Data

Date:: 27-06-2007
Country:: USA
Number:: B179387, B189213
Court:: Court of Appeal, Second District, Division 7, California
Parties:: Orthotec, LLC. v. Eurosurgical, S.A

Keywords

CHOICE OF LAW OF CONTRACTING STATE AS GOVERNING LAW OF CONTRACT - SUFFICIENT TO EXCLUDE APPLICATION OF CISG IN PRESENCE OF A CLEAR INTENTION OF THE PARTIES (ART. 6 CISG)

Abstract

A French manufacturer of surgical products and a US company entered into a licensing agreement granting the former the right to market the medical products manufactured by the latter in North America and Central America. After the licensing agreement has been signed, the US company was incorporated into a new company; the original licensing agreement was terminated and the new company entered into a new agreement with the French manufacturer (the assignment agreement), which expanded the new company’s rights and entitled the manufacturer to an interest in the US company. The assignment agreement was governed by California law. The relationship deteriorated between the parties. Consequently, the US company filed a suit against the manufacturer claiming, among others, breach of the assignment agreement. The latter proposed a series of jury instructions based on CISG, arguing the Convention applied to the sale of goods from the manufacturer to the distributor under the assignment agreement.

The Court of First Instance held that the CISG did not govern the case and rejected the jury instructions on the CISG. The jury and court ruled in favor of the US company and the manufacturer appealed.

The Appellate Court confirmed the First Instance’s decision with respect to the application of CISG. Since the parties had agreed on the exclusion of CISG during negotiations and in the final agreement any reference to CISG was omitted, providing only for the application of California law, CISG could not be regarded as the law governing the sale contracts under the licensing agreement.

Furthermore, the Appellate Court found there was not sufficient grounds to reverse the First Instance’s ruling on the ground that CISG had been considered inapplicable, since the US company did not provide adequate evidence that it was prejudiced in any way by such a decision.

Fulltext

APPEAL from a judgment of the Superior Court of Los Angeles County, Joanne O'Donnell, Judge. Affirmed in part, reversed in part and remanded.

ORIGINAL PROCEEDING. Petition for writ of habeas corpus/certiorari. Joanne O'Donnell, Judge. Petition granted.

PERLUSS, P.J.

Eurosurgical, S.A. appeals from the judgment entered after a four-week jury trial and a two-day bench trial awarding monetary and equitable relief to OrthoTec, LLC relating to OrthoTec, LLC's agreement to market Eurosurgical's medical devices in the United States. Eurosurgical contends the trial court made various evidentiary and instructional errors during the jury trial and neither the jury's damage award nor the trial court's equitable award is legally or factually sustainable. We reverse that part of the judgment finding against Eurosurgical on its declaratory relief claim and remand with directions for the trial court to modify the judgment to provide Eurosurgical is entitled to a 10 percent economic interest in OrthoTec, LLC from the date of the judgment forward. In all other respects, we affirm the judgment. We also grant the petition for a writ of habeas corpus/certiorari filed by Eurosurgical and its principals Guy Viart and Mathieu Maassen, which we have considered in conjunction with this appeal, finding an insufficient evidentiary basis for the trial court's order of contempt.

FACTUAL AND PROCEDURAL BACKGROUND

1. Eurosurgical and Its Interest in Distributing Its Products in the United States

Eurosurgical, founded in 1992, is a French corporation that designs and manufactures surgical products used in the treatment of spinal diseases. Viart is its managing director.

Near the time of Eurosurgical's formation, Viart met with Patrick Bertranou, a French citizen residing in Los Angeles. Bertranou, who had been a medical doctor in France, was distributing medical devices in the United States through a company called OrthoTec, Inc. Bertranou saw the United States as having the potential to be a hugely profitable market for distribution of Eurosurgical's products; Viart, recognizing significant benefits in expanding Eurosurgical's distribution of its products beyond Europe, was interested in using Bertranou to find a United States distributor for Eurosurgical's products.

[...]

2. The Licensing Agreement

Still interested in distributing Eurosurgical's products in the United States, but dissatisfied with the results of their efforts to date, Viart and Bertranou decided to enter a formal agreement they believed would help further the goal of securing a distributor. As a result, on November 24, 1997 Viart and Bertranou signed a licensing agreement in which Eurosurgical granted OrthoTec, Inc. "the exclusive right to Market and manufacture the Products [defined as three spinal interlaminal fixation devices entitled the SCS, Twinflex and Claris systems] and any improvements, alterations, modifications or replacements thereof ..., using the Patent Rights, and the right to use the Trademarks, by any and all methods and channels of distribution now or hereafter known and to permit or sublicense others to do any or all of the foregoing.” Under the agreement OrthoTec, Inc. was required to "use its best efforts to Market the Products within the Territory[,]" which was defined as North America and Central America.

