Hennepin Healthcare System, Inc. v. Freedom Medical, Inc.

Background

Hennepin Healthcare System, Inc., doing business as Hennepin County Medical Center (HCMC), contracted with Freedom Medical, Inc. for specialty medical beds. HCMC alleged that the beds were defective and notified Freedom Medical in March 2018 that it was terminating the agreement in 60 days. Freedom Medical responded that early termination would place HCMC in default and later invoiced HCMC $601,336.12—the difference between the group-purchasing price and the lower price HCMC had received under its separate rental agreement.

The dispute involved two agreements. The first was a group-purchasing agreement between Freedom Medical and Novation, now known as Vizient. It required Freedom Medical to provide discounted equipment to Vizient’s customers, including HCMC. The second was an Equipment Rental Agreement and two addenda between Freedom Medical and HCMC, which gave HCMC an even greater discount.

HCMC sought a declaration under Minnesota Statutes Chapter 55 that it could terminate the agreement without a penalty and also claimed that Freedom Medical breached the contract by failing to repair the mattresses and by sending the invoice. Freedom Medical counterclaimed for breach of contract and breach of the implied duty of good faith and fair dealing.

Contract provisions and the parties’ positions

The group-purchasing agreement stated that a member entering into an agreement for enhanced pricing could terminate any “existing” contract with the supplier without penalty. HCMC argued that this provision allowed it to terminate the rental agreement without consequences. Freedom Medical argued that the provision referred only to contracts that existed before Freedom Medical became a preferred Vizient supplier, not to the later agreement with HCMC.

The rental agreement’s default provision stated that if the customer canceled before the expiration date or used another provider as its primary vendor, Freedom Medical could charge the customer its list price or the applicable group-purchasing list price. HCMC argued that this allowed only a forward-looking price change. Freedom Medical argued that it allowed the retroactive charge reflected in the invoice.

Court’s analysis

The court held that the group-purchasing agreement’s Section 10 was unambiguous. In the court’s view, it allowed a member to cancel a pre-existing supplier contract when the supplier became a preferred Vizient supplier and the member then took advantage of the new pricing. It did not authorize HCMC to terminate the rental agreement without consequences.

The court found the rental agreement’s Section 7 ambiguous—meaning reasonably open to more than one interpretation—because it did not specify that Freedom Medical could impose a retroactive penalty for early termination. Whether the provision allowed the invoice’s charge therefore presented a factual question for a jury. Because both parties’ breach-of-contract claims depended on interpreting that provision, summary judgment was not appropriate on those claims.

The court also denied judgment on Freedom Medical’s good-faith-and-fair-dealing counterclaim. That claim concerned HCMC’s alleged refusal to cooperate in investigating or repairing the mattresses and other conduct related to the allegedly defective equipment. The court found multiple factual disputes concerning that claim.

The court’s footnote stated that there appeared to be no disagreement that HCMC could withdraw from the rental agreement before its term ended; the dispute concerned the consequences of doing so. For that reason, the court said HCMC’s request for a declaration that it was entitled to terminate the agreement was moot.

Disposition

The court ordered that HCMC’s motion for partial summary judgment was denied and Freedom Medical’s motion for partial summary judgment was denied. The court did not enter judgment for either party on the disputed contract or good-faith issues.