Quality Manufacturing Systems, Inc. v. R/X Automation Solutions, Inc.
MEMORANDUM AND ORDER: The Court finds that QMSI's cross-motion for partial summary judgment should be GRANTED. The Court finds, as a matter of law, the Pill Counter Agreement between the parties remains in effect and binding, and that RXAS' s announced intention to terminate the Agreement as of July 2013 violated the terms of the Agreement. All other issues in this case, including damages, are expressly reserved. Signed by Magistrate Judge John S. Bryant on 9/30/2014. (DOCKET TEXT SUMMARY ONLY-ATTORNEYS MUST OPEN THE PDF AND READ THE ORDER.)(eh)
UNITED STATES DISTRICT COURT
MIDDLE DISTRICT OF TENNESSEE
R/X AUTOMATION SOLUTIONS, INC., )
Magistrate Judge Bryant
MEMORANDUM AND ORDER
Pending in this case is Plaintiff’s cross-motion for
partial summary judgment (Docket Entry No. 40). Defendant has filed
a response (Docket Entry No. 47) and Plaintiff has filed a reply
(Docket Entry No. 52).
Pursuant to the consent of the parties, this case is
before the undersigned Magistrate Judge for all proceedings (Docket
Entry No. 48).
Plaintiff’s motion for partial summary judgment.
STATEMENT OF THE CASE
In this diversity action removed from the Chancery Court
for Rutherford County, Tennessee, Plaintiff Quality Manufacturing
Solutions, Inc. (“RXAS”) has breached the Pill Counter Agreement
between the parties dated July 23, 2007, by wrongful termination of
contract, breach of the covenant of good faith and fair dealing,
interference with business relationships. As relief, QMSI seeks a
declaratory judgment that the Pill Counter Agreement remains in
effect and binding on the parties, together with an award of
compensatory and punitive damages (Docket Entry No. 1-1).
Defendant RXAS has filed its answer denying liability,
asserting affirmative defenses, and asserting a counterclaim under
theories of breach of contract, violation of the Tennessee Consumer
Protection Act, and violation of the Tennessee Uniform Trade
Secrets Act. RXAS, by way of counterclaim, seeks a declaratory
judgment that the Pill Counter Agreement lacks a termination
reasonable notice. RXAS also seeks an award of monetary damages
(Docket Entry No. 17).
STANDARD OF REVIEW FOR A MOTION FOR SUMMARY JUDGMENT
A party may obtain summary judgment by showing “that
there is no genuine dispute as to any material fact and that the
movant is entitled to judgment as a matter of law. See Fed. R. Civ.
P. 56(a); Covington v. Knox County School Sys., 205 F.3d 912, 914
(6th Cir. 2000). The moving party bears the initial burden of
satisfying the court that the standards of Rule 56 have been met.
See Martin v. Kelley, 803 F.2d 236, 239 n.4 (6th Cir. 1986). The
ultimate question to be addressed is whether there exists any
genuine dispute of material fact. See Anderson v. Liberty Lobby,
Inc., 477 U.S. 242, 248 (1986); Covington, 205 F.3d at 914 (citing
Celotex Corp. v. Catrett, 477 U.S. 317, 325 (1986)). If so, summary
judgment is inappropriate.
judgment, the nonmoving party must set forth specific facts showing
that there is a genuine issue of material fact for trial.
party does not so respond, summary judgment will be entered if
appropriate. Fed. R. Civ. P. 56(e). The nonmoving party’s burden of
providing specific facts demonstrating that there remains a genuine
issue of material fact for trial is triggered once the moving party
shows an absence of evidence to support the nonmoving party’s case.
Celotex, 477 U.S. at 325. A genuine issue of material fact exists
“if the evidence is such that a reasonable jury could return a
verdict for the nonmoving party.” Anderson, 477 U.S. at 248. In
ruling on a motion for summary judgment, the Court must construe
the evidence in the light most favorable to the nonmoving party,
drawing all justifiable inferences in its favor. See Matsushita
Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 587 (1986).
STATEMENT OF PERTINENT FACTS
The pertinent facts in this action are almost altogether
undisputed by the parties. QMSI is a corporation based in LaVergne,
Tennessee, that provides custom designed industrial automation and
control systems for its customers, most of whom are engaged in the
automated pharmacy industry. QMSI also provides general contracting
services in which it designs automated processing facilities,
purchases and resells to the customer the mechanical components of
the system, develops the software that allows the mechanical
systems to work together, and supervises the construction and
RXAS builds machines for automated inventory management,
product packaging and pharmaceutical dispensing. QMSI and RXAS have
done business with each other for some time. QMSI has written
environments, and QMSI has purchased several million dollars worth
of RXAS equipment for installation in QMSI’s customers’ facilities.
