The opinion of the court was delivered by: Jerome B. Simandle U.S. District Judge
HONORABLE JEROME B. SIMANDLE
This matter is before the court on the motion by plaintiff, Wright Medical Technology, Inc. ("Wright") for a preliminary injunction, pursuant to Federal Rule of Civil Procedure 65, and on the motion of defendants, George E. Somers and The Somers Group, Inc. (collectively "Somers"), to dismiss Wright's Verified Complaint for failure to state a claim upon which relief can be granted, pursuant to Federal Rule of Civil Procedure 12(b)(6). This court has diversity jurisdiction under 28 U.S.C. § 1332, *fn1 and Tennessee law supplies the law of decision. *fn2
Wright, a designer, manufacturer and seller of medical implant devices including as knee and hip implants, seeks an Order enjoining Somers, its former exclusive representative in New Jersey, Delaware and Eastern Pennsylvania, from competing against Wright in the sale of medical implant devices in that territory, pursuant to the non- competition provisions set forth at ¶¶ 5 and 13(E) of the November 1, 1994 Distributor Agreement ("the Distributor Agreement") between the parties, pending arbitration of their dispute, pursuant to ¶ 16 of the Distributor Agreement. Somers opposes Wright's motion for a preliminary injunction and moves to dismiss Wright's Verified Complaint, contending (1) that the Distributor Agreement expired by its own terms on October 31, 1997, rendering the non-competition provisions unenforceable thereafter, and (2) that even if the parties did extend the Distributor Agreement by their conduct, as Wright maintains, Somers did not trigger the non-competition provisions by terminating the Distributor Agreement in the manner set forth in ¶ 13(E). Both parties agree that the contractual dispute is arbitrable before the American Arbitration Association, pursuant to ¶ 16 of the Distributor Agreement, and are endeavoring to commence the arbitration hearing promptly.
The court finds, based upon the verified pleadings, affidavits and documentary evidence presented, that it is highly likely that the arbitrator will find that the parties did extend the Distributor Agreement beyond its express expiration date of October 31, 1997 through October 30, 1998, when Somers effectively terminated the Distributor Agreement within the meaning of ¶ 13(E) by surreptitiously entering into an agreement with a competitor of Wright's to distribute the competitor's products in the same territory in which he was supposed to be representing Wright. Thus, the court finds that Wright has established a likelihood of success on the merits at the arbitration. The court also finds that Wright is suffering and will continue to suffer irreparable harm if injunctive relief is not granted, that the possibility of harm to Somers if injunctive relief is granted can be minimized and does not outweigh the harm Wright will suffer if injunctive relief is denied, and that granting injunctive relief to Wright will serve the public interest. Accordingly, the court grants Wright's motion for a preliminary injunction restricting competition by Somers in New Jersey, Delaware and Eastern Pennsylvania pending arbitration of the dispute, and denies Somers' motion to dismiss for failure to state a claim upon which relief can be granted.
On October 17, 1994, Wright and Somers entered into a Distributor Agreement, effective November 1, 1994, pursuant to which Wright appointed Somers as its exclusive representative in New Jersey and Delaware for a period of three years. (Fisher Aff., Ex. A at ¶¶ 1- 2.) In exchange, Somers agreed to the following non-competition provision:
In exchange for being granted the exclusive distribution rights in the Territory under this Agreement, Distributor agrees that neither Distributor nor any employee or representative of Distributor shall, either directly or indirectly, handle, sell or in any way have a financial interest in the handling or sale of any medical products which compete directly or indirectly with the Products, or undertake the representation or sale of any other products or services directly associated with the health care business, unless Wright Medical agrees to the contrary in advance in writing. (Id. at ¶ 5.)
The parties also agreed to the following term and termination provision:
Unless otherwise terminated by mutual written agreement, this Agreement shall continue in effect for a period of three (3) years from the date hereof provided, however, that the confidentiality provisions of Paragraph 9 shall survive termination. This Agreement can otherwise be terminated in the following circumstances:
(E) By Distributor without cause upon ninety (90) days prior written notice to Wright Medical. Under such circumstances, however, Distributor shall use its best efforts to effectuate a smooth transition of the Distributor's business to a new Distributor and shall remain bound, in the Territory for a period of one (1) year from the date of termination, by the non-competition provisions of Paragraph 5 above regarding medical products. (Id. at ¶ 13.)
