Victory!, Part II.

Background

My client, A Company ("A Co."), "provides physical and occupational therapy to patients. During the course of treatment, therapists can recommend to patients that they obtain durable medical equipment, such as wheelchairs, walkers, canes, crutches, braces, and hospital beds. For insurance purposes, often patients will first obtain a prescription from their physician before ordering the needed durable medical equipment from a vendor.

"In August 2002, [A Co.'s] vice president, C, entered into a written “Exclusive Referral” agreement with P, president of S Inc., promising 'to refer all durable medical equipment prescriptions' to S Inc. (hereafter, the A Co.-S Inc. Agreement). A Co. did not receive a fee for this exclusive arrangement. C testified it would have been illegal to have received a kickback from any medical equipment referrals.

"Within two years, S Inc. hired a broker to find a buyer for the exclusive referral arrangement. In February 2004, M Corp., a pharmacy and home medical equipment company, expressed an interest in making a deal. After meetings and telephone calls with the broker, C and P, regarding the quantity and types of referrals, M Corp. agreed to purchase the exclusive referral arrangement...

"M Corp. executed two agreements on the same day. The first was with C, on behalf of A Co., and the second was with P, on behalf of S Inc. Both contracts contained provisions expressly integrating the prior A Co.-S Inc. agreement’s terms, stating the documents constituted 'the complete and exclusive statement of the [a]greement between the [p]arties[.]'

"M Corp.’s agreement with A Co. (hereafter, referred to as the Exclusive Referral Agreement) stated A Co. agreed 'to refer all durable medical equipment prescriptions to M Corp. for a term of five years. In the document, A Co. was called either the 'physical therapy/referral company' or 'Seller.' M Corp. was either the 'Buyer' or 'exclusive referral recipient.' There was no provision stating A Co. would be paid a fee in exchange for the exclusive referral rights. Moreover, M Corp. did not promise to actually fill the prescriptions referred.

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"The parties agreed the agreement could be terminated for good cause by giving three weeks written notice.

"The second agreement stated M Corp. (buyer) had agreed to pay S Inc. (seller) 'for the sixty (60) month Avalon . . . Exclusive Referral Agreement from S Inc. ...' This contract (hereafter, referred to as the Purchase Agreement) provided, 'Seller represents that . . . S Inc. is not an affiliate, subsidiary or under contract with A Co. excepting the [A Co.-S Inc.] agreement.' ... The payee on checks written for the purchase was S Inc.

"Thereafter, A Co. failed to refer any medical equipment prescriptions to M Inc., prompting it to file a lawsuit against [A Co., C, S Inc., and P]. It alleged two claims for breach of contract as well as a fraud cause of action. The first cause of action alleged that in February 2004, A Co. executed and breached its Exclusive Referral Agreement by referring prescriptions to other businesses.

"The second claim for breach of contract alleged that in February 2004, S Inc. breached the Purchase Agreement by failing to facilitate the transfer of referrals from A Co., and instead A Co. referred those prescriptions to other businesses. It was alleged S Inc. 'promised to deliver and facilitate to plaintiff the exclusive referrals of all durable medical equipment prescriptions from A Co. pursuant to an A Co.-S Inc. agreement' executed on August 20, 2002.

After trial, the fact-finder rejected all claims for fraud against my clients A Co. and C, but found them liable for $75,000.

Briefs

Here are salient parts of my briefing to the appellate court:

"Although S Inc. did not sue Appellants A Co. and C for breach of the 2002 Exclusive Referral Agreement [ ], had S Inc. sought to enforce this agreement, it would have been unsuccessful due to lack of consideration. [footnote omitted].

"The reason is S Inc. was bound to do nothing. At best, the 'agreement' was merely a one-way proposition. A Co. 'agree[d] to refer all durable medical equipment prescriptions to S Inc.' ... However, S Inc. did not even agree to fill such prescriptions, provide any compensation to A Co., [fn: A Co. believes that any such payment would have been a violation of federal law] or do anything of substance.

"Upon closer examination, A Co. was likewise bound to refer no level of durable medical equipment prescriptions. In other words, it could have fully complied with the terms of the 'agreement' even if it referred exactly zero prescriptions to S Inc. ...

A. No Valid Consideration Existed for the 2004 Exclusive Referral Agreement

"Notably, the two 'referral agreements' paralleled each other in the operative language. The 2004 referral agreement likewise stated: “A Co. agrees to refer all durable medical equipment prescriptions to M Corp….”

