Medicalgorithmics, SA v. AMI Monitoring, Inc.
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Opinion
IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE
MEDICALGORITHMICS S.A., ) ) ) ) Plaintiff, ) ) v. ) C.A. No. 10948-CB ) AMI MONITORING, INC. d/b/a ) SPECTOCOR and SPECTOCOR LLC, ) ) ) Defendants. ) ) v. ) ) MEDICALGORITHMICS S.A., ) ) Counterclaim Defendant. )
MEMORANDUM OPINION
Date Submitted: May 10, 2016 Date Decided: August 18, 2016
Philip Trainer, Jr. and Marie M. Degnan, ASHBY & GEDDES, P.A., Wilmington, Delaware; Madlyn Gleich Primoff, Daniel Reisner, Michael Lynn and Kyle D. Gooch, KAYE SCHOLER LLP, New York, New York; Attorneys for Plaintiff.
Blake Rohrbacher, Kelly E. Farnan, Robert L. Burns, Rachel E. Horn, Thomas R. Nucum and Brian F. Morris, RICHARDS, LAYTON & FINGER, P.A., Wilmington, Delaware; Attorneys for Defendants.
BOUCHARD, C. In 2011, Medicalgorithmics S.A. and AMI Monitoring, Inc. entered into a
Strategic Alliance Agreement under which AMI received an exclusive license to
market and distribute in the United States a cardiac monitoring device that
Medicalgorithmics invented. A critical term of the agreement, which was updated
in 2014, prohibited AMI from seeking or developing a product to replace the
Medicalgorithmics device unless AMI first provided a notice of termination, which
would begin a two-year period at the end of which the remaining obligations under
the agreement would expire. The purpose of this provision was to deter AMI,
Medicalgorithmics’ exclusive licensee in the United States, from seeking to
develop or use a competing device and to afford Medicalgorithmics a two-year
runway to transition to another distributor if it did.
In this post-trial decision, I conclude that AMI materially breached the
Strategic Alliance Agreement by no later than April 2014 by secretly seeking to
develop a device for use in the United States to replace the Medicalgorithmics
device without first providing the required notice to Medicalgorithmics. Because
of AMI’s material breach, Medicalgorithmics’ later termination of the agreement
was valid, and it is entitled to damages, although significantly less than it sought at
trial. Medicalgorithmics also is entitled to recover its attorneys’ fees and costs for
this litigation under an indemnification provision in the agreement, and to
judgment in its favor dismissing AMI’s counterclaims.
1 I. BACKGROUND
The facts recited in this opinion are my findings based on the stipulations of
the parties, documentary evidence, and testimony presented during a five-day trial
during which seven fact and three expert witnesses testified. I accord the evidence
the weight and credibility I find it deserves.
A. The Parties
Plaintiff and counterclaim defendant Medicalgorithmics S.A. is a public
company incorporated and headquartered in Poland. 1 Medicalgorithmics is the
developer and manufacturer of a remote cardiac monitoring system known as the
PocketECG, a medical device marketed in the United States under a premarket
clearance from the United States Food and Drug Administration.
Medicalgorithmics holds the intellectual property rights to the PocketECG.2
Marek Dziubinski, the founder and CEO of Medicalgorithmics, 3 invented the
PocketECG technology. 4
1 PTO ¶ 10. 2 PTO ¶ 13-14. 3 Tr. 5 (Dziubinski). 4 Tr. 7-8 (Dziubinski).
2 Defendant and counterclaim plaintiff AMI Monitoring, Inc. (“AMI”) is a
privately held corporation incorporated and headquartered in Texas. 5 Joseph
Bogdan (“Joe”) founded AMI in 2002 and serves as its President. 6 Defendant
Spectocor LLC is a limited liability company organized under Nevada law and
headquartered in Texas. Joe is Spectocor’s sole managing partner. 7 AMI and
Spectocor run cardiac monitoring centers known as independent diagnostic testing
facilities.8 At the times relevant to this action, Joe owned and controlled both
Spectocor and AMI, which were operated in a coordinated fashion as a single
business. For simplicity, I generally refer to both entities interchangeably as
“AMI.”
Non-party Medi-Lynx Cardiac Monitoring, LLC is a competitor of AMI that
was formed in 2013 after disagreements arose between Joe and his brother,
Andrew Bogdan (“Andy”), who were the original co-owners of AMI. Andy
currently serves as President of Medi-Lynx. 9
5 PTO ¶ 11. 6 PTO ¶ 11. I refer to the Bogdan brothers in this opinion by their first names to avoid confusion. No disrespect is intended. 7 PTO ¶ 12. 8 Tr. 28-29 (Dziubinski). 9 Tr. 855 (Andy).
3 B. The PocketECG Technology
The PocketECG is a system for diagnosing heart arrhythmia that
Medicalgorithmics sells to its licensees around the world.10 Medicalgorithmics has
manufactured two versions of the PocketECG: the PocketECG II and the
PocketECG III.11 The PocketECG II is a Bluetooth device that a patient wears. It
transmits electrocardiography (“ECG”) 12 data digitally via Bluetooth to an off-the-
shelf smartphone, which then processes the ECG signal using an algorithm
designed by Medicalgorithmics and uploads the data to a remote server.13 The
PocketECG III contains the smartphone technology within the device, avoiding the
need for a separate off-the-shelf smartphone device. 14
The PocketECG devices are known as 3-in-1 devices because they offer
three types of cardiac monitoring services: Holter, event monitoring, and mobile
cardiac telemetry (“MCT”). 15 Holter is the oldest of the three methods and the
most commonly used method worldwide. Holter involves recording a continuous
ECG signal for 24 to 48 hours and downloading the data to a computer for 10 Tr. 5-6 (Dziubinski). 11 PTO ¶ 15. 12 Tr. 1243 (Scher). 13 Tr. 10 (Dziubinski). 14 Tr. 12 (Dziubinski). 15 Tr. 19 (Dziubinski).
4 subsequent analysis. Event monitoring is a longer process, lasting up to 30 days,
during which time the device transmits only certain fragments of the ECG signal
arising during noteworthy events or symptoms, and discarding the remaining data.
MCT also provides intermittent monitoring but frequently sends transmissions,
which are then classified as being an arrhythmia or not an arrhythmia. 16 The 3-in-1
designation is a creature of the United States healthcare insurance market, in which
all three methods are reimbursable. Mobile cardiac telemetry is largely unknown
elsewhere in the world. 17
Cardiac monitoring services using the PocketECG and similar devices are
provided through independent diagnostic testing facilities such as AMI, which
receive the data and have cardiac technicians provide diagnostic reports to the
patient’s physician.18 Private insurers or Medicare reimburse these facilities for
providing the device and the diagnostic services to the patient. 19 The amount of
reimbursement depends on which of the three services is used, with mobile cardiac
telemetry receiving a significantly higher level of reimbursement. 20
16 Tr. 19-21 (Dziubinski); Tr. 321-24 (Moss). 17 Tr. 21 (Dziubinski); Tr. 320-21, 376-77 (Moss). 18 Tr. 325 (Moss); Tr. 23-25 (Dziubinski). 19 Tr. 24-25 (Dziubinski). 20 Tr. 25-26 (Dziubinski) (noting that telemetry is reimbursed at a rate of approximately ten times the reimbursement rate for Holter monitoring).
5 C. Medicalgorithmics and AMI Enter into Business Together
In May 2009, Medicalgorithmics received approval from the FDA to market
the PocketECG in the United States under Section 510(k) of the Food, Drug, and
Cosmetic Act. 21 After receiving this approval, Medicalgorithmics contacted
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IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE
MEDICALGORITHMICS S.A., ) ) ) ) Plaintiff, ) ) v. ) C.A. No. 10948-CB ) AMI MONITORING, INC. d/b/a ) SPECTOCOR and SPECTOCOR LLC, ) ) ) Defendants. ) ) v. ) ) MEDICALGORITHMICS S.A., ) ) Counterclaim Defendant. )
MEMORANDUM OPINION
Date Submitted: May 10, 2016 Date Decided: August 18, 2016
Philip Trainer, Jr. and Marie M. Degnan, ASHBY & GEDDES, P.A., Wilmington, Delaware; Madlyn Gleich Primoff, Daniel Reisner, Michael Lynn and Kyle D. Gooch, KAYE SCHOLER LLP, New York, New York; Attorneys for Plaintiff.
Blake Rohrbacher, Kelly E. Farnan, Robert L. Burns, Rachel E. Horn, Thomas R. Nucum and Brian F. Morris, RICHARDS, LAYTON & FINGER, P.A., Wilmington, Delaware; Attorneys for Defendants.
BOUCHARD, C. In 2011, Medicalgorithmics S.A. and AMI Monitoring, Inc. entered into a
Strategic Alliance Agreement under which AMI received an exclusive license to
market and distribute in the United States a cardiac monitoring device that
Medicalgorithmics invented. A critical term of the agreement, which was updated
in 2014, prohibited AMI from seeking or developing a product to replace the
Medicalgorithmics device unless AMI first provided a notice of termination, which
would begin a two-year period at the end of which the remaining obligations under
the agreement would expire. The purpose of this provision was to deter AMI,
Medicalgorithmics’ exclusive licensee in the United States, from seeking to
develop or use a competing device and to afford Medicalgorithmics a two-year
runway to transition to another distributor if it did.
In this post-trial decision, I conclude that AMI materially breached the
Strategic Alliance Agreement by no later than April 2014 by secretly seeking to
develop a device for use in the United States to replace the Medicalgorithmics
device without first providing the required notice to Medicalgorithmics. Because
of AMI’s material breach, Medicalgorithmics’ later termination of the agreement
was valid, and it is entitled to damages, although significantly less than it sought at
trial. Medicalgorithmics also is entitled to recover its attorneys’ fees and costs for
this litigation under an indemnification provision in the agreement, and to
judgment in its favor dismissing AMI’s counterclaims.
1 I. BACKGROUND
The facts recited in this opinion are my findings based on the stipulations of
the parties, documentary evidence, and testimony presented during a five-day trial
during which seven fact and three expert witnesses testified. I accord the evidence
the weight and credibility I find it deserves.
A. The Parties
Plaintiff and counterclaim defendant Medicalgorithmics S.A. is a public
company incorporated and headquartered in Poland. 1 Medicalgorithmics is the
developer and manufacturer of a remote cardiac monitoring system known as the
PocketECG, a medical device marketed in the United States under a premarket
clearance from the United States Food and Drug Administration.
Medicalgorithmics holds the intellectual property rights to the PocketECG.2
Marek Dziubinski, the founder and CEO of Medicalgorithmics, 3 invented the
PocketECG technology. 4
1 PTO ¶ 10. 2 PTO ¶ 13-14. 3 Tr. 5 (Dziubinski). 4 Tr. 7-8 (Dziubinski).
2 Defendant and counterclaim plaintiff AMI Monitoring, Inc. (“AMI”) is a
privately held corporation incorporated and headquartered in Texas. 5 Joseph
Bogdan (“Joe”) founded AMI in 2002 and serves as its President. 6 Defendant
Spectocor LLC is a limited liability company organized under Nevada law and
headquartered in Texas. Joe is Spectocor’s sole managing partner. 7 AMI and
Spectocor run cardiac monitoring centers known as independent diagnostic testing
facilities.8 At the times relevant to this action, Joe owned and controlled both
Spectocor and AMI, which were operated in a coordinated fashion as a single
business. For simplicity, I generally refer to both entities interchangeably as
“AMI.”
Non-party Medi-Lynx Cardiac Monitoring, LLC is a competitor of AMI that
was formed in 2013 after disagreements arose between Joe and his brother,
Andrew Bogdan (“Andy”), who were the original co-owners of AMI. Andy
currently serves as President of Medi-Lynx. 9
5 PTO ¶ 11. 6 PTO ¶ 11. I refer to the Bogdan brothers in this opinion by their first names to avoid confusion. No disrespect is intended. 7 PTO ¶ 12. 8 Tr. 28-29 (Dziubinski). 9 Tr. 855 (Andy).
3 B. The PocketECG Technology
The PocketECG is a system for diagnosing heart arrhythmia that
Medicalgorithmics sells to its licensees around the world.10 Medicalgorithmics has
manufactured two versions of the PocketECG: the PocketECG II and the
PocketECG III.11 The PocketECG II is a Bluetooth device that a patient wears. It
transmits electrocardiography (“ECG”) 12 data digitally via Bluetooth to an off-the-
shelf smartphone, which then processes the ECG signal using an algorithm
designed by Medicalgorithmics and uploads the data to a remote server.13 The
PocketECG III contains the smartphone technology within the device, avoiding the
need for a separate off-the-shelf smartphone device. 14
The PocketECG devices are known as 3-in-1 devices because they offer
three types of cardiac monitoring services: Holter, event monitoring, and mobile
cardiac telemetry (“MCT”). 15 Holter is the oldest of the three methods and the
most commonly used method worldwide. Holter involves recording a continuous
ECG signal for 24 to 48 hours and downloading the data to a computer for 10 Tr. 5-6 (Dziubinski). 11 PTO ¶ 15. 12 Tr. 1243 (Scher). 13 Tr. 10 (Dziubinski). 14 Tr. 12 (Dziubinski). 15 Tr. 19 (Dziubinski).
4 subsequent analysis. Event monitoring is a longer process, lasting up to 30 days,
during which time the device transmits only certain fragments of the ECG signal
arising during noteworthy events or symptoms, and discarding the remaining data.
MCT also provides intermittent monitoring but frequently sends transmissions,
which are then classified as being an arrhythmia or not an arrhythmia. 16 The 3-in-1
designation is a creature of the United States healthcare insurance market, in which
all three methods are reimbursable. Mobile cardiac telemetry is largely unknown
elsewhere in the world. 17
Cardiac monitoring services using the PocketECG and similar devices are
provided through independent diagnostic testing facilities such as AMI, which
receive the data and have cardiac technicians provide diagnostic reports to the
patient’s physician.18 Private insurers or Medicare reimburse these facilities for
providing the device and the diagnostic services to the patient. 19 The amount of
reimbursement depends on which of the three services is used, with mobile cardiac
telemetry receiving a significantly higher level of reimbursement. 20
16 Tr. 19-21 (Dziubinski); Tr. 321-24 (Moss). 17 Tr. 21 (Dziubinski); Tr. 320-21, 376-77 (Moss). 18 Tr. 325 (Moss); Tr. 23-25 (Dziubinski). 19 Tr. 24-25 (Dziubinski). 20 Tr. 25-26 (Dziubinski) (noting that telemetry is reimbursed at a rate of approximately ten times the reimbursement rate for Holter monitoring).