By the spring of 2007, RXAS had developed an operational
prescription bottles at high speed and volume, called in the
industry a “pill counter.” The RXAS machine held great opportunity
for profit because alternative pill counters then available in the
marketplace were comparatively unsatisfactory. After discussions
between representatives of RXAS and QMSI, the two companies decided
to work together to refine and commercialize the RXAS pill counter,
first called the “RX-Count” and later renamed the “Script Count.”
The parties entered into a written contract called the
“Pill Counter Agreement” in July 2007. It is the construction of
this Agreement, which consists of approximately 3½ typed pages,
that is at the center of the current dispute. The Agreement
separates the performance of the parties into two phases. Phase 1
is called the Production System Development, and Phase 2 is called
the Commercial System Production and long-term supply agreement
(Docket Entry No. 40-2 at 2).
The Agreement details the respective responsibilities of
both parties in Phase 1, which can be summarized as testing,
development and further refinement necessary to advance the RXAS
pill counter from an operative prototype into a mature device ready
successfully completed, and that they have since been operating
pursuant to Phase 2 of the Agreement.
The contract provides that during Phase 2 “[t]he pill
counter will be sold to QMSI at the most advantageous (lowest)
price offered to any other company.” The Agreement also entitles
QMSI to “priority order fulfillment.” (Docket Entry No. 40-2 at 45). The parties apparently agree that QMSI has purchased from RXAS
numerous pill counters in compliance with these provisions of the
Agreement. However, in January 2013 RXAS through counsel informed
QMSI that RXAS intended to terminate the Agreement effective July
1, 2013. This written notice stated that the planned termination
would end any right of QMSI to purchase pill counters from RXAS
under the conditions stated in the Pill Counter Agreement. It is
undisputed that RXAS continues to manufacture and sell the Script
termination of the Agreement amounts to a breach of the Agreement.
RXAS disagrees, and argues that under applicable law it has the
right to terminate the Agreement upon reasonable notice.
The resolution of this dispute requires the Court to
construe the Pill Counter Agreement, to determine the parties’
intention concerning termination. As a general rule, when resolving
disputes concerning contract interpretation, the Court’s task is to
determine the intention of the parties based upon the usual,
natural, and ordinary meaning of the contract language. City of
Cookeville ex rel. Cookeville Reg’l Med. Ctr. v. Humphrey, 126
S.W.3d 897, 903 (Tenn. 2004); Guiliano v. cleo, Inc., 995 S.W.2d
88, 95 (Tenn. 1999). Moreover, if a contract’s language is clear
and unambiguous, then the literal meaning of the language controls
the outcome of the contract dispute. Planters Gin Co. v. Fed.
Compress & Warehouse Co., Inc., 78 S.W.3d 885, 890 (Tenn. 2002). In
addition, the Court must construe the provisions of a contract in
harmony with each other, as distinguished from focusing on portions
in isolation, in order to promote consistency among provisions of
a single contract and give meaning to the document as a whole.
Maggart v. Almany Realtors, Inc., 259 S.W.3d 700, 705 (Tenn. 2008).
RXAS argues that the predominant purpose of the Pill
Counter Agreement was the sale of goods. The Uniform Commercial
Code applies to transactions in goods. Tenn. Code Ann. § 47-2-102.
RXAS insists that the U.C.C. controls and provides that a contract
for successive performance of indefinite duration is terminable
after a reasonable time with reasonable notification. Tenn. Code
Ann. § 47-2-309(2).
QMSI disagrees and argues that a fair reading of the
Agreement shows that the parties intended that QMSI’s right to
purchase pill counters at an advantageous price would continue
“through all phases of the product life cycle,” or so long as RXAS
continued to sell pill counters.
As a general statement, courts have held that where a
contract itself does not state its duration, it should be effective
for a reasonable time or terminable at will upon reasonable notice.
Where, however, the parties have indicated an intent that their
contractual obligations last indefinitely until the occurrence of
a particular event, many courts have concluded that the contracts
are terminable only upon occurrence of that event. Johnson v.
Welch, 2004 WL 239756 at * 10 (Tenn. Ct. App. Feb. 9, 2004). Thus,
where a contract does not include a termination date but does
include the right to terminate upon a happening of specified
circumstances, the court will generally interpret the contract as
remaining in force until terminated for cause. Id.
In Warner-Lambert Pharmaceutical Co., Inc. v. John J.
Reynolds, Inc., 178 F. Supp. 655 (S.D.N.Y. 1959), the manufacturer
of Listerine had agreed to pay royalties for the use of the secret
formula for the product based upon the amount sold, and many years
later sought to be relieved of that obligation after the secret
formula was no longer secret. The manufacturer argued that the
contract did not have a specific termination date and was therefore
unenforceable. The court acknowledged the general rule that where
the contract includes no specific termination date and the parties’
intention regarding termination cannot be ascertained, the court
will deem the contract terminable within a reasonable time or at
will, depending upon the circumstances. Warner-Lambert, 178 F.
