RBC v. SKF USA (2010)

MEMORANDUM OF DECISION

This matter was tried to the court over sixteen days between September 30, 2008 and May 7, 2009.   The parties thereafter submitted deposition designations and the trial record was closed on September 15, 2009.   The parties submitted post-trial briefs on January 15, 2010.   The court thereafter granted the parties' requests to file reply briefs, which were filed on April 5, 2010.

The plaintiffs (hereinafter collectively referred to as “RBC”) brought this action against SKF USA, Inc. (hereinafter referred to as “SKF”) on June 20, 2006.   The operative complaint is its September 17, 2008 Amended Complaint, the First Count of which was voluntarily withdrawn on December 4, 2008.   The complaint, as it now stands, includes three counts of breach of contract (Counts Two, Three and Five), and counts alleging anticipatory breach of contract (Count Four), breach of the covenant of good faith and fair dealing (Count Six), unjust enrichment (Count Seven), violations of the Connecticut Uniform Trade Secrets Act (“CUTSA”) ¹ (Count Eight), the Connecticut Unfair Trade Practices Act (“CUTPA”) ² (Count Nine), the Connecticut Unfair Sales Practices Act (“CUSPA”),³ tortious interference with business relations (Count Eleven) and usurpation of corporate opportunity (Count Twelve).

In its answer dated September 26, 2008 SKF has asserted seven counterclaims against RBC for breach of contract (Count One), tortious interference with contractual relations (Count Two), tortious interference with prospective business relations (Count Three), restitution/unjust enrichment (Count Four), unfair and deceptive acts, and practices under CUTPA (Counts Five and Six), and promissory estoppel (Count Seven).

The evidence presented clearly demonstrates that the parties' 2000 Sales and Supply Agreement was modified by the conduct of the parties, who for most of the contract period did not follow the annual sales requirements set forth therein, and instead negotiated mutually acceptable, annual purchase volumes based on the realities of the market and on their business capacities.   When the plaintiff decided that it was to its business advantage to end the relationship, it used the original sales figures as a pretext for improperly terminating the contract.

Defendant is not entitled to recover on its counterclaim, as it has not presented sufficient evidence of any of its claimed damages to allow the court to award them without speculation.

FINDINGS OF FACT

NICE Ball Bearings are the oldest line of ball bearings manufactured in the United States.   The defendant owned the NICE product line until it sold it to RBC on February 28, 1997.

In the 1997 sales contract, SKF sold to RBC the NICE product line and the various assets needed to manufacture the bearings.   At that time, plaintiff did not have the ability to distribute NICE bearings to the industrial aftermarket, which market accounted for approximately 50% of the NICE business.   The parties agreed that SKF would continue to sell NICE bearings to this market, and executed a “Sales and Supply Agreement” ⁴ whereby SKF became RBC's exclusive distributor for certain scheduled NICE products.   The contract designated SKF as RBC's exclusive distributor of the scheduled NICE products.   The contract ran for eight years, and it obligated SKF to buy about $9,000,000 in NICE products during each year.

During the 1997-1998 and 1998-1999 contract years, SKF's NICE purchases from RBC were below $9,000,000.   The plaintiff did not demand compliance with the minimum purchase requirement, nor did it do anything else to challenge the failure to comply.⁵

By the spring of 1999, it was clear to the plaintiff that “the current sales agreement does not serve either party in the manner originally intended.⁶ ”  The parties entered into negotiations for a new sales and supply agreement, which culminated in the July 31, 2000 “Agreement to Amend Sales and Supply Agreement,” ⁷ which the parties refer to as the “2000 Sales and Supply Agreement” and which the court will hereinafter refer to as “the Agreement.”   This Agreement completely superseded the 1999 Agreement.   It initially required SKF to buy not less than $6,000,000 per year in scheduled NICE product, and provided for possible future increases in the contract minimum to reflect price increases, as well as possible price decreases based on certain enumerated circumstances.   The contract years ran from March 1 to February 28 of the next year.   March of each contract year was designated as a catch-up period, during which purchases by SKF could be credited toward the prior year, if sales were running behind, or toward the current year.⁸  The contract also included a clause (17(c)) which stated that “[n]o provision of this (sic) Amendment may be waived or amended other than by a written instrument signed by the party against whom enforcement of such amendment or waiver is sought.” ⁹

The defendant purchased the required amount of RBC product for the 2000-2001 Contract Year. During the 2001-2002 Contract Year, defendant's sales of NICE bearings were down.   Defendant tried to invoke a “downward adjustment” clause in the Agreement which reduced its Contract Year purchase obligations from $6,184,200 to $4,354,295, a purchase requirement which defendant met, and which plaintiff accepted as fulfilling defendant's purchase obligations for the Contract Year.¹⁰ The parties agree that the “downward adjustment” clause could not have been invoked without RBC's cooperation and permission.

