Antitrust Law Daily Wrap Up, FRANCHISING & DISTRIBUTION—4th Cir.: Settlement agreement could not be summarily enforced against pharmacy franchisor, (Nov 6, 2013)

By Tobias J. Gillett, J.D., LL.M.

Genuine issues of material fact existed regarding whether a former pharmacy franchisee had satisfied the conditions precedent to enforcement of a settlement agreement with the franchisor, and therefore a district court erred in summarily enforcing the agreement against the franchisor, the U.S. Court of Appeals in Richmond has ruled (Medicine Shoppe International, Inc. v. Siddiqui, November 5, 2013, per curiam).

Medicine Shoppe International, Inc. (MSI) grants licenses to franchisees to operate Medicine Shoppe System pharmacies. Drugsmart, Inc., a company owned by Anwar Yousuf, entered into licensing agreements to operate two Medicine Shoppe pharmacies. The parties also entered a security agreement under which MSI extended Drugsmart a line of credit in exchange for a security interest in certain assets of one of the pharmacies. MSI later terminated the franchise agreements over the franchisees’ outstanding debts, but Yousuf transferred the pharmacies to Mohammed Siddiqui and his companies Loch Raven Pharmacy Inc. and Belvedere Enterprises Inc. without MSI’s permission.

MSI filed suit against Siddiqui, Loch Raven, and Belvedere, and the parties reached a settlement agreement which provided: “upon execution of this Agreement and all necessary documents to effect conversion of the Pharmacies to [Medicap Pharmacies, Inc.] franchisees,” MSI would release Siddiqui from any claims it might have against him. A separate paragraph stated: “upon receipt of the executed franchise documents discussed above, MSI agrees to cause its claims within the Litigation to be dismissed with prejudice.”

Although Siddiqui and MSI both signed the settlement agreement, Siddiqui failed to sign the franchise documents, personal guaranties, inventory documents, or other related documents. Instead, Siddiqui entered into bills of sale with Yousuf purportedly transferring Siddiqui’s interest in Loch Raven and Belvedere to Yousuf. The bills of sale provided that the liabilities associated with the companies “shall be discharged fully and completely by the buyer prior to” their execution, but Yousuf did not discharge those liabilities prior to execution. Siddiqui then died, and the counsel for Siddiqui and his companies e-mailed and faxed to MSI signature pages from some of the franchise documents and personal guaranties that Yousuf had executed as President of Loch Raven and Belvedere.

MSI challenged Yousuf’s ownership of the corporations and the enforceability of the settlement agreement. The district court found the settlement agreement was valid and enforceable and fully resolved the dispute, and therefore granted summary judgment enforcing the agreement. MSI appealed.

The appellate court vacated the district court’s opinion, finding that genuine issues of material fact existed regarding the issues disputed by MSI. Maryland law applied, under which a court must give effect to the plain meaning of a contract if it is unambiguous.

The court found material issues of fact existed regarding whether certain conditions precedent to enforcement of the settlement agreement were satisfied. The court noted that the parties disputed whether “all necessary documents to effect conversion” of the pharmacies referred only to the franchise agreement, or also included an amendment to that agreement providing for a three-year term, a state-specific addenda, and documents related to purchase of inventory. This dispute had to be resolved before the agreement could be summarily enforced, in the court’s view.

Moreover, the court found a genuine issue of fact existed regarding whether Yousuf had authority to sign franchise-related documents on behalf of the corporations. MSI contended that the bills of sale could be invalid because Yousuf failed to satisfy the condition precedent requiring him to “fully and completely” discharge all obligations associated with the corporations before the execution of the bills of sale. However, the appellees contended that the language in the bills of sale constituted a mutual mistake. Since a genuine dispute existed regarding whether Yousuf had authority to sign documents on behalf of the corporations, summary judgment was precluded, in the court’s view. Therefore, the court remanded the case for further proceedings.

The case is No. 12-2001.

Attorneys: Stephen Jerome O’Brien (Dentons US LLP) for Medicine Shoppe International, Inc. David Michael Silbiger (Silbiger & Silbiger) for Mohammed A. Siddiqui.

Companies: Medicine Shoppe International, Inc.; Loch Raven Pharmacy Inc.; Belvedere Enterprises Inc.

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