Amerisourcebergen Corp. v. Dialysist West, Inc.

• Citation: 445 F.3d 1132
• Decision Date: 22 March 2006
• Docket Number: No. 04-15595.,04-15595.
• Parties: AMERISOURCEBERGEN CORPORATION, a New Jersey corporation, dba Bergen Brunswig Corporation, aka BBC; AmerisourceBergen Drug Corporation; Medical Initiatives, Inc., aka Oncology Supply; ASD Specialty Healthcare, Inc., Plaintiffs-Appellants, v. DIALYSIST WEST, INC., an Arizona corporation, Defendant-Appellee, v. Amerx Inc., a Florida corporation; CSG Distributors, a Tennessee company; Premier Medical Distributors, Inc., Third-party-Defendants.
• Court: United States Courts of Appeals. United States Court of Appeals (9th Circuit)

445 F.3d 1132

AMERISOURCEBERGEN CORPORATION, a New Jersey corporation, dba Bergen Brunswig Corporation, aka BBC; AmerisourceBergen Drug Corporation; Medical Initiatives, Inc., aka Oncology Supply; ASD Specialty Healthcare, Inc., Plaintiffs-Appellants, v. DIALYSIST WEST, INC., an Arizona corporation, Defendant-Appellee, v. Amerx Inc., a Florida corporation; CSG Distributors, a Tennessee company; Premier Medical Distributors, Inc., Third-party-Defendants.

No. 04-15595.

United States Court of Appeals, Ninth Circuit.

Argued and Submitted November 18, 2005.

Filed March 22, 2006.

COPYRIGHT MATERIAL OMITTED

Morton R. Branzburg and Andrew O. Schiff, Klehr, Harrison, Harvey, Branzburg, & Ellers LLP, Philadelphia, PA, for the plaintiffs-appellants.

Dan L. Bagatell and Joel W. Nomkin, Perkins Coie Brown & Bain P.A., Phoenix, AZ, for the defendant-appellee.

Appeal from the United States District Court for the District of Arizona; John W. Sedwick, District Judge, Presiding. D.C. No. CV-02-01472-JWS.

Before JEROME FARRIS, A. WALLACE TASHIMA, and CONSUELO M. CALLAHAN, Circuit Judges.

FARRIS, Circuit Judge.

I. FACTUAL AND PROCEDURAL HISTORY

On August 2, 2002, AmerisourceBergen Corporation¹ brought suit against Dialysist West, Inc. alleging that Dialysist West breached a sales agreement concerning the sale of the drug Epogen S40. Following its determination that 50% to 100% of the Epogen it purchased from Dialysist West was counterfeit, AmerisourceBergen withheld payments due Dialysist West on non-Epogen drug sales. On May 18, 2003, Dialysist West filed a counterclaim demanding that AmerisourceBergen pay the approximately $2.2 million it owed for the non-Epogen products Dialysist West had shipped to AmerisourceBergen. On May 30, 2003, AmerisourceBergen filed a reply to Dialysist West's counterclaim conceding that it had not paid for the non-Epogen products and that these products were genuine. On August 25, 2003, AmerisourceBergen filed a cross-motion for leave to amend its complaint and its reply to Dialysist West's counterclaim, changing its tack by alleging that Dialysist West also sold it counterfeit, non-Epogen products (namely Procrit). On January 6, 2004, the district court granted Dialysist West's motion for judgment on the pleadings, denied AmerisourceBergen's motion for leave to amend, and certified the judgment as final under Federal Rule of Civil Procedure 54(b). On March 3, 2004, the district court denied AmerisourceBergen's motion to stay execution of judgment and AmerisourceBergen filed this appeal on March 24, 2004.

II. JURISDICTION & STANDARD OF REVIEW

We have subject matter jurisdiction over the final decision of the district court pursuant to 28 U.S.C. § 1291. We review the district court's interpretation of Arizona contract law de novo. El-Hakem v. BJY Inc., 415 F.3d 1068, 1072 (9th Cir. 2005). The denial of AmerisourceBergen's motion for leave to amend is reviewed for abuse of discretion. See Bowles v. Reade, 198 F.3d 752, 757 (9th Cir.1999). The district court's Rule 54(b) certification of the judgment is reviewed de novo to determine if it will lead to "piecemeal appeals" and for "clear unreasonableness" on the issue of equities. See Gregorian v. Izvestia, 871 F.2d 1515, 1519 (9th Cir.1989). The district court's refusal to stay enforcement of the judgment under Rule 62(h) is reviewed for abuse of discretion. See MacKillop v. Lowe's Mkt., Inc., 58 F.3d 1441, 1446 (9th Cir.1995).

III. DISCUSSION

A. Setoff of Epogen Claims

AmerisourceBergen claims that the district court erred in finding that it could not set-off the approximately $2.2 million it owes Dialysist West for non-Epogen, pharmaceutical purchases against the estimated $8 million judgment it seeks from Dialysist West for selling AmerisourceBergen counterfeit Epogen. AmerisourceBergen bears the burden of establishing that it is entitled to either a legal or equitable setoff of its claims. See Newbery Corp. v. Fireman's Fund Ins. Co., 95 F.3d 1392, 1399 (9th Cir.1996).

AmerisourceBergen and Dialysist West agree that section 47-2717 of the Arizona Commercial Code applies. The Arizona statute, a codification of section 2-717 of the Uniform Commercial Code, provides:

The buyer on notifying the seller of his intention to do so may deduct all or any part of the damages resulting from any breach of the contract from any part of the price still due under the same contract.

