7th Circuit affirms stay of DePuy medical device distribution litigation

A dispute over a medical device maker’s distribution contracts in Southern California was properly stayed in an Indiana federal court after parallel claims were brought here, the 7th Circuit Court of Appeals ruled Wednesday.

The panel found that Chief Judge Jane Magnus-Stinson properly balanced a 10-factor test to determine whether the disfavored federal court grant of a stay deferring to state court action was warranted in DePuy Synthes Sales, Inc. v. OrthoLA, Inc. and Bruce Cavarno, 19-2765.

For about a decade, OrthoLA had a contract to distribute DePuy’s medical devices, including joint-reconstruction products, in and around Los Angeles. After the contract was not renewed in 2018, OrthoLA sued in Los Angeles Superior Court, claiming it was entitled to more than $1 million in continuing income under terms of the contract. DePuy, however, claimed OrthoLA breached the competition terms and therefore was not entitled to further compensation.

DePuy moved to stay OrthoLA’s California suit and asked the California state court for an order compelling arbitration in Indiana, per the terms of the contract. The state court denied the motion, finding those contract terms unconscionable and one-sided. DePuy appealed, but it then also filed a demand for arbitration with the American Arbitration Association in Indianapolis. Three days later, DePuy filed two petitions in the Southern District that were consolidated into the instant action, again seeking an order to compel arbitration.

Magnus-Stinson stayed the federal suit, citing Colorado River Conservation Dist. v. United States, 424 U.S. 800 (1976). The 7th Circuit affirmed, finding “the district court did not stray beyond the boundaries of its discretion” in applying the jurisdictional test from Colorado River and its progeny.

The 7th Circuit, did, however, find questionable motives in DePuy’s duplicative filings. Citing the final factor – whether the federal case was vexatious or contrived – Chief Judge Diane Wood wrote that the panel was not entirely convinced. “Although we are not willing to go quite that far, we do think that DePuy’s decision to open a second front in its effort to obtain arbitration just three days after it filed its appeal in the California courts was at best opportunistic and at worst manipulative.

“DePuy protests that it was not seeking a second audience for its arguments about the arbitration clause, but neither the district court nor we are persuaded. Its argument would be more believable if it had not waited until after the Los Angeles Superior Court denied its motion to compel arbitration,” Wood wrote.

“Here, the adjudication of DePuy’s petition to enforce the arbitration clauses in the two agreements was complete in the trial court and was in the process of being handled by the state appellate court. And there was no need at all for parallel suits,” the panel held. “The district court was rightly concerned about the strategy of staying in the state court until after it had ruled, and only then seeking a second bite at the apple in federal court. We are satisfied that the district court reasonably weighed these incommensurables, with proper attention to the general duty to hear cases, and that it did not abuse its discretion in finding the necessary exceptional circumstances to justify a Colorado River stay.”

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