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Kreisler Drug Co., Inc. v. Missouri CVS Pharmacy, LLC

United States District Court, W.D. Missouri, Western Division

October 4, 2016

MISSOURI CVS PHARMACY, LLC, Defendant/Counter-Plaintiff/ Third-Party Plaintiff,


          John T. Maughmer United States Magistrate Judge

         In 2012, Missouri CVS Pharmacy, LLC (“CVS”), which owns and operates a chain of pharmacies, entered into an agreement to purchase the assets and prescription files of three independent pharmacies located in Clinton, Missouri. The three pharmacies were operated by Kreisler Drug Co., Inc., Kreisler Drug No. 3, and Kreisler Clinic Pharmacy, Inc. (collectively “Kreisler”). Following the execution of an Asset Purchase and Sale Agreement (“APSA”), several disputes arose between the parties with Kreisler alleging that it is still owed substantial monies under the terms of the APSA and CVS countering that Kreisler had breached the APSA (in particular, in conjunction with the circumstances surrounding the opening of a new independent pharmacy in Clinton by Ryan Summers in 2013).

         In 2014, Kreisler instituted an action against CVS in the Circuit Court of Henry County asserting that CVS still owed Kreisler a payment of $100, 000 under the terms of the APSA. CVS subsequently removed the case to this Court and filed a Counterclaim/Third-Party Petition against Kreisler, James Naber, Samuel Kernohan, David Hubble, Ryan Summers, and Summers Pharmacy Inc. alleging: (1) breach of the APSA by Kreisler, (2) breach of a guaranty against Naber, Kernohan, and Hubble (the individual shareholders of Kreisler), (3) unjust enrichment against Kreisler, (4) breach of the ASPA against Naber, (5) misappropriation of trade secrets against Mr. Summers and Summers Pharmacy, and (6) tortious interference with a contractual relationship against Mr. Summers and Summers Pharmacy. A long and contentious period of discovery ensued. With an impending trial date approaching, presently pending before the Court are several dispositive motions, to wit:

(1) Kreisler's motion for summary judgment [Doc. 252];
(2) the motion for partial summary judgment of Kreisler, Naber, Kernohan, and Hubble seeking to limit numerous categories of damages alleged by CVS [Doc. 257];
(3) the motion for summary judgment of Mr. Summers and Summers Pharmacy with regard to CVS' claims for misappropriation of trade secrets and tortious interference [Doc. 261]; and
(4) CVS' motion for summary judgment on its counterclaim and third-party claims and on Kreisler's claim for payment of the final $100, 000 under the APSA [Doc. 263].[1]

         In light of the overlapping legal arguments and factual considerations, the Court will discuss all of the motions together.

         The “holdback” provision

         The APSA between CVS and Kreisler included a provision creating a “holdback” of certain monies otherwise immediately payable under the APSA. The provision states:

The sum of $100, 000.00[2] (hereinafter the “Holdback Amount”) shall be retained by [CVS] and not paid to [Kreisler] as a reserve to ensure payment of [Kreisler's] indemnification obligations pursuant to this Agreement. However, [Kreisler] will perform a UCC search with the Secretary of State and corresponding Counties for secured creditors two (2) weeks prior to the date of inventory. If there are no further secured creditors other than [Hawthorn Bank] it is agreed that the amount of the holdback shall be reduced to $50, 000.00 and the holdback period shall be reduced to six (6) months. CVS shall hold, administer and disburse the Holdback Amount, net of amounts, if any, applied against [Kreisler's] indemnification obligations as provided herein, together with interest at the annual rate of one (1%) percent on all amounts held by [CVS] (net of amounts, if any, applied against [Kreisler's] indemnification obligations hereunder) for Kreisler, pursuant to this Agreement, computed from the Date of Inventory. Following acknowledgement by [Kreisler] or a determination of liability on account of [Kreisler's] indemnification obligations hereunder, CVS shall deduct from the Holdback Amount an amount equal to the damages suffered or incurred and either retain such amount for its own account or make payments directly to the appropriate party. At any time from and after one year from the Date of Inventory[3], [Kreisler] may submit a request to [CVS] to pay, and upon receipt of such request [CVS] shall pay the remaining Holdback Amount, if any, plus interest, if any, minus any amounts held in respect of pending, disputed, or otherwise unpaid claims of [CVS].

