RIJ PHARMACEUTICAL CORP. v. Ivax Pharmaceuticals, Inc.

Citations: 322 F. Supp. 2d 406; 54 U.C.C. Rep. Serv. 2d (West) 130; 2004 U.S. Dist. LEXIS 11569; 2004 WL 1435531Docket: 02 CIV.4301 CM

Court: District Court, S.D. New York; June 14, 2004; Federal District Court

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RIJ Pharmaceutical Corp. filed a complaint against Ivax Pharmaceuticals, Inc. for breach of contract related to the sale of goods, while Ivax counterclaimed for similar allegations. Both parties submitted motions: Ivax sought partial summary judgment on its counterclaims and partial dismissal of RIJ's claims, while RIJ sought summary judgment on all its claims and dismissal of Ivax's counterclaims. The court, presided over by District Judge McMahon, denied in part Ivax's motion and granted it in part, while denying RIJ's motion entirely.

RIJ specializes in manufacturing over-the-counter generic pharmaceuticals for private labels and has worked with Ivax since 1986, producing various products under Ivax's trade names based on individual purchase orders without a formal contract. In September 2000, Ivax conducted an audit of RIJ's facilities, revealing significant deficiencies, including bacterial contamination, which were reported to RIJ. 

RIJ's complaint, filed on June 1, 2002, claims compensation for unpaid product deliveries, inventory maintained for future orders, and canceled product orders. The complaint references a series of purchase orders from October 2000, totaling $112,533.76, primarily for Genfiber Powder, with smaller amounts for Losopan. RIJ fulfilled these orders and invoiced Ivax for payment upon delivery.

In late 2000, Ivax increased its orders of Genfiber beyond the typical monthly shipments of approximately 40,000 regular and 15,000 orange-flavored bottles. RIJ claims that to avoid inventory shortages, they agreed that RIJ would manufacture and hold one month of Genfiber, based on a supposed written agreement between RIJ’s sales representative from Bi-Costal Pharmaceutical Corp. and Ivax. However, RIJ has not produced this agreement. RIJ asserts it incurred $100,710 in costs on materials specifically for Ivax. Contrarily, Bi-Costal's representative, Brett Barczak, mentioned an existing "floor stock" program from 1997, requiring RIJ to maintain one month of inventory for all products and three months for key products, but this was never documented. Barczak noted that there was no agreement about leftover inventory if the relationship ended and stated that typically, a customer would purchase unsold inventory, which should be documented in a purchase order. Ivax denies requesting RIJ to maintain additional inventory and claims that no written agreement exists.

Additionally, RIJ accuses Ivax of canceling seven product orders worth $80,411.44, with three orders canceled via fax by Ivax representative Sandra Darling on January 18, 2001. Dr. Gupta confirmed these cancellations. The remaining orders were canceled when Ivax terminated their relationship on May 8, 2001. Gupta testified that RIJ made no claims for the January 18 canceled orders as they could sell the products to other customers. The total for the three canceled orders is $24,098.32, and Gupta confirmed that all products RIJ manufactures can be sold to any customer with similar distribution needs.

Gupta testified that he believed many products manufactured for Ivax's canceled orders were sold to other customers, with RIJ unable to sell only slow-moving items. RIJ maintained records detailing sales, inventory, and expired products. Ivax requested sales documentation from RIJ, which went unanswered. RIJ is seeking damages for unpaid costs of Genfiber and Losopan products, a month's inventory of Genfiber, and costs related to canceled purchase orders. 

In response, Ivax filed a counterclaim on August 16, 2002, alleging breach of implied and express warranties due to defective products received from RIJ, costs associated with product recalls, and consequential damages. A complaint from a hospital pharmacist regarding an unusual smell in Genaton antacid led to testing that revealed bacterial contamination, similar to findings from a previous audit of RIJ. Following this and other complaints, Ivax suspended orders for liquid pharmaceuticals from RIJ. Dr. Gupta sent a recall notice for contaminated Genaton lots on March 26, 2001, instructing Ivax to notify customers and arrange product returns. Ivax subsequently recalled the products as directed. Between September 2000 and March 2001, RIJ delivered over $74,000 worth of various pharmaceutical products to Ivax, which are regulated by the FDA and other agencies to ensure consumer safety.

The Food, Drug, and Cosmetic Act (FDCA) prohibits the introduction or delivery of adulterated or misbranded food, drugs, devices, or cosmetics into interstate commerce (21 U.S.C.A. 331(a)). A drug or device is considered misbranded unless its labels include the established names of all inactive ingredients in alphabetical order on the outside container, unless exempted under specific conditions (21 U.S.C. 352(e)(1)(A)(iii). The FDA established standardized content requirements for over-the-counter (OTC) drug labeling effective April 17, 2001.

RIJ Pharmaceutical Corporation executed guarantees in favor of Ivax on September 1, 1988, and June 3, 1992, assuring that all drugs shipped would not be adulterated or misbranded under the FDCA. A Continuing Guarantee executed on March 11, 1997, included provisions for third-party liability and compliance with applicable laws and regulations.

