Pharm. Horizons, Inc. v. SXC Health Solutions, Inc.

PHARMACEUTICAL HORIZONS, INC., Plaintiff,

v.SXC HEALTH SOLUTIONS, INC. Defendant.

No. 11 C 6010

UNITED STATES DISTRICT COURT FOR THE NORTHERN DISTRICT OF ILLINOIS EASTERN DIVISION

ENTER: May 15, 2012

Judge Blanche M. Manning

MEMORANDUM AND ORDER

The plaintiff, Pharmaceutical Horizons, Inc. ("PHI"), has sued SXC Health Solutions, Inc. ("SXC"), contending the SXC breached the parties' value-added reseller agreement. SXC counterclaimed alleging that PHI breached the contract and its duty of good faith and fair dealing, and seeking a declaratory judgment to that effect. PHI has moved for judgment on the pleadings with respect to both its and SXC's claims. For the reasons stated below, the motion is granted.

Facts

The facts of the case are undisputed. The parties entered into an Asset Purchase Agreement ("APA") on September 30, 2005, under which SXC purchased certain assets of PHI, including its "Rebate Program." The APA contained a provision under which PHI agreed not to compete with SXC in the business of providing rebate processing services for three years from the closing date of September 30, 2005. On the same day the APA was executed, the parties also signed a Value-Added Reseller Agreement ("VAR Agreement") under which PHI agreed to act as a value-added reseller of SXC's pharmaceutical rebate processing services. Specifically, the VAR Agreement appointed PHI as an "independent, nonexclusive, value-added reseller topromote, distribute and sublicense [SXC's] Rebate Services." VAR, §1(a). Under the terms set forth by the parties, payment for the Rebate Services ordered by PHI and provided by SXC was to be "deducted by SXC from the rebate amounts received" with the balance to be remitted to PHI's customers with a written reconciliation. VAR §5(c). The VAR Agreement did not contain a non-compete or non-solicitation provision.

For several years after the execution of the APA and the VAR Agreement, PHI used SXC's pharmaceutical rebate processing services for its customers. However, on or around January 11, 2011, several of PHI's customers switched rebate processing services from SXC to one of its competitors. SXC sent a letter to PHI alleging breach of contract claiming that the VAR Agreement created an exclusive arrangement whereby PHI's customers were required to use SXC's rebate processing services. SXC threatened to (and ultimately did) withhold over $900,000 in rebate monies due PHI and its customers as damages for PHI's purported breach of contract. PHI then brought the instant suit alleging breach of contract by SXC for its failure to pay to PHI (and, ultimately, its customers) the over-$900,000 in rebate funds due under the VAR. SXC filed a counterclaim alleging breach of contract and breach of the duty of good faith and fair dealing, and seeking a declaratory judgment that PHI had breached the contract. PHI has moved for judgment on the pleadings with respect to its breach of contract claim as well as SXC's counterclaim.

The relevant contract provisions are as follows:

Section 1(a)-under which PHI was appointed "as an independent, nonexclusive, value-added reseller to promote, distribute and sublicense the Rebate Services" to certain PHI customers.

Section 1(c)-which provides that "PHI may not authorize any . . . value added resellers or other third parties to distribute the Rebate Services."

Section 3(b)-which required PHI to "conduct business in a manner that reflects favorably at all times on the Rebate Services and the name, goodwill and reputation of SXC."

Section 10-which provides how the VAR Agreement could be terminated.

"Rebate Services"-defined as SXC's "services to process pharmaceutical rebates."

Standard

As noted by the Seventh Circuit, in the instance where a party is attempting to dispose of a case on the merits using Rule 12(c),

the appropriate standard is that applicable to summary judgment, except that the court may consider only the contents of the pleadings. Thus, we take all well-pleaded allegations in the plaintiffs' pleadings to be true, and we view the facts and inferences to be drawn from those allegations in the light most favorable to the plaintiffs. We will not affirm the granting of the . . . 12(c) motion unless no genuine issues of material fact remain to be resolved and unless the [moving party] is entitled to judgment as a matter of law.

Alexander v. City of Chicago, 994 F.2d 333, 336 (7th Cir. 1993) (internal citations omitted).

Analysis

According to the plaintiffs, the disposition of the case depends on whether PHI was obligated to use SXC as its exclusive provider of rebate services under the terms of the VAR Agreement (PHI contends no). To establish a breach of contract under Illinois law, a plaintiff must prove: (1) that a valid and enforceable contract exists; (2) that it has substantially performed; (3) that the defendant has committed a breach; and (4) damages. See Reger Dev., L.L.C. v. Nat'l City Bank, 592 F.3d 759, 764 (7th Cir. 2010).

