Sharkey v. Zimmer USA, Inc.

Background

Peter F. Sharkey and Charles Leinberry, Jr. alleged that they sold rights to their surgical technology, called subchondroplasty, to Knee Creations, LLC under a 2008 agreement. In exchange, they received an upfront payment and rights to royalty and milestone payments based on sales of products incorporating the technology. The agreement required Knee Creations to use commercially reasonable best efforts to achieve specified milestones. It also restricted the development and marketing of competing products and required reasonable protection of the technology and its confidentiality.

In 2013, Zimmer purchased Knee Creations and formed Zimmer Knee Creations, Inc. The 2013 amendment assigned Zimmer rights to the technology and transferred related payment obligations, but it deleted the agreement’s provisions restricting competing products and requiring protection of the intellectual property. A 2014 amendment further addressed royalty payments for products focused on joints other than the knee.

The plaintiffs alleged that Zimmer and Zimmer Knee Creations later reduced budgets for medical education and sales commissions, eliminated direct-to-consumer marketing, closed the Knee Creations division, redirected sales efforts toward joint-replacement products, and failed to protect technology and trade secrets. They claimed these actions reduced sales of the products and their royalty payments. The amended complaint asserted breach of the implied covenant of good faith and fair dealing against both defendants and tortious interference with contract against Zimmer.

Rule 12(b)(6) standard

The defendants moved to dismiss under Rule 12(b)(6), which tests whether a complaint states a legally sufficient claim. The Court assumed the truth of well-pleaded factual allegations and considered the agreements attached to or incorporated into the amended complaint. The parties applied New York law, consistent with the agreements’ choice-of-law provision.

Implied covenant claim

New York law implies a promise of good faith and fair dealing in contracts, but that promise cannot add obligations inconsistent with the contract’s terms or undermine a party’s general right to act in its own interests. The Court held that the amended agreement did not require the defendants to use “best efforts” to promote, market, or sell the products.

The 2008 agreement expressly required best efforts for four specified milestones, none of which involved product promotion or sales. The Court reasoned that the omission of a similar requirement for promotion and sales was deliberate. It also concluded that the plaintiffs’ proposed duty conflicted with the 2013 amendment, which removed the provision barring competing products. Imposing a best-efforts sales duty would effectively restore a restriction the plaintiffs had agreed to remove.

The Court also held that the plaintiffs did not adequately plead a breach of the implied covenant based on the defendants’ change in business strategy. The defendants were permitted to redirect resources toward other products, even if that decision reduced the plaintiffs’ expected royalty benefits. The plaintiffs’ allegations that the defendants failed to protect intellectual property and trade secrets likewise fell outside the implied covenant because the 2013 amendment removed the contractual protection requirement. In addition, the allegations did not show that the defendants acted intentionally, in bad faith, or with reckless disregard when third parties allegedly received or infringed the information.

The Court therefore granted the motion to dismiss the breach-of-implied-covenant claim.

Tortious-interference claim

Under New York law, tortious interference with contract requires, among other things, an actual breach of the contract by the third party. The Court concluded that the plaintiffs had not adequately alleged a breach of the implied covenant and did not argue that the defendants breached an express contract term. The Court therefore dismissed the tortious-interference claim against Zimmer.

Leave to amend and disposition

The plaintiffs requested permission to file another amended complaint. The Court denied that request because the plaintiffs had already amended their complaint after receiving notice of the defendants’ arguments, had not identified facts that would cure the defects, and were challenging contractual obligations that the 2013 amendment had expressly removed. The Court stated that the claims were being dismissed on substantive grounds rather than for lack of detail.

Judge John P. Cronan granted the defendants’ motion to dismiss with prejudice as to both claims, directed the Clerk to terminate the motion, and closed the case.