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Clinical Technology, Inc. v. Covidien Sales, LLC

United States District Court, D. Massachusetts

June 16, 2016

CLINICAL TECHNOLOGY, INC., Plaintiff,
v.
COVIDIEN SALES, LLC, Defendant.

          MEMORANDUM AND ORDER

          Patti B. Saris Chief United States District Judge.

         INTRODUCTION

         Plaintiff Clinical Technology, Inc. (CTI), is a specialty distributor of medical products in the Midwest. CTI brings this action against Defendant Covidien Sales, LLC, alleging breach of contract (Count I), breach of the implied covenant of good faith and fair dealing (Count II), unjust enrichment (Count III), negligent misrepresentation (Count V), and violations of Massachusetts General Laws Chapter 93A, § 11 (Count VI).[1] The claims all arise from Covidien’s termination of a written distribution agreement, under which CTI sold Oridion Capnography, Inc., products from 2008 to 2013. CTI first entered into the distribution agreement with Oridion in June 2008. In June 2012, Covidien acquired Oridion, and became the successor-in-interest to the distribution agreement.

         Roughly eight months later, in February 2013, Covidien notified CTI that it was exercising its contractual right to terminate the agreement. The termination had an effective date of March 31, 2013. The parties agree that § 15 of the distribution agreement gave Covidien the right to terminate the agreement, but dispute the meaning of other termination provisions. Covidien now moves for summary judgment on the ground that the contract language is unambiguous.

         CTI argues that § 15(d) of the distribution agreement obligated Covidien to continue selling products to CTI after termination so that CTI could sell such products to specific end users, which had fixed-term contracts, for the duration of those end-user agreements. CTI also alleges that Covidien engaged in deceptive practices surrounding contracts it signed directly with some of CTI’s customers. Covidien responds that there are no genuine disputes of material fact as to the meaning of the agreement because it states that Covidien, not CTI, is entitled to sell directly to end users upon termination. Covidien further maintains that there is no evidence of unfair or deceptive conduct. The Court ALLOWS in part and DENIES in part the Motion for Summary Judgment for the reasons that follow.

         UNDISPUTED FACTS

         With all reasonable inferences drawn in favor of the nonmoving party, CTI, the following facts are not in dispute, except where noted.

         I. The Distribution Agreement

         Oridion Capnography, Inc. sold noninvasive ventilation monitoring equipment and products. Oridion’s relationship with CTI began in 2004, when the parties entered a prior contract for CTI to distribute Oridion products from October 20, 2004 to June II, 2008. In late 2007, Oridion presented CTI with a new, form distribution agreement, which required CTI to make some up-front investments. For example, it required CTI to invest in clinical employees to train end users on the monitoring equipment Oridion and CTI sold.

         CTI President, Dennis Forchione, was initially reluctant to sign the new agreement because he was concerned that the contract did not provide sufficient protection for such investments in the event Oridion later terminated the agreement. Section 15(a)(ii) of the agreement granted Oridion the right to terminate the agreement “immediately upon delivery of written notice to Distributor: (x) if there shall be a ‘Change of Control’ of the Company or any of its parent entities; or (y) the Company, in its sole discretion, determines to engage in a direct sales effort in the Territory.” Draft Agreement, Docket No. 68, Ex. 8, at 16. Section 15(c) outlined the compensation CTI would receive if Oridion terminated the agreement:

In the event of a termination of this Agreement pursuant to Sections 15(a)(ii), the Company hereby agrees to pay Distributor an amount equal to 5% of the net revenue collected by Company attributable to sales of Products in the Territory during the 12 month period immediately prior to such termination (as determined by the Company in its sole discretion) and shall not owe Distributor any other compensation whatsoever.

Id. Mr. Forchione approached Oridion’s President, Gerald Feldman, about Forchione’s concerns with these provisions, and suggested adding a provision that would have required Oridion to pay CTI a “buyout” or its “lost profit” after termination. Forchione Dep., Docket No. 74, Ex. B, at 44-49. Mr. Feldman rejected this suggestion, and after further negotiations, the parties ultimately agreed upon a separate change to § 15. Section 15(d) of the new agreement originally stated:

Should the Company choose to terminate this Agreement, the Company shall be obligated to honor those agreements between Distributor and end-users of Company Products provided for by this Agreement until the next anniversary of the Agreement after termination, and shall sell Products to such Hospitals, ambulatory surgery centers, outpatient surgery centers and EMS Environments at established Oridion ODN Prices.

         Draft Agreement, Docket No. 68, Ex. 8, at 16 (emphasis added). The final version of § 15(d) that the parties signed states:

Should the Company choose to terminate this Agreement, the Company shall be obligated to honor those agreements between Distributor and end-users of Company Products provided for by this Agreement until the termination of Distributor’s agreements with end-users, and shall sell Products to such Hospitals, ambulatory surgery centers, outpatient surgery centers and EMS Environments at established Oridion ODN Prices.

         Amended and Restated Distribution Agreement, Docket No. 74, Ex. E, at 15.

         According to CTI, Mr. Forchione’s intent in negotiating the change to § 15(d) was to allow CTI to continue to supply end users until the end of their contracts’ terms in the event Oridion terminated the distribution agreement. Such an arrangement would “protect CTI’s investments on an account-by-account basis post-termination” by requiring Oridion to sell products to CTI that CTI would then sell to the end users until expiration of the end-user contracts. Docket No. 75, at 3. In signing the 2008 distribution agreement, Mr. Forchione highlighted and initialed the change to § 15(d) in order to draw attention to the revised language.

