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Linder v. Inhalation Therapy Services Inc.

filed: November 19, 1987.


Appeal from the United States District Court for the Eastern District of Pennsylvania, No. 85-6486.

Seitz, Greenberg, and Rosenn, Circuit Judges.

Author: Rosenn


ROSENN, Circuit Judge.

This appeal requires us to interpret a written sales representation agreement between the plaintiff-appellee, Peter S. Linder, and Respiratory Care Services (RCS). RCS subsequently merged with Inhalation Therapy Services, Inc. (ITS), the defendant-appellant in this litigation. After a trial in the United States District Court for the Eastern District of Pennsylvania, a jury awarded plaintiff commissions of $104,224.40. The defendant appeals, contending that the district court erred in failing to direct a verdict in its favor. We reverse.


In December 1983, Linder and Roy Hathcock, president of RCS, engaged in a series of negotiations that culminated in the execution of a sales representation agreement granting Linder the exclusive right to solicit respiratory service contracts on behalf of RCS in the Northeastern United States.*fn1 The agreement entitled Linder to a commission of either five or eight percent of the gross revenues of contracts he obtained on behalf of RCS. In the event a contract obtained by Linder was renewed, the agreement entitled him to a commission of 2.5 % of the renewal revenues. The agreement further provided that upon execution of a contract, plaintiff was to be paid fifty percent of the total commission due on revenues received over the first year of the contract term. The balance of a commission was to be paid on a monthly basis over the remaining contract term.

During the course of the negotiations, Hathcock disclosed his intention to sell RCS. Noting the possible effect of a subsequent sale, the parties agreed to a provision that entitled Linder to commissions on contracts whose terms might extend beyond the duration of the agreement. In essence, section 5.7 of the contract ensured that a purchaser of RCS could not deprive Linder of a commission's unpaid balance simply by terminating the agreement. Linder additionally disclosed the existence of Hospital Purchasing Service (HPS), a group purchasing organization consisting of one hundred ten hospitals throughout Pennsylvania. He observed that the establishment of a business relationship with HPS would inevitably lead to individual contracts with its constituents. The impact of RCS' sale on nascent HPS contracts induced the parties to execute a provision entitling Linder to commissions on contracts obtained by RCS after the term of the principal agreement. The parties envisioned that plaintiff's initial contacts with HPS possibly would result in RCS' procurement of contracts after the agreement was terminated by a subsequent purchaser. Section 5.8 therefore guaranteed Linder's right to post-termination commissions resulting from his sales activities. Shortly thereafter, the parties expanded the agreement to encompass MAGNET, an association of group purchasing organizations representing some five hundred and fifty hospitals. The language and intention of section 5.8 was embodied in section 5.9 of the amendatory agreement, which entitled Linder to a commission on "any contract obtained by RCS after the term of this Agreement from . . . any hospital or organization participating in MAGNET."*fn2

From January to April 1984, Linder performed in accordance with the agreement but obtained no contracts on behalf of RCS. In April 1984, Hathcock informed the plaintiff that RCS had been sold to its one time competitor, ITS. At Hathcock's insistence, Linder went to Lexington, Massachusetts to meet with ITS' chief operating officer, Reid Baddeley, and its vice president for sales and marketing, Jack Donahue. During the course of three meetings over a two day period, Linder reviewed the details of the RCS agreement, especially as it pertained to MAGNET. After commenting that ITS was "weak in the northeast," Donahue instructed Linder to constitute his solicitation of MAGNET participants, this time on behalf of ITS. For the next twelve months, Linder contacted a number of the seven group purchasing organizations that comprised MAGNET, but failed to obtain a contract on behalf of ITS.*fn3 During that period, Linder continually apprised Donahue of his progress and requested an accounting documenting any new or pre-existing ITS contracts with MAGNET affiliates. Donahue failed to respond to Linder's requests, and on April 16, 1985, Baddeley terminated the agreement pursuant to paragraph ten of the contract.

Linder instituted suit to recover commissions on eleven contracts obtained by ITS with MAGNET hospitals between December 1983, and May 1985. On Linder's motion for summary judgment prior to trial, the district court held that ITS had assumed the RCS agreement with Linder as a matter of law. At the conclusion of trial, ITS moved for a directed verdict, contending that section 5.9 prohibited consideration of the ten contracts obtained by ITS before the agreement's termination, and that Linder had introduced no evidence establishing that his activities resulted in the procurement of the single contract obtained after his dismissal. The district court denied the motion and submitted evidence of all eleven contracts to the jury.



Initially, we are required to ascertain whether Pennsylvania law applies to this diversity action. The defendant contends that because both the principal and amendatory agreements were negotiated in Jackson, Mississippi, the law of Mississippi determines the validity of the contract.*fn4 Assuming Mississippi law applies, ITS argues that the amendatory agreement must fail for lack of consideration. See Krebs v. Strange, 419 So. 2d 178 (Miss. 1982).

A federal court sitting in a diversity action applies the choice of law rules of the state in which it sits. Klaxon Co. v. Stentor Elevator Mfg. Co., 313 U.S. 487, 85 L. Ed. 1477, 61 S. Ct. 1020 (1941). Pennsylvania law directs us to consider the extent "to which one state rather than another has demonstrated, by reason of its policies and their connection and relevance to the matter in dispute, a priority of interest in the application of its rule of law." Myers v. Commercial Union Assurance Companies, 506 Pa. 492, 496, 485 A.2d 1113, 1116 (1984), quoting McSwain v. McSwain, 420 Pa. 86, 94, 215 A.2d 677, 682 (1964). Amplifying its adherence to interest analysis, the ...

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