Biotronik A.G., Appellant,v.Conor Medsystems Ireland, Ltd., et al., Respondents.BriefN.Y.January 7, 2014To be Argued by: RONALD S. RAUCHBERG (Time Requested: 30 Minutes) New York County Clerk’s Index No. 603751/07 Court of Appeals of the State of New York BIOTRONIK, A.G., Plaintiff-Appellant, – against – CONOR MEDSYSTEMS IRELAND, LTD., CONOR MEDSYSTEMS IRELAND LIMITED, CONOR MEDSYSTEMS, INC., CONOR MEDSYSTEMS, INC., as successor by merger of CONOR MEDSYSTEMS, INC. and CONOR MEDSYSTEMS LLC, Defendants-Respondents. REPLY BRIEF FOR PLAINTIFF-APPELLANT RONALD S. RAUCHBERG ANNA G. KAMINSKA PROSKAUER ROSE LLP 11 Times Square New York, New York 10036 Tel.: (212) 969-3000 Fax: (212) 969-2900 – and – BERTRAND C. SELLIER VANDENBERG & FELIU LLP 60 East 42nd Street, 51st Floor New York, New York 10165 Tel.: (212) 763-6800 Fax: (212) 763-6810 Attorneys for Plaintiff-Appellant Date Completed: July 24, 2013 APL-2012-00291 TABLE OF CONTENTS Page TABLE OF AUTHORITIES ....................................................................................... ii PRELIMINARY STATEMENT .................................................................................. 1 ARGUMENT ............................................................................................................... 2 I. BIOTRONIK DOES NOT SEEK CONSEQUENTIAL DAMAGES ........................................................................................................ 2 II. BIOTRONIK'S DAMAGES ARE NOT LIMITED TO THE TIME PERIOD THROUGH APRIL 2008 ........................................................ 1 0 III. THIS CASE SHOULD BE REMITTED TO THE TRIAL COURT FOR TRIAL ........................................................................... 13 CONCLUSION ............................................................................................................ 15 TABLE OF AUTHORITIES Cases Airlink Commc 'ns, Inc. v. Owl Wireless, LLC, No. 3:10 CV 2296,2011 WL 4376123, Page(s) 2011 U.S. Dist. LEXIS 106673 (N.D. Ohio Sept. 20, 2011) ................................ 9 American List Corp. v. U.S. News & World Report, Inc., 75 N.Y.2d 38 (1989) ............................................................................ 2, 3, 4, 5, 6 Biovail Pharms, Inc. v. Eli Lilly & Co., No. 5:01-CV-352-BO(3), 2003 WL 25901513, 2003 U.S. Dist. LEXIS 27916 (E.D.N.C. Feb. 28, 2003) ..................................... 8 Canusa Corp. v. A&R Lobosco, Inc., 986 F. Supp. 723 (E.D.N.Y. 1997) ....................................................................... 8 Campania Embotelladora Del Pacifico S.A. v. Pepsi Cola Co., 650 F. Supp. 2d 314 (S.D.N.Y. 2009) .................................................................. 6 D.P. Serv., Inc. v. AM Int'l, 508 F. Supp. 162 (N.D. Ill. 1981) ......................................................................... 8 Deutsch v. Health Ins. Plan of Greater NY., 751 F.2d 59 (2d Cir. 1984) .................................................................................. 12 Gov't Guar. Fund of Finland v. Hyatt Corp., 960 F. Supp. 931 (D.V.I. 1997) .......................................................................... 12 Kerr S.S. Co. v. Radio Corp. of Am., 245 N.Y. 284 (1927) ............................................................................................. 1 NY State Ass 'n of Criminal Defense Lawyers v. Kaye, 96 N.Y.2d 512 (2001) ......................................................................................... 14 Orange & Rockland Util., Inc. v. New England Petroleum Corp., 60 A.D.2d 233 (1st Dep't 1977) .................................................................. 11, 13 Orester v. Dayton Rubber Mfg. Co., 228 N.Y.134 (1920) ................................................................................. 5, 6, 7, 9 .. 11 Simon v. Electrospace Corp., 28 N.Y.2d 136 (1971) .................................................................................. 11, 13 Tall Trees Constr. Corp. v. Zoning Bd. of Appeals of Town of Huntington, 97 N.Y.2d 86 (2001) ........................................................................................... 14 V.S. Int'l, S.A. v. Boyden World Corp., 862 F. Supp. 1188 (S.D.N.Y. 1994) ............................................................ 11, 12 Vias tar Energy, LLC v. Motorola, Inc., No. 01:05-cv-l095-DFH-WTL, 2006 WL 3075864, 2006 U.S. Dist. LEXIS 78331 (S.D. Ind. Oct. 26, 2006) ..................................... 