Zimmer Inc. v. Beamalloy Reconstructive Medical Products, LLC et al

Filing 32

OPINION AND ORDER: The Court GRANTS IN PART Zimmer, Inc.'s Motion to Dismiss Count III of the Counterclaim 11 and DISMISSES WITHOUT PREJUDICE Count III of the Defendants' Counterclaim. The Court DENIES IN PART the Motion in so far as dismissing Count III with prejudice and GRANTS the Defendants leave to file a second amended answer and counterclaim. Signed by Chief Judge Theresa L Springmann on 8/2/2017. (lhc)

UNITED STATES DISTRICT COURT
NORTHERN DISTRICT OF INDIANA
ZIMMER INC.,
Plaintiff,
v.
BEAMALLOY RECONSTRUCTIVE
MEDICAL PRODUCTS, LLC, and
BEAMALLOY TECHNOLOGIES, INC.
Defendants.

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CAUSE NO.: 1:16-CV-355-TLS

OPINION AND ORDER
This matter is before the Court on Plaintiff Zimmer, Inc.’s Motion to Dismiss Count III
of the Counterclaim [ECF No. 11] for breach of fiduciary duty. This suit concerns a series of
agreements the Plaintiff entered into with Beamalloy Reconstructive Medical Products, LLC
(“Beamalloy Reconstructive”), under which Beamalloy Reconstructive was tasked with
developing and licensing to the Plaintiff a coating, and a process for applying that coating to the
Plaintiff’s medical devices. On October 4, 2016, the Plaintiff filed its Complaint against the
Defendants, Beamalloy Reconstructive, and Beamalloy Technologies, LLC, and filed its First
Amended Complaint [ECF No. 5] on December 22, 2016. The Defendants filed their Answer to
the Amended Complaint and First Counterclaim [ECF No. 8] on February 2, 2017. The Plaintiff
filed its Motion and accompanying Brief in Support [ECF No. 12] on February 23, 2017. The
Defendants filed their Amended Answer and Counterclaim [ECF No. 15] on March 8, 2017. On
March 9, 2017, the Defendant filed its Response [ECF No. 18], to which the Plaintiff filed its
Reply [ECF No. 21] on March 16, 2017. The Motion is now fully briefed and ripe for ruling.

FACTUAL ALLEGATIONS
The Plaintiff, a Delaware corporation with its principle place of business in Indiana, and
Beamalloy Reconstructive, an Ohio corporation with its principle place of business in Ohio, 1
entered into a License and Supply Agreement (the “Agreement”), and several related
agreements, on September 30, 2011. Under the Agreement, Beamalloy Reconstructive was to
develop a process for coating medical devices known as ion beam enhanced deposition (the
“IBED Process”). (Counterclaim ¶ 5, ECF No. 15; Agreement § 4.2, ECF No. 1-1.) The coating
is intended as a solution for knee implant recipients who have allergies to nickel and chromium,
which are present in Cobalt Chromium materials. (Id. ¶ 5.) Once Beamalloy Reconstructive
developed the IBED Process to the Plaintiff’s specifications (as provided for in the Agreement),
the Plaintiff was to use Beamalloy Reconstructive as its exclusive supplier for the IBED Process.
(Id. at ¶¶ 5–7.) Under this arrangement, the Agreement set forth minimum annual quantities that
the Plaintiff agreed to order. (Id. ¶ 6, Agreement § 4.15.)
Over the course of several years, the Plaintiff worked with Beamalloy Reconstructive to
develop the IBED process in accordance with the Agreement. (Id. ¶ 7.) The Agreement set forth
a series of “[t]echnical [m]ilestones,” listed in Exhibit C, that Beamalloy Reconstructive was
required to satisfy before triggering the supply commencement date. 2 Among the technical
milestones listed, the scratch adhesion/cohesion values that Beamalloy Reconstructive was
required to meet 3 were set by both the Plaintiff’s research team and Beamalloy Reconstructive.