The parties agree that a valid and enforceable contract exists. In addition, PHI contends that it substantially performed its obligations under the contract because no language in the VAR Agreement prohibits PHI from reselling, or PHI's customers from using, pharmaceutical rebateprocessing services provided by another vendor. SXC disagrees and alleges in its counterclaim that "[b]y entering into the VAR Agreement, PHI committed to using SXC to process pharmaceutical rebates for . . . PHI customers . . . ." SXC's Counterclaim, ¶ 9, Dkt. #25. It goes on to allege that when certain PHI steered customers to use another rebate processor, PHI breached the VAR Agreement.

"The primary goal of contract interpretation is to give effect to the intent of the parties" and "[i]n determining the intent of the parties, a court must consider the contract document as a whole and not focus on isolated portions of the document." Richard W. McCarthy Trust Dated September 2, 2004 v. Illinois Cas. Co., 946 N.E.2d 895, 903 (Ill. App. Ct. 2011) (citation omitted). "If the language of a contract is clear and unambiguous, the intent of the parties must be determined solely from the language of the contract document itself, which should be given its plain and ordinary meaning, and the contract should be enforced as written." Id.

Express Contract Language

The court can find no language in the contract that requires PHI to exclusively use the services of SXC. SXC's arguments to the contrary are unavailing. SXC first contends that PHI was required under § 1(a) of the contract not to steer its customers to a competitor of SXC and genuine issues of material fact exist about whether PHI breached that aspect of the contract which preclude judgment. Section 1(a) states:

SXC appoints PHI as an independent, nonexclusive, value-added reseller to promote, distribute and sublicense the Rebate Services:

(i) only to PHI's Customers; and

(ii) pursuant to mutually agreed upon terms and conditions to be completed no later than March 31, 2006.

Contrary to SXC's position, this section does not "require" PHI to do anything. In it, SXC merely appoints PHI as a "non-exclusive, value-added reseller to promote, distribute and sublicense the Rebate Services" but it does not state that PHI must act in that capacity. Indeed, as noted by PHI, the second whereas clause in the VAR Agreement states only that the parties agree that "PHI may serve as a value-added reseller," not that it was required to do so.

SXC next asserts that PHI did not substantially perform because it breached § 1(c) of the VAR Agreement which states that "[w]ithout the prior written approval of SXC, PHI may not authorize any dealers, agents, representatives, sub-distributors, value added resellers or other third parties to distribute the Rebate Services." According to SXC, if PHI steered customers to a different rebate service provider, "PHI breached its obligation to refrain from authorizing other third parties to distribute the services SXC was hired to perform for PHI and its customers." Response at 5, Dkt. #37. But SXC misinterprets the plain language of this section, which provides that as an appointed distributor of SXC's Rebate Services, PHI cannot then authorize others to distribute SXC's Rebate Services.¹ There is no allegation that PHI gave another party permission to use SXC's rebate processing services; rather, SXC alleges that PHI either appointed or allowed its customers to use another company's rebate processing services. In other words, PHI cannot authorize others to do what it has been appointed to do, which ispromote, distribute, and sublicense SXC's Rebate Services. No such allegation is made and therefore, SXC's argument that PHI breached this section of the VAR Agreement is inapposite.

Duty of Good Faith and Fair Dealing

In its third argument, SXC contends that by steering its customers to an SXC competitor, PHI breached its duty of good faith and fair dealing. Under Illinois law, a duty of good faith and fair dealing is implied in every contract. See Reserve at Woodstock, LLC v. City of Woodstock, 958 N.E.2d 1100, 1112-13 (Ill. App. Ct. 2011). "Its purpose is to ensure that parties do not take advantage of each other in a way that could not have been contemplated at the time the contract was drafted or do anything that will destroy the other party's right to receive the benefit of the contract." Gore v. Indiana Ins. Co., 876 N.E.2d 156, 161 (Ill. App. Ct. 2007). The duty requires "a party vested with contractual discretion to exercise it reasonably, and not arbitrarily, capriciously, or in a manner inconsistent with the reasonable expectations of the parties." Seip v. Rogers Raw Materials Fund, L.P., 948 N.E.2d 628, 637 (Ill. App. Ct. 2011). However, the duty is "not an independent source of duties for the parties to a contract, and is 'used as a construction aid in determining the intent of the parties where an instrument is susceptible of two conflicting constructions.'" Id. (quoting Fox v. Heimann, 872...