducting
this analysis, the court "must assess the parties' reasonable expectations at the time of
contracting." Id.
Here, the Merger Agreement expressly addresses the relief plaintiffs seek
through their implied covenant claims. Plaintiffs agreed that whether the regulatory
approvals and sales of Contingent Payment Products would occur was "uncertain," and
the receipt of any milestone payments was "not assured." (D.I. 1, § 1.6(e)) Moreover,
the exclusive remedy for any claims arising out of delivery of the Spending
Determination Notice is a return of the Technology. (D.I. 1, § 1.6(f)) This excludes
damages as a form of relief. The implied covenant cannot be used to rewrite these

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reasonable expectations. Winshall v. Viacom Int'/, Inc., 76 A.3d 808, 816 (Del. 2013)
(stating that plaintiffs cannot rely on the implied covenant to give them contractual
protections they failed to secure at the bargaining table).
In addition, as the Delaware Supreme Court explained in Winshall, the implied
covenant does not obligate a buyer in a merger transaction to "conduct their
businesses, post-merger, so as to ensure or maximize the earn-out payments." 76 A.3d
at 811. In fact, the Merger Agreement expressly committed to BSC's sole discretion all
decisions on how to develop the Technology and how to spend the $15 million. It also
committed to BSC's sole discretion the decision on whether to deliver the Spending
Determination Notice. Delaware courts have repeatedly emphasized that "one
generally cannot base a claim for breach of the implied covenant on conduct authorized
by the terms of the agreement." Nemec v. Shrader, 991A.2d1120, 1125-26 (Del.
2010)); Dunlap v. State Farm Fire & Gas. Co., 878 A.2d 434, 441 (Del. 2005)
(explaining that "[e]xisting contract terms control" such that the implied covenant "cannot
be used to circumvent the parties' bargain"). Thus, the court cannot find that BSC
breached the implied covenant by exercising its contractual rights to develop the
Technology how it chose to deliver a Spending Determination Notice.
Admittedly, "[w]hen a contract confers discretion on one party, the implied
covenant requires that the discretion be used reasonably and in good faith." Airborne
Health, Inc. v. Squid Soap, LP, 984 A.2d 126, 146-47 (Del. Ch. 2009); Winshall, 76 A.3d
at 816. But Delaware courts have explained that it is not bad faith for a buyer to
conduct its business in a commercially reasonable manner. Winshall v. Viacom Int'/,
Inc., 55 A.3d 629, 638 (Del. Ch. 2011 ); see also ev3, Inc. v. Lesh, 114 A.3d 527, 540-41

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(Del. 2015) (discussing Winshall with approval). It could be bad faith for a buyer to
"purposefully" take some action to reduce the earn-out payments so as to shift
additional profits its way at the expense of the seller's former shareholders. Winshall v.
Viacom Int'/, Inc., 55 A.3d at 638. By that standard, plaintiffs have pointed to no
conduct by BSC that suggests bad faith. Plaintiffs have simply disagreed with how BSC
chose to develop the Technology. A dispute over BSC's exercise of its commercially
reasonable judgment does not amount to a breach of the implied covenant of good faith
and fair dealing. For these reasons, BSC's motion for summary judgment is granted as
to counts Ill and IV.

V.

CONCLUSION
For the foregoing reasons, BSC's motion for summary judgment is granted in

part and denied in part. Summary judgment is granted with respect to counts I, Ill, IV,
and that portion of count II addressing damages. Summary judgment is denied with
respect to that portion of count II addressing specific performance. BSC's motions to
preclude or strike the opinions and testimony of plaintiffs' experts are moot. An
appropriate order shall issue.

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