Philips faces huge payment awarded 3D entrepreneurs

Damages in fraud verdict could total more than $150 million

One-time 3D ultrasound pioneer Volumetrics Medical Imaging has won a major court battle against Royal Philips Electronics. On Feb. 6, a U.S. District Court jury in Raleigh, NC, delivered a verdict against the Dutch company for fraud and negligent misrepresentation, awarding the plaintiff $151.25 million plus $1 million (which is automatically tripled under North Carolina law) for 17 acts of unfair and deceptive trade practices and/or unfair competition.

Before the verdict becomes a judgment, it must be reviewed by the trial judge, James A. Beaty, Jr., who has the authority to modify it. Philips expects that the review will be done in March. But even then, the story may be a long way from over.

"Philips Electronics is disappointed in the outcome of the trial and believes the facts of the case do not support the verdict," said Philips spokesperson Terry Fassburg. "We intend to appeal."

If the verdict stands, the damages would dwarf those awarded Fonar in 1997, when GE Medical Systems was forced to pay $128.7 million for patent infringement. The first verdict in favor of Fonar came in May 1995. Appeals lasted two years and ended only when the U.S. Supreme Court refused to hear the case in October 1997. Fonar kept $77.2 million of the judgment. The rest went for lawyer's fees and related expenses (DI SCAN 10/29/97).

The verdict rendered against Philips' ultrasound business related to the company's decision to neither collaborate with nor acquire Volumetrics, according to Royal Philips Electronics. The decision was made when Philips was in discussions with Agilent Technologies to purchase its Healthcare Solutions Group. Philips announced its intention to acquire Agilent HSG in November 2000. The deal closed Aug. 1, 2001 (DI SCAN 8/8/01).

Court documents obtained from the Middle District of North Carolina in Raleigh indicate that discussions between Volumetrics and Philips (then known as ATL Ultrasound, a Philips subsidiary) began in the fall of 1999, when Volumetrics asked one of its principal investors, Bill Bright, to locate a strategic partner to help the company bring its 3D ultrasound system to market. Bright invited ATL's chief technical officer, Jacques Souquet, to a demonstration of Volumetrics' system during the 1999 annual meeting of the American Heart Association. Souquet then instructed ATL's director of cardiology product development, David Croniser, to learn more about Volumetrics and its technology.

Over the following months, Croniser, Bright, and other executives from the two companies met to discuss a possible joint venture or corporate purchase of Volumetrics by ATL. Among those involved with the meetings was cofounder John Oxaal, who still serves as chair of Volumetrics and is a partner in Sevin Rosen Funds, an early-stage, technology venture capital firm in Palo Alto, CA. Oxaal was not available for comment.

Among the evidence presented during the trial, which began Jan. 6, were voicemail messages left by Croniser stating "we have at least gotten over the first hurdle, the ATL hurdle, and now we have two Philips' hurdles to go through. One is (ATL Ultrasound CEO Tim) Mickelson's group, and the second one is the whole board of directors for Philips corporate." Similar references to Philips appeared in other voicemails.

Around June 2000, Volumetrics provided ATL staff with engineering resource and budget information and the two companies worked together to develop a joint budget, according to the court documents. Throughout July 2000, engineers at the two companies corresponded with questions and information about the technical details of a potential joint Volumetrics-ATL machine. On July 7, 2000, Croniser told Volumetrics executives that the Philips mergers and acquisitions group had become preoccupied with negotiations for another potential deal, but he did not know the nature of the negotiations. Croniser predicted this would delay the deal between Volumetrics and ATL by two or more months.

During the trial, Volumetrics presented evidence that ATL executives visited Volumetrics for a joint engineering meeting July 14, during which they reviewed design plans for the joint product, product cost projections, and other development plans. As a result of this meeting, the two companies developed a list of action items, which assigned tasks for both parties to complete.

Croniser and Bright spoke several times from July through September 2000. During these conversations, Croniser provided updates on progress made toward finalizing the joint transaction and was generally optimistic about "moving forward," according to the court document. He explained that continuing delays were due to Mickelson being tied up with the other transaction, as were the mergers and acquisition staff at Philips.

On Sept. 18, 2000, Croniser traveled to Volumetrics. Notes taken by Bright during a presentation by Croniser to Volumetrics employees reflect Bright's impression that "the outside (time frame Croniser was) look(ing) at was four weeks or maybe five weeks that we ought to have negotiated and gotten the final deal."

Later that day, Bright drove Croniser to the airport, discussing the deal further. "He (Croniser) was telling me driving in the car how tough these M&A people were going to be," Bright stated in notes made after the conversation and presented at trial. Bright concluded, "I felt that he (Croniser) is being more pessimistic about what they can do with me than he was in front of the people."

For reasons not described in court documents, Croniser's employment with ATL ended in late October 2000. ATL chief engineer Roy Peterson then became Volumetrics' main contact person.

On Nov. 17, 2000, Philips publicly announced an agreement to acquire the Healthcare Solutions Group of Agilent. Discussions between ATL and Volumetrics continued. Bright and other Volumetrics staff traveled to Washington state Dec. 1, 2000, to meet with ATL executives, including CEO Mickelson, to discuss the status of the ATL/Volumetrics talks in light of Philips' planned acquisition of Agilent. During the meeting, Mickelson asked Bright to put together a proposal about how the companies might proceed. A proposal submitted Dec. 5 under which ATL/Philips would purchase stock in Volumetrics was rejected Jan. 5, 2001, by Mickelson, who then advised Bright that discussions with ATL would not proceed further.

On Feb. 16, 2001, Volumetrics shut down its operations and terminated all but one of its employees. The company then launched litigation alleging breach of contract, breach of joint venture agreement, actual and constructive fraud, negligent misrepresentation, unfair and deceptive acts and practices and/or unfair competition, breach of fiduciary duty, and unjust enrichment. On Jan. 29, 2003, District Judge Beaty dismissed the claims other than actual fraud, negligent misrepresentation, and unfair and deceptive trade practices and/or unfair competition.

The jury found that ATL not only discouraged Volumetrics from discussing a potential partnership with other companies, but it misled Volumetrics into believing that:

• on June 16, 2000, the ATL management council had approved a deal between Volumetrics and ATL;
• on June 21, 2000, the Philips board had approved putting together the paperwork to submit to Philips for a deal between ATL and Volumetrics;
• on Aug. 24, 2000, the documentation for presenting the deal was "100% complete";
• in September 2000, ATL had no other plan for 3D and was not working on anything on its own in the 3D ultrasound area and ATL's plan was to complete this arrangement with Volumetrics; and
• in December 2000, ATL was committed to doing 3D with Volumetrics.

The jury further found that ATL falsely led Volumetrics to believe that $30 million to $40 million had been committed to build a joint ultrasound machine, that further approvals from Philips Medical and Royal Philips Electronics for the agreement to build such a machine were "mere formalities" and that the "skids were greased," and that a deal priced at $100 million involving ATL and Volumetrics would not require Philips board approval.

The jury found that ATL committed fraud and that Volumetrics had been damaged by it, and it recommended that Volumetrics be awarded $106.25 million in compensatory damages and $45 million in punitive damages. The jury found ATL had committed negligent misrepresentation but recommended no damages, as this claim did not apply because of the finding of fraud. Issues regarding unfair trade and deceptive practices led the jury to recommend a payment of $1 million.

With the findings of the jury, Volumetrics could choose either the compensatory and punitive damages ($151.25 million) or $1 million, which would be tripled under North Carolina's Unfair and Deceptive Trade Practices Act.