8 Wood v. Lucy, Lady Duff-Gordon, 222 N.Y. 88 (1917) ............................................................................................... 5 Woods v. MONY Legacy Life Ins. Co., 84 N.Y.2d 280 (1994) ........................................................................................... 9 Zuckerman v. City ofN Y., 49 N.Y.2d 557 (1980) ......................................................................................... 15 Other Authorities Arthur Karger, The Powers of the New York Court of Appeals § 15.14 (3d ed. 2005) ...................................................................................................... 14 111 Appellant Biotronik, A.G. ("Biotronik") respectfully submits this reply brief in further support of its appeal from a decision and order of the Appellate Division, First Department (the "Order") which affirmed the dismissal of Biotronik's Amended Complaint based upon a determination that Biotronik's claim for lost-profits damages was barred as a matter of law by the contract at Issue. PRELIMINARY STATEMENT Conor's brief repeats the error of the Appellate Division by arguing that profits that would have been made on contracts of resale are always and everywhere "consequential damages." Such a broad and inflexible rule has never been the law in New York, or under the VCC. Rather, as Judge Cardozo has admonished, whether damages are direct or consequential depends upon the nature of the contract at issue, and there is no absolute rule that must be slavishly followed. See Kerr S.S. Co. v. Radio Corp. of Am., 245 N.Y. 284, 288-89 (1927). It cannot be ignored that the Agreement at issue here is a distribution agreement. Conor wanted distribution for its stents and so bargained for and obtained Biotronik' s contractual assurance that it would use commercially reasonable efforts to make contracts with third parties to resell Conor's stents. The contracts with third parties that followed are thus are hardly collateral; they are the very raison d' etre of the Agreement. 1 Conor's insistence that the provisions of the Agreement fixing Biotronik's profit margin are a mere "pricing formula" thus misses the point entirely. The Agreement provided that the proceeds of every CoStar sold by Biotronik ultimately would be shared by the parties in stated percentages: 61 % to Biotronik for direct sales, and 75% to Biotronik for sales by its dealers, and in each case the remaining proceeds to Conor. Biotronik's loss of its share of those proceeds was therefore the direct and inevitable result of Conor' s failure to supply CoStar. This loss is recoverable as an item of direct, general damages. Accordingly, the Order should be reversed, and the matter remitted to the Supreme Court for trial. ARGUMENT I. BIOTRONIK DOES NOT SEEK CONSEQUENTIAL DAMAGES. The Agreement at issue, in Section 14.5, bars the recovery of damages that are "indirect, special, consequential, incidental, or punitive."l It thus presents no obstacle to the recovery of damages that are direct or general. "General damages," this Court has written, are those "flowing as a natural and probable consequence of the breach." American List Corp. v. U.S. News & World Report, Inc., 75 N.Y.2d 38, 44 (1989). The "distinction between general and special 1 R. 889-90. 2 damages is well defined but its application to specific contracts and controversies is usually more elusive." [d. at 42. Conor's chief contention in this appeal is that Biotronik has "grossly mischaracteriz[ ed]" the Agreement in order to create the impression that the lost profits it seeks to recover are derived from the Agreement itself? For example, Conor asserts that "Biotronik's contention that it was required . .. to resell at a higher price is simply not accurate.,,3 But there can be no doubt that the essence of the Agreement was the sale of CoStar by Biotronik for a profit. No matter how Conor parses the Agreement, it is beyond dispute, first, that Biotronik was required to use commercially reasonable efforts to sell as many stents as possible.4 Second, that those resales had to be at a higher price was the practical consequence of the pricing mechanism in Exhibit C to the Agreement, which provided for Conor to be paid, as the price of the stents it sold to Biotronik, a specified portion of the proceeds of Biotronik' s sales of the same stents to third parties, with Biotronik keeping the remainder.s Biotronik's resales, by the necessary operation of the Agreement, were thus at a price higher than Conor was paid. Biotronik's inability to earn its share of the proceeds of resale-i.e., to 2 Conor Bf. 3. 