5 C. Medicalgorithmics and AMI Enter into Business Together
In May 2009, Medicalgorithmics received approval from the FDA to market
the PocketECG in the United States under Section 510(k) of the Food, Drug, and
Cosmetic Act. 21 After receiving this approval, Medicalgorithmics contacted
different independent diagnostic testing facilities, including AMI, about working
together to provide PocketECG devices in the United States.22 At the time, Joe and
Andy were 50/50 co-owners of AMI,23 and Medi-Lynx did not yet exist. 24 In
2010, AMI and Medicalgorithmics began working together on a non-exclusive
basis, with AMI purchasing PocketECG devices from Medicalgorithmics. 25
During this period, the parties discussed possible business arrangements,
including the possibility of AMI purchasing Medicalgorithmics 26 as well as an
exclusive licensing arrangement between Medicalgorithmics and AMI. Joe’s goal
was to have AMI either “own or uniquely license” a mobile cardiac telemetry
device like the PocketECG in order to stand out in the monitoring community. 27
21 JX-817 at 4. 22 Tr. 28-29 (Dziubinski). 23 Tr. 858 (Andy); Tr. 29 (Dziubinski); 24 Tr. 880 (Andy). 25 Tr. 29-30 (Dziubinski); Tr. 453 (Joe). 26 Tr. 453 (Joe); JX-6. 27 Tr. 449 (Joe). 6 Ultimately, the companies went the route of an exclusive licensing agreement. It
was “very important” to Joe that the agreement would be exclusive in the United
States.28
In late 2011, AMI and Medicalgorithmics negotiated a strategic alliance
agreement under which AMI would become the exclusive licensee of the
PocketECG in the United States. 29 At the end of December, Medicalgorithmics
and AMI completed negotiations and signed the agreement (the “2011 SAA”).30
As discussed below, the 2011 SAA was updated in 2014 (the “2014 SAA”) after
Joe and Andy split, but the key provisions relevant to this dispute remained
substantively identical. 31 The 2011 SAA and the 2014 SAA are sometimes
referred to together as the “SAA” or “SAAs.”
Section 3.3 of the SAA restricts AMI from seeking or developing
technology that would replace Medicalgorithmics’ products, such as the
PocketECG, without first providing notice of termination:
Without first providing notice of termination of this Agreement to Supplier [Medicalgorithmics], Buyer [AMI] agrees that it shall not
28 Tr. 455 (Joe). 29 Tr. 30-32 (Dziubinski). 30 JX-38 (“2011 SAA”) at 17. 31 See JX-248 (“2014 SAA”) §§ 3.3, 7.1, 10.1, Attachments 1 & 2.
7 seek, develop, engage, promote or market any technology to replace Supplier’s products or services.32
This provision was the result of arm’s-length negotiations. Medicalgorithmics
added the restriction (without the notice of termination exception) after AMI
requested exclusivity, 33 and the parties eventually agreed on the language quoted
above, which included the option to extinguish the restriction by providing prior
notice of termination. The evident purpose of Section 3.3 was to deter AMI—
Medicalgorithmics’ exclusive licensee in the United States—from seeking to make
or use a competing product, and to afford Medicalgorithmics a two-year period to
make arrangements to transition to another distributor if AMI nevertheless did so.
Under Section 7.1, AMI could terminate the SAA by providing
Medicalgorithmics with written notice 24 months in advance. 34 Thus, reading
Sections 3.3 and 7.1 together, AMI could extinguish the restrictions of Section 3.3
immediately by providing a written notice of termination, thereby allowing AMI to
begin product development otherwise restricted under Section 3.3, but termination
of its remaining obligations under the agreement would not become effective until
24 months later under Section 7.1. Such continuing obligations included AMI’s
32 2011 SAA § 3.3. 33 JX-18 § 3.3 (redline of draft SAA); Tr. 31-33 (Dziubinski) (explaining that Medicalgorithmics added protections to the draft SAA, including Section 3.3, in response to Joe’s request that the agreement be exclusive). 34 2011 SAA § 7.1.
8 agreement to “solely use” Medicalgorithmics’ products for all diagnostic work
AMI was capable of performing,35 and to achieve certain minimum growth targets
for active PocketECG devices. 36
Section 10.1 of the SAA sets forth Medicalgorithmics’ delivery
requirements:
1. Fill Buyer’s orders for Products within thirty (30) days in a professional manner and shall advise Buyer as soon as possible if it appears that Supplier may not be able to fill Buyer’s orders for any reason, or of any delay or anticipated delay in delivery or performance. Supplier shall be required to maintain a reasonable inventory (the percentage of inventory should equal the % growth requirements within this agreement) to satisfy orders within thirty (30) days of request by Buyer. Failure of Supplier to fulfill buyer’s order for Products not exceeding 1000 units within sixty (60) days, assuming the orders are not made more frequently than every sixty (60) days, or any number of units in hundred and twenty (120) days, assuming such orders are not made more frequently than every hundred and twenty (120) days, is a material breach of this Agreement subjecting the Agreement to immediate termination at the discretion of Buyer. 37
Attachment 1 to the SAA specifies that the product to be sold under the
agreement is the PocketECG II model and provides technical specifications
relevant to that model.38 Attachment 1 also specifies that “[p]erformance of
35 Id. ¶ 9 (“Buyer agrees to solely use Supplier’s products for all diagnostic work the Products are capable of performing at the time of this Agreement . . . .”). 36 Id. at Attachment 3 (Cumulative Product Activation Targets). 37 Id. § 10.1. 38 See id. at Attachment 1. 9 subsequent versions may differ from those presented. The New devices may also
have other or additional functionalities.”39 Under the SAA, the “Product” that is
the subject of the agreement includes “any variations, advancements,
improvements, or modifications made to the Product during the term of this
Agreement.” 40 The 2011 SAA envisioned the eventual creation of an all-in-one
device such as the PocketECG III. Specifically, Medicalgorithmics’ “Continuous
Improvement” commitments under the 2011 SAA included a 2012 task of creating
a fully-functional prototype of an integrated all-in-one PocketECG device, and a
2013 task of receiving FDA approval for said device. 41
Payment terms for the PocketECG II were included in Attachment 2 to the
2011 SAA. For instance, each PocketECG II order required a prepayment of $303
per device. That amount would be credited toward the monthly service fees paid to
Medicalgorithmics for using the devices, which were calculated using a formula,
also contained in Attachment 2, that assessed charges based on the number of
Holter, event, and telemetry sessions that were undertaken each month. 42
39 Id. at Attachment 1. 40 Id. ¶ 2. 41 Id. § 3.1(n), (r). These tasks, including the years in which they were to be achieved, remained the same in the 2014 SAA even though that agreement was signed after the timelines envisioned for the tasks had passed. 2014 SAA § 3.1(n), (r). 42 2011 SAA at Attachment 2.
10 D. Joe and Andy Split Up AMI’s Business
By 2013, significant disagreements had developed between Joe and Andy
about AMI’s business and how best to manage it. 43 In mid-2013, Andy informed
Joe that he wanted to leave AMI. 44 In June, he let Medicalgorithmics know the
same in an e-mail stating that he would be selling his 50% stake either to Joe or to
a third party and encouraging Medicalgorithmics to consider buying his stake.45
That sale did not materialize. Instead, the brothers ended up splitting the business
in two, with Joe owning AMI/Spectocor and Andy owning a new business called
Medi-Lynx Monitoring, Inc. 46 Each business was to become a co-exclusive
licensee of the PocketECG, thus requiring Medicalgorithmics to sign new license
agreements. 47 The separation was troubling to Dziubinski, who recalled the
difficulties Medicalgorithmics had experienced with AMI early in their
relationship and worried that it would experience similar growing pains with
Medi-Lynx. 48
43 Tr. 507-10 (Joe); Tr. 872-79 (Andy). 44 Tr. 509 (Joe). 45 JX-146 at 1; Tr. 58-59 (Dziubinski). 46 See generally JX-246 (Agreement and Plan of Separation). 47 Tr. 59 (Dziubinski); 2014 SAA; JX-249. 48 Tr. 59-60 (Dziubinski).
11 Despite these reservations, Medicalgorithmics proceeded with the brothers’
now-separate businesses and signed separate strategic alliance agreements with
AMI and with Medi-Lynx on January 2, 2014.49 Because AMI and
Medicalgorithmics already were working under the 2011 SAA, the primary change
reflected in the 2014 SAA was to update the licensing provisions such that AMI
became a co-exclusive U.S. licensee of the PocketECG with Medi-Lynx, rather
than the sole exclusive U.S. licensee as it was under the 2011 SAA.
E. The PocketECG III
In July 2013, before the 2014 SAA had been entered, Medicalgorithmics
sent AMI a draft amendment to the 2011 SAA regarding pricing for the new
PocketECG III model it was developing.50 The PocketECG III would be a 3-in-1
device like the PocketECG II, but unlike the PocketECG II, it would integrate the
data transmission technology into the device so that a separate smartphone would
not be required to transmit the patient’s data. The proposed amendment required a
prepayment of $505, an increase from the $303 required for the PocketECG II
under the 2011 SAA. 51 As with the PocketECG II, the first $303 of the
prepayment would be credited against the device’s monthly service charges
49 2014 SAA; JX-249 (the “Medi-Lynx 2014 SAA”). 50 JX-156 at 1. 51 Id. at 3.
12 beginning when the unit is activated.52 The remaining $202 would be an additional
cost for AMI, although it presumably would be offset by some savings from
avoiding the purchase of a separate smartphone device. 53
Medicalgorithmics anticipated, and AMI acknowledged, that the PocketECG
III devices would require more time to manufacture—initially five months,
compared to the three-month timeframe of the PocketECG II—although it planned
to bring the production timeline for the PocketECG III down to three months
within a year. 54 Medicalgorithmics also knew that the technology would take time
to perfect, and it informed AMI that the technology would need to be released
gradually to work out bugs without causing significant damage to the business.55
Medicalgorithmics was concerned that AMI was facing liquidity constraints
that could make it difficult for AMI to make prepayments for the new PocketECG
III devices, particularly given the distractions the brothers’ splitting of the business
had caused.56 Medicalgorithmics came up with a way to ship PocketECG III
52 Id. at 3. 53 AMI alleges these savings were not necessarily significant because the wireless carrier sometimes provided phones at no charge, depending on how a given deal was negotiated. Tr. 1142-44 (Velez). 54 JX-171 at 2-3. 55 Tr. 73-74 (Dziubinski). 56 Tr. 73-75 (Dziubinski).
13 devices to AMI without receiving the $505 prepayment fee required under
Attachment 2 of the SAA. By charging interest, Medicalgorithmics could
essentially turn the prepayment fee into a loan, allowing AMI to make the payment
90 days after delivery, with a modest premium of $8.83 per device reflecting the
accrued interest, for a total cost of $513.83.57 Joe responded enthusiastically to
this proposal.58 Unlike with the PocketECG II, Medicalgorithmics required signed
purchase orders in light of the fact that it was manufacturing devices for AMI
without receiving any prepayment. 59
On November 13, 2013, in accordance with this arrangement and without
making a prepayment, AMI e-mailed Medicalgorithmics four purchase orders,
each of which sought 1,000 PocketECG III devices, to be delivered in April, May,
June, and July, 2014, respectively. 60 In total, this order requested four times as
many devices as the 1,000 PocketECG III units AMI initially had requested in
August, before Medicalgorithmics gave AMI the prepayment workaround.61 The
order form Medicalgorithmics provided did not contain a delivery date field, but
57 JX-190; Tr. 74-77 (Dziubinski). 58 JX-190 (“Thank you! That sounds great and resolves the upfront pricing on so many units.”). 59 Tr. 79 (Dziubinski); JX-190. 60 JX-205; JX-207. 61 See JX-171 at 2.
14 AMI added these dates to the forms when placing the orders. 62 After receiving
these orders, AMI reminded Medicalgorithmics that the 2011 SAA only covered
the PocketECG II, and that AMI needed to sign the amendment adding Attachment
4 to the 2011 SAA. As discussed above, that amendment, which AMI had
received in July but still had not signed, covered the PocketECG III and its
pricing. 63 Internally, Medicalgorithmics expressed concern about being unable to
fill the large order AMI had placed within the timeframes it had requested. 64
At the end of November 2013, after much back-and-forth discussion, AMI
and Medicalgorithmics executed the amendment to the 2011 SAA incorporating
the PocketECG III as a product under the 2011 SAA. 65 The amendment included
Attachment 4, which provided for a prepayment fee of $505 per PocketECG III
device, the same price circulated in the draft from July. 66
On December 3, 2013, AMI asked Medicalgorithmics for an anticipated
delivery schedule for the 4,000 units, acknowledging that the dates “may not be
62 See JX-910 at 2. 63 JX-205 at 1; supra note 50. 64 JX-210. 65 JX-223. 66 Id.
15 exact.”67 The next day, AMI informed Medicalgorithmics that the original
purchase order forms for the 4,000 PocketECG III devices had been mailed. 68 On
December 9, Medicalgorithmics provided a tentative delivery schedule to AMI that
was significantly behind the timeline AMI had requested in its order forms: a total
of 245 units out of the 1,000 requested by April, a total of 545 out of total 2,000
requested by May, 945 out of 3,000 by June, and 1,645 out of 4,000 by July. 69
Medicalgorithmics estimated it would not reach the 4,000 unit mark until
November 2014. AMI expressed disappointment with this timeline, noting that it
could not effectively market the PocketECG III until there were enough units to
provide them to a critical mass of customers, and it considered whether the launch
should be delayed until production could meet AMI’s expectations.70 Neither
company otherwise questioned whether the order should be withdrawn or rejected,
or whether the delivery timeframe was unacceptable, or merely suboptimal.
Because it has the smartphone technology built into the device, the
PocketECG III unit needs to be built to work on one of the two major cellular
network types in the United States, namely CDMA or GSM. Different wireless
67 JX-225. 68 Id. 69 JX-226. 70 Id.
16 carriers use different networks: CDMA is used primarily by Sprint and Verizon,
while GSM is used mostly by T-Mobile and AT&T. 71 AMI asserts that it needed
both types of the device because some of its patients had access to one network but
not the other, although Medicalgorithmics contends this percentage is small. 72 It
also was preferable for AMI to have access to CDMA PocketECG III devices
because the vast majority of its patients using the PocketECG II already were on
the Verizon (CDMA) network, and AMI had a strong business relationship with
Verizon.73
AMI’s order for 4,000 PocketECG III devices did not specify whether those
devices should be designed for use on the GSM or the CDMA networks.
Attachment 4 to the 2011 SAA did not specify which network the devices would
use either. On December 9, 2013, in the same e-mail describing the production
timeline for the PocketECG III, Medicalgorithmics asked AMI to estimate the
percentage of GSM and CDMA devices they would need.74 Medicalgorithmics
indicated that it would need to begin with the GSM units, and only later could
begin producing CDMA units, which it had not yet developed. The CDMA units
71 Tr. 1102 (Velez). 72 Tr. 1102 (Velez); Tr. 69-70 (Dziubinski). 73 Tr. 496-98 (Joe). 74 JX-226.
17 had the longest lead time for components, requiring them to place orders as soon as
possible. 75 AMI requested 2,000 of each. 76 Although Medicalgorithmics noted the
longer timeline for beginning production of CDMA units, it did not tell AMI that
the order was unacceptable or that filling it would not be possible.
