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LABORATORY CORP. OF AMERICA v. UPSTATE TESTING LAB

May 20, 1997

LABORATORY CORPORATION OF AMERICA, INC., f/k/a NATIONAL HEALTH LABORATORIES, INC., Plaintiff,
v.
UPSTATE TESTING LABORATORY, INC., f/k/a OMNILAB, INC., Defendant.



The opinion of the court was delivered by: BUCKLO

 The plaintiff, Laboratory Corporation of America ("LabCorp"), *fn1" has sued the defendant, Upstate Testing Laboratory ("Upstate"), *fn2" asserting several claims with respect to its purchase of Upstate. Upstate has counterclaimed against LabCorp concerning the same transaction. The parties have filed cross motions for summary judgment. For the following reasons, both LabCorp and Upstate's motions for summary judgment are granted in part and denied in part.

 Background

 The second part of the accord was an escrow agreement. The parties placed 1.3 million dollars of the purchase price into escrow in the event that some of Upstate's customers might discontinue their use of laboratory services after LabCorp's acquisition. Specifically, LabCorp knew that Upstate's contracts with three medical facilities, Hudson Headwaters Health Network ("HHH"), Compre-Care, Inc. ("CCI"), and Benedict Health Center ("BHC") (collectively, "health centers"), were set to expire on December 31, 1993. LabCorp agreed to use its "best efforts" to secure a renewal of the contracts with the health centers. Id. § 11. Depending on the success of these efforts, the parties devised a formula for the distribution of funds held in the escrow account. Escrow Agreement § 3(e). In the event of a dispute involving the escrow agreement, the parties agreed to bring suit in Illinois and to have Illinois law govern the contract.

 The seeds of this dispute began on February 24, 1994 when HHH and CCI notified LabCorp that they would not be renewing their contracts and would stop sending their laboratory work to LabCorp as of March 10, 1994. Pursuant to the formula in the escrow agreement, LabCorp claimed to be entitled to $ 550,738, representing a partial refund of the purchase price. Upstate balked at this claim and instead insisted that it was entitled to $ 200,000 from the escrow account. Litigation ensued. Upstate fired the first salvo by filing a complaint against LabCorp in New York state court. LabCorp returned fire the next day with a suit of its own in Illinois state court. After several rounds of legal wrangling regarding jurisdiction, LabCorp's case landed in this Court, and the Northern District of New York dismissed Upstate's complaint. The case presently is before me on the parties' cross-motions for summary judgment. *fn3"

 Best Efforts

 Both LabCorp and Upstate have moved for summary judgment on Count I of the complaint and counterclaim. Upstate claims that LabCorp breached the purchase agreement by failing to use its best efforts to retain the health centers' testing business. Upstate asserts that LabCorp made virtually no efforts to win renewal of the contracts and instead preferred to focus on staking its claim to the escrow fund. LabCorp asks this Court to declare that the best efforts clause is unenforceable as a matter of law because the clause lacks any clear standards by which to judge LabCorp's performance. In the alternative, LabCorp states that it used its best efforts to secure renewal, and, in any event, Upstate has failed to demonstrate that the breach of the best efforts clause actually caused damage to Upstate because the health centers would not have renewed the contracts under any circumstance.

 In the instant case, the purchase agreement contained no standards for assessing LabCorp's best efforts. Yet these standards can be implied from the surrounding circumstances. The parties' goal was the retention of the health centers' accounts. To that end, LabCorp had fairly elaborate internal policies and procedures for the acquisition and retention of laboratory testing accounts. Specifically, LabCorp had a program known as "Client SAVE Alert" which identified accounts that were in jeopardy to receive heightened attention and service by the account representative and, if necessary, management. Defendant's Exh. HH. Furthermore, LabCorp had general guidelines for resolving problems and ensuring account retention. Id. Exh. LL. Because LabCorp was in the business of providing medical testing laboratory services for hospital and other medical providers, Upstate certainly could expect that, at the least, LabCorp would follow its own internal policies and procedures when using its best efforts to pursue the health centers' business.

 The following facts are undisputed with respect to LabCorp's efforts. LabCorp took several steps toward retaining the health centers' business. After the acquisition of Upstate, LabCorp hired Dr. Steven Levenston, one of Upstate's founders, as a consultant to assist it with its pursuit of the health centers' business. Dr. Levenston "aggressively" pursued this business "by telephone, letter, meeting and otherwise." Upstate's 12(N)(3)(a) Response P 41. In addition, Evelyn Peterson, Associate Regional Director of LabCorp, went with Dr. Levenston to a meeting with Dr. John Rugge, Executive Director of the health centers, in which she made a proposal regarding additional services that LabCorp was willing to provide the health centers. She reiterated her verbal proposal in a written letter to Dr. Rugge. Def. Exh. PP. Finally, LabCorp hired Roberta Wasson, the Upstate account representative who had worked with the health centers accounts, to continue in her customer service capacity. Records kept by Ms. Wasson reveal that she made several phone contacts and personal visits to the health centers to check on their levels of satisfaction and resolve any problems. Id. Exh. QQ. *fn5" Given these efforts, I cannot say that LabCorp did not put forth some effort to retain the health centers' accounts.

 Whether these efforts were enough to satisfy the "best efforts" standard, however, is an issue for a trier of fact. Kroboth v. Brent, 215 A.D.2d 813, 625 N.Y.S.2d 748, 749 (N.Y. App. Div. 1995). Although LabCorp sent Ms. Peterson to meet with Dr. Rugge, a question remains whether someone higher in the management chain at LabCorp should have met with Dr. Rugge and offered proposals to him. In February 1994, Dr. Levenston warned Shelley Melzer, the division manager at LabCorp, that the failure of either Mr. Melzer or Steve Stark, vice-president of LabCorp, to meet with Dr. Rugge could have serious consequences for LabCorp's success in retaining the health centers' business. Def. Exh. SS. Despite this letter, neither Mr. Melzer nor Mr. Stark ever met with Dr. Rugge. Furthermore, LabCorp may not have complied fully with its internal standards and processes for handling important accounts such as the health centers.

 The issue of causation also is unresolved. Dr. Rugge, the health centers' director, testified that LabCorp was doing "exemplary work," and he never stated that LabCorp had no chance of retaining the health centers' business. Rugge Dep. at 82. In fact, Dr. Rugge stated that, despite the momentum building for a laboratory testing agreement with Glenn Falls Hospital ("GFH"), he was still open to hearing proposals from LabCorp until a few days before February 24, 1994 when he notified Dr. Levenston of the health centers' decision. Id. at 114. Whether the health centers would have declined to renew their contracts with LabCorp even if LabCorp had used its best efforts cannot be resolved by summary judgment.

 Count IV - Breach of Contract - Forum Selection Clause

 LabCorp seeks summary judgment on its breach of contract claim (Count IV) for Upstate's failure to comply with the forum selection clause. LabCorp contends that Upstate breached the contract by initiating this suit in New York state court, thereby violating the forum selection ...


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