3 Conor Br. 7 (internal quotation marks omitted). 4 R. 876, at §§2.1-2.3, 2.5(i). 5 R. 900-01. 3 make a profit from the resales-thus "flow[ed] as a natural and probable consequence" of Conor' s cut-off of supply. American List, 75 N.Y.2d at 43. Conor argues that the Agreement provided "simply a formula to determine the price that Biotronik would pay to Conor to purchase the stents.,,6 Of course the Agreement had provisions to determine how much Conor would be paid. The crucial point, however, is that the pricing formula started with the proceeds of Biotronik's sales to third parties and set forth the percentages thereof that Conor and Biotronik each would receive. Conor dislikes Biotronik's references to a pool of funds created by the Agreement that the parties would share, but that is precisely the effect of these provisions. Conor also repeatedly emphasizes that Biotronik was not required to resell any "specific" quantity of stents. 7 That fact is meaningless. Biotronik was required under the Agreement to enter into contracts of resale; the resulting contracts of resale were thus not collateral whether specific quantities of such contracts were required or not. Biotronik's opening brief also showed that Conor's reading of the Agreement would leave Biotronik with no remedy for a breach by Conor of its supply obligation and thus effectively render both Conor's supply obligation and the agreed term of the contract meaningless. Conar responds, incorrectly, that 6 Conor Br. 4. 7 Id. 4 Biotronik is asking the Court to disregard the plain meaning of the prohibition of consequential damages.8 To the contrary, it is a firmly established principle of contract interpretation to avoid reading contractual provisions as meaningless. See, e.g., Wood v. Lucy, Lady Duff-Gordon, 222 N.Y. 88,91-92 (1917). Biotronik's reading of Section 14.5, otherwise fully supported by New York law, is thus further supported because Conor's contrary reading would render key provisions of the Agreement-indeed, the very heart of the Agreement- meaningless. This Court held in Orester v. Dayton Rubber Mfg. Co. that the profits lost by a distributor as a result of being unable to make resales when the manufacturer breaches its supply obligation are direct, not consequential, damages. 228 N.Y. 134, 138-39 (1920). Conor contends that later New York cases have silently overruled Orester, but this is not correct. Orester remains good law. Conor places its principal reliance on American List and its conclusion that plaintiffs claim there for damages based upon "moneys which defendant undertook to pay under the contract" was a claim for general damages. 75 N.Y.2d at 43. But American List did not say that only moneys to be paid by a defendant can be general damages. American List also stated that profits on "collateral business arrangements" constitute consequential damages. As we have shown here, the 8 Conor Br. 28, 30. 5 resales upon which Biotronik's lost-profits claim is based were not "collateral." Rather, they were the very point of the Agreement and exactly what Conor bargained for when it sought distribution for its stents. Orester and American List are thus entirely consistent. Nor does the federal court decision in Campania Embotelladora Del Pacifico S.A. v. Pepsi Cola Co., 650 F. Supp. 2d 314 (S.D.N.Y. 2009), help Conor. That case found that profits lost as a result of the defendant's failure to prevent third parties from competing with the plaintiff were consequential damages. As we showed in our opening brief, however, that holding simply does not bear on the issue here of whether a manufacturer's breach of its supply obligation in a distribution agreement yields consequential or direct damages. In response, Conor argues, astonishingly, that "the manner in which a party claims a contract was breached is irrelevant to the analysis of whether the lost profits it seeks [are consequential or direct damages].,,9 But general damages are those that flow, in the words of American List, "as a natural and probable consequence of the breach." 