Opinion
Case No. 5:00CV00039
November 16, 2001
Alan Daniel Rutenberg [COR LD NTC] Brian W. McGrath [COR LD NTC] C. Anthony Trambley [COR LD NTC] Juliet D. Hiznay [COR LD NTC] Paul R. Monsees [COR LD NTC] Foley Lardner Washington, DC for Plaintiff AAF-McQuay, Inc.
Phillip Verne Anderson [COR LD NTC ret] Walter Herbert Peake, III [COR LD NTC ret] Nancy Fuller Reynolds [COR LD NTC ret] Frith, Anderson Peake, P.C. Roanoke, Va for Defendant MJC, Inc.
REPORT AND RECOMMENDATION
Plaintiff filed this diversity action alleging defendant breached the terms of certain common law contracts and warranties extended to the plaintiff under the Uniform Commercial Code as adopted by Va. Code Ann. § 8.1-101 et seq. The case is before the undersigned under authority of 28 U.S.C. § 636(b)(1)(B) to render to the presiding District Judge a report setting forth findings, conclusions and recommendations for the disposition of defendant's October 12, 2001 motion for partial summary judgment and the plaintiffs opposition thereto. The parties appeared before the undersigned and presented oral argument on October 31, 2001. For the reasons that follow, the undersigned will RECOMMEND that the presiding District Judge determine that the transactions at bar are governed by Virginia's Uniform Commercial Code, DENY defendant's motion for summary judgment in all respects but, nevertheless, DISMISS plaintiffs claim for breach of common law contract set forth in COUNT IV of the complaint as duplicative of and as surplusage to its claims under the Uniform Commercial Code.
BACKGROUND
While the factual record submitted in this case is extensive, the evidence can be distilled into a few essential operative facts, most of which are not disputed. At all relevant times, MJC was the exclusive southwest regional licensee of Heresite Protective Coatings, Inc. ("Heresite"). Heresite is a protective coating product which is applied, for example, to air conditioner parts to help prevent corrosion of the component parts. AAF-McQuay manufactures, sells and services heating and air conditioning equipment for commercial and industrial consumers.
Defendant's relationship with Heresite lasted from 1989 to 1999 and ended for reasons that do not affect this litigation.
Plaintiff manufactures "chillers" at its plant in Staunton, Virginia. These chillers employ an internal system of 20-foot-long finned tube condenser coils which feature as many as 16 metal "fins" per inch of coil. The purpose of the fins is to diffuse heat generated in freon during the cooling process as the freon is carried through copper coils. Cooling the freon in this way prevents it from overheating and damaging other operative components of the air conditioning unit. As part of its "chiller" product line, plaintiff offers customers the option of coating the finned condenser coils to prevent corrosion from elements such as salty air. of course, this is designed to lengthen the life of plaintiff s products for its customers.
As an exclusive licensee, MJC marketed Heresite products through brochures and other informational literature. According to defendant's materials, Heresite P-413 coating was available from defendant, whose plant was located in Marietta, Georgia, or directly from the manufacturer, which is headquartered in Wisconsin. Either way, a Heresite customer could not acquire only the coating material, for the material was marketed and sold only in its applied form. Moreover, the detailed specifications for the coating process, whether the application occurred at a facility operated by a licensee or at headquarters, came directly from Heresite's home office. The licensed process required defendant to degrease the coils, sandblast them, dip the coils into large vats of coating, bake the coating and then apply a final cosmetic spray. Heresite representatives visited defendant's plant regularly to ensure that defendant complied with the licensed process and maintained the plant in a condition acceptable under the licensing agreement.
Plaintiff claims that, from 1995 through 1998, it contracted with defendant to coat its condenser coils with Heresite P-413-C coating, a "baked phenolic" coating. The evidence is undisputed that plaintiff chose the defendant with whom to do business because defendant was the exclusive licensee of Heresite products in the Southeast region. Moreover, there is no dispute that plaintiff could not have purchased the coating apart from the application process, as the coating product and its application by Heresite licensees, here the defendant, was adhesively bundled and sold together by the unit of product applied. That is to say, the price of each unit of product included its application.