Around mid-December 2013, AMI placed additional orders for a total of
4,360 PocketECG II devices.77 Medicalgorithmics did not require AMI to prepay
for these devices. 78 AMI placed this order to “last us until we can transition fully
to [PocketECG III].” 79 Medicalgorithmics projected that the order would be filled
over the next few months, and it was filled by about June 2014.80
F. The 2014 SAA
Joe and Andy’s separation agreement became effective at the end of
December 2013. On January 2, 2014, Medicalgorithmics and AMI signed a new
strategic alliance agreement (as defined above, the “2014 SAA”) replacing the
75 Id. 76 Tr. 86 (Dziubinski); JX-482. 77 JX-232. 78 Tr. 692 (Joe). 79 JX-251 at 3. 80 See id. at 5; JX-328 at 4. AMI does not contend that a breach of the SAA occurred in connection with the December 2013 order for PocketECG II devices. Tr. Post-Trial Arg. 52.
18 2011 SAA. The 2014 SAA updated the 2011 SAA to account for the fact that
Andy’s part of the business, Medi-Lynx, was now a co-exclusive licensee.81 The
attachments from the 2011 SAA were included in the 2014 SAA, including the
product description and fee schedule for the PocketECG II, but Attachment 4 from
the amendment to the 2011 SAA signed in November, which described the
PocketECG III device and fees, was not included.82 The omission of Attachment 4
from the 2014 SAA was not intended to alter the previously agreed-upon pricing
for the PocketECG III. To the contrary, both sides understood and expected that
the pricing for that device would remain the same under the 2014 SAA as it was
under the 2011 SAA. 83
Medicalgorithmics did not fill the PocketECG III orders within the
timeframe it envisioned. It sent the first 50 units at the end of April 2014, and 100
more in late June 2014, for a total of 150 devices rather than the 945 it had
81 2014 SAA at 1. 82 Id. at 18-20. 83 See Tr. 101-03 (Dziubinski) (explaining that they learned AMI had not signed an Attachment 4 for the 2014 SAA after a pricing dispute discussed below); Tr. 726-31 (Joe) (opining that the parties expected Medicalgorithmics would send a new Attachment 4 amending the 2014 SAA); see also JX-234 (e-mail from AMI’s counsel informing Medicalgorithmics that, after entering into the 2014 SAA, for convenience Medicalgorithmics could “send new amendments in identical form as before for the new devices”); Tr. 103 (Dziubinski) (noting that Medi-Lynx promptly signed a new Attachment 4 upon learning that it had not been included in the Medi-Lynx 2014 SAA); Dziubinski Dep. 298-300 (opining that not signing amendment including Attachment 4 in the 2014 SAA was an inadvertent mistake).
19 expected to deliver by the end of June. 84 In September 2014, AMI sent
Medicalgorithmics an e-mail expressing concern over the behind-schedule
production of PocketECG III devices, pointing out that Medicalgorithmics was in
violation of the delivery requirements of Section 10 of the SAA, while expressing
confidence that Medicalgorithmics would be able to address the issues.85 By mid-
October 2014, Medicalgorithmics had sent all 2,000 GSM devices, 86 but it still had
not completed development of the CDMA version.
On November 7, AMI sent Medicalgorithmics another letter, this time
informing Medicalgorithmics that it was in material breach of the SAA due to
alleged warranty issues, inventory deficiencies, and Medicalgorithmics’ intent to
phase out the PocketECG II. The letter requested that Medicalgorithmics cure the
alleged breaches within 30 days and noted that the failure to do so could result in
consequences “including and up to immediate termination.”87 According to Joe,
AMI never intended to terminate the agreement but instead sent this notice to
84 The monthly totals of Medicalgorithmics’ shipments to AMI from April 2014 to April 2015 are summarized in an exhibit (JX-823) prepared from a database Medicalgorithmics operated in the ordinary course of its business. Tr. 776-77 (Zolkiewicz). AMI did not challenge the data in this exhibit, which I find to be reliable. 85 JX-372. 86 JX-823. 87 JX-416.
20 encourage Medicalgorithmics to comply with the SAA. 88 Medicalgorithmics
responded to AMI’s letter, disputing the alleged breaches and noting that AMI had
been late on a number of payments under the SAA. 89
G. AMI’s Discussions with Vasomedical
Unbeknownst to Medicalgorithmics, AMI began exploring alternative
technologies to the PocketECG even as it entered the 2014 SAA.
In August 2013, Juan Velez, the Chief Operations Officer of AMI, 90 had a
phone call and exchanged e-mails with David Nierle, a sales representative for
Vasomedical, Inc., a medical device manufacturer. 91 Nierle provided Velez
information regarding Vasomedical’s products, including its combined ECG Holter
and ambulatory blood pressure monitor.92 Over the following months, Velez and
Nierle corresponded by e-mail a few times. On October 15, Nierle inquired about
AMI’s potential interest in Vasomedical’s Holter and ambulatory blood pressure
88 Tr. 523 (Joe). 89 JX-421. 90 Tr. 1092 (Velez). 91 Tr. 1161-62 (Velez); JX-186; Tr. 339 (Moss). 92 JX-186 at 5. For simplicity, I refer to both Vasomedical and its manufacturing subsidiary, Biox, as Vasomedical. Certain quoted e-mails that mention Biox are referring to this subsidiary.
21 monitors.93 On October 24, Velez informed Nierle that AMI was “very interested”
but was still working out the details for the possible addition of a Vasomedical
product. 94 On December 17, Velez told Nierle that he wished to focus on a
“possible joint venture” between the companies starting in early January, after
AMI had finished urgent company business, apparently referring to the split of
AMI and Medi-Lynx that was underway. 95
On January 2, 2014, the effective date of the 2014 SAA, Velez met with
Nierle and Kelly Rodriguez, a consultant for Vasomedical.96 Rodriguez
summarized the details of their meeting in an e-mail she sent later that day to Jun
Ma, the President and CEO of Vasomedical. Rodriguez described AMI’s business
with the PocketECG and explained that AMI was “interested in a win-win
relationship whereas we can work together to develop future products they have
identified with a focus on the USA and their new market India.” 97 On January 6,
93 JX-233. 94 Id. at 2. 95 Id. at 1. 96 JX-250; Tr. 1163-65 (Velez). 97 JX-250.
22 Nierle further explained to Ma that AMI was interested in, among other things,
having Vasomedical “design/build a combo Event, Holter, MCOT device.”98
Vasomedical and AMI met several more times over the following months,
with Joe becoming more involved in the dialogue over time. On or about February
5, 2014, Joe, Ma, Velez, Rodriguez, and Nierle had a teleconference during which
Ma gave a presentation called “Original Equipment Development and
Manufacturing for Spectocor,” copies of which were distributed to Joe and Velez.99
On February 10, Rodriguez provided a summary of the companies’ discussions to
Velez, noting that, per the discussion, AMI would “explore the contractual terms of
[its] existing OEM [Original Equipment Manufacturing] agreement, expiration
dates, etc. and determine what OEM opportunities may exist within US and outside
98 JX-253. “MCOT” means “Mobile Cardiac Outpatient Telemetry.” See http://www.fcminc.com/Mobile-Cardiac-Outpatient-Telemetry.html (defining MCOT). Christian Taconet, a former employee of AMI, testified in deposition that Joe had discussed his frustrations with the PocketECG and his interest in AMI developing its own cardiac monitoring device in January 2014, although his testimony is unclear as to whether Joe hoped to develop his own device for use domestically or abroad. Taconet Dep. 29-34. AMI challenges Taconet’s credibility because he had expressed dissatisfaction with working at AMI and reached out to Dziubinski in search of a job. Tr. 281-82 (Dziubinski); Taconet Dep. 113. Because Taconet did not testify at trial and I did not have the opportunity to observe his testimony, I reach no conclusion concerning his credibility and place no independent weight on his testimony, except to note that it corroborates my finding that AMI was seeking to develop a replacement for the PocketECG in early 2014. 99 JX-272.
23 of US.”100 Depending on the outcome of that inquiry, the companies might
“pursue the opportunity for a custom design build of a special product to meet
Spectocor’s specifications.”101 Both companies were to look for “other
opportunities for partnership” both inside and outside the United States.102
Commenting on Rodriguez’s summary, Velez noted that AMI “would be more
interested in a custom build in which we have sole rights to distribute using our
model.” 103 In a March 2014 presentation, Vasomedical touted its ability “to
complement and supplement Spectocor’s current offering” and to use its talents
“for the development of future proprietary products.”104
On March 10, 2014 Ma, Rodriguez, and Nierle visited AMI’s office in
Texas, meeting Velez and Joe.105 Rodriguez prepared a summary of the meeting
for Ma the next day, which indicated that AMI had issues with the PocketECG,
including late product deliveries, and that there were ways Vasomedical “could
develop products that would [be] viable options to move from their existing
100 JX-273. 101 Id. 102 Id. 103 JX-279 at 2. 104 JX-282 at 23. 105 Tr. 636-37 (Joe); Rodriguez Dep. 42; Ma Dep. 51.
24 relationship.”106 According to the summary, which I credit, Joe demonstrated the
“features and functionality” of the PocketECG to Vasomedical during the
meeting.107 Ma’s deposition testimony is consistent with Rodriguez’s summary.
He testified that “it is always [Vasomedical’s] belief to combine everything [into]
one” device, that Joe said at the meeting that Medicalgorithmics was having
problems getting AMI the products it needed on time, and that the companies
explored during the meeting the possibility of Vasomedical supplying a new device
for AMI.108
At the end of March 2014, Rodriguez and Joe had another meeting.
Rodriguez sent notes on the meeting to Ma on March 27, which indicated that AMI
was seeking to “work towards a way out of [its Medicalgorithmics] relationship
permanently,” and that AMI was ready to work toward the development of a new
product, which would not pose a legal problem for AMI as long as the product was
different from the current one. 109 According to the notes, Joe stated that
106 JX-288 at 1. 107 Id. Although Joe denied doing this, Tr. 545 (Joe), I do not credit this testimony given the specific and contemporaneous nature of Rodriguez’s notes summarizing the meeting between representatives of Vasomedical and Joe that occurred in Texas the day before, given Ma’s testimony that Joe performed a similar demonstration for him in China in April, Ma Dep. 184-85, and given Joe’s overall lack of credibility. See infra notes 252-61 and accompanying text. 108 Ma Dep. 51-55. 109 JX-296.
25 Vasomedical’s current products probably would not meet AMI’s immediate needs,
and that he wanted to visit Vasomedical in China during 2014 but was not prepared
to do so yet. 110
On April 1, Nierle, Rodriguez, Joe, and Velez met again. According to
Rodriguez’s notes to Ma regarding this meeting, AMI was frustrated with a
software update from Medicalgorithmics that had caused major issues for AMI’s
monitoring systems, making Joe “now more determined to move away from
Medicalgorithmics and have his own product without restrictions” and prompting
him to reconsider making a trip to China in the near future to discuss products with
Vasomedical. 111
On April 3, AMI and Vasomedical entered into a mutual non-disclosure
agreement.112 On April 8, Velez e-mailed Nierle and Rodriguez to inquire about
the cost of having Vasomedical develop a product for AMI based on the
technology Vasomedical already had in place. 113 In mid-April, Joe visited
Vasomedical in China, where Ma gave him a tour of the facilities.114 Ma testified
110 Id. 111 JX-299. 112 JX-300. 113 JX-307 at 3. 114 Tr. 644 (Joe); Ma Dep. 121-22.
26 credibly with specific details regarding how Joe demonstrated to him the
functionality of the PocketECG software platform during that visit. 115
On May 13, Nierle provided a summary of AMI’s position to a number of
other Vasomedical employees, including Ma:
Joe Bogdan, President recently took a trip to China for the CMES meeting followed by a trip to Biox [Vasomedical’s manufacturing subsidiary], hosted by Jun and Qiuming, for discussions on multiple topics. The visit was successful and Joe was impressed with the infrastructure in China and his visit to Biox. Their first priority is establishment of a Service Provider office on the other side of the globe to ensure better 24/7 coverage for their customers. Second priority is a 3 in 1 Monitoring unit to provide an alternate source for their present product. EECP© as a service provider or Finder’s Fee arrangement is also a possibility but lower priority based on their high volume of work and their recent restructuring.116
At trial, Joe did not dispute that he told Ma that one of his priorities was to develop
a 3-in-1 product, but claimed that he told Ma this product would be for
international use in India or China.117 Joe also testified that part of his trip to
China was to investigate MobiCare, a telehealth platform developed by
Vasomedical. 118 Joe opined that MobiCare would not be a replacement for the
115 Ma Dep. 184-85. 116 JX-311 (emphasis added). 117 Tr. 646-47 (Joe). 118 Tr. 564 (Joe).
27 PocketECG device because telemedicine platforms do not perform analytics but
simply capture information about a patient’s vital signs. 119
On June 18, 2014, Rodriguez wrote an e-mail describing a meeting with Joe
that day in which she noted that Joe planned to meet Ma in New York and
expected Vasomedical to prepare a “draft agreement to review for the collaboration
of the development of a product to meet state of the art needs for a 3/1 cardiac
monitor (holter/telemetry/event) with bluetooth capability to capture every beat
and transmit with no loss compression” and to include, among other things, a “joint
venture agreement on the IP - Vasomedical and Spectracor [sic] to partner for
opportunities to take worldwide.”120 Soon after, Ma and Joe met in New York,
during which they “decided to move towards some type of agreement” regarding
development of a cardiac monitoring device. 121 On July 11, Ma reconfirmed this
agreement in an e-mail to Joe: “I am glad that we both decided to move ahead, and
quickly.” 122 Ma also asked Joe for a sample of their current PocketECG device so
that they could get familiarized with its operations. 123
119 Tr. 564-65 (Joe). Joe’s opinion aligns with that of Moss, who noted that MobiCare would not be a replacement for the PocketECG. Tr. 414-15, 435-36 (Moss). 120 JX-332. 121 Tr. 647 (Joe). 122 JX-342. 123 Id.