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Beamalloy Technologies, LLC is also an Ohio corporation with its principle place of business in

Ohio.
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Under the Agreement, “[s]upply [c]ommencement [d]ate” means “the date that the first
[p]roduct is processed and supplied by Beamalloy [Reconstructive] under this Agreement for commercial
sale by [the Plaintiffs]; provided that the [p]arties have first received [m]arketing approval for the
[p]roduct in the United State and Europe.” (Agreement § 1.1, ECF No 1-1.)
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It appears the scratch adhesion/cohesion values go to the viability of the coating.
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But the Defendants allege that the Plaintiff then created an additional standard, the Zimmer
Engineering Specification, which Beamalloy Reconstructive was required to meet in addition to
the former requirement. The Defendants allege it met the requirements of the Zimmer
Engineering Specification too. (Id. ¶ 7.)
The Defendants allege that the Plaintiff thereafter presented data to the FDA on “the great
resistance” of Beamalloy Reconstructive’s “coating to scratching and the excellent adhesion to
the metal substrate,” and as a result, the Plaintiff received FDA approval for the IBED Process in
December 2014. (Id.) The Plaintiff then presented to the orthopedic community a paper on the
technique and results of the Beamalloy Reconstructive coating versus the world’s coating leader,
Oxinium. (Id.)
According to the Defendants, the Plaintiff authorized Beamalloy Reconstructive to
commence production in August 2015, triggering the supply commencement date. (Id. ¶ 8.) But
by January 2016, the parties began to dispute whether Beamalloy Reconstructive had met its
obligations under the Agreement, and thus, whether the Plaintiff’s commitments under the
agreement had been triggered in turn. (Id. ¶¶ 8–13.) The Defendants allege that without any
warning, the Plaintiff required the Defendants to submit the IBED Process to additional
subjective testing known as a “third body wear test,” designed by the Plaintiff for “marketing
purposes.” (Id. ¶ 8.) According to the Defendants, the FDA requires a scratch, adhesion/cohesion
test for all coatings, but does not require third body wear testing. (Id. ¶ 8.) The Defendants allege
that the Plaintiff had not previously used third body wear testing in knee implants, and that the
third body wear test was not clinically relevant. (Id.)
The Defendants allege that although the Plaintiffs acknowledged that Beamalloy
Reconstructive had met all technical specifications as required under the Third Amendment of

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the Agreement, the Plaintiff was aware that when it signed the Third Amendment, the third body
wear test for marketing purposes was ongoing and not completed. (Id. ¶ 9.) The Defendants
allege that to alleviate concerns, Beamalloy Reconstruction recommended additional testing that
the Plaintiff declined to execute, including comparative testing with Zimmer Biomet’s TiNbN
coating on the Vanguard Knee Replacement, testing with particles suspended in solution, testing
with smaller metal particles, testing with fewer more clinically relevant particles, and additional
testing with a buffed process that resulted in parts that passed the “marketing” third body wear
test. (Id. ¶ 11.)
The Defendants allege that the Plaintiff has failed and refused to pay Beamalloy
Reconstructive the amounts owed to it under the Agreement, “in excess of” $9,700,000, based
upon Beamalloy Reconstructive’s alleged failure to pass the third body wear test. (Id. ¶ 12.) The
Defendants allege that although the Plaintiff claims that the Defendants breached the safety and
efficacy provision of the Agreement (section 4.15(c)), the Plaintiff has not specified what safety,
efficacy, or liability issue exists with Beamalloy’s product. (Id. ¶ 13.) The Defendants allege that
Beamalloy Reconstructive has satisfied its obligations under the Agreement, specifically the
commercialization and validation milestone provisions, and therefore, the Plaintiff was obligated
to purchase the IBED Process services pursuant to the annual minimum unit requirements. (Id.
¶ 15). On November 17, 2016, the Plaintiff terminated the Agreement. (Id. ¶ 17.) The Defendants
allege this was without cause.
In Count Three of their Counterclaim, the Defendants allege that the Plaintiff concealed
from Beamalloy Reconstructive its intention to seek other competing allergy solutions while it
continued to require Beamlloy Reconstructive’s products to undergo testing not enumerated in
the Agreement and contemplated transaction. (Id. ¶ 37.) The Defendants also allege that the

