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Acheron Medical Supply, LLC v. Cook Inc.

United States District Court, S.D. Indiana, Indianapolis Division

June 24, 2019

COOK INCORPORATED, et al., Defendants.


          Hon. William T. Lawrence, Senior Judge

         A bench trial was held in this case before the undersigned beginning on April 23, 2019, on the counterclaim of Cook Medical LLC (“Cook”).[1] The Court, having considered the evidence submitted at trial, as well as the parties' post-trial submissions, hereby makes the following findings of fact and conclusions of law.

         In July 2014, Cook and Counterclaim Defendant Acheron Medical Supply, LLC, (“Acheron”) entered into a five-year Distribution Agreement (the “Agreement”). Pursuant to the terms of the Agreement, Acheron was to serve as a distributor (or reseller) of certain of Cook's medical devices and products to the Department of Defense Medical Centers (“DOD”) and the Veterans Administration (“VA”). Specifically, the Agreement stated that Acheron was appointed as Cook's exclusive distributor to the DOD and VA for the products and devices of Cook's Endoscopy business unit and a non-exclusive distributor for the products of its other business units. Acheron, which had been formed in July 2013, qualified as a small business for purposes of certain government set-asides, whereas Cook did not; therefore, by utilizing Acheron as a distributor, Cook could make more sales to the VA and DOD than it could by selling to them directly.

         The Agreement provides that “[Acheron] will obtain a Federal Supply Schedule contract and use it to sell the Products.” A Federal Supply Schedule contract (“FSS”) is one type of Multi-Award Schedule contract that the VA enters into with suppliers covering the sale of goods and services to the VA; the Agreement also contemplates that sales would be made under various other types of government contract vehicles. The Agreement further provides that

Cook will pay [Acheron] a commission of 3 percent (3%) of the purchase price on all Endoscopy Products sold by [Cook] in the Territory between March 1, 2014 and the date [Acheron] obtains its Federal Supply Schedule contract, provided such Federal Supply Schedule is obtained by the end of the 2014 calendar year. After the date [Acheron] obtains its Federal Supply Schedule contract Cook will pay [Acheron] a commission on Products that are approved on its Federal Supply Schule contract at the time of the sale, in accordance with the applicable rate (depending on selling party, method of sale, etc.) as set forth in the commission schedule attached to this Agreement as Exhibit A.

         The parties stipulate that Cook paid Acheron commissions in the amount of $116, 317.81 pursuant to this provision, which was based upon sales made by Cook to the VA and DOD between March 1, 2014, and December 31, 2014.

         It is undisputed that Acheron did not obtain an FSS. It is also undisputed that Acheron was unable to obtain an FSS because the VA's Office of Inspector General (“OIG”) would not award an FSS to Acheron unless Cook underwent an OIG audit. The OIG audit of Cook was required by the VA because Acheron was a new company that did not have a record of significant sales to the public; therefore, in order to determine whether Acheron's proposed pricing of Cook's products was fair and reasonable, the VA needed to review Cook's commercial sales records. Cook had not anticipated that it would have to provide the extensive information required by the VA in order for Acheron to obtain an FSS; in fact, Ron Walters testified that he was shocked to learn that it was being requested. Cook ultimately refused to undertake the burden of the OIG audit. After it was apparent that Acheron would be unable to obtain an FSS audit, Cook attempted to salvage a relationship with Acheron-after all, there were other means by which sales could be made to the VA besides an FSS-but ultimately decided to exercise its right to terminate the contract pursuant to the following provision in the Agreement:

Cook may terminate this Agreement effective immediately upon written notice to [Acheron] of the occurrence of a material breach by [Acheron] of any of its essential contractual obligations contained in this Agreement, which is not cured by [Acheron] within thirty (30) days after receiving written notice of the breach from Cook.

         In its counterclaim, Cook asserts a breach of contract claim against Acheron based upon Acheron's failure to obtain an FSS. Cook asserts that it is entitled to a return of the $116, 317.81 it paid to Acheron pursuant to the Agreement as damages for the breach.[2]

         The Court finds that Acheron's admitted inability to obtain an FSS was a material breach of the Agreement.[3] However, the Court finds that Acheron was excused from this breach by the force majeure clause in the Agreement.

         “A force majeure clause is defined as a ‘contractual provision allocating the risk if performance becomes impossible or impracticable, esp. as a result of an event or effect that the parties could not have anticipated or controlled.'” Specialty Foods of Indiana, Inc. v. City of S. Bend, 997 N.E.2d 23, 26 (Ind.Ct.App. 2013) (quoting Black's Law Dictionary 674 (8th ed. 2004)). However,

the scope and effect of a force majeure clause depends on the specific contract language, and not on any traditional definition of the term. In other words, when the parties have defined the nature of force majeure in their agreement, that nature dictates the application, effect, and scope of force majeure with regard to that agreement and those parties, and reviewing courts are not at liberty to rewrite the contract or interpret it in a manner which the parties never intended. The party seeking to excuse its performance under a force majeure clause bears the burden of proof of establishing that defense.

Id. at 27 (citations and internal quotation marks ...

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