Appendix — McDonald v. Johnson & Johnson

No. 83-___ Office - Supreme Court, U.S.

ewan pes

84-89 JUL 16 1904

IN THE ALEXANDER L. STEVAS,

Supreme Court of the Hnited- State"

OCTOBER TERM, 1983

JOHNSON & JOHNSON,

Petitioner,

—_—V.—

STANLEY McDONALD, NORMAN R. HAGFORS,

and CLAYTON JENSEN,

Respondents.

PETITION FOR A WRIT OF CERTIORARI TO THE UNITED

STATES COURT OF APPEALS FOR THE EIGHTH CIRCUIT

PETITION FOR CERTIORARI

APPENDICES

DAVID F. DOBBINS

PATTERSON, BELKNAP, WEBB

& TYLER

30 Rockefeller Plaza

New York, New York 10112

(212) 541-4000

Counsel for Petitioner

Johnson & Johnson

Of Counsel:

GEORGE S. FRAZZA

ROGER S. FINE

One Johnson & Johnson Plaza

New Brunswick, New Jersey 08933

Telephone: (201) 524-0400

TABLE OF CONTENTS

APPENDIX A

Opinion of the Eighth Circuit on Appeal from the

United States District Court for the District of Minne-

sota in McDonald v. Johnson & Johnson, No. 82-1594

Cees Cae. PPE BG, DOS) ovo ccc ccaccccccecsss

APPENDIX B

Opinion of the United States District Court for the

District of Minnesota in McDonald v. Johnson &

Johnson, Civ. 4-79-189 (D. Minn. 1982)............

APPENDIX C

Opinion of the Eighth Circuit on Petitions for Rehearing

and Rehearing En Banc in McDonald v. Johnson &

Johnson, No. 82-1594 (8th Cir. January 12, 1984)...

APPENDIX D

Amended Order of the Eighth Circuit Denying Appel-

lant’s Second Petition for Rehearing and Rehearing

En Banc in McDonald v. Johnson & Johnson, No.

82-1594 (8th Cir. February 28, 1984)...............

APPENDIX E

semtubes TRVONVEG OM TRO COSE .. ccc cc ccccccccccess

APPENDIX F

Letter of Joseph M. Alioto to Joint Venturers in the

Microelectronics Industry, January 27, 1983 ........

PAGE

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B-!

C-1

D-1

APPENDIX A

A-l

United States Court of Appeals

FOR THE EIGHTH CIRCUIT

No. 82-1594

Stanley McDonald, Norman R.

Hagfors, and Clayton Jensen,

Appeal from the United States

District Court for the

District of Minnesota.

Appellees,

Vv.

Johnson & Johnson,

+ &eettsett i

Appellant.

Submitted: January 14, 1983

Filed: November 16, 1983

Before LAY, Chief Judge, HEANEY and FAGG, Circuit Judges.

LAY, Chief Judge.

On May 2, 1979, Messrs. McDonald, Hagfors, and Jensen filed

suit against Johnson & Johnson (J&J), a corporation whose sub-

sidiaries compete in the prescription and over-the-counter drug

markets, alleging violations of sections 1 and 2 of the Sherman Act,

section 7 of the Clayton Act, breach of contract, and fraud. After

a five and one-half month jury trial, a verdict was returned against

J&J on all counts except the Clayton Act violation. The following

alternative damages were awarded: $170.4 million (treble $56.8

million compensatory damages) under section 1 of the Sherman

Act; $1704 million (treble $56.8 million compensatory damages)

under section 2 of the Sherman Act; $5.7 million for breach of con-

tract; $6.275 million actual damages and $25 million punitive

damages for fraud.

A-2

In an opinion denying J&J's alternative motions for judgment

notwithstanding the verdict or a new tnal, Distnct Judge Miles Lord

summarized the facts and discussed the issues of law. McDonald

v. Johnson & Johnson, 537 F.Supp. 1282 (D. Minn. 1°82). For

purposes of appeal, we need only briefly summarize the his-

torical facts.

Prior to 1974, McDonaid, Hagfors, and Jensen (MH&J)

(plaintiff-appellees) owned StimTech (ST), a corporation that

manufactured TENS' devices and pacemakers. Hagfors onginally

had worked for another company in the field of nerve stimulation

for the treatment of pain and in the heart pacemaker field. After

incorporating ST in 1970, he designed the first modern solid-state

TENS device. McDonald and Jensen became stockholders and

officers of ST shortly thereafter.

In 1973, J&J (defendant-appellant), purchased 37.1% of ST's stock

for $700,000. In 1974, after extensive negot:ations, J&J purchased

the remaining ST stock to make ST a wholly-owned subsidiary. The

1974 acquisition agreement provided that J&J would pay a mini-

mum of $1.3 million for 63% of ST stock, and a maximum of $7

million based on the amount of ST's profits during a five-year earn-

out period from 1975 through 1979. The stock purchase contract

contained a provision that stated:

Stockholders and Johnson & Johnson agree that each will at

all times act in respect to its dealings with the Company and

its operations, and subject to the exercise of reasonable

business judgment, act [sic] in such a way as to promote to the

'“TENS"™ is an abbreviation for trancutaneous electronic nerve sumulators: they are used to treat

pain by sending electnc currents into the body through electrodes attached at the site of the pain.

or ha aer aah Neth Nitns Dar NERA, Senn

A-3

extent reasonably possible the successful operation and

growth of the Company.

The three plaintiffs, MH&J, also entered into five-year noncompeie

agreements and three-year employment contracts. The employment

contracts automatically renewed for successive one-year periods

after the first three years, unless terminated by J&J, which it could

do with three months’ notice at any time after the first three years.

When J&J took over ST in 1974, ST had lost, under the opera-

tion of the three plaintiffs, over $400,000. Between 1974 and 197,

J&J supplied ST with $10.9 million of working capital. In 1975, ST

had net TENS sales of $780,000, about 25-30% of the infant in-

dustry’s sales; under J&J’s ownership, ST's net TENS sales reached

$5.4 million by 1979, which was also about 25-30% of industry

sales? Between 1975 and 1979, ST had increased its sales sevenfold,

but had aggregate operating losses of $7.3 million. Because of the

losses MH&J never received any more than the minimum payment

of $1.3 million for their stock. While employed by J&J, McDonald

was demoted. He then left the company in 1977. Hagfors was

demoted and left in 1977; Jensen was discharged in 1977. J&J claims

the two demotions and the firing were due to incompetence.

On appeal, J&J attacks the sufficiency of the evidence to sustain

plaintiffs’ recovery for the antitrust violations under sections | and

2 of the Sherman Act. Various objections are raised concerning the

instructions given relating to the component proofs required to suc-

cessfully sustain a claim under the Sherman Act; in addition, the

damage awards are attacked as being based on conjectural and

speculative evidence. More significant to our decision, J&J also

challenges plaintiffs’ standing to sue for antitrust violation.

J&J similarly challenges the sufficiency of the evidence to sus-

?The TENS industry had only four firms in 1974, it had expanded to about thirty firms by 1979. Since

1975, no firm has ever had more than a 3] ® market share.

A+

tain proof of fraud, and alternatively the verdict for breach of con-

tract: in addition, it is argued that the damages are excessive and

based upon speculative proof. The $25 million punitive damages

award for the fraud claim is similarly challenged.

We find that sufficient evidence was provided to sustain the claim

for fraud and damages causally related thereto. We therefore sus-

tain the plaintiffs’ verdict for $6.275 million for actual damages; we

find, however, that the $25 million verdict for punitive damages was

based on prejudicial evidence and argument ard a new trial must

be held in this regard.

We vacate the judgment based on sections 1 and 2 of the Sher-

man Act antitrust claims for lack of standing. We hold that the anti-

trust laws were not designed to provide stockholders, who may have

been defrauded in the sale of their stock, a remedy. Their loss is not

causally related to the effects of lessening of competition and the

law recognizes other reinedies for these plaintiffs. In doing so, we

only acknowledge that even if we assume standing, it is readily ap-

parent that plaintiffs have a great burden to establish a per se viola-

tion of section | of the Sherman Act. To suggest plaintiffs’ proof of

acquisition and suppression meets traditional tests of establishing

a per se violation of restraint of trade under section 1, which would

conclusively presume that the agreement and practices are so per-

nicious and harmful to competition that the precise harm or

business excuse need not be studied, would indeed, under the cir-

cumstances, be an unusual and unprecedented decision. Cf

Worthen Bank & Trust Co. v. National BankAmericard, Inc. , 485

F.2d 119 (8th Cir. 1973), cert. denied, 415 U.S. 918 (1974). We ex-

A-5

press no opinion whether J&J's conduct was violative of the Sher-

man Act as tested by the “rule of reason.”” We need not meet these

difficult issues because we find plaintiffs did not demonstrate stand-

ing to sue for J&J's alleged violations of the antitrust law.

I. STANDING

Standing for antitrust violations is governed by section 4 of the

Clayton Act: “Any person who shall be injured in his business or

property by reason of anything forbidden in the antitrust laws may

sue therefor..." In Associated General Contractors v. California

State Council of Carpenters, 103 S. Ct. 897 (1983) it is acknowl-

edged that earlier Supreme Court cases have read the statute expan-

sively. /d at 904. See, e.g., Mandeville Farms v. Sugar Co. , 334 U.S.

219 (1948). However, Associated General now makes clear that the

standing question requires an evaluation of the plaintiffs’ harm, the

alleged wrongdoing by the defendants, and the relationship between

them. /d. at 9073 The Court further points out that antitrust stand-

ing goes beyond the constitutional standard of “injury in fact” and

includes a determination whether the plaintiff is a proper party to

bring a private antitrust action. /d. n.31.

Whether the plaintiffs are proper parties depends on the factors

articulated in Associated General. These are: (1) The causal con-

nection between the alleged antitrust violation and the harm to the

plaintiff; (2) Improper motive; (3) Whether the injury was of a type

that Congress sought to redress with the antitrust laws; (4) The

directness between the injury and the market restraint; (5) The

3See also Blue Shield of Virginia v. McCready, 457 U.S. 465, 477 (1982) (“It is reasonable to assume

that Congress did not intend to allow every person tangentially affected by an antitrust viola-

von to maintain an action to recover threefold damages for the injury to his business or

property.”’).

A-6

speculative nature of the damages; (6) The risk of duplicative

recoveries or complex damage apportionment. The court is to

weigh these factors in determining whether to enforce a plainuff's

antitrust claim. /d. at 908-12 4

As we weight these factors, the evidence will be viewed in the

light most favorable to the jury verdict and therefore it will be

assumed that J&J did suppress the TENS market.

Although there may be shown some causal link between “‘the

mere presence of a violator in the market” and harm caused to a

plaintiff, more must be shown. As the landmark decision of

Brunswick Corp. v. Pueblo Bowl-O-Mat, Inc. , 429 U.S. 477 (1977),

makes clear, a mere causal connection between an antitrust vio-

lation and harm to a plaintiff cannot be the basis for antitrust

compensation unless the injury is directly related to the harm the

antitrust laws were designed to protect.

In the present case, it is insufficient for plaintiffs to simply assert

that plaintiffs’ damages would not have been incurred without

defendant’s suppression of the TENS market. Assuming the proof

of such fact, assuming further that defendant acted with an im-

proper motive, as the jury finding would seem to sustain, we find

‘The Associated General test is further iliuminated by the Supreme Court's actuons in three cir-

cuit Cases in which ceruoran had been requested. In the two cases in which antitrust standing

had been granted. the Supreme Court granted certiorari, vacated. anc remanded for further

consideration in light of Associated General. H.S. Crocker Co. v. Ostrofe. 03S. Ct. 244

(1983); Mitsu: & Co. , Lid. v. Industnal Investment Development Corp. , 03 S. Ct. 1244 (1983)

Significantly. the Supreme Court denied certioran in the third case, in which the circuit court

affirmed a judgment for defendants on the basis of lack of standing. Michan v. Chemetron Corp.,

103 S. Ct. 1261 (1983); see 681 F.2d SK, 517-20 (7th Cir. 1982).

A-7

there was no proximate causation’ between plaintiffs’ harm and the

alleged illegal market restraint. Assuming there was market

restraint —that 1s, the suppression of competition—by defendant's

alleged violation of §§ | or 2, there is no showing that a harmful

effect on TENS competition caused plaintiffs any antitrust injury.

Furthermore, we deem it significant the damages awarded by the

jury for the antitrust violation were entirely speculative, further cor-

roborating the lack of antitrust injury. Tne bottom line is that the

evidence clearly does not support a finding that plaintiffs’ injury

was of a type Congress sought to redress by the antitrust laws.

First, we turn to the identity of the parties. Although plaintiffs

initially represented the majority shareholders of ST and for pur-

poses of discussion might be described as the sole representative

of ST's interests, it is clear that by selling their stock plaintiffs volun-

tarily withdrew individually and in their representative capacity

from further competition in the TENS market. Cases are legion that

preclude plaintiffs’ standing to bring suit for antitrust violations

when they have voluntarily withdrawn from the market. See, e.g.,

Chrysler Corp. v. Fedders Corp. , 643 F.2d 1229 (6th Cir.), cert.

denied, 454 U.S. 893 (1981); A.D.M. Corp. v. Sigma Instruments,

Inc. ,628 F.2d 753 (Ist Cir. 1980); Peterson v. Borden Co. , 50 F.2d

644 (7th Cir. 1931); Stryco, Inc. v. Penn Central Corp. , 551 F.Supp.

949 (E.D. Pa. 1982); Turner v. Johnson & Johnson, 549 F.Supp.

*The Supreme Court has injected into the § 4 standing inquiry an element of proximity:

In the absence of direct guidance from Congress. and faced with the claum that a parocular injury

1S 100 remote from the alleged violation to warrant § 4 standing. the courts are thus forced to

resort to an analysis no less elusive than that employed traditionally by the courts at common

law with respect to the matter of “proximate cause.”

Blue Shield of Virginia v. McCready, 457 U.S. 465, 477 (1982). See also Associated General Con-

tractors v. California State Council of Carpenters, 103 S. Ct. 897, 905-07 (1983) (§ 4 inquiry sub-

ject lo proximate cause constrauits).

A-8

807 (D. Mass. 1982); V7R, Inc. v. Goodyear Tire & Rubber Co ,

303 F.Supp. 773 (S.D.N.Y. 1969)

In Chrysler Corp. v. Fedders Corp. , 643 F.2d 1229 (6th Cir.),

cert. denied, 454 U.S. 893 (1981), for example, the court denied

antitrust standing to a corporation that sold its assets and covenanted

not to compete; the court's decision was based on the fact that no

Brunswick “antitrust injury” was alleged since the corporation had

voluntarily withdrawn from the market. Chrysler Corp. had entered

into a 76-page agreement to sell virtually all the assets of its Airtems

*Turner v. Johnson & Johnson, 549 F Supp. 807 (D. Mass. 1982) was a similar action against the

same defendant. The coun analy zed the alleged injunes under the Brunswick “antitrust injury”

test and denied antitrust standing to the plainuffs.

The plaintiffs included the trustees of the AMEC Liquidating Trust. which was the successor

in interest to the AMEC company, and Robert Turner. who was the president and founder of the

AMEC company and inventor of its line of ““Meditem”™ electronic thermometers. /d. at 809. J&J's

subsidiary had developed and was to market its own “Survalent™ electronic thermometer. After

extended negotiauions. AMEC’s assets were sold to J&J under a contract that apparenuy provided

for rovalty payments to plaintiffs based on the amount of future sales of Meditemp.

The plainuffs subsequently brought a suit for fraud and antitrust violations under sections |

and 2 of the Sherman Act and section 7 of the Clayton Act. The plaintiffs alleged that, through

fraud and misrepresentation. J&J acquired the assets of AMEC for the purpose of suppressing

it and eliminating competition between AMEC’'s Meditemp thermometer and J&J's Survalent

thermometer. /d. at 809. It alleged that J&J made certain false representations during the con-

tract negotiation: that J&J caused a patent interference proceeding to be filed to create a quesuon

concerning the validity of AMEC’s patent to put AMEC in a difficult posiuon if negouauons with

J&J fell through: and that after acquisition J&J suppressed Meditemp by not providing sufficient

funding. manpower, or equipment to develop and market successfully the product. /d. at 809-10.

Eventually, J&J discontinued Meditemp and never returned the business © AMEC, which was

allegedly contrary to the written sales agreement. /d. at 810.

In tne present case, Chrysler's primary allegauon 1s that it has been elumunated from competion

with the defendants by the virtual destruction of the Airtemp Division and its affi!:ated foreign

subsidiaries. Chrysler contends that Fedders’ failure to fuifill sts obligations under the contract

gave the Fedders defendants the financia! power to effect this destrucuon. Chrysler does not sug-

gest that the contract itself violates the antitrust laws. rather, it claims that Fedders’ sutwersion

of that agreement was the anticompetitive means of eliminating Chrysler from the market.

We hold that these alleged injuries do not constitute “anti-trust injury” within the meaning

of Brunswick, supra. By contracting to sell virtually al] the assets of the Airtemp Division and

all but two of its foreign subsidiaries. Chrysler voluntarily withdrew from competition in the

non-automotive air-conditioning market. It did not contemplate continuing to compete in that

market and in fact covenanted not to do so.