On April 4, 2001, Ivax sought a Return Goods Authorization for shipments valued at $74,506 due to labeling non-compliance with federal law, which RIJ refused based on its policy against accepting returns of private label merchandise. On May 9, 2001, Ivax terminated its business relationship with RIJ, citing audit findings, regulatory compliance issues, quality concerns, recalls, and consumer complaints.

As of May 2, 2003, RIJ filed for summary judgment seeking $112,553.76 and dismissal of Ivax's counterclaims for return of goods and consequential damages. Ivax sought dismissal of RIJ's claims related to excess inventory and a portion of payment for canceled orders, while also pursuing reimbursement for recall expenses.

Summary judgment may be granted only when there is no genuine issue of material fact and the moving party is entitled to judgment as a matter of law, as outlined in Fed. R.Civ. P. 56(c) and clarified by Celotex Corp. v. Catrett. In New York, a breach of contract claim requires proof of: (i) a contract's existence, (ii) a breach by the other party, and (iii) damages resulting from the breach, as established in First Investors Corp. v. Liberty Mut. Ins. Corp. Summary judgment is appropriate in breach of contract cases when the contract language is clear and unambiguous, with no room for reasonable differing interpretations, per Fulton Cogeneration Assoc. v. Niagara Mohawk Power Corp. Contract language is deemed unambiguous if it has a definite meaning without potential for misunderstanding, as stated in Hunt Ltd. v. Lifschultz Fast Freight, Inc.

In the case at hand, Ivax requested to return $74,506 worth of pharmaceuticals due to alleged labeling non-compliance with federal laws and FDA regulations. RIJ argues against Ivax's counterclaim, asserting the goods were not defective and that Ivax failed to reject them in a reasonable time frame. Ivax counters that the products were indeed defective due to specific labeling deficiencies and maintains that industry standards dictate compliance with new FDA regulations upon their publication. The existence of such an industry standard is a material factual issue, preventing summary judgment for RIJ. Additionally, the timeliness of Ivax's rejection or revocation of acceptance regarding the goods is also a factual matter, governed by the New York Uniform Commercial Code, which allows buyers a reasonable time to inspect and reject non-conforming goods and possibly revoke acceptance based on substantial impairment of value. The definition of "reasonable time" is flexible, considering the nature and circumstances of the transaction.

In First Security Mortgage Co. v. Goldmark Plastics Compounds, the court addresses the issue of whether a three-month delay by Ivax in rejecting allegedly non-conforming products was reasonable. RIJ argues the delay is unreasonable, while Ivax claims it was due to business size and inspection challenges. The Second Circuit indicates that exceptional circumstances warranting judicial determination of "reasonable time" exist when a buyer with knowledge of defects continues to use the product or makes payments for over six months before attempting rejection. However, the court finds Ivax's delay does not meet the threshold for inexcusable delay, making the timeliness of rejection a jury question.

Ivax's claim against RIJ for breach of warranty is also discussed, focusing on RIJ’s alleged shipment of mislabeled products. The court notes that RIJ cannot be held to express guarantees regarding labeling, as regulations effective after shipment do not apply retroactively. Nonetheless, RIJ is not entitled to summary judgment on Ivax's breach of warranty counterclaim because RIJ's products did not list inactive ingredients, violating Section 21 U.S.C. 352(e).

Regarding consequential damages, RIJ seeks dismissal of Ivax's counterclaim, arguing the damages are speculative. Under New York's U.C.C., consequential damages can include losses the seller had reason to know about at the time of contracting. Ivax claims damages for lost profits while seeking alternative suppliers, and losses in market share for specific products due to RIJ's breach. The law permits recovery of consequential damages, including loss of goodwill and future profits, especially for resellers. However, any lost profits must not be based on speculation, necessitating a clear basis for calculations in claims.

A plaintiff claiming lost profits due to a breach of warranty must satisfy specific criteria: they must show that the damages were caused by the breach and that the loss is provable with reasonable certainty, avoiding speculative claims. Damages must be directly traceable to the breach and within the parties' contemplation at the contract's inception. In evaluating Ivax's case, it was determined that there is sufficient evidence for a trier of fact to infer that Ivax suffered lost profits and loss of market share for certain products due to RIJ's breach. Although based primarily on past market conditions, such claims are valid under New York law, as demonstrated in relevant case law. Dr. Gupta acknowledged that RIJ should have been aware of potential consequential damages under UCC § 2-715. However, Ivax failed to definitively establish how much of its market loss was attributable to RIJ's breach, with its own evidence suggesting multiple factors could have influenced the decreased demand for its products. As a result, Ivax's lost profits claim is confined to existing orders rather than potential future orders, as no ongoing sales agreement was established beyond those specified in current purchase orders.

