$400 Million Judgment Against Medtronic

By Barnaby J. Feder | October 13, 2004

A jury in Memphis said yesterday that Medtronic's spinal products subsidiary should pay $400 million in punitive damages for violating agreements covering its use of surgical products invented by Dr. Gary K. Michelson.

The punitive award follows a verdict reached by the jury last month that Medtronic owed $159 million in compensatory damages and unpaid royalties to Dr. Michelson and his company, Karlin Technology.

Dr. Michelson and his lawyers estimated that the increased royalties as a result of the ruling would bring the amount owed him and Karlin -- now owned by a charitable trust -- to well over $1 billion. The calculation is based on the assumption that his inventions will be used in spinal surgery for the next 20 years.

The trial lasted nearly three months and was followed by more than a month of deliberations.

"No jury ever worked harder or got it better," said Dr. Michelson, a 55-year-old surgeon and inventor, who added that he had spent $62 million on the case.

Medtronic, based in Minneapolis, said in a statement that the awards were excessive and unjustified, and that it would pursue all its options including appeals.

Medtronic's shares closed yesterday at $51.09, down 9 cents.

Daniel Owczarski, a research analyst for Belmont Harbor Capital, said, "The number is so far out there that no one expects it to hold on appeal."

Medtronic had revenue of $9.09 billion in the fiscal year that ended April 30.

Medtronic does not break out the results of Medtronic Sofamor Danek, its spinal unit, but analysts have estimated that Sofamor's revenue tops $1.5 billion and that its profit margins are at least 70 percent.

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A Medtronic spokesman, Robert Hanvik, said, "We don't believe this will have a material impact on our ability to supply products to our customers or to continue to innovate."

The case began in 2001 with Medtronic suing Dr. Michelson over obligations under contracts in the early 1990's covering the licensing and sale of his inventions to Sofamor Danek, based in Memphis. Medtronic acquired Sofamor for $3.3 billion in 1999.

Medtronic accused Dr. Michelson of failing to recognize the extent of its rights to his inventions and interfering with its business by trying to market them to competitors.

Dr. Michelson countered that Medtronic violated the agreement by not using its "best efforts" to develop and sell his inventions. He accused Medtronic of having shelved some inventions to protect the profits it was earning from older technology. In addition, he accused Medtronic of manipulating its accounting and operating practices to deprive him of tens of millions of dollars of royalties.

Medtronic also disclosed yesterday that Judge Gary L. Taylor of Federal District Court in Santa Ana, Calif., had issued an order barring it from using a spinal implant screw patented by Interpore International.

Interpore was acquired by Biomet in June.

Medtronic said that it no longer used the screw in its domestic products but that it would appeal the injunction, which the judge stayed for 90 days.