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Schwartz v. Diagnostix Network Alliance LLC

Court of Appeals of Tennessee, Nashville

November 17, 2014


September 17, 2014 Session

Direct Appeal from the Circuit Court for Davidson County No. 10-C-1821 Carol Soloman, Judge

Martin Douglas Holmes, Nashville, Tennessee, for the appellants, Michael L. Schwartz and M.L. Schwartz & Associates, Inc.

Kevin Clayton Baltz and David L. Johnson, Nashville, Tennessee, for the appellees, Diagnostix Network Alliance, LLC, and Clyde Spencer.

Brandon O. Gibson, J., delivered the opinion of the Court, in which J. Steven Stafford, P.J., W.S., and John W. McClarty, J., joined.



I. Background and Procedural History

Diatherix Laboratories, Inc. ("Diatherix") is a clinical laboratory headquartered in Huntsville, Alabama that provides laboratory testing for the early detection of infectious diseases through a medical test called Tem-PCR.[1] In March 2008, Diatherix granted Defendant/Appellee Diagnostix Network Alliance, LLC ("Diagnostix") the exclusive right to distribute Tem-PCR in the United States. Plaintiff/Appellant Michael L. Schwartz has worked as a healthcare consultant since 1977. Schwartz is president of M.L. Schwartz & Associates, Inc. Unless otherwise distinguished, we refer to M.L. Schwartz & Associates, Inc. and Michael L. Schwartz collectively as "Schwartz" in this opinion.

Schwartz first met with Diagnostix CEO Clyde Spencer to discuss assisting Diagnostix in the marketing and sale of Tem-PCR in September 2008. Shortly thereafter, Schwartz began contacting medical facilities in order to sell Tem-PCR. On November 28, 2008, Diagnostix entered into a written "REPRESENTATIVE AGREEMENT" with "Michael L. Schwartz dba M.L. Schwartz & Associates." The agreement provided that Schwartz would solicit orders for Tem-PCR from potential customers within an assigned territory. In return, Diagnostix would pay Schwartz a commission of two percent of all invoices for Tem-PCR within his territory. Of particular relevance to this case, Section 6 of the agreement, titled "Term and Termination of Agreement" provided:

b. The term of this Agreement (the "Term") shall commence upon the date last set forth below, and shall terminate immediately upon notice of termination by DNA or Representative. Notice of termination shall be sent via mail, fax, email or any other form which provides an acknowledgment of receipt.
c. DNA agrees that when Representative has made or exceeded his or her Quota for the Territory in the preceding fiscal year, and has sales in the current fiscal year which are consistent with his or her achievement of Quota for that time period, DNA may only terminate Representative for good cause. In all other situations, the parties agree that DNA shall have the right to terminate this Agreement with or without cause with advanced notice.
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h. Upon the termination of this Agreement, Representative shall cease acting as a sales representative for the Product and or Services in the Territory or elsewhere and agrees not to commence any action or proceeding claiming that Representative still has rights under this Agreement or otherwise. Representative waives any claim against DNA for loss or damage of any kind (including, without limitation, damages or other compensation for unjust enrichment, loss of prospective profits, reimbursements for investments or expenditures made or goodwill) arising from the expiration or termination of this Agreement. Representative acknowledges and agrees that any amounts spent by Representative in the performance of this Agreement, including, without limitation, establishment or maintenance of sales personnel, equipment or facilities, advertising or promotion costs, and travel and living costs and expenses, shall be spent and incurred with the knowledge that this Agreement may be terminated as provided in this Agreement, and thus Representative shall make no claim against DNA or DNA's contracted partners for, and DNA shall not be liable with respect to, investments and expenditures incurred by Representative in anticipation of the continuance of this Agreement.
** * *
j. This Agreement may be terminated at any time by DNA immediately upon prior notice to Representative if Representative shall be acquired by or merged with a non-affiliated third party or if ownership or control of Representative shall change by any other means. DNA reserves the right to terminate this agreement upon (30) days notice to the Representative in the event DNA or any of DNA's contracted partners shall be acquired by or merged with a non-affiliated third party or if ownership or control of DNA or any of DNA's contracted partners shall change by any other means. On termination of this Agreement, the Representative shall have no further interest in outstanding quotes, prospective orders, unfinished sales or orders not filled prior to termination.

