The Franchise Memorandum

The U.S. Court of Appeals for the Sixth Circuit recently affirmed summary judgment for a medical device manufacturer, Wright Medical Technology, on claims brought by a distributor, Beijing Fito Medical, alleging that Wright breached the distribution agreement between the parties. Beijing Fito Med. Co. v. Wright Med. Tech., Inc., 2019 WL 480410 (6th Cir. Feb. 7, 2019). Wright and Fito entered into an agreement that gave Fito the right to serve as Wright’s exclusive distributor of hip, knee, foot, ankle, and biologics products in China. The agreement permitted Wright to remove individual products from the contract as long as it gave 90 days’ notice to Fito. The agreement also allowed Wright to assign any part of the agreement to a third party. Shortly after entering into the agreement with Fito, Wright entered into a “logistics” agreement with Shanghai CIIC, under which Shanghai became Wright’s exclusive distributor of foot, ankle, and biologics products in China and Fito was permitted to purchase those products from Shanghai. A few months later, Wright advised Fito that it was selling a portion of its business, including its agreement with Fito, to a third party named MicroPort, and removing the foot, ankle, and biologic products from Fito’s agreement. Fito filed suit against Wright in federal court in Tennessee alleging, among other things, that Wright breached the agreement and the implied covenant of good faith and fair dealing by (1) divesting Fito of its right to sell foot, ankle, and biologics products under the agreement, and (2) granting Shanghai “logistic” distributorship rights for those products. Wright successfully moved for summary judgment on Fito’s claims.

On appeal, the Sixth Circuit confirmed Wright’s summary judgment award. Because the agreement gave Wright broad discretion to remove products from Fito’s distributor rights, it did not breach the agreement by doing so. Similarly, the court concluded that removing the foot, ankle, and biologics products did not breach the implied covenant of good faith and fair dealing under Tennessee law because Wright acted in accordance with the express provisions of the agreement and there was no evidence that it acted in bad faith or with the intent to harm Fito’s business. Further, the appellate court held that because Fito retained the right to distribute other Wright products, removal of the foot, ankle, and biologics products did not result in termination in violation of the agreement. Finally, the court considered Fito’s claim that Wright breached the “exclusivity” provision of the agreement or the implied covenant of good faith and fair dealing simply by entering into the “logistics” distribution agreement with Shanghai. It reasoned that Fito lost its right to distribute Wright’s foot, ankle, and biologics products 90 days after receiving notice from Wright, and Shanghai had not distributed Wright’s products before that date. Thus, Fito could not have suffered any damages from Shanghai’s sale of products and, because Fito could not show damages, its claims would fail.