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Plaintiff failed and refused to modify its testing parameters to represent clinically relevant
conditions because the IBED coating may have indeed passed testing conditions. (Id.) According
to the Defendants, the Plaintiff is currently pursuing another allergy solution, and has medical
device products on the market in both Europe and the United States that could not pass the same
third body wear test that Beamalloy Reconstructive was required to pass, and therefore, this test
was overly burdensome for the Defendants.

STANDARD OF REVIEW
A motion to dismiss pursuant to Federal Rule of Civil Procedure 12(b)(6) tests the
sufficiency of the complaint and not the merits of the suit. Gibson v. City of Chi., 910 F.2d 1510,
1520 (7th Cir. 1990). Requirements for stating a claim under the federal pleading standards are
straight forward. A pleading that states a claim for relief must set forth “a short and plain
statement of the grounds for the court’s jurisdiction . . . a short and plain statement of the claim
showing that the pleader is entitled to relief,” and “a demand for relief sought.” Fed. R. Civ. P.
8(a). In considering motions to dismiss for failure to state a claim, the court presumes all wellpleaded allegations to be true, views them in the light most favorable to the plaintiff, and accepts
as true all reasonable inferences to be drawn from the allegations. Whirlpool Fin. Corp. v. GN
Holdings, Inc., 67 F.3d 605, 608 (7th Cir. 1995).
Additionally, a complaint must contain sufficient factual matter to “state a claim to relief
that is plausible on its face.” Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570 (2007). “A claim has
facial plausibility when the pleaded factual content allows the court to draw the reasonable
inference that the defendant is liable for the misconduct alleged.” Ashcroft v. Iqbal, 556 U.S.
662, 678 (2009) (citing Twombly, 550 U.S. at 556). Although the court must accept as true all
well-pleaded facts and draw all permissible inferences in the Plaintiff’s favor, it need not accept
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as true “[t]hreadbare recitals of the elements of a cause of action, supported by mere conclusory
statements.” Id. at 678 (citing Twombly, 550 U.S. at 555). Legal conclusions can provide a
complaint’s framework, but unless well-pleaded factual allegations move the claims from
conceivable to plausible, they are insufficient to state a claim. Id. at 680. A plaintiff can also
plead himself out of court if he pleads facts that preclude relief. See Atkins v. City of Chi., 631
F.3d 823, 832 (7th Cir. 2011); Edwards v. Snyder, 478 F.3d 827, 830 (7th Cir. 2007); McCready
v. Ebay, Inc., 453 F.3d 882, 888 (7th Cir. 2006).

DISCUSSION
The Plaintiff argues that the Defendants’ Motion should be dismissed with prejudice
because the parties’ commercial relationship precludes a fiduciary relationship as a matter of law
and the Defendants’ claim for breach of fiduciary duty “is merely a repackaged version of its
breach-of-contract claim,” Count I of the Counterclaim. 4 (Pl.’s Br. 1, ECF No. 12.)

A.

New York Law
The Plaintiff argues that because the Defendants have admitted that the parties have an

arm’s length commercial relationship under the Agreement and the related agreements, the
Defendants are precluded from raising the argument that a fiduciary relationship existed between
the parties. It is undisputed that the parties entered into the following contracts: the Agreement,