In the 2002-2003 Contract Year, the adjusted “Base Amount” was $6,323,345.¹¹  The actual amount of NICE product which SKF would buy during the year was negotiated throughout the year, and RBC ultimately agreed that $6,101,761 in NICE product purchases met SKF's contractual obligations for the Contract Year. This was a shortfall of $221,584.   Plaintiff, acting through Mr. Gostomski, confirmed, in an E-Mail dated March 5, 2003, “that the contract has been met through February 2003.” ¹²

For the 2003-2004 Contract Year, the Agreement called for defendant to buy $6,323,345 in NICE product.   SKF bought $4,512,707 during that year or $1,810,638 less than RBC claims it should have.   The amount which SKF ultimately bought during this Contract Year was negotiated between the parties.   There was conflicting testimony between Mr. Gostomski and Ms. Thomerson as to what was said during those negotiations.   The court found Ms. Thomerson's testimony to be more credible, as it is better supported by the evidence, but it is clear, in either event, that there were negotiations as to how much product defendant would buy during the Contract Year, that defendant bought substantially less than $6.23 Million in product, and that RBC took no steps at that time to collect the nearly $2 Million that it claims it was owed for this Contract Year. The relationship between the parties was still such that, according to Dr. Hartnett, RBC was “still in a mode of trying to determine what are the problems that they're having in the marketplace, what we can do to solve some of those problems, and what can we do together to increase the sales of this brand.” ¹³

Discussions about the 2004-2005 Contract Year started in October 2004.   There was considerable testimony presented about an October 29, 2004 meeting between Mr. Whipple (RBC) and Ms. Thomerson (SKF), among others.   Two days before that meeting, Mr. Werner E-Mailed Mr.Whipple ¹⁴ with a list of projected figures and a contract “bogey,” or minimum purchase requirement for the Contract Year of $7,200,000.   Mr. Werner went on to say that

My plan is to present this to Bonnie Thomerson on Friday the 29th.   She know (sic) that the contract bogey is $7.2 million.   As we discussed last week we need to decide on what we are willing to let SKF back off to.¹⁵

SKF ultimately stated that it would be able to buy $5,129,490 in 2004-2005.   Mr. Gostomski wrote, on December 15, 2004, that “we would be more than satisfied with this level ․ The plan our (sic) of the last Ops Meeting was to continue to speak to the $7.2 million level and take what we could get for NICE.” ¹⁶ Mr. Whipple subsequently testified that he, too, would be “more than satisfied with this level, referring to $5,129,490.” ¹⁷

In his October 1, 2008 testimony, Mr. Gostomski discussed a $43,820 purchase which SKF made in March 2005, at his request, to eliminate a shortfall for the 2004-2005 Contract Year.¹⁸ Since SKF bought $4,962,282 during this period, Mr. Gostomski clearly was not talking about the $7.2 million “bogey,” or the $2,150,515 shortfall which RBC now claims for this Contract Year.

By the middle of 2005, the relationship between RBC and SKF had changed in significant ways.   RBC had, for some time, considered ending the Agreement with SKF and taking over the direct-to-market distribution of the NICE product line.¹⁹  RBC reviewed the relationship in May 2004 and again in May 2005, and both times concluded that it was not ready to take the NICE line direct to market.²⁰  These deliberations were not revealed to anyone at SKF until RBC terminated the contract on June 21, 2006.²¹  By late 2005, RBC, after an extensive review of the relationship, including discussions with major NICE customers about the possibility of taking SKF out of the distribution chain, had concluded that it was now ready to sell NICE products without a distributor.   Its original target date for this was at the end of 2005.²²  Dr. Hartnett, in a note to Mr. Whipple dated July 9, 2005,²³ stated that “I want to run NICE at a rate this year that does not create a major inventory hang over problem [and] I don't want to end the contract this year.   Play nice!   But let's reserve our claim.” ²⁴

The parties continued to do business in the 2005-2006 Contract Year despite the deterioration in their relationship.   According to Mr. Yerman's calculations, SKF bought $5,341,976 in NICE product.²⁵  This exceeded the $5.1 Million that defendant told plaintiff it would commit to buying that year.²⁶

RBC terminated the Agreement with a letter dated June 21, 2006,²⁷ The stated reason for termination was “failure to pay the required 2004 and 2005 Contract Year shortfalls.”