28 On July 28, Joe sent Ma an email in which he described AMI’s interest in
developing or acquiring products and a potential merger with Vasomedical:
Our interests is [sic] to either build or acquire our own technologies (hardware and software) that further the progress of our presence in the US market with the ability to move into the international arena in the near future. As we have discussed, Spectocor and Vasomedical/Biox have unique and complementary strengths. While an agreement to acquire technologies is attractive, even more so would be a means to join forces as one company. This could lead to a potential offer to purchase Vasomedical/Biox. Can we open a dialogue about this now and potentially develop a Memorandum of Understanding (MOU) that may be inclusive of product development and acquisition? 124
In a responsive e-mail, Ma answered a question from Joe asking about what
projects Vasomedical had in development that would be helpful to AMI: “We
have started to develop a combination device for Holter, event monitor and MCT,
with options to wirelessly connect BP, temp, SpO2, etc.”125
On August 18, Joe followed up this e-mail exchange by sending Ma a first
draft of a nonbinding letter of intent “to begin discussing terms for the formation of
two joint venture entities for the creation of a stand alone service center to support
international operations in East Asia, more specifically China, and the
development of a stand alone state-of-the-art three-in-one mobile telemetry device
124 JX-350 at 2. 125 Id.
29 . . . .”126 Both of the entities referenced in the letter of intent would have their
principal places of business in the United States. 127 The letter of intent called for
the eventual transfer of the entity producing the 3-in-1 device to AMI:
Spectocor would be awarded the entity owning the stand-alone state- of-the-art mobile telemetry device with the exclusive rights to the tolls and efforts of that entity. Spectocor would agree as a part of the agreement to not sell or use the device in the Chinese market in exchange for the transfer.128
This arrangement would give AMI ownership of a 3-in-1 device and exclusive
rights to sell it worldwide, excluding China, and would help Joe achieve his goal of
having AMI control its own product.
In late August and early September, Joe and Ma continued developing their
ideas for a joint venture. Ma sent Joe an outline of the scope of the joint venture’s
business, to which Joe added comments that are reflected below in bold text. The
entire outline, including Joe’s comments, states as follows:
1. JV scope of business:
1a. Multi-function MCT Device and Service Platform - JV to subcontract product/software development work to VASO with specific delivery tables, budgets, and regular progress reporting.
126 JX-360 at 1 (emphasis added); JX 362; Tr. 651-52 (Joe). 127 JX-360 § 3. 128 Id. § 6.
30 - JV to subcontract development of Service Center to Spectocor with specific delivery tables, budgets, and regular progress reporting. - JV will own all IP’s and rights (except for China where VASO owns all and for USA where Spectocor owns all) - JV will pay VASO for the work later (to minimize initial capital contribution) 1b. MCT Monitoring Service - JV has exclusive rights worldwide (except for the US where Spectocor owns those rights and for China where VASO owns those rights) - JV will pay Spectocor later for its consultation in starting up new services (to minimize initial capital contribution) 1c. Exclusions - VASO owns device rights in China - Spectocor owns device rights in the USA - VASO owns MCT service rights in the China [sic] - Spectocor owns MCT service rights in the US - Spectocor may contract VASO or JV for expanded monitoring support to the US business 2. Matters to consider for the JV - Ownership and control - Capitalization - Jurisdiction (Delaware) - Management (50/50 with impasse rules) 129 An MCT device is a “mobile cardiac telemetry” device.130 Joe initially suggested
at trial that the device referred to in the joint venture outline would only have
129 JX-368. 130 Tr. 317 (Moss).
31 mobile telemetry device functionality and not be a 3-in-1 device, but he later
seemed to concede it would have all the functionality of a 3-in-1 device when
pressed by the Court’s questions. 131 Any suggestion that the joint venture outline
was not referring to a 3-in-1 device is not credible. The letter of intent Joe sent Ma
just a few weeks earlier specifically used the term “three-in-one,” 132 and the joint
venture outline specifically refers to a “multifunction MCT device.” Thus, the
plain intention of AMI’s proposed joint venture with Vasomedical was to make a
3-in-1 device that would include MCT as well as Holter and event monitoring. 133
AMI and Vasomedical’s discussions regarding their joint venture went quiet
after these exchanges in August and September, and the companies never reached a
formal agreement to develop a product.134 But around the time that AMI’s
discussions with Vasomedical seemed to end, AMI began discussions with another
potential product developer.
131 Tr. 550-52 (Joe). 132 JX-360 at 1. 133 This finding also is supported by Medicalgorithmics’ expert, who opined that a “multi-function MCT device” means a 3-in-1 Holter, event, and mobile telemetry device. Tr. 341 (Moss). 134 Tr. 737 (Joe).
32 H. AMI Works on Product Development with Professor Tamil In September 2014, Joe began discussions with Lakshman Tamil, a
professor of electrical engineering at the University of Texas, Dallas.135 Tamil
previously had developed a telemedicine system that could relay patient data from
various biosensors to a data center. 136
In November 2014, Joe attended a “Financial Sponsors Conference” hosted
by Deloitte Corporate Finance where lenders and venture capitalists met with
companies to explore investment opportunities. 137 According to notes from a
Deloitte representative at that conference, AMI was “looking into buying a
software platform developed by a group of [University of Texas] professors. . . . It
could work with off the shelf hardware and would replace the company’s licensed
technology, eliminating a major cost.”138 Joe denied that this statement concerned
the PocketECG, and offered inconsistent explanations about what he believed the
notes meant: at first, he thought they referred to saving on licensing costs if AMI
135 Tr. 994, 1029 (Tamil). 136 Tr. 997, 1034-35 (Tamil); JX-333 (white paper entitled “Intelligent Telemedicine and Chronic Disease Care”). 137 Tr. 584-85, 677 (Joe). 138 JX-432; Tr. 679 (Joe).
33 expanded to international markets; later he claimed they concerned Tamil’s
telemedicine platform, which would not replace the PocketECG. 139
In mid-December, Tamil created two companies: Htel, LLC and imedLogix,
LLC. Tamil and a colleague formed imedLogix to perform technology
development work on a contract basis. 140 Htel was created to hold Tamil’s
telemedicine assets, which he carved out from other assets developed by his
laboratory, the Quality of Life Technology laboratory, because AMI was only
interested in the telemedicine technologies. 141 On January 15, 2015, AMI bought a
66.5% stake in Htel for $300,000, with Tamil and his colleagues retaining the
minority interest. 142
Around the same time, AMI and imedLogix began to negotiate a product
development agreement. It is undisputed that an agreement was signed on April
15, 2015, 143 but the timing and nature of the negotiations leading up to that point is
not clear because the record is missing information one would expect to see when
parties negotiate a commercial agreement, such as drafts of the agreement and
139 Tr. 586, 680, 741-42 (Joe). 140 Tr. 1009 (Tamil). 141 Tr. 998-99 (Tamil). 142 JX-476; Tr. 999 (Tamil); Tr. 1034 (Tamil). 143 JX-590.
34 communications reflecting the negotiations. Other than the executed version of the
agreement, the only other version in the record is a draft dated January 15, 2015,144
which Joe contends is an incorrect date that was carried over from the Htel
agreement. According to the document’s metadata, this draft was created on
February 7 at the latest.145
The stated purpose of the agreement was “to describe terms under which the
Parties will engage in a Product Development Agreement to support Buyer’s
expansion into international markets.”146 The product to be created was intended
to meet or exceed AMI’s “current device”:
Developer [imedLogix] will develop, formulate, design, and deliver to Spectocor a new state-of-the-art telemetry cardiac monitoring software platform (the “Product”) that meets or exceeds Spectocor’s current device to support Spectocor’s expansion and growth in global markets in the future. Spectocor will own all developed software and intellectual property rights to the Product.147
Under the agreement, AMI would pay imedLogix $10 million if imedLogix
developed a commercially viable product within one year, stepping down over
increments to a payment of $8 million if imedLogix did so within 36 months, and
144 JX-479 at 1. 145 Tr. 1122-23. 146 JX-590 at 2. 147 Id.
35 no payment if creating the product were to take more than 36 months.148 One
required component for commercial viability under the agreement was receiving
FDA approval.149 AMI provided Tamil and his team space to work at
Medicalgorithmics’ office.150
On December 23, 2014, while AMI was pursuing a new venture with Tamil,
Dziubinski sent Joe a lengthy “personal” email describing the history and status of
the relationship between Medicalgorithmics and AMI, and stating that he wanted
to touch base with Joe after the holidays to “talk broadly about the future of our
collaboration.”151 Over a month later, on January 27, 2015, Joe sent Dziubinski an
email acknowledging he had received Dziubinski’s December 23 email, which
included an out-of-the-blue question about the PocketECG III:
I received your email dated 12/23/2013 [sic] and am thrilled you have achieved your life goals. Question: Is PECG III an improvement of PECG II or is it a new stand-alone Product? 152
148 Id. § 5. 149 Id. 150 Tr. 666-67 (Joe). 151 JX-510. 152 JX-496.
36 Also on January 27, Velez, Joe, Rodriguez (who was no longer a
Vasomedical consultant and was now working for AMI), and others were
scheduled for a meeting that Joe described in the invitation’s subject line as:
“Urgent Meeting; RE: Strategy meeting vs Medicalgorithmics.”153 The record
provides no other information about this meeting. Later in the day, after the
scheduled time of the meeting, Velez e-mailed a Technical Support Coordinator at
Medicalgorithmics the following request: “Please send me written specs on
[PocketECG II]. I do not have anything in PDF format.” 154 Velez provided no
explanation in his message. When Medicalgorithmics asked Velez for more details
about his request, Velez said that AMI had “the opportunity to get the largest
military contact [sic] in military heart medicine and they are looking for specs on
the devices.” 155 AMI did not produce any documents relating to this alleged
opportunity. Velez testified at trial that he could not recall who had contacted him
about the opportunity or who the contractor was, and admitted he had never seen a
request for a proposal. 156
153 JX-820. 154 JX-501. 155 Id. 156 Tr. 1156-58 (Velez).
37 A calendar invitation reflects that Joe, Velez, and Joe Khan, AMI’s Chief
Information Officer, 157 were scheduled to meet the next day, on January 28, to
discuss “R&D :: Software Development.” 158 Velez testified that he does not
remember whether he attended this meeting, which was scheduled for the morning
after the previous strategy meeting and after he had requested technical
specifications from Medicalgorithmics regarding the PocketECG II. 159 Joe
acknowledged that the three of them were attendees at the meeting but did not
remember the details of the meeting.160
On February 10, 2015, Joe purportedly drafted another e-mail replying to
Dziubinski’s December 23 e-mail in which Joe said he would like to meet him in
Poland during a trip Joe planned to take to visit India “to initiate a new operations
center there which will allow [AMI] to grow internationally with a new Telehealth
technology we have just acquired.” 161 Dziubinski never received this e-mail, and
157 Khan Dep. 23; see also Tr. 946 (Mularczyk) (describing Khan as the manager of IT at AMI). 158 JX-499. 159 Tr. 1160-61 (Velez). 160 Tr. 701-03 (Joe). 161 JX-508.
38 Medicalgorithmics was unable to find it after checking its records through its third-
party e-mail provider. 162 Joe admitted at trial that he never sent this e-mail. 163
About three hours later on February 10, Joe drafted another reply to
Dziubinski’s December 23 e-mail, this time omitting any reference to a telehealth
technology, international growth, or a trip to India, and stating instead simply that:
“I agree that it would be a good time to meet and discuss our existing contract and
future. I would like to visit you in Poland if possible. I have another trip being
planned and can route my itinerary through Warsaw.” 164 The next day, Dziubinski
replied that he was available to meet Joe in Warsaw in March and asked to know
the exact dates of Joe’s trip. 165 Joe did not respond to this request.
AMI and imedLogix continued working on technology development
together, but there is, once again, a dearth of evidence in the record that one would
expect to exist regarding the specific work they were doing. One of the few
documents during this period that does exist is a 95-page software requirements
specification that imedLogix developed, dated April 11, 2015. Tamil testified that
this document would have been a work in progress for perhaps a month before,
162 Tr. 135-36 (Dziubinski). 163 Tr. 588-89 (Joe). 164 JX-510. 165 JX-511; Tr. 124-25 (Dziubinski).
39 with AMI providing input regarding the specifications to include.166 But no
previous drafts of the specification document were produced.
Throughout the specification document are references to cardiac, event, and
telemetry functions.167 The introduction section of the document has a diagram of
a telehealth system with additional features, including a glucometer and a blood
pressure monitor. 168 But, according to John Moss, Medicalgorithmics’ expert in
product development, technical specifications, and mobile cardiac telemetry, 169 the
technical aspects of the specification document focused specifically on Holter,
event, and telemetry cardiac monitoring and did not cover any other functionality,
aside from certain references to other vital signs that Moss opined were listed in
the comments “as a future, not a must have now.” 170 Moss also testified that
166 JX-588; Tr. 1052-53 (Tamil). 167 JX-588 § 3.8.3.2 (“Monitoring Session Type (eg: Event, Telemetry)”), § 3.8.3.3.3.1 (same), § 3.8.3.3.4 (“Telemetry and Event report generated for the current whole week.”), § 3.8.3.4.2 (description of checkbox noting that “monitoring (i.e. Biosensor, Stress Test, Holter (if Biosensor is ECG), Event monitor, Mobile Telemetry) has been unrevealing”), § 3.8.3.4.5 (“When Event or Telemetry is selected an option for ordering a first 24hr monitoring is presented.”),§ 3.8.5.3; Tr. 353 (Moss) (opining that language in § 3.8.3.4.2 refers to a Holter or mobile cardiac telemetry monitor). 168 JX-588 § 1.1. The diagram of the telehealth system was not newly created for the specification document; instead, it appears to have been pulled from Tamil’s white paper from June 2014 or earlier. Compare JX-588 § 1.1 with JX-333 at 2. 169 Tr. 332-33 (Moss). 170 Tr. 355-57 (Moss); see JX-588 § 3.2.1 (listing additional data channels for accelerometer, respiration, temperature, weight, oximeter, etc. as a “Should” level of desire, with comments specifying they are for a “Future version”). 40 telemetry would not be relevant to other vital signs because it is designed for
dynamic waveforms such as ECG, rather than static numbers such as a patient’s
glucose level. 171 Moss’s opinion that the technical specifications laid out in the
document focus on 3-in-1 cardiac monitoring is persuasive and matches my own
review of the document. 172 The specification document also listed under the
heading “General Constraints” that the device should be HIPAA compliant, FDA
approvable, and compliant with Texas Health Authority regulations—all of which
support an intention to use the device in the United States. 173
I. AMI and Medicalgorithmics Enter Litigation
By mid-March 2015, the relationship between AMI and Medicalgorithmics
had deteriorated significantly. On March 10, Medicalgorithmics’ auditor asked
Velez to confirm AMI’s outstanding balances with Medicalgorithmics. Joe replied
to the e-mail chain two days later, stating that Medicalgorithmics may have
overcharged AMI by $499,035 based on the price charged for PocketECG III
devices, and by $514,215 based on potentially missing prepayments for new device
171 Tr. 355-56 (Moss). In addition, according to Moss, “event” must refer to a cardiac event because, in contrast to a heart arrhythmia, other vital signs such as blood pressure or gaining weight are not emergent events or symptoms. Tr. 355 (Moss). 172 Another imedLogix document associated with the project provides a table of various milestones relating to the project, which includes milestones focused on ECG-related requirements. JX-586. 173 JX-588 § 2.3.
