Howmedica Osteonics v. Zimmer Inc.

NOT PRECEDENTIAL
UNITED STATES COURT OF APPEALS
FOR THE THIRD CIRCUIT
____________
No. 11-2342
No. 11-2343
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HOWMEDICA OSTEONICS,
a subsidiary of Stryker Corporation, a New Jersey corporation
v.
ZIMMER INC, a Delaware corporation;
ZIMMER US INC; ZIMMER SPINE INC; PAUL GRAVELINE, an individual;
CHRISTOPHER GIEBELHAUS, an individual; CHRISTOPHER LOUGHRAN,
an individual; RYAN LIVELY, an individual; RYAN HERMANSKY, an individual;
ZACH HILTON, an individual; THOMAS FALLON, an individual;
RUBEN BURCIAGA, an individual; ALEX POULEMANOS, an individual;
BRIAN ROWAN, an individual,
Christopher Giebelhaus, Paul Graveline,
Zimmer Spine, Inc, Zimmer US, Inc., Zimmer Inc.,
Appellants
____________
On Appeal from the United States District Court
for the District of New Jersey
(D.C. No. 11-cv-01857)
District Judge: Honorable Katharine S. Hayden
____________
Argued January 26, 2012
Before: AMBRO, CHAGARES and HARDIMAN, Circuit Judges.
(Filed: February 15, 2012)
David M. Monachino
James S. Yu
Seyfarth Shaw
32nd Floor
620 Eighth Avenue
New York, NY 10018
Michael D. Wexler [Argued]
Seyfarth Shaw
131 South Dearborn Street
Suite 2400
Chicago, IL 60603
Attorneys for Plaintiff-Appellee
Dana E. Becker
Rebecca Hillyer
Thomas B. Kenworthy [Argued]
Kenneth L. Racowski
Morgan, Lewis & Bockius
1701 Market Street
Philadelphia, PA 19103-0000
James P. Walsh
Morgan, Lewis & Bockius
502 Carnegie Center
Princeton, NJ 08540-0000
Attorneys for Defendant-Appellants
Thomas F. Doherty
McCarter & English
100 Mulberry Street
Four Gateway Center, 14th Floor
Newark, NJ 07102-0652
2
Michael S. Elvin [Argued]
Heather J. Macklin
Edward F. Malone
Barack Ferrazzano Kirschbaum & Nagelberg
200 West Madison Street
Chicago, IL 60606
Attorneys for Defendant-Appellee
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OPINION OF THE COURT
____________
HARDIMAN, Circuit Judge.
A subsidiary of Stryker Corp., Howmedica Osteonics Corp. (Stryker), brought
breach of contract and tort claims against Zimmer, Inc., Zimmer U.S., Inc., Zimmer
Spine, Inc., Paul Graveline, and Christopher Giebelhaus (the Zimmer Defendants), and
against Christian Loughran,1 Ryan Lively, Ryan Hermansky, Zach Hilton, Thomas
Fallon, Ruben Burciaga, Alex Poulemanos, and Brian Rowan (the Individual
Defendants). Stryker sought and obtained a temporary restraining order from the District
Court. Stryker later obtained a preliminary injunction, from which the Zimmer
Defendants and the Individual Defendants have appealed.
1
Christian Loughran was incorrectly named as “Christopher Loughran” in the
pleadings.
3
I
Because we write for the parties, who are well acquainted with the case, we
recount only the essential facts and procedural history.
Stryker designs, manufactures, and sells spine-related medical devices. It employs
sales representatives to market its products to hospitals and surgeons. Sales
representatives are supervised by sales managers and branch managers, who are
responsible for building customer relations and improving sales.2
The spinal products industry is a competitive field that relies heavily on customer
relationships. Stryker sales representatives receive lists of surgeons in their respective
sales territories and are expected to meet those customers and establish connections with
them. After gaining the surgeons‟ trust, representatives typically are invited to attend
surgeries, where they provide technical support and advice regarding the use of Stryker
products. Representatives familiarize themselves with surgeons‟ individual preferences,
and they assist surgeons in a variety of ways. As a result, representatives foster close
relationships with their customers, and that loyalty redounds to Stryker‟s benefit.
2
Before this suit began, Stryker‟s Arizona branch manager was Loughran, its
Arizona sales manager was Lively, and its Arizona sales representatives included
Hermansky and Hilton. Stryker‟s Las Vegas branch manager was Fallon, and its Las
Vegas sales representatives included Burciaga, Poulemanos, and Rowan.
