Did the maker of America's most popular pain-killing pills buy up an innovative electronic pain-killing device in order to stifle the product's development and thereby protect its own drug business?
That question lies at the heart of a court battle between Johnson & Johnson and three inventors from Minnesota who sold their young company and its electronic pain reliever to the health care giant seven years ago.
Last July a Federal jury in Minneapolis ruled that Johnson & Johnson had fraudulently bought the electronic painkilling product in order to quietly suppress the device and head off new competition for its drug business. The court ordered the New Brunswick, N.J., company to pay $170.4 million in damages and antitrust fines. According to Judge Miles Lord of the United States District Court in Minneapolis, the evidence before the jury indicated that Johnson & Johnson had engaged in fraud of ''the most extreme and culpable nature.''
For its part, Johnson & Johnson angrily retorted that it was ''absurd'' to conclude that it bought the device only to kill it.
'Not the Second Coming'
''The fact is, this product is not the Second Coming,'' David F. Dobbins of Patterson, Belknap, Webb & Tyler, which represents Johnson & Johnson, declared in an interview. ''Where there is a possibility of making money in a certain area, or where one of our products may be superseded by another, we invest in it. But we're not magicians. We can't make a market where there is none. If this was so profitable we would have exploited it.''
Johnson & Johnson's lawyers are to file a brief today asking Judge Lord to overturn the jury's verdict. If he does not, the company said it would appeal to a higher court.
J&J was not able to overturn the verdict.
No matter how the case comes out, it has stirred broader questions about the possible conflicts of interest that come up when companies acquire businesses in related fields. In addition, some people see it as an instance of the problems that can arise when huge multiproduct companies try to absorb younger high-technology concerns.
By all accounts, the story behind the trial began in 1970 in the Minneapolis basement of Norman Hagfors. Mr. Hagfors and a colleague, Stanley McDonald, had worked for several years at Medtronic Inc., a Minneapolis manufacturer of pacemakers and health care products. Both were familiar with the practice of certain doctors of implanting electrodes in a person's spine to block the transmission of pain signals to the brain.
Using elementary electrical components bought at the local hardware store, Mr. Hagfors and Mr. McDonald built a shoe box-size device that would block pain without having to be implanted surgically.
Pain Relief Varied
Electrodes inserted in small spongy pads were placed on the skin in places where large peripheral nerve bodies were located near the surface. When 20 to 80 milliamperes of electricity were fed into the nerve bodies they sent a tingling sensation down the nerve path, blocking out the signals emanating from the source of pain. Sometimes the pain would be relieved for minutes, sometimes for days, sometimes forever.
''We went to the University of Minnesota Hospital,'' Mr. McDonald recalled in an interview last week, ''and tried the device out on a man who had lost his leg and was suffering from so-called phantom limb pain. When a person loses a leg, for instance, the nerves that connected the leg to the brain don't disappear. The surviving nerves bunch together in the stump. Those nerves can send off confusing signals, telling an amputee his leg is on fire or freezing or itching, even though he has no leg.
''When we tried it out on this man,'' Mr. McDonald continued, referring to his device, ''it relieved his pain for the first time without drugs. He said: 'What is this thing? Where can I buy one? How much does it cost?' We said, 'Well, we really don't know.' ''
They did not take long to find out. Mr. McDonald and Mr. Hagfors took in another partner, Clayton Jensen, and formed a company in 1971 to manufacture the device. They called their small black box with the spongy electrodes a ''transcutaneous electrical nerve stimulator'' - or TENS for short - and named their company Stimulation Technology Inc., also known as Stimtech.
According to their testimony, in testing out their black box they soon discovered that it could be used to relieve not only phantom limb pain but all kinds of pains resulting from cancer, back problems, muscle aches, surgery, sports accidents and even some headaches. Importantly, they testified, it was nonaddictive and had none of the side effects of drugs.
Doctors who learned of the device began prescribing TENS treatment for their patients at a clinic set up by Stimtech. At the clinic, patients learned how to use the device, which they then took home. An aching pass receiver on the Dallas Cowboys football team even had a battery-operated TENS device strapped on to keep him in a key game.
Size of a Man's Hand
In the meantime, several other American and Japanese companies joined the market, but Stimtech's product remained the market leader. Sales approached $1 million by 1974, but profit margins were slim on the complex units. The devices, then about the size of a man's hand, sold by prescription only at a price ranging from $300 to $500.