CONCLUSIONS OF LAW

During most of the time that the parties did business, they had a solid relationship in which each party worked with the other to generate good results for both.   In a long-term relationship like this, many things are negotiated, often on a continuous basis, and deviations, both major and minor, from the precise terms of the written contract are virtually inevitable.   The NICE relationship included obvious examples of this, where the defendant overlooked-or put up with-deviations from the contract by the plaintiff, including problems with the “fill rate” at which RBC was able to get ordered product to SKF and frequent problems with RBC employees making direct sales of products to which SKF had exclusive distribution rights under the Agreement.

Until the plaintiff decided that it was ready to do otherwise, the parties worked together so that SKF agreed to buy, during each contract year, the amount of product which it could reasonably expect to sell, and RBC, while understandably interested in maximizing its sales, acted appropriately given the realities of the situation.   Everyone involved in this relationship, on both sides, who came before the court, is an intelligent businessperson who must have understood, during the period in question, that neither the manufacturer nor the distributor of any product wants the distributor to be burdened with more inventory than it can sell within a reasonable time.   For many, obvious reasons, such a situation cannot last, and it can lead to unpleasant consequences for both sides.   The amounts which SKF agreed to buy each year were obviously based on a mutual understanding of these realities.

The situation changed only when RBC decided it was ready to remove SKF from the NICE distribution chain.   The evidence supporting this finding is close to overwhelming.   RBC, according to Mr. Gostomski, “always contemplated” that, at some point during the years covered by the Agreement, it would decide that it could handle distribution of the NICE line itself.²⁸  Starting in 2003, RBC performed a study each year to determine whether it was now time to end its deal with SKF.²⁹ The discussion, between the parties, of purchase shortfalls, did not start until after Dr. Hartnett decided, in 2005, that RBC would soon be in a position to end the Agreement and distribute the NICE line itself.³⁰  His “play nice” memo of July 9, 2005 was followed by the first shortfall invoice on August 10, 2005.   The court finds that the shortfall invoices were a pretext which RBC used to terminate the contract.

The plaintiff maintains that the 2000 Agreement was never modified, and that it is therefore entitled to all the amounts it claims as shortfalls.   The court disagrees.

Before addressing this issue, the court must first resolve the choice of law issue raised by the defendant.   The court finds that there is no conflict between the laws of Pennsylvania and Connecticut on the issues involved in this dispute.   The only exception is a conflict on the issue of whether consequential damages are recoverable.   Because the court has determined that plaintiff is not entitled to recover any damages, that conflict need not be resolved.

Under the Uniform Commercial Code, “[a] course of performance ․ between the parties ․ is relevant in ascertaining the meaning of the parties' agreement ․ and may supplement or qualify the terms of the agreement.” ³¹  This general rule is subject to Section 2-209, which states in pertinent part that “[a] signed agreement which excludes modification or rescission except by a signed writing cannot be otherwise modified or rescinded ․” ³² and that “[a]lthough an attempt at modification or rescission does not satisfy the requirements of subsection (2) or (3) it can operate as a waiver.” ³³

The court finds that the parties, through their course of performance clearly modified the original terms of their agreement.   By the third year of the Agreement, the parties' conduct clearly reflects an agreement to set the amount of product to be purchased at a level consistent with SKF's reasonably foreseeable business needs.   Moreover, the record reveals several occasions when SKF made additional purchases-or changed the timing of purchases-as accommodations to RBC.

