No. 99-CV-2164 (RFT).
January 22, 2002
CARL F.W. ADAMEC, ESQ., Attorney for Plaintiff, Troy, New York
GARTNER, BLOOM GREIPER, P.C., OF COUNSEL, STUART GARTNER, ESQ. New York, New York, Attorney for Defendant.
FINDINGS OF FACT AND CONCLUSIONS OF LAW
This is a civil action for breach of contract involving the sale of adhesive labels by defendant Logotech, Inc. ("Logotech") to plaintiff Ardex Cosmetics of America, Inc. ("Ardex"). This action was initially commenced in New York Supreme Court, Rensselaer County, but was removed to the Northern District of New York pursuant 28 U.S.C. § 1441, et seq. The parties have consented to having a U.S. Magistrate Judge conduct any and all further proceedings in this case, including a trial and entry of a final judgment, in accordance with 28 U.S.C. § 636(c). A non-jury trial was held on January 9 and 10, 2002, at the James T. Foley U.S. Courthouse in Albany, New York. Upon the conclusion of the evidence, the Court reserved decision.
Ardex's exhibits are denoted as P-1 through P-48. Logotech's exhibits are denoted as D-1 through D-30, however, D-12 and D-14 were withdrawn. The witnesses that testified are: Tina Pafundi, Tina Sowalsky, Donald Miller, Loretta Sukljian, Regina Dennis, Nubar Sukljian and Moses Sukljian. Portions of Richard Bombardier's deposition were read into the record.
Ardex is a New York corporation involved in, inter alia, the manufacturing of perfumes and oils, which are then packaged and sold in labeled bottles to retailers. The President and sole shareholder is Nubar Sukljian, who has been involved with Ardex and similar cosmetic businesses for almost sixty years. Tr. 139, 155. His children, Loretta and Moses Sukljian, are principal managers in Ardex and have worked with their father since the inception of the business in 1989. Tr. 63, 208.
In 1997, Ardex created a new line of oils called Ancient Oils. These oils would be contained in an ember color, cylinder type bottle approximately two inches in height. P-48. On or about April 8, 1997, Ardex received substantial orders for the Ancient Oils line from Family Dollar of Charlotte, North Carolina. The orders were to be tentatively delivered on July 21 and August 18, 1997. P-31-34. To complete the order, Moses Suklijian entered into negotiations with Logotech, a New Jersey printing company that specializes in the production of adhesive labels for many types of packages including bottles. Tr. 213-14.
There were various stages to these negotiations, such as, selecting artwork, selecting colors and determining the size of the labels. Ardex sent Logotech several samples of the Ancient Oils' bottle in order to determine the specifications for the labels. Bombardier Dep. (D-26), pp. 25, 38; P-1. Logotech was aware of the urgency of this production due to the Family Dollar order. P-2-7. Logotech quoted the labels at a cost of $11.42 per thousand, plus several production costs. P-3. On June 27, 1997, Ardex ordered two million labels, but contested the production costs. P-27.
In July 1997, Logotech shipped the test labels to Ardex. After receiving the first shipment, Ardex began placing the labels on the Ancient Oils' bottles with a label machine. Although there was conflicting testimony as to the production process for the Ancient Oils, this Court gives more credit to Moses and Lorretta Sukljian's testimony as to the production sequence. It appears that the oil is filled into the bottles first by a machine, capped by another and then the bottles are labeled by a separate machine. Tr. 230. Lorretta Sukljian was in charge of this aspect of production and immediately noticed that the labels did not properly adhere to the bottles. Tr. 106.
Prior to the delivery, color changes were made on two of approximately twenty-two Ancient Oils' labels. P-10, 11. An issue also arose regarding the labels being in the proper "wind" or "rewind" position for placement on the label machine. D-2: P-5, 14, 21, 22. These issues were thoroughly discussed at trial, but are irrelevant to the issue of whether the labels were nonconforming.
