Opinion
Case No. 2:99CV972K
May 12, 2000
ORDER
This matter is before the court on Plaintiff LIGI's ("LIGI") motion for a Preliminary Injunction. A hearing on that motion was held on April 26-27, 2000. At the hearing, LIGI was represented by Dwight B. Williams and Richard B. Ferrari. Defendants Bausch Lomb Surgical, Inc. ("BL") and Orbtek, Inc. ("Orbtek") (collectively "Defendants") were represented by Clark Waddoups and Steven E. Hugie. Before the hearing, the court considered carefully the memoranda and other materials submitted by the parties. Since taking the matter under advisement, the court has further considered the memoranda and exhibits submitted by the parties, the testimony of the witnesses presented at the hearing, and the arguments presented by counsel. Now being fully advised, the court renders the following Order.
I. BACKGROUND
Orbtek manufactures scanners (Orbscan and Orbscan II) that are topography systems for examination of the cornea and its abnormalities, many of which are correctable by laser surgery or ablation. LIGI became Orbtek's exclusive distributor in Italy pursuant to an International Distributor Agreement (the "Distributor Agreement") dated June 6, 1996. The Distributor Agreement contained broad termination rights. Specifically, it provided that either party could cancel the Distributor Agreement without cause (1) on the anniversary of the Agreement with ninety days written notice, or (2) in the event of a controlling interest change in ownership, with ninety days written notice. See Distributor Agreement § 2.
LIGI specifically requested this termination provision, which was different from Orbtek's standard termination provision found in its other International Distributor Agreements.
During 1997 and 1998, LIGI collaborated with Orbtek in the development of Corneal Interactive Programmed Topographic Ablation ("CIPTA") software for use in conjunction with the Orbtek scanners. The interface software translates the examination data into a "prescription" of the corneal volume to be ablated. At the time that the development of this software was discussed, Orbtek did not have a business relationship with any laser manufacturer and expressly conditioned Orbtek's willingness to develop and market CIPTA on agreements between Orbtek, LIGI, and the manufacturer of the laser to be used with CIPTA. Various representatives of Orbtek, LIGI and LaserSight (a laser manufacturer) attempted to negotiate such agreements over an extended period of time. Based on suggestions that such an agreement was reasonably within the contemplation of the parties, Orbtek began to develop CIPTA while continuing to attempt to reach an agreement with LaserSight and LIGI. Ultimately, LaserSight decided not to join the CIPTA venture and instead developed a relationship with a competitor of Orbtek.
After extensive negotiations, in a License Agreement dated September 11, 1998, LIGI licensed its current and subsequent contributions to the CIPTA software, including all present and future patent rights to Orbtek. In consideration, Orbtek would provide to LIGI "one free copy of the software per Orbscan II system that LIGI sells or has sold in Italy." Orbtek also agreed to display the LIGI logo "where appropriate" throughout the CIPTA software.
Its contributions included, but were not limited to "the architecture of the software, a method for maintaining a constant slope in the transition zone, and any and all patents which LIGI may own or have issued to it at any time in which the contributions are incorporated." The exact contributions and the effectiveness of those contributions are disputed, but that issue is not relevant to this motion.
Under the License Agreement, Orbtek could terminate the Agreement only on default by LIGI in the "observance or performance of any covenant, condition or terms herein required to be observed and performed by LIGI . . ." after a cure period. LIGI had successfully resisted the inclusion of a broad termination clause such as the one found in the Distributor Agreement.
Orbtek canceled the Distribution Agreement effective on or about September 1, 1999. The distributorship was terminated to give BL, which was in the process of acquiring Orbtek, the option of selecting its own distributors of the Orbscan systems, or distributing directly in Italy. After canceling the distributorship, Orbtek maintained that the License Agreement still remained in effect because Orbtek's termination rights under the Distributor Agreement are not affected by the subsequent License Agreement.
Orbtek was acquired by BL in 1999 and is now a wholly owned subsidiary.
Consequently, LIGI filed suit against Defendants on December 10, 1999, claiming, among other things, that by canceling the Distributor Agreement, Orbtek had necessarily terminated the License Agreement and had breached that Agreement because the termination was without cause. LIGI maintains that because a termination of the Distributor Agreement would render the License Agreement essentially worthless to LIGI, the two Agreements are inextricable and must be read together and harmonized to mean that the termination clause of the License Agreement superceded the broad termination clause of the Distributor Agreement.
