7th Circuit Preliminary Injunction to Enforce Right of First Refusal Part I
By Jay Lewis
Roche Diagnostics Corporation v. Medical Automation Systems, Inc; Gregory A. Menke; and Kurt M. Wassenar, Case No. 11-1446 (7th Cir. May 24, 2011)
Facts
Roche Diagnostics (Roche) is a glucose monitor manufacturer. Medical Automation Systems (MAS) is a software company. Roche and MAS entered into a contract whereby MAS would supply software for Roche’s glucose monitors. During the course of the contract, MAS agreed to sell its stock and assets to Alere, Inc. (“Alere”), one of Roche’s competitors. Roche claimed a right of first refusal under the contract. MAS denied that the right of first refusal was effective because the sale was scheduled to close after the expiration of the contract. Roche filed for injunctive relief. On February 23, 2011, the Southern District Court of Indiana allowed the sale to move forward subject to hold-separate conditions. Roche appealed. The Seventh Circuit affirmed the lower court’s ruling with an additional condition.
Arbitration Clause
The Roche-MAS contract contained an arbitration clause covering any disputes over the right of first refusal. The clause allowed either party to seek equitable relief pending arbitration. The Court acknowledged this clause and refrained from discussing the merits of the contract dispute. Instead, the Court focused solely on the equitable relief. Specifically, the Court examined the potential for irreparable harm to the parties should the sale take place prior to a resolution in arbitration.
Balance of Harms
Roche’s right of first refusal would be damaged or eliminated if MAS was allowed to move forward with the sale of its assets. It would be incredibly difficult to unravel a sale if the arbitrator later decided Roche had a right to buy the company. However, enjoining the sale could harm MAS by killing the deal or diminishing its value should the arbitrator decide that Roche has no right of first refusal. The Court decided to set aside the uncertainty in the arbitrator’s decision and examine who faces the greater harm.
The Court found that Roche faced the greatest harm. Should an unbridled sale go forward, the parties would be completely unable to “unscramble the eggs.” Changes to the corporate structure and management, disclosure of intellectual property, sell-off of assets, and alterations in strategy all create a potential impossibility of restoring the status quo ante. Additionally, MAS has two potential purchasers and any uncertainty will be resolved when the arbitrator decides who gets to buy it. Ultimately, the Court decided that the sale could continue on the condition MAS and Alere were separately maintained during arbitration.
Part II will delineate the Hold-Separate Conditions.
