Medtronic Inc.’s Kyphon division has lost another legal round with Pabban Development Inc. over Medtronic’s 2008 purchase of Pabban’s Natrix System. Irvine, California-based Pabban developed the Natrix System, which is a hand pump and tube used by spinal surgeons to deliver medical cement into a patient’s spine during a kyphoplasty.
On Wednesday, November 16, 2016, the Ninth Federal Circuit Court upheld a California federal jury’s finding that Medtronic Inc. owes Pabban Development Inc. $15.4 million for breaking the terms of a deal for the latter’s spinal cement device, rejecting Medtronic’s assertion that Pabban provided faulty devices.
Medtronic paid Pabban $18.5 million for the system in August 2008. The agreement included provisions for milestone payments that Medtronic chose not to pay eight months after the contract was signed, when the first milestone payment was due. Pabban filed suit in 2010, alleging Medtronic and Kyphon had failed to pay $15 million in mandated, scheduled milestone payments.
Medtronic argued at trial that it had sought to purchase the device, rather than develop its own version, because it needed to get to market quickly, and that Pabban had committed fraud in representing that the Natrix System was ready to go to market. In May 2014, the jury sided with Pabban, finding it did not breach the agreement.
“Good Enough” for Kyphon
The ninth circuit panel, according to Law 360, said a warranty of merchantability provided by Pabban as part of the deal, “only ensured the Natrix System was good enough to be sold to Kyphon, not that it was of good enough quality to be sold on the open market. The court said the evidence supported that interpretation as both parties knew the Natrix System couldn’t be commercially sold until certain validations had been received from federal regulators.”
George W. Bush appointee Circuit Judge Jay Bybee pointed out that the evidence was that despite earlier tests indicating leaking, after the 2008 agreement was signed, the bags only leaked after being shipped to Kyphon. He said the evidence seemed to be that the problem was with the packaging, not “the freestanding device” covered by the deal.
“Because both parties also knew at closing that Kyphon did not yet have packaging validation for the Natrix System, Pabban would have been in immediate breach of the warranty under Kyphon’s proposed interpretation, regardless of any leaks in the saline bags, ” said Bybee.
“The only evidence you had was that it was leaking after it had shipped, ” he said.
The appeals panel found that a new trial was not needed as the trial court had properly interpreted the terms of the parties’ purchase agreement and properly instructed the jury.