The customary manner in which plaintiff secured coating on its coils was to send defendant a purchase order, listing the coils to be coated. The reverse side of each purchase order contained terms and conditions, including express warranties related to workmanship and merchantability. Defendant responded to each purchase order in two ways. First, defendant sent a confirmation form indicating receipt of the purchase order. Then, it would perform, namely by applying the units of coating to the coils covered by each purchase order. The defendant's acknowledgment form contained no additional contract terms and conditions, nor did it contain any language disclaiming, limiting or modifying the terms and conditions set forth in each purchase order. Moreover, defendant billed plaintiff for its performance under each purchase order by invoice, which listed the quantity, unit price and product description. None of the invoices included any disclaimers, limitations or modifications of the terms set forth in the purchase orders.
Defendant customarily coated coils by dipping them into large vats containing the coating solution. It appears undisputed that dipping best ensured complete coverage of the coating on each set of coils. However, plaintiffs particular coils were 20 feet long and did not fit inside defendant's 16-foot-long dipping vats. Thus, defendant elected to spray the coating onto the coils instead with a pressurized gun. This fact provides the basis for plaintiffs complaint that the tightly-packed metal fins on the coils prevented the sprayed coating from properly adhering to the entirety of the coil, resulting in minimal coverage of coating. Plaintiff then claims that its customers who purchased chillers with coils coated in this fashion experienced corrosion, which led to failure in coil function and, in turn, to eventual overheating and failures in the chiller units themselves. According to plaintiff, problems like this have occurred at a minimum of 31 different sites where plaintiffs chillers with coils coated by the defendant had been installed. Plaintiff further claims that, as a result of these chiller failures, it has experienced financial loss related to servicing these units. Defendant contests the causal relationship between the alleged coating failures and the alleged eventual damage to chiller's manufactured by the plaintiff as well as the financial loss plaintiff claims to have suffered.
For liability purposes in this case, the primary factual dispute centers around the proper methodology for applying the coating to plaintiffs finned condenser coils. Plaintiff asserts that it provided specifications regarding the proper application of the coating to its coils. Even if such specifications weren't provided, plaintiff argues that Heresite itself provided detailed instructions on the application of its coating to its licensees which defendant either overlooked or ignored. Plaintiffs evidence would suggest that nothing could justify as a proper technique merely spraying the coating onto the coils except as a final cosmetic touch-up. Plaintiff points to defendant's own sales literature as proscribing any spray technique as an inappropriate application method. Plaintiffs evidence further shows that immersion was possiblQ under the circumstances of this case, but that if it were not, then defendant's only other commercially reasonable option was to have poured the coating over and onto the coils, which defendant elected not to do in favor of spraying the coating. Plaintiffs evidence shows that pouring the coating more closely would have corresponded to immersion and beyond that is what the applicable specifications in this case outlined as an acceptable alternative.
For its part, defendant has offered evidence that both plaintiff and Heresite approved the spray method employed in light of the fact that plaintiffs larger-than-usual coil design made the ordinary dipping technique impossible. Thus, defendant contends it cannot be held liable for employing a process approved by plaintiff. In support of this contention, defendant points both to a letter in which its president informed a representative of plaintiff that it was "flooding" the coils with pressurized guns and other conversations in which plaintiff was made aware that defendant would be or actually was using a spray application method.
The parties first became aware of a coating failure in 1997 when a McQuay customer reported that the coating was peeling. Defendant remedied this particular problem under its warranty, and two years thereafter passed uneventfully. In 1999, plaintiff began receiving complaints from a number of customers regarding coating failure, corrosion and subsequent burnout of air conditioning units. Plaintiff again turned to MJC to remedy these problems but was unsuccessful. Plaintiff filed suit on May 22, 2000, discovery proceeded, and on October 12, 2001 defendant filed the instant motion for summary judgment.
