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05/18/88 Hollister Incorporated Et v. Abbott Laboratories

May 18, 1988





524 N.E.2d 1035, 170 Ill. App. 3d 1051, 120 Ill. Dec. 853 1988.IL.775

Appeal from the Circuit Court of Cook County; the Hon. Richard L. Curry, Judge, presiding.


JUSTICE RIZZI delivered the opinion of the court. McNAMARA and FREEMAN, JJ., concur.


Plaintiffs, Hollister Incorporated (Hollister), and Hollister Overseas, Ltd. (Overseas), appeal from a judgment of the circuit court of Cook County confirming an arbitration award in favor of defendant, Abbott Laboratories (Abbott). On appeal, Hollister and Overseas argue that the circuit court erred in holding that the arbitrators did not, and as a matter of law could not, exceed their power in arbitrating the disputes between Hollister, Overseas and Abbott. Hollister and Overseas contend that: (1) the arbitrators violated the doctrine of functus officio when they ordered Hollister and Overseas to negotiate in good faith with Abbott and then on a later date set the "Agreed Purchase Levels" themselves; (2) the arbitrators exceeded their powers when they determined that they would set the "Agreed Purchase Levels" and (3) the arbitrators exceeded their powers when they required that adjustments for currency rate fluctuations be made in setting certain prices on products sold by Hollister and Overseas to Abbott. We affirm.

Hollister, and its wholly owned subsidiary Overseas, manufactures and sells ostomy devices and other specialty medical products. Hollister maintains its principal office in Libertyville, Illinois, while Overseas' only manufacturing facility is in Ballina, Ireland. Abbott is headquartered in North Chicago, Illinois, and manufactures and distributes various medical products throughout the world. Abbott and Hollister formed a contractual business relationship in 1970. Pursuant to a series of contracts, Abbott developed markets outside of the United States and Canada for medical specialty products manufactured by Hollister.

In 1977, Hollister and Abbott entered into two long-term contracts which were to extend through 1991. These agreements were known as the "International Marketing Agreement" and the "International Supply Agreement" . The IMA conferred upon Abbott the exclusive right to market and distribute Hollister's products which were manufactured in Hollister's plants located in the United States. The ISA agreement, on the other hand, related to products sold to Abbott that were manufactured in Overseas' Ballina facility.

Both the IMA and the ISA provided that in the event the parties had controversies they could not settle, the differences would be arbitrated under the rules of the American Arbitration Association. The IMA and ISA further provided, respectively, that they be "construed in accordance with the laws of the State of Illinois" and "construed, interpreted, applied and enforced in accordance with the laws of the State of Illinois, including Article 2 of the Uniform Commercial Code."

After approximately four years, certain issues between Hollister and Overseas and Abbott could not be agreed upon. One issue was the parties' inability to agree upon the "Agreed Price Levels" (APLs) necessary for Abbott to meet in 1984 and the remaining years of the contract. Under the terms of the IMA, APLs were defined as "the minimum unit quantity required to be ordered by ABBOTT for a given Product Purchase Group for distribution or resale in a country or area in the Territory in a Contract Year." Under the terms of the IMA, the APLs for the first five years (1977-81) were agreed upon at the inception of the contract. APLs for the following years were to be negotiated by Hollister and Abbott, on a year-by-year basis, five years in advance. The APLs were then to be reduced to writing and incorporated into exhibit "C" of the IMA. The IMA further provided that: (1) if APLs were not agreed upon, reduced to writing and incorporated as exhibit "C," Hollister had the right to "exclude such country or area from this Agreement upon expiration of the remaining Contract Years" and (2) the agreement "shall continue for a period of fifteen (15) years . . .; PROVIDED HOWEVER, that Agreed Purchase Levels for each Contract Year after the first five (5) Contract years shall be renegotiated." The terms of the ISA were essentially the same.

Another issue the parties could not agree upon was the currency adjustments that Overseas was or was not to make in setting the dollar prices for products sold to Abbott from Overseas' Ballina facility. With respect to pricing, the IMA provided that Overseas could adjust its prices to Abbott on an annual basis. However, the percentage change in those prices to Abbott was limited by the percentage change in Overseas' manufacturing costs.

For the first two years of the contract, prices were set on an ad hoc basis because the Ballina plant had just begun its full operations. For the years of 1979, 1980 and 1981, the parties used a method known as the Gunderson Method to set prices. Under this method the percentage change in Overseas' manufacturing costs was calculated. The manufacturing costs percentage increase was then multiplied by a currency factor which was based upon the yearly change in the six-month average exchange rates between Irish currency and United States dollars.

Overseas records all of its manufacturing costs in the currency used in Ballina: Irish Pounds (punts). However, the sales prices to Abbott are denominated in United States dollars. When the parties attempted to set the 1982 prices, the dollar had strengthened significantly against the punt. As a result, if the Gunderson Method were used, Overseas' dollar prices to Abbott would have to be reduced even though Overseas' punt manufacturing costs were rising. Therefore, in calculating the prices for 1982, Overseas did not use a currency factor but, instead, calculated the increase in its manufacturing costs and set its prices according to the provision in the ISA relating to the pricing issue. Abbott objected that Overseas did not use a currency factor to adjust its 1982 prices and refused to pay the 1982 prices. Abbott then paid the 1981 prices that were currency adjusted for the years of 1982, 1983, 1984 and a portion of 1985. These unresolved issues were ultimately submitted to arbitration in June 1982.

At the arbitration hearing, the arbitration panel heard the testimony of 24 witnesses, eight independent experts and 16 present or former officers and employees of Hollister or Abbott. The arbitrators further heard the testimony of Hollister's current president, its director of international marketing, its vice-president of finance and its president in 1977, the year in which the present contracts were negotiated and entered into. In their award of February 25, 1985, with respect to the APLs, the arbitrators found that Hollister "did not negotiate in good faith respecting Agreed Purchase Levels for the years 1984 and following." The arbitrators ordered Abbott and Hollister to negotiate APLs for the years 1985-89, further providing that if Abbott and Hollister could not agree upon the APLs in writing by July 31, 1985, the arbitrators would take any additional measures they deemed appropriate.

With respect to the pricing issue, the arbitrators in their award ruled that "the Gunderson Method should have been and should be employed," and ordered that Overseas' prices for 1982 and the years thereafter be recomputed with a currency adjustment under the Gunderson Method. The arbitrators stated:

"[The] [Gunderson Method] [represented] the course of conduct employed between the parties during the period of the contracts in question up to the time that [Overseas] unilaterally and without notice chose to change the foregoing method of pricing used by the parties pursuant to prior practice."

Based upon the recomputation, the arbitrators ordered that any money due from one party to the other for 1982, 1983 and ...

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