7th Circuit affirms ruling for Cook in medical-supply dispute

Despite arguments from both sides, the 7th Circuit Court of Appeals affirmed a lower court’s ruling that while a medical supply company breached a distribution agreement with a medical supply manufacturer, the former was not liable for the breach.

In July 2014, Cook Medical contracted with Acheron Medical Supply in a five-year distribution agreement that arranged for Acheron to serve as the exclusive distributor of certain Cook medical devices and products to the Veterans Administration and Department of Defense Medical Centers. It also provided that Acheron would serve as the non-exclusive distributor of certain other of Cook’s medical products to those same entities.

The relationship between Cook and Acheron didn’t work out, however, after they failed to achieve the results they had hoped for. Acheron argued it was Cook’s fault because Cook refused to submit to a required audit of its commercial sales records and refused to deactivate its Distribution and Pricing Agreement, preventing Acheron from selling Cook products to the DOD through Acheron’s own DAPA.

For Cook’s part, it alleged that Acheron led it to believe the Federal Supply Schedule could be acquired using the pricing information available in Cook’s DAPA. But Cook ultimately declined to submit the information requested by the VA’s Office of Inspector General, despite steps taken by Ronald Walters, a sales account executive at Cook who worked with Acheron.

Ultimately, Cook informed Acheron that it would no longer use it to sell the DOD and instead directly make those sales. Acheron protested and Cook sent notice that Acheron was in material breach of the agreement by failing to obtain an FSS and failing to use its best efforts to promote, solicit, and expand the sale of its products.

Cook subsequently terminated the agreement due to Acheron’s failure to cure, and Acheron responded by suing Cook for breach of the agreement.

The Southern District Court granted summary judgment against Acheron on its claims, holding Cook did not breach the agreement because it owed no duty to undergo the VA audit or deactivate its DAPA. However, it held on Cook’s counterclaim that Acheron materially breached its obligation to obtain an FSS but owed Cook no damages because the breach was excused by the agreement’s force majeure provision.

The 7th Circuit Court of Appeals affirmed in Acheron Medical Supply, LLC v. Cook Medical Incorporated, 19-2315 & 19-2410, first finding that the district court correctly held Cook had no obligation to submit to the VA audit or deactivate its DAPA.

Specifically, it noted that Cook did not breach the implied duty of good faith by refusing to undergo an audit of its confidential sales records and that there was no support for the conclusion that Walters had the authority to bind Cook to a course of action, to affirm or modify the contract, or to waive Cook’s right to terminate the contract.

Additionally, the 7th Circuit found that the agreement did not obligate Cook either to submit to the VA audit or deactivate its DAPA.

“The district court properly held Cook did not breach the Agreement, and therefore Acheron’s failure to obtain an FSS was a material breach of the Agreement,” Circuit Judge Daniel Manion wrote for the 7th Circuit panel.

Lastly, the 7th Circuit found that the VA’s denial of the FSS qualifies as a force majeure event outside both parties’ anticipation and out of Acheron’s control. Thus, the force majeure provision excuses Acheron of any liability.

“In summary, the district court correctly held Cook had no obligation to submit to the VA audit or deactivate its DAPA. It also correctly held Acheron breached the Agreement by not obtaining the FSS but was not liable for that breach due to the force majeure provision,” the panel concluded.

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