RBC relies on Paragraph 17(c) of the Agreement, which states that “[n]o provision of this [contract] may be waived or amended other than by a written instrument signed by the party against whom enforcement of such amendment is sought.” ³⁴  This reliance is misplaced, since there are writings in evidence for each of the Contract Years in dispute, from RBC's employees, which reflect RBC's acknowledgment that SKF had bought what the parties had agreed it would buy for that contract period.³⁵

Even if the court found that the various writings in evidence did not fulfill the requirements of the Sales and Supply Agreement or those of 2-209(2), it also finds that the behavior of the plaintiff, in dealing with the issues of purchase requirements for the Contract Years of 2003-2004 and 2004-2005, amounted to a waiver of any right RBC has to claim that SKF breached the Agreement in either of those years.   Waiver is widely defined as the intentional relinquishment of a known right.  Multiplastics, Inc. v. Arch-Industries, Inc., 166 Conn. 280, 286 (1974).   RBC negotiated purchase agreements which it obviously knew were lower than the amounts provided for in the 2000 Agreement, and it failed to assert any timely claim for the alleged shortfalls.

The court therefore finds that SKF did not breach the 2000 Sales and Supply Agreement.   It further finds that this conclusion of law is dispositive of all of plaintiff's other claims, and that judgment should enter in favor of the defendant on the complaint.

THE COUNTERCLAIM

The counterclaim sets forth several claims for damages which SKF claims were caused by RBC's conduct while the companies were doing business and after their contract was terminated in June 2006.   All of these claims share a common problem:  they are based on so many variables and contingencies that the court cannot assess damages on any of them by a preponderance of the evidence.

Many of these claims are based on what profits SKF submits it would have made if the parties had continued doing business under the Agreement until it expired in 2008.   As should be obvious from all of the foregoing, the amounts of product which SKF bought from year to year while the Agreement was in effect were hardly uniform and difficult to project in advance.   Projections seem to have been particularly unreliable in 2006, right before RBC ended the relationship.   This court is in no position to determine, based on the evidence presented, how much NICE product SKF would have purchased, let alone what profits it would have made, if the Agreement had run its full term.   The court has similar problems with the other “lost profits” damages asserted.

SKF also claims that over the life of the Agreement, RBC employees improperly sold direct to market approximately $750,000 in product which SKF had the exclusive right to sell under the contract.   The evidence shows that this was a small matter of contention between the parties while they were doing business together, and the court finds that the amount in dispute did not become a significant issue between defendant and plaintiff until litigation was being contemplated.   In other words, defendant did not plan to pursue any such claim until such time as the contract was terminated and it started formulating its litigation strategy.

CONCLUSION

Judgment shall enter in favor of the defendant on the complaint.

Judgment shall enter in favor of the plaintiff on the counterclaim.

No costs are awarded to either side.

Miller, J.

FOOTNOTES

FN1. Conn. Gen.Stat. § 35-50, et. seq..  FN1. Conn. Gen.Stat. § 35-50, et. seq.

FN2. Conn. Gen.Stat. § 42-110a, et. seq..  FN2. Conn. Gen.Stat. § 42-110a, et. seq.

FN3. Conn. Gen.Stat. § 42-111, et. seq..  FN3. Conn. Gen.Stat. § 42-111, et. seq.

FN4. Pltf. Exh. 1..  FN4. Pltf. Exh. 1.

FN5. Trial transcript (Gostomski, 9/30/08) at 45:14-46:21, 49:23-50:15, 139:26-146.11..  FN5. Trial transcript (Gostomski, 9/30/08) at 45:14-46:21, 49:23-50:15, 139:26-146.11.

FN6. Pltf. Exh. 4..  FN6. Pltf. Exh. 4.

FN7. Pltf. Exh. 24..  FN7. Pltf. Exh. 24.

FN8. Id..  FN8. Id.

FN9. Id..  FN9. Id.

FN10. One of the many controversies between the parties involves their conflicting interpretations of the “downward adjustment” clause.   Plaintiff maintains that this clause was invoked only for the 2001-2002 Contract year, while defendant argues that this invocation reduced its annual purchase obligation for the remainder of the contract period.   Although it is ultimately not relevant to the decision of the case-and will receive no further mention in this decision, the court finds that the “downward adjustment” clause only applied to the individual Contract Year in which it was invoked;  it did not reduce defendant's annual purchase obligations-whatever they may have been-for any Contract Year other than 2001-2002..  FN10. One of the many controversies between the parties involves their conflicting interpretations of the “downward adjustment” clause.   Plaintiff maintains that this clause was invoked only for the 2001-2002 Contract year, while defendant argues that this invocation reduced its annual purchase obligation for the remainder of the contract period.   Although it is ultimately not relevant to the decision of the case-and will receive no further mention in this decision, the court finds that the “downward adjustment” clause only applied to the individual Contract Year in which it was invoked;  it did not reduce defendant's annual purchase obligations-whatever they may have been-for any Contract Year other than 2001-2002.