—= eT ee eS ee ee Pee eee

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Division to Fedders Corp. in return for cash. some Fedders’ stock,

a note, and the assumption of certain liabilities. 570 F.Supp. 706,

708 (S.D.N.Y. 1982) (connected case); see 643 F.2d at 1231.

Chrysler also convenanted, with certain exceptions, not to com-

pete in the nonautomotive air conditioning market for a five-year

period. 643 F.2d at 1231. Chrysler became dissatisfied with the

agreement after Fedders allegedly failed to pay several million

dollars due under the contract. Chrysler filed a claim for a viola-

tion of section | of the Sherman Act against Fedders and others,

alleging they had conspired to manipulate the nonautomotive air

conditioning market in a manner calculated to lessen competition

by eliminating Chrysler as a competitor. /d. at 1231-32. The district

court denied standing on this claim, characterizing Chrysler’s

allegation as a “breach of contract action which lacked the element

of antitrust injury required by Brunswick.” Id. at 1231. The Sixth

Circuit affirmed the holding on this allegation, correctly foresee-

ing that Brunswick should be interpreted “to mean that the pleading

of ‘antitrust injury’ is an essential component of standing under §

4 of the Clayton Act” (footnote omitted), and thus a court should

“focus on the mpe of injury pleaded and its relationship to the

alleged anticompetitive conduct.” /d. at 1234-35. As to Chrysler’s

injury, the Court reasoned:

In the present case, Chrysler’s primary allegation is that it

has been eliminated from competition with the defendants by

the virtual destruction of the Airtemp Division and its affil-

iated foreign subsidiaries. Chrysler contends that Fedders’

failure to fulfill its obligations under the contract gave the Fed-

ders defendants the financial power to effect this destruction.

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Chrysler does not suggest that the contract itself violates the an-

titrust laws; rather, it claims that Fedders’ subversion of that agree-

ment was the anticompetitive means of eliminating Chrysler from

the market.

We hold that these alleged injuries do not constitute “anti-trust

injury” within the meaning of Brunswick, supra. By contracting

to sell virtually all the assets of the Airtemp Division and all but two

of its foreign subsidiaries, Chrysler voluntarily withdrew from

competition in the non-automotive air-conditioning market. It did

not contemplate continuing to compete in that market and in fact

covenanted not to do so except through the Australian and South

African subsidiaries.

Even if a breakdown of competitive conditions in the market has

indeed occurred, Chrysler's loss is not attributable to that change.

Chrysler would have suffered an identical loss if the defendants had

failed to make payments under the contract for reasons unrelated

to the alleged antitrust violations. Cf Brunswick, supra, at 487, 97

S. Ct. at 696. Moreover, if the defendants had fulfilled their obliga-

tions as agreed, Chrysler would have no complaint, yet would still

be divested of its assets and precluded from competing in the

market. See A.D.M. Corp. v. Sigma Instruments, Inc. , 628 F.2d 753

(Ist Cir. 1980). Therefore, to the extent that Chrysler alleges

damages resulting from its elimination from competition with the

defendants through the Airtemp Division and the subsidiaries in-

cluded in the contract for sale, it lacks the “essential connection bet-

ween injury and the aims of the antitrust laws” necessary to

establish standing. A.D.M. Corp., supra, at 754.

"An early case cited in Brunswick, 429 U.S. at 488 n.13, as an example of an unsuccessful anutrust

suit for damages for injuries unrelated to the reason the merger was prohibited 1s Peterson ¥:

Borden Co. . 50 F.2d 644 (7th Cir. 1931). The plainuffs. as minority stockholders in Clover Leaf

Milk Co. , had alleged that the mayonty stockholders. in a conspiracy with the Borden Co.. a milk

business competitor. induced them through false representations to sell their stock to the majonty

for less than fair value. /d. at 645. The majority then conveved all the assets of Clover to Borden

in exchange for Borden stock: Clover was then dissolved. the plaintiffs sued Borden for treble

damage. alleging the eftect of the transacuon was to substanually lessen competivon and w create

a monopoly.

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It should be clear here that if the sale of ST assets and the merger

agreement (the primary basis of the § 7 Clayton Act claim and the

§ 1 Sherman Act claim) hac an effect on competition within the

market, it was completely unrelated to plaintiffs’ harm. Any resul-

tant effect on competition by reason of the merger would have

occurred whether or not plaintiffs were harmed. Thus, the indirect-

ness of plaintiffs’ injury to any antitrust violation is made clearly

visible. In the present case, the jury, in finding for the defendant

under § 7 of the Clayton Act, necessarily found there was no effect

on competition by the saie itself. Plaintiffs thus argue that it was the

subsequent suppression that caused the lessening of the product

competition. Assuming this to be so, we find plaintiffs’ harm is

direcily related to their contractual agreement and only indirectly

caused by J&J’s alleged suppression of ST in the TENS market.

Even ?f the injury to the plaintiffs is characterized as directly

linked to any antitrust wrongdoing by J&J because the “‘suppres-

sion of the plaintiffs individually was a necessary step for Johnson

The court found that although the fraudulent conduct of the purchaser injured the plaintiffs in the

sale of their stock. not one of the piainuffs was a person “injured in his business or property

by reason of any thing forbidden in the anutrust laws” under secuon 4. See id. at 646. The court

explained:

Whatever of other infirmities the declaration may disclose, we are met at the outset with

the utter want of causal relauion between the alleged injury to plainuffs and the alleged statutory

transgression by any of defendants. The statute was not designed to give to stockholders who

have been defrauded in the sale of their stock treble damages for their injunes. nor indeed

any new or additional remedy for such injury If they have been thus defrauded. the law

aside from the anti-trust statutes affords ample remedy. The sale of corporate stock holds no

different relation toward the statute here invoked than would a horse trade, or any other

transacuuon between parties.

... We do not understand how a stockholder of an absorbed corporation who parted with

his stock for less than its actual valwe can attribute his loss to the substantial lessening of com-

petition or the creation of monopoly through acquirement of the corporate stock by a cor-

porate competitor. The competition destroyed or the monopoly created could not injure him

in his relauwn as a stockholder of the acquired corporauon, since he had parted with his stock.

Id. at 645-46.

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& Johnson to take in achieving the overall suppression of the TENS

industry,” McDonald, 537 F.Supp. at 1325, the type of injury the

plaintiffs suffered is not the type the antitrust laws were intended

to redress. See Associated General, 103 S.Ct. at 910 n.44 (“We

...need not decide whether the direct victim of a boycott, who suf-

fers a type of injury unrelated to antitrust policy, may recover

damages when the ultimate purpose of the boycott is to restrain

competition in the relevant economic market.”). In exchange for the

guarantee of receiving $1.3 million for their stock, the $5.7 million

contingent earnout, and the three-year employment contracts, the

plaintiffs willingly surrendered their stock in ST and their status as

actual or potential competitors of J&J for the next five years. Con-

trary to the district court’s portrayal of the situation that the plain-

tiffs “in no way intended to withdraw from the TENS industry,” 537

F.Supp. at 1329, the plaintiffs clearly intended to withdraw as com-

petitors in the pacemaker and pain control markets by signing the

noncompete agreements.’ The fact that the plaintiffs expected to

work in the industry as employees of J&J for at least three years?

and anticipated the contract earnout because of J&J's representa-

tions does not permit them to successfully distinguish the A.D. M.,

Chrysler, Peterson, Snvco, Turner line of cases.

Snyco, 551 F.Supp. at 950, and presumably Turner, 549 F.Supp.

at 809-LI, see supra note 6, also involved contract payouts that were

*There 1s no aliegauon that these noncompete agreements are in themselves unreasonable restraints

of trade. See infra.

*McDunald stayed as an employee of J&J for 2'4 years before he voluntarily left and was released

from his noncompete agreement w buy another pain control company. /d. at 1319. 1328. The other

two plainuffs finished out the three years as employees of J&J. although at the end of that ume penod.

Jensen was fired. /d. at 1319, 1328-29.

2 ne RAGIN st

PO Pt ten toe

SOAS Candie gy. Seminal Sah te i ill NG LAU Sat ge RS,

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contingent on the profits of the company sold to the alleged violator;

these courts did not accord any antitrust significance to the fraud

or breach of contract involved in the sale price ultimately paid under

the contracts. By agreeing to accept the earnout under the contract

with J&J, McDonald, Hagfors, and Jensen were voluntarily func-

tioning as mere contract creditors who were formerly market par-

ticipants. Similar to the situations in Chrysler, A.D. M., Snvco, and

Turner, had the plaintiffs received the full contingent earnout in the

contract, they would not have been harmed and clearly could not

sue. However, they would still be divested of their assets and

precluded from competing for five years, even though an injury to

the TENS industry may have occurred. If the sale of ST and its

alleged subsequent suppression had a negative effect on competi-

tion in the TENS industry, it would have occurred whether or not

the plaintiffs were harmed. See A.D. M. , 628 F.2d at 754. Likewise,

as in Chrysler, 643 F.2d at 1235, the plaintiffs would not have

received the full earnout if J&J had failed to make payments

because of a poor economy or a variety of other reasons unrelated

to the alleged antitrust violation. The injuries to the plaintiffs flowed

from the alleged fraud and breach of contract, not from suppressed

competition in the TENS or other product markets; thus, the plain-

tiffs did not suffer a Brunswick “antitrust injury.”

Although none of the “market withdrawal” cases involved seller-

plaintiffs who accepted employment contracts with the buyer-

defendants, the fact that MH&J continued in the industry as

employees of J&J under five-year noncompete contracts does not

alter the fact that they voluntarily withdrew as competitors and thus

|

A-14

lack “antitrust injury.” As employees, the only market the plaintiffs

would have a personal stuke in would be the labor market in that

industry, not the TENS market at which the conspiracy was aimed.

As employees, MH&J agreed to accept certain annual salanes and

benefits. 537 F.Supp. at 1318. Whether or not ST achieved the

potential in the market the plaintiffs envisioned, the plaintiffs as

employees were still subject to receiving such salaries and being

discharged without cause after three years. Any competition re-

strained in the labor market by reason of the plaintiffs’ employment

contracts and the agreements not to compete was only brought

about by plaintiffs’ voluntary and negotiated contractual choice. Cf.

Snyco, 551 F.Supp. at 952 (“the diminished number of competitors

results from [corporate] plaintiff's voluntary, contractual with-

drawal from the market”). This is unlike the situation in which an

employee challenges an alleged boycott in the employment market

of his and other employees’ services. See Radovich v. National

Football League, 352 U.S. 445, 448-49, 453-54 (1957) (alleged con-

spiracy among football teams to boycott players breaking standard

contract is subject to antitrust damages claim by boycotted player):

Ostrofe v. H.S. Crocker Co. , 670 F.2d 1378, 1390-91 (9th Cir. 1982)

(Kennedy, J., dissenting).

Regarding the covenants not to compete in this case, we note that

covenants not to compete have been used as parts of schemes to

unlawfully restrain trade. Schine Chain Theatres, Inc. v. United

States, 334 U.S. 110, 119 (1948); United States v. Crescent Amuse-

ment Co., 323 U.S. 173, 181 (1944); United States v. American

Tobacco Co. , 221 U.S. 106, 183 (1911). However, covenants not to

A-15

compete generally are not violative of the antitrust laws. United

States v. Empire Gas Corp., 537 F.2d 296, 307 (8th Cir. 1976).

When the goodwill of a business is sold along with its other assets,

such a covenant, if reasonably limited in time and geography, is

necessary to protect the buyer's legitimate interests. See id; Syvntex

Laboratories, Inc. v. Norwich Pharmacal Co., 315 F.Supp. 45,

56-57 (S.D.N.Y. 1970).

This case is not alleged to be a situation as in Schine, Crescent,

or American Tobacco in which the United States brought suit

against competitors who forced or attempted to force other com-

petitors to sell out to them by threats or other predatory conduct,

and extracted covenants not to compete through superior bargain-

ing position. Nor is it alleged that the covenants themselves were

unreasonable in scope or duration and should thus not be enforced.

Rather, the plaintiffs point to the existence of the covenants as

evidence of the underlying conspiracy to suppress the TENS in-

dustry. Such evidence would be admissible in a criminal! antitrust

suit brought by the United States against J&J or in an antitrust

damages suit brought by actual or potential competitors in the

TENS market or other product markets alleged to be injured by the

suppression of ST and the TENS industry. However, the mere

presence of such covenants ancillary to the voluntary sale of the

plaintiffs’ business cannot be used to bootstrap fraud and contract

claims into an antitrust suit. See Chrysler Corp. v. Fedders Corp.,

643 F.2d at 1231-35; Sryco, Inc. v. Penn Central Corp., 551 F.Supp.

at 950-53.

Finally, we think it clear that the damage award for this violation

A-16

of the antitrust laws is not only speculative, but serves to cor-

roborate the lack of plaintiffs’ direct injury from the alleged market

restraints. The jury awarded plaintiffs $56.8 million as compen-

satory damage. Yet as plaintiffs have attempted to otherwise prove,

their actual damage from the fraud or breach of contract was

$5.7-6.2 million. Plaintiffs urge that $56 million is ST’s damage

from not being allowed to survive and compete in the market; this

figure would allegedly have been its projected profit. But this argu-

ment is not only conjectural in amount, it basicaliy fails to recognize

that had J&J successfully manufactured the TENS device, the profit

would have been J&J’s and the only derivative share plaintiffs would

have received was their contracted earnout compensation awarded

in their suit for fraud.

Plaintiffs further urge that by the suppression, competition in the

TENS industry was harmed. But surely plaintiffs cannot claim

damages for the entire industry. In this regard, it is difficult to

understand just how the competition in the TENS industry was

harmed—ST’s competitors arguably were better off by J&J's sup-

pression of its own TENS product. Even if the competitors were

not better off, J&J had no duty to competitors or consumers to pro-

mote its own product. This is an internal, private business decision.

Cf GAF Corp. v. Eastman Kodak Co., 519 F.Supp. 1203, 1231

(S.D.N.Y. 1981) (firm’s failure to introduce a product is not anti-

competitive). Nor can plaintiffs’ individual withdrawal from the

market—separating themselves from ST (somewhat inconsistent

with plaintiffs’ overall theory)—be the basis for projected profits.

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A-17

Another theory we inferentially glean from plaintiffs’ argument is

that plaintiffs harm is based upon J&J’s further intrenchment in the

analgesic market by removing ST and its competition in the related

field of pain control. Assuming this true, plaintiffs’ harm clearly

did not result from such alleged market restraints.

In sum, we find that (1) plaintiffs voluntarily withdrew themselves

from competition: (2) there was no causal connection between plain-

tiffs’ harm and the alleged market restraint; (3) there was only

speculative damage shown, and (4) any injury plaintiffs have shown

was not a type that Congress soughtto redress under the antitrust laws.

Since the plaintiffs have not proven “antitrust injury,” a solid line

of case law mandates a judgment notwithstanding the verdict to

dismiss the plaintiffs’ antitrust claims for failure to prove damages

cognizable under the antitrust laws. If consumers or competitors in

the product markets suffered “antitrust injuries,” they should be the

ones with capacity to sue under the antitrust laws for the violations

alleged here. Cf’ Southhaven Land Co. v. Malone & Hyde, Inc. , 715

F.2d 1079 (6th Cir. 1983).

We vacate the judgment on the antitrust claim and remand with

directions to dismiss the counts dealing with these claims.

ll. THEFRAUD CLAIM

J&J challenges the fraud claim on several grounds. First, it argues

that the alleged oral assurance thata full earnout would be returned

to the plaintiffs was merely a prediction ofa future event; second, that

nocredible evidence exists that such an assurance was made; third,

that the alleged promises of generalized assistance to ST were notac-

tionable: fourth, assuming a prima facie case of fraud was estab-

A-18

lished, that no ascertainable damage was shown; last, that the trial

court erred in failing to submit J&J's in pari delicto defense. We

discuss these claims seriatim.

J&J first alleges that a prediction of a future event cannot be the

basis of an actionable misrepresentation. The evidence adduced at

trial shows that J&J made assurances of what it was going to do for

ST after the acquisition. These assurances were material promises

to be performed in the future by the defendant. Under controiling

Minnesota law, when such promises are made with the intent to

defraud and without the intent to perform, this constitutes actionable

fraud. Vandeputte v. Soderholm, 298 Minn. 505, 216 N.W.2d 144, 147

(1974); Wojtkowski v. Peterson, 234 Minn. 63,47 N.W.2d 455, 458

(1951).

Second, J&J argues that no credible evidence exists that it assured

plaintiffs of receiving a full earnout. We find this argument to be

without merit because plaintiffs’ fraud claim did not rest on any

“guarantees” of payment. Rather, plaintiffs’ theory was that JoJ

made material promises to be performed in the future which were

made with the intent to defraud and which were never intended to be

performed by J&J. These promises were related to the general pro-

motion of ST.'°

Third, J&J urges that the supposed generalized promise to make

‘‘an effort’ to promote ST cannot be a basis for the fraud claim and

‘For example, the district court, in reciting the facts, observed:

Mr. Whitlock admitted at the trial that he told the plaintiffs that Johnson & Johnson had the

resources and would put them to work for SumTech in aneffor to make StumTech “tops in the

pacer business” and that the Johnson & Johnson name would be behind SumTech. The evidence

revealed that the defendant represented that it would furnish substanual research and develop-

ment funds. marketing assistance, administrative assistance, etc., in an effort to promote

SumTech and its products to the fullest extent.