CONTENTIONS OF THE PARTIES
It is the defendant's position that this case should be analyzed under ordinary common law contract principles, rather than under the Uniform Commercial Code (UCC). It believes that the contracts (purchase orders) here primarily are for services and not for the sale of goods. Under ordinary principles of contract, defendant then takes the position that there was no meeting of the minds as to the terms of the parties' contracts. Therefore, defendant argues there was no agreement on operative warranties, thus excluding plaintiffs more inclusive express warranty contained in each of the purchase orders. Defendant also contends that since the purchase orders were not signed by the parties, the three year statute of limitations governing oral contracts should apply rather than the five year limitation governing written contracts.
Plaintiff first responds that the contracts at issue are governed by the UCC, since the contracts themselves were primarily for goods with ancillary services connected to the application of those goods. It is noteworthy, however, that plaintiff has set forth a count in its complaint alleging breach of a common law contract. Therefore, it is legitimate to ask, as the undersigned will do below, whether plaintiff can assert concurrent UCC and common law contract claims. The point here is that if the transactions between the parties here are governed by the UCC, it stands to reason that the court should apply the UCC to govern all aspects of the parties' relationship, including those affecting to the formation, content, performance or breach of performance of the commercial relationship in the market place.
Moreover, plaintiff disagrees with defendant's assertion of a three year period of limitation. Here, too, plaintiffs argument becomes a bit perplexing. While plaintiff contends that the five year statute of limitations for written contracts should apply because defendant acknowledged the purchase orders in writing before it commenced performance thereunder, if the transactions were governed by the UCC, a four-year statute of limitation would apply. See, VA. CODE ANN. § 8.2-725. The court, likewise, will address that issue below.
ANALYSIS
Summary Judgment Standard
Defendants are entitled to summary judgment if the evidence shows that there is no genuine issue of material fact and that they are entitled to judgment as a matter of law. See Celotex v. Catrett, 477 U.S. 317, 106 S.Ct. 2548 (1986). In order to avoid summary judgment, plaintiffs must present sufficient evidence to support each element of their claim. See id. When ruling on a motion for summary judgment, the court must assess the evidence in the light most favorable to the non-moving parties, in this case, the plaintiff. See Myers v. Finkle, 950 F.2d 165 (4th Cir. 1991).
Uniform Commercial Code
1. Goods or Services?
Article 2 of the Uniform Commercial Code, as adopted in Virginia, applies to contracts for the sale of goods but not to contracts predominantly for services. See VA. CODE ANN. § 8.1-101, et. seq.; Princess Cruises, Inc. v. Gen. Elec. Co., 143 F.3d 828 (4th Cir. 1998); Fournier v. Waltz-Hoist Blow Pipe Company, 980 F. Supp. 187 (W.D. Va. 1997). When a contract involves both the sale of goods and the performance of services related thereto, such as appears in this case, a determination of whether the UCC applies depends on the "predominant purpose of the transaction," or, more specifically, upon whether the transaction is principally for the sale of goods or the performance of services Princess Cruises, Inc., 143 F.3d at 833. A determination of "predominant purpose" appears to be one for the court to make, and in making it, the court should assess three factors: 1) the language of the contract; 2) the nature of the business of the supplier; and 3) the intrinsic worth of the materials. Id. In this case, the factual record is sufficiently developed and undisputed for the court to determine as a matter of law whether or not the UCC governs. Id. ( citing Cambridge Plating Co. v. Napco, Inc., 991 F.2d 21, 24 (1st Cir. 1993)).
A. Nature of Supplier's Business
While not glossing over the first factor, it is clear to the undersigned that the second factor, namely the nature of the business of the supplier, strikes at the heart of the issue. In that regard, it is not disputed that defendant was the exclusive licensee of Heresite coating products, and that in order to acquire Heresite coating at all, plaintiff or any other Heresite customer had no choice but to purchase the coating application from a Heresite licensee, such as defendant. The popular term for such a link between the sale of the goods and its application is "bundling," and, of course, when both goods and services are bundled, some might then find it difficult to make any distinction for purposes of determining whether this is a UCC case. However, it is important that the undisputed evidence also shows that plaintiff chose to deal with the defendant and received the service of application only because it could not acquire the product independent of the application service, and then the service could be performed only by a Heresite licensee, the closest one being the defendant. In other words, to acquire the product, plaintiff was required to accept the product supplier's application process.