Ivax is seeking summary judgment for reimbursement of $45,394 in expenses related to the Genaton recall. RIJ contends that the recall was conducted at the retail level, which they argue was excessive; however, RIJ has agreed to cover the recall expenses, negating any claims of failure to mitigate. A letter from Dr. Gupta indicates that he directed the retail-level recall, not Ivax, thus Ivax is entitled to the requested reimbursement. 

Regarding RIJ's affirmative claim for $112,533.76 for goods sold and delivered but unpaid, RIJ claims $98,567.68 for Genfiber and $13,966.09 for Losopan. The Losopan shipments were deemed non-conforming by Ivax, and RIJ’s rejection of these shipments was appropriate. However, whether the shipments were non-conforming remains a factual question, leading to the denial of RIJ’s summary judgment for that portion. Ivax concedes liability for the Genfiber shipments, but requests postponement of any judgment on this claim due to potential offsets from its counterclaims. The court agrees that the claims are interrelated and denies RIJ's request for immediate judgment on the Genfiber claim.

Ivax also seeks to dismiss RIJ's claim that it is obligated to purchase surplus inventory under an alleged agreement. The court denies this motion, citing Section 2-201(1) of the New York Uniform Commercial Code, which stipulates that a written contract is required for sales over $500, including a signature and specification of quantity.

A writing does not need to include all material terms but must provide a basis for believing that any oral evidence relates to a real transaction. The adequacy of such writing for statute of frauds purposes is assessed solely from the documents themselves. An exception exists for goods specially manufactured for a buyer that are unsuitable for sale to others in the ordinary course of the seller's business. This unsuitability must be based on the characteristics of the special manufacture, not on factors like lost market opportunities.

In this case, RIJ claims an agreement with Ivax to manufacture and hold inventory of Genfiber, which Ivax disputes. RIJ asserts that the production cost exceeded the $500 threshold for the Statute of Frauds but has failed to provide documentary evidence during discovery. RIJ claims that the excess inventory was specially manufactured for Ivax, yet it has not demonstrated that the raw materials used for Genfiber were unsuitable for sale to others. Testimony indicated that some raw materials had already been sold to others, contradicting the special manufacturing claim.

The only remaining question is whether the silk-screened bottles can be considered specially manufactured. Ivax argues that these bottles were not specially manufactured, citing a case where packages printed with a client's logo were found not to constitute specially manufactured goods. However, the current case differs as testimony suggests that the silk-screened bottles were integral to the agreement, with Ivax specifically contracting for them. The necessity for an inventory agreement arose from the long lead time required for Genfiber orders, with a significant portion of that time attributed to the silk-screening process. If a "floor stock" agreement existed, it likely included the silk-screened bottles as a key component. New York law further supports this interpretation, as demonstrated in a precedent involving specially packaged goods for retailers.

The court determined that the defendants' contract for specially manufactured goods, including fully assembled products with bottles and labels, does not fall under the Statute of Frauds. The case of Meyer Bros. was cited to support the conclusion that the Genfiber bottles and labels are specially manufactured goods, allowing Ivax to present parol evidence of the "floor stock" agreement at trial. 

Regarding RIJ's claim for reimbursement of cancelled purchase orders, RIJ has abandoned claims for three orders totaling $24,098.32, which are dismissed. For the remaining four cancelled orders, RIJ failed to produce records that would support its claims despite Ivax's requests. Dr. Gupta's testimony indicated that some goods were sold, implying that RIJ likely mitigated its damages by reselling those products. The court infers that RIJ's failure to provide the records suggests they would indicate successful sales, which could negate its claims for damages. RIJ has been given 10 days to produce the requested records, or its claims for the cancelled orders will be dismissed.

The court denied RIJ's motion for summary judgment entirely and denied Ivax's motion regarding RIJ's claims for excess inventory and cancelled orders. However, Ivax's motion for summary judgment was granted for recall expenses amounting to $45,394. This constitutes the court's decision and order.

RIJ reports receiving approximately seven complaints regarding Genfiber powder. A wholesale-level recall entails returning all products from distributors and wholesalers, while a retail-level recall includes products with wholesalers, distributors, and retailers. Upon recall, Ivax must notify all buyers of the non-compliant product, arrange returns, and offer replacements, refunds, or credits. Specific purchase orders detail quantities and costs of various products purchased on specific dates. RIJ has not responded to Ivax's claim regarding improper listing of inactive ingredients on labels as required by 21 U.S.C. § 352(e). Dr. Gupta stated that Ivax had promised to provide new label graphics but failed to do so, while Ivax claims RIJ was responsible for label revisions. Disputed facts prevent a ruling on whether Ivax accepted the nonconforming labels. RIJ argues Ivax had notice of label issues upon receipt of goods, suggesting a lack of due diligence on Ivax's part. However, the court cannot conclude that Ivax's defect detection procedures were inadequate. Ivax also argues that RIJ has not substantiated claims for $42,991.33 in damages, despite inconsistencies in the invoices. This issue will be addressed at trial.