Antitrust Law Daily Medical device maker did not breach contract with Chinese distributor
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Friday, February 8, 2019

Medical device maker did not breach contract with Chinese distributor

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

A manufacturer’s removal of three products from its distribution contract with a distributor did not breach the contract or the contract’s implied covenant. Additionally, enforcing the contract’s forum selection clause was an important public policy that warranted an anti-suit injunction against a parallel suit brought by the distributor in China.

Tennessee-based medical device manufacturer Wright Medical Technology did not breach its contract or the contract’s implied covenant of good faith and fair dealing with a Chinese distributor, Beijing Fito Medical Company (Fito), by removing three categories of devices from the agreement, the U.S. Court of Appeals in Cincinnati has decided. Similarly, Wright did not breach the contract or the implied covenant by appointing another distributor for the three deleted products, and Fito’s claim for tortious interference with business relations was without merit. Finally, the federal district court in Memphis did not err in granting a non-suit injunction against a subsequent suit brought by Fito against Wright in a Chinese court because enforcing the distribution contract’s Tennessee forum selection clause was an important public policy that warranted an anti-suit injunction. The district court’s grant of summary judgment on Fito’s breach of contract and tortious interference claims, as well as its anti-suit injunction, were affirmed (Beijing Fito Medical Co. Ltd. v. Wright Medical Technology, Inc., February 7, 2019, Nalbandian, J.).

In October 2012, Wright and Fito executed a three-year contract, under which Fito agreed to serve as Wright’s exclusive distributor of hip, knee, foot, ankle, and biologics products in twenty Chinese provinces. Under the contract, Wright could: (1) terminate it four specific events occurred; (2) could remove individual products from the contract as long as Wright gave Fito 90 days’ notice; and (3) could assign any part or all of the contract to a third party.

Wright informed Fito in an August 29, 2013, letter that it planned to delete the foot, ankle, and biologics products from the contract before completing a sale of part of its business. According to Wright, Fito lost the right to distribute the foot, ankle, and biologics products on November 27, 2013, 90 days after it informed Fito that it was deleting those products. Under the contract’s Tennessee forum selection clause, Fito filed this action alleging that Wright breached the contract and tortiously interfered with its business relationships. While this litigation was ongoing, Fito filed a parallel lawsuit against Wright in January 2017 in the Beijing Huairou District People’s Court of the People’s Republic of China. Fito’s claims in the Chinese litigation were substantially similar to its claims in this litigation.

The district court granted Wright summary judgment on Fito’s breach of contract and tortious interference claims. The lower court also granted Wright’s motion for an anti-suit injunction to enjoin the Chinese litigation. Fito appealed.

Breach of contract and the implied covenant. Section 3.3 of the parties’ distribution contract gives Wright significant discretion to delete products from the contract. It imposes no express limits on Wright’s ability to delete products, and a plain reading suggested that Wright could delete any product for any reason, the court noted. But Fito argued that both the contract’s construction and the implied covenant of good faith and fair dealing restrict Wright’s discretion to delete products from the distribution agreement—and that Wright breached the contract when it deleted the foot, ankle, and biologics products.

First, the appellate court concluded that interpreting Section 3.3 in conjunction with the contract’s termination provision, as Tennessee law required, necessarily restricted Wright’s discretion to delete products under section 3.3. If Wright could delete all of the products through section 3.3 without cause, then that section would serve as an alternative termination clause, rendering section 11.2 superfluous. Thus, Wright could not delete all products from the distribution agreement under section 3.3, according to the appellate court. But because Wright deleted only the foot, ankle, and biologics products—leaving the hip and knee products in place—it did not breach the contract by circumventing section 11.2’s termination provision, the court held.

Moreover, Wright’s deletion of the foot, ankle, and biologics products did not violate the implied covenant and thereby breach section 3.3, even though Wright’s conduct could be seen as aggressive, the court opined. Commercially reasonable, self-interested business tactics do not, by themselves, breach the implied covenant of good faith and fair dealing under Tennessee law. Without evidence of bad faith, Fito’s claim for breach of the implied covenant of good faith and fair dealing could not survive summary judgment.

Fito separately argued that while Wright may delete a product under section 3.3 and then cease selling that product to Fito, Wright could not compel Fito to stop selling or distributing a deleted product. This argument was rejected because it was not supported by the plain language of the contract, the court held. Relatedly, Fito’s contention that Wright breached the contract’s termination provision by deleting the three products from the contract and divesting Fito of the right to distribute those products was unavailing. The termination provision outlines the grounds for a complete termination of the contract. But Wright never terminated the contract with Fito, the court explained.

Fito also contended that Wright breached section 2.1 of the contract, which gives Fito exclusive distribution rights in twenty Chinese provinces. It alleged that Wright breached section 2.1 when it entered into a distribution agreement with a third party for the deleted products. The court was not persuaded. Fito retained the exclusive right to distribute Wright’s foot, ankle, and biologics products for 90 days after receiving Wright’s letter—that is, until November 27, 2013. But Fito offered no evidence to suggest that the third party distributed Wright’s products before that date.

Tortious interference. Fito alleged that twice, Wright contacted Fito’s customers to discourage them from purchasing Wright’s products from Fito, thereby committing tortious interference with business relations. As for the first allegation, Fito did not identify who at Wright made such representations or which of Fito’s customers heard such representations, nor did Fito specify when in "late 2013" the representations occurred. Thus, the first allegation could not survive summary judgment.

The second allegation fared no better. In an August 13, 2014, letter to Fito’s customers, Wright explained that its contract with Fito "has been officially terminated and Fito has not had the right to distribute Wright products under the Distributor contract since November 27, 2013." However, by August 2014, when Wright sent the letter, Fito had lost all rights to sell Wright’s products. A party does not act with improper motive or means—a necessary element of tortious interference—when it makes a truthful statement, the court observed.

Anti-suit injunction. In the Sixth Circuit, courts may grant an anti-suit injunction to prevent threats to the forum court’s jurisdiction or to stop one party from evading an important public policy of the forum court. Because the Chinese litigation did not threaten the federal court’s jurisdiction, the only proper basis for awarding the anti-suit injunction would have been to prevent Fito from evading an important public policy. Wright argued that the district court properly issued the injunction to enforce the contract’s forum selection clause.

The Sixth Circuit has never addressed whether enforcing a forum selection clause is a sufficiently important national public policy to warrant an anti-suit injunction. But the Supreme Court has recognized a federal policy favoring enforcement of forum selection clauses, and other circuits have held that an anti-suit injunction is an appropriate remedy to enforce a forum selection clause. Given these decisions, which recognize the important national policy interest in enforcing forum selection clauses, the district court did not abuse its discretion when it issued the anti-suit injunction, the appellate court reasoned.

This case is Nos. 17-6530/6531.

Attorneys: Michael Francis Rafferty (Harris Shelton Hanover Walsh, PLLC) for Beijing Fito Medical Co., Ltd. George T. Lewis, III (Baker, Donelson, Bearman, Caldwell & Berkowitz, PC) for Wright Medical Technology, Inc.

Companies: Beijing Fito Medical Co., Ltd.; Wright Medical Technology, Inc.

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