537 F Supp. at 1352.

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A-19

should have been dismissed because (a) the evidence contradicts the

alleged promises, (b) even if the promises were made, J&J made the

requisite effort, (c) any alleged promise to promote is contrary to the

contractual good faith standard of conduct, and (d) whether the con-

tract terms contradicted the alleged oral representations is aquestion

of law and should not have been decided by the jury.

As to(a) and (b) above, there was sufficient evidence for the jury

to find to the contrary.'!

With regard to(c), we cannot find any inconsistency between the

acquisition agreement and J&J’s alleged representations that J&J

would provide marketing, financial , managerial, and other assistance

to ST. The evidence shows representations that J&J would permit the

plaintiffs to remain with ST and runthe business; that the J&J name

would be behind ST; and that J&J would do everything possible to

assist ST so that it could produce sales and profits sufficient to

generate the maximum earnout payments. Moreover, the court

specifically instructed the jury that it could not return a verdict for

the plaintiffs on the basis of any representations directly contradicted

by the September 20, 1974, agreement. We must assume that the jury

'' See supra note 10. Additionally, the evidence revealed that:

Within six months of the acquisition, Johnson & Johnson imposed a number of restrictive and

suppressive requirements upon StuumTech. including: The hiring freeze. the imposition of the

requirement that research and development be funded only out of gross profits. the transfer pnc-

ing policy : Devices’ acquisition of exclusive distribution nghts for SumTech products for the

United Kingdom and Europe: the humiliation and demouon of Mr. Mc Donald: the prohibi-

uon against using the Johnson & Johnson name: the prohibivion against expansion of interna-

tional and domestic business; the prohibition against any mini-plants. the direction to cutin-

ventories 40 & when SumTech was experiencing shortages of inventories; the curtailment of

SumTech’s programmable pacemaker development. and the prohibinon against SumTech

display ing its products at Johnson & Johnson's annual meeung as other Johnson & Johnson com-

panies were allowed to do.

537 F.Supp. at 1352.

A-20

properly regarded these instructions, especially when there is

evidence to support the jury's findings.

J&J also argues that whether the contract terms contradicted the

alleged oral representations is a question of law and should not have

been decided by the jury. We respectfully disagree.

The district court instructed the jury that “where the parties’

contract contradicts the allegedly false representation, plaintiffs’

reliance on the representation is not reasonable under the circum-

stances.” J&J admits that this is acorrect statement of law, but asserts

that the jury was not the one toapply it. J&J relies on the principle that

a contract must be interpreted and enforced according to its terms,

and such interpretation is primarily a question of law. This argument

fails for three reasons. First, although interpreting a contract may be

a question of law, it does not follow that determining whether a

representation contradicts a contract is also a question of law. To the

contrary, whether a representation contradicts a contract is question

of fact, or at best a mixed question of law and fact. Second, J&J made

no objectior. «. the applicable instruction at trial or in its post-trial

motions. Th. * eve. ifthe determination were a question of law, we

find the represenu *'ons .* not contradict the contract.

J&J's fourth challe;.z* tc the fraud claim is that even assuming

that plaintiffs made out a prima facie case of fraud, they failed

to prove any damages. The district court instructed that the appro-

priate measure of compensatory damages was the difference between

the value of the plaintiffs’ stock in ST and what they actually received

for it. Plaintiffs received $1.3 million; they testified that the stock was

worth at least $7 million. Mr. Whitlock, vice chairman of J&J's Exec-

alt ee iee iis ee

A-21

utive Committee, admitted that he sought authority from the Exec-

utive Committee to purchase the ST stock for $8 million because that

is what he thought it was worth. We find that this is sufficient evidence

to sustain the jury’s damage award on the fraud claim.

J&J stressed at ora] argument that since the contract only provided

the plaintiffs with amaximum of $5.7 million in addition to the $1.3

million already paid, the most the jury could award would be $5.7

million. J&J argues that the amount over $5.7 million is therefore ex-

cessive. We do not agree. There is evidence in the record that J&J

made representations to plaintiffs to the effect that they would receive

certain executive benefits in addition to the payout. The jury could

have found these to equal the difference.

J&J's final challenge to the fraud claim is that the district court erred

in refusing to submit J&J's in pan delicto defense. The essence of this

defense is that plaintiffs concealed from J&J that their previous

employer had fired them for incompetence, and that J&J would not

have bought ST had it known this fact. The district court allowed the

defendants during trial to explore the area of nondisclosure on the part

of the plaintiffs. However, the evidence revealed only that McDonald

and Hagfors left the employment of their previous employer due to

personality conflicts. J&J failed to provide evidence that plaintiffs

were fired for incompetence. Moreover, there was noevidence of any

reliance upon this alleged nondisclosure.

Under the circumstances we find no prejudicial error in the district

court's refusal to submit an instruction on the in pan delicto defense.

Because we find no merit to J&J's challenges of the fraud claim,

we affirm the jury’s award of $6.275 million.

A-22

lll. PUNITIVE DAMAGES

Based on the fraud count. the district court submitted the question

of punitive damages to the jury. The jury returned a verdict for $25

million. J&J challenges the punitive damages award as being ex-

cessive and based upon prejudicial factors.

The district court instructed the jury: “If you decide to award

punitive damages, then your award should be measured by such fac-

tors as the seriousness or degree of any damage defendant's conduct

caused to the general public.” This is acorrect statement of Minnesota

law with respect to punitive damages. The relevant statute states:

Any award of punitive damages shall be measured by those

factors which justly bear upon the purpose of punitive damages,

including the seriousness of hazard to the public arising from

the defendant's misconduct, the profitability of the misconduct

to the defendant, the duration of the misconduct and any con-

cealment of it, the degree of the defendant’s awareness of the

hazard and of its excessiveness, the attitude and conduct of the

defendai: upon discovery of the misconduct, the number and

level of employees involved in causing or concealing the

misconduct, the financial condition of the defendant, and the

total effect of other punishment likely to be imposed upon the

defendant as a result of the misconduct, including compen-

Satory and punitive damage awards to the plaintiff and other

similarly situated persons, and the severity of any criminal

penalty to which the defendant may be subject.

Minn. Stat. § 549.20(3) (1982).

Punitive damages are designed to punish the offender for his

malicious or oppressive conduct. Nye v. Blyth Eastman Dillion &

Co. , 588 F.2d 1189, 1200 (8th Cir. 1978). Inthe presentcase, itis highly

relevant that the malicious or oppressive conduct must have been

related to the fraud, not the suppression. Punitive damages beyond

the statutory trebled damages cannot be awarded for an antitrust

violation. The enhancement of damages in an antitrust case

A-23

is the damages trebled. See Clark Oil Co. v. Phillips Petroleum Co.,

148 F.2d 580, 582 (8th Cir. ) (antitrust damage provision embodies

both punitive and compensatory damages), cert. denied, 326 U.S.

734 (1945). A separate award for punitive damages would at the very

least become duplication.

The record makes clear that plaintiffs argued to the jury that it could

punish J&J for the suppression. Counsel used the court’s punitive

damages charge to inject an inflammatory remark concerning

“public damage” directly related tothe alleged antitrust violation of

suppression.

Plaintiffs’ counsel argued:

Before we go any further, “seriousness or degree of any

damage the defendant's conduct caused to the general public.”

There is no amount of money that can any way, any way, satisfy

that requirement—none. Because the seriousness and the

degree of damage that thes have caused to the general public is

incalculable, even if it were but one person, one person. as you

Saw in this study when they were trying to evaluate in terms

of money.

That's the way you have todo it, in terms of money —evaluate

what it is in the pain market.

They say it’s $50 billion it costs. But they say the pain itself

to the patients is immeasurable. The amount there is im-

measurable! You can never calculate that! You can never

calculate that!

So how do we do this? I don’t know. I really don’t know. I will

tell you what I do know and what we in this courtroom, we know,

aiid J&J knows and all those people, all of the people, so-called

chronic pain sufferers, every one of them.

A-24

The drugs—Tylenol with Codeine, Zomax, whatever—are ab-

solutely worthless to them. That is uncontested, that the drugs can-

not do anything for those people—nothing!

Yet the chronic pain patients spend $300 milliona year on this fake,

on those pills that do nothing, because they're looking for anything

they can get their hands on to relieve their pain, and J&J above all

of them knows that that [TENS] would help them!

We're a $5 billion company. We can't be fooling around

with this small-time stuff [TENS]. Now, that—that is an obligation.

Tr. 13, 159-60.'?

Plaintiffs ultimately asked the jury for $300 miilion in punitive

damages. This amount was based on the harm to the public—the

chronic-pain patients that were denied access to TENS devices.

Thus, we think it clear the jury was rejuested to punish defendants

for suppression, not for fraud. This argument was clearly prejudi-

cial. Although the fraud may have been tangentially related to the

suppression, damages for suppression were to be awarded by the

'?Plainuffs’ counse! also then instructed the jury that J&J's failure to send letters to the medical

profession about the dangers of analgesic drugs was a basis for awarding punitive damages:

Well. the one that is the most disturbing. at least to me, 1s the serrousness and the degree of

damage that the defendant's conduct caused to the general public. because since J&J 1s the

only one in the position, the only drug company in the posiuon that has somethig else [TENS],

not only could they send a letter to the doctors. who they have this fantastic contact with—

we ve been through the trade relations —but not only would they be able to say, “Look. the

drugs are no good for the chronic patient. They re no good. Don't use them. Don't fake these

people out or let them believe that these pills are going to help them in the slightest’ —not

only could they have said that. but in the same letter they could say, “We have the answer.

Tr. 13. 167-68. This argument had nothing to do with the musrepresentation concerning piain-

uffs’ earnout.

A-25

jury under the antitrust claim. Our finding that these plaintiffs do

not have standing to punish for antitrust violations merely enhances

the prejudicial effect of the argument.

We therefore find the jury’s $25 million punitive damages award

to have been largely based upon plaintiffs’ prejudicial and legally

unfounded arguments. Moreover, the long tral (nearly six months)

and the evidence relating to the entire antitrust claim created a prej-

udicial atmosphere that was compounded by plaintiffs’ impermis-

sible closing argument on punitive damages. This allowed the jury

to punish the defendant as well for the antitrust violations.

In this regard, we vacate the award on punitive damages and

remand to the district court for a new trial solely on the issue of

punitive damages. We do not pass on the issue of whether, in the

abstract, a $25 million punitive damages award may be excessive

when based upon a $6 million fraud judgment.

We vacate the award of damages relating to the antitrust claim under

§§ | and 2 of the Sherman Act with directions to dismiss piaintiffs’

complaint with prejudice as to these claims for lack of standing to

bring the suit.

We affirm the judgment on the verdict of $6.275 million for fraud;

we vacate the judgment on the verdict of $25 million for punitive

damages and remand to the district court for a new trial on punitive

damages only.

Each party shall pay own costs.

HEANEY, Circuit Judge, concurring and dissenting.

I concur in the majority opinion only insofar as it sustains the

jury verdicts for breach of contract and fraud. I would affirm the $25

million punitive damage award. I would moreover hold that the plain-

tiffs had standing to bring an action for antitrust violations and that

while insufficient evidence was presented to find a violation of Sec-

tion 2 of the Sherman Act, sufficient evidence was presented to permit

the jury to find that the defendants had violated Section | of the Sher-

man Act under a rule of reason. I would remand tothe district court

for a new trial on the section | violation under a rule of reason

standard.

i.

SECTION 1 OF THE SHERMAN ACT

A. Standing

The standing requirements are correctly set forth in the majority

opinion. It is their application to this case that is questionable. In my

view, the plaintiffs had standing to bring an actionunder Section 1 of

the Sherman Act under the six standards of Associated General Con-

tractors of California v. California State Council of Carpenters, 103

S. Ct. 897 (1983).

(1) There was a causal connection between the alleged antitrust

violation and the harm to the plaintiffs. The violation consisted

of J&J’s suppression of the TENS device. The plaintiffs were harmed

by this violation. Had J&J made the payments required by the con-

tract, and suppressed the devices the plaintiffs could still recover for

any injuries that the jury found to have occurred because of the

suppression.

Brunswick Corp. v. Pueblo Bowl-O-Mat, Inc. ,429 U.S. 477 (1977),

isnoton point. The facts may be briefly stated: Brunswick, one of the

nation’s largest manufacturers of bowling equipment, acquired a

number of defaulting bowling centers, some of which were incom-

petition with the plaintiffs’ recreation centers. Plaintiffs brought suit

under Section 7 of the Clayton Act on the theory that. because of

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A-27

Brunswick's size, it had the capacity to drive smaller competitors out

of the market. Plaintiffs claimed damages for the lost profits they

would have made had Brunswick not acquired the defaulting centers

and continued their operations. The jury returned a verdict for the

plaintiffs. On appeal. the Third Circuit adopted the plaintiffs’ legal

theory, although remanding for anew trial. NBO Industries Tread-

way, Cos. v. Brunswick Corp. , 523 F.2d 262, 268-273 (3d Cir. 1975).

On petition for a writ of certiorari, a unanimous Supreme Court

reversed. Justice Marshall, writing for the Court, observed that not

only was the injury unrelated to the substantive basis for Brunswick’s

liability, but an award of damages based on such injury would be “‘in-

imical to the purposes” of the antitrust laws. Brunswick Corp. v.

Pueblo Bowl-O-Mar, Inc., supra, 429 U.S. at 488. The lost profits

claimed by the Brunswick plaintiffs were profits they would have earn-

ed if the acquired bowling centers had been permitted to drop out of

the market. “‘Inother words, they were profits that would have been

earned as the result of a reduction in competition.”’ Note, Antitrust

Injury and Standing: A Question of Legal Cause, 67 Minn. L. Rev.

1011, 1023 (1983).

Inthe instant case, plaintiffs claim an injury directly related to the

substantive basis of J&J's antitrust liability. They claim the “‘profits”’

lost as a result of J&J’s suppression of the TENS devices. They did

not seek to restrict competition or to withdraw from it; they sought

rather toexpand the competition. They sought to profit by having the

TENS devices developed by acompany with adequate capital and an

in-place international distribution system. When J&J instead sup-

pressed the TENS devices, both competition and the plaintiffs were

harmed.

(2) J&J’s motives were improper, i.e., the suppression of the

A-28

TENS devices to maximize their profits in prescription and non-

prescription pain killers, and to retard the development of TENS

devices in the pain killing industry.

(3) The injury was clearly of the type that Congress intended to

protect against. Plaintiffs’ injuries flowed from the anti competitive

aspects of J&J's acts. The fact that the anticompetitive acts were

also breaches of contraci and acts of fraud is immaterial.

(4) The anticompetitive injury to the plaintiffs flowed directly

from J&J’s suppression of the TENS devices.

(5) The damages are reasonably susceptible of measurement.

(6) There is little risk of duplicate recoveries. The district court

should limit recovery to the larger of the verdicts recovered under the

fraud plus punitive damages or the antitrust verdict trebled. Unless

the plaintiffs are permitted to recover antitrust damages, the reality

is that no one will have a sufficient stake to justify bringing an antitrust

action and the practice of buying products or processes for the pur-

pose of suppressing them will continue.

Ihave carefully read the cases cited by the majority for the propo-

sition that a person who voluntarily withdraws from the market does

not have standing to bring an antitrust action. In each of them the

plaintiff intended to withdraw from the market. Here, the plaintiffs

did not intend to withdraw. They intended to combine their

knowledge, skills and resources with those of J&J and continue to par-

ticipate in the market. Indeed, they believed that the product would

be marketed vigorously and they would share along with the pain-

ridden in the benefits of that vigorous marketing.

In view of the fact that I would find that the plaintiffs had standing,

it is necessary to discuss the remaining contentions raised by

appellants.

;

‘

|

‘

;

j

A-29

B. The Section ] Violation

To establish a claim under Section | of the Sherman Act, a plain-

tiff must show (1) that two or more persons entered into a “contract,

combination***or conspiracy,” and (2) that it was in restraint of

trade. Oreck Corp. v. Whirlpool Corp. , 639 F.2d 75, 78 (2d Cir. 1980),

cert. denied, 454 U.S. 1083 (1981). Here, the jury properly found and

the district court properly held that the requisite concerted action was

present. The court’s reasons are set forth in detail in its post trial opi-

nion and are fully supported in the record. First, J&J entered intoa

series of agreements with the subsidianes Devices, PCD, and McNeil

to suppress the TENS devices. See Perma Life Mufflers, Inc. v. Inter-

national Parts Co. , 392 U.S. 134, 141-142 (1968); Kiefer-Stewart Co.

v. Seagram & Sons, 340 U.S. 211, 215 (1951). Second, J&J used

employment and noncompete agreements in tandem with the sales

agreement. As for the “restraint of trade” element, section 1 clearly

prohibits persons from engaging in acts to suppress or destroy acom-

petitor in order to protect or enlarge their market position or to

foreclose competition in a market. See 2 Von Kalinowski, Antitrust

Laws and Trade Regulation § 6.01 (1982) (collected cases).

The key issue in this case, then, is whether plaintiffs’ suppression

claim should be analyzed under a per se ora rule of reason test. Under

a per se approach, acts in restraint of trade, if proven, are conclusively

presumed illegal without inquiry into the competitive harm they may

have caused or the business reasons for their use. Northern Pacific

Railway Co. v. United States, 356 U.S. 1,5 (1958). Under the rule of

reason test, the plaintiff must demonstrate that under “‘all the cir-

cumstances of a case***(the challenged practice] impos[es] an

unreasonable restraint on competition.” Continental TV, Inc. v. GTE

Sylvania, Inc. , 433 U.S. 36, 50 (1977) (footnote omitted). Such

unreasonableness is generally established by showing that the

A-30

restraint has an adverse impact on competition which is not offset by

other procompetitive consequences. See Rosebrough Monument Co.

