National Medical, Inc. v. SCA Hygiene Products

99-4790 (U.S. Dist. Ct. D. N.J. 2001) (Unpublished)

Opinion Date: September 26, 2001
Business Law
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CONTRACTS; DISTRIBUTORS—An agreement that merely sets forth the prices at which a supplier will sell to its distributor may not require the supplier to sell to that distributor at all and the seller may terminate the agreement when its own business interests so dictate.

A distributor of adult incontinence products sued the manufacturer for breach of contract, breach of the implied covenant of good faith and fair dealing, tortious interference with prospective economic advantage, and unfair competition. There was no written distributorship agreement. Rather, there was an established customer pricing agreement, stating the price to be paid by the distributor for the goods, the price to be charged by the distributor to the customer, and the rebate to be paid to the distributor on the sales. The pricing agreement did not contain any procedure for the distributor to submit rebate forms. At a later date, the manufacturer established procedures for the submission of rebate claims. When the distributor refused to abide by those terms and failed to pay for goods ordered, the manufacturer terminated the relationship, demanded payment of all open invoices, demanded reimbursement for rebates allegedly fraudulently obtained by the distributor, and notified its customers of the termination of the distributorship. The distributor sued, and the manufacturer moved for summary judgment. The Court found that the customer pricing agreement did not require the manufacturer to sell any goods to the distributor, it merely set the price for goods if they elected to transact business. Further, because it contained no specific quantities to be sold, the contract could not be enforced to compel the manufacturer to sell to the distributor. It also noted that the manufacturer was relieved of its duties, if any, under the contract because of the substantial breaches by the distributor, which included the distributor’s submission of fraudulent rebate forms and its failure to pay its invoices timely. With respect to the distributors’ claim of breach of the implied covenant of good faith, the court found that the manufacturer had a legitimate business interest in advising its customers of the termination of the distributorship and how to order goods in the future. It also rejected the distributor’s claim of tortious interference because the distributor could not establish that it had a reasonable expectation of an economic benefit that it would have received if not for the behavior of the manufacturer or that the conduct of the manufacturer in terminating the contract and informing the customers was wrongful. In the Court’s opinion, the manufacturer had legitimate business reasons for its actions. Also, the Court rejected the distributor’s claim for unfair competition. In order to prevail on a claim for unfair competition, one must prove either that someone else is passing off its goods as those of another or must prove unprivileged imitation. Since the evidence provided by the distributor did not support those claims, they were dismissed by the Court.

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