41 activations and for devices sent back for repair. Joe noted that AMI had not
previously disclosed these invoice disputes to Medicalgorithmics. 174
The alleged overpayment for PocketECG III devices was based on the
difference between the $505 listed in the amendment adding Attachment 4 to the
2011 SAA for that device (plus interest), and the price of $303 originally included
in the 2011 SAA for the PocketECG II device. 175 Contrary to the position Joe
asserted to Medicalgorithmics’ auditors, Joe admitted at trial that, when he signed
the 2014 SAA, he expected the price of the PocketECG III would remain $505
($513.83 including interest) under the 2014 SAA even though Attachment 4 had
not formally been added to the new agreement. 176
On March 13, Medicalgorithmics issued a late payment notice to AMI
requesting payment of about $1.8 million.177 On March 17, Joe e-mailed
Dziubinski expressing dissatisfaction with the companies’ relationship.178
Reiterating the assertions he had made to Medicalgorithmics’ auditors a few days
174 JX-534. 175 Attachment 4 to the amendment listed a price of $505 rather than $513.83. As discussed earlier, the difference of $8.83 reflects the accrued interest if AMI paid for the device 90 days after delivery, rather than prepaid for the device. 176 Tr. 728 (Joe); see supra Part I.F (discussing omission of Attachment 4 from 2014 SAA). 177 JX-538; JX-552. 178 JX-547.
42 earlier, Joe told Dzuibinski in the e-mail that Medicalgorithmics had been
overcharging AMI for new devices and asked to have a conference call with
Dziubinski the next day, noting that if they could not speak to resolve these issues,
AMI would need to “consider alternate measures to ensure our market future.”179
That call never occurred, although it appears Dziubinski attempted to contact Joe at
the scheduled time on March 18 but was unable to reach him. 180
On March 19, Dziubinski replied to Joe’s e-mail, discussing the companies’
degrading business relationship, requesting that they work together to improve it,
and stating that he was open to meeting with Joe but that he rarely received a
meaningful response from him despite the importance of their relationship.181
Dziubinski also explained that AMI knew when it ordered the PocketECG III that
the delivery timeframes for the new product were estimates, which was the reason
Medicalgorithmics did not require prepayments.182 Dziubinski further noted that
Medicalgorithmics was open to working with AMI to resolve any billing errors,
179 Id. 180 JX-550; Tr. 130-31 (Dziubinski). 181 JX-554. 182 Id.
43 but that in light of the adverse relationship developments, Medicalgorithmics
would begin sending late notices for overdue payments. 183
On March 23, Dziubinski wrote to cancel a scheduled call with Joe until
they could get their payment dispute sorted out, and requested that Joe provide an
explanation of their invoice disputes in an e-mail instead.184 Joe responded with an
e-mail detailing a series of issues concerning their relationship. The final item
stated that AMI was “seeking international growth opportunities, as we have
discussed in the past with you, and I would like to determine if there are any
opportunities to expand with Medicalgorithmics.” 185
This comment aroused immediate suspicion at Medicalgorithmics.
Dziubinski credibly testified that he found it “extremely odd” that Joe would
randomly ask about partnering for international expansion in the midst of a heated
dispute over their commercial relationship. 186 After seeing Joe’s message,
Zolkiewicz and Dziubinski discussed the possibility that Joe was trying to fabricate
a defense to a claim for breach of contract by claiming that he was only seeking a
183 Id. 184 JX-562. 185 Id. 186 Tr. 134 (Dziubinski).
44 new product for “international” purposes on the theory that the SAA only governed
products for use in the United States. 187
On March 23, AMI asked for 200 units of their CDMA order to be switched
to GSM units. Medicalgorithmics confirmed the change and shipped these units on
March 30.188 On April 3, AMI asked to switch another 500 units from CDMA to
GSM and inquired about the production timeline. 189 Medicalgorithmics initially
agreed and estimated that they would ship in three weeks. 190
Also on April 3, Joe e-mailed Dziubinski identifying “outstanding invoices
for PECG III devices that need to be corrected,” requesting invoices correcting for
the difference between the billed amount of $513.83 per unit and the “contract
amount” of $303 per unit.191 Medicalgorithmics replied ten days later, disagreeing
with Joe’s assertions concerning the per-unit price, and demanding adequate
assurance of AMI’s performance before they would send any of the 500 GSM
187 JX-563. 188 JX-561; JX-572 at 2. 189 Id. 190 Id. 191 JX-589.
45 devices AMI had recently requested to be shipped, given that AMI owed almost
$2.3 million on outstanding invoices.192
On April 17, AMI sent a wire transfer paying its outstanding invoices along
with a letter stating that the payment was made under protest and that AMI
demanded an accounting.193 AMI’s letter also stated that Medicalgorithmics was
in material breach of the 2014 SAA and demanded an immediate refund for the
difference between the $303 per-unit price in the contract and the invoiced price of
$513.83. 194 AMI noted that Attachment 1 of the 2014 SAA indicated that “[n]ew
devices may also have other or additional functionalities” and that the definition of
“Product” included “all IP associated with the Product, along with any variations,
advancements, improvements, or modifications made to the Product during the
term of this Agreement.” 195 AMI cited a reply from Dziubinski to Joe’s earlier
question, in which Dziubinski stated that the PocketECG III was an improvement
to the Product rather than a new Product. On that basis, AMI demanded that the
original SAA terms, including the $303 price, be applied to the PocketECG III.196
192 Id. 193 JX-600 at 2. 194 Id. 195 Id. at 2-3. 196 Id. at 3-4.
46 On April 23, Joe e-mailed Dziubinski to make a few points.197 First, he
noted the struggle with making device payments up front due to AMI’s rapid
growth and the fact that it takes time for AMI to be reimbursed for its services.
Second, Joe asserted that AMI was in full compliance with the SAA and would
continue to make payments on time “so there is no question Spectocor is in any
way breaching the Agreement.” Third, he noted that AMI was preparing legal
action based on its discovery of inappropriate charges. Fourth, Joe stated that he
was “hereby withdrawing all pending and unfulfilled device orders until further
notice” and until Medicalgorithmics complied with the SAA and agreed to
renegotiate certain terms. Fifth, he noted that Medicalgorithmics had breached the
SAA multiple times and that its devices were not performing as required, pointing
out a failure rate of over 30% for the PocketECG III. Finally, Joe noted that
“Spectocor desires to shut down growth in the US market and begin concentrating
on global expansion with other technologies. If you desire otherwise, please
provide some good reasons for me to consider.”198
On April 27, Medicalgorithmics sent AMI a notice of termination of the
2014 SAA under Section 7 of the agreement. 199 The notice stated that the
197 JX-615. 198 Id. 199 JX-625.
47 termination was “effective immediately based on numerous material breaches” by
AMI, including (1) AMI’s efforts to seek or develop a replacement product in
violation of Section 3.3, which Medicalgorithmics asserted “upon information and
belief,” and (2) AMI’s withdrawal of its unfulfilled orders and stated desire to shut
down the United States market, as reflected in Joe’s April 23 e-mail. The notice
also stated that Medicalgorithmics was terminating the agreement under Section
2-309 of the Uniform Commercial Code. 200 It filed this litigation on the same day.
On May 18, 2015, AMI sent its own notice of termination. The only specific
breach the notice cited was AMI’s “improper and invalid attempt to terminate the
SAA on April 27, 2015.” 201 AMI invoked the 24-month notice provision in
Section 7(1) of the 2014 SAA, thus calling for the termination to be effective on
May 18, 2017. 202
II. PROCEDURAL POSTURE
Medicalgorithmics filed this action on April 17, 2015. On May 1, 2015, the
Court entered a stipulated Status Quo Order, which has governed the parties’
relationship throughout this litigation.203 Under the Status Quo Order,
200 Id. at 2. 201 JX-631. 202 Id. 203 Status Quo Order, May 1, 2015.
48 Medicalgorithmics has continued to provide services to AMI in accordance with
the 2014 SAA, but Medicalgorithmics has not been obligated to fill any new
equipment orders. 204 On May 18, 2015, AMI filed its answer and brought
counterclaims against Medicalgorithmics.
On September 18, 2015, Medicalgorithmics filed its First Verified Amended
Complaint, asserting seven claims for relief:
I. Declaratory Judgment that Medicalgorithmics Validly Terminated the SAAs;
II. Declaratory Judgment that Medicalgorithmics Validly Terminated the SAAs Pursuant to 6 Del. C. § 2-309;
III. Damages for Breaches of the SAAs, Breaches of the Implied Covenant of Good Faith and Fair Dealing Under Delaware Common Law and 6 Del. C. § 1-304 and Breaches of the Duty to Commercialize;
IV. Declaratory Judgment that AMI Is Not Entitled to a Refund of Any Alleged Overcharges Relating to Its Purchase of PocketECG III Devices;
V. Breach of Contract for Nonpayment of Late Charges on Delinquent Invoices;
VI. Injunctive Relief Regarding Defendants’ Use of Substitute Batteries and Battery Chargers; and
VII. Injunctive Relief Regarding Plaintiff’s Confidential 205 Information.
204 Status Quo Order ¶ 2. 205 Am. Compl. ¶¶ 49-114.
49 Counts VI and VII have been withdrawn.206 On October 8, 2015, AMI filed its
Answer to First Amended Verified Complaint and Amended Verified
Counterclaims, asserting four counterclaims:
I. Damages for Breach of the 2014 SAA;
II. Specific Performance for Breach of the 2014 SAA;
III. Damages and Specific Performance for Violations of the UCC; and
IV. Declaratory Judgment that Medicalgorithmics did not validly terminate the 2014 SAA and that it is still in force.207
Trial was held from March 7 to March 11, 2016. Post-trial argument occurred on
May 10, 2016.
III. LEGAL ANALYSIS
A. Legal Standard
Medicalgorithmics bears the burden of proving each element of each of its
claims by a preponderance of the evidence. 208 AMI bears the same burden for each
of its counterclaims. This burden requires proving “that something is more likely
than not. It means that certain evidence, when compared to the evidence opposed
to it, has the more convincing force and makes you believe that something is more
206 PTO ¶ 27. 207 Defs.’ Ans. First Am. Verified Compl. and AMI Monitoring, Inc.’s Am. Verified Counterclaims ¶¶ 52-85. 208 See Revolution Retail Sys., LLC v. Sentinel Techs., Inc., 2015 WL 6611601, at *9 (Del. Ch. Oct. 30, 2015), appeal dismissed, 130 A.3d 931 (Del. 2015).
50 likely true than not.”209 This standard applies to the parties’ claims for breach of
contract as well as their requests for declaratory relief.210
I begin by assessing Spectocor’s status as a defendant in this action. I then
turn to the questions of breach of contract, materiality of breach, damages, and
declaratory relief.
B. Spectocor Is Bound by the 2014 SAA
In footnotes in their post-trial briefing, defendants argue that Spectocor
cannot be held liable under the 2014 SAA because it, unlike AMI, did not sign the
agreement.211 Spectocor originally raised this argument in June 2015 in a speaking
motion for judgment on the pleadings. 212 Medicalgorithmics filed a brief opposing
that motion,213 after which Spectocor failed to file a reply brief or to pursue the
209 Agilent Techs., Inc. v. Kirkland, 2010 WL 610725, at *13 (Del. Ch. Feb. 18, 2010) (Strine, V.C.). 210 See Estate of Osborn ex rel. Osborn v. Kemp, 2009 WL 2586783, at *4 (Del. Ch. Aug. 20, 2009) (“Typically, in a post-trial opinion, the court evaluates the parties’ claims using a preponderance of the evidence standard.”), aff’d, 991 A.2d 1153 (Del. 2010). 211 Defs.’ Op./Ans. Post-Trial Br. 40 n.33; Defs.’ Reply Post-Trial Br. 3 n.3. 212 Spectocor LLC’s Mot. J. Pleadings, June 4, 2015. 213 Pl.’s Br. in Opp’n to Spectocor LLC’s Mot. J. Pleadings, June 17, 2015.
51 motion further. As such, I conclude that Spectocor has abandoned that motion and
waived the argument. 214
Even if Spectocor’s unwarranted delay did not constitute a waiver, the
argument is unavailing. The 2014 SAA was entered into “with the intent to create
a separate Strategic Alliance Agreement for AMI Monitoring, Inc. and its
Affiliates and Medi-Lynx Cardiac Monitoring, LLC, and its Affiliates.”215 The
agreement includes “Affiliates” within its definition of “Parties” and defines the
term “Affiliate” to include a “corporation or other entity controlled by, controlling,
or under common control with Supplier or Buyer.” 216 Joe, who signed the 2014
SAA on behalf of AMI, 217 controls both AMI and Spectocor.218 Thus, Spectocor is
214 See 60 C.J.S. Motions and Orders § 44 (“It is the responsibility of the movant to obtain, or request, a ruling from the court on a motion, and failure to do so constitutes a waiver of the motion. Generally, a motion which is not called to the attention of the court is presumed to have been waived or abandoned by the moving party.”); cf. Joyce ex rel. CTC Minerals, Inc. v. Cuccia, 1997 WL 257448, at *2-3 (Del. Ch. May 14, 1997) (concluding that defendant had waived certain defenses that should have been argued earlier to avoid expense and prejudice to plaintiffs resulting from “piecemeal motions practice”) (“[Defendant] was fully aware of his procedural defenses, yet chose not to present them, and instead subjected the plaintiffs to the delay and expense of litigating his motion to stay.”). 215 2014 SAA at 1. 216 Id. 217 Id. at 17. 218 Tr. 58 (Dziubinski) (noting that before the Bogdans’ split, Joe and Andy were 50/50 owners of AMI and Spectocor); Tr. 684 (Joe) (noting that Joe gave Andy 50% ownership of Spectocor in about 2008). After the split in 2013, Andy gained ownership of Medi- 52 an “Affiliate” and was intended to be a party to the 2014 SAA. This reason alone
suffices to bind Spectocor.
As this Court pointed out in MicroStrategy Inc., an affiliate’s lack of
signatory status is “not a basis for [the affiliate] to escape liability . . . .” 219 In that
case, the Court found that a wholly owned subsidiary of a signatory was bound by
a contractual provision because the provision applied to “affiliates,” which was
defined to include any entity that a party “directly or indirectly, owns or
controls.”220 Similarly here, although Spectocor did not sign the 2014 SAA, it is
bound by its terms because the contract binds “Affiliates,” which includes entities
such as Spectocor that are “under common control” with AMI.
In addition, the record shows that AMI and Spectocor often were used
interchangeably and that Spectocor held itself out as a party to the SAAs. For
instance, it was Spectocor that sent Medicalgorithmics the November 2014 notice
of breach of “our Strategic Alliance Agreement.”221 Joe sent the notice on
Lynx in exchange for redeeming his interest in AMI and Spectocor, leaving Joe as the owner of those entities. See JX-246 ¶¶ 1.1-1.7; see also PTO ¶¶ 11-12 (naming Joe as President of AMI and sole Managing Partner of Spectocor). 219 MicroStrategy Inc. v. Acacia Research Corp., 2010 WL 5550455, at *12 (Del. Ch. Dec. 30, 2010) (applying contract to an affiliate entity formed after the contract was made). 220 See id. 221 JX-416 at 2 (emphasis added).