The presiding court should be guided by the principles set forth in Bonebrake v. Cox, 499 F.2d 951 (8th Cir. 1974), which has been recognized by the Fourth Circuit Court of Appeals as "the seminal case" for analyzing mixed contracts for goods and services. Princess Cruises, 143 F.3d at 833. In Bonebrake, it was recognized that a contract does not become one for services "simply because an added service is required to inject or apply the product." 499 F.2d at 959 (citation omitted).
It is the view of the undersigned that the instant case is a classic illustration of where an application service is required in order to obtain the product. The necessity of accepting the bundled application with purchase of the product, merely because that service is required by some exclusive licensing arrangement between the manufacturer of the product and its dealers, is not enough to transform what otherwise would be the sale of goods under Article 2 of the UCC into a sale of services which is excluded from coverage by the UCC.
Moreover, there is no dispute that the instant defendant aggressively marketed its Heresite line as products being offered for sale. One hardly can read defendant's marketing literature without concluding that while application was part of the package, the star feature, so to speak, was the Heresite product itself. Defendant's sales and promotional literature trumpets the value of Heresite P-413 baked phenolic coating over other competing products, in light of which a strong signal is sent that what was being offered for sale was a product and not a service. Wellmore Coal Co. v. Powell Const. Co., 600 F. Supp. 1042 (W.D. Va. 1984).
The constant attention to quality control by Heresite representatives is another indication that the instant transactions primarily focused on the sale of goods. Heresite representative Jerome Truettner visited defendant's facility on several occasions, testing the viscosity of the coating in defendant's dipping vats and monitoring the application process. These efforts were toward one end, namely ensuring the good will of the Heresite product.
The undersigned finds it difficult to accept how, in real terms, defendant could be seen as providing a service that was independent of the sale of its product. It is not disputed that Heresite determined, for whatever reasons, that it would dictate the application protocol. There also is no dispute that some of these protocols were slightly modified, with Heresite's approval, to accommodate the application process at defendants' particular plant site. On the other hand, there is quite a dispute as to whether any of the protocols were modified with the approval of the plaintiff in order to perform under the purchase orders in this case.
Irrespective of this last contested factual issue, the undersigned finds that the nature of defendant's business would not support any contention that the so called "service" in this case, namely product application, predominated over the sale of the product in the first place. To put it another way, the nature of defendant's business clearly supports a conclusion that the contracts at issue here were predominantly related to the sale of goods, not services.
B. Language of the Contracts and Worth of the Materials
An analysis of the contract language does not alter the conclusions the undersigned already has reached. The contract in Princess Cruises was found to be primarily for services, in part because the prevailing documentation in the case referred to providing services for the upkeep of a cruise ship, such as opening valves, inspecting turbines and cleaning parts of the ship. See Princess Cruises, 143 F.3d at 833. In the instant case, plaintiffs purchase orders were rather generic in their terms and conditions, referencing equally both goods and services. ( See, e.g., "Purchase Order-Terms and Conditions" at ¶ 12 ("Seller expressly warrants that the products or services to be delivered or performed hereunder. . . .")). However, the front portion of each purchase order contained a referenced to the quantity of product ordered, provided a "Product Description" of what was being ordered and set forth the unit pricing for the product being purchased and sold. As indicated above, defendant never objected to conducting business by the use of these purchase orders containing this information and both confirmed such orders in writing and commenced performance.
