MedChem U.S.A. initially sold only one product, Amvisc. Amvisc, which is unrelated to Avitene, is a hyaluronic-acidbased product used to lubricate and separate tissues in ophthalmic surgical procedures. MedChem U.S.A. decided in 1987 to diversify its operations by acquiring the Avitene business from Alcon P.R., which at the time was Avitene's manufacturer and seller. MedChem U.S.A.'s decision was based in part on the fact that it was being sued for patent infringement as to Amvisc. The plaintiffs in that lawsuit had commenced the lawsuit in 1984 and were seeking an injunction and treble damages.

On December 18, 1987, petitioners entered into a series of agreements with Alcon P.R., Alcon Pharmaceuticals, Ltd. (Alcon Pharmaceuticals), and Alcon Laboratories, Inc. (Alcon Labs) (these three Alcon entities are collectively referred to as the Alcon Entities), to purchase the Avitene business for approximately $31 million. The agreements included three asset purchase agreements, three noncompetition agreements, a guaranty, and a processing agreement. All of the Alcon Entities were related, and none of the Alcon Entities was related to either petitioner.

The assets sold under the asset purchase agreements generally included all Avitene inventories, all tangible assets used to manufacture Avitene, and all Avitene-related intangible assets such as receivables, contract rights, and intellectual property. Under the first agreement, Alcon Labs sold to MedChem U.S.A. receivables valued at $1,085,000, a noncompetition agreement valued at $200,000, goodwill valued at $4,490,000, contract rights valued at $5,000, and records valued at $5,000; Alcon Labs sold to MedChem P.R. receivables valued at $1.3 million and inventory valued at $2.5 million. Under the second agreement, Alcon P.R. sold to MedChem U.S.A. patents and related know-how valued at $2.6 million, trademarks valued at $1.9 million, various Food and Drug Administration (FDA) approvals (including the premarket approval for Avitene) valued at $300,000, a noncompetition agreement valued at $200,000, goodwill valued at $4,910,000, and contract rights valued at $5,000. Under the third agreement, Alcon P.R. sold to MedChem P.R. inventory valued at $10.1 million and machinery and equipment valued at $800,000; the machinery and equipment had been used by Alcon P.R. to manufacture Avitene and was located in Alcon

P.R.'s Avitene manufacturing facility in Humacao, Puerto Rico (Humacao). That facility consisted of the Avicon (Avitene) plant, two unrelated plants, warehouse space, and administrative offices.

Each of the asset purchase agreements required that the Alcon Entities manufacture and sell to petitioners 20,000 pounds of corium and provided that the Alcon Entities had to refund to petitioners the entire amount paid for the Avitene business, plus interest, if the corium could not be manufactured by December 31, 1990. At all times during the 3-year period ended August 31, 1992, Avitene was manufactured using the patents, know-how, product specifications (as reflected in the FDA pre-market approvals), and goodwill owned by MedChem U.S.A. MedChem P.R. held the legal title to all of the Avitene manufacturing equipment, the raw materials used to manufacture Avitene, the Avitene work-inprocess, and the finished Avitene inventory until sold. When the finished Avitene was shipped from the Alcon P.R. facility, title passed to the purchaser, which in all cases but one was MedChem U.S.A.3 MedChem P.R. would invoice MedChem U.S.A. (or the other purchaser) for the Avitene sold to it at a price equal to MedChem P.R.'s manufacturing cost plus 10 percent. From September 1, 1989, through August 31, 1992, MedChem U.S.A. distributed, marketed, and sold Avitene from its offices in Woburn. MedChem P.R. played no part in these sales or in the other sales of Avitene to end users. The labels which MedChem P.R. used during its fiscal year ended August 31, 1992, designated Alcon P.R. as Avitene's manufacturer. The labels read:

3 The sole exception concerned the sale of Avitene for distribution in Japan through June 6, 1991. In that case, MedChem P.R. sold Avitene to Alcon Pharmaceuticals, which owned the distribution rights to the Japanese market until June 6, 1991; title to that Avitene passed to Alcon Pharmaceuticals when the finished Avitene was shipped from the Alcon P.R. facility. Alcon Pharmaceuticals sold the distribution rights to the Japanese market to MedChem U.S.A. on June 6, 1991, for $15 million, and MedChem U.S.A. transferred those rights to MedChem P.R. on Aug. 31, 1992. MedChem P.R.'s sales of Avitene for the Japanese market accounted for approximately 20 percent of its total net sales of Avitene.

Neither petitioner acquired under the asset purchase agreements Alcon P.R.'s Avitene-manufacturing facility in Humacao or the right to market, distribute, or sell Avitene in Japan. That right to the Japanese market was initially retained by Alcon Pharmaceuticals, which, during the period of retention, purchased Avitene for the Japanese market from MedChem P.R. Alcon P.R. manufactured the Avitene sold to Alcon Pharmaceuticals and treated it the same as all other Avitene for purposes of scheduling, planning and buying, manufacturing, and quality control.

The respective parties to the noncompetition agreements were: (1) MedChem U.S.A. and Alcon Labs, (2) MedChem U.S.A. and Alcon Pharmaceuticals, and (3) MedChem U.S.A. and Alcon P.R. Under these agreements, the Alcon Entities generally promised not to manufacture, market, or sell any product having the same or substantially the same form, function, or application as Avitene during the 5-year period commencing on December 19, 1987.

MedChem U.S.A. gave the guaranty to each of the Alcon Entities. Under the guaranty, which was in effect throughout the fiscal year ended August 31, 1992, MedChem U.S.A. guaranteed to pay any debt and perform any obligation of MedChem P.R. arising from the asset purchase and related agreements.

The processing agreement dealt primarily with a promise by Alcon P.R. to manufacture Avitene for MedChem P.R. using Alcon P.R.'s facility and labor and MedChem P.R.'s raw materials and equipment. (Alcon P.R. also used MedChem U.S.A.'s technology but not pursuant to the processing agreement.) See appendix B for the relevant provisions of the processing agreement. The processing agreement expired initially on December 31, 1990, but was extended on four separate occasions to June 30, 1991, December 31, 1992, Decem

4 Neither petitioner has ever had an Avitene manufacturing facility in Puerto Rico.