Antitrust Law Daily Wrap Up, FRANCHISING & DISTRIBUTION—3d Cir.: Distribution agreement not breached in joint venture to sell medication-mixing robots, (Jul 11, 2014)

By Edward L. Puzzo, J.D.

Breach of distribution agreement claims, arising from a failed joint venture to sell medication-mixing robots, failed where a jury found there was substantial compliance with the distribution agreement, the U.S. Court of Appeals in Philadelphia has ruled. Claims of promissory estoppel and breach of duty to negotiate in good faith also failed when reliance on an alleged promise was unreasonable and where no specific agreement to negotiate in good faith was made, the court ruled (Bennett v. Itochu International, Inc., July 10, 2014, Hardiman, T.).

In 2007, a representative of Itochu International began discussions with Dr. John Bennett, discussing (1) a possible multi-million dollar investment by Itochu in Devon Health Services, Bennett's medical supply distribution company, as well as (2) the creation of a joint venture to sell medication-mixing robots.

Although several non-binding letters of interest were signed, Itochu never approved the investment in Devon Health, but a joint venture was formed between Devon Robotics, formed by Dr. Bennett, and MedSurg, an Itochu subsidiary. Devon Robotics leased distribution rights to MedSurg to sell medication-mixing robots. However, MedSurg was unable to sell the robots and each side in the joint venture blamed the other for the failure. Devon and Bennett brought claims of promissory estoppel, breach of duty to negotiate in good faith, and breach of the distribution agreement. The district court entered summary judgment against Devon and Bennett on the claims of promissory estoppel, and breach of duty to negotiate in good faith, and, after a jury verdict on the breach of distribution agreement, ruled in favor of Itochu and MedSurg. Dr. Bennett and Devon appealed.

Devon Robotics alleged that the jury verdict on its claim of breach of the distribution agreement went against the weight of the evidence and that they were entitled to judgment as a matter of law under Federal Rule of Civil Procedure 50(b). Devon claimed that MedSurg had materially breached the distribution agreement by failing to hire the contractually minimum number of salespeople. However, the court noted, MedSurg produced evidence that Devon was partially to blame for the lack of sales staff, even firing two of MedSurg's salespeople. MedSurg also produced evidence that the sales problems were primarily related to performance problems with the robots and to the economic recession. Evidence was also produced that, while MedSurg did refuse to pay for a clinical trial of the robot, Devon had already decided to terminate the contract when MedSurg's duty to pay ripened, which excused the breach. Given this evidence, the court found, it was reasonable for the jury to have found that MedSurg substantially complied with its obligations under the distribution agreement. Therefore, Devon was not entitled to judgment as a matter of law.

Promissory estoppel. Dr. Bennett and Devon also argued that the district court erred in holding that their reliance on certain promises was unreasonable as a matter of law. First, they alleged that Itochu's representative, Mounir Rabbat, had breached a promise to complete the proposed investment by Itochu in Devon Health. The district court found that, notwithstanding any oral promises made by Rabbat, the written non-binding letters of interest executed at the time of Rabbat's oral statements clearly stated that a binding agreement would result only from a formal written contract and that the investment must first be approved by Itochu's internal investment committee. Since neither the contract nor the investment approval occurred, it was not reasonable for Dr. Bennett or Devon to have relied on Rabbat's oral representations, the court ruled.

Breach of duty to negotiate in good faith. Dr. Bennett and Devon further claimed that Itochu breached its duty to negotiate in good faith. The court explained that a duty to negotiate in good faith requires a binding agreement between the parties expressing their commitment to negotiate together in good faith and reach a final agreement. However, the court noted, Devon was unable to unable to identify a specific promise to negotiate in good faith.

Devon countered that, in the course of negotiations over a possible investment by Itochu in Devon Health, a term sheet stated that the parties were to make "a firm and committed effort to close" the deal. But the court noted that another part of the term sheet used unambiguous language to disclaim any intent by the parties to bind each other. For these reasons, the court ruled, the district court's rulings in favor of Itochu and MedSurg must be affirmed.

The case is Civil Action No. 13-3145.

Attorneys: Anthony L. Gallia (Duane Morris) and Gary M. Samms (Obermayer, Rebmann, Maxwell & Hippel) for Devon Robotics LLC, John A. Bennett, and Devon Health Services Inc. Bobby R. Burchfield (McDermott, Will & Emery) for Itochu International, Inc. and MedSurg Specialty Devices Inc.

Companies: Devon Robotics LLC; Devon Health Services Inc.; Itochu International, Inc.; MedSurg Specialty Devices Inc.

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