¥. Memonal Park Cemetery Association, 666 F.2d 1130, 1138 (8th Cir.

1981), cert. denied, 457 U.S. 1111 (1982). Plaintiffs’ section 1 claim

here was tried on a per se theory.

1. Per Se Rule

Nocase law or secondary authority recognizes a per se rule agairist

“suppression of competition of the kind the jury found to exist in this

case. Plaintiffs rely on cases which state that it is per se illegal “‘to

foreclose competitors from any substantial market.” E.g., United

States v. Griffith, 334 U.S. 100, 107 (1948); International Salt Co. v.

United States, 332 U.S. 392, 396 (1947). Although the

‘“foreclos[ure]” language can be stretched to cover the facts here, the

cases cited by plaintiff are distinguishable because they involve price

fixing, tying arrangements, horizontal market divisions, and group

boycotts — activities against which per se rules traditionally have been

applied. See Von Kalinowski, Antitrust Laws and Trade Regulation

§ 6.02 (1982).

Thus. the question becomes whether we should create a new per

se category for intentional acts of suppression of the type found here.

The Supreme Court has frequently cautioned that “[i]tis only after

considerable business experience with certain business relationships

that courts classify them as per se violations.” Broadcast Music, Inc.

v. CBS, 441 U.S. 1, 9 (1979), quoting United States v. Topco

Associates, 405 U.S. 596, 607-608 (1972). See Von Kalinowski,

Antitrust Laws and Trade Regulation § 6.02 (1982).

Nonetheless, the Supreme Court has not held that per se categories

are limited to those listed above. It has stated the test for finding per

se categories in various ways. In Broadcast Music, Inc. v. CBS, supra,

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A-31

441 US. at 19-20, quoting United States v. United States Gypsum Co.,

438 U.S. 422, 441 n.16 (1978), it said that the test for determining

whether to apply a rule of per se illegality to a restraint of trade is

‘whether the practice facially appears to be one that would always

or almost always tend to restrict competition and decrease

output * * *or instead one designed to ‘increase economic efficiency

and render markets more, rather than less, competitive.” InNorthern

Pacific Railway Co. ¥. United States, supra, 356 U.S. at 5, it stated that

to be illegal perse a practice must have a “pernicious effect on com-

petition and lack any redeeming virtue.”

Inthe light of these standards we should not consider the conduct

of J&J inthe present case a per se violation for the following reasons.

' First, aper se rule against “suppression” of the kind of conduct in-

volved here has no case law support. Nor are these acts of suppres-

sion closely analogous to any of the per se categories that courts

previously have recognized. Moreover, the Supreme Court has

advised courts to move cautiously in finding new per se offenses.

Second, plaintiffs’ suppression theory is not well defined. Suppres-

sion is the essence of every violation of section 1, which prohibits

concerted action “‘in restraint of trade.” If we find that J&J's acts of

suppression here constituted a per se section | violation, where

should the line be drawn to determine which suppressive acts are per

se illegal? Obviously notall combinations in restraint of trade are per

se illegal. Standard Oil Co. v. United States, 221 U.S. 1,63-70 (1911).

The conduct involved here will not always be egregious. The act

of purchasing acompany for the purpose of suppressing it is indeed

pernicious, and it is difficult to conceive of any benefit that could

result from such an act. It is important to remember, however, that

in this case, the use of the phrase “intentional suppression” is a short-

hand way of saying that the jury inferred from circumstantial

A-32

evidence— in essence J&J’s failure to adequately fund and promote

StimTech—that the defendant intended to suppress the TENS

devices. A decision notto fully fund and promote a new product like

TENS is not always bad for society. It may be bad because it is an

intentional suppression of competition, or it may be a valid business

decision because the product is not a worthwhile one.

Where, as here, the conduct that forms the basis of an alleged

unlawful restraint of trade may be either good or bad for competition,

depending on the particular factual setting, a per se rule against such

conduct is inappropriate. This is particularly true since per se

antitrust rules are intended to apply to categories of conduct, not

single acts. See Broadcast Music, Inc. v. CBS, supra, 441 U.S. at9.

Finally, this case is not a unique one because of J&J’s size or market

position. While J&J holds adominant position in the market, itis not

amonopolist. Discouraging all acquisitions does not promote com-

petition. Individuals or small companies frequently are better in-

novators than large corporations, but they need the resources ofa large

corporation to market the product. An inappropriate per se rule here

in order to punish J&J for intentionally suppressing plaintiffs’ prod-

uct may be more harmful to competition in tiie long run.

2. Rule of Reason

On the other hand, there is clearly sufficient evidence in the record

to find a violation of Section 1 of the Sherman Act under a rule of

reason, €.g. :

A. Prohibition of sales of TENS devices by StimTech in the United

Kingdom and Europe, except through companies who had only one

salesman and could not provide adequate sales coverage —

December, 1974.

va “aa

eT a

A-33

B. Refusal! to permit SumTech to develop an improved TENS

device — December, 1974.

C. Refusal to permit expansion of StimTech’s United States

business, and imposition of a “‘concentrated effort program”

restricting StimTech’s sales efforts to three or four already successful

territories —January, 1975.

D. Refusal to permit StimTech to expand its successful and

unique nurse liaison program for the sale of TENS devices—

January, 1975.

E. Prohibition of construction of foreign factories and assembly

plants for StimTech’s products, known as “mini plants,” useful to

avoid tariff barriers, to receive favorable government treatment, and

to reduce cost of production—January, 1975.

F. Continuing refusal to permit StimTech to engage in interna-

tional marketing of the TENS devices, including entering a coercive

arrangement with Devices prohibiting StumTech from selling in the

United Kingdom and Europe. firing of international salesmen, failing

to follow up on international sales leads, refusing to permit SumTech

to establish its own distribution in Sweden in competition with

Devices distributor, and failing to use J&J international connections

to assist SumTech.

G. Refusal in 1977 to accept large purchase orders for TENS

devices from Pain Control Centers International.

H. Limiting and diluting StimTech’s advertising campaign in

1977-1978. This advertising would have stressed the advantages of

TENS devices over drugs used to kill pain.

I. Misappropriating StimTech’s TENS electrode technology,

refusing toassist StimTech in the development of anew TENS elec-

trode, failing to supply StimTech witha TENS electrode developed

by J&J's Patient Care Division for approximately three years, and

ee, |

A-34

attempting to coerce StimTech into price fixing and customer and

market allocation agreements as a condition to supplying TENS elec-

trodes to StumTech.

J. Withholding from StimTech a conductive adhesive gel for

TENS electrodes developed by J&J's Patiert Care Division.

K. Continuing refusal to permit SumTech to market its TENS

devices in Japan or enter into licensing or other distribution arrange-

ments with Japanese companies.

A jury could find from the evidence outlined above and similar

evidence presented at trial that J&J's actions not only affected the

market for TENS devices but that the actions were taken to protect

J&J's stake in the over-the-counter and prescription analgesic drug

markets. The TENSdevices directly compete with analgesic drugs

in virtually all areas of paincontrol. J&J isthe dominant firm in both

the prescrnipuon and over-the-counter analgesic markets, and its share

in both these markets increased rapidly in recent years and continues

to grow.

A defendant's intent in adopting a challenged practice is relevant

to determining whether that practice is reasonable. See Continental

TV., Inc. v. GTE Sylvania, Inc. , supra, 433 U.S. at50n.15; Chicago

Board of Trade v. United States, 246 U.S. 231, 238 (1918). Here. the

jury found that J&J intentionally suppressed StimTech to prevent it

irum competing with J&J.

In sum, since it appears that there is sufficient evidence in the

record to sustain a finding that J&J's actions were motivated by an

anticompetitive intent and they had an anticompetitive impact, a jury

might properly conclude that J&J’s conduct constituted an

unreasonable restraint of trade in violation of section 1. A remand for

a jury determination on that issue is therefore appropriate. See

A-35

generally Apply ing the Rule of Reason: A Survey of Recent Cases

and Comment. 18 San Diego L. Rev. 335 (1980).

i.

SECTION 2 OF THE SHERMAN ACT

To establish a claim of attempt to monopolize the plaintiffs were

required to prove (1) arelevant market, (2) a specific intent to obtain

a monopoly within that market, (3) steps to obtain monopoly power,

and (4) adangerous probability of success in obtaining a monopoly.

United States v. Empire Gas Corp. , 537 F.2d 296, 298-307 (8th Cir.

1976), cert. denied, 429 U.S. 1122 (1977). Here. plaintiffs did not. as

a matter of law, prove adangerous probability of success in any of the

four markets considered by the jury below. J&J’s share in any of the

relevant markets was significantly less than that required to indicate

a dangerous probability of success.

PUNITIVE DAMAGES

In my view, the jury was correctly instructed as to punitive damages

and that award should be permitted to stand. The fraud on the part of

J&J was entering into the agreement with plaintiffs with the intent to

suppress the TENS devices. J&J's conduct was a breach of contract,

an act of fraud, and an act of suppression prohibited by the Sher-

man Act. If J&J had not acted out their intent to suppress, there

would be no damages. But, they acted on their intent and the plain-

tiffs and the public were harmed. As one authority has noted, “*[I]t

is not so much the particular tort committed as the defendant's

A-36

motives and conduct in committing it which will be important as

the basis of the award [of punitive damages].”’ W. Prosser, Law of

Torts § 2, at 11 (4th ed. 1971) (footnote omitted). The plaintiffs

should be able to recover punitive damages to deter J&J or any other

company from engaging in similar intentional conduct in the future.

See City of Newport v. Fact Concerts, Inc. , 453 U.S. 247, 266-267

(1981); Nve . Blyth Eastman Dillion & Co., 588 F.2d 1189, 1200

(8th Cir. 1978).

The majority correctly notes that treble damages in an antitrust

action enbodies both punitive and compensatory elements. Thus,

the plaintiffs’ recovery would in any event be limited to the larger

of the sums allowed for the antitrust violation or the fraud claim

with punitive damages. No duplicative damages would be

permitted.

IV.

CONCLUSION

We cannot continue to dilute our antitrust laws. They should be

vigorously enforced to insure a competitive economy in which new

products are freely and fully developed. While we should not

discourage large companies from acquiring smaller ones for the

purpose of developing the products of the smaller company, we can-

not permit a company that is dominant in a relevant market to ac-

quire a smaller company that has perfected a competing product

with an intent to suppress that product and then carry out that in-

tent. Such conduct is clearly in violation of the antitrust laws. If the

seller makes the sale with knowledge of the intended suppression

or without regard to whether the product will be developed. he or

A-37

she obviously does not have standing to bring an action for the

antitrust violation. But if the sale is made with the understanding

that the product will be freely and fully developed and that the seller

will participate in the benefits of the development, he or she has

standing. Unless we so hold, the probabilities are that the conduct

will go unpunished.

A true copy.

Attest:

CLERK, U.S. COURT OF APPEALS. EIGHTH CIRCUIT.

APPENDIX B

IN THE

United States District Court

DISTRICT OF MINNESOTA

FOURTH DIVISION

STANLEY McDONALD. NORMAN R.

~ HAGFORS and CLAYTON JENSEN, Civ. 4-79-189

Plaintiffs,

VS. MEMORANDUM OPINION

JOHNSON & JOHNSON, AND ORDER

Defendants.

Gray Plant Mooty Mooty & Bennett, by Daniel R. Shulman

and John Q. McShane, 300 Roanoke Building, Minneapolis,

MN; 55402: and

Alioto & Alioto, by Joseph M. Alioto, 11] Sutter Street,

San Francisco, CA 94104.

Maslon Edelman Borman Brand & McNulty. by

Charles Quaintance. Jr., 1800 Midwest Plaza Building,

Minneapolis, MN 55402;

Patterson Belknap Webb & Tyler, by David F. Dobbins

and Theodore B. Van Itallie, Jr., 30 Rockefeller Plaza,

New York, NY 10112; and

James E. Farrell. Johnson & Johnson, 501 George Street,

New Brunswick, NJ 08903.

B-2

] INTRODUCTION

On May 2, 1979, Norman R. Hagfors, Clayton Jensen, and Stanley

McDonald, hereinafter plaintiffs, filed this suit against Johnson &

Johnson, a health care corporation headquartered in New Brunswick,

New Jersey, alleging breach of contract, fraud, and conduct designed

to foreclose competition in violation of Sections | and 2 of the Sher-

man Act, 15 U.S.C. §§1 and 2, and Section 7 of the Clayton Act, 15

U.S.C. §18. This Court’s jurisdiction is based on §§1332 and 1337 of

28 U.S.C.

Following a five and one-half month trial in which the jury awarded

the plaintiffs $56,800,000.00 (before trebling) on the Sherman Act

claims, $6,275,000.00 as actual and compensatory damages and

$25,000,000.00 as punitive and exemplary damages on the fraud

claim, and $5,700,000.00 on the contract claim, the defendant

Johnson & Johnson moves this Court, pursuant to Rule 50(b),

F.R.Civ.P. for judgment notwithstanding the verdict or, in the alter-

native, for a new trial. For the reasons stated below, the motion is

denied.

The essential elements of the plaintiffs’ contentions are as follows:

1) Johnson & Johnson induced the plaintiffs to enter into stock

purchase and employment agreements on September 20, 1974, on the

basis of numerous promises and representations of Johnson &

Johnson’s intention to foster the rapid and successful development

of StimTech, a corporation owned by the plaintiffs which manufac-

tured and sold heart pacemakers and electronic nerve stimulators for

the control of pain; ;

2) From the time of StimTech’s acquisition by Johnson & Johnson

until the present, Johnson & Johnson intentionally caused StimTech

to languish close to the point of extinction;

3) During the same period of time, Johnson & Johnson placed

tremendous resources and support at the disposal of its pain control

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drug business, which enjoyed phenomenal growth and profitability

in the sale of drugs used to treat the same pain conditions that the

transcutaneous electronic nerve stimulators (TENS), manufactured

by StimTech, could have effectively treated; and

4) All of the aforementioned activity, designed to foreclose com-

petition between TENS devices and pain control drugs, occurred with

the full knowledge and participation of the top executives of Johnson

& Johnson.

I] THE EVIDENCE

This Court considered the evidence in the light most favorable to

the non-moving parties, the plaintiffs, and because of the magnitude

of the 13,000 page transcript generated in the course of the five and

one-half month tnal, summarized only that evidence which is relevant

to the plaintiffs’ claims, together with the inferences which may prop-

erly be drawn therefrom. Even so, this summary by no means pur-

ports to be complete and exhaustive. The transcript itself should be

referred to as the ultimate source of the evidence; therefore, where

helpful, cites to the record (Tr. .. .) are included in parentheses.

In 1970, plaintiff Norman Hagfors set up an office and work- shop

in the basement of his home and began making plans to start a new

business. Mr. Hagfors, until the time of his new venture, had been

employed for 13 years at Medtronic Inc., most recently as head of

New Product Research. While at Medtronic, Mr. Hagfors did exten-

sive work in the area of nerve stimulation for the treatment of pain,

in addition to his earlier work in the heart pacemaker field.

In August of 1970, Mr. Hagfors incorporated Stimulation Tech-

nology, Inc. (StimTech) and began looking for a foreign heart pace-

maker company willing to enter into a licensing arrangement with him

for the manufacture and distribution of pacemakers in the United

States.

During that same time period, Dr. Donlin Long, a neurosurgeon at

Ba

the University of Minnesota, discussed with Mr. Hagfors the possibili-

ty of designing a transcutaneous (non-implantable) electronic nerve

stimulator (TENS). Dr. Long and Mr. Hagfors, along with several

other experts in the pain control field, had, in the late 1960's,

deveioped a surgically implantable device known as a dorsal column

nerve stimulator for use in the treatment of certain types of pain. The

interest in these devices had grown out of a theory proposed in a paper

publishcu by two medical doctors in 1965. The paper, entitled ‘‘The

Gate Theory of Pain,’’ described a mechanism by which nerve fibers

transmit pain signals to the brain. The success of the surgically im-

planted devices, developed as a result of clinical applications of the

gate theory, led Dr. Long to consider the deveiopment of an exter-

nal stimulator which would achieve the same results as the implant-

able stimulator. After joining Dr. Long in work at the University, Mr.

Hagfors designed the first modern solid state TENS device. The

device, consisting of an electronic package in a metal box, provided

electrical stimulation to nerve fibers on the skin, thereby blocking the

transmission of pain sensations along the nerve fibers deeper in the

body and reducing pain in the patient. This use of stimulation, with

the resultant effect of controlling pain in the patient, represented the

most sophisticated application of the gate theory of pain. The elec-

trical impulses were transmitted along wires to pads (electrodes) which

were attached to the patient’s skin at the pain site. The first SumTech

TENS device was constructed by Mr. Hagfors in his basement from

parts purchased from electronics supply stores.

In September of 1971, a short time before StimTech built its first

TENS unit, Mr. Hagfors was joined in his new corporation by Mr.