4
Sales representatives are responsible primarily for servicing their own clients, but
they “cover” one another‟s surgeries when conflicts arise. In such cases, the assigned
representative typically informs the substitute of the surgeon‟s protocols and preferences
to ensure the best possible service. This preserves the loyalty and trust that the assigned
representative has cultivated with the surgeon.
Both managers and representatives sign non-compete agreements prohibiting
“direct or indirect” competition with Stryker. For example, the agreements prohibit them
from inducing Stryker‟s employees to resign or soliciting Stryker‟s customers, both
during their employment with Stryker and for one year thereafter.3 Stryker maintains that
these agreements protect it from its competitors, like Zimmer, which also use
representatives to sell spine-related products.
In December 2010, Zimmer had virtually no market presence in Las Vegas or
Arizona. Kevin Brothen, Zimmer‟s Area Director for the West and a former Stryker
manager, developed plans to acquire all but one of Stryker‟s branch managers, sales
managers, and sales representatives in Arizona and Las Vegas. These plans were called
Project Sun Devil and Project Viva, respectively. Brothen began by contacting Stryker‟s
3
Some of the agreements vary in what they expressly prohibit. For example,
managers‟ agreements prohibit them from competing in their former “Sales and
Marketing Regions,” while representatives‟ agreements prohibit them from soliciting
business from Stryker‟s “customers” whom they “had contact with or serviced, directly
or indirectly” in their respective sales territories.
5
Las Vegas branch manager (Fallon) and its Arizona branch manager (Loughran), both of
whom gave him compensation data and sales information. Brothen used this information
to calculate what he would offer Stryker employees to induce them to join Zimmer.
Brothen devised a “flip-flopping” scheme to facilitate the employees‟ compliance
with their non-compete agreements while still working for Zimmer. Pursuant to this
scheme, Fallon would manage Zimmer‟s Arizona branch, while Loughran would manage
its Las Vegas branch. Sales representatives would remain in their respective branches but
would service different customers. This scheme was feasible because of Stryker
representatives‟ personal familiarity with each other‟s customers.
Around this time, Giebelhaus, a representative in Stryker‟s Chicago branch, also
spoke to Zimmer about defecting from Stryker. Giebelhaus received permission to bring
along two other representatives, William Williams and Brian Miller. As in Projects Sun
Devil and Viva, the plan was for all three to “flip-flop” sales territories to avoid violating
their non-compete agreements.
Brothen‟s plans were so successful that on March 21, 2011, eleven employees
resigned en masse from Stryker‟s Arizona and Las Vegas branches.4 In Chicago,
however, only Giebelhaus resigned.
4
Three employees ultimately changed their minds and decided to stay with
Stryker. The eight who did not return are the Individual Defendants in this case.
6
On April 1, 2011, Stryker filed a complaint, along with a motion for a temporary
restraining order and preliminary injunction, in the United States District Court for the
District of New Jersey, alleging breach of contract and several business torts. The
District Court issued a temporary restraining order that same day. A preliminary
injunction hearing followed, and on May 13, 2011, the Court issued an oral opinion and
entered a written order granting a preliminary injunction. The Individual and Zimmer
Defendants both filed timely appeals, which we have consolidated for review.
II5
A preliminary injunction may be issued if “„(1) the plaintiff is likely to succeed on
the merits; (2) denial will result in irreparable harm to the plaintiff; (3) granting the
injunction will not result in irreparable harm to the defendant; and (4) granting the
injunction is in the public interest.‟” P.C. Yonkers, Inc. v. Celebrations the Party &
Seasonal Superstore, LLC, 428 F.3d 504, 508 (3d Cir. 2005) (quoting NutraSweet Co. v.
Vit-Mar Enters., Inc., 176 F.3d 151, 153 (3d Cir. 1999)). “[W]e exercise plenary review
over the district court‟s conclusions of law and its application of law to the facts, but
review its findings of fact for clear error.” Id. (citing Duraco Prods., Inc. v. Joy Plastic
Enters., Ltd., 40 F.3d 1431, 1438 (3d Cir. 1994)). We review the grant of a preliminary
5
The District Court had jurisdiction pursuant to 28 U.S.C. § 1332, and we have
jurisdiction under 28 U.S.C. § 1292(a)(1).