From October 2008 to May 2009, Schwartz traveled extensively and made numerous contacts on behalf of Diagnostix and Diatherix. During that time, Schwartz and other Tem-PCR representatives made presentations and marketing pitches to VHA Southeast, Inc. ("VHASE"), an organization that provides products and services to a network of hospitals throughout the southeast. On May 1, 2009, Diatherix entered into a contract with VHASE that provided a means for VHASE member hospitals to purchase Diatherix's services though the contract did not require them to do so. Meanwhile, Diatherix had apparently received complaints from VHASE representatives about Schwartz's aggressive sales tactics. On May 18, 2009, Diagnostix CEO Dennis Grimaud sent an email to Spencer stating that Schwartz's behavior had "created a negative environment" for Diagnostix and Diatherix in providing services to VHASE and requesting that Schwartz no longer represent Diatherix effective immediately. Later that day, Spencer notified Schwartz that Diagnostix was terminating its business relationship with Schwartz in accordance with Section 6.b. The parties do not dispute that Schwartz's efforts did not lead to any sales of Tem-PCR prior to termination of the agreement.

On May 18, 2010, Schwartz filed a complaint in the Davidson County Circuit Court, naming Diagnostix and Spencer as defendants.[2] Schwartz alleged that Spencer conspired with Grimaud to create Diagnostix in order to insulate Diatherix from the claims of independent representatives who marketed and solicited sales for Tem-PCR. Schwartz alleged that Diagnostix terminated the agreement in bad faith in order to reap the benefits of Schwartz's work while depriving him of commissions on future Tem-PCR sales. Schwartz alleged that, in terminating the agreement, Diagnostix breached both the express terms of the agreement as well as its implied obligation to perform in good faith. Schwartz also asserted a claim of fraud and misrepresentation against the defendants.[3] Schwartz alleged that Spencer was vicariously liable for the actions of Diagnostix and requested an award of actual and punitive damages to be determined by a jury.

The defendants responded by filing a motion to dismiss for failure to state a claim, which the trial court granted in part after a hearing. The court found that because the clear language of the agreement permitted Diagnostix to terminate the agreement at any time, Schwartz could not maintain a cause of action based on its express terms. Though the court dismissed Schwartz's breach of contract claim based on the express terms, it found that Schwartz sufficiently alleged breach based on Diagnostix's obligation to exercise good faith in terminating the contract. Accordingly, the court found that the good faith claim survived a motion to dismiss as to both Diagnostix and Spencer.[4] Finally, the court dismissed Schwartz's fraud and misrepresentation claim, finding that it failed to meet the specificity requirements of Tennessee Rules of Civil Procedure 9.02.

On July 27, 2011, the defendants filed a motion for summary judgment contending they were entitled to judgment as a matter of law because the undisputed facts established that Diagnostix terminated the agreement in good faith. Specifically, they presented evidence to show that potential Tem-PCR customers complained about Schwartz's sales tactics on numerous occasions. The defendants also asserted that because Schwartz's efforts did not result in any Tem-PCR sales, Diagnostix had no motivation to terminate Schwartz to avoid paying him commissions. As further proof of good faith, the defendants pointed out that although it was not required to do so under the agreement, Diagnostix offered to pay Schwartz a commission on sales made within ninety days of his termination if Schwartz would help facilitate a smooth transition with existing contacts. Finally, the defendants argued that the court should dismiss Schwartz's corporate veil-piercing claims against Spencer in his individual capacity because undisputed facts established that Diagnostix followed appropriate corporate formalities.

Schwartz filed a response to the defendants' motion, arguing that disputed material facts precluded summary judgment and presenting two new theories of recovery developed during the discovery period. Schwartz reiterated his original theory that Diagnostix breached a duty of good faith in terminating the agreement to avoid paying commissions but added that Diagnostix also breached a duty of good faith because it failed to provide an adequate sales force to follow up on leads Schwartz generated. Schwartz also alleged that Diagnostix breached a separate verbal ...

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