The parties further agreed that the Agreement was to be "governed and interpreted in accordance with the laws of the State of Tennessee" and that "[all disputes arising in connection with this Agreement, including the interpretation, performance or non-performance of the Agreement," would be arbitrable. (Id. at ¶¶ 14, 16.)
On the same day Wright and Somers entered into the Distributor Agreement, Wright and Somers also entered into a separate letter agreement ("the Letter Agreement") that provided, in pertinent part, as follows:
This letter agreement provides additional terms to the Distributor Agreement signed and executed on the same date as below [and] the terms of this agreement supersedes (sic.) any terms of the Distributor Agreement to the extent they are inconsistent. By the signature below, the parties agree to the following terms:
2. Wright Medical will provide you at your option, a monthly commission/draw of $33,333 per month for a period of 24 months. To the extent your calculated commission is less than that amount, Wright will provide you the difference, which difference will be considered a loan. To the extent if your calculated commission exceeds that amount, such excess shall be used to reduce your outstanding loan balance, if any. At the end of the 24 month period, and outstanding loan balance will bear simple interest at the current rate and will be payable in 24 equal installments. (Fisher Aff., Ex. B.)
Throughout 1995 and into 1996, Somers performed under the Distributor Agreement. He was paid commissions by Wright, and also began to incur debt under the Letter Agreement. In July 1996, Wright extended Somers' territory into Eastern Pennsylvania. In November 1996, Wright began deducting money from Somers' commissions to pay down his indebtedness under the Letter Agreement, which had grown to an amount in excess of $200,000. (Fisher Aff., ¶¶ 5-9; March 15, 1999 Somers Aff. ¶¶ 10-12.)
Beginning in the second half of 1996 and continuing into 1997, Somers began to inquire about a new contract with Wright. Nevertheless, the original expiration date of the three-year Distributor Agreement -- October 31, 1997 -- came and went without a new contract in place, the parties continued their relationship unchanged, and they agreed in November 1997 to reduce the amount Wright would deduct from Somers' commission each month to pay off his indebtedness under the Letter Agreement to $2,000 per month. Somers continued to serve as Wright's representative in New Jersey, Delaware and Eastern Pennsylvania while he attempted to negotiate a new contract with Wright. (March 15, 1999 Somers Aff. at ¶¶ 13-16.) In fact, Somers continued to expect Wright to protect his exclusive territories in New Jersey, Delaware and Eastern Pennsylvania, and on one occasion after November 1, 1997, asked Wright to enforce his exclusivity when he learned that another representative was selling Wright products in Delaware. (Somers N.T. at 165:6-9; 147:3 - 150:21.) Additionally, Wright expanded Somers' territory in Eastern Pennsylvania in March 1998. (Fisher Aff. at ¶ 8; Somers N.T. at 159:10 - 164:10.)
In March 1998, Somers retained counsel to represent him in his negotiations with Wright. In correspondence with Wright, Somers' counsel expressed Somers' position that the Distributor Agreement had expired by its own terms on October 31, 1997, and that Somers was continuing to represent Wright without a written contract while negotiations for a new contract proceeded. (See March 15, 1999 Somers Aff. at ¶¶ 16-18 and Ex. A.) However, Somers continued to sell Wright products and Wright continued to pay commissions based on those sales, minus $2,000 per month to reduce Somers' indebtedness under the Letter Agreement, throughout the spring and summer of 1998.
The negotiations for a new distributor agreement broke off near the end of July 1998, but in September 1998 the parties did reach an agreement regarding Somers' indebtedness under the October 17, 1994 letter agreement. By letter to Somers dated September 8, 1998, Wright's Senior Director of Sales, Mark Fisher, set forth the terms of the agreement as follows:
Per our recent discussion at the National Sales Meeting regarding the debt of 187,439.16 owed by you the following program has been put in place to support the ongoing efforts or you and your organization.
1. The current monthly deduction of 2,000 per month will be reduced to 1,000 per month for the next 24 months (August 1998 through July 2000).
2. The remaining debt of 163,439.16 will be written off by WMT in August 1998. You will have no further financial obligation regarding this issue. George, I believe this is good for all parties and I hope this demonstrates to you a true commitment to what we believe you can accomplish in the short and long term. (Fisher Aff., Ex. D.)
Somers endorsed the September 8, 1998 letter from Fisher on September 17, 1998. (See id.) Somers admits that it was his intention when he endorsed the September 8, 1998 letter to continue his relationship with Wright for the long term, and that Wright probably would not have agreed to forgive his indebtedness to them if they knew he was in ...