75 N.Y.2d at 43. How can one determine whether the damages flow naturally and probably from the breach without knowing what the breach was? Plainly, one cannot. The nature of the breach is therefore critical to the damages analysis. Pepsi Cola, dealing with a breach entirely different from that in 9 Conor Br. at 28. 6 Orester, thus, is not at all inconsistent with Orester. The continuing authority of Orester has never been questioned, either directly or by implication. Conor also argues that under the DCC, in cases unlike this one, where the seller has "reason to know" of particular requirements or needs of the buyer, such as the buyer's business of reselling at a profit, the buyer's lost profits may be recoverable as consequential damages. 10 But that analysis is irrelevant here. Biotronik makes no argument based upon facts extrinsic to the Agreement about what Conor may have had "reason to know." Here, Biotronik was obligated by the Agreement to resell, and what Conor calls the Agreement's pricing formula required that the proceeds of resale would go in part to Conor, as the price it receives for its sale of the goods to Biotronik, and in part to Biotronik, as its mark-up, or profit, on resale. Biotronik's loss of these profits upon Conor's breach of its supply obligation is thus evident from the face of the Agreement. There is no need to inquire into any extrinsic proof that Conor could foresee that Biotronik would lose profits if the supply of stents ceased. Biotronik's damages are direct based upon the terms of the Agreement alone. The Agreement here is materially different from many other contracts of sale, where a seller sells something, perhaps knowing that it may be resold, perhaps not, but not having any direct interest in that question. One may sell a 10 Conor Br. 31-32. 7 Picasso, for example, simply because one would rather have the money than the painting. In such a contract, if the seller breaches, it may be important to inquire whether the seller knew of any plans to resell by the buyer. But such inquiry would have no place here, where the contracts of resale are required by the contract at issue, and where the very reason the seller entered into the contract at issue was so that there would be contracts of resale. In these circumstances, Biotronik's damages are distinguishable from those described in the uce cases Conor cites. I I See, e.g., Canusa Corp. v. A&R Lobosco, Inc., 986 F. Supp. 723, 732 (E.D.N.Y. 1997) (lost profits by a reseller or broker of goods are "consequential" when the supplier breaches its supply obligations under a simple output contract). The uec cases that Biotronik cites consistently hold that damages precisely like those suffered by Biotronik are direct, general damages. Viastar Energy, LLCv. Motorola, Inc., No. 01:05-cv-1095-DFH-WTL, 2006 WL 3075864, 2006 U.S. Dist. LEXIS 78331 (S.D. Ind. Oct. 26, 2006); Biovail Pharms., Inc. v. Eli Lilly & Co., No. 5:01-CV-352-BO(3), 2003 WL 25901513, 2003 U.S. Dist. LEXIS 27916 (E.D.N.C. Feb. 28, 2003); D.P. Serv., Inc. v. AM Int'l, 508 F. Supp. 162, 167 (N.D. Ill. 1981). Conor dismisses these authorities as 11 Conor Br. 32. 8 "contrary to cases applying New York law," 12 but as we have shown, there is no inconsistent New York law, and the only applicable New York case, Orester, also requires that Biotronik's damages be held to be direct. The importance of nationwide consistent interpretation of the UCC, as emphasized by this Court in Woods v. MONY Legacy Life Ins. Co., 84 N.Y.2d 280, 285 (1994), thus provides additional strong support for the reversal of the Appellate Division's Order. Conor, finally, points to one case from outside of New York involving a distribution agreement that it asserts supports the court's Order. 13 But that case does not present facts similar to those here. In Airlink Commc 'ns, Inc. v. Owl Wireless, LLC, No. 3:10 CV 2296,2011 WL 4376123,2011 U.S. Dist. LEXIS 106673 (N.D. Ohio Sept. 20, 2011), the distributor sued alleging that the supplier breached the agreement by misrepresenting its pricing in an attempt to drive the distributor out of the market. Airlink did not address a breach of a supply obligation, and the question there of what damages flowed from the supplier's misrepresentation was very different from the question presented here. Airlink, moreover, states as a general matter that consequential damages are those which, although "not normally arising from a breach in the ordinary course of things, nevertheless arise because of some special circumstances 12 Conor Br. 4. 