Covidien Subsidiary Hit by Milestone Payment Lawsuit

A jury for the Delaware Superior Court ruled that ev3, a subsidiary of Covidien, broke an agreement for a $175 million payment to one of its partners. The court ruled that ev3 must pay Appriva Medical the total amount owed and interest.

According to the lawsuit, ev3 broke a contract with its partner by not making a $175 million milestone payment for the Plaato device by Appriva. ev3 acquired the device in August of 2002. Plaato is a percutaneous left atrial appendage transcatheter occlusion device. The system can help reduce a patient's risk of stroke by treating a heart defect. Under the purchase agreement, ev3 was required to pay $50 million at the time. The company also agreed to make additional payments to Appriva as milestones were reached.

Erik van der Burg and Dr. Michael Lesh, both cofounders of Appriva, sued ev3 for failure to meet its payment milestones. According to the terms of the deal, ev3 breached the deal by not devoting enough resources to get the device commercialized.

Covidien is not the original owner of ev3. During its troubled times, the company was owned by a private equity group.

The initial $50 payment milestone was due by January 1st of 2005 and was contingent on FDA approval of an IDE. An additional $25 million milestone was due if ev3 was able to place 300 patients in a Europe-based registry trial. This second payment was due by January 1st of 2008.

Another payment for $50 million was due when the FDA PMA application was submitted. Finally, $25 million was due once the device achieved FDA PMA approval.

For ev3, things took a different turn. The company decided to create a different design for the IDE trial. This revised trial was not randomized. This came after the private-equity owners of ev3 failed to locate additional investors. In May of 2003, FDA regulators denied ev3's bid for a non-randomized clinical trial of Plaato. Based on this, ev3 attempted to change its milestone payment agreement.

ev3 started to put together an IPO in late 2004. By September of 2005, the company trashed its Plaato device development initiative. In July of 2010, ev3 was acquired by Covidien for a price tag of $2.6 billion.

Since ev3 lost its case in a Delaware court, Covidien is now on the hook for up to $275 million (including interest and other fees). In response, the company filed for a new trial and for judgement as a matter of law.

"The company has assessed the status of this matter and has concluded that it is more likely than not that the finding will be overturned, and, further, intends to vigorously pursue all available means to achieve such reversal. Accordingly, no liability has been recorded with respect to any damage award," stated a regulatory filing by Covidien.