         The parties did not change the above-quoted language in § 15(a)(ii) or § 15(c) in the final 2008 distribution agreement. Thus, Oridion maintained the right to terminate the agreement “to engage in a direct sales effort” in CTI’s territory, and the final agreement states that in the event of such a termination, Oridion would not owe CTI any compensation beyond “an amount equal to 5% of the net revenue collected by [Oridion] attributable to sales of Products in the Territory during the 12 month period immediately prior to such termination.” Amended and Restated Distribution Agreement, Docket No. 74, Ex. E, at 14-15. The final agreement also included a clause specifying that § 15 would survive termination. Id. at 15.

         Under the agreement, CTI was the exclusive distributor for some Oridion products, such as “filterlines, ”[2] in the Midwest from June 2008 until April 2013. CTI purchased products from Oridion at one price, and then sold them to its customers, the end users, at a mark-up. Section 8(b) of the agreement required CTI to use “its best efforts to actively promote sales” of Oridion products within its defined territory. Id. at 9. The initial contract term was for two years, with automatic renewal periods thereafter, unless Oridion provided CTI with notice of non-renewal ninety days prior to end of the previous term.

         Section 1(g) of the distribution agreement defines the term “Oridion ODN Price” used in § 15(d) as “the Oridion ODN price as listed in the Oridion Pricing Handbook.” Id. at 5. The parties agree that this definition refers to the discounted price at which distributors, like CTI, purchased product from Oridion, sometimes called the distributor or wholesale price. The parties further agree that Oridion/Covidien would not, and did not, sell product to end users at this distributor price, despite the fact that the agreement states that in the event of termination, Oridion/Covidien “shall sell” products to end users “at established Oridion ODN Prices.” Id. at 15. The parties dispute whether the parties intended “Oridion ODN Price” in § 15(d) to mean the distributor price, as the § 1(g) definition would require, or instead intended it to mean the price that CTI was charging its end users at the time of the agreement’s termination. Finally, the agreement also contained a merger clause in § 17(e):

This agreement constitutes the entire agreement of the parties with respect to the subject matter hereof and supersedes and cancels all prior agreements, claims, representations, and understandings of the parties in connection with such subject matter, including, but not limited to, Non-Exclusive Distributor Agreement, October 20, 2004, which has been amended and restated hereby. Except as otherwise expressly provided above, this Agreement shall not be modified or amended except by written agreement signed by duly authorized representatives of each of Distributor and the Company.

Id. at 16.

         II. Integrated Delivery Network Agreements

         Oridion (and later Covidien) and CTI amended their agreement multiple times over the course of its five-year duration to account for pricing agreements with certain end users, who signed Integrated Delivery Network (IDN) contracts directly with Oridion/Covidien. An IDN is a group of hospitals or other end users with consolidated purchasing; by consolidating, the group can obtain better leverage in negotiating prices and services. CTI alleges that the IDNs at issue in this case were all pre-existing CTI customers. Covidien admits that at least some of the IDN end users were pre-existing customers of CTI, but contends that some of the IDN contracts spanned multiple territories and involved IDN facilities that CTI had not sold to before.

         Although CTI was not a party to the IDN contracts, CTI helped to negotiate and approved the pricing in the IDN contracts. CTI was also named as the exclusive distributor in the IDN contracts, and, thus, continued to sell products to the IDNs after they signed contracts with Oridion/Covidien. Oridion began entering into IDN contracts directly with CTI customers roughly two years after signing the 2008 Oridion-CTI distribution agreement. The IDN contracts typically contained three-year terms. Each time Oridion/Covidien entered into an IDN contract, CTI and Oridion/Covidien amended the distribution agreement by adding a one-page document outlining the price to be charged to both CTI and the IDN end user based on the new IDN agreement.

         Ten of the nineteen end users at issue in this case had IDN contracts with Oridion/Covidien. Eight of the remaining nine end users are hospitals or hospital groups that had supply agreements with CTI covering Oridion products, but did not have contracts directly with Oridion/Covidien. The parties dispute whether the end user Sparrow Health had finalized an IDN contract by the time Covidien terminated its distribution agreement with CTI. CTI asserts that Sparrow Health told CTI days before termination that the IDN contract had been finalized, but CTI does not have a signed copy of the agreement.

         III. Termination

         In April 2012, an Oridion employee, Tom Millonig, informed CTI and other Oridion distributors that an affiliate of Covidien had agreed to acquire Oridion. The acquisition closed in June 2012, at which point Covidien Sales, LLC, became the successor-in-interest to the 2008 Oridion-CTI distribution agreement. Approximately eight months later, in February 2013, Covidien sent CTI written notice of its decision to terminate the agreement, pursuant to § 15(a)(ii), “to engage in a direct sales effort” in CTI’s territory. Amended and Restated Distribution Agreement, Docket No. 74, Ex. E, at 14. Covidien credited “5% of the net revenue collected by [Oridion/Covidien] attributable to sales of Products in the Territory during the 12 month period immediately prior to such termination, ” to CTI, in accordance with the termination-fee provision in § 15(c). Id. at 15.

         CTI responded to the termination notice through outside counsel on March 21, 2013, asserting that it expected Covidien to continue shipping products to CTI under § 15(d) so that CTI could fulfill the end-user agreements through their respective termination dates. Covidien’s counsel responded that it interpreted § 15(d) to mean that Covidien, not CTI, would fulfill the end-user agreements upon termination of the 2008 Oridion-CTI ...


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