3. The Creation of OrthoTec, LLC and the Assignment Agreement

[...]

On August 28, 1998 Bertranou formed OrthoTec, LLC. According to OrthoTec, LLC's September 15, 1998 operating agreement, the company was created "to engage in the sales, manufacture, distribution and licensing of medical equipment now or hereafter designed by or for Eurosurgical, S.A., a French corporation, and of such other medical equipment determined by the Manager [initially Bertranou] in his sole discretion, and to do any and all other things determined by the Manager to be necessary, desirable or incidental to the foregoing purposes."

The day after OrthoTec, LLC's operating agreement was signed, the licensing agreement between OrthoTec, Inc. and Eurosurgical was terminated, and OrthoTec, LLC and Eurosurgical entered into a new agreement (the assignment agreement), which expanded OrthoTec, LLC's manufacturing rights and entitled Eurosurgical to
an interest in OrthoTec, LLC.

Under the assignment agreement Eurosurgical sold and transferred to OrthoTec, LLC (1) all rights, including marketing rights, in the SCS, Claris and Cerfix cervical plate systems and any improvements, alterations, modifications or replacements; (2) the exclusive right to use the trademarks and the right of first opportunity to market any new product developed or created by or for Eurosurgical at any time; and (3) the exclusive right to pursue the issuance of one or more patents and other protections available in the territory (now defined as "North America, Mexico, Central America, India, Australia and New Zealand"). OrthoTec, LLC, from its first date of purchase of products from Eurosurgical, also enjoyed an exclusive right for 18 months to manufacture the products in the defined territory, and for the same time period OrthoTec, LLC was required to purchase the products exclusively from Eurosurgical. As consideration for transfer of the rights, OrthoTec, LLC was to give Eurosurgical a 10 percent ownership interest in OrthoTec, LLC. FN1 The agreement further provided that, if OrthoTec, LLC refused to timely pay any amount owed to Eurosurgical in connection with manufacturing the products, Eurosurgical could repurchase the rights from OrthoTec, LLC for $100. The agreement stated it was governed by California law and the prevailing party in any action to enforce the agreement was entitled to recover reasonable attorney fees.

[...]

7. The Merger Discussions and Eurosurgical's Efforts to Reacquire Rights

[...]

OrthoTec, LLC was having difficulty meeting the 30-day payment terms on new orders now being enforced by Eurosurgical and, therefore, was unable to buy as much product as in the past. Bertranou asked Viart to modify the terms to 90 days, and Viart agreed. Shortly thereafter, on April 22, 2002, Bertranou sent a letter to Viart stating OrthoTec, LLC was terminating the partnership agreement because Eurosurgical, OrthoTec, LLC and REO had failed to enter into a three-party arrangement by April 1, 2002, as provided by the agreement's terms.

On May 7, 2002 Eurosurgical sent a letter to Bertranou stating OrthoTec, LLC had a balance due from 1999 of $153,418.72 and requested payment "as soon as possible." Bertranou disputed that any amounts were due from 1999 based on conversations he had had with Eurosurgical's accountant and the recent statement of outstanding balance he had received from Eurosurgical, which had not shown any balance due for 1999 invoices and, in any event, had been paid in full. On May 20, 2002 Viart and Maassen met with REO representatives and told them Eurosurgical was going to terminate the assignment agreement with OrthoTec, LLC. Eurosurgical then sent another letter to OrthoTec, LLC demanding payment for unpaid invoices from 1999.

On June 28, 2002 Eurosurgical sent a letter to OrthoTec, LLC exercising its option to repurchase for $100 the rights defined in the assignment agreement on the ground that OrthoTec, LLC had refused to pay within 45 days the $153,418.72 demanded on May 7, 2002. That same day, before receiving Eurosurigcal's letter, Bertranou gave instructions to his bank to wire transfer, under protest, more than $70,000 to Eurosurgical as partial payment of the allegedly outstanding 1999 balance. On July 1, 2002, after receiving the June 28, 2002 letter, Bertranou sent a letter to Viart informing him about the initial wire transfer and stating he had given instructions to wire transfer another $82,650.32, the remaining balance, again under protest. On July 9, 2002 OrthoTec, LLC's counsel sent a letter to Viart returning the $100 payment for the repurchase of the rights in the assignment agreement and stating that, given the dispute regarding the 1999 invoices and the payment under protest, OrthoTec, LLC did not recognize Eurosurgical's exercise of its reacquisition option.

