United States District Court, N.D. Georgia, Atlanta Division
Decided Date: December 4, 2013
For Chemence Medical Products, Inc., Plaintiff, Counter Defendant: Robert D. Wilson, LEAD ATTORNEY, PRO HAC VICE, Wilson & Wilson, Co., LPA, Chagrin Falls, OH.
For Medline Industries, Inc., Defendant, Counter Claimant: Henry D. Fellows, Jr., Kevin P. Weimer, Fellows La Briola, LLP, Atlanta, GA.
For Piedmont Hospital, Inc., Objector: Kyler Lee Wise, LEAD ATTORNEY, Brown, Beloin, Blum & Wise, LLC, Atlanta, GA.
OPINION AND ORDER
THOMAS W. THRASH, JR., United States District Judge.
The Plaintiff, a manufacturer of medical adhesives, entered into a long-term contract to sell the adhesives to the Defendant, a distributor of medical supplies. After the contract went into effect, the Patient Protection and Affordable Care Act imposed a 2.3 percent tax on all medical devices. The Plaintiff initially passed this cost on to the Defendant. The Defendant, however, refused to pay the cost and notified the Plaintiff that the price increase was prohibited by the parties' agreement. The Plaintiff filed suit seeking a declaration that the medical device tax should be assessed against the Defendant distributor. The Defendant has moved for a judgment on the pleadings with respect to the declaratory relief, arguing that the Plaintiff is responsible for the tax pursuant to the Act and pursuant to the agreement between the parties. Because a fair interpretation of the Act indicates that the tax falls on manufacturers, the Defendant's motion for partial judgment on the pleadings should be granted.
This dispute is between Chemence Medical Products, Inc. (" Chemence" ), a producer of specialized medical adhesives, and Medline Industries, Inc. (" Medline" ), a distributor of medical devices and products. The parties' broad dispute concerns a supply agreement entered into on August 1, 2010, under which Chemence supplies Medline with all of Medline's adhesive requirements (the " Supply Agreement" ), and the parties' conduct after the agreement went into effect. Within the broad dispute, the parties have a narrower dispute, relevant to this motion, concerning whether the medical device tax (the " Device Tax" ) imposed as part of the Patient Protection and Affordable Care Act (" ACA" ) must be imposed on the Plaintiff as manufacturer and whether the tax may be reflected as a price increase pursuant to the Supply Agreement.
The ACA " imposed on the sale of any taxable medical device by the manufacturer, producer, or importer a tax equal to 2.3 percent of the price for which so sold." 26 U.S.C. § 4191(a). " Under section 4191(a), tax is imposed on the sale of any taxable medical device by the manufacturer, producer,
or importer of the device." 26 C.F.R. § 48.4191-1(a). And " [t]he manufacturer, producer, or importer making the sale of a taxable medical device is liable for the tax imposed by section 4191(a)." 26 C.F.R. § 48.4191-1(c). The Defendant contends the Plaintiff is a manufacturer under the ACA and is therefore liable for the Device Tax, and that the Plaintiff's imposition of the tax on the Defendant was a violation of the Supply Agreement.
The Supply Agreement itself provides a Transfer Price for the adhesives. " Transfer Price" is defined as " the price per Unit that Medline will pay Chemence for Products and Media as set forth in Section 5" of the Supply Agreement. (Def.'s Mot. for Partial Judgment on the Pleadings, Ex. 1, the " Supply Agreement," § 1(O)). There is no other definition for a price term. Section 5.2 provides that " Product shall be sold by Chemence to Medline at the Transfer Price of: $5.50 through December 31, 2012." (Id. at § 5.2). Chemence has the right to raise the Transfer Price if Medline failed to purchase its minimum annual commitment, as set forth in Section 5.5. (Id. § § 5.2, 5.5). The Supply Agreement also provided a mechanism for increasing the Transfer Price every January 1st:
Transfer Price can change annually to reflect changes in raw material, labor costs or manufacturing, provided Chemence gives Medline at least thirty (30) days prior written notice, pursuant to the following formula:
Before the end of the first year of this Agreement, Chemence will calculate and provide Medline with a current Unit Cost (" UC" ) that includes Direct Material Cost (" DMC" ), Direct Labor (" DL" ) and Overhead (" OH" ). A new UC will be calculated by Chemence considering changes in the DMC, DL, and OH on an annual basis commencing January 1, 2013, and each subsequent January 1st to determine the Percentage Variance (" PV" ) in Unit Cost as a positive or negative. The new Transfer Price is determined by multiplying the current Transfer Price by the PV.
(Id. at § 5.6). Section 5.6 further provided Medline the right to review the changes in price and terminate the agreement within 30 days of a Transfer Price increase. (Id.) Finally, Section 5.8 provided that:
Chemence agrees that Transfer Prices charged to Medline for the Products shall be no less than 15% less than the lowest net price charged for Products sold to other distributors permitted in this Agreement. Charges to Medline pursuant to sections 5.5 and 5.6 ...