The defendant's invoices appear more descriptive. Each of them shows a quantity and unit pricing and then describe what is being invoiced as "Heresite Coat Co." with reference to the plaintiffs purchase order number. Invoices referencing "quantity" and "unit price" have been interpreted in this district as designating a sale of goods rather than services. See Fournier Furniture, Inc. v. Waltz-Holst Blow Pipe Co., supra. Thus, defendant's own invoices would allow for a reasonable conclusion that the contracts here primarily were for the sale of goods, not services. C. Intrinsic Worth of the Materials
There is evidence in this record that the unit price may have been based, in part, upon the square footage of product supplied and applied. The notion of square foot pricing could carry with it an inference that defendant was selling a service. However, that inference would not be reasonable in the context of this case, particularly in light of the parties' course of dealing and the language of the operative instruments. The mere fact that square foot pricing was a part of the unit pricing, in the context of this case, should not influence or persuade the court to reach a different conclusion about whether goods predominated over services. Each transaction, viewed in the context of the parties' course of dealing, was dominated by indications that goods were being sold.
Aside from what already has been discussed, there is little or nothing in the record concerning the intrinsic worth of the materials. To the undersigned's knowledge, no evidence has been presented to suggest there was, at the time of contracting, any distinction being made between the costs of the materials and the costs of application. The reasons for such an absence of evidence concerning issues related to the intrinsic comparative worth of the product, on one hand, and the application, on the other hand, partially are revealed from what the undersigned already has discussed concerning Heresite's marketing strategy to bundle the sale of the product with its application. Little more on this particular factor can be gleaned from the record.
D. Summary
For the reasons set forth above, the undersigned finds that the contracts in this case predominately involved the purchase and sale of a Heresite product (goods), rather than the application of the product (services) and concludes that the UCC as adopted in Virginia applies to the transactions between the parties in this case.
2. Warranties
Of course, if, the UCC controls the transactions between the parties in this case, as the undersigned has concluded, common law contract principles cannot be relied upon to support either plaintiffs apparent independent claim for breach of contract or defendant's motion for summary judgment. The extent to which plaintiffs common law contract claim is subsumed in and should be interpreted as being part of its claims for breach of express and implied warranties under the UCC will be discussed below. In addition, irrespective of the effects on plaintiffs claims, a determination that the UCC applies here renders moot defendant's motion for summary judgment to the extent it is premised on common law contract theories rather than upon the UCC.
A. Express Warranties
First, defendant argues that there was no "meeting of the minds" over the terms of the. contract, and, thus, claims premised on any alleged express warranties set forth in the purchase orders should be dismissed as a matter of law. This is a juncture at which the defendant either misunderstands or misapplies the standards under the UCC. There is no question that basic contract law, even that expressed in the UCC, requires a "meeting of the minds" to form a contract. However, the course of dealing between the parties — which includes plaintiffs purchase orders and defendant's subsequent acknowledgments, performance and invoicing based upon those purchase orders — certainly can satisfy the requirement for a "meeting of the minds" under the UCC. See J.B. Moore Elec. Contractor v. Westinghouse Elec. Supply Co., 221 Va. 745, 273 S.E.2d 553 (1981). of course, under this "course of dealing" analysis, both parties would also be free to introduce evidence of course of dealing in an attempt to persuade the trier of fact that the express terms of the agreement somehow have been modified through conduct. See Va. Code Ann. § 8.1-205. The point, however, is that defendant's summary judgment based on common law principles relating to a "meeting of the minds" cannot carry the day in this case, except to the extent that it calls upon the court to assess plaintiffs common law contract claim, on which plaintiff likewise cannot proceed.
B. Implied Warranties
Second, defendant argues that the implied warranty of fitness for a particular purpose does not arise on the facts presented. The undersigned disagrees. The facts already outlined are sufficient to support a reasonable inference that plaintiff communicated the particular purposes for which the defendant's product was to be used and relied on defendant to provide a product sufficient to meet those purposes. See Va. Code Ann. § 8.2-315. Certainly on the facts presented here, an implied warranty of merchantability also applies to the extent that it is not covered by the express terms of the purchase orders requiring that the product be supplied in a workman like manner. See VA CODE ANN. § 8.2-317.
3. Plaintiff's Claim for Breach of Common Law Contract
Both at oral argument and in this Report, the undersigned feels constrained to raise a question of whether the plaintiff should be permitted to concurrently proceed under the UCC and at common law. It is noted that plaintiff has asserted what would be a garden variety, common law contract claim premised on an alleged breach of warranty set forth in the purchase orders. Likewise, defendant's entire motion for summary judgment is premised upon the notion that common law contract principles control rather than those applicable under the UCC.