After this time Eurosurgical did not manufacture any additional product for OrthoTec, LLC; REO cancelled its open purchase orders with OrthoTec, LLC and, other than its already purchased inventory, refused to sell any additional product for OrthoTec, LLC. Instead, as of July 2002 Eurosurgical went into business directly with REO, signing a distribution agreement in October 2002. According to Maassen, both Eurosurgical and REO benefited from their new relationship without OrthoTec, LLC's involvement: Eurosurgical made more money dealing directly with REO than it had under its relationship with OrthoTec, LLC, and REO paid a lower price to acquire products from Eurosurgical than it had from OrthoTec, LLC. For its part, OrthoTec, LLC terminated its licensing agreement with REO and demanded REO cease using the rights transferred to OrthoTec, LLC under the assignment agreement. As of July 30, 2002 OrthoTec, LLC entered a manufacturing subcontract with a company called Specialized Medical Devices, Inc.

8. OrthoTec, LLC's Lawsuit Against Eurosurgical

On July 2, 2002 OrthoTec, LLC filed a lawsuit against Eurosurgical. FN4 In the operative first amended complaint OrthoTec, LLC alleged 10 causes of action: (1) breach of the assignment agreement; (2) restitution of forfeited property; (3) declaratory relief; (4) accounting; (5) injunctive relief; (6) intentional interference with contract; (7) negligent interference with contract; (8) breach of the partnership agreement; (9) unfair competition; and (10) specific performance….

FN4. OrthoTec, LLC also sued REO but dismissed it from the action to pursue claims against REO in federal court.

[...]

10. The Jury Trial

[...]

The jury returned a special verdict as to OrthoTec, LLC's causes of action finding (1) in favor of OrthoTec, LLC on its claim for breach of the assignment agreement with damages of $6 million; (2) against OrthoTec, LLC on its claim for breach of the partnership agreement; (3) in favor of OrthoTec, LLC on its claim for intentional interference with contract with damages of $500,000; and (4) in favor of OrthoTec, LLC on its claim for negligent interference with prospective economic advantage with damages of $2.5 million. The jury also concluded on OrthoTec, LLC's interference with contract claim, by clear and convincing evidence, Eurosurgical had acted with oppression, fraud or malice…

Based on the finding Eurosurgical had acted with malice, fraud or oppression with respect to the interference with contract claim, additional argument was presented to the jury on the issue of the amount of punitive damages, if any, it should award to OrthoTec, LLC. The jury returned a special verdict declining to
award any punitive damages.

[...]

CONTENTIONS

Eurosurgical contends on appeal (1) the admission of evidence concerning a pending criminal action in France against Bertranou and pending actions commenced by Eurosurgical against OrthoTec, LLC in the United States Patent and Trademark Office (USPTO) constituted prejudicial error; (2) the trial court's failure to instruct the jury on principles regarding the United Nations Convention on Contracts for the International Sale of Goods (CISG) in relation to the interpretation of the assignment agreement constituted prejudicial error; (3) the trial court erred by directing a verdict in favor of OrthoTec, LLC on Eurosurgical's constructive fraud claim in the operative cross-complaint; (4) the evidence is insufficient to support the jury's verdicts on OrthoTec, LLC's claims for intentional interference with contract and negligent interference with prospective economic advantage; (5) the jury's damage awards on the interference claims cannot stand because they are duplicative of the award on the claim for breach of the assignment agreement; (6) the trial court's award of equitable relief to OrthoTec, LLC cannot stand because it is unwarranted and duplicative of the jury's monetary award; and (7) the trial court's award of attorney fees to OrthoTec, LLC constitutes an abuse of discretion. FN11

FN11. OrthoTec, LLC filed a request for judicial notice of a judgment and findings of fact and conclusions of law entered by the district court in a federal court action it pursued against Eurosurgical and REO, contending they had res judicata and collateral estoppel effect in the instant proceeding. Although we certainly have the authority to take judicial notice of federal court records (Evid.Code, ss 452, 459), we decline to do so in this case because OrthoTec, LLC failed to explain how the federal court records impact our resolution of any of the issues raised by Eurosurgical in its appeal. Accordingly, OrthoTec, LLC's request for judicial notice is denied.