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Under Section 13.2 of the Agreement, the “[A]greement and the transactions contemplated . . .
shall be governed by and interpreted in accordance with the law of the State of New York, without regard
to the choice of laws principles thereof.” The Plaintiff and the Defendants appear to dispute whether New
York law or Indiana law applies to the breach of fiduciary duty claim. However, neither party appears to
give more than cursory attention to this issue in their briefing. Given the procedural disposition of this
case, the Court, at this time, will not rule on this question. Because the Court ultimately finds that the
Defendants have not adequately pleaded their breach of fiduciary duty counterclaim, the Court instead
will evaluate the claim under both New York and Indiana law for the purposes of this motion.
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an equipment and construction agreement, a related equipment lease, a security agreement, and a
patent security agreement. (Id. ¶ 4; Answer to First Am. Compl. ¶¶ 21-22.)
A breach of fiduciary duty claim sounds in tort rather than contract law. “To prove a
common-law tort claim of breach of fiduciary duty under New York law, a plaintiff must
demonstrate: ‘(i) the existence of a fiduciary duty; (ii) a knowing breach of that duty; and (iii)
damages resulting therefrom.’” Zorbas v. U.S. Trust Co., 48 F. Supp. 3d 464, 478–79 (E.D.N.Y.
2014) (quoting Johnson v. Nextel Commc’ns, Inc., 660 F.3d 131, 138 (2d Cir. 2011)).
“[N]ormally where there is a contract between the parties, no fiduciary duty beyond the
terms of the contract will be found.” Zorbas, 48 F. Supp. 3d at 478–79; see EBC I, Inc. v.
Goldman Sachs & Co., 5 N.Y.3d 11, 20 (N.Y. 1987) (“If the parties . . . do not create a
relationship of higher trust, courts should not ordinarily transport them to the higher realm of
relationship and fashion the stricter duty for them.”) But under special circumstances, “a
fiduciary duty may be found notwithstanding the existence of a contract—specifically, when
there is ‘a relationship of higher trust than would arise from . . . the agreement alone.’” Zorbas,
48 F. Supp. 3d at 479; see EBC I, Inc., 5 N.Y.3d at 20; Fillmore E. BS Fin. Subsidiary LLC v.
Capmark Bank, 552 Fed. App’x 13, 17 (2d Cir. 2014).
Thus, a contractual relationship alone, as a matter of law, does not foreclose the
Defendants’ breach of fiduciary duty claim. Count Three does not fail as a matter of law because
breach of fiduciary duty is a factual claim that lies in tort. Zorbas, 48 F. Supp. 3d at 479. Nothing
in the arms-length contractual relationship entered into by the parties here estops, precludes, or
waives the Defendants’ ability to assert their claim of breach of fiduciary duty before this court.
But looking at the factual allegations set forth in the Defendant’s counterclaim, the
Defendants have not adequately pleaded their relationship with the Plaintiff was one of higher

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trust. The Defendants argue that Beamalloy Reconstructive has clearly alleged the existence of a
fiduciary relationship, misconduct, and damages caused by the Plaintiff’s misconduct. The
Defendants allege that the Plaintiff has exercised power and control over Beamalloy
Reconstructive’s product. And the Defendants argue that the Plaintiff intentionally required
additional unnecessary testing beyond the contract terms at the same time the Plaintiff began
secretly pursuing a product competing with Beamalloy Reconstructive’s product. None of these
allegations establish the parties engaged in a relationship of higher trust.
The cases the Defendants cite also do not help support their claim. Those cases involved
relationships in which fiduciary duties would typically arise—the relationship between client and
portfolio manager, or the relationships between company and company executives, and company
and the attorneys representing it. See Neogenix Oncology, Inc. 133 F.Supp.3d 539 (E.D.N.Y.
2015); Maillet v. Frontpoint Partners, L.L.C., No. 02 Civ. 7865(GBD), 2003 WL 21355218
(June 10, 2003); Indep. Mgmt. LLC v. Zanger, 538 F. Supp. 2d 704 (S.D.N.Y. 2008).
The Defendant accuses the Plaintiff of acting in bad faith. But the Defendants have not
proffered factual material suggesting that the Plaintiff breached a duty owed to the Defendants
beyond the obligations of the contract terms. See Manufacturers Hanover Tr. Co. v. Yanakas, 7
F.3d 310 (2d Cir. 1993); EBC I, Inc., 5 N.Y.3d at 20. Accordingly, the Court finds that the
Defendants have not pled facts alleging a relationship of higher trust with the Plaintiff or that the
Plaintiff used this relationship higher trust to exercise power and control over the Defendants’
product.

