department in Woburn. MedChem P.R. did not have a quality assurance department, and it never tested Avitene for quality compliance.

MedChem U.S.A. prepared and filed all applications, reports, and other documents required by the FDA to manufacture Avitene. Alcon P.R. provided MedChem U.S.A. with information relating to the manufacturing process, and MedChem U.S.A. incorporated that information into its FDA filings. MedChem P.R. did not submit any applications, reports, or other documents to the FDA. MedChem U.S.A.'s filings with the FDA for the period August 26, 1991, to October 27, 1993, identified Alcon P.R. as Avitene's manufacturer. MedChem U.S.A. also reported to the SEC for most of 1989 and each of the relevant years thereafter that Alcon P.R. was Avitene's manufacturer and that Alcon P.R. manufactured Avitene at its Puerto Rico facility for MedChem U.S.A.

MedChem P.R. did not have a facility registered with the FDA to manufacture pharmaceuticals. Alcon P.R.'s manufacturing facility was so registered, and the FDA performed a yearlong inspection of that facility beginning in August 1992. During the inspection, the FDA dealt almost exclusively with employees of Alcon P.R.; contacts with non-Alcon P.R. personnel were minimal and insignificant. The FDA's report on the inspection listed Alcon P.R. as Avitene's manufacturer.

MedChem U.S.A. had a department in Woburn where its employees researched and developed Avitene. During the subject years, for example, MedChem U.S.A. researched and developed a new form of Avitene named Endo-Avitene, which it began shipping in November 1992. Ariel Ferdman generally directed MedChem U.S.A.'s research and development activities out of Woburn, and he was assisted in his work by MedChem U.S.A. employees and/or Alcon P.R. employees. On a few occasions from 1990 through 1992, Dr. Ferdman (occasionally accompanied by other MedChem U.S.A. employees) traveled to Alcon P.R.'s manufacturing facility in Puerto Rico to research and develop Avitene. Dr. Ferdman's research and development work at Alcon P.R.'s manufacturing facility related primarily to preparing validation studies to obtain approval of an application that MedChem U.S.A. had made to the FDA for Endo-Avitene. Dr. Ferdman also worked at the Alcon P.R. facility from April through August 1990 studying

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

March 1991. Kelly hired him and paid him $12.02 per hour. Neither petitioner was involved in his hiring or in his placement as planner/buyer. He reported to Ronald Shepherd and/ or Luis Diaz, an Alcon P.R. manager, and Mr. Castro's work required that he interact with Alcon P.R. employees and MedChem U.S.A. employees. Alcon P.R. invoiced MedChem P.R. for the amount that it paid Kelly as to Mr. Castro, and MedChem P.R. accounted for its payment of these invoices as an expense for outside services for office support. Mr. Castro's status as a Kelly employee ceased in March 1991, when he was hired by Alcon P.R. as a full-time employee. Mr. Castro continued to work on Avitene matters after he was hired by Alcon P.R., and he continued to interact with other Alcon P.R. employees and with MedChem U.S.A. employees.

Nelson Velez succeeded Mr. Castro as planner/buyer from March 1991 through April 1992. Mr. Velez was a longtime Alcon P.R. employee, and neither petitioner was involved in his selection or placement as planner/buyer. Mr. Diaz, who was Mr. Velez's superior, assigned Mr. Velez to serve concurrently as the planner/buyer of both Avitene and an unrelated Alcon P.R. product. Mr. Velez divided his work equally between the two functions, and Alcon P.R. invoiced MedChem P.R. for 50 percent of his salary. MedChem P.R. accounted for its payment of these invoices as an expense for outside services for office support. Mr. Castro's Avitenerelated work required that he interact with Alcon P.R. employees and MedChem U.S.A. employees.

Luis Rivera was a Kelly employee who succeeded Mr. Velez as planner/buyer from April 1992 to August 31, 1992. Kelly hired him and paid him $12 per hour. Neither petitioner was involved in his hiring or with his placement as planner/ buyer. Mr. Rivera reported to Mr. Shepherd and/or various Alcon P.R. managers, and Mr. Rivera's work required that he interact with Alcon P.R. employees and with MedChem U.S.A. employees. Alcon P.R. invoiced MedChem P.R. for the amount that it paid Kelly for Mr. Rivera's services, and MedChem P.R. accounted for its payment of these invoices as an expense for outside services for office support. Mr. Rivera's status as a Kelly employee ceased on November 1, 1993, when he was retained by MedChem P.R. as independent consultant.

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.