(…)

DISCUSSION

Issues on Eurosurgical's Appeal

1. The Admission of Evidence of the Pending French and USPTO Proceedings Is Not a Basis To Reverse the Judgment

[...]

2. The Trial Court's Decision Not To Instruct the Jury on the CISG's Principles Did Not Prejudice Eurosurgical's Case

Eurosurgical proposed a series of jury instructions on the CISG, arguing it applied to the sale of goods from Eurosurgical to OrthoTec, LLC under the assignment agreement. FN13 The trial court found the CISG did not govern the assignment agreement and, consequently, refused Eurosurgical's proposed instructions. FN14 Eurosurgical contends the trial court's failure to instruct the jury on the CISG's principles constituted prejudicial error. FN15

FN13. The CISG is an international treaty governing contracts for the sale of goods between parties living in those countries that have signed the treaty. The intent of the countries signing the treaty was "that the adoption of uniform rules which govern contracts for the international sale of goods and take into account the different social, economic and legal systems would contribute to the removal of legal barriers in international trade and promote the development of international trade[.]" (United Nations Convention on Contracts for the International Sale of Goods (May 1980) 19 I.L.M. 668, 671.)

FN14. The trial court based its finding the CISG did not apply to the assignment agreement on the agreement's express direction it would be governed by California law and on evidence (1) the initial draft of the agreement provided for application of the CISG; (2) Bertranou believed potential distributors would be uncomfortable with a treaty governing the parties' relationship and discussed the matter with Viart; (3) Viart agreed to eliminate application of the CISG; and (4) the final version of the agreement omitted any reference to the CISG and provided only for the application of California law. Accordingly, as the trial court found, the facts of this case are distinguishable from those in Asante Technologies, Inc. v. PMC-Sierra, Inc. (N.D.Cal.2001) 164 F.Supp.2d 1142, 1149-1150, relied on by Eurosurgical, in which the parties expressed no clear desire to exclude application of the CISG to their agreement. (See also BP Oil Intern., Ltd. v. Empresa Estatal Petroleos (5th Cir.2003) 332 F.3d 333, 336-337 [parties did not expressly opt out of application of the CISG].)

FN15. The trial court fully instructed the jury on contract interpretation and breach under California law and on the proper measure of damages for a breach of contract.

Regardless of the merits of Eurosurgical's argument that jury instructions on the CISG were warranted, it is not entitled to reversal of the judgment on that ground because it has failed to establish it was prejudiced in any way by the trial court's decision the CISG did not govern the assignment agreement and concomitant refusal to instruct the jury on the CISG's principles. A fundamental tenet of appellate review is that a judgment will not be reversed unless the appellant demonstrates not only error in the trial court proceedings but also resulting prejudice. (Code Civ. Proc., s 475 ["No judgment, decision, or decree shall be reversed or affected by reason of any error, ruling, instruction, or defect, unless it shall appear from the record that such error, ruling, instruction, or defect was prejudicial, and also by reason that such error, ruling, instruction, or defect, the said party complaining or appealing sustained and suffered substantial injury, and that a different result would have been probable if such error, ruling, instruction, or defect had not occurred or existed"]; FN16 see, e.g., Paterno v. State of California (1999) 74 Cal.App.4th 68, 107 [to prevail on appeal, party who "has been deprived of a jury trial on an omitted theory ... must articulate prejudice specific to the particular case and cannot rely on a simple showing of error"]; Brokopp v. Ford Motor Co. (1977) 71 Cal.App.3d 841, 853-854 ["A miscarriage of justice should be declared only when the reviewing court is convinced after an examination of the entire case, including the evidence, that it is reasonably probable a result more favorable to the appellant would have been reached absent the error. [Citations.] Prejudice from error is never presumed but must be affirmatively demonstrated by the appellant"].) This rule is applicable to trial court error on an instructional issue: "[T]he existence of instructional error alone is insufficient to overturn a jury verdict. A defendant must also show that the error was prejudicial (Code Civ. Proc., s 475) and resulted in a 'miscarriage of justice' (Cal. Const., art. VI, s 13)." (Pool v. City of Oakland (1986) 42 Cal.3d 1051, 1069.)

FN16. The requirement that an appellant demonstrate prejudice, in addition to error in the trial court proceedings, is also contained in the California Constitution. (Cal. Const., art. VI, s 13 ["No judgment shall be set aside, or new trial granted, in any cause, on the ground of misdirection of the jury, or of the improper admission or rejection of evidence, or for any error as to any matter of pleading, or for any error as to any matter of procedure, unless after an examination of the entire cause, including the evidence, the court shall be of the opinion that the error complained of has resulted in a miscarriage of justice"].)