         As noted above, this “holdback” provision of the APSA was intended by the parties to ensure “payment” of Kreisler's indemnification obligations under the APSA. To that end, the Agreement included a specific term:

[Kreisler] shall indemnify, defend and hold [CVS] harmless from and against any and all losses, costs, expenses, damages or liabilities (including court costs and reasonable attorneys' fees) incurred by [CVS] arising from (a) any breach of any covenant, representation or warranty by [Kreisler] contained in or given in writing pursuant to this Agreement or (b) relating to [Kreisler's possession or use of [Kreisler's] Assets being sold hereunder, up to and including the Date of Inventory, or resulting from operations, or based on events, acts or omissions of [Kreisler] which occurred prior to or on such date.

         In reviewing the holdback provision of the APSA, the Court finds that by its plain terms, it contained two separate components. First, if there were no secured creditors of Kreisler - other than Hawthorn Bank, as determined two weeks prior to the Date of Inventory - then the holdback amount retained by CVS would be reduced to $50, 000 and the holdback period would be reduced to six months (instead of the original $100, 000 with a holdback period of one year). The second component of the holdback provision required CVS to disburse the holdback amount (either $50, 000 or $100, 000 depending on the first component of the provision) to Kreisler net of amounts, if any, applied against Kreisler's indemnification obligations.

         Following the sale of the Clinton pharmacies and the passage of six months, Kreisler demanded from CVS the payment of the $100, 000 holdback amount. With regard to the first component of the holdback provision, prior to the closing of the APSA, the lone creditor of Kreisler was Hawthorn Bank. Hawthorn Bank's claim was subsequently satisfied prior to or at the closing, and after the closing there were no secured creditors of Kreisler. CVS, however, refused to reduce the retained holdback amount to $50, 000 and refused (and continues to refuse) to pay Kreisler the $50, 000. In so doing, CVS breached the APSA and continues to be in breach of the APSA.[4]

         With regard to the second component of the holdback provision, CVS has also refused to pay to Kreisler the remaining $50, 000 (or, in the actual case, the entire $100, 000). Pursuant to the APSA, CVS is permitted to withhold such payment only if Kreisler “acknowledges” a violation of its indemnification obligations under the APSA or there is a “determination of liability” based on Kreisler's indemnification obligations under the APSA. As made clear with the present litigation, Kreisler has never acknowledged any violation. As such, the resolution of whether CVS was and is justified in withholding any or all of the holdback amount turns on whether this Court determines that Kreisler violated its indemnification obligation under the APSA, i.e., whether Kreisler materially breached the APSA. As set out herein, the Court concludes that Kreisler did not materially breach the Agreement.

         In defense of its refusal to pay out the holdback amount and in support of its own affirmative claim for damages for breach of contract, CVS argues [Docs. 263 and 285] that Kreisler breached the APSA in one or all of eight respects, to wit:

(a) Kreisler authorized the transfer of its physician database to a competitor (Summers Pharmacy) after the execution of the APSA without CVS' consent;
(b) Kreisler allowed certain key Kreisler employees and technicians to “be employed simultaneously” at Kreisler and Summers Pharmacy;
(c) Kreisler allowed a former employee (Melanie Dehn) to share customer information with Ryan Summers and Summers Pharmacy after the execution of the APSA;
(d) Kreisler shareholders disclosed details of the pharmacy sale to family and friends;
(e) James Naber failed to provide agreed upon consulting services to CVS; and
(f) James Naber and Samuel Kernohan violated a non-competition agreement by airing a radio advertisement heard in Clinton, Missouri on behalf of Kreisler Country Pharmacy in Appleton City, Missouri (a pharmacy not involved in the sale at issue in the APSA).

         The Court will address each breach allegation in turn for the dual purposes of addressing whether CVS was justified in withholding the holdback amount and whether CVS has a trialworthy claim of breach of contract against Kreisler.

         Transfer of physician database

         Kreisler maintained a physician database that contained information regarding approximately 6, 000 physicians who had prescribed medication to Kreisler customers over a 20 year time period. The database included physician names, addresses, phone/fax numbers, NPI numbers, and DEA numbers. Kreisler utilized a software program called “WinRx” that was offered by an Oklahoma company called Computer Rx. According to Computer Rx, it is common for a pharmacy to consent to the releasing of its physician database to another pharmacy that is also utilizing the company's software since all of the information contained in the physician database exists in other public domains and the physician database contains no customer information.

         On March 27, 2013, James Naber permitted Ryan Summers to copy Kreisler's physician database because Mr. Summers was installing the same prescription data management software that Kreisler used [WinRx]. Naber views this as a “courtesy” while CVS argues the access was a breach of the APSA.

         The APSA specifically provides that Kreisler could not “share with a third party” any of its “RX Data.” The APSA defines “RX Data” to include Kreisler's prescription files, records, and data, including hard copies of prescriptions and customer lists. Thus, the Court concludes that the APSA did not forbid the sharing of general physician ...

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