LIGI has not gone uncompensated for its contributions to the CIPTA software. LIGI claims that it has sold or leased fourteen software packages, with each package having a market value of more than $40,000 per unit. Thus, LIGI has obtained approximately $560,000 for its contributions.
LIGI has now moved this court to (1) enjoin Defendants from refusing to sell Orbtek products to LIGI for resale as the exclusive distributor of those products in Italy and (2) order Defendants, in connection with those sales, to compensate LIGI for its intellectual property and patent license, as provided by the parties' License Agreement.
II. DISCUSSION
A. LEGAL STANDARD FOR OBTAINING A PRELIMINARY INJUNCTION
In order to obtain preliminary injunctive relief, the moving party must establish:
(1) substantial likelihood that the movant will eventually prevail on the merits; (2) a showing that the movant will suffer irreparable injury unless the injunction issues; (3) proof that the threatened injury to the movant outweighs whatever damage the proposed injunction may cause the opposing party; and (4) a showing that the injunction, if issued, would not be adverse to the public interest.
SCFC ILC, Inc. v. Visa USA, Inc., 936 F.2d 1096, 1098 (10th Cir. 1991). Because a preliminary in junction is an extraordinary remedy, "the right to relief must be clear and unequivocal." See id.
In the instant case, there has been significant debate between the parties about whether LIGI must satisfy an even higher standard because, Defendants argue, the requested injunction would not only alter the status quo, but it is mandatory in nature rather than prohibitory. In Visa, the Tenth Circuit stated that such injunctions are disfavored and, consequently, the movant must "satisfy an even heavier burden of showing that the four factors listed above weigh heavily and compellingly in movant's favor before such an injunction may be issued." Id. at 1098-99.
However, because LIGI has not demonstrated even a "clear and unequivocal" right to relief — the "normal" preliminary injunction standard — the court need not decide if the heightened standard should apply in this case.
1. Likelihood of Success on the Merits
LIGI argues that once the License Agreement became effective, a cancellation of the distributorship would cancel LIGI's benefits under the License Agreement. In other words, LIGI claims that the consideration it received for its intellectual property concerning CIPTA was "almost wholly contingent upon its continued distribution of Orbscan systems," and the License Agreement was meaningless without the distributorship. Thus, LIGI argues that when the Distributor Agreement was canceled, it terminated all LIGI's compensation for "its purported ongoing surrender of its intellectual property and patents pursuant to the License Agreement. It also wiped out LIGI's larger revenues from scanner sales; in other words, it will destroy nearly LIGI's entire business."
Accordingly, LIGI argues that the Distributor and License Agreements are inextricable and must be applied together, with any conflicts resolved in favor of the later-executed License Agreement. LIGI maintains that when contracts are "executed substantially contemporaneously and are clearly interrelated, they must be constituted as a whole and harmonized, if possible." Atlas Corp. v. Clovis Nat'l Bank, 737 P.2d 225, 229 (Utah 1987). Similarly, LIGI argues that "[w]here two or more instruments are executed by the same parties . . . at different times in the course of the same transaction, and concerning the same subject matter, they will be read and construed together so far as determining respective rights and interests of the parties even though they do not in terms refer to each other . . ." Bullfrog Marina, Inc. v. Lentz, 501 P.2d 266 (1972). Therefore, LIGI contends that the cancellation of the Distributor Agreement was necessarily a cancellation of the License Agreement, and because the termination was not for cause — which is required under the License Agreement — that Agreement was breached.
On the other hand, Defendants argue that Orbtek's termination rights under the Distributor Agreement were not affected in the least by the subsequent License Agreement. Defendants explain that the cases upon which LIGI relies are not applicable because the Distributor and License Agreements were signed over two years apart and they pertain to difference subjects, unlike the situations in Atlas and Bullfrog Marina. Instead, Defendants rely on Sterling Colorado Agency, Inc. v. Sterling Ins. Co., 266 F.2d 472, 476 (10th Cir. 1959).
In Sterling, there were two agreements between an insurance underwriter and its representative agency. One governed the general agency relationship and the other provided for additional compensation in connection with the sale of life insurance policies. One question presented to the court was whether the termination provisions of the latter governed the former. The agency agreement was silent with respect to termination and the court found that there was no discussion of that issue between the parties. Notwithstanding the fact that the agreements were dated the same day and both dealt with the subject matter of the terms of the agency relationship, the Tenth Circuit held that the parties intended the agreements to be separate and independent and that therefore the termination date provided in the life insurance agreement did not alter the at-will nature of the agency agreement. Id. at 476. Defendants argue that in the instant case, it is clear that the two Agreements were separate instruments providing for different things.