Ariz.Rev.Stat. § 47-2717 (2006). A plain reading of the statute indicates that a party may not set-off a contractual claim against a debt on a separate contract. See ITV Direct, Inc. v. Healthy Solutions, LLC, 379 F.Supp.2d 130, 133 (D.Mass. 2005) ("Section 2-717 is not a general setoff provision permitting a buyer of goods to adjust its continuing contract obligations according to the equities perceived by the buyer.").

AmerisourceBergen concedes that the contracts for sale of Epogen and the other drugs were separate contracts. But because the Vendor Agreement signed by Dialysist West permits AmerisourceBergen to return any goods to Dialysist West for "full credit," AmerisourceBergen believes it was justified in applying the credit it held for the counterfeit Epogen purchases against its outstanding debts. AmerisourceBergen's reading of the Vendor Agreement is strained.² The Vendor Agreement does not indicate that AmerisourceBergen can offset one deficient transaction against another transaction. Rather, as the district court pointed out, "[t]he plain language of the provision links the allowable credit to the specific returned goods." AmerisourceBergen Corp. v. Dialysist West, Inc., No. CIV-02-1472 PHX JWS, slip op. at 13 (D.Ariz. Jan. 6, 2004).

The contract clause is not ambiguous, as AmerisourceBergen argues. The intention of the parties is clear: to create a return policy by which AmerisourceBergen can fully recover for returned goods that do not meet its standards. See Smith v. Melson, Inc., 135 Ariz. 119, 659 P.2d 1264, 1266 (1983) (stating that a contract should be read in light of the intentions of the parties as reflected in the language and circumstances of the contract); see also ECHO, Inc. v. Whitson Corp., 52 F.3d 702, 705 (7th Cir.1995) (holding under Illinois law that in applying UCC section 2-717, purchase orders cannot be setoff against damages buyer sustains as result of breach of related distributorship agreement).

Furthermore, AmerisourceBergen has provided no evidence that it was the pattern or practice of the parties or industry custom to offset deficiencies in one sales contract by giving discounts or "credit" on other sales contracts. See Mohave Valley Irrigation & Drainage Dist. v. Norton, 244 F.3d 1164, 1166 (9th Cir.2001) ("According to the UCC, to determine whether a contract's terms are ambiguous, courts may only consider evidence of course of dealing, trade usage, or course of performance."). The district court did not err in holding that AmerisourceBergen had no legal right to set-off its Epogen claims against its other contractual claims.

AmerisourceBergen argues that even if it is not entitled to offset its debt under section 47-2717 of the Arizona Commercial Code, Dialysist West's insolvency affords it an equitable right of setoff under Arizona common law. But AmerisourceBergen's claim to equitable setoff is preempted by 47-2717. Arizona's Commercial Code provides that "principles of law and equity" apply "unless [displaced] by the particular provisions of this title." Ariz.Rev.Stat. § 47-1103 (2006); see also John Deere Co. v. First Interstate Bank, 147 Ariz. 256, 709 P.2d 890, 894 (App.1985). Although no Arizona court has ruled on whether section 47-2717 preempts a common law claim for setoff, several federal courts have indicated that the corresponding UCC section preempts equitable setoffs. See ITV Direct, 379 F.Supp.2d at 133; Carlisle Corp. v. Uresco Const. Materials, Inc., 823 F.Supp. 271, 275 (E.D.Pa. 1993). As the court convincingly reasoned in Carlisle, because the UCC "specifically provides for set-offs in particular circumstances. . . we must conclude that the Code drafters, and the state legislatures that have adopted the Code, meant to displace common law set-off." Carlisle, 823 F.Supp. at 275. It is apparent that the Arizona legislature intended section 47-2717 to supercede the common law of setoff. The district court did not err in denying AmerisourceBergen's common law claim for equitable setoff.

B. Denial of Leave to Amend

AmerisourceBergen appeals the district court's decision to deny it leave to amend its reply pursuant to Fed.R.Civ.P. 15(a).³ Rule 15(a) is very liberal and leave to amend "shall be freely given when justice so requires." See Bowles v. Reade, 198 F.3d 752, 757 (9th Cir.1999). But a district court need not grant leave to amend where the amendment: (1) prejudices the opposing party; (2) is sought in bad faith; (3) produces an undue delay in litigation; or (4) is futile. Id. at 758; Jackson v. Bank of Hawaii, 902 F.2d 1385, 1387 (9th Cir.1990).

The district court found that AmerisourceBergen's motion to amend its reply and allege that non-Epogen drugs (Procrit) that it had purchased from Dialysist West were counterfeit was both untimely and prejudicial to Dialysist West. In evaluating undue delay, we ask "whether the moving party knew or should have known the facts and theories raised by the amendment in the original pleading." Jackson, 902 F.2d at 1388. We have held that an eight month delay between the time of obtaining a relevant fact and seeking a leave to amend is unreasonable. See Texaco, Inc. v. Ponsoldt, 939 F.2d 794, 799 (9th Cir.1991) (citing Jackson, 902 F.2d at 1388).

As the district court pointed out, AmerisourceBergen sought to amend its pleadings nearly fifteen months after it first learned that counterfeit Procrit was in the market and three months after entering a reply where it conceded that the products for which it had not paid, including Procrit, were genuine. It is...