53 Spectocor letterhead using his title as Managing Partner of Spectocor.222
Spectocor also acted as a party to the SAAs on numerous other occasions.223 As a
result, Spectocor accepted the benefits of the SAAs and the commercial
relationship with Medicalgorithmics, and therefore must accept the obligations of
the agreements as well.224 For all of these reasons, I find that Spectocor was a
party to the SAA and treat its actions and those of AMI as one and the same.
C. Breach of the 2014 SAA
The 2014 SAA is governed by Delaware law.225 Section 3.3 of the 2014
SAA, which is identical to the same section of the 2011 SAA, provides as follows:
Without first providing notice of termination of this Agreement to Supplier [Medicalgorithmics], Buyer [AMI] agrees that it shall not seek, develop, engage, promote or market any technology to replace Supplier’s products or services.226
222 Id. at 5. 223 See JX-600 (letter from Joe, as Managing Partner of Spectocor, on Spectocor letterhead, notifying of breach under the SAA and demanding an accounting); JX-554 at 2-3 (e-mail from Joe, signing as Managing Member of Spectocor, discussing business issues pertaining to the SAA). 224 See Westendorf v. Gateway 2000, Inc., 2000 WL 307369, at *4 (Del. Ch. Mar. 16, 2000) (“[O]ne who knowingly accepts the benefits intended as the consideration, coming to him or her under a contract voluntarily made by another in his or her behalf, becomes bound by reason of such acceptance to perform his or her part of the contract.”), aff’d, 763 A.2d 92 (Del. 2000). 225 2014 SAA § 17. 226 Id. § 3.3.
54 As explained below, I conclude that AMI breached Section 3.3 by no later than
April 2014 by secretly seeking to develop a device for use in the United States to
replace the PocketECG without first providing the required notice to
Medicalgorithmics. Before discussing the factual basis for this conclusion, I
address two contentions the parties raise concerning the meaning of Section 3.3.
First, AMI takes issue with what it means “to replace” Medicalgorithmics’
products under Section 3.3. Specifically, AMI contends that, before providing a
notice of termination, AMI only may not “market or take steps to market” a 3-in-1
device “in place of” the PocketECG, as if to suggest that a competitive product
must exist before AMI can be found in breach of Section 3.3. Medicalgorithmics
argues in response that AMI’s interpretation would read the words “seek” and
“develop” out of the contract. I agree with Medicalgorithmics.
In my view, the plain meaning of “seeking” or “developing” a replacement
product does not require that a replacement product must be ready for use for a
breach of Section 3.3 to occur. Rather, AMI will have breached the agreement if it
was simply seeking to develop a replacement technology for the PocketECG
without giving notice of termination to Medicalgorithmics. 227 In other words, the
227 Indeed, Joe admitted at trial when discussing AMI’s product development agreement with imedLogix that development of a product (albeit one intended for use in the United States) would violate the agreement. Tr. 575 (Joe) (“And if we were to do something of this nature and intend to use it in the United States, I believe that would have been a breach of our contract.”).
55 expansive language of Section 3.3 does not require a landmark to occur, such as
the successful creation of a replacement product or the sale of such a replacement,
but is designed instead to ensure that “there can be no running start” for AMI to
begin work on a replacement for the PocketECG. 228
Second, Medicalgorithmics contends that the plain language of Section 3.3
covers the replacement of its products or services anywhere in the world, and not
just in the United States. It points to Section 3.4 of the 2014 SAA, a reciprocal
provision to Section 3.3, in which Medicalgorithmics agrees not to replace AMI’s
services. That provision explicitly limits itself to the United States:
Without first providing notice of termination of this Agreement to Buyer, Supplier agrees that it shall not seek, develop, engage, promote or market the Product in the United States to any other entity to replace Buyer’s services for current or future versions of Product and related IP. 229
Medicalgorithmics argues that the use of “in the United States” in Section 3.4
shows that the parties knew how to write a provision to cover only the United
228 See Revolution Retail, 2015 WL 6611601, at *10-11 (noting the expansive meaning of a provision preventing defendant from “engag[ing] in the business of developing, marketing, or manufacturing [competitive] systems” and rejecting defendant’s argument that it only prevents the actual sale of a system). 229 2014 SAA § 3.4.
56 States if the parties had wished to do so, and that the exclusion of this limitation in
Section 3.3 means that Section 3.3 is not geographically limited. 230
AMI counters that Section 3.3 only covers products in the United States
because the companies’ commercial arrangement was centered entirely in the
United States.231 The 2014 SAA does focus on the companies’ relationship in the
United States. For example, the 2014 SAA states that the United States is “the
exclusive territory in which Buyer intends to provide services using Supplier’s
products”232 and that “[Medicalgorithmics] hereby grants to Buyer [AMI] and
Medi-Lynx Cardiac Monitoring, LLC the exclusive right to use, sell, market,
distribute, and license . . . the Products for diagnostic services within the United
States.”233 These provisions logically coincide with the fact that
Medicalgorithmics sold its devices in other countries through different companies.
Ultimately, I need not decide whether Section 3.3 applies to products used outside
230 See MicroStrategy Inc., 2010 WL 5550455, at *7 (“The use of different language in the two sections shows the parties knew how to cover patents beyond the Licensed Patents when that was their intent.”). 231 There is evidence that this was Medicalgorithmics’ understanding of Section 3.3. In March 2015, just one month before it sent AMI a notice of termination, Dziubinski and Zolkiewicz expressed concern that Joe was attempting to disguise development of a product in the United States as an international endeavor to avoid breaching Section 3.3. See JX-563. 232 2014 SAA ¶ 4. 233 Id. § 8.1.
57 of the United States because I find as a factual matter that AMI breached the
provision even if it were construed to apply only to the United States. I turn next
to that factual question.
The trial evidence amply demonstrates that AMI sought to develop a 3-in-1
device to replace the PocketECG in the United States through its interactions with
Vasomedical, and later with imedLogix. Numerous contemporaneous documents
described in greater detail in the narrative above detail AMI’s efforts to do so with
Vasomedical:
• On January 2, 2014, Nierle, Rodriguez and Velez met and discussed AMI’s desire to “develop future products . . . with a focus on the USA and their new market India,” and that AMI was interested in having Vasomedical “design/build a combo Event, Holter, MCOT device.”234
• In February 2014, Joe and Ma joined Nierle, Rodriguez and Velez in another discussion, during which they discussed that AMI would explore its contract with Medicalgorithmics to “determine what OEM opportunities may exist within US and outside of US,” and both companies would look for “other opportunities for partnership” inside and outside of the United States.235 Velez indicated that AMI “would be more interested in a custom build in which we have sole rights to distribute using our model,” 236 indicating the company’s desire to control its own product.
• On March 10, 2014, Joe demonstrated the functionalities of the PocketECG for Vasomedical. During the same meeting, AMI expressed its dissatisfaction with the PocketECG’s issues and delivery schedule, and Vasomedical discussed with AMI “ways [Vasomedical] could develop
234 JX-253. 235 JX-273. 236 JX-279 at 2.
58 products that would [be] viable options to move from [AMI’s] existing relationship.”237 Notes from later in March indicate that AMI expressed a desire to “work towards a way out of [its Medicalgorithmics] relationship permanently.” 238
• In April 2014, Joe visited Vasomedical’s production facilities in China,239 during which he demonstrated the functionality of the PocketECG software platform to Ma. After the visit, Nierle summarized AMI’s interests, which included as its second-highest priority “a 3 in 1 Monitoring unit to provide an alternate source for their present product.” 240
• In July 2014, Joe sent Ma an e-mail stating, “Our interests is [sic] to either build or acquire our own technologies (hardware and software) that further the progress of our presence in the US market with the ability to move into the international arena in the near future.”241
• In August 2014, AMI sent Vasomedical a draft of a letter of intent “to begin discussing terms for the formation of two joint venture entities for the creation of a stand alone service center to support international operations in East Asia, more specifically China, and the development of a stand alone state-of-the-art three-in-one mobile telemetry device . . . .” 242 The MOU noted that the entity producing the 3-in-1 device—a term unique to the United States market—would be awarded to AMI at the end of the venture, provided that AMI did not sell or use the device in China.243
• Annotations that Joe added to a subsequent outline of a proposed joint venture between AMI and Vasomedical’s concerning a “Multi-function
237 JX-288. 238 JX-296. 239 Tr. 644 (Joe). 240 JX-311. 241 JX-350. 242 JX-360 § 3. 243 Id. § 6.
59 MCT device” stated that AMI would own all rights in the United States, while Vasomedical would own all the rights in China. 244
In terms of a timeframe for the breach, it would be reasonable to conclude
from the record that AMI had begun to seek a new 3-in-1 device for use in the
United States in place of the PocketECG as early as January 2014, when Velez first
met with representatives of Vasomedical to discuss AMI’s desire to develop a
3-in-1 device for use in the United States. But the conclusion that AMI was
pursuing a replacement device for use in the United States is inescapable in my
opinion when the respective heads of AMI (Joe) and Vasomedical (Ma) met in
China in April 2014 to discuss developing “a 3 in 1 Monitoring unit to provide an
alternate source for [AMI’s] present product.” 245 Thus, based on the totality of the
evidence of record, I find that AMI breached Section 3.3 by no later than April
2014.
In the face of numerous contemporaneous documents evidencing the nature
of AMI’s interactions with Vasomedical, the only rebuttal AMI offers is Joe’s
testimony that AMI was seeking a product for use in India or China, rather than the
United States, 246 and that the reason he sought exclusive rights for AMI to use the
product in the United States was to have “blocking rights” to prevent Vasomedical
244 JX-368. 245 JX-311. 246 Tr. 646-47 (Joe).
60 or the joint venture from competing with AMI’s current license with
Medicalgorithmics. 247 This testimony, which is uncorroborated by any documents
or other evidence, is not credible.
To start, Joe’s own revisions to the outline of joint venture terms indicate
that AMI would control the replacement device in the United States and that
Vasomedical would retain the rights in China.248 It would be illogical for AMI to
seek a product for its use in India and China while giving away rights to that
product in China. More importantly, Joe’s self-serving explanation about
“blocking rights” defies reason. It makes no business sense that AMI would
partner with Vasomedical to develop a 3-in-1 device for use in India (or elsewhere
outside the United States) and not seek a return on its investment in the most
lucrative healthcare market in the world—the United States—where all of AMI’s
experience had been gained to date and where, unlike other countries, all the
functions provided by the 3-in-1 device are reimbursable.249 Apart from being
247 Tr. 553-54, 739 (Joe). 248 JX-368; supra note 129 and accompanying text. 249 Tr. 21-22 (Dziubinski) (“[T]he three-in-one, these three methods are reimbursable in the United States. There’s no other country in the world where these three methods would be reimbursable. And therefore a physician from India or from Poland would not know what the three-in-one is. I don’t know any other -- any company that would sell three-in-one devices outside of the United States. So this is a very U.S.-specific name.”); id. (“Three-in-one device is very U.S.-specific name, because anywhere else in the world, mobile cardiac telemetry is unknown, or nearly completely unknown, method.”); Tr. 376-77 (Moss) (opining that it would make no business sense to develop a 3-in-1 without 61 unsubstantiated by documents or other evidence, Joe’s “blocking rights” assertion
cannot be squared with substantial evidence of Joe’s dissatisfaction with AMI’s
relationship with Medicalgorithmics and professed desire to find a replacement
product that would allow him to control AMI’s destiny and to sever its ties with
Medicalgorithmics. 250
AMI’s efforts to develop a replacement product for the PocketECG in the
United States are also evident from its dealings with imedLogix, which began at
the tail end of AMI’s discussions with Vasomedical. As described in greater detail
above, Tamil was working on a product development agreement with AMI by
February 2015. The agreement eventually reached called for a $10 million
payment if imedLogix developed a commercially viable product within one year,
which was contingent on obtaining FDA approval—a United States standard. The
specifications for the product to be made called for a 3-in-1 device and are replete
the intent to commercialize it in the United States since it is a specification unique to the United States). 250 See JX-288 (noting that Medicalgorithmics was having trouble delivering product on time, was unwilling to extend their relationship with AMI internationally, and PocketECG issues); JX-279 (noting that AMI “would be more interested in a custom build in which we have sole rights to distribute using our model”). Defendants suggest that Joe’s interest in Vasomedical concerned its MobiCare product for bedside patient monitoring. Even if AMI also was interested in the MobiCare product, it is irrelevant because, as I have found, AMI was in discussions with Vasomedical to develop a 3-in-1 cardiac monitoring device to replace the PocketECG in the United States.
62 with other indications that the product was intended for use in the United States,
such as compliance with HIPAA and Texas Health Authority regulations. 251
In the midst of its interactions with imedLogix, moreover, Velez asked
Medicalgorithmics for technical specifications on the PocketECG II, a highly
unusual request that triggered suspicions at Medicalgorithmics. The request took
place on the same afternoon that Joe, Velez, and others held a “Strategy meeting vs
Medicalgorithmics.” Velez’s testimony that he needed the specifications for a
large potential military contract, about which he could provide no names, details,
or documents, is not credible. Rather, the logical inference, which I find, is that
AMI’s meetings with imedLogix, the product development agreement they entered
into requiring FDA approval, the specifications for a 3-in-1 device ostensibly to be
used in the United States, and AMI’s request that Medicalgorithmics provide it
with the technical specifications for the PocketECG, all reflect a continuation of
the plan that began with Vasomedical to develop a new 3-in-1 device to replace the
PocketECG in the United States.
Finally, a further reason I do not credit Joe’s naked denial that his
discussions with Vasomedical (and later with imedLogix) were in furtherance of a
plan to replace the PocketECG in the United States is that Joe’s credibility at trial
was lacking in numerous other important respects. For example:
251 See supra Part I.H.
63 • Joe told Medicalgorithmics’ auditors (without warning Medicalgorithmics) that AMI had been systematically overcharged for PocketECG III devices.252 But, as Joe admitted, he expected the price of the PocketECG III to be the higher amount of $505 rather than $303—as previously had been documented in Attachment 4 of the amendment to the 2011 SAA. 253 In other words, Joe had no good faith basis to claim that AMI had been overcharged for the PocketECG III devices. He manufactured a pricing dispute that not only created problems for Medicalgorithmics with its auditor, but also formed the basis of a meritless claim in this litigation.