7
injunction for abuse of discretion. E.g., Stilp v. Contino, 613 F.3d 405, 409 n.3 (3d Cir.
2010).
III
The District Court applied the proper test in concluding that Stryker was entitled
to a preliminary injunction. First, the Court determined that Stryker was likely to succeed
on the merits of its breach of contract and tort claims under New Jersey law because the
record revealed solicitations of both its employees and customers in violation of its non-
compete agreements with the intent to “decimate” its Arizona and Las Vegas operations.6
The Court also concluded that Stryker would be irreparably harmed without an injunction
because it stood to lose nearly all of its customer relationships and goodwill in Arizona
and Las Vegas. By contrast, the Individual Defendants had been indemnified and were
guaranteed contracts with Zimmer. And although Zimmer stood to lose the value of its
customer relationships, the Court noted that such an injury could be discounted because
Zimmer likely was at fault. Finally, the Court determined that the public interest in
6
The Individual Defendants argue that New Jersey‟s “economic loss doctrine”
bars Stryker‟s tort claims. By contrast, the Zimmer Defendants argue that New Jersey
law does not apply and that the District Court should have analyzed Stryker‟s tort claims
under Arizona or Nevada law. Both of these arguments have been waived because they
were not raised below. See, e.g., Srein v. Frankford Trust Co., 323 F.3d 214, 224 n.8 (3d
Cir. 2003) (“We have consistently held that we will not consider issues that are raised for
the first time on appeal absent „compelling reasons.‟” (quoting Patterson v. Cuyler, 729
F.2d 925, 929 (3d Cir. 1984))).
8
enforcing non-compete agreements and in promoting lawful competition supported an
injunction.
Although we largely agree with the District Court‟s thorough analysis, we hold
that portions of the injunction are overbroad. Accordingly, we will affirm in part and
vacate in part the order granting a preliminary injunction and remand for proceedings
consistent with this opinion.
A
We begin by holding that the injunction must be vacated as to Graveline,
Giebelhaus, Rowan, and Poulemanos. “In an action tried on the facts without a jury . . .
the court must find the facts specially and state its conclusions of law separately.” Fed.
R. Civ. P. 52(a)(1). This requirement is not “hypertechnical.” Prof’l Plan Examiners of
N.J., Inc. v. Lefante, 750 F.2d 282, 289 (3d Cir. 1984). “[T]he judge need only make
brief, definite, pertinent findings and conclusions upon the contested matters; there is no
necessity for over-elaboration of detail.” Fed. R. Civ. P. 52(a) advisory committee‟s note
(1946). But if “the record does not provide a sufficient basis to ascertain the legal and
factual grounds for issuing the injunction or if the findings are inadequate,” the injunction
cannot stand. Educ. Testing Servs. v. Katzman, 793 F.2d 533, 537 (3d Cir. 1986)
(quoting Lefante, 750 F.2d at 289).
9
The District Court made ample factual findings with respect to six of the
Individual Defendants: Hermansky, Hilton, Burciaga, Lively, Fallon, and Loughran. The
Court did not, however, explain why it enjoined Rowan or Poulemanos. Though the
Court suggested that they resigned from Stryker and planned to participate in the “flip-
flopping” scheme, it did not cite any evidence that they actually breached their non-
compete agreements or acted tortiously. Absent specific findings of fact, the injunction
against Rowan and Poulemanos cannot stand.
As for Graveline and Giebelhaus, the District Court did not discuss either
Defendant until after reading its order into the record, which prompted their counsel to
ask whether they were included in the injunction. The Court then simply noted that it
was “very reluctant to unhitch them from the corporate entity . . . and the individuals that
are part of it.” Because the Court made no factual findings as to how Graveline or
Giebelhaus engaged in tortious activity, the injunction was not proper as to them as well.
B
Defendants argue that the injunction is overbroad. We agree, but only with
respect to paragraphs A and F of the injunction.
“District courts are afforded considerable discretion in framing injunctions,” but
“„injunctive relief should be no broader than necessary to provide full relief to the
10
aggrieved party.‟” Meyer v. CUNA Mut. Ins. Soc’y, 648 F.3d 154, 169–70 (3d Cir. 2011)
(quoting Ameron, Inc. v. U.S. Army Corps of Eng’rs, 787 F.2d 875, 888 (3d Cir. 1986)).