Stanley McDonald. From 1967 until 1971, Mr. McDonald had been

with Medtronic in a marketing position, and prior to that he had

worked in sales for the E.R. Squibb Company, where he won a

number of sales awards. Together the two men continued the search

for a foreign heart pacemaker manufacturer interested in a licensing

arrangement with StimTech. It was Mr. Hagfors’ plan to use the sale

B-5

of heart pacemakers as a financial base to support the development

and marketing of TENS devices, which had not attained the same

level of acceptance among the medical profession as that of the

pacemaker. This lack of acceptance of TENS among doctors was due

in large part to the doctors’ lack of awareness of the device and to the

fact that studies showed doctors were more drug-onented than device-

oriented. Mr. Hagfors believed, however, that once the medical pro-

fession could be sold the concept of stimulation, the potential market

for the TENS device far exceeded the potential for the already

substantial pacemaker market. The evidence revealed that in introduc-

ing a new drug or medical device, the patient’s confidence in the device

is much greater if it is prescribed for him by a physician. As a conse-

quence, many drugs and devices are marketed through the prescrip-

tion method. This is not necesszrily a result of the need to use them

under the supervision of a physician but rather because the physician’s

prescription constitutes an endorsement of the product, and it is

simpler and less expensive to educate the physicians than the popula-

tion generally.

It appears from the evidence that after the drug or device is

established and used, it is frequently taken off the prescription List,

or the so-called ‘‘ethica!’’ prescription list, and sold over the counter

(OTC). Since a great deal of the physician’s education depends on the

advice given him by the drug company ‘‘detail’’ men in whom he has

confidence, the best available way to put a new drug or medical device

into the market is to have the detail men contact the doctor, endorse

the product, and convince the doctor that the medicine or the device

should be purchased. In the course of educating the doctor, it is most

helpful to have available for presentation to the physician research

articles, experiments, and surveys made by other reputable physicians

who endorse the new cirug or device. Thus, the usual way in which to

proceed is to have the promoter of the drug ‘‘fund’’ the research by

prominent practitioners or researchers, and also to have these re-

searchers present learned treatises to the various segments of the

B-6

medical professions and publish the work in the medical journais.

These requirements for obtaining ‘‘respectability and acceptability”’

are expensive, time-consuming, and create genuine problems for a

new company with a new product entering into the medical field.

In achieving proper introduction and marketing, a TENS device

would face many of the above obstacles, whereas much of the ground

work had already been laid for the pacemaker’s endorsement. It was

for this reason that these plaintiffs made a decision to sell pacemakers.

If they could obtain a pacemaker and sell it, they would not face the

barriers to market entry that they faced in marketing the TENS

device. The pacemaker was already accepted both by the physicians

and the public; therefore, the extensive research and development

both in the product and the market were unnecessary. Since Mr.

Hagfors and Mr. McDonald were thoroughly familiar with the

manufacture and sale of pacemakers, it was their plan to manufac-

ture and sell pacemakers and to use the profits therefrom to ‘‘carry

them’’ financially while they developed the TENS device and

promoted the marketing of it.

During the summer of 1971, Mr. Hagfors invited Mr. P.J.

Reynolds, head of marketing for Devices, Ltd., an English heart

pacemaker company, to visit him on one of Mr. Reynolds’ trips to

the United States. In August of 1971, Mr. Reynolds came to the

United States and met in Minneapolis to discuss a licensing agreement.

As a follow-up to the August meeting, Mr. Hagfors and Mr.

McDonald went to England in October of 1971 for further discussions

with Devices. During the October meeting, a verbal understanding

between the two companies was reached in which it was agreed that

StimTech would distribute and manufacture heart pacemakers for

Devices, Ltd. in the United States. Pursuant to a later written agree-

ment, StimTech began importing and selling Devices’ pacemakers in

the United States.

Following the agreement with Devices, all three plaintiffs pledged

their financial and professional support to the development of

B-7

StimTech, and in the summer of 1972, Mr. Clayton Jensen assum-

ed a full-time position as Vice President in charge of manufacturing.

Mr. Jensen graduated in 1960 from the University of Minnesota with

a degree in mechanical engineering and, before coming to StimTech,

worked in various electrical and mechanical engineering positions with

the McQuay Corporation. With Mr. Jensen’s arnval at SumTech, the

executive staff consisted of Mr. Hagfors, President; Mr. McDonald,

Vice President for Marketing; and Mr. Jensen, Vice President for

Manufacturing.

During 1972, StimTech sold heart pacemakers and TENS devices

in Minnesota and California. At the same time, the company was

engaged in product research and market evaluation with the idea of

improving its product lines and expanding its sales terntory. Dr. Long,

the pain expert, signed an exclusive consulting agreement with

StimTech. Clinical studies during this period indicated the growing

possibilities for the successful use of TENS devices in new areas such

as sports medicine. Already TENS had proved successful in treating

conditions such as headaches, back pain, post-surgical pain, and

phantom limb pain without any risks to the patient. As a result of

TENS’ proven effectiveness in these areas, TENS devices were pro-

moted as alternatives to drugs. A strong selling point for TENS was

the fact that TENS have virtually no side effects, while pain-killing

drugs, as indicated in the evidence, have proven dangerous side ef-

fects, especially when used for extended periods of time.

The pacemaker StimTech was importing from Devices was the

Model 3821 mercury-powered device, which contained the first hybrid

integrated circuits in pacemaking as well as the first hermetically sealed

container for pacemaker electronics. By 1973, StimTech had im-

proved upon Devices’ 3821 by designing its own 3821T with a tangen-

tial entry for the pacemaker electrode.

In addition to designing the 3821T pacemaker, StimTech did ex-

tensive planning in 1973. In August of that year, before Johnson &

Johnson became a factor in the operation of the company, Mr.

B-8

McDonald presented his 1973-74 sales and marketing plan for

StimTech which included the following emphases:

1) research and new product development: in heart pacemakers,

development and manufacture of a programmable pacemaker

which would permit the alteration of pacemaker rate and other

parameters without the necessity for additional surgery; the

development of a lithium powered pacemaker; in TENS, the

development of a smaller TENS device with a separate battery

pack, rechargeable batteries, recessed knobs, and rounded cor-

ners; the develoment of new stimulating electrodes;

2) expansion of marketing: sales in the Far East and other inter-

national markets; marketing of TENS for sports injuries;

development of a TENS rental program; formation of a nation-

wide staff of nurses to work with doctors and salesmen;

3) market analysis: potential for TENS—existence of 18 million

arthntics, 7.5 million back patients, 1.2 million amputees.

Underlying Mr. McDonald’s sales and marketing plan was the em-

phasis on the company’s urgent need for additional funds to support

its projected research and development. Without additional capital,

StimTech believed it would not be able to exploit fully its potential.

From mid-1972 through mid-1973, StimTech contacted a number

of potential lenders and investors. The plaintiffs estimated that they

would need approximately $7 million to provide ‘‘up front’’ financ-

ing for research and development for new pacemaker and TENS pro-

ducts. They planned to raise $5 million of this amount through an

initial stock offering of $750,000.00, followed by a placement of $2

million, and then a public offering of $3 million.

Because of the fact that Devices, too, was in serious need of addi-

tional working capital, the plaintiffs also considered purchasing

Devices or having a public offering for a combined StimTech/Devices

company. Plaintiffs informed Devices of their interest in ‘‘combin-

ing forces.”’

In late May of 1973, StimTech entered into an agreement with

B-9

Piper, Jaffray & Hopwood, Minneapolis’s leading investment

bankers, giving that firm the exclusive right for 120 days to find in-

vestors for StimTech. Piper, Jaffray was also given the first choice

to handle any public offerings or private placements for StimTech

over the next five years.

During the same period of time in which StimTech was seeking ad-

ditional funding, Mr. Hagfors was sought out by Dr. Jack McConnell

who had heard of StimTech and had begun to make overtures. Dr.

McConnell was the Director of Corporate Development for Johnson

& Johnson. Corporate development is a major activity for Johnson

& Johnson, which actually consists of a ‘‘family’’ of approximately

150 companies, separately incorporated, which operate in an

autonomous fashion. Testimony from Johnson & Johnson officials

indicated that Johnson & Johnson has a highly decentralized posture,

and each Johnson & Johnson company is run as a separate profit

center with its own budget, President, and Board of Directors.

Although Johnson & Johnson is in the health care field generally, the

greatest percentage of Johnson & Johnson’s overall sales is in the

pharmaceutical area. Within that pharmaceutical segment of the cor-

poration, McNeil is the Johnson & Johnson owned company engaged

in the sale of the pain control drugs Zomax and Tylenol. This last

statement is significant because, as the plaintiffs contend and it ap-

pears from the record, the agents and officers of the Johnson &

Johnson companies, specifically McNeil, working in the drug pain

control area, moved in and took over StimTech and its affairs; this

is more fully developed infra.

In the fall of 1972, before visiting Mr. Hagfors, Mr. McConnell,

who had previously been the chief of new product development for

McNeil, took the precautior of visiting the English company Devices,

on which StimTech was dependent for its ‘‘bread and butter.’’ Ap-

proximately six months later, Dr. McConnell approached and spoke

with Mr. Hagfors at a StimTech booth at a medical convention.

StimTech and its cashflow problems were discussed at this visit. Later

B-10

in the spring of 1973, Dr. McConnell again met with the plaintiffs at

the StimTech office in Minneapolis. While in Minneapolis, Dr.

McConnell explained that he was seeking corporate opportunities for

Johnson & Johnson and that the purpose of his visit was to consider

Johnson & Johnson’s buying an interest in StimTech.

Following his meeting at StimTech, Dr. McConnell reported to his

superior, Foster Whitlock, Johnson & Johnson Executive Committee

Vice Chairman, that StimTech represented a genuine opportunity for

Johnson & Johnson. The nature of this ‘‘opportunity’’ was not made

clear in the letter. As the evidence adduced at trial demonstrated, the

jury was entitled to conclude that what Dr. McConnell had referred

to was the ‘‘opportunity”’ to take over the company, to stifle it, and

to continue to promote and to protect the sale of pain killing drugs,

Johnson & Johnson’s most lucrative products. Dr. McConnell also

informed Mr. Whitlock of StimTech’s need for additional funding

and of his plans to show Mr. Hagfors a Johnson & Johnson sub-

sidiary in Texas as a part of the Johnson & Johnson program to im-

press the plaintiffs with the wisdom of being a part of the Johnson

& Johnson family.

The Johnson & Johnson Executive Committee, of which Mr.

Whitlock was a member, is the top mariagement group for the entire

Johnson & Johnson organization. Each of the Johnson & Johnson

companies reports directly to an Executive Committee member, or

to a Johnson & Johnson executive who, in turn, reports directly to

an Executive Committee member. As such, every Johnson & Johnson

company has an Executive Committee member ultimately responsible

for it.

The Executive Committee is in charge of the development of

business, development of products, examination of acquisition candi-

dates, and the general orchestration of the Johnson & Johnson cor-

poration as well as having considerable management responsibilities

for the ‘‘family”’ corporation. More specifically, the Executive Com-

mittee annually reviews each Johnson & Johnson company, annually

B-11

reviews and approves a budget and forecast for each Johnson &

johnson company, annually reviews the performance of every

Johnson & Johnson executive at every Johnson & Johnson company,

reviews and approves expenditures above certain levels, and reviews

and approves all executive compensation at Johnson & Johnson com-

panies above certain levels.

Mr. Whitlock, as Vice Chairman of the Johnson & Jchnson Ex-

ecutive Committee, was the committee member to whom Dr. McCon-

nell brought news of the StimTech opportunity because, in Dr.

McConnell’s estimation, Mr. Whitlock was “‘likely to be most closely

related to that particular business being looked at’’. Therefore, Mr.

Whitlock, the president of the Pharmaceutical Manufacturers

Association and the Committee member with the ultimate respon-

sibility for the Johnson & Johnson pharmaceutical companies, in-

cluding McNeil, added StimTech to his list of charges. The plaintiffs

contend that the singling out of Mr. Whitlock by Dr. McConnell as

the Committee member most closely related to StimTech is evidence

of the fact that Johnson & Johnson itself was fully aware of the rela-

tionship of TENS devices and pain control drugs and the potential

for competition.

In keeping with his report to Mr. Whitlock, Dr. McConnell in-

duced the plaintiffs to travel to Arbrook, a Johnson & Johnson sub-

sidiary near Dallas, in the summer of 1973. During that visit, the

plainuffs saw a Johnson & Johnson company in action and discussed

with Dr. McConnell the nature and extent of Johnson & Johnson’s

support of StimTech should the proposed acquisition take place. Dr.

‘McConnell showed the plaintiffs the research and technology at Ar-

brook. At trial, Dr. McConnell admitted wanting to impress the plain-

tiffs with what Johnson & Johnson could do, and he told them that

“Johnson & Johnson encourages them to market their products as

widely as possible.’” Mr. McConnell also described international sales,

“‘how that’s encouraged,”’ and the use of other Johnson & Johnson

companies to assist acquired companies. (Tr. 5,012-24.) Both

B-12

Mr. Whitlock and Dr. McConnell testified to the fact that Johnson

& Johnson had numerous salesmen, and it would be to StimTech’s

benefit to become part of the family for a number of reasons, in-

cluding marketing assistance. (Tr. 5,490-91; 3,798-99.) The plaintiffs

were indeed impressed by the trip and satisfied by Dr. McConnell’s

responses to their questions.

As Dr. McConnell proceeded to negotiate for the acquisition of

StimTech, he also indicated an interest in acquiring Devices. Mr.

Hagfors, who at the time of the Arbrook visit could see no harm in

Johnson & Johnson’s simultaneous acquisition of StimTech and

Devices, wrote a letter to the Chairman of Devices when he returned

from Texas and stated that ‘*‘ Johnson & Johnson has one goal with

all of their companies, and that is to make them number one in their

field. Their goal would be to make Devices number one in pacemakers

and to spend the required monies to make it happen’’. (Tr. 2,590-95.)

Dr. McConnell told the plaintiffs at the conclusion of the trip to

Arbrook that Johnson & Johnson was interested in buying 40-60%

of StimTech, with an option for the remainder. At the same time, Dr.

McConnell reported to Mr. Whitlock that the visit was worthwhile,

that the opportunity was attractive, and that he had responded to the

plaintiffs’ many questions regarding the possible acquisition. Dr.

McConnell emphasized the fact that the three persons who were the

principals of StimTech, and are the plaintiffs here, worked very well

together and certainly constituted the most valuable asset of the com-

pany. He began his memo to Mr. Whitlock with the following

observations:

July 5, 1973

Mr. F. B. Whitlock

Last Thursday and Friday I visited in Dallas with the three prin-

cipals from Stimulation Technology of Minneapolis. I wanted

to show them an example of a company that grew from a single

product and also give them a chance to visit with other person-

nel in the company.

e eaeee ma

eae aM ee ee ey

B-13

Their Sales Manager, Mr. Stan. Macdonald, had previously been

with Medtronic. He is a bnght, accomplished salesman and

probably a very good manager from the sales record. He is ex-

tremely talkative and in a group discussion one often ends up

with a monoiogue. Mr. Norman Hagfors, the President, is the

quiet, controlled, competent type and tends to use Stan. as a

tracking horse. Sooner or later, Stan. will ask the questions that

Norm. wants asked. I may under-rate Stan. He may even speak

for the corporation as a whole at times. Under any circum-

stances, there is a very good relationship among the three pnnci-

pals. The third is Clayton Jennsen who is Vice President in

charge of operations. He speaks very little in a group. That is

probably because he is the least experienced of the three—a hard

worker and knowledgeable in operations, but would not make

a good manager.

The visit was very worthwhile. I continue to be impressed with

this group. There is a real substance in the company. They have

competed with one of the giants in the field (Medtronic which

does $50,000,000 and over per year) and have come out extreme-

ly well in the contest. In the area of pacemakers, where they com-

pete with Medtronic, they get their share of the market and

more. They need capital to expand their marketing effort.

In the area of research (dorsal column stimulators) they are

ahead of Medtronic.

This one has an enormous amount of potential. The main

characters have a proven track record which is enviable; they

have basic technology in an area which is considered to be one

of the truly emerging areas and the marketing and manufactur-

ing know-how to accompany it. It is the most attractive oppor-

tunity I have seen in quite some time. When one couples it with

the potential that Devices brings to this discussion, it suggests

that this will be a major business for us in a few years.

Jack B. McConnell

After receiving Dr. McConnell’s account of the tip, Mr. Whitlock

instructed Dr. McConnell to continue with negotiations with

StimTech.

The plaintiffs contend that this memorandum was ambiguous and

was subject to several interpretations. The ‘‘attractive opportunity”’

B-14

could have meant the chance to get involved and really make a profit

in a new industry, or it could have meant the chancefor Johnson &

Johnson to destroy a potential competitor of drugs at an early stage

before the business had a chance to fully develop. Theplaintiffs’ con-

tention, apparently adopted by the jury, is that the evicence supported

the latter interpretation.

Before serious and formal negotiations were begun, Messrs.

Whitlock, McConnell, and Anderson, at various meetings, had made

promises and representations to plaintiffs that after acquisition by

Johnson & Johnson, StimTech Company and its TENS therapy

would be actively promoted by the Johnson & Johnson sales force of

4,000 people, who were capable of contacting every physician in

America on very short notice; that adequate financing would be given

to promotion, development, experimentation, research, and

marketing of TENS devices; that StimTech would be given manage-

ment and sales assistance; and that StimTech would have available

to help it in its marketing the already established worldwide sales

organization of Johnson & Johnson. Insofar as athletic medicine was

concerned, Johnson & Johnson had a salesman ‘‘in every locker

room’”’ throughout America, and the assertion was that those persons

would be available to promote TENS devices for sports medicine. The

representation was that the projected sales would easily make millions

of dollars for the plaintiffs.