"Significantly, nothing in the Agreement bound M Corp. to do anything in return. Both parties could have fully complied with its terms by doing nothing. M Corp. promised nothing to A Co., such as filling any such referrals or paying any compensation, and Avalon promised no set amount of referrals to M Corp.... M Corp.'s President conceded he had no evidence of any referrals going to any competitors of M Corp. (citation omitted.)

"Further, regardless of whether there was consideration, the trial court found that M Corp. failed to show any lost profits for any failure to refer prescriptions to it. (citation omitted.) In so doing, the court found that the purported lost profits were speculative. (citation omitted.) This is another way of saying that it was pure conjecture that M Corp. would fill any such prescriptions, for the same reason, that it was pure conjecture that there would be any referrals of prescriptions by A Co. to M Corp.

"Finally, since Appellant C was not a party or signatory to the 2004 agreement (or any written agreement in this case), it necessarily follows that there was no consideration flowing to him from any such agreement."

B. Neither Referral Agreement Can Be Enforced Without Consideration

"Since there was no consideration for either agreement, Appellants submit neither can be enforced. Appellants are unaware of any legal theory under which they could be enforced, even if M Corp. were to seek to enforce them. As noted above..., M Corp. sued neither Appellant under the 2002 Referral Agreement (which was between S Inc. and Appellants only), and M Corp. sued only A Co. under the 2004 Referral Agreement. However, it was not the 2004 Agreement under which the trial awarded any damages, but the separate purchase agreement (citation omitted), on which neither Appellant was sued."

I closed one of my briefs by quoting part of my closing argument at the trial: "Not one dime has gone to C [or A Co.]. C [and A Co.] [are] victims in this affair. [They've] not receiv[ed] anything, except this lawsuit." See if the Court of Appeal picked up this theme later.

Bottom-Line

Here's what the appellate court ruled, in pertinent part:

"A Co.'s subsequent exclusive referral agreement with M Corp. was illusory and nonenforceable. Under the terms of the agreement, A Co. was not to receive any consideration for its promise to refer its patients’ durable medical equipment prescriptions. ...

"Moreover, under the terms of both Exclusive Referral Agreements, neither M Corp. nor S Inc. was legally obligated to fill any specific quantity of prescriptions referred by A Co. Absent from the agreements is any language indicating best efforts or good faith would be used with regard to filling the prescriptions. Indeed, nothing in the agreement bound Medical Nutritionals to do anything in return for the referrals. Likely, this is because the parties understood filling a patient’s prescription benefited the patient, not his or her physical therapist from A Co. A Co.'s clients certainly were under no obligation to seek A Co.’s assistance in obtaining medical equipment prescribed by their treating physicians.

"It is well settled sufficient consideration is an essential element of any contract. (Civ. Code, § 1550.) As stated long ago in Scott v. Cline Electric Mfg. Co. (1930) 104 Cal.App. 122, 125-126, 'A promise is a good consideration for a promise, provided always that it imposes some legal liability on the person making it. If it imposes none, then it cannot be a good consideration. A promise may be too vague and uncertain to amount to a consideration for a promise made by the other party.’ [Citation.] [¶] ‘A purported contract between a cement manufacturer and a cement dealer, whereby the dealer, in consideration that he would give the manufacturer’s brand the preference in his sales and 'push' the same, was to have a lower rate per barrel than other dealers, was void for lack of mutuality, since the dealer did not bind himself to make any sales of cement.’ [Citation.]' Similarly, here, the Exclusive Referral Agreement with A Co. was unenforceable because neither party was bound to perform.

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"Alternatively, M Corp. argues the Exclusive Referral Agreement is enforceable because it is tied to the $75,000 Purchase Agreement. It fails to appreciate that if the two agreements are treated as one, the $75,000 will serve as consideration and render the entire scheme illegal under anti-kickback laws.

"We recognize an innocent buyer of property under an illegal contract of sale can recover the consideration paid to the seller. However, in this case, it was undisputed only S Inc. received the sale proceeds. No evidence was produced that proved A Co. received a single dime. [fn. omitted.] Recovery against S Inc. (and its principal) is not feasible because they were dismissed for a waiver of costs at the beginning of trial. We find no legal basis to hold A Co. must return funds it never received.

[ ] It cannot be assumed that just because A Co. may have helped S Inc. with its efforts to broker the deal, A Co. necessarily received some of the sale proceeds. The court rejected the conspiracy and fraud claims, and C testified neither he nor A Co. received anything from the transaction."

Good day at the office.