• In an effort to deny that AMI was trying to develop a 3-in-1 device with Vasomedical, Joe offered a convoluted, nonsensical explanation of the meaning of a multi-function MCT device. Joe initially claimed that a “multi-function” MCT device did not need to have any functionality other than telemetry, before essentially admitting that it likely would have the other functions of a 3-in-1 device. 254
• Joe drafted but did not send an e-mail explaining to Dziubinski that “a new Telehealth technology we have just acquired” was for the purpose of international expansion.255 Shortly after, Joe drafted and sent a similar e- mail omitting any reference to international expansion.256 Joe ultimately admitted he never sent the original e-mail, but offered a confusing explanation for why it was not sent.257 AMI produced the unsent email in discovery and used it during Dziubinski’s deposition.258 During that deposition, Dziubinski explained that Medicalgorithmics had checked its servers and confirmed that the e-mail had never been received. 259 The e-
252 JX-534. 253 Tr. 728-32 (Joe); JX-223 at Attachment 4. 254 Tr. 548-52 (Joe). 255 JX-508. 256 JX-510. 257 See Tr. 588-90 (Joe). 258 Dziubinski Dep. 568-71. 259 Dziubinski Dep. 569. 64 mail appears to have been created in order to manufacture evidence that AMI’s discussions with other manufacturers were above board and directed only to international markets when, in reality, they were not.
• Joe testified that the imedLogix agreement was created in April 2015.260 This assertion was belied by evidence from Tamil’s privilege log that the document existed as of February 7, 2015.261
*****
In sum, for the reasons explained above, it is clear from the record that, at
least as of April 2014, when Joe went to China to meet with Ma, if not months
earlier, AMI was working with Vasomedical to seek a replacement for the
PocketECG for use in the United States. I thus find that AMI breached Section 3.3
of the 2014 SAA by no later than April 2014.
D. Materiality of AMI’s Breach
Section 7.2 of the 2014 SAA provides that, “upon the occurrence of a
material breach of this Agreement, . . . the non-breaching Party shall be entitled to
immediately terminate this Agreement at their discretion[.]” Thus, if AMI’s
breach of the 2014 SAA as of April 2014 was material, Medicalgorithmics was
entitled to terminate the agreement under its own terms at that time. In that
circumstance, AMI also would be entitled to terminate the 2014 SAA under
Delaware law, which provides that:
260 Tr. 740 (Joe). 261 Tr. 1122-23.
65 “A party is excused from performance under a contract if the other party is in material breach thereof.” . . . A “material breach” is a failure to do something that is so fundamental to a contract that the failure to perform that obligation defeats the essential purpose of the contract or makes it impossible for the other party to perform under the contract. In other words, for a breach of contract to be material, it must “go to the root” or “essence” of the agreement between the parties, or be “one which touches the fundamental purpose of the contract and defeats the object of the parties in entering into the contract.”262
“The question whether the breach is of sufficient importance to justify non-
performance by the non-breaching party is one of degree . . . .” 263 Courts in
Delaware look to Section 241 of the Restatement (Second) of Contracts for
guidance regarding materiality of a breach. 264 That section lists the following
circumstances as significant in determining materiality of a breach:
(a) the extent to which the injured party will be deprived of the benefit which he reasonably expected;
(b) the extent to which the injured party can be adequately compensated for the part of that benefit of which he will be deprived;
(c) the extent to which the party failing to perform or to offer to perform will suffer forfeiture;
262 eCommerce Indus., Inc. v. MWA Intelligence, Inc., 2013 WL 5621678, at *13 (Del. Ch. Sept. 30, 2013). 263 Id. 264 See, e.g., 2009 Caiola Family Trust v. PWA, LLC, 2015 WL 6007596, at *18 (Del. Ch. Oct. 14, 2015); BioLife Solutions., Inc. v. Endocare, Inc., 838 A.2d 268, 278 (Del. Ch. 2003).
66 (d) the likelihood that the party failing to perform or to offer to perform will cure his failure, taking account of all the circumstances including any reasonable assurances;
(e) the extent to which the behavior of the party failing to perform or to offer to perform comports with standards of good faith and fair dealing. 265
Section 3.3 was designed to protect Medicalgorithmics by deterring AMI, its
exclusive licensee in the United States, from seeking or developing a product that
would compete with the PocketECG. 266 Dziubinski credibly testified that
Medicalgorithmics was willing to accept the 24-month termination notice
requirement, as opposed to an absolute ban on seeking competing technology,
because it would not allow enough time to develop a competing technology. 267
By breaching the 2014 SAA, AMI deprived Medicalgorithmics of the
benefit it reasonably expected from this provision, namely that AMI would not be
able to begin seeking or developing a replacement product without officially
notifying Medicalgorithmics and putting a 24-month termination period in motion,
which would allow Medicalgorithmics to begin making its own arrangements for
its post-termination business. The mere fact that AMI did not succeed in bringing
a finalized replacement product to fruition does not negate this injury, because the 265 Restatement (Second) of Contracts § 241 (1981). 266 See Tr. 33 (Dziubinski). 267 Tr. 37 (Dziubinski) (explaining the time periods involved in creating algorithms, obtaining FDA approval, and testing a product).
67 broadly drafted provision was intended to protect Medicalgorithmics by preventing
AMI from even seeking or developing a replacement. AMI’s breach exposed
Medicalgorithmics to these very risks and deprived it of a meaningful benefit of
the contract.
Medicalgorithmics cannot be compensated adequately for the breach with
damages, and thus termination is an appropriate remedy under the circumstances in
my view. The breach was not a mere performance failure, but was a violation of
an agreement not to seek or develop replacement technology as part of an
exclusive licensing agreement.268 By seeking to replace the PocketECG, AMI
deprived Medicalgorithmics of a primary benefit of an exclusive licensing
arrangement. Awarding damages to Medicalgorithmics while allowing the
licensing arrangement—or even the Status Quo Order—to continue would not be
adequate compensation, because the trust and exclusivity inherent in the 2014 SAA
have been irretrievably tainted. Similarly, it is not possible for AMI to cure its
breach, because it cannot undo the effects of its secret efforts to replace the
PocketECG or restore the protection from the risk of development that
Medicalgorithmics lost.
268 AMI became a co-exclusive licensee instead of the sole licensee after the split between Joe and Andy. Although somewhat less significant than a solely exclusive arrangement, AMI remained only one of two providers of the PocketECG in the entire United States.
68 AMI will not suffer a forfeiture if the agreement is terminated. AMI’s plan
to develop a replacement product presumably would have resulted in the eventual
termination of the agreement once it had completed development of a replacement.
Had AMI submitted a notice of termination in January 2014, when it began
meetings with Vasomedical, or even in April 2014, when Joe visited their facilities
in China, the two-year termination period already would have expired, and AMI
would no longer be able to rely on the agreement.
AMI argues that the costs of retraining staff for a new product and for the
PocketECG devices it already has purchased, which will no longer be functional,
amount to a forfeiture. 269 But AMI eventually would have faced similar costs if it
had completed development of a replacement for the PocketECG or if it had
submitted a termination notice after beginning discussions with Vasomedical.
Even under the notice of termination that AMI sent with an effective date of May
2017, 270 AMI eventually would have incurred such costs. I therefore do not find
that AMI would suffer a forfeiture upon termination of the 2014 SAA.
Finally, as discussed above, AMI was intentionally seeking and developing a
replacement for the PocketECG for use in the United States. It did so in secret and
without providing the required 24-month termination notice to Medicalgorithmics.
269 Defs.’ Op./Ans. Post-Trial Br. 64. 270 JX-631.
69 This conduct does not meet the standards of good faith and fair dealing. To the
contrary, AMI’s covert plan to develop a replacement for the PocketECG that
would sabotage Medicalgorithmics’ distribution channels in the lucrative United
States healthcare market was undertaken in bad faith to deprive Medicalgorithmics
of a critical element of its bargain.
AMI’s lack of good faith is further evidenced by the false allegations of
overcharging it made to Medicalgorithmics’ auditors without warning. 271 Joe
admitted at trial that he expected the price of the PocketECG III to be $513.83 (the
$505 base price plus interest), rather than the $303 he used in developing his
allegations of overcharging, and that he disputed the pricing simply to get
Dziubinski come to the table to renegotiate their contract. 272 Ambushing
Medicalgorithmics by stirring up its auditor in order to gain leverage to renegotiate
its pricing structure was another act of bad faith.
Based on my consideration of the Restatement factors and my conclusion
that Medicalgorithmics was deprived of a meaningful benefit of the contract as a
result of AMI’s conduct in seeking a replacement product, I find that AMI’s breach
of the 2014 SAA in April 2014 was material, entitling Medicalgorithmics to
271 See supra Part I.I. 272 Tr. 728-32 (Joe).
70 terminate the agreement under its own terms and under Delaware contract law.273
Consequently, Medicalgorithmics validly terminated the agreement in April 2015.
Because I conclude that Medicalgorithmics validly terminated the 2014 SAA
based on AMI’s material breach of Section 3.3, I need not address
Medicalgorithmics’ separate claims for termination, namely AMI’s alleged
repudiation, its alleged breach of the duty to commercialize the PocketECG, its
alleged breach of the implied covenant of good faith and fair dealing, or
Medicalgorithmics’ right to terminate under Section 2-309 of the Uniform
Commercial Code. 274
E. Medicalgorithmics Did Not Breach the Agreement Before AMI
AMI contends that Medicalgorithmics breached the 2014 SAA by failing to
timely deliver PocketECG III devices, with a material breach “for purposes of this
case” first occurring in August 2014, at which time Medicalgorithmics had
delivered only 747 of the 1,000 PocketECG III devices AMI had ordered in April,
120 days earlier. 275 This claim is based on Section 10.1 of the 2014 SAA, which
states that a failure to fulfill an order for any number of units within 120 days
constitutes “a material breach of this Agreement subjecting the Agreement to 273 See supra note 262. 274 Tr. Post-Trial Arg. 28 (noting that these other claims are alternative grounds to reach the same end, namely a declaration that the termination was valid and damages). 275 Tr. Post-Trial Arg. 45; Defs.’ Op./Ans. Post-Trial Br. 18.
71 immediate termination at the discretion of Buyer.” 276 AMI argues that this breach
excused any subsequent breach by AMI.
Medicalgorithmics disputes AMI’s characterization of these delivery delays
as material breaches, pointing out that the 120-day requirement assumed that
device orders would be prepaid in accordance with Attachment 2 to the SAA. It
also argues that, by continuing to perform under the contract by ordering and
accepting PocketECG devices, AMI waived any potential breach of this provision
by Medicalgorithmics. Both of these arguments have some persuasive force, but I
need not decide them because AMI’s breach occurred in April 2014 (if not earlier),
thereby preceding the purported breach by Medicalgorithmics that AMI alleges
occurred in August 2014. Consequently, Medicalgorithmics committed no prior
material breach that could have excused AMI’s obligations under the 2014 SAA,
including under Section 3.3.277
Because I conclude that AMI materially breached the 2014 SAA in April
2014 and that Medicalgorithmics did not breach the 2014 SAA before AMI did, I
deny AMI’s counterclaims for damages and specific performance for
Medicalgorithmics’ alleged breach of the 2014 SAA. In addition, because I
276 2014 SAA § 10.1; see also supra note 37 and accompanying text. 277 See BioLife Solutions, 838 A.2d 268, 278 (Del. Ch. 2003) (“A party is excused from performance under a contract if the other party is in material breach thereof.”).
72 conclude that Medicalgorithmics validly terminated the 2014 SAA, I deny AMI’s
counterclaim for a declaratory judgment that the 2014 SAA is still in force.
Finally, I deny AMI’s request for a declaration that Medicalgorithmics violated the
Uniform Commercial Code, which AMI did not press at trial or address in its
briefing, thus waiving the claim. 278 Judgment will be granted in
Medicalgorithmics’ favor on all of AMI’s counterclaims.
F. Medicalgorithmics’ Damages
Medicalgorithmics seeks damages in addition to termination of the 2014
SAA and of the Status Quo Order. “Plaintiffs must prove their damages by a
preponderance of the evidence”279 and “must prove their damages with a
reasonable degree of precision and cannot recover damages that are merely
speculative or conjectural.”280 On the other hand, “Delaware does not require
certainty in the award of damages where a wrong has been proven and injury
established. . . . Responsible estimates of damages that lack mathematical certainty
278 Emerald P’rs v. Berlin, 726 A.2d 1215, 1224 (Del. 1999) (“Issues not briefed are deemed waived.”). 279 Beard Research, Inc. v. Kates, 8 A.3d 573, 613 (Del. Ch. 2010), aff’d sub nom. ASDI, Inc. v. Beard Research, Inc., 11 A.3d 749 (Del. 2010). 280 Kronenberg v. Katz, 872 A.2d 568, 609 (Del. Ch. 2004) (internal quotation marks omitted). 73 are permissible so long as the court has a basis to make such a responsible
estimate.” 281
Medicalgorithmics did not offer any independent expert testimony to attest
to its damages. It instead offered a simplistic calculation of expectation damages
through its CEO (Dzuibinski) that was presented in a matter of minutes and
comprises about four pages out of 1,306-page trial transcript.282
Dzuibinski estimated that AMI’s breach caused Medicalgorithmics to lose
annual sales of 6,657 PocketECG III devices and associated monthly service
charges for a two-year period beginning in April 2015, when Medicalgorithmics
provided its notice of termination. This sales estimate is based on a year-to-year
growth rate of 100% for the first year, which was the average rate of sales growth
over the past few years.283 It also assumes that AMI would continue buying
approximately 555 devices each month for the 24-month period leading up to a
proper ending of the agreement.284 Based on these assumptions,
Medicalgorithmics contends it suffered $3,150,698 in damages in the first year,
consisting of $1,531,110 in lost net revenues for device sales plus $1,619,588 in
281 Beard Research, 8 A.3d at 613 (internal citations and quotation marks omitted). 282 See Tr. 147-50 (Dziubinski). 283 Tr. 147-48 (Dziubinski). 284 JX-822.
74 lost net revenues for services.285 Because the contract would not have expired for
24 months after a valid notice of termination, Medicalgorithmics argues it is
appropriate to double this one-year figure, for a total of $6,301,696 in damages.286
AMI disputes both the evidentiary foundation for these figures and the logic
behind them. It argues that the assumption of a continued 100% growth rate is
unrealistic, and that it would not be reasonable to expect AMI to continue
purchasing large volumes of devices close to the end of the two-year termination
period because the devices would no longer be supported by Medicalgorithmics
upon expiration of the contract and thus would become unusable.287 AMI further
argues it would not have continued purchasing such a high volume of PocketECG
III devices because what it really wanted were CDMA devices, which were not
available.
285 Id. 286 Pl.’s Op. Post-Trial Br. 63. 287 Defs.’ Op./Ans. Post-Trial Br. 64 (“[The PocketECG] devices will not work without access to [Medicalgorithmics’] services, so AMI will have purchased products that it cannot use . . . .”); 71-72 (arguing that AMI would have slowed purchases to “avoid being stuck with millions of dollars of unusable devices once the SAA terminated”); see also Tr. 1300 (AMI requesting completion of a 24-month termination period so that AMI would not have to “shut our doors”); 2014 SAA § 14.1 (noting that all rights to the licensed software belong to Medicalgorithmics except as provided in the agreement); JX- 393 at 59-61 (manual explaining that PocketECG relies on client software).
