An Indiana federal court concludes that sellers’ allegations of twenty-one buyer post-closing actions and inactions did not diverge “from the level of efforts, expertise, and resources applied by” the buyer “in the ordinary and usual course of its business.”
M&A Stories
September 15, 2022
Introduction
In a recent case, a federal court in Indiana concluded that sellers of a medical device company were unable to make an earnout claim. They alleged that the buyer did not make sufficient efforts to commercialize their medical device.
Background
The deal involved the acquisition of a company that developed a groundbreaking surgical device for treating bone fractures, reconstructions, and bone loss. The device used a bioresorbable bone substitute material, which supports bone healing and eventually dissolves as the body replaces it with natural bone. This device was the first of its kind to receive regulatory approval for sale in the United States, Europe, and Australia.
The buyer, a global orthopedics products company, purchased the company for over $17 million. As part of the agreement, the sellers were entitled to a percentage of profits from the device’s sales during the first seventeen years after the acquisition. The buyer committed to using “commercially reasonable efforts” to commercialize the device.
The Lawsuit
The sellers were dissatisfied with the earnout payments and filed a lawsuit against the buyer in an Indiana federal district court. They claimed that the buyer did not fulfill their obligation to make commercially reasonable efforts and cited twenty-one instances of post-closing actions and inactions by the buyer.
The buyer argued that it had indeed made commercially reasonable efforts to market the device, as required by the purchase agreement. The buyer requested the court to dismiss the sellers’ complaint, and the court agreed, dismissing the lawsuit with prejudice.
Court’s Decision: The court emphasized that the buyer’s commitment was to use the same level of discretion in commercializing the sellers’ product as it did with its own products. The court concluded that the buyer’s actions aligned with the ordinary and usual course of its business.
See Russell v. Zimmer, Inc., Cause No. 2:20-CV-200-TLS-JEM United States District Court, N.D. Indiana, Hammond Division, (August 15, 2022).
Additional Notes
The sellers also expressed grievances about broken promises made by the buyer before signing the purchase agreement. However, these promises were not included in the agreement, and the integration clause stated that the written agreement constituted the entire agreement, superseding all prior agreements and understandings between the parties, both written and oral.
By John McCauley: I write about recent legal problems of buyer and sellers of small businesses.
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