Eurosurgical's argument on appeal regarding the purported impact of the trial court's failure to instruct on the CISG's principles relates solely to its right to collect from OrthoTec, LLC the alleged 1999 debt of $153,418.72. According to Eurosurgical, under the CISG it had no duty to inform OrthoTec, LLC about the outstanding debt and did not relinquish any right to pursue that debt by failing to do so immediately. As a result, Eurosurgical contends, jury instructions on those principles would have disproved OrthoTec, LLC's claim Eurosurgical forfeited its right to collect the alleged 1999 debt by waiting until May 2002 to do so and, therefore, had no basis to terminate the assignment agreement.

The focus of OrthoTec, LLC's case, however, was not that Eurosurgical waited too long to collect on outstanding invoices from 1999 but that Eurosurgical fabricated the debt as an excuse to terminate the assignment agreement and reacquire product rights. Evidence of Maassen's communications with Viart, specifically stating "we must, at all costs, cause [the assignment agreement] to be terminated or to be substantially changed," and with REO, contemplating a merger between Eurosurgical and REO and the elimination of OrthoTec, LLC as an intermediary, certainly supported OrthoTec, LLC's theory. In addition, Bertranou's testimony he had worked out any unresolved issues on the 1999 invoices with Eurosurgical's accountant long before the May 2002 demand and had received and paid earlier in 2002 a demand for payment of outstanding invoices, which included no debt from 1999, also supported OrthoTec, LLC's claim the alleged 1999 debt was fabricated. To the extent OrthoTec, LLC asserted Eurosurgical delayed in making efforts to collect the alleged 1999 debt, it was essentially to provide further support for its theory there was no debt, not to argue the right to collect a legitimate obligation had been forfeited. Accordingly, the trial court's failure to instruct the jury on the CISG's rules regarding unpaid invoices did not prejudice Eurosurgical's case.

In any event, even if we were to assume instructions on the CISG's principles may have had some relevance to Eurosurgical's case apart from the general contract instructions under California law given by the trial court, Eurosurgical has made no showing that it is reasonably probable it would have obtained a more favorable result absent the court's alleged error. (Soule v. General Motors Corp. (1994) 8 Cal.4th 548, 576-583 [miscarriage of justice occurs only when it is reasonably probable that a result more favorable to the complaining party would have been reached in the absence of error]; see also Brokopp v. Ford Motor Co., supra, 71 Cal.App.3d at pp. 853-854.)Absent such a showing, the trial court's failure to instruct the jury on the CISG's principles is no basis to reverse the judgment. FN17

FN17. In one paragraph of its opening brief, and citing no authority, Eurosurgical contends the trial court erred by allowing OrthoTec, LLC to elicit evidence suggesting Eurosurgical had violated customs regulations in shipping products to REO and then by refusing to instruct the jury to disregard such evidence. As with the refusal to instruct on the CISG's principles, even if the trial court should have prevented questioning about shipping to REO or stricken the testimony, Eurosurgical has not shown the few questions answered or OrthoTec, LLC's counsel's reference to them in closing argument prejudiced its case. Given the overwhelming evidence of Eurosurgical's plan to terminate the assignment agreement and its efforts to establish a direct relationship with REO, the brief reference to shipping procedures and customs regulations in a four-week jury trial simply could not have contributed to the jury's verdict against Eurosurgical, and Eurosurgical cannot demonstrate a reasonable probability it would have obtained a more favorable jury verdict had the reference not been made. (Code Civ. Proc., s 475; Cal. Const., art. VI, s 13; Soule v. General Motors Corp., supra, 8 Cal.4th at pp. 576-583;Brokopp v. Ford Motor Co., supra, 71 Cal.App.3d at pp. 853-854.)

[...]

DISPOSITION

That portion of the judgment finding against Eurosurgical on its cause of action for declaratory relief is reversed; and the matter is remanded with directions to the trial court to modify the judgment to provide that Eurosurgical is entitled to a 10 percent economic interest in OrthoTec, LLC from the date of the August 27, 2004 judgment forward. In all other respects, the judgment is affirmed. The petition for writ of habeas corpus/certiorari is granted; and the trial court is directed to vacate its order of contempt. OrthoTec, LLC is to recover its costs in the appeal. Eurosurgical is to recover its costs in the writ proceeding.

We concur: JOHNSON and ZELON, JJ.}}

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