Moreover, Defendants argue that the termination clause in the Distributor Agreement is clear enough that the court need not even look beyond the contracts to the circumstances surrounding the execution of the Agreements. Thus, Defendants claim that extrinsic evidence is not needed to cure an ambiguity in the contracts.
The court finds that the Distributor Agreement and the License Agreement were two separate and complete agreements, neither of which is ambiguous on its face. "The cardinal rule in construing any contract must be to give effect to the intentions of the parties. If possible, those intentions must be determined from an examination of the text of the agreements." Atlas Corp. v. Clovis Nat's Bank, 737 P.2d 225, 229 (Utah 1987). Unlike the situations in Atlas and Bullfrog Marina, the Agreements were not executed substantially contemporaneously, they do not pertain to the same subject matter, and they were not part of the same transaction. Rather, the Agreements were executed more than two years apart and they pertain to entirely different subject matters: one pertains to a distributorship, and the other pertains to the joint effort between Orbtek and LIGI to develop a new software for corneal ablation. Indeed, the two Agreements would have nothing to do with each whatsoever except that Mr. D'Ippolito, president of LIGI, insisted, after months of negotiations, that his compensation for his contributions to the development of CIPTA — one free copy of the software for every Orbscan II sold — be linked to his selling of the scanners. Orbtek had previously offered him a royalty based on worldwide sales. This compensation had absolutely nothing to do with the Distributor Agreement. The fact that Mr. D'Ippolito requested that his compensation under the License Agreement be tied to the number of scanners he sold as a distributor does not render the subject matter of the Agreements the same nor did it transform the parties' dealings into one transaction.
Because there is no ambiguity in the language of the contracts, this court need not resort to extrinsic evidence to determine the intentions of the parties. See, e.g., Hansen v. Stichting Mayflower Recreational Fonds, 898 F. Supp. 1503, 1514 (D. Utah 1995) (applying Utah law and stating that if the contract is not ambiguous, the intention of the parties must be determined from the words of the agreement and that "a contract provision is ambiguous if it is capable of more than one reasonable interpretation because of `uncertain meaning of terms, missing terms, or other facial deficiencies.") However, even if the court considered extrinsic evidence regarding the Agreements, such evidence further bolsters Defendants' claim that the contracts are not related and should not be construed together. Mr. D'Ippolito testified that he assumed that the termination provision of the License Agreement would be incorporated into the Distribution Agreement because otherwise, a cancellation of the Distribution Agreement would terminate any compensation under the License Agreement. He did not offer any evidence that the parties had ever discussed linking the two Agreements together or changing the termination provision of the Distributor Agreement. Defendants, however, provided significant testimony that during the negotiation of the License Agreement, Orbtek viewed the Distributor Agreement to be a completely separate agreement from the License Agreement. Mr. Savage, President of Orbtek testified that Orbtek would not have executed the License Agreement had it been tied to the Distributor Agreement. Moreover, W illiam Sivill, on behalf of Orbtek, expressly told Mr. D'Ippolito that the License Agreement was to be separate from any other agreements with Orbtek. To Defendants' knowledge, D'Ippolito never expressed a contrary understanding of the License Agreement until this litigation was threatened more than six months after the termination notice was sent to LIGI.
While the Bullfrog Marina case upon which LIGI relies may, at first blush, seem similar to this case, it is actually quite different. In Bullfrog, the parties had made an oral agreement regarding both (1) the plaintiff's employment of defendant to operate a houseboat business, and (2) the defendant's lease to the plaintiff of three houseboats. The agreement had been reached well before the employment contract and the lease were put into writing and signed. Thus, each agreement was signed with knowledge of the other agreement. See Bullfrog Marina, Inc. v. Lentz, 501 P.2d 266, 269-70 (Utah 1972). The defendant terminated the two-year employment agreement for cause and took his boats with him. The lease contained no specified term. On appeal, the plaintiff argued that the trial court erred in determining that the two contracts should be considered together as one contract. He argued that the lease was a separate and distinct agreement and that he was entitled to possession of the houseboats for two years. The Utah Supreme Court stated that the issue was whether the lease represented a final and complete expression of the agreement of the parties or was merely a written memorandum by which part of the contract may be proved. Because the issue of whether the lease represented an integration was a factual question, and there was substantial evidence to support the determination of the trial judge, the court sustained the trial court's ruling. Id. at 267.