Supp. at 661. Nevertheless, the court found that contracts that
provide no fixed date for termination but condition the obligation
upon an event which would necessarily terminate the contract are in
quite a different category. Id. at 661-62. It is generally held
that parties may contract for an indefinite term whose duration is
defined by the conduct of the parties as set out in the conditions
agreed to for continuation or termination. Johnson, 2004 WL 239756
at 11 (citing Zee Medical Distributor Association, Inc. v. Zee
Medical, Inc., 94 Cal. Rptr. 2d 829, 833 (Cal. Ct. App. 2000).
The undersigned now turns to the provisions of the Pill
Counter Agreement to examine what the parties said about the
duration of their Agreement. On the first page in the introductory
follows: “The following terms and conditions detail the conditions
RXAS and QMSI will operate under through all phases of the product
life cycle.” Under the heading of “Agreement Summary,” the parties
describe Phase 2 as a “long-term supply agreement.” In the “Phase
2 Summary” paragraph located at the bottom of the first page, the
parties describe their agreement to define “the long term supply
guarantees for QMSI.” The final sentence in this paragraph states:
“Phase 2 will be effective throughout the tenure of this agreement
and protect both parties’ long-term interests.” From the foregoing
statements, the Court finds that the parties clearly intended their
business relationship to be a “long-term” one.
On the third page of the Agreement under the heading
describing the intended duration of their Agreement. In the first
paragraph, the parties state as follows: “Phase 2 of this agreement
developed within phase 1, but will not exclude future enhancements
to better the product line by both RXAS and QMSI.” In a paragraph
numbered 2 in the middle of the third page, the parties include the
This agreement will survive any change of ownership
at either RXAS or QMSI. QMSI will be granted rights
to purchase pill counters directly from RXAS or any
company that may obtain the rights to the counters
in the future. It is an explicit requirement of
this agreement that RXAS and its owners shall pass
on QMSI rights to purchase the RX-Count product
line in any agreement to sell or license this
product line to another company or individual. The
company receiving the rights to the pill counter
shall be legally obligated to continue this
agreement with QMSI.
In the next paragraph, numbered 3, the parties state that the right
to purchase pill counters at favorable prices shall also extend to
“enhanced or competitive products” for pill counting in the future:
If RXAS or any company controlled by the principle
owner(s) of RXAS creates enhanced or competitive
products for pill counting, QMSI will be granted
rights to purchase the enhanced and competitive
products under the same conditions (including, but
not limited to price and order fulfillment
priority) as the initial pill counter.
Finally, in paragraph number 4, the parties state explicitly their
intention regarding the expiration date for this agreement: “There
is no expiration date for QMSI rights to purchase the pill counters
covered in items 2 and 3 above.”
“The absence of a duration provision of a contract does
instead, requires the court to look to the intention of the parties
to determine what the parties’ intention was concerning duration
concerning the parties’ intent.” Johnson, 2004 WL 239756 at * 14
(citing Hamblen County v. City of Morristown, 584 S.W.2d 674, 677
(Tenn. Ct. App. 1979) and Mid-Southern Toyota, Ltd. v. Bug’s
Imports, Inc., 453 S.W.2d 544 (Ky. Ct. App. 1970)). From the
contract provisions quoted above, the Court finds that this is not
a contract in which the parties failed to address the issue of
termination. Rather, the Court finds that the parties clearly
expressed their intent that the rights of QMSI to purchase pill
counters from RXAS or its successors in interest at “the most
advantageous (lowest) price offered to any other company” would
competitive products for pill counting” created by RXAS or its
successors in the future. Therefore, the Court finds that while the
Pill Counter Agreement contains no specific termination date, the
parties did intend that their Agreement would continue until the
happening of a future event – the cessation of sales of pill
counters by RXAS or its successors. The parties agree that RXAS
continues to sell pill counters.
In its response in opposition to QMSI’s motion, RXAS
argues that even if RXAS has breached the Pill Counter Agreement by
terminating in July 2013, QMSI breached the Agreement first when it
secretly began developing a competing pill counter in July 2012
(Docket Entry No. 47 at 6-11). Here, RXAS argues that “QMSI’s
development of a competing pill counter is a material breach of the
profitability of QMSI and RXAS.” (Id. at 9). In support of its
argument, RXAS relies upon several quoted sentences from the
Agreement. Following a review of these quoted provisions, the Court
is unpersuaded, however, and finds that these provisions fail to
contain any agreement that would restrict QMSI’s right to develop
a competing pill counter.
For the reasons stated above, the Court finds that QMSI’s
cross-motion for partial summary judgment should be GRANTED. The
Court finds, as a matter of law, the Pill Counter Agreement between
announced intention to terminate the Agreement as of July 2013
violated the terms of the Agreement. All other issues in this case,
including damages, are expressly reserved.
It is so ORDERED.
/s/ John S. Bryant
JOHN S. BRYANT
United States Magistrate Judge
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