B.

Indiana Law
Like New York, under Indiana law, “[c]ontractual agreements do not give rise to a

fiduciary relationship creating a duty.” Morgan Asset Holding Corp. v. CoBank, ACB, 736 N.E.
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2d 1268, 1273 (Ind. Ct. App. 2000); Wilson v. Lincoln Fed. Sav. Bank, 790 N.E.2d 1042, 1046
(Ind. App. 2003) (“a business or ‘arm’s length’ contractual relationship does not give rise to a
fiduciary relationship”); ArcAngelo, Inc. v. Directbuy, Inc., No. 3:14-CV-104, 2013 WL
6095678, at *10 (N.D. Ind. Nov. 20, 2013) (“Indiana cases repeatedly observe that ordinary
business relationships based on arms-length contracts do not establish fiduciary relationships
between the parties.”). Town of Goodland v. Kessler Tank Co., No. 4:13-CV-0082, 2014 WL
1319509, at *1–2 (N.D. Ind. April 1, 2014). But like New York, under Indiana law, a breach of
contract and breach of fiduciary duty are two different claims; a contractual relationship does not
preclude a fiduciary one. See Town of Goodland v. Kessler Tank Co., No. 4:13-CV-0082, 2014
WL 1319509, at *1–2 (N.D. Ind. April 1, 2014) (“the existence of a fiduciary relationship
depends upon the facts of each case, not on the label or classification”) (citing Demming v.
Underwood, 943 N.E.2d 878, 888 (Ind. Ct. App. 2012)).
Under Indiana law, “a claim for breach of fiduciary duty requires proof of three elements:
(1) the existence of a fiduciary relationship; (2) a breach of that duty owed by the fiduciary to the
beneficiary; and (3) harm to the beneficiary.” Rapkin Group, Inc. v. Cardinal Ventures, Inc., 29
N.E.3d 752 (Ind. Ct. App. 2015). Although a fiduciary relationship does not arise out of a
contractual relationship, a fiduciary duty can arise out of a confidential relationship between the
parties under “special circumstances.” Town of Goodland, 2014 WL 1319509, at *1–2 (“The
only relevant exception [to the general rule that a contractual relationship does not give rise to a
fiduciary relationship] is when special circumstances establish a ‘confidential relationship’
between the parties.”) (citing Wilson v. Lincoln Fed. Sav. Bank, 790 N.E.2d 1042, 1046–47 (Ind.
Ct. App. 2003)).

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Establishing a confidential relation requires three elements. First, the claimant must
establish that there was “an unequal relationship between two parties, with one party in a
position of dependence, weakness or lack of knowledge.” Id. (citing Kreighbaum v. First
National Bank & Tr., 776 N.E.2d 413, 419 (Ind. Ct. App. 2002)). Second, the weaker party must
have put its trust and confidence in the stronger party. Id. Third, “the stronger party [must have]
wrongfully abused the weaker party’s trust and confidence by improperly influencing the weaker
party to gain an advantage.” Id. (citing Kreighbaum, 776 N.E.2d at 419). In order to prove
improper influence to gain an advantage, the plaintiff “has to plead facts showing [the tortfeaser]
took advantage of [the claimant’s] trust.” Id. (citing Kreighbaum, 776 N.E.2d at 419).
The Defendants argue that they have established the elements of a confidential
relationship with the Plaintiff. The Defendants argue that there is an unequal relationship
between Beamalloy Reconstructive and the Plaintiff. They argue that “Plaintiff is a huge
company, but Beamalloy is very small.” (Pl.’s Resp. 11, ECF No. 18.) And that despite drafting
a “detailed contract,” the Plaintiff continued to insist on additional tests that were not part of the
contract while at the same time secretly pursuing a competing product. (Id.)
The Defendants argue that the Plaintiff exercised great power and control over Beamalloy
Reconstructive because it had relied on the Plaintiff to market its product under the Agreement.
They argue that Beamalloy Reconstructive put its trust and confidence in the Plaintiff by
believing the Plaintiff was using them as an exclusive supplier, when in fact, the Plaintiff was
testing and working on a competing product internally. The Defendants also argue that the
Plaintiff improperly influenced Beamalloy Reconstructive to gain an advantage by secretly
pursuing a competing product.

