J&J still seeing red over Boston Sci's 2006 acquisition of Guidant

Nine years ago Boston Scientific Corp. prevented its fierce health care competitor Johnson & Johnson from buying Guidant — the heart-device company with a big Twin Cities presence — for a massively inflated price.

Rather than sending a thank-you card, however, Johnson & Johnson slapped Boston Scientific with a $4 billion lawsuit.

And to the surprise of lawyers and investors, that lawsuit — alleging breach of contract and deceitful behavior by Guidant and its allies — is headed to Nov. 20 trial in a Manhattan federal court.

"To see that you've got J&J, who should be thanking Boston Scientific for preventing them from doing that deal and saving J&J from massive losses, is now trying to have its cake and eat it too? It's over the top," said Steve Kozachok, a health care merger lawyer at Briggs & Morgan in Minneapolis. "I think somebody very high up at each of the companies really doesn't like the other person, and it's more of a personality spat than anything else."

Boston Scientific famously won a bidding war for Guidant in 2006, ultimately purchasing Guidant for $27 billion following weeks of competing offers that escalated the price from Johnson & Johnson's written offer of $21 billion. Analysts rejoiced at the news; one proclaimed at the time that the deal was a "table pounder" that would transform Boston Scientific into a global cardiovascular powerhouse.

But neither company anticipated the yearslong market slump for Guidant's sophisticated pacemakers and implantable defibrillators, which has depressed Boston Scientific's earnings and caused the company to write off $6.3 billion in Guidant's fair-market value. Today, the entirety of Boston Scientific has a market capitalization of just $17.6 billion.

"Guidant was less valuable than either J&J or Boston Scientific believed," Boston Scientific's attorneys wrote in court paperwork last month.

The case is freighted with emotion among longtime industry opponents.

Johnson & Johnson's lawsuit claimed its former partner in the Guidant deal, Chicago's Abbott Laboratories, "went behind J&J's back" by helping Boston Scientific buy Guidant, even though Abbott was simultaneously working with J&J. Observed then-District Judge Gerard Lynch in 2007, "This case arises from a proposed merger that left plaintiff Johnson & Johnson with a broken heart."

Typically a settlement would be likely in a high-stakes case among industry titans. And indeed observers say it may still happen before the start of the two-week trial in Manhattan. But if part of the motivation for avoiding settlement thus far is personal antagonism, that might auger against an out-of-court deal, Kozachok said, "because they just want to fight."

Whatever the case, the litigation has spooked some Boston Scientific investors.

"The liability risks at Boston Scientific are getting hard to ignore," analysts at J.P. Morgan wrote in a note to investors in August, just after U.S. District Judge Richard Sullivan denied Guidant's request for summary judgment. The analysts "believe the odds are in Boston's favor, but by no means is this an open-and-shut case."

In mid-2005, Johnson & Johnson had a written agreement to acquire Guidant for $25.4 billion, but J&J got cold feet after highly publicized recalls of defective Guidant devices led to regulatory and legal problems for the company. Guidant actually sued J&J for breaching the merger agreement after Johnson & Johnson threatened to back away from the deal, citing the legal woes. The companies eventually reconciled, and Guidant agreed to a lowered price of $21.5 billion.

Like previous agreements, the new merger contract prohibited Guidant from actively seeking competing offers. Guidant was allowed to consider unsolicited proposals, as is required under laws in many states, but the agreement imposed strict confidentiality rules strictly limiting any sharing of due-diligence information to active parties in such a deal.

Just before J&J closed on the deal, Boston Scientific tendered a purchase offer of $25 billion, with an assurance that the deal would pass antitrust scrutiny because Abbott Labs had agreed to ensure future competition by buying some product lines and sharing rights to sell Guidant's lucrative drug-eluting heart stents, according to the lawsuit.

But court records say Abbott was secretly working both sides of the deal.

Abbott had already agreed to buy or share much the same product lines from J&J in a consent decree with the Federal Trade Commission, resolving antitrust concerns in J&J's offer.

"As a result of the 'deeper dive' it was permitted into Guidant's confidential business information, Abbott was able to make a decision to move forward and agree to acquire" the parts of Guidant that could hold up Boston's offer, Johnson's lawsuit says. "Without these agreements, Boston Scientific's takeover proposal would not have been viable, much less superior to J&J's."

To win at trial this month Johnson & Johnson will have to prove not just that Guidant violated a confidentiality agreement, but that the violation was willful, said Bret Puls, a litigator with Oppenheimer Wolff & Donnelly in Minneapolis.

Boston Scientific Chief Executive Mike Mahoney cited that high burden of proof in an interview with the Star Tribune last month. "We feel confident in our position," Mahoney said.

Executives with Johnson & Johnson declined to comment for this story, citing the pending litigation. Abbott was dismissed from the case in 2007, and declined to comment.

To recover any money, Johnson & Johnson will have to prove that it was financially damaged by a willful breach of confidentiality. That's why company lawyers have asked Sullivan not to allow Boston Scientific to show at trial how overvalued Guidant was.

"They're clearly gearing up for trial," Puls said. "That said, with claims of this size and cases of this size, the majority of them settle, even if it's on the courthouse steps."

Joe Carlson • 612-673-4779