Antitrust Law Daily Wrap Up, FRANCHISING & DISTRIBUTION—M.D. Tenn.: Tennessee sales rep law did not apply to pharmacy group purchasing agreement, (Sep 11, 2015)

By Peter Reap, J.D., LL.M.

The Tennessee Commission Statute, a law providing for the payment of commissions to sales representatives, did not apply to a contractual arrangement between plaintiff Southern Pharmacy Consultants (“Southern”), an alleged sales representative, and defendant Smart Fill Management Group (“Smart Fill”), an entity that provided purchasing services to independent pharmacies, the federal district court in Nashville has decided (Southern Pharmacy Consultants, LLC v. Smart Fill Management Group, Inc., September 9, 2015, Campbell, T.). Thus, Smart Fill was granted summary judgment on Southern’s claim under the Commission Statute.

Background. Before the parties entered into the contract at issue in this case, Southern’s principal, Mr. Hatfield, was the president of a non-profit organization made up of independent pharmacies in Tennessee whose function was to negotiate prices from drug wholesalers as a group to provide leverage in price negotiations with pharmaceutical distributors comparable to that enjoyed by larger pharmacy chains. Smart Fill is a company that provides a variety of business services to independent pharmacies, including facilitating this type of group purchasing with drug wholesalers, the court noted.

Smart Fill wanted to expand into Tennessee and approached Hatfield to discuss the possibility of working together. At that time, Southern’s organization had nineteen member pharmacies. Based on Smart Fill’s proposal, Hatfield’s organization decided to dissolve and have its members become members of Smart Fill, such that Smart Fill would take over negotiating with pharmaceutical distributors on their behalf.

Hatfield and Smart Fill’s executives met sometime between January and March 2011 and reached an oral agreement about the future working relationship between the parties. The terms of that oral agreement are disputed. After the meeting, Hatfield drafted a written contract called the Group Purchasing Organization Agreement, which he presented to Smart Fill on April 1, 2011. An executive with Smart Fill signed the written contract soon thereafter. The written contract left many terms undefined and details unspecified, the court observed. It provided that Smart Fill was to pay Southern “an administrative fee of 2% of brand purchases of product purchased by qualified members in addition to a 1% fee of all generics purchased by qualified members.”

Smart Fill agreed that it did not pay Southern in accordance with the written contract, but asserted that the parties verbally agreed to amend the written contract soon after it was signed to clarify that the savings were to be split between the parties. Smart Fill contended that the verbal modification of the contract also provided Southern with less administrative fees for some types of sales and higher administrative fees for other types of sales, such that if Southern is correct that the written contract governs, Smart Fill overpaid Southern for some types of sales. The parties disagree about when, if, and how many times the written agreement was orally modified, but no new written contract was signed.

On October 7, 2013, Southern filed this action. Southern’s amended complaint raises the following claims: (1) declaratory judgment; (2) breach of contract; (3) violation of the Tennessee unpaid commissions statute; (4) violation of the Tennessee Consumer Protection Act; and (5) intentional misrepresentation. In short, Southern alleges that Smart Fill failed to pay it all the administrative fees due under the contract, which Smart Fill denies.

Commissions Statute claim. Tenn. Code Ann. § 47-50-114, et seq. (the “Commission Statute”) provides that “[a]ll commissions that are due at the time of termination of a contract between a sales representative and principal shall be paid within fourteen (14) days after the date of termination.” The statute defines a “sales representative” as “a person who contracts with a principal to solicit wholesale orders and who is compensated, in whole or in part, by commission, but does not include one who places orders or purchases for such person's own account for resale.” A “principal,” is a person who, among other things, “[c]ontracts with a sales representative to solicit orders for the product.”

Southern argued that it is a “sales representative” under this statute because the pharmacies it recruited for membership with Smart Fill were required to purchase 95% of their pharmaceuticals from Smart Fill as a condition of membership. Smart Fill did not dispute that it sells some pharmaceuticals directly to pharmacies and that member pharmacies can count these sales in the calculation required to show that they have purchased 95% of their pharmaceuticals from Smart Fill. Nonetheless, Smart Fill argued that Southern did not solicit orders from pharmacies as required by the statute.

The court agreed with Smart Fill that Southern was not a “sales representative” as defined in the Tennessee Commission Statute. Although the plaintiff recruited pharmacies to become members in Smart Fill’s organization, which entailed a commitment to purchase 95% of its pharmaceuticals from Smart Fill, Southern did not itself solicit those wholesale orders. Nor was Smart Fill a “principal” under the statute, because it did not “contract[] with a sales representative to solicit orders for the product,” according to the court. Smart Fill contracted with Southern to recruit members, not to solicit orders for pharmaceuticals.

The court also agreed with Smart Fill that the statute did not apply to intangible items, such as the services Southern provided. Southern argued that the pharmaceuticals purchased by member pharmacies are tangible items, but again, Southern contracted with Smart Fill to provide its services of recruiting pharmacies for membership, not to solicit wholesale orders of pharmaceuticals. Southern’s connection to the member pharmacies’ purchases of pharmaceuticals from Smart Fill was simply too attenuated to fall within the plain language of the Tennessee Commission Statute. Therefore, the court entered judgment for Smart Fill on this claim.

The case is No. 3:13-cv-1100.

Attorneys: Gregory H. Oakley (Oakley Rieger PLLC) for Southern Pharmacy Consultants, LLC. E. Todd Presnell (Bradley Arant Boult Cummings LLP) for Smart Fill Management Group, Inc.

Companies: Smart Fill Management Group, Inc.; Southern Pharmacy Consultants, LLC

Cases: FranchisingDistribution TennesseeNews