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But like New York law, under Indiana law, even when taking the Defendants’ allegations
as true, “there’s just not enough here to establish a fiduciary relationship.” Town of Goodland,
2014 WL 1319509, at *2. The Defendants’ argument that the Plaintiff is much larger than the
Defendants does not establish that the Plaintiff’s and the Defendants’ relationship was unequal.
Even assuming the veracity of the Defendants’ argument, the Defendants do not articulate the
comparable sizes of the two companies in their pleadings. But regardless of size, the Defendants
miss the point of this first element: an “unequal relationship between the parties, with one party
in a position of dependence, weakness, or lack of knowledge.” Id. (emphasis added). It is
conceivable that size could be a contributing factor in establishing dependence, weakness, or
lack of knowledge. But without more, it is certainly not dispositive.
The Defendants’ next argument that Beamalloy Reconstructive was required to perform
tests outside the contract does not establish that the Plaintiff exerted its power and control over
the Defendants. Beamalloy Reconstructive was a sophisticated party to a sophisticated
transaction, in which the primary agreement at issue here is over seventy pages long. If the
Plaintiff breached the Agreement, or the related agreements between the parties, Beamalloy
Reconstructive had remedies set forth in the contract available to it. The Defendants therefore
have not plausibly set forth the element that the Plaintiff wrongfully abused Beamalloy
Reconstructive’s trust and confidence by improperly influencing it to gain an advantage.
Though the Defendants allege that Beamalloy Reconstructive put its trust and confidence
in the Plaintiff, “[t]rust is not enough.” Town of Goodland, 2014 WL 1319509, at *3. “[W]e trust
most people with whom we do business.” Id. (quoting Pommier v. Peoples Bank Marycrest, 967
F.2d 1115, 1117 (7th Cir. 1992)). To be sure, the Defendants allege that the Plaintiff engaged in

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bad faith behavior. But this behavior does not, with the facts set forth by the Defendants, give
rise to a fiduciary relationship.
The Court notes that the Defendants’ reliance on Town of Goodland is unavailing,
because, in that in that case, the district court found there was no fiduciary relationship
established between the Town of Goodland and Kessler Tank Company, Inc., which was alleged
to have performed substandard work on the town’s water tower. See Town of Goodland, 2014
WL 1319509, at *1. That case had the same procedural disposition as the case here, in which the
court there discussed at length why a fiduciary duty was not established between the two
contracting entities. Id. at *2–3.
Accordingly, the Court finds that the Defendants have not pled sufficient factual matter to
allege the existence of a confidential relationship between the parties under Indiana law.

C.

Leave to Amend
Lastly, the Plaintiff argues that Count Three should be dismissed with prejudice. But

“[w]hen a complaint fails to state a claim for relief, the plaintiff should ordinarily be given an
opportunity . . . to amend the complaint to correct the problem if possible.” Bogie v. Rosenberg,
705 F.3d 603, 608 (7th Cir. 2013). Accordingly, the Court grants the Defendants an opportunity
to amend their counterclaim consistent with this opinion.

CONCLUSION
For the foregoing reasons, the Court GRANTS IN PART Zimmer, Inc.’s Motion to
Dismiss Count III of the Counterclaim [ECF No. 11] and DISMISSES WITHOUT
PREJUDICE Count III of the Defendants’ Counterclaim. The Court DENIES IN PART the

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Motion in so far as dismissing Count III with prejudice and GRANTS the Defendants leave to
file a second amended answer and counterclaim.

SO ORDERED on August 2, 2017.
s/ Theresa L. Springmann
CHIEF JUDGE THERESA L. SPRINGMANN
UNITED STATES DISTRICT COURT

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