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Medline Industries, Inc. v. Cymbion

November 16, 2010

MEDLINE INDUSTRIES, INC., PLAINTIFF,
v.
CYMBION, LLC, DEFENDANT.



The opinion of the court was delivered by: James F. Holderman Chief Judge, United States District Court

MEMORANDUM OPINION AND ORDER

JAMES F. HOLDERMAN, Chief Judge

Plaintiff Medline Industries, Inc. ("Medline") is an Illinois corporation headquartered in Mundelein, Illinois (Dkt. No. 70 ("Cymbion's Local R. 56.1(b)(3) Resp.") ¶ 1), and defendant Cymbion, LLC ("Cymbion") is a Kentucky limited liability company headquartered in Louisville, Kentucky (id. ¶ 2). Medline originally filed its complaint in the Circuit Court of Cook County, asserting claims against Cymbion for breach of contract (Count I) and for a declaratory judgment that Medline terminated the parties' supply agreement with cause (Count II). (Dkt. No. 1, Ex. 1 ("Compl.") ¶¶ 19-26.) Cymbion timely filed its Notice of Removal pursuant to 28 U.S.C. §§ 1441 and 1446 and then filed its answer and a counterclaim for breach of contract. Because none of Cymbion's members is a citizen of Illinois (see Dkt. No. 1, Notice of Removal ¶ 4), and the amount in controversy exceeds $75,000 (id. ¶ 6),this court has diversity jurisdiction over this action pursuant to 28 U.S.C. § 1332(a)(1). Currently before the court is Medline's "Motion for Summary Judgment on Count II of Its Complaint and Defendant's Counterclaim" (Dkt. No. 61 ("Medline's Mot.")). For the reasons explained below, Medline's Motion is denied.*fn1

BACKGROUND

For purposes of Medline's Motion for Summary Judgment, the relevant facts of this case are described below in the light most favorable to Cymbion. See Fischer v. Avanade, Inc., 519 F.3d 393, 401 (7th Cir. 2008).

I. The Parties

Medline is a nation-wide distributor of medical products. ("Cymbion's Local R. 56.1(b)(3) Resp.") ¶ 1.) Cymbion is a medical products manufacturer managed by two brothers, Dipak Narula and Vinod Narula (referred to hereafter individually as "Dipak" and "Vinod" and collectively as "the Narulas"). The Narulas together own a majority of Cymbion. (Id. ¶¶ 9, 10.)

II. The Supply Agreements

In 2005, Medline entered into a supply agreement with Cymbion, dated May 11, 2005 ("First Supply Agreement"), for the purchase of medical scrub brushes. (Id. ¶ 18.) On December 16, 2005, Medline and Cymbion entered into a second supply agreement ("Second Supply Agreement" or "Agreement") that superceded the First Supply Agreement and altered both the price terms and the scrub brushes' specifications. (Id. ¶ 23.) Under the terms of the Second Supply Agreement, Cymbion agreed to manufacture both "dry" and "wet" scrub brushes (collectively "Products") for Medline. (Id. ¶¶ 30-31.)

"Dry" scrub brushes do not contain any chemicals (such as liquid antiseptics) and are intended to be used in conjunction with antimicrobial soap and water by surgeons to clean the skin on their arms and hands before surgery through an abrasive, scrubbing action that removes germs and bacteria. (Id. ¶ 30.) "Wet" scrub brushes are manufactured in the same way as the dry scrub brushes except the wet scrub brushes are impregnated with one of three liquid antiseptics: (a) Povidone-Iodine ("PVP"); (b) Chlorhexidine gluconate ("CHG"); or (c) parachlorometaxylenol ("PCMX"). (Id. ¶ 31.)

Exhibit B of the Second Supply Agreement outlines the "Product Specifications" for the scrub brushes. Based on those specifications, each scrub brush was to be enclosed in a "[t]hermoformed pouch and vacuum sealed," using Alcan M-6221 Medical Device Forming Film and Alcan M-6200*fn2 Medical Device Lidding Stock for the thermoform packaging materials. (Cymbion's Ex. 1, Second Supply Agreement 9.) The packaging pouch was to be "heat sealed" with a "peel strength [of] 2 to 4 pounds" (id. at 10),*fn3 which were "estimated approximate values" and the "[a]ctual values [would] not be known until actual product [was] made" (id.). Additionally, the specifications do not state whether the identified peel strengths refer only to the leading edge of the packaging pouch or to all the edges. (See id.) Under the terms of the Second Supply Agreement, Cymbion also was "solely responsible . . . for ensuring that the [scrub brushes] conform[] to any regulatory specifications set forth for the [scrub brushes]." (Cymbion's Local R. 56.1(b)(3) Resp. ¶ 26; Second Supply Agreement § 1(c).)

The Second Supply Agreement further required that Medline purchase "committed annual minimum purchase volumes" of the scrub brushes (Second Supply Agreement 7), and this obligation would be triggered when Cymbion delivered "acceptable quality product" to Medline (id. § 6). The Second Supply Agreement does not state what percentage of the "committed annual minimum purchase volumes" was to consist of dry as opposed to wet scrub brushes. (See id. at 7.)

Additionally, according to the Agreement, "[i]f the Buyer [Medline] reasonably determines that the Products do not conform to the Product Specifications or otherwise are not in good and merchantable condition at the time of delivery to the Buyer, the Buyer shall have the right to return the Products to the Seller [Cymbion] at the Seller's cost for replacement by the Seller." (Id. § 2(b).)

