The Franchise Memorandum

The Seventh Circuit Court of Appeals recently affirmed a district court’s dismissal of two claims brought by distributors against the medical-device manufacturer Zimmer Biomet. It also affirmed a jury verdict in favor of the distributors on their breach of contract claim under Indiana law. Hess v. Biomet, Inc., 105 F.4th 912 (7th Cir. 2024). In the early 1980s, Biomet, one of the largest medical-device manufacturers in the world, entered into identical distributorship agreements with six distributors. The agreements enrolled the distributors in a generous “long-term commission program” to receive a specified fraction of “gross sales made within the subject distributorship” after their retirement. When the distributors retired, Biomet (which had grown significantly and merged with its main competitor, Zimmer) began paying the distributors commissions on its sales of reconstructive products, but not on other product lines it had obtained through expansion and the acquisition of other companies.

The distributors brought a complaint alleging, among other things, that Biomet breached the agreements by paying commissions on only certain types of products rather than “all Biomet products sold in the distributor’s respective territories” (Count I); that Biomet violated the agreement by rebranding products (Count II); and that Biomet refused to honor its obligation to pay commissions on all products sold by Biomet or Zimmer Biomet in the distributors’ former territories” (Count III). The district court (1) dismissed Counts II and III because they had no contractual basis and were otherwise duplicative of Count I; (2) denied the parties’ cross motions for summary judgment regarding which categories of products were subject to the agreement; and (3) denied Biomet’s motion for judgment as a matter of law (at trial) regarding the insufficiency of the evidence supporting a broad application of the agreement to all other types of products. At trial the jury delivered a split verdict and found that sports-medicine and trauma products, additional products sold by the distributors during their careers, also fell “within the subject distributorship” at the distributors’ retirement, but other products did not. Both parties appealed. 

On appeal, Biomet argued that the agreements limited the commissions to reconstructive devices, the primary category of products sold by the distributors prior to their retirement. Conversely, the distributors argued that the agreements covered all products sold by Biomet and its subsidiaries. The Seventh Circuit determined that both parties were mistaken and held that the jury acted rationally in deciding that the distributors were entitled to additional commissions on Biomet’s sales of trauma and sports-medicine products, but not others. There was sufficient evidence in the record to conclude that Biomet intended the agreements to cover all categories of products “within the subject distributorship,” regardless of subsidiary status, and sufficient evidence to determine that trauma and sports-medicine products also fell within the subject distributorship.