Based upon these representations and many others, the negotia-

tions with StimTech continued.

In August of 1973, the plaintiffs and their attorney, Michael P.

Sullivan, Esq., met in Minneapolis with Dr. McConnell and other

representatives of Johnson & Johnson. At that meeting, Johnson &

Johnson orally agreed to buy 37.1% of StimTech’s outstanding stock

for approximately $750,000.00, with the plaintiffs agreeing that they

would sell the rest of StimTech to Johnson & Johnson under certain

conditions, which are hereinafter explained. It was also understood

at this meeting that Johnson & Johnson’s continued interest in

B-15

StimTech was contingent on StimTech’s not seeking additional

funding from any source other than Johnson & Johnson.

Dr. McConnell’s contemporaneous reports of the meeting, writ-

ten to Mr. Whitlock, outlined the terms of the agreement and

elaborated on StimTech’s concern over the possibility of being

isolated from Devices. Dr. McConnell explained that if a company

hostile to StimTech purchased Devices, the plaintiffs would face

‘*‘a very awkward situation.’’ Such an ‘‘arrangement would interrupt

the smooth flow of technical information important to their research

and manufacturing operations,’” wrote Dr. McConnell. (Tr. 3710-16.)

The plaintiffs contend that this ‘‘awkward situation’”’ is precisely

what Johnson & Johnson created and confronted StimTech with later

in the preacquisition negotiations.

Later in August of 1973, Mr. Hagfors met with Dr. McConnell

and Mr. Whitlock in Mr. Whitlock’s New Brunswick office. Mr.

Whitlock gave Mr. Hagfors a placard entitled ‘‘Our Track Record

in Acquisitions’’ which stated in essence that Johnson & Johnson

always underestimated the capita! required for new companies. Thus,

plaintiffs contend, it could reasonably be assumed that if Johnson &

Johnson were consistent in following its track record, Johnson &

Johnson would, in reality, invest a great deal more in StimTech when

the acquisition became final than it originally promised.

On September 5, 1973, StimTech, the plaintiffs, and Johnson &

Johnson executed a Securities Purchase and Option Agreement

(‘1973 Agreement’’) providing that Johnson & Johnson would pay

$700,000.00, plus commissions, to Piper, Jaffray in return for a

37.1% interest in StimTech’s stock. This initial investment was to be

known as Phase I. The 1973 Agreement also contemplated a Phase

II, which was to be the complete conveyance of all remaining shares

of StimTech stock to Johnson & Johnson. The effectuation of Phase

II was to be attempted by the parties within 180 days of the signing

of the 1973 Agreement. The agreement also provided that

“‘the shareholders hope to negotiate a pay-out over 5 to 10 years for

B-16

said shares purchased in Phase II of an amount approximating 10

million dollars conditioned upon the performance of the Company

in the manner which they contemplate.’’ The fact that Johnson &

Johnson had not acquiesced in the purchase price but had agreed to

negotiate with the knowledge of the plaintiffs’ range was also included

in the agreement.

After Dr. McConnell’s original contact with StimTech, but before

the purchase of 37.1% of StimTech’s stock, Johnson & Johnson

formed a new subsidiary, Johnson & Johnson Development

Company, whose sole purpose was to acquire or invest in new or

developing companies. Charles M. Anderson was made President,

and StimTech was his first investment. Following the formation of

the Development Company, Johnson & Johnson placed a

“‘tombstone’”’ ad in the Wall Street Journal to announce Johnson &

Johnson Development to the financial community. However, when

the plaintiffs attempted to run a similar announcement of their 37%

sale to Johnson & Johnson in a local newspaper, Dr. McConnell

asked them to cancel the ad. It is the plaintiffs’ contention that the

refusal to permit StimTech to advertise its association with Johnson

& Johnson was one of the first manifestations of Johnson &

Johnson’s disguised intent to suppress StimTech.

Pursuant to the 1973 Agreement, Mr. Whitlock, the Executive

Committee’s pharmaceutical man, was appointed to the StimTech

Board of Directors. Mr. Whitlock came to Minneapolis for the

October 21, 1973, meeting of the Board and talked with plaintiffs

about the purchase negotiations for the remainder of the StimTech

stock. The possibility of opening a Japanese market for StimTech was

discussed at the meeting and followed up by Mr. Whitlock with the

suggestion that the plaintiffs contact a Johnson & Johnson Japanese

subsidiary to obtain additional information about the potential

Japanese distributor. It should be noted that this apparent willingness

B-17

to have StimTech sell in Japan was manifested before the purchase

of the remaining shares of StimTech stock. The evidence is that once

the acquisition was complete, such sales were prohibited by Johnson

& Johnson, and no effective intercompany cooperation or com-

munication was allowed.

Following the October 21 meeting, Mr. Whitlock also informed

plaintiffs that he did not want Mr. Sullivan, plaintiffs’ attorney, at

any future meeting between himself and plaintiffs. Mr. Sullivan, after

being told by the plaintiffs of Mr. Whitlock’s request, resigned from

the SmTech Board of Directors.

A short time after the signing of the 1973 partial acquisition agree-

ment, several unexpected changes occurred in the relationship between

StimTech and Johnson & Johnson, some of which served to disrupt

the progress of the negotiations and caused delays in much needed

research and development for SumTech. Mr. Charles Anderson took

over the responsibility of face-to-face negotiations from Mr.

Whitlock. Hagfors requested, but was not shown, an evaluation of

Devices, Lid. prepared for Johnson & Johnson by a prominent cardi-

ologist. This report pointed out Devices’ need for substantial funds

if the company were to remain viable. Plaintiffs contend that Johnson

& Johnson knew of the need for the infusion of funds into Devices,

Ltd. but did not provide sufficient funds because better heart

pacemakers from Devices, Ltd. would generate profits for StimTech,

which, in turn, could be used to promote TENS in competition to pain

drugs. During this same period of time, Dr. McConnell, in person and

later by letter, suggested that the originally agreed upon 180 day

negotiating period be extended.

The plaintiffs became concerned about the extension of the

negotiation period requested by Johnson & Johnson but reluctant-

ly agreed to it. They had little alternative because of increasing finan-

cial difficulties caused by the delay and by Johnson & Johnson’s in-

sistence that they not deal with others for finances. Both StimTech

and Devices had been forced to delay the development of new

B-:8

programs because of the time demands for the negotiations on their

personnel and the uncertainties created by the extension. On March

13, 1974, with the future of the acquisition still unclear, the plaintiffs

requested and were given a $100,000.00 loan from Johnson &

Johnson. StimTech subsequently borrowed from Johnson & Johnson

a total of $300,000.00, which was set by Johnson & Johnson as the

limit of its line of credit. StimTech was aware that if the acquisition

did not proceed to completion it would have to seek outside financ-

ing to enable it to repay the $300,000.00 to Johnson & Johnson. The

plaintiffs also testified that they wondered what would become of

StimTech’s agreement with Devices should the Johnson & Johnson-

SumTech negotiations fail, a fear expressed earlier to Dr. McConnell.

Duning the period between September 5, 1973, and the eventual ac-

quisition of SumTech by Johnson & Johnson, the plaintiff continued

to meet with Mr. Anderson to work out the details of the potential

purchase. At Mr. Anderson’s request, the plaintiffs provided Johnson

& Johnson with continually updated projections of StimTech sales

and profits for the next five year period. Mr. Anderson, at that time,

stated that his reason for seeking revised projections was that the

figures then being used by StumTech were too conservative. At a later

time, after a dispute developed, however, the plair.iiffs were told that

Johnson & Johnson believed the projections were very optimistic and

therefore unrealistic.

On April 9, 1974, Mr. Anderson met with the plaintiffs in Min-

neapolis to present a proposal for the completed acquisition of

SumTech stock. Mr. Anderson’s proposal consisted of a handwnitten

document containing the following provisions:

1) cap On maximum earn-out payment to the plaintiffs of $12

million, based upon a multiple of StimTech’s profits over the next five

years;

2) contribution of additional financial support by Johnson &

Johnson as required in good business judgment; and

3) intercompany loans as required.

B-19

At this same meeting, Mr. Ai:derson asked for and received a sum-

mary of projected financial requirements for StimTech which would

follow the acquisition. In that projection, Mr. Hagfors’ estimation

totalled $7 million, including $1.5 million in working capital before

the end of 1975, total financial commitments of $1.3 million for the

remaining eight months of 1974, and $1.3 million for 1975.

The potential for international sales was also discussed at the April

9 meeting, and Mr. Anderson told the plaintiffs that if it made sense

after the acquisition, Johnson & Johnson would support it. At the

conclusion of the April 9 meeting, Mr. Anderson told plaintiffs that

he would present the $12 million earn-out proposal to the Johnson

& Johnson Executive Committee for approval.

On May 9, 1974, the plaintiffs were informed by Mr. Anderson’s

superior at Johnson & Johnson, Mr. Whitlock, that he would be

presenting an acquisition proposal for StimTech to the Executive

Committee the following week and that Johnson & Johnson was

completing its acquisition of Devices on May 10, the next day. Prior

to Mr. Whitlock’s telephone call, the plaintiffs were not aware that

Johnson & Johnson’s purchase of Devices was so near to compietion.

The plaintiffs contend that when they received the news that Johnson

& Johnson was on the verge of owning and controlling their source

of pacemakers on which they relied to fund their development of the

TENS business, they became very concerned about the loss of their

bargaining position with Johnson & Johnson. The plaintiffs later

learned that in order to acquire Devices, Johnson & Johnson had paid

yearly the full asking price, despite strong warnings from its own ex-

perts regarding Devices’ financial condition and net worth. This ex-

cessive expenditure for Devices is cited by the plaintiffs as an indi-

cation of Johnson & Johnson’s urgent desire to gain control over

StimTech for its own purpose, which was to suppress it as a com-

petitor in the pain control field. This acquisition of Devices effectively

gave Johnson & Johnson the power to cut off all heart pacemaker

components, which, as the evidence demonstrated, was the lifeblood

B-20

of SumTech and its main hope for the profits needed to fund research

and development for TENS.

On May 13, 1974, rather than asking the Johnson & Johnson Ex-

ecutive Committee to approve the $12 million proposal outlined to

the plaintiffs, Mr. Whitlock presented an $8 million earn-out proposal

to the Executive Committee and received authority from them to

spend up to his requested amount in acquiring the remainder of

StimTech stock. Furthermore, Mr. Whitlock testified that neither he

nor Mr. Anderson ever intended to request approval for the $12

million proposal, and any mention of that amount to plaintiffs was

““pure negotiation.”” Johnson & Johnson never told the plaintiffs that

the reqrest to the Executive Committee had been $8 million, not $12

million.

On May 20, 1974, having secured Johnson & Johnson Executive

Committee approval for the $8 million package, Mr. Anderson met

with the plaintiffs and presented a proposal on a “‘take it or leave it’’

basis. According to Mr. Anderson, the cap was $6.5 millior and the

time and method of payment were not negotiable. Mr. Anderson also

told the plaintiffs that Johnson & Johnson’s acquisition of Devices

had been completed. In light of StimTech’s indebtedness to Johnson

& Johnson, Johnson & Johnson’s ownership of Devices, and Johnson

& Johnson’s intransigent offer, the plaintiffs became aware of the fact

that they were in a very poor bargaining position.

A subsequent meeting between the plaintiffs and Johnson &

Johnson was held on May 23. This time, Mr. Whitlock came to Min-

neapolis to answer the plaintiffs’ questions relating to their concern

over the change in Johnson & Johnson’s proposal. Mr. Whitlock en-

couraged the plaintiffs to take the new, lower cap because StimTech’s

association with Johnson & Johnson would make the plaintiffs elig-

ible for Johnson & Johnson executive benefits. Mr. Whitlock dis-

cussed salaries and informed the plaintiffs that his own package

amounted to $500,000.00. He also discussed cash bonuses, stock op-

tions, stock grants, and retirement programs and convinced the plain-

B-21

tiffs that the executive benefits would more than make up for the

reduction in the cap from $12 million to $6.5 million. Mr. Whitlock,

according to Mr. Hagfors’ contemporaneous notes of the meeting,

told the plaintiffs to take a look at McNeil Laboratories’ Henry

McNeil who believed Johnson & Johnson and made $100,000,000.00.

In addition, Mr. Whitlock assured the plaintiffs that Johnson &

Johnson had the resources and would put them to work for StimTech

so that the relationship would be profitable for Johnson & Johnson

as well as for the three principals.

Several weeks after the May 23, 1974, meeting with Mr. Whitlock,

the plaintiffs reached agreement on an acquisition with a maximum

earn-out of $7 million. Once the verbal agreement on the acquisition

had been reached, Johnson & Johnson, represented by Mr. Ander-

son and the Johnson & Johnson in-house corporate attorney Peter

Galloway, met with the plaintiffs and Mr. Sullivan, who was allowed

to re-enter negotiation, in Minneapolis to negotiate the terms of a

written agremeent. Although Mr. Whitlock’s visit had succeeded in

alaying the plaintiffs’ fears to the extent that they were willing to agree

to the acquisition, the plaintiffs testified that the residual effect of the

long, uncertain negotiating period on their part was a basic distrust

of Johnson & Johnson.

As a result of that distrust, which was obvious to Johnson &

Johnson witnesses, who testified to that effect, the plaintiffs

attempted to include contractual provisions in the written agreement

which were not acceptable to Johnson & Johnson. Specifically, one

of the plaintiffs’ requests was for provisions relating to thr details of

calculating the earn-out, which was to be based on a formula applied

to the perforrnance of StimTech over the following five years. These

provisions r¢flected both plaintiffs’ understanding of those elements

agreed to in earlier stages of the negotiations and their concerns that

changes might occur which would adversely affect their potential to

achieve the maximum earn-out. One provision the plaintiffs sought

and obtained called for measuring the earn-out based on 5% of total

B-22

sales over the earn-out period, which would have yielded the $7

million cap on $140 million of sales.

Two other of plaintiffs’ requests, one, that Johnson & Johnson

provide that it would not compete with StimTech in TENS devices or

pacemakers during the earn-out period and two, that Johnson &

Johnson agree that it would not sell or dispose of StimTech’s business

during the earn-out period, were refused by Mr. Galloway. At a later

date, however, Mr. Anderson assured the plaintiffs that Johnson &

Johnson had no intention of competing with StimTech or disposing

of the business but that these understandings could not be part of the

agreement. Rather, they had to be left to mutual trust and good will,

according to Johnson & Johnson through Mr. Anderson.

The concept of mutual trust became an important element of the

stock purchase agreement executed on September 20, 1974, by the

plaintiffs and Johnson & Johnson. Over the negotiating period, a

number of representations had been made by Johnson & Johnson to

the plaintiffs, which influenced their willingness to sell the remaining

shares of StimTech stock. Among these representations were the

following:

1) StimTech would get financial and managerial backing from

Johnson & Johnson;

2) StumTech could avail itself of the Johnson & Johnson sales force

which consisted of more than 4,000 persons;

3) StumTech could make use of the Johnson & Johnson worldwide

sales organization, which had distribution to all but a few countries

in the world;

4) StimTech would be able to realize the maximum earn-out based

solely on sales of $140 million; and

5) StimTech could expect the cooperation of the Johnson &

Johnson athletic division in introducing TENS for sports medicine.

StimTech sought to include many of these representations in the

contract, but Mr. Anderson again informed the plaintiffs that every-

thing could not be put in writing. Mr. Anderson told the plaintiffs

B-23

they had to trust that Johnson & Johnson would do the things they

had said they would do. At Mr. Sullivan’s suggestion, paragraph 10(a)

was included in the stock purchase agreement to assure the plaintiffs

those items not in writing would be dealt with in good faith. Mr.

Hagfors was further advised by Mr. Sullivan that the ‘‘umbrella’’ of

paragraph 10(a) would incorporate any representations made during

the negotiating period.

In its final draft, paragraph 10(a) of the September 20, 1974, stock

purchase agreement read as follows:

Stockholders [plaintiffs] and Johnson & Johnson recognize and

acknowledge that the relationship which will exist between

Johnson & Johnson, the Company [StimTech] and the

Stockholders upon consummation of the transactions con-

templated herein, must be based upon a high degree of mutual

trust and confidence by the Company, Stockholders and

Johnson & Johnson. Stocxholders and Johnson & Johnson

agree that each will at all times act in respect to its dealings with

the Company and its operations, and subject to the exercise of

reasonable business judgment, act [sic] in such a way as to pro-

mote to the extent reasonably possible the successful operation

and growth of the Company. (Emphasis added)

In testimony adduced at trial, Mr. Galloway, attornev for Johnson

& Johnson, stated that if Johnson & Johnson intentionally withheld

adequate financial backing, marketing assistance, administrative

assistance, Overseas marketing assistance, and help in research and

development, in his mind there would be no question of its being in

violation of paragraph 1Q(#). This, according to Mr. Galloway, would

be true even though none _f the aforementioned were provided for,

specifically, in the contract. Thus, the chief counsel of Johnson &

Jchnson, the man involved in th:2 drafting of the contract, admitted

on the witness stand that many of the previous promises and represen-

tations were effectively incorporated into paragraph 1a). The plain-

tiffs’ testimony as to each of these promises and representations was

largely admitted by one or more of the defendant’s witnesses or the

Johnson & Johnson documents introduced at trial.