13 Conor Br. 34. 9 surrounding the actual contract at issue and were known to the breaching party." Id. at *2 (internal quotation marks omitted). Here, of course, the profits Biotronik lost were "normally arising from a breach in the ordinary course of things," and thus under Airlink, just as under the New York and non- New York DCC cases Biotronik has cited, Biotronik's damages are not consequential. Biotronik respectfully submits that the structure of the Agreement makes it clear that its lost profits are direct damages as a matter of law. But if there is any uncertainty about the meaning of Section 14.5 of the Agreement, the determination of what the parties intended by that provision should be made by the jury.14 With the parties having stipulated New York law, and with Orester, never overruled or even criticized, holding that Biotronik's damages are direct, surely Conor cannot successfully argue that the parties meant the opposite as a matter of law. II. BIOTRONIK'S DAMAGES ARE NOT LIMITED TO THE PERIOD THROUGH APRIL 2008. The Agreement provided that it would "automatically be extended by one (1) year" beyond December 31, 2007 "unless one Party gives notice to the other Party prior to July 1, 2007 of its desire not to ... extend []." 15 The Agreement 14 See Biotronik Opening Br. 36. 15 R. 891, at ~16.1. 10 also gave Biotronik a four-month period after termination to sell off its existing inventory.I6 Thus, in the absence of a timely notice of termination, the Agreement would extend to December 31, 2008, with a four-month sell-off period through April 30, 2009. At the time of Conor' s breach on May 6, 2007, no party had exercised the right to shorten the term of the Agreement. Thus, at the time of the breach the term of the Agreement would have extended through April 30, 2009, and damages should be available for that entire period. Conor asserts, however, that Biotronik's damages-even if they are direct-should be limited because Conor's June 6, 2007 notice, given well after Conor's breach, was effective to reduce the otherwise-available damages. I7 Under New York law, it is axiomatic that Biotronik's damages should be measured at the time of Conor' s breach. I8 See, e.g., Simon v. Electrospace Corp., 28 N.Y.2d 136,145 (1971); Orange & Rockland Uti/., Inc. v. New England Petroleum Corp., 60 A.D.2d 233,236 (1st Dep't 1977). Conor fails to address these authorities. Instead, Conor attempts to rely upon its post-breach cancellation notice and, based upon VS. Int'l, S.A. v. Boyden World Corp., 862 F. Supp. 1188 (S.D.N.Y. 1994), argues that its post-breach notice was effective 16 R. 893, at ~16.5. 17 Conor Br. 38-40. 18 See Biotronik Opening Br. 37. 1 1 because Biotronik did not formally terminate the Agreement. 19 Conor's reliance upon that decision is misplaced. In V.S. Int'l, as the portions of the quotation omitted by Conor in its brief make clear, the non-breaching party "continued to conduct business pursuant to the contract, and continued to receive [its] benefits." Id. at 1196. Here, in sharp distinction, Biotronik was unable to benefit from the contract once Conor unilaterally cut off the supply of CoStar stents. See also Gov't Guar. Fund of Finland v. Hyatt Corp., 960 F. Supp. 931, 946-47 (D.V.1. 1997) (applying New York law). Because Biotronik did not, and indeed could not, continue to perform or benefit from the Agreement after Conor's breach, the case cited by Conor is inapposite. Conor also argues that because on May 6, 2007 it ceased supplying Costar to Biotronik, thereby breaching the Agreement, Conor was not required to notify Biotronik thereafter that it was not extending the Agreement, citing Deutsch v. Health Ins. Plan of Greater N Y., 751 F.2d 59,64 (2d Cir. 1984)?O Deutsch and similar cases, however, involved circumstances where a party's breach was deemed to be notice that an optional renewal term would not be invoked in the future. Here, by contrast, there is no issue about whether an agreement would be extended: at the time of the breach, the term of the Agreement, without the need 19 Conor Br. 39. 20 Conor Br. 39-40. 