75 I agree with AMI that Medicalgorithmics’ damages estimate is based on
unrealistic and speculative assumptions. Given the tension between the
companies, including ongoing concerns AMI had expressed about
Medicalgorithmics’ production timelines and product quality, it is unlikely that
AMI would have purchased 6,657 PocketECG III devices had the contract not been
terminated.288 Much to AMI’s dismay, Medicalgorithmics had failed to promptly
develop a marketable CDMA version of the PocketECG III. It also is unrealistic to
assume that AMI would have continued to purchase large numbers of devices right
up until the contract expired after the hypothetical two-year period used for
estimating damages because the devices would cease to function at the end of the
period. Moreover, although AMI’s material breach of Section 3.3 undoubtedly
caused certain unquantifiable injuries, Medicalgorithmics’ decision to terminate
the agreement could be said to have caused most of the alleged losses for which it
seeks a recovery because it could have chosen not to terminate the agreement and
to sue instead for injunctive relief to address AMI’s violation of Section 3.3. For
all these reasons, I reject Medicalgorithmics’ estimate of damages as unrealistic
and speculative.
288 Putting aside the relationship and product issues that would have made large orders less likely, Medicalgorithmics’ estimate of about 555 devices per month is aggressive compared to deliveries made shortly before the litigation. Compare JX-700 (showing deliveries of 800 devices in the first quarter of 2015, or 200 per month on average) with JX-822 (damages calculation estimating deliveries of 555 devices per month).
76 The Court may exercise its “own independent judgment in determining the
calculation of damages.” 289 In my view, a realistic estimate of damages
Medicalgorithmics suffered can be derived from the 1,000 devices that AMI
ordered in November 2013 and later cancelled on April 23, 2015. 290 These 1,000
devices are the balance that had not been filled from the order for 4,000
PocketECG III devices AMI placed in November 2013, consisting of 2,000 GSM
and 2,000 CDMA devices.291 Although the unfilled balance was for CDMA
devices that Medicalgorithmics was unable to provide, it is reasonably likely in my
judgment that AMI would have accepted GSM devices for this remaining balance
given that AMI previously switched the other half of its order for CDMA units
(i.e., 1,000 units) to GSM units during 2015 to meet its sales demand.292
In its damages analysis, Medicalgorithmics calculated its loss of net revenue
for PocketECG III devices at $230 per unit, representing the difference between a
289 In re Mobilactive Media, LLC, 2013 WL 297950, at *24 (Del. Ch. Jan. 25, 2013). 290 JX-615. 291 JX-207. 292 See JX-700; JX-561; JX-481; JX-495; JX-526; JX-530; Tr. 274 (Dziubinski). It appears that if things had proceeded in the ordinary course, a greater proportion of this order would have been switched to GSM. See JX-572 (requesting switch for 500 units, which would have brought the total switched to 1,300 out of 2,000, although order never appears to have been executed).
77 price of $505 and variable manufacturing costs of $275 per unit. 293 AMI argues
that this calculation improperly fails to account for Medicalgorithmics’ fixed costs,
including R&D. It is not necessary, however, to add fixed costs to the per-device
cost because Medicalgorithmics would have incurred those costs regardless of
AMI’s breach. 294 For similar reasons, I reject AMI’s argument that
Medicalgorithmics should use its net profit margin of 36.7% 295 rather than its
calculation based on sale price and manufacturing costs. Accepting
Medicalgorithmics’ estimate of $230 per unit in lost net revenue, I calculate its
damages from the lost sale of 1,000 devices to be $230,000.
It stands to reason that Medicalgorithmics also suffered damages for lost
service fees for losing the opportunity to sell the estimated 1,000 devices. It would
be speculative to award additional damages for those service fees, however,
because the record is devoid of reliable evidence from which to extrapolate a
reasonable estimate of the service fees one would expect to derive from devices
sold under the circumstances discussed above, particularly given the uncertainty as
to how long the devices would remain active. Although a plaintiff need not
293 Tr. 252 (Dziubinski). 294 See All Pro Maids, Inc. v. Layton, 2004 WL 1878784, at *11 (Del. Ch. Aug. 9, 2004) (“[T]he Court will not charge fixed costs against Plaintiff’s damages. The Court finds that [plaintiff’s] expert properly did not deduct fixed costs in calculating lost profits.”), aff’d, 880 A.2d 1047 (Del. 2005). 295 Tr. 254 (Dziubinski).
78 calculate damages with certainty, “this Court will nonetheless refuse to award
damages based on mere speculation or conjecture where a plaintiff fails to
adequately prove damages.”296 In this case, Medicalgorithmics’ estimated
damages for lost service fees are speculative, and it has failed to adequately prove
them.
AMI argues that Medicalgorithmics failed to mitigate its damages because it
could have shipped more devices to AMI but it refused to do so without receiving
adequate assurances of payment from AMI. This argument is unpersuasive for
several reasons. First, Medicalgorithmics’ request for adequate assurances was
made in response to AMI’s contention that the price for each device should have
been $303 and not $505. As explained above, this request was a reasonable
response to AMI’s bad faith argument that it was being overcharged $202 per
device. Second, although Medicalgorithmics did request adequate assurances, it
was AMI that definitively withdrew its device orders before Medicalgorithmics
terminated the 2014 SAA as a result of AMI’s material breach. Third, even though
it was not required to ship more devices under the Status Quo Order,
Medicalgorithmics nevertheless shipped another 200 units in June 2015 upon
296 Encite LLC v. Soni, 2011 WL 5920896, at *25 (Del. Ch. Nov. 28, 2011) (quoting Beard Research, 8 A.3d at 613) (internal quotation marks omitted).
79 AMI’s request, 297 thus reducing its damages from a base of 1,200 withdrawn
devices to 1,000.298 In sum, AMI has not demonstrated that Medicalgorithmics
failed to mitigate its damages from the 1,000 devices that were never sold.
Finally, Medicalgorithmics contends that it is entitled to late payment
charges based on Section 5.3 of the 2014 SAA, which states:
Supplier may assess late payment charges on amounts not paid within thirty (30) days of the invoice date and written notice of non-payment delivered to Buyer at the maximum rate allowed by law or 1½% per month, whichever is less.299
When Medicalgorithmics sent late payment notices to AMI on March 18, 2015, it
provided written notice of non-payment and that it was assessing late charges.300
Dziubinski testified that these charges amounted to $23,482.08. 301 AMI has not
disputed Medicalgorithmics’ calculation of this amount, which apparently is based
297 Tr. 1093 (Velez); Tr. 274 (Dziubinski). 298 See JX-700 (noting 4,000 ordered devices and 3,000 delivered, including June 2015 delivery of 200 devices). Medicalgorithmics also sent another 250 devices at some point in 2015 that AMI returned because it had not requested them. Tr. 274 (Dziubinski). 299 2014 SAA § 5.3. 300 JX-552 (noting assessment on each invoice) (“Medicalgorithmics S.A. reserves its right to assess and hereby does assess late payment charges on the invoiced amount not paid within thirty (30) days of invoice date at the maximum rate allowed by law or 1.5% per month, whichever is less.”). 301 Tr. 151 (Dziubinski); JX-800.
80 on the legal interest rate of 6%. 302 Thus, Medicalgorithmics is entitled to this
amount in addition to its other damages.
G. Medicalgorithmics’ Attorneys’ Fees and Expenses
Medicalgorithmics argues AMI must indemnify it for its costs and attorneys’
fees under Section 15 of the 2014 SAA. That provision states, in relevant part:
[AMI] shall indemnify, defend, and hold [Medicalgorithmics] harmless from all claims, damages, settlements, expenses, and attorneys’ fees incurred as a result of: . . . [AMI’s] material breach of this Agreement, including any of its representations or warranties in this Agreement.303
I have concluded that AMI materially breached the 2014 SAA. This action sought
various forms of relief in response to that breach. Consequently, the expenses and
attorneys’ fees in this litigation were incurred as a result of AMI’s material breach.
AMI argues it should not be held responsible for Medicalgorithmics’ fees
and expenses because they were incurred as a result of Medicalgorithmics’
voluntary decision to terminate the SAA and to file suit. This argument is
unpersuasive. If a party files litigation to vindicate its rights in response to a
material breach, it may be true that the suit and its associated expenses resulted
from that party’s voluntary decision to litigate, but they are also the result of the
material breach itself. Refusing to indemnify expenses for a suit that was filed in
302 Pl.’s Op. Post-Trial Br. 63; 6 Del. C. § 2301(a). 303 2014 SAA § 15.
81 response to a material breach by AMI would render the indemnification provision
ineffective and is not a reasonable interpretation of “incurred as a result of.”304
The same holds true for Medicalgorithmics’ decision to terminate the agreement
after the material breach. These expenses are one and the same, because the
litigation was filed in order to receive a declaration that the agreement validly was
terminated. For these reasons, I award Medicalgorithmics the expenses and
attorneys’ fees it incurred in this action under Section 15 of the 2014 SAA. 305
H. Declaratory Judgment Regarding PocketECG III Charges
Medicalgorithmics seeks a judgment declaring that it does not owe any
alleged overcharges to AMI based on the purchase price of the PocketECG III.306
This request stems from AMI’s contentions that Medicalgorithmics charged it
$505 per PocketECG III device under Attachment 4 of the amendment to the 2011
SAA, rather than the $303 that was listed for the PocketECG II in Attachment 2 of
the original 2011 SAA and the 2014 SAA. 307
304 Notably, in arguing that Medicalgorithmics materially breached the SAAs, AMI itself contends that it is entitled to “everything incurred as a result of this litigation” notwithstanding the fact that some of its expenses undoubtedly stemmed from its counterclaims for breach. Defs.’ Op./Ans. Br. 73. 305 For the avoidance of doubt, this award of attorneys’ fees does not include expenses for unrelated litigation, including litigation surrounding the potential purchase of Medi-Lynx by Medicalgorithmics. 306 Pl.’s Post-Trial Op. Br. 64. 307 2014 SAA at Attachment 2.
82 As discussed at several points above, AMI’s dispute over the pricing of the
PocketECG III was not in good faith. AMI admitted at trial it expected the price of
the PocketECG III to be $505 rather than $303, and it recognized the exclusion of
Attachment 4 from the 2014 SAA was either inadvertent, or was intended to be
followed up by an amendment identical to the amendment to the 2011 SAA.308
Without Attachment 4, the 2014 SAA has no price for the PocketECG III and does
not call for the sale of that device at all; instead, the 2014 SAA (in Attachment 2)
lists only the PocketECG II device and its price of $303.
The record suggests that AMI was hoping to trap Medicalgorithmics in a
difficult position regarding device pricing in order to renegotiate its agreements in
AMI’s favor. On January 27, 2015, Joe responded to a lengthy e-mail Dziubinski
sent a month earlier discussing their relationship. Joe’s response was cryptic,
simply noting, “I received your email dated 12/23/2013 [sic] and am thrilled you
have achieved your life goals. ” and posing a seemingly unrelated question: “Is
PECG III an improvement of PECG II or is it a new stand-alone Product?”309
The purpose of the e-mail becomes obvious in its full context. On the same
day, Joe and AMI’s staff were meeting to discuss AMI’s strategy against
308 Tr. 728-32 (Joe); see also supra Part I.F (discussing omission of Attachment 4 from 2014 SAA). 309 JX-496.
83 Medicalgorithmics. That strategy was to have Dziubinski admit that the
PocketECG III was an “improvement” so that AMI could claim that it fell under
the definition of “Product” under the 2014 SAA and therefore qualified for the
price of $303 rather than $505, and to surprise Medicalgorithmics’ auditors with
allegations of overcharges in order to enhance AMI’s negotiating leverage,
sabotage the company, or both. As I have explained, AMI did all of those things
over the ensuing months, demanding that the price for all of their previously
ordered PocketECG III devices be reduced.
AMI’s strategy relies on the omission of Attachment 4 from the 2014 SAA,
which the parties did not intend. The merits of AMI’s strategy are unpersuasive, in
particular because all of the purchase orders between the parties listed the higher
price of $505 plus interest.310 These orders already fell outside the terms of the
2014 SAA and its attachments because they did not require AMI to prepay for the
devices. Instead, they allowed AMI to order devices without prepaying, provided
that AMI would pay the agreed price of $505 plus interest.311
310 JX-207. As mentioned previously, the price for these orders was $513.83 rather than $505, reflecting the interest accruing in lieu of prepayment. 311 In addition, the PocketECG III, although more expensive than the PocketECG II, would obviate the need for AMI to procure a separate smartphone device. See supra note 14 and accompanying text.
84 For these reasons, I conclude that AMI’s pricing dispute was without merit
and that the price of the PocketECG III was properly set at a prepayment of $505.
The agreed price for devices paid for within 90 days of delivery was $513.83,
which included interest. AMI argues that this figure overstates the interest charge
and should only be $510.85. 312 This figure comes from an internal e-mail from
Zolkiewicz to Dziubinski in which Zolkiewicz calculates $510.85 as the charge
including interest.313 At trial, Dziubinski admitted the possibility that he made a
mistake in calculating the final price, including interest.314 Regardless of any
internal calculations, however, the price clearly conveyed to and accepted by AMI
was $513.83.315 That same figure was used in AMI’s own purchase orders.316
Consequently, AMI’s claim that it was overcharged by $2.98 per device based on a
calculation within an internal Medicalgorithmics e-mail is without merit—as well
as miniscule.
312 Defs.’ Op./Ans. Post-Trial Br. 26 n.18. 313 JX-192. 314 Tr. 197 (Dziubinski). 315 JX-190. 316 JX-208.
85 AMI has failed to present any other evidence of overcharging. Thus,
Medicalgorithmics is entitled to a declaration that it does not owe AMI for any
alleged overcharges relating to the price of the PocketECG III.
IV. CONCLUSION
For the foregoing reasons, Medicalgorithmics is entitled to a declaratory
judgment that it validly terminated the 2014 SAA. AMI and Spectocor are jointly
and severally liable to Medicalgorithmics for damages in the amount of
$253,482.08 plus prejudgment interest,317 and for Medicalgorithmics’ costs and
attorneys’ fees incurred in this litigation. Medicalgorithmics also is entitled to a
declaration that it is not liable to AMI for any alleged overcharges concerning the
price of the PocketECG III device, and to entry of judgment in its favor dismissing
all of AMI’s counterclaims with prejudice. The parties are directed to confer and
to submit a final judgment and order in accordance with this opinion within ten
business days.
317 See Citadel Hldg. Corp. v. Roven, 603 A.2d 818, 826 (Del. 1992).
Related
Cite This Page — Counsel Stack
Medicalgorithmics, SA v. AMI Monitoring, Inc., Counsel Stack Legal Research, https://law.counselstack.com/opinion/medicalgorithmics-sa-v-ami-monitoring-inc-delch-2016.