Paragraph A states:
Defendants, and all parties in active concert or participation with them, are
preliminarily enjoined from soliciting or moving the business of any current
Stryker Spine customer of the Las Vegas and Arizona Branches, defined as
any physician who was serviced by any of the Stryker employees who were
solicited and acquired by Zimmer under Project Sun Devil and Project
Viva, to Zimmer, for a period of 12 months, effective April 1, 2011[.]
We are concerned that the phrase “moving the business” might be read to completely
preclude Stryker‟s customers in Arizona and Las Vegas from using Zimmer products,
even when they have not been solicited by Defendants. In such cases, Stryker‟s business
would be “moving” only because of fair competition. Restricting such competition
would go beyond restoring the status quo as it existed before Projects Sun Devil and
Viva, when Zimmer was free to service Stryker customers so long as it did so fairly.
Insofar as the injunction now prohibits Zimmer from competing fairly, the injunction is
overbroad.7
7
The District Court expressed concern that trying to return to the status quo would
present a “problem in terms of capitalism and free competition” because the Individual
Defendants already may have severed Stryker‟s customer relationships by soliciting
surgeons in Arizona and Las Vegas. We agree that this is a valid concern, but Stryker
can seek damages for business that was “moved” tortiously or in violation of non-
compete agreements.
11
We also agree with Defendants that Paragraph F is overbroad. That
paragraph states:
Defendants, and all parties in active concert or participation with them, are
preliminarily enjoined from soliciting, inducing or influencing, or
attempting to solicit, induce or influence, any person engaged as an
employee, independent contractor or agent of Stryker to terminate his, her
or its employment and/or business relationship with Stryker[.]
Paragraph F reasonably prohibits Defendants from soliciting Stryker‟s branch managers,
sales managers, and sales representatives in Las Vegas and Arizona to terminate their
employment. But it also precludes them from soliciting any Stryker employees,
independent contractors, and agents in any Stryker branch. The District Court made no
findings to support such a broad injunction. Though the District Court found that some
of Stryker‟s Chicago employees were solicited, it concluded that Stryker had not shown
any irreparable harm there. No findings were made with respect to any other Stryker
office outside of Las Vegas and Arizona, and there were no findings of fact relating to
independent contractors or agents. Paragraph F must be circumscribed accordingly.
C
Finally, we consider Defendants‟ argument that the District Court erred by not
establishing an injunction bond as required by Rule 65 of the Federal Rules of Civil
Procedure. “The court may issue a preliminary injunction or a temporary restraining
order only if the movant gives security in an amount that the court considers proper to
12
pay the costs and damages sustained by any party found to have been wrongfully
enjoined or restrained.” Fed. R. Civ. P. 65(c). The bond “serves to inform the plaintiff of
the price they [sic] can expect to pay if the injunction was wrongfully issued.” Instant
Air Freight Co. v. C.F. Air Freight, Inc., 882 F.2d 797, 804–05 (3d Cir. 1989). The
amount of the bond is left to the district court‟s discretion. Zambelli Fireworks Mfg. Co.
v. Wood, 592 F.3d 412, 426 (3d Cir. 2010).
The District Court set the bond at $800,000 to secure the temporary restraining
order but declined to require the posting of a new bond at the preliminary injunction
hearing, reasoning:
We are recreating in this 12 month period a time during which Zimmer[,]
had it played fair according to the testimony shown in the prima facie
showing . . . would have trained its own fleet. It has already trained
people[,] which puts it [ahead] of the game. And what we‟re saying is, they
are not going to go into action now. There‟s no loss that I see.
The Individual Defendants have been indemnified and guaranteed salaries, so they bear
no financial risk if they are wrongfully enjoined. But concluding that the Zimmer
Defendants bear no risk of loss assumes that Projects Sun Devil and Viva were improper
and that the Zimmer Defendants were properly enjoined. The purpose of the bond
requirement is to protect the enjoined party in the event the injunction should not have
been imposed. Accordingly, the District Court must impose a new bond after considering
what is necessary to protect Zimmer in the event the injunction is later deemed unlawful.
13
We express no opinion as to the value of such a bond and leave that decision to the sound
discretion of the District Court following a full hearing on the issue.
IV
For the reasons stated, we will affirm in part and vacate in part the District Court‟s
order granting a preliminary injunction and remand the matter for further proceedings
consistent with this opinion.
14