12 for either party to extend it, continued to April 30, 2009. Conor's reliance upon its post-breach conduct thus cannot be squared with Simon and Orange & Rockland, supra, holding that such post-breach events should not be considered. Accordingly, Biotronik is entitled to damages through April 30, 2009. III. THIS CASE SHOULD BE REMITTED TO THE TRIAL COURT FOR TRIAL. Conor asserts that if this Court determines that Biotronik is entitled to a trial on its claim for lost profits, the case should be remitted to the Appellate Division for a determination of the legal issues concerning Conor's cross-appeal, seeking summary judgment on liability grounds?l But Conor's position on liability is frivolous, as its own statement of facts here shows. Conor recites that it performed an analysis of why the COSTAR II trial produced unsatisfactory results for the Altered CoStar stent, and it concluded that after the successful European clinical trials, Conor altered the stent with "several process changes, along with two formulation changes" that were designed "to lower the initial in vitro burst [of paclitaxel]," thereby "impact[ing] the release kinetics of paclitaxel under circumstances where the clinical effect of these differences were magnified.,,22 Conor never suggests that CoStar as it existed at the time Biotronik and Conor first entered into their Agreement, and as it was approved by the 21 Conor Br. 40-41. 22 Conor Br. 18-19. Conor does add that it contends the changes it made left CoStar within specifications, but this is irrelevant as the specifications to which it refers are not part of the Agreement. 13 European authorities for distribution in Europe, presented any issues of safety or efficacy. Nor does Conor offer any reason why it could not have met its obligation to supply CoStar stents to Biotronik with that original design, as it existed before the changes Conor made to reduce its effective dosage. Conor's liability for its breach of its supply obligation thus stands effectively undenied (at least for purposes of summary judgment). Remand to the Appellate Division would simply add more delay to a case that is already old, having been brought in 2007. This Court may, in its discretion, decide questions of law that were not addressed by the Appellate Division: [T]he Court of Appeals is not required ... upon reversing the Appellate Division on a question of law, to remit the case to that Court for determination of a remaining question of law which it had found it unnecessary to decide. Instead, so long as there are no undecided questions of fact or discretion, the Court of Appeals is free, in its discretion, to decide that remaining question of law itself ... ifit deems it appropriate to do so. Arthur Karger, The Powers of the New York Court of Appeals § 15: 14, at 559 n.6 (3d ed. 2005). Examples of decisions by this Court resolving legal issues not considered by the Appellate Division include NY State Ass 'n of Criminal Defense Lawyers v. Kaye, 96 N.Y.2d 512,516 (2001), and Tall Trees Const. Corp. v. Zoning Bd. of Appeals of Town of Huntington , 97 N.Y.2d 86,92-94 (2001). Whether the undisputed facts entitle Conor to summary judgment here is, 14 of course, a question of law. See~ e.g., Zuckerman v. City a/N.Y., 49 N.Y.2d 557 (1980). Conor previously told this Court that the question of whether it was entitled to summary judgment on liability was presented on this appeal and repeatedly asked this Court to affirm on that ground.23 Conor's late change in tactics should not affect the disposition of this appeal. CONCLUSION For the reasons stated above, Biotronik respectfully requests that this Court reverse the Order below, and remit this case for trial. Dated: July 24,2013 Respectfull y Submitted, Ronald S. Rauchberg Anna G. Kaminska PROSKAUER ROSE LLP 11 Times Square New York, NY 10036 212-969-3000 23 See Conor Ltr Brief dated Nov. 30, 2012, at 2 C"Even if the Court finds that Biotronik's lost profits are not consequential damages, it should affinn the Decision because the evidence in the record establishes that Conor did not violate the Agreement and therefore summary judgment on liability should have been granted in Conor's favor."); id. at 10. 15 16 Bertrand C. Sellier VANDENBERG & FELIU LLP 60 East 42nd Street, 51 st Floor New York, NY 10165 (212) 763-6833 Attorneys for Appellant Biotronik, A. G. A The Appellate Experts 460 WEST 34TH STREET, NEW YORK, NEW YORK 10001 (212) 685-9800; (716) 852-9800; (800) 4-APPEAL www.counselpress.com (248639)