In his testimony the chief counsel for Johnson & Johnson admitted

B-24

the need for parol evidence to explain the promises to be incorporated

into the contract, and there ts, thereafter, very little genuine dispute

as to what the promises were and no dispute that they were to be read

into the contract. (Tr. 8197-98; 8210-11.)

The stock purchase agreement also provided that the compensa-

tion for the stock would be roughly $2.00 for every $1.00 of profit

earned by StimTech during the five year earn-out period, with a

guaranteed minimum of $1.3 million and a cap of $7 million.

In addition to the stock purchase contract, on September 20, 1974,

the plaintiffs entered into three year employment and five year non-

compete agreements, which prevented their competing in the

pacemaker or the pain control industry for the next five years, except

as employees of StimTech. With the signing of the agreements,

StimTech became a wholly-owned subsidiary of Johnson & Johnson.

Once the acquisition was completed, Johnson & Johnson instituted

a number of new policy changes at StimTech, which adversely af-

fected growth and development. Initially, Charles Anderson became

the Chairman of the Board for both StimTech and Devices, Ltd.; as

such, he had the major responsibility for both companies. Although

Mr. Hagfors remained in the position of President of StimTech for

a period of time following acquisition, it was conceded in the evidence

that Mr. Anderson could overrule Mr. Hagfors, and the plaintiffs had

no power to outvote Mr. Anderson. Mr. Anderson made all the basic

management decisions at StimTech and relieved the plaintiffs of any

effective role in the operations of the company. Plaintiffs introduced

evidence showing that at a very early time after the total acquisition,

Mr. Anderson, acting for Johnson & Johnson, took many steps

which were very damaging to StimTech as a corporation and thus to

the plaintiffs as individuals. The plaintiffs were now divested of their

stock and relegated to the role of employees of Johnson & Johnson

under the control of Mr. Anderson. They were later able to protest

Johnson & Johnson decisions successfully on only two occasions,

both of which involved steps which would have had serious legal

B-25

implications if enacted. These instances will be discussed in connec-

tion with the electrodes and the pricing policies attempted to be im-

posed upon them by Johnson & Johnson in certain patent matters.

Exactly three months after Johnson & Johnson acquired SiumTech,

Mr. Anderson imposed a hiring freeze in the marketing area. Later,

in February of 1975, a total freeze was imposed on hiring and extend-

ed to include Devices as well as StimTech. All hiring decisions had to

be made with Mr. Anderson’s approval; one janitor was added to the

staff but even the hiring of secretaries was not permitted.

In addition, even though StimTech had become a subsidiary of

Johnson & Johnson, on December 31, 1974, Mr. Anderson

announced that StimTech would not be permitted to use the Johnson

& Johnson name in connection with marketing or labeling its products

or in dealing with its customers. Several months later, StimTech was

also informed that Johnson & Johnson would not permit the

StimTech products to be displayed at the Johnson & Johnson 2ennual

meeting to be held at the end of March in 1975.

One of Mr. Anderson’s earliest orders which was alleged to be

detrimental to StimTech established a transfer pricing policy at

StimTech which applied to any sale of StimTech products to other

Johnson & Johnson companies. The originai transfer price was

manufacturing cost plus 10%. This price, which created a loss for

StimTech, was protested by Mr. Hagfors and was later increased to

manufcturing cost plus 25%, but the normal StimTech markup, ab-

sent transfer pricing, was at least two times the manufacturing cost.

This newly instituted pricing created dissension between StimTech and

Devices, Ltd. and deprived StimTech of badly needed profits.

Another of Mr. Anderson’s earlier directives adversely affected

StimTech’s future sales and expansion plans. On December 12, 1974,

Mr. Anderson announced that Devices, Ltd. would have exclusive

distribution rights for StimTech’s products for the United Kingdom

and Europe. If StimTech wanted to sell TENS in that part of the

world, it could do so at transfer prices and only through Devices, Ltd.,

B-26

even though Devices, Ltd. had only one salesman for TENS in all of

the United Kingdom and Europe. At a later date, Mr. Anderson ex-

tended Devices, Ltd.’s terntory to the Far East, which foreclosed

StimTech from making any effective sales efforts in the Far East.

From the inception of StimTech, the plaintiffs had planned to ex-

pand the marketing of TENS to include international sales. This in-

tention was reflected in Mr. McDonald’s 1973-74 marketing plan and

discussed with Johnson & Johnson during the negotiation period. Let-

ters of inquiry to StimTech from all over the world, prior to acquisi-

tion, indicated the existence of a market potential for companies in-

terested in purchasing or distributing TENS devices. However, the

Johnson & Johnson imposed distribution arrangement with Devices

served to lessen that potential because of the sheer inability of Devices,

Ltd.’s one salesman to cover any extensive territory.

In addition, Mr. Anderson initially refused to permit StimTech to

hire an international salesman, indicating that StimTech, instead,

should concentrate its efforts on the domestic market. In the spring

of 1976, however, StimTech did hire an international salesman,

Shimon Gibori. Mr. Gibori, who was subsequently fired by Mr.

Anderson, was somewhat erratic and irresponsible. However,

evidence adduced at trial indicated that Mr. Gibori, before his termi-

nation, made a sales trip to South America and returned with what

appeared to be orders of approximately $100,000.00. These orders

were not filled. Although the parties stipulated that no evidence ex-

isted to show that StimTech stifled the orders, the most it was possible

to glean from the activities of Mr. Gibor was reflected in a stipula-

tion which stated that he ‘‘indicated in several instances possible

availability of SumTech distributorships in foreign countries and that

StimTech didn’t follow through’’. Gibori’s testimony and his other

activities were ‘‘not to be considered”’ by the jury.

Another international sales incident, peripherally related to Shimon

Gibori, was Mr. Anderson’s termination of StimTech’s relationship

with Cilag-Chemie, a Johnson & Johnson subsidiary in Sweden.

B-27

Mr. Gibon, while an employee of StimTech, arranged for Cilag-

Chemie to distnbute TENS devices for StemTech in Sweden. Devices,

in the meantime, however, had established a distnbutorship for TENS

with Ethicon in Sweden, another Johnson & Johnson subsidiary.

Ethicon, upon learning that it would be competing with Cilag-Chemie

in the sale of TENS, expressed its displeasure over the arrangement

to Brian Cornish of Devices and Charles Anderson of StimTech.

Specifically, the company stated that ‘‘It is perhaps needless to say

that we are chagrined to find ourselves in this situation and so are our

friends at Cilag-Chemie who also have spent time and money on this

project.’’ Ethicon made it perfectly clear that it was that company’s

understanding that Devices, Ltd. was to ‘‘have full responsibility for

their own products as well as StimTech’s products on the European

market’’. (Tr. 8432.) Mr. Anderson, upon learning of Ethicon’s

annoyance, immediately terminated the arrangement with Cilag-

Chemie and prevented StimTech from setting up its own direct rela-

tionships. Thus, not only did Johnson & Johnson fail in its contrac-

tual obligation to promote StimTech products, but actually refused

to allow the Johnson & Johnson subsidiary Cilag-Chemie to compete,

in the sale of stimulators after its assistance had been solicited by

StimTech and had agreed to the distribution arrangement.

Aside from the question of the international suppression of

StimTech, we have here an instance where the two independent com-

panies and StimTech were not allowed to compete with Devices and

Ethicon which, in and of itself, gives indication of Johnson &

Johnson’s reluctance to foster an atmosphere in which competition

can thrive.

During that same period, late 1974 to early 1975, Mr. Anderson

told StimTech that there would be no planning and construction of

foreign ‘‘mini-plants.’’ These factories, alreacy in use by Medtronic,

were designed to serve as final assembly plants for StumTech products

in foreign countnes as a means of avoiding tariff barriers, receiving

favorable government treatment and lowering the prices of the goods.

B-28

As such, these proposed mini-plants had been an integral part of

StimTech’s onginal international marketing plan, the essence of

which was well known by Johnson & Johnson before the purchase

of StimTech.

Despite these restrictions on international sales, many inquiries

came from Europe, the British Isles, Central and South America, the

Middle East, the Far East, Australia, and even the Iron Curtain

countnes. The plaintiffs, during the case, argued that this evidence

showed a deliberate intent by Johnson & Johnson to suppress their

sales and prevent their competition. Johnson & Johnson never gave

any explicit explanation for prohibiting these sales, and no plausible

explanation for these acts, other than plaintiffs’ theory, came into the

evidence in this case.

Another futile attempt to expand StimTech’s sales international-

ly was made by Mr. McDonald during a European trip in 1975. Mr.

McDonald called on several European dealers and physicians in an

attempt to enhance the sales of both electronic pain control devices

and heart pacemakers. Bnan Cornish, the Devices’ managing

director, who, like many of the men who controlled StimTech’s

destiny, had come to the company from McNeil (the Tylenol Com-

pany), later wrote to Mr. Hagfors complaining about Mr.

McDonald’s activities and insisting that the previous ground rules

relating to ‘‘assigned markets’’ be observed. This was true in spite of

Mr. McDonald’s invitation to Devices to come to the United States

to sell its products to customers. When Mr. McDonald returned from

his tnp, he encouraged the securing of government approvals of pay-

ment for TENS under national health insurance programs as quickly

as possible. He theorized that TENS would be cheaper and more

effective than drugs to treat pain over a long period of time and con-

cluded that the European market was potentially larger than the

domestic market because of the European system of socialized

medicine. No action was taken in response to Mr. McDonald’s report,

and StimTech received no assistance from other Johnson & Johnson

B-29

companies to sell its products internationally.

As stated earlier, shortly after the acquisition, Mr. Anderson re-

quired StimTech to concentrate on its domestic rather than its inter-

national market.

However, Mr. Anderson would not even allow StimTech to expand

its U.S. market. Specifically, in January of 1975, Mr. Anderson told

StimTech that its sales efforts must be concentrated in three of four

geographic areas in which the company was already successfully sell-

ing its product and that the domestic ternitones would not be permit-

ted to expand. In keeping with his directive, Mr. Anderson vetoed any

significant expansion of the very effective nurse liaison program under

which StimTech employed registered nurses to assist in sales, patient

instruction, and research of TENS devices. No rational explanation

for these moves was ever given by Johnson & Johnson except that it

was their business judgment. The jury could well have concluded,

however, that the steps were taken with a deliberate intent to injure

StimTech and to prevent its competition.

Another StimTech-owned innovation, designed to assist in sales,

education, and research in regard to TENS, was Midwest Pain. This

center was the prototype of pain control clinics to which doctors could

refer patients for instruction in the use of TENS devices and a place

where prescriptions for TENS could be filled. A memo from Mr.

Galloway to Mr. Anderson sent six months after acquisition evi-

denced Johnson & Johnson’s prior intention to dispose of Midwest

Pain ‘‘at an early date’. This was done despite the plaintiffs’ long-

held plan to expand the Midwest Pain concept by opening such centers

in other parts of the country. As a result, no additional pain control

centers were opened by Johnson & Johnson, and Midwest Pain was

eventually sold to Mr. McDonald when he left StimTech in 1977. The

plaintiffs contend that the curtailment of this marketing technique was

very effective in keeping the sales of TENS devices down and even

more significant in keeping the medical profession and the public

oblivious to the benefits available through TENS therapy.

B-30

As a further example of what plaintiffs allege was intentional sup-

pression, evidence was introduced to show that in Novernber of 1977,

StimTech received a request from Pain Control Centers International,

a chain of pain clinics, to buy at least $200,000.00 of TENS devices

for its 25 centers. Mr. DeAngeli, the Johnson & Johnson man

in charge of StimTech, sought and obtained legal advice from Mr.

Galloway to the effect that StimTech did not have to sell to PCI, and

he subsequently refused their business. The defendant contends the

sale was not made because the prospective purchaser PCI’s credit was

poor. The plaintiffs responded at trial, however, that a ‘‘cash on

delivery sale’’ would have provided adequate protection for

StimTech. Johnson & Johnson had no satisfactory explanation for

refusing to allow SumTech to sell its products, and one could conclude

on the record that Johnson & Johnson never asked for the products

to be sent C.O.D. The failure to sell to PCI further served to depress

StimTech’s profits.

During the period in which most of the foregoing policy directives

were being handed down, several other major changes were imple-

mented, which directly and adversely affected the financial and

managerial underpinnings of the StimTech Company.

On December 17, 1974, three months after full acquisition, Mr.

McDonald, who had been praised earlier by Mr. McConnell in his

memo to Mr. Whitlock, presented his marketing plan to the StimTech

Board and was openly cniticized and humiliated by Mr. Anderson at

the Board meeting. Mr. Anderson accused Mr. McDonald of pre-

paring a totally inadequate marketing plan and shortly thereafter

relieved Mr. McDonald of all significant duties and responsibilities.

Mr. Hagfors testified at trial that Mr. Anderson told him the decision

to replace Mr. McDonald had been made by Mr. Whitlock before the

acquisition took place. (Tr. 2,921-23.)

Mr. McDonald and the other plaintiffs had sold their stock to

Johnson & Johnson with the expectation that they would make

millions of dollars as Johnson & Johnson executives, based on Mr.

B-31

Whitlock’s assurances of benefits. However, in February of 1975, six

months after acquisition, Mr. Anderson formally told Mr. McDonald

that he was being replaced as Vice President of Market.ng by Frank

Clark, an executive from Ethnor, another Johnse= « Johnson com-

pany. Mr. McDonald was given a position as Vice President of

Market Development, but he had no job description nor anyone

reporting to him. In 1976, Mr. McDonald was prevented from receiv-

ing a raise which would have been equivalent to those of Mr. Hagfors

and Mr. Jensen. Because of his employment contract and his non-

compete agreement, Mr. McDonald remained at StimTech until 1977,

even though his position was devoid of responsibility.

While he was still at StimTech, however, in an effort to achieve his

earn-out, Mr. McDonald made a number of suggestions to

StimTech’s management. He pointed out the fact that Medtronic

TENS devices were being used by a pro football team and in the

Olympics; and although Mr. McDonald suggested that StimTech

should investigate the use of TENS for sports injuries, there was no

follow up with the Johnson & Johnson athletic division, which had

a “‘man in every locker room’’.

In mid-1976, an orthopedic surgery professor at Yale Medical

School sent Mr. McDonald a proposal for a study of TENS for sports

injuries. Mr. McDonald sought funding for the study with the idea

that the results could have been used as a promotional and marketing

aid for StimTech. StimTech management, under the leadership of

Mr. Anderson, refused to approve funding.

Mr. McDonald also suggested that StimTech follow up on the

veterinary uses of TENS. There was no follow up, although Johnson

& Johnson owned a company specializing in veterinary medicine and

supplies.

Other areas in which Mr. McDonald recommended investigating

the possible uses of TENS included the following: 1) treatment of

multiple sclerosis; 2) treatment of arthritic pain; 3) treatment of

visceral pain; and 4) treatment for pain from acute injury. Again,

B-32

there was no follow up. The plaintiffs contend that Johnson &

Johnson intentionally ignored these opportunities for StimTech

because the medical conditions Mr. McDonald recommended in-

vestigating were being treated by pain-killing drugs.

The arrival at StimTech of Mr. Clark, Mr. McDonald’s replace-

ment, marked a new period of change for the worse in the company

management. In the first place, the decision to bring Mr. Clark to

StimTech was made by Mr. Anderson and Mr. Whitlock without

consulting Mr. Hagfors or anyone else at StimTech. Secondly, when

Mr. Clark was transferred to StimTech, he was receiving a salary 1.5

times greater than that of Mr. Hagfors and by the end of 1975, the

discrepancy was corrected only to the extent that Mr. Hagfors was

receiving $35,000 a year and Mr. Clark was receiving $47,000. In ad-

dition to the higher salary, Mr. Clark had stock grants and options,

none of which the plaintiffs had. Mr. Whitlock was aware that the

salary difference might cause disharmony at StimTech because he

knew that Mr. Hagfors was aware of the discrepancy.

Although Mr. Clark was Executive Vice President of Marketing

for StimTech and Mr. Hagfors was President, Mr. Clark extended

his authority into areas beyond marketing and soon began com-

municating directly with Mr. Anderson, without involving Mr.

Hagfors. On several occasions, Mr. Hagfors was unable to overrule

Mr. Clark’s decisions. Other Johnson & Johnson executives often

referred to StimTech as ‘‘Mr. Clark’s company’’. Mr. Clark’s arrival

served to reinforce the reality that Mr. Hagfors, Mr. McDonald, and

Mr. Jensen had lost all control of the company. Management and

operating decisions were in Johnson & Johnson’s hands.

At approximately the same time Mr. Clark was brought to

StimTech, Mr. Anderson announced to the plaintiffs that any funds

for research and development would have to come out of the gross

profits of StimTech and not from Johnson & Johnson. Mr. Hagfors

took his concerns over this development to Mr. Whitlock, who con-

firmed Mr. Anderson’s decision, even though Mr. Hagfors explained

B-33

that the plaintiffs had agreed to be acquired by Johnson & Johnson

because StimTech didn’t have money. Mr. Whitlock then told Mr.