''We saw so much pain out there that we could remove without drugs,'' Mr. McDonald said, ''that we decided we needed more capital for research to bring the cost and the size of the device down. We needed a brand name to give the product credibility with physicians and a sales force to convince doctors to use it instead of the drugs they were trained to use.''
At this point, Johnson & Johnson, which says it routinely keeps an eye out for new products, approached the young enterprise and offered to buy out its three founders for $1.3 million and a promise to share up to $7 million in future profits. The plaintiffs, who became Johnson & Johnson executives after the acquisition, testified that the New Jersey company had also said their device would be given the Johnson & Johnson label and actively marketed worldwide, although the contract contained nothing that specific.
Johnson & Johnson, the world's largest health-care company, was no stranger to the pain-killing business, of course. Its Tylenol line of prescription and nonprescription pain relievers is the bestselling product in American drugstores and the nation's most popular pain reliever, ringing up about $385 million in sales last year. Tylenol without codeine sells as much as Anacin, Bayer and Bufferin combined. Zomax, Johnson & Johnson's new nonaddictive painkiller with the strength of codeine, was introduced last year and is expected to top $50 million in sales this year.
The merger with Stimtech soon turned into a headache for both parties. From Johnson & Johnson's perspective, the venture has meant only losses.
Research Money from Profits
According to Mr. McDonald, however, Johnson & Johnson failed to live up to its promises. Joseph Alioto Jr., a lawyer for the plaintiffs, said Stimtech was not allowed to use the Johnson & Johnson label, the device was not displayed in the company's annual report and Stimtech was not allowed to market the product abroad, even though thousands of competing devices were being sold every month in Japan. Further, it was told that money for research had to come entirely from profits, of which there were none. And Mr. Hagfors and Mr. Jensen, who were supposed to run the company, were undercut and dismissed in 1977, Mr. Alioto contends.
''All Johnson & Johnson did was try and match the competition,'' Dan Shulman, the plaintiff's other lawyer, asserted. ''They never made any innovations on their own. When Hagfors offered to buy Stimtech back from Johnson & Johnson - which was losing millions on the company - it refused. They couldn't start their own company because Johnson & Johnson had made them sign noncompete agreements.''
Mr. Hagfors and his two associatess sued Johnson & Johnson in May 1979, charging it with breach of contract and with fraudulently inducing them into selling the company so it could be suppressed. The plaintiffs contended that by stifling Stimtech, the leading manufacturer, Johnson & Johnson had effectively suppressed the entire electrical nerve stimulator industry.
In rebuttal, Johnson & Johnson said it had invested in Stimtech what it thought the product merited and the company should not be blamed for the device's failure to catch on with doctors. Further, the company said that it was put into a position of having to prove why the device did not succeed.
'Invested $11 Million'
''The way the trial was set up we had to justify why we didn't make this into a billion-dollar business,'' the company's general counsel, George Frazza, said in an interview. ''The fact is we invested more than $11 million in Stimtech since acquiring it; its sales have increased from $631,000 in 1974 to $5.3 million in 1979. Stimtech's sales force increased from three, to 18. We didn't give the Johnson & Johnson name because we only give it to very few products, and we would not sell it back because we think it still may have potential.''
Mr. Frazza added that, in his company's view, the costly electronic pain-control devices were really only effective for patients with chronic intractable pain and were not even competitive with a simple pain reliver like Tylenol. In addition, because there are more than 10 other companies that sell electronic pain-killing devices, ''the notion that anyone could suppress the entire business by suppressing Stimtech is absurd,'' he said.
Some who have followed the case say that the issues it poses will likely arise more often as companies seek to acquire technology instead of developing it themselves. Some also say that if Johnson & Johnson did smother the young company, it probably did so more through mismanagement than by intentional suppression.
''I have watched some big companies kill small companies, but only inadvertently,'' said Patrick R. Liles, a lecturer at the Harvard Business School who specializes in high-technology companies. ''Small companies tend to reward risk-taking, their executives protect venture-capital teams and tolerate organizational ambiguity. When a mature company tries to put its bureaucractic stamp on a small entreprenuerial one, it can smother it inadvertently. That may have happened here.''
Whatever the outcome of the Stimtech case, other American manufacturers have entered the field. Since the suit was brought in 1979, the Dow Corning Corporation and the Minnesota Mining and Manufacturing Company have come out with their own device, selling for as low as $90 and at a size not much bigger than a match box.