The Franchise Memorandum

A federal court in California recently partially granted China-based medical device distributor Belter’s motion to dismiss a complaint by U.S.-based device distributor Meditex Capital, and related parties, for breach of contract and fraud, among other claims. Naghavi v. Belter Health Measurement & Analysis Tech. Co., 2020 WL 6150431 (S.D. Cal. Oct. 20, 2020). In May 2017, Belter and Meditex entered into a distribution agreement that granted Belter certain rights to sell Meditex’s medical devices in China and contained minimum sales requirements. The parties amended the agreement in August 2018. Meditex subsequently sued Belter and related parties alleging, among other things, that Belter failed to meet the minimum sales requirements and fraudulently entered into the distribution agreement with no intention of performing its contractual duties. Belter moved to dismiss the complaint.

Applying Texas law, the court denied Belter’s motion to dismiss the breach of contract claim but granted the motion as to the fraud claim. Belter argued there was no minimum sales requirement to breach because the parties’ 2018 amended distribution agreement superseded the 2017 agreement and was silent on minimum sales requirements. The court observed that the 2018 amendment would only supersede the 2017 agreement insofar as the parties made it clear in the 2018 agreement that was their intent. Otherwise, the two agreements were to be interpreted together, and only where provisions conflicted would the later agreement prevail. The court held that Meditex had failed to identify any provision in the August 2018 amendment that expressly superseded, addressed, or otherwise conflicted with the minimum sales requirements in the 2017 agreement. The court also rejected Belter’s argument that device approval from the Chinese Food and Drug Administration (CFDA) was a condition precedent to the minimum sales requirement. Observing that conditions precedent are “disfavored” and should not be found unless the contractual language “may be construed no other way,” the court found the contractual language concerning CFDA approval was insufficiently definite to demonstrate a condition precedent at the motion to dismiss stage. Finally, in dismissing Meditex’s fraud claim, the court held Meditex had failed to allege any facts to show Belter did not intend to perform under the contract at the time of formation. The court also dismissed the fraud claim against Belter’s parent company because, though Belter and its parent company shared managers and board members, Meditex had failed to allege any such individuals were acting on behalf of the parent.