Hagfors that Johnson & Johnson was expecting those companies it

bought to develop their own monies for research and development.

Mr. Hagfors later heard that the same policy was also in effect at

Devices. Mr. Galloway, in his testimony, had admitted that an inten-

tional failure to provide adequate financing would be actionable and

a breach of contract. There is nc evidence that Johnson & Johnson

so limited other companies which it acquired.

The evidence clearly established the fact that the understanding,

based on representations of Johnson & Johnson before acquisition,

was that Johnson & Johnson would invest a substantial sum of money

‘up front’’ to cover expenses for research and development and to

boost sales. Instead of utilizing this arrangement, however, Johnson

& Johnson established a line of credit for StimTech through which

the company could borrow money to cover losses as incurred. The

cash from Johnson & Johnson was made available only in amounts

sufficient to keep the business solvent and (the plaintiffs contend) out

of bankruptcy, where it could be acquired by others and, with proper

funding, become a greater threat to drugs within the pain control

market.

Various witnesses, including some called by the defendant, ex-

plained the difference between providing money up front and provid-

ing it through a line of credit. It was generally established that money

up front permits the company receiving the funds to develop new pro-

ducts and exercise its discretion in doing so, while a line of credit is

more of a maintenance arrangement. The former method, according

to the evidence and especially the testimony of the presidents of two

smaller TENS companies called as witnesses by Johnson & Johnson,

is the only way to build up a company. A whole series of restraints

were placed upon StimTech which had the effect of stifling its growth

and development. After acquisition, it became apparent that

the necessary funds would not be forthcoming. The effects of this

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arrangement, which maintained StimTech in a state of suspended

animation, were felt at StimTech shortly after it was announced that

research and development funds must come out of StimTech’s

profits.

Plaintiffs also point to another order made by Mr. Anderson which

rendered it impossible for them effectively to do business. In early

February of 1975, Mr. Anderson said that inventories must be re-

duced by 10%, even though StimTech was already having problems

in filling orders because of a low inventory.

During that same month, February 1975, a meeting was held in

England with Mr. Hagfors, Mr. Anderson, and two men from

Devices at which the pros and cons of the programmable pacemaker,

long planned by the plaintiffs, were discussed. Hagfors and Jensen

at StimTech had improved upon the Devices’ pacemaker and had

close relationships to the world’s leading expert on programmable

pacers. They had long planned to invent a programmable pacer that

could be adjusted through electronic impulses outside the body. The

first to develop such a pacer would preempt the market and prosper

greatly. The profits so reaped could be used to develop TENS which

had even greater profit potential. However, in February 1975, Mr.

Anderson indicated that the speed of development of the program-

mable pacemaker was to be determined by Devices, not StimTech.

Brian Cornish, the marketing director of Devices, since his arrival

from McNeil Pharmaceutical Laboratories, expressed concern over

whether or not the programmabie pacemaker was important. Mr.

Hagfors, who knew that the development of the programmable

pacemaker would bring great profits to StimTech, which profits could

be used to develop and market TENS therapy, reviewed the advan-

tages of the device. Everyone at the meeting seemed to agree that

Devices should proceed to develop the programmable pacemaker and

that its development was very important. A month later, however, a

memo from Mr. Anderson ordered StimTech and Devices to provide

more marketing data before he would permit funds to be invested in

B-35

the programmable pacemaker program. Mr. Anderson’s order

slowed the pacemaker program down considerably and created a con-

comutant delay in the development of new stimulators and their sales.

It should be noted that the natural, proper, and normal thrust of

a modern corporate business is to make a profit. The thrust of the

plaintiffs’ case is that StimTech was not allowed to make a profit so

that other Johnson & Johnson companies could make much greater

profits from the sale of drugs. There is little dispute about the evidence

since nearly everything to which the plaintiffs testified was cor-

roborated and in many instances made stronger and more compell-

ing by the defendant’s own documents and admissions.

There was, however, much debate over the inferences to be drawn

from the evidence. From the evidence, it appeared that the greatest

need of this small company was to get funds to use in teaching

doctors, hospital personnel and nurses of the benefits of TENS

therapy. The potential profit could be measured in several hundred

million dollars each year. Once Johnson & Johnson controlled

StimTech and they announced that the research must be funded from

profits, che potential for sufficient funding for research, teaching, and

development became rather remote."

Since the only source of research was profits, and if, as contend-

ed, Johnson & Johnson did not wish the research and development

to go on, then any profit from any source represented a threat to what

plaintiffs contend was Johnson & Johnson’s plan to suppress TENS.

It mattered not whether the potential profit came from the sale of

TENS devices, electrodes, or pacemakers. If the Johnson & Johnson

‘Early in the trial, defense counsel questioned the notion that there had been any

limitation on research and development to funds derived from ‘‘profits’’. After

further proof and admissions, the question became one of whether the limitation

was to ‘“‘profits’’ or ‘‘gross profits’’. Later in the trial this distinction was

abandoned entirely by defense counsel. In any event, it makes little difference since

earnings can not be spent for research over a period of time unless they exceed ex-

penses, and they never did in StimTech during the relevant period of time.

B-36

alleged plan was to succeed, there could be no substantial profit for

StimTech from any such sources. The jury considered evidence re-

lating tc actions and omissions by Johnson & Johnson, which can

have no other explanation than that of a deliberate course of conduct

designed to prevent StimTech from making a profit. Without profit,

of course, there could be no earn-out for the plaintiffs. The more im-

portant aim appeared from the evidence to be that Johnson & John-

son sought to prevent the growth and development of TENS therapy

and thus avoid competition with drugs in the pain control field.

From the time of incorporation, StimTech had looked upon the

pacemaker as a ‘‘bread and butter”’ item, the sales of which wouid

provide a source of funding for the development of TENS devices.

With the slowing down of the pacemaker program and the general

scarcity of funds, StimTech’s plans to engage in new product develop-

ment were greatly affected. In the initial stages of the company’s plan-

ning, Mr. McDonald had presented as part of the 1973-74 marketing

plan for StimTech a proposal for the development of a new, smaller

TENS device. Within six months of the acquisition, Mr. Jensen and

a StimTech technician built two engineering prototypes of stimulators

in cases approximately the size of a square cigarette lighter, both with

recessed controls. The two stimulators were samples of what plain-

tiff wanted StimTech to do and represented a tangible expression of

what Mr. Jensen believed were the desires of the marketplace.

These prototypes were shown to Mr. Anderson in late 1974 or early

1975 as a basis for a stimulator development program. Mr. Ander-

son told Mr. Jensen that limited assets would not permit StimTech

to develop something of that sort and that the emphasis at that time

should be on the sales of the existing stimulator. The plan was thus

abandoned, and StimTech did not develop the new stimulator until

five years later in 1978. In the interim, StimTech did not realize its ex-

pected volume of sales and, in fact, lost market share to other TENS

companies.

StimTech was not alone, however, in being starved for funds by

B-37

Johnson & Johnson. From the beginning of the ‘‘courtship’’ penod

between Johnson & Johnson and Devices, Johnson & Johnson was

aware of the fact that Devices would need additional funding to build

up its inventory, improve its delivery schedule, and bring its pace-

maker operations up to date.

In spite of this need for infusion of substantial capital to enable De-

vices to build up its marketing organization, the combination of Suim-

Tech and Devices offered a ‘‘unique opportunity’’ for Johnson &

Johnson; Johnson & Johnson readily acknowledged this in an internal

memorandum. Devices had a 6% share of the world pacemaker mar-

ket at the time of acquisition and offered, in alliance with StimTech,

considerable expertise in the pacemaker field. In addition, Devices had

the most advanced electronics in the industry, an excellent reliability

record, good relations with government officials, and quality

employees.

As previously stated, however, shortly after acquisition, the

Johnson & Johnson directives imposing a hiring freeze and requir-

ing research and development funds to come out of company-

generated gross profits were applied to Devices as well as StimTech.

Mr. Anderson made several additional moves and gave orders and

instructions to Devices, which could only be construed as damaging

Devices as a company and ultimatcly destroying it as a source of pace-

makers and pacemaker profits to StimTech. Mr. Anderson instructed

Devices to cut its inventory to a bare minimum and to delay its work

on a programmable pacemaker until he could obtain more marketing

information. At the same time, the lack of a lithium-powered pace-

maker was hurting Devices and StimTech in the marketplace. No

funding was made available for such new product research.

One of the most serious weaknesses of the StimTech/Devices pace-

maker program, however, was the companies’ failure to secure a sec-

ond source for the electronic circuitry necessary for pacemaker

manufacturing. Mr. Jensen, aware of the fact that no company

should attempt to do business without a second source for its

B-38

essential components, attempted to find one. He presented a price esti-

mate to Mr. Anderson, in late 1974, for preliminary research and devel-

opment and circuitry design, but Mr. Anderson squelched Mr. Jensen’s

efforts by responding that there was no money available for his project.

This failure to have available a second circuitry source was later used by

Johnson & Johnson as its justification for closing Devices.

In May and June of 1977, a quality problem known as ESR drift

developed in several of Devices’ 3821 pacemakers. The drift involved

an increase in rates which was caused by a defect in some of the pace-

maker circuits manufactured by ITT in England, the sole source of

supply for the electronic circuits. At the time the drift occurred, Mr.

Frank DeAngeli, who had replaced Mr. Anderson as the StimTech/

Devices Chairman, described the problem to Johnson & Johnson

Chairman Burke as ‘‘minor’’. Had Mr. Anderson followed Mr.

Jensen’s suggestion and obtained a second source of circuitry, there

would have been absolutely no problem in carrying on production

while the ITT circuitry was being corrected.

In late July of 1977, Mr. DeAngeli, who was then Johnson & John-

son’s man in control of StimTech, went to England to meet with gov-

ernment health officials and to investigate further devices’ quality prob-

lem. Without a second circuitry source, Devices was dependent on ITT

to resolve the difficulry, which ITT said it could do in a very few months.

In the fall, despite the fact that British health officials urged Mr.

DeAngeli to keep Devices open and offered assistance in locating a

second power source, and despite the fact that ITT promised to have

a new electronic system available within three months of that time,

Mr. DeAngeli decided to close Devices. This was done in mid-Septem-

ber of 1977. Production of the 3821 pacemaker was permanently

stopped, thus depriving Devices of between 80 and 90% of its sales

volume and destroying StimTech’s ‘‘bread and butter’’ pacemaker

business. The plaintiffs contend, and the jury could reasonably find,

that the decision to close Devices was a deliberate act done for the

purpose of suppressing StimTech in order to foreclose TENS from

B-39

competing with the drugs Tylenol and Zomax.

At the trial, Mr. Alan Smale, an eminent British scientist and one

of the men who sold Devices to Johnson & Johnson, testified through

his deposition that he was certain that the ESR drift problem could

have been corrected in a very short time. He also stated that Devices’

quality problem was no more serious than problems experienced by

its competitors in the pacemaker industry. Those competitors, Med-

tronic and Cordis, recalled their defective pacemakers and persisted

in the market in spite of their difficulties. It is plaintiffs’ contention

that Johnson & Johnson could have and should have done likewise.

Johnson & Johnson did not persist, however. Devices’ production

capacity was idle, and after a year, Johnson & Johnson entered into an

agreement with American Pacemaker Corporation, which paid John-

son & Johnson a small amount for Devices and assumed all of Devices’

outstanding warranty obligations. The evidence was sufficient to allow

the jury to conclude that this potential liability, plus the purcnase price,

was inadequate compensation for the sale of Devices. The plaintiffs argue

that it amounted to “‘giving away”’ the company. At no time during the

period that Johnson & Johnson was looking for a buyer did it inform Mr.

Hagfors of the proposed sale, nor did it give him an opportunity to make

an offer for Devices.

Mr. Hagfors had been hopeful that a lithium powered programmable

pacemaker would be available in 1976. Instead, while he was still with

StimTech in 1976, one researcher was hired to work on the programmable

pacemaker, and his only assistance came from Dr. Keller, an outside con-

sultant. This researcher, Mr. Bailey, testified that even though there was

a lack of coordination in the program anc the program was quite inade-

quate, it still continued. The rate at which this research program proceed-

ed was to be determined by Devices, and the separation of Devices and

StimTech by the Atlantic Ocean made coordination rather difficult.

Nevertheless, after Devices had closed and with StimTech continuing

on its own, a lithium programmable pacemaker was developed in 1978.

The new pacemaker was considered ‘‘a step beyond anything that was

B-40

available at the time.’’ This programmable pacemaker showed great

promise for the future of StimTech. In August of 1978, SuumTech man-

agement met with Johnson & Johnson Chairman Burke and Mr.

DeAngeli to review the proposed marketing plan of the new pacemaker.

At the conclusion of the meeting, the project’s engineer and the

StimTech officers left, convinced the funding to support the

marketing plan would be forthcoming and that StimTech would pros-

per. Within sixty days, however, Johnson & Johnson closed the

StimTech pacemaker business and offered it for sale; programmable

pacemaker and all. The plaintiffs contend that Johnson & Johnson

knew the programmable pacemaker was a very valuable asset and fur-

ther contend that if it had been marketed by StimTech, StimTech

would have benefitted greatly. In that case, however, there would

have been funds available for research and development in the TENS

therapy, and Johnson & Johnson’s desire to curtail competition with

drugs by TENS therapy caused them to sell the programmable

pacemaker business at a very low price. As a part of the evidence that

Johnson & Johnson knew it was selling a very valuable asset when it

sold the lithium programmable pacemaker, plaintiffs point out that

Johnson & Johnson provided potential purchasers of the business

with sales estimates for the new pacemaker starting at $4.3 million in

1979 and nising to $56 million by 1988, with after tax profits of $5.7

million. In January of 1979, Johnson & Johnson sold the StimTech

pacemaker business to Biotronik, a German company. Although Mr.

Hagfors made his interest in buying the business known to Johnson

& Johnson, he was never given the opportunity to bid.

Testimony at trial indicated that StimTech had the proper

technology and planning capacity to develop the very pacemakers

which later captured the market. The pacemaker company which

developed the programmable lithium-power pacemakers went on to

make sales and profits in the hundreds of millions of dollars. The

evidence indicated that StimTech, had it been given proper funding

and research assistance, would in all probability have done as well as

B-41

any of the other pacemaker companies. According to the plaintiffs,

StimTech was not given the proper assistance and was in fact held

back. As a result thereof, in 1979, although SumTech possessed a fully

competitive lithium programmable pacemaker, it was not allowed to

market the product, rather the whole program was sold by Johnson

& Johnson.

At trial, the plaintiffs introduced evidence to show that Johnson

& Johnson was in haste to divest itself of Devices and the StimTech

pacemaker business, allegedly in order to cripple the TENS produc-

tion and sales. The plaintiffs argued that the defendant wanted to be

in the pacemaker business and to make the high profits that were

available there, but not if the profits could be used by StimTech to

develop the TENS market and to compete with Johnson & Johnson’s

lucrative drug market. As evidence of this desire to be in the

pacemaker market without developing the TENS business, the plain-

tiffs point to Johnson & Johnson’s interest in buying a pacemaker

company that would not benefit the TENS industry, even as it

prepared to sell a pacemaker that was ahead of the state of the art.

In mid-1978, Mr. DeAngeli asked Mr. Anderson to look at the

pace:naker industry to see if it still offered a good opportunity and,

if so, to suggest ways Johnson & Johnson might take advantage of

that opportunity.

The study made by Mr. Anderson was called ‘‘Project Summer.”’

It started with a survey of the whole pacemaker industry and then

gradually focused on possible acquisitions, with particular emphasis

on CPI, which became the code name ‘‘Summer’’ of the study title.

CPI management was seriously considering selling the company, and

Mr. DeAngeli was seriously considering buying it on behalf of

Johnson & Johnson.

In his interoffice review of the pacemaker industry, Mr. Anderson

pointed out that major market opportunities existed in international

sales and in the development of programmable pacemakers. Although

the evidence demonstrated that StimTech, a wholly-owned subsidiary

B-42

of Johnson & Johnson, had a lithium-powered programmable

pacemaker that was beyond the state of the art, the plaintiffs argued

that Johnson & Johnson did not choose to market it because any prof-

its generated for StimTech would be used to make funds available for

research and development of TENS devices. Likewise, the plaintiffs

would have earned their payout and after their termination, they

could have used the proceeds of the payout to fund a new TENS com-

pany to compete against the entire pain-control industry—not only

Johnson & Johnson but all dispensers of pain-controlling drugs. An

explanation which the jury could have rationally arrived at was that

Johnson & Johnson, in divesting itself of one pacemaker company,

even as it sought to buy another, was doing it for anti-competitive

reasons.

The most interesting opporturucy for ‘acquisition as an entry’’ was

CPI, according to Mr. Anderson. In making his assessment of the

value of CPI, Mr. Anderson did in actual practice that which the

plaintiffs did in arriving at their ‘‘values”’ in their damage studies. Mr.

Anderson took the after-tax profit for CPI for the past year and

multiplied it by a factor of 77. This multiple of 77 gave him a value

of $134.3 million. In order to acquire CPI, Mr. Anderson conclud-

ed that Johnson & Johnson could pay $113 million assuming earn-

ings of $2.41 per share, or $127 million assuming earnings of $2.71

per share, without diluting Johnson & Johnson’s stock. Mr. Ander-

son and Mr. DeAngeli secretly flew to Bemidji, Minnes

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