In the case at bar, each agreement is an integrated contract — a complete and certain agreement. Each contains a distinct termination clause, unlike the lease agreement in Bullfrog, which was silent as to the duration of the lease. Moreover, in the present case, the contracts were executed over two years apart, unlike the situation in Bullfrog where the agreements were executed within months of each other and an oral agreement about both items had been reached prior to either written contract being signed. In addition, the contracts in Bullfrog were clearly related to the same subject matter, unlike the present case.
Apparently, Mr. D'Ippolito had originally wanted a 33% royalty from sales in the United States, and 100% from sales in Italy. At that point, the parties reached an impasse. Eventually, Orbtek offered him a 15% royalty on all sales, but Mr. D'Ippolito rejected that proposition. He suggested that he receive a free copy of the software for every Orbscan II that he sold. There were also extensive negotiations about the termination provision in the License Agreement, and Mr. D'Ippolito eventually succeeded in obtaining the wording he desired.
In negotiating his compensation for his contributions to CIPTA, which was apparently an eight-month process, Mr. D'Ippolito simply failed to recognize or account for the possibility that his Distributor Agreement with Orbtek could be canceled on its anniversary date or if Orbtek was bought by another entity. If the parties had intended to alter the termination provision of the Distributorship Agreement at the time they entered into the License Agreement, the parties could have easily so stated. The court cannot create a better contract for LIGI than it created for itself. Consequently, LIGI has not demonstrated that it is likely to prevail on the merits at trial, much less that it has a substantial likelihood of success.
2. Irreparable Injury
LIGI claims that it will suffer irreparable injury if an injunction does not issue. LIGI argues that 80-85% of its revenue is derived from sales pertaining to refractive surgery and that it cannot survive without a source of scanners in an Italian market where "the customer preference for ensemble purchases is strong and increasing." In addition, it claims that it has made debt-financed capital expenditures in reliance on the Distributor Agreement. In addition, LIGI argues that loss of a business has been repeatedly held to constitute irreparable injury for purposes of a preliminary injunction.
Defendants highlight that LIGI's speculation about losing its business is vague and general and that LIGI failed to produce any concrete evidence on this subject. In addition, they argue that loss of a distributorship or product line does not constitute irreparable harm. Defendants maintain that any loss of revenue suffered from the alleged breach of contract and any capital expenditure LIGI made in reliance on the collaborative development of CIPTA with Orbtek are measurable and compensable in damages.
The court agrees with Defendants that LIGI has not demonstrated irreparable injury. LIGI still sells LaserSight lasers, which constitute the vast majority of LIGI's revenues for the eighty percent of its business in refractive surgery. Although LIGI claims that the Italian market now demands ensembles rather than mere components, LIGI admitted that other LaserSight distributors throughout the world sell their lasers without the benefit of an "ensemble." The court agrees that LIGI may be losing a competitive edge in the Italian market, but such a loss is compensable with damages at trial, should LIGI succeed. LIGI has also argued that it has invested over $7 million in anticipation of selling the ensembles. However, Orbtek notified LIGI in March 1999 that the Distributor Agreement would be canceled. The distributorship was then terminated on approximately September 1, 1999. The building that LIGI has begun constructing — which accounts for the bulk of the capital expenditures — was not even started until July 1999, well after LIGI knew about the cancellation of its distributorship. These are expenses that LIGI has voluntarily chosen to incur with knowledge that its distributorship would end. The fact that LIGI has continued to invest in such capital improvements with the knowledge that its distributorship had been canceled also casts doubt on LIGI's assertion that it cannot survive without its Orbscan distributorship. Accordingly, the court finds that LIGI has not demonstrated irreparable injury.
The testimony at the hearing was that LIGI sold an ensemble — an Orbscan scanner, a laser, and CIPTA — for approximately $600,000. The laser itself is sold for $400,000 to $450,000.