FN11. Pltf. Exh. 143, p. 2, Trial Transcript (Yerman, 12/1/08 at 65)..  FN11. Pltf. Exh. 143, p. 2, Trial Transcript (Yerman, 12/1/08 at 65).

FN12. Def. Exh. 548..  FN12. Def. Exh. 548.

FN13. Trial transcript (Hartnett, 10/02/08) at 30:8-30:15..  FN13. Trial transcript (Hartnett, 10/02/08) at 30:8-30:15.

FN14. Def. Exh. 579..  FN14. Def. Exh. 579.

FN15. Id..  FN15. Id.

FN16. Def. Exh. 585;  Trial transcript (Gostomski, 10/1/08) at 113:14-114:5;  Trial transcript (Hartnett, 10/02/08) at 93-13-93:18..  FN16. Def. Exh. 585;  Trial transcript (Gostomski, 10/1/08) at 113:14-114:5;  Trial transcript (Hartnett, 10/02/08) at 93-13-93:18.

FN17. Trial transcript (Whipple, 12/16/08) at 35:5-36:3..  FN17. Trial transcript (Whipple, 12/16/08) at 35:5-36:3.

FN18. Trial transcript (Gostomski, 10/1/08) at 116:3-118:11..  FN18. Trial transcript (Gostomski, 10/1/08) at 116:3-118:11.

FN19. Trial transcript (Hartnett, 10/02/08) at 89:17-90:22.   Trial transcript (Werner, 12/16/08) at 70:17-71:25..  FN19. Trial transcript (Hartnett, 10/02/08) at 89:17-90:22.   Trial transcript (Werner, 12/16/08) at 70:17-71:25.

FN20. Trial transcript (Werner, 12/16/08) at 71:13-71:25..  FN20. Trial transcript (Werner, 12/16/08) at 71:13-71:25.

FN21. Id., at 72:8 to 73:5.   The court finds that Mr. Werner's testimony that Mr. Gostomski listed termination as a possible option, in a meeting on April 21 or 22, 2006, was not a disclosure to SKF that it had looked into the possibility of termination as closely as it really had by the spring of 2006..  FN21. Id., at 72:8 to 73:5.   The court finds that Mr. Werner's testimony that Mr. Gostomski listed termination as a possible option, in a meeting on April 21 or 22, 2006, was not a disclosure to SKF that it had looked into the possibility of termination as closely as it really had by the spring of 2006.

FN22. Id., at 84:4-84:9..  FN22. Id., at 84:4-84:9.

FN23. Def. Exh. 608..  FN23. Def. Exh. 608.

FN24. Id. (emphasis in original)..  FN24. Id. (emphasis in original).

FN25. Pltf. Exh.143..  FN25. Pltf. Exh.143.

FN26. Transcript (Thomerson, 12/15/08) at 29:16-29:22;  44:5-44:8..  FN26. Transcript (Thomerson, 12/15/08) at 29:16-29:22;  44:5-44:8.

FN27. Pltf. Exh. 145..  FN27. Pltf. Exh. 145.

FN28. Trial Transcript (Gostomski, 9/30/08) at 31:9-31:12..  FN28. Trial Transcript (Gostomski, 9/30/08) at 31:9-31:12.

FN29. Trial Transcript (Werner, 12/16/08) at 70:12-72:11..  FN29. Trial Transcript (Werner, 12/16/08) at 70:12-72:11.

FN30. Def. Exh. 608..  FN30. Def. Exh. 608.

FN31. Conn. Gen.Stat. § 42a-1-303(d)..  FN31. Conn. Gen.Stat. § 42a-1-303(d).

FN32. Conn. Gen.Stat. § 42a-2-209(2)..  FN32. Conn. Gen.Stat. § 42a-2-209(2).

FN33. Conn. Gen.Stat. § 42a-2-209(4)..  FN33. Conn. Gen.Stat. § 42a-2-209(4).

FN34. Pltf. Exh. 24, at 20..  FN34. Pltf. Exh. 24, at 20.

FN35. See, e.g., Pltf. Exh. 58, 59, 60..  FN35. See, e.g., Pltf. Exh. 58, 59, 60.

Miller, Grant H., J.