In light of what has been discussed above, defendant's motion based on common law contract defenses cannot prevail because Article 2 of the UCC governs this case. By the same token, some question has been raised in the decisional authorities concerning whether plaintiffs common law breach of contract claim is duplicative of its UCC claims, and therefore is subject to dismissal on that basis.
The undersigned has a great deal of reservation about whether plaintiff should be allowed to proceed simultaneously on both common law and UCC principles. In other words, when the plaintiff rests the bulk of its opposition to the defendant's motion for summary judgment on the ground that the relevant transactions are governed by the UCC, the plaintiff should not be entitled to have its "cake and eat it too," and should be required to elect the basis upon which it wishes to proceed. Otherwise, there would be an apparent lack of genuiness to the plaintiffs claims, and the court would be playing a role in fostering it.
The presiding court in Fournier declined to dismiss, as surplusage, the plaintiffs common law contract claim which apparently was duplicative of its UCC claims or, alternatively, to force an election at the summary judgment stage of the case. Fournier, 980 F. Supp. at 189, 190. The court's rationale was that it could be diligent to guard against any attempt by the plaintiff to recover double damages in light of the fact that "the UCC follows general contract law." Id. at 189
In the case at bar, however, the common law and the UCC issues go much further than to the potential of a double recovery by the plaintiff. They diverge in several important substantive respects as has been well articulated in the defendant's motion for summary judgment. To say in this case that the two are essentially coextensive, or even compatible in the context of this case, misses the points asserted by defendant and addressed by the undersigned in this Report. In other words, the issues struck here present themselves in very different and much more substantive ways than those presented to Judge Jones in Fournier. These differences are sufficient to distinguish the two cases and make room for a different result.
In the end, the undersigned does not believe the plaintiff in this case should be permitted to proceed both under the UCC and common law contract principles. It essentially has elected to stand on the UCC for most purposes in this case, and therefore, the undersigned believes it should be held to have made an election concerning its common law breach of contract claim. The presiding court should dismiss plaintiffs common law claim as surplusage and duplicative of its UCC claims. It is so RECOMMENDED.
4. Statute of Limitations
Finally, defendant argues that even if the UCC is the appropriate standard, the three-year statute of limitations governing oral contracts should apply, since it believes there was no signed contract in this case. As mentioned above, plaintiff responded by relying on the five-year statute of limitations governing written common law contracts, and in support thereof contended that a UCC acknowledgment substitute for a signature of acceptance under common law.
It is the view of the undersigned that both sides miss the statute of limitation mark in this case and rely on inapposite legal principles. Under the UCC, the limitations period for actions related to sales of goods is four years, irrespective of the nature of the contract. See Va. Code Ann. § 8.2-725. Clearly plaintiff commenced the action here within that period. The defendant's motion on this ground should be denied.
SUMMARY OF RECOMMENDATIONS
For the reasons stated above, the undersigned RECOMMENDS that the presiding District Judge determine that the transactions at issue are governed by the Uniform Commercial Code, DENY defendant's motion for summary judgment in all respects but, nevertheless, DISMISS its claim for breach of contract under the Virginia common law set forth under COUNT IV of the complaint as duplicative of and as surplusage to its claims arising under the Uniform Commercial Code.
The Clerk is directed to immediately transmit the record in this case to the Hon. James H. Michael, Jr., Senior United States District Judge. Both sides are reminded that pursuant to Rule 72(b) they are entitled to not objections, if any they may have, to this Report and Recommendation within ten (10) days hereof. Any adjudication of fact or conclusion of law rendered herein by the undersigned not specifically objected to within the period prescribed by law may become conclusive upon the parties. Failure to file specific objections pursuant to 28 U.S.C. § 636(b)(1)(C) as to factual recitations or findings as well as to the conclusions reached by the undersigned may be construed by any reviewing court as a waiver of such objections.
The Clerk of the Court hereby is directed to send a certified copy of this Order to all counsel of record.