3. Balance of Harships
LIGI claims that the threatened injury to LIGI outweighs whatever damage the injunction would cause Defendants because loss of the distributorship will virtually eliminate LIGI's entire business, while the distributorship's continuation would simply require Defendants to continue to do business with a distributor that has performed well
Defendants, however, do not agree. They argue that if this court orders an injunction, Defendants will risk liability for a product that has never been approved by the FDA. Defendants explained that the CIPTA software never got off the ground, in part because no laser manufacturer ever signed on as a partner in the project and because insufficient clinical data was gathered to allow for commercialization of the software product. According to the Defendants, CIPTA has never been offered for sale or commercially marketed anywhere in the world by Defendants. It has not been approved by the FDA, and it remains a developmental product. If it is to be commercialized, Defendants claim that significant additional clinical trials must be completed and an agreement must be reached with the manufacturer of a surgical laser to be used with CIPTA. Orbtek has not authorized LIGI or any other entity to distribute the software commercially. Preliminary versions of CIPTA had been provided to LIGI and updated for purposes of clinical testing only. Defendants had no knowledge until this proceeding began that LIGI had been copying the preliminary versions of Orbtek's CIPTA and selling it in Italy without Orbtek's or permission.
Defendants maintain that an injunction would harm their business. Specifically, Defendants claim that they are on the cutting edge of an emergent technology, called Zyoptix. They are negotiating with New Tech, a distributor in Italy with whom BL has had a relationship for years. BL's entire line of refractive products, except for Orbscan scanners, is now being marketed in Italy through that distributor. BL claims that it has been hampered in its efforts to market the Orbscan, which is a key component in the new "wavefront" surgery ensemble, through this distributor, as a result of this lawsuit. BL maintains that the dispute over the distribution rights to Orbscan in Italy threatens to derail the negotiations with New Tech and the Zyoptix venture as a whole because it creates uncertainty as to the right to market a price of the Zyoptix ensemble, the Orbscan scanner. Defendants claim that the uncertainty in the marketplace about the status of the LIGI distributorship has affected Defendants' relationships with consumers and business partners alike, and seriously jeopardizes its commercial development and distribution of the new wavefront surgery ensemble.
In addition, Defendants claim that they would be harmed because they would be unable to bundle and market their Zyoptix system through a single distributor, and BL would have its product line split between two separate distributors in the same market. Moreover, because distribution of two key components of BL's new integrated wavefront surgical product would be divided between two competitors, BL's interest in that new technology would likely be jeopardized. Also, LIGI is the distributor of LaserSight lasers, and LaserSight is a competitor of Technolas lasers, a subsidiary of BL. If BL were forced to provide Orbscan scanners to LIGI, it would in effect be providing scanners for use with a competitor's line of laser products. Finally, Defendants argue that consumer confusion would result, and Defendants' good will with consumers and business partners would suffer if an injunction were entered.
BL has already told its customers and potential customers that LIGI's distributorship was terminated and that New Tech would be the exclusive distributor.
Moreover, Defendants argue that Orbtek had a vested contractual right to terminate the distributorship and that they should not be forced against its wishes to be in a working relationship with LIGI. To require such a relationship would, they claim, work a serious interference with Orbtek's business.
Because this court has determined that there is little chance of success on the merits, LIGI must satisfy a higher burden regarding the balance of harms. See Roland Mach. Co. v. Dresser Indus., 749 F.2d 380, 387 (7th Cir. 1984) ("The more likely the plaintiff is to win, the less heavily need the balance of harms weigh in his favor; the less likely he is to win, the more need it weigh in his favor."). Even applying a "normal" balance of hardships standard, however, the court finds that the balance of harms weighs in favor of Defendants for the reasons stated by Defendants.
4. Public Interest
LIGI claims that the injunction would not be adverse to the public interest. Defendants, on the other hand, claim that everyone benefits from a settled expectation that private contractual arrangements will be respected by the courts, and that consumers are entitled to expect some level of predictability and regularity in dealing with merchants. Moreover, Defendants argue that it serves the public interest for courts to refrain from compelling companies to allow commercial use of its product when the company developing the product does not believe that the product is ready for commercial use and when it has not been approved by the FDA.
Again, the court agrees with Defendants that the public interest is best served by declining to enter a preliminary injunction.
III. CONCLUSION
LIGI has failed to satisfy any of the four requirements for obtaining a preliminary injunction. For the foregoing reasons, and good cause appearing, IT IS HEREBY ORDERED that LIGI's Motion for a Preliminary Injunction is DENIED.