# Appendix — McDonald v. Johnson & Johnson

> Briefs, arguments, decisions, and more.

URL: https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40385010_3146%3A2

## Record

- **Collection:** Supreme Court brief
- **Document type:** Appendix
- **Published:** January 1, 1984
- **Citation:** 469 U.S. 870

## Text

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

A-1

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

A-9

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.

A-10

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.

A-ll

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.

A-12

& 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,

A-13

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.

vrei 4 De) soe Posiaitls

I AT IR CA, Oa SID by LI gear Eas lal, Sead cat T#

POD RE 0 Rh ABS AP th OPE, Bi in A Lips Peel 1p Bas a cit!

‘ah 5 dee

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.

msdint de en "

Se ee ee he

at Re eae See

a

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

RLV Ried eat SA Neti OE MP Ue sib aes z ae vk

PEO tl Ror A INRA EN es TRA

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,

8 alls oh i itil

sci tits y EnN R E ay Ri rs ok. OA 8 LIE late So Pe

SENG Pott nes era Met wy &

elec arsenic ob Spohs (Sian) ee ag BASS NS ett IR Na A eR eS TRE RIN TIN MeL ics eTNS e

Wr aS ON Nin He cet gi ES

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

B-3

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 cer

[Text truncated at 120,000 characters. The full text is on the page linked above.]

---

Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40385010_3146%3A2. Public record. Not legal advice.