Under Exhibit C of the Second Supply Agreement, if Medline terminated the Second Supply Agreement "without cause," within thirty-six months of its execution and before 24 million Products had been purchased, Medline agreed to "(a) purchase a maximum of 3 months inventory based on the rolling forecast provided [to Cymbion]; (b) make a unit shortfall payment, corresponding to the year of the shortfall as specified . . . ; and (c) purchase the machinery, tooling, and other prototypes associated with the Product production . . . as specified . . . ." (Id. at 12.)

III. Manufacturing the Scrub Brushes

After the execution of the Second Supply Agreement, Cymbion worked on manufacturing scrub brushes that met Medline's specifications, including certain specifications based on Medline's interpretations of the relevant Food & Drug Administration ("FDA") regulations. Joe Dunn, who was the Director of Quality Assurances in the Dynacor Division of Medline (Medline Ex. 16, Dunn Aff. ¶ 3), advised Cymbion that in addition to complying with the FDA's device regulations, Medline believed that the wet scrub brushes also had to comply with the FDA's drug/pharmaceutical regulations (id. ¶ 10; Cymbion's Local R. 56.1(b)(3) Resp. ¶ 53). Such compliance included placing an expiration date on the product packaging which was established by an acceptable scientific test, known as a "stability study." (Cymbion's Local R. 56.1(b)(3) Resp. ¶ 53.) In early 2006, Medline informed Dipak, who appears to have been more personally involved in the Medline communications than Vinod, that Medline wanted samples of the wet scrub brushes to undergo stability testing. (Cymbion's Ex. 2, Dipak Aff. ¶ 30.) Although Cymbion apparently questioned whether the wet scrub brushes had to comply with the FDA drug/pharmaceutical regulations (see Dipak Dep. 93:10-15), Dipak ultimately sent Cymbion's samples to Q Laboratories, which performed six months of stability testing (Dipak Aff. ¶ 30). After the stability testing was completed, Dunn informed Dipak that he was dissatisfied with the results and requested that Cymbion find another laboratory to perform additional stability testing, which would take approximately three months. (Id. ¶ 31; see also Cymbion Ex. 29, MED0000217 (noting that second stability testing would be a "three month process.") In January 2007, Dipak sent protocols to Dunn from another testing laboratory, Custom Industrial Analysis ("CIA") Labs, which Dunn ultimately approved. (Dipak Aff. ¶ 32.) While the samples were undergoing a second round of stability testing, Medline terminated the Second Supply Agreement. (Id. ¶ 32.)

On April 6, 2006, Dipak sent Dunn Cymbion's proposed validation protocols for manufacturing the Products (Dkt. No. 78 ("Medline's Resp. Cymbion's Local R. 56.1(b)(3)(C) Stmt. Add'l Facts") ¶ 19), and in June 2006, Dale Greeson, a Medline validation engineer, became involved in the Cymbion project (Cymbion Ex. 6, Greeson Dep. 90:4-6). Greeson was responsible for verifying that Cymbion's validation protocols satisfied the relevant regulations (id. at 89:17-21), and in September 2006, Greeson sent Cymbion the actual validation protocols Medline wanted Cymbion to employ. (Cymbion Ex. 35, MED0001497; Dipak Dep. 147:19-148:5.)

Also in August 2006, Medline submitted a provisional purchase order for the Products to Dipak. (Dipak Aff. ¶ 17; Medline's Ex. 31, CYM3191-92; Medline's Ex. 15, Palmer Aff. ¶ 14.) Dipak had requested this purchase order to enable Cymbion to estimate the amount of raw materials necessary for manufacturing the surgical scrub brushes under the Second Supply Agreement. (Id.)*fn4 The provisional purchase order listed a delivery date of September 18, 2006, but Cymbion never delivered the products. (Medline's Ex. 31, CYM3191-92.)

By September 2006, Cymbion had submitted samples of the packaging pouches to Medline for testing and evaluation. (Cymbion's Ex. 38, MED0006495.) Based on the results of the testing, Dunn informed Dipak that it "[w]ould be great for all samples to have . . . same seal on all sides." (Id.) Medline does not dispute that it believed the peel strength specifications in the Second Supply Agreement apply to all four sides of the packaging. (Medline's Resp. Cymbion's Local R. 56.1(b)(3)(C) Stmt. Add'l Facts ¶ 23.) As discussed above, the Product Specifications outlined in Exhibit B of the Second Supply Agreement do not specify whether the identified peel strengths refer to all sides of the packaging pouch or just the leading edge. Nevertheless, with Medline's assistance, Cymbion began working to meet Medline's peel strength request. Specifically, during September 2006 and December 2006, Medline flew its employees, including three of its engineers, Dale Greeson, David Dziekan, and Earl David Wilson (Medline's Chief Manufacturing Engineer), to Cymbion's manufacturing facility to assist Cymbion in achieving the peel strength that Medline requested for the packaging pouches and evaluate Cymbion's form, fill, and seal machine ("FFS Machine"), the machine used to heat-seal the packaging for the individual scrub brushes. (See Cymbion's Local R. 56.1(b)(3) Resp. ¶¶ 41-43.)

While Medline and Cymbion continued to work on the peel strength issue, in October 2006, Dunn sent Cymbion a list of protocols and other documents which it required Cymbion to submit as Medline's "first attempt" to get Cymbion into "basic compliance," including revising and updating Cymbion's Quality Manual to comply with Medline's interpretations of the relevant FDA drug/pharmaceutical regulations. (Medline's Resp. Cymbion's Local R. 56.1(b)(3)(C) Stmt. Add'l Facts ΒΆ 21; Cymbion Ex. 36, MED0000170-73.) In response to ...


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