Several witnesses testified about the problems with the labels. The various descriptions included: "popping up," "butterfly effect," and that the edges of the labels were not sticking. Tr. 131. In essence, the labels were not adhering to or wrapping around the bottles. Apparently, the labels would begin to pop off within a relatively short period of time after the labels were placed on by the label machine. Tr. 226; D-26, p. 27-30.
On or about July 12, 1997, Moses Sukljian advised Logotech's salesperson, Randy Fiorey ("Fiorey"), that the labels were peeling away from the bottles and suggested that Logotech used another type of adhesive for the remaining labels. P-12; Tr. 226-27 Logotech informed Ardex that it experienced a similar problem with the sample bottles. D-26, pp. 26, 31; P-27. Logotech suggested washing and then placing the labels on the bottles, a process Logotech found successful with the sample bottles. D-26, pp. 26, 31; P-17, 30-31. Ardex attempted this course of action after attempting to heat the labels and/or heat the bottles and then put the labels on, with the hope of activating the adhesion on the labels, which was to no avail. Tr. 229-30. Ardex also tried changing the sequence of production, again to no avail. Tr. 234-35. Indeed, washing the bottles proved to be the soundest solution. Tr. 133. Logotech also suggested that blank labels first be placed on the bottles, then place the descriptive labels over the blanks. P-24. Ardex rejected this approach as unacceptable, because it would give the product the appearance of being a "close-out." Tr. 236-37.
Logotech began delivering the two million labels on or about August 5, 1997, continuing into November 1997. Tr. 230. Logotech then billed Ardex $30,982.42, which included the products charges that Moses Sukljian challenged. P-23; D-6; Tr. 185. Ardex continued to experience some problems with the labels, notwithstanding the washing of the bottles prior to applying the labels. Tr. 230. From the receipt of the initial delivery in July of the test sample-labels and continuing for months thereafter, the parties discussed the problem. Tr. 237. Nonetheless, Ardex was concerned about meeting the Family Dollar order and continued the production of their product line. The then-president of Logotech, Tuvia Leibovitz ("Tuvia"), subscribed the cause of the peeling to the bottles and that the only successful remedy was to wash the bottles. D-26, p. 16, 22, 24, 30, 31.
Since Bombardier refers to Tuvia Leibovitz as "Tuvia," throughout his deposition testimony, Mr. Leibovitz is referred to as Tuvia here.
On June 26, 1997, Ardex had an inventory of 1.6 million bottles and the oils were kept in 55 gallon drums. These bottles are provided by an outside vendor. When received they are stored on trays holding approximately 150 bottles per tray with wrapping around the circumference of the tray and bottles to hold them in place. Tr. 218-19. As a general rule, before the bottles are filled with the oils, they are not inspected. Tr. 133.
Moses Sukljian accepted Leibovitz's assertion that it was the bottles that was causing the labels to peel off. Tr. 245. Thus, Ardex went through the arduous task of removing the first run of 255,000 labels from the bottles as well as washing and drying 550,000 bottles and then putting on labels. Tr. 237-40. As mentioned earlier, this process worked best, but the labels still did not adhere properly. Tr. 241. Ardex continued to complain. Within a week after the August 5, 1997 delivery, Logotech representative Bombardier arrived at Ardex with the hope of resolving the dilemma. Tr. 238. Indeed, there were other occasions when Bombardier and/or Fiorey visited Ardex either to determine how things were going or to collect monies toward the account. The last meeting occurred in February 1998. Tr. 237-38.
Several approaches were used to remove the labels. The bottles were soaked, which hopefully would remove the labels, if not, razors or other devices, even fingernails were used to scrap off the paper and glue. All of Ardex's staff, except office staff, participated in either scraping off the labels or washing the bottles. Ardex employees performed these tasks in conjunction with their other duties. The scrapping of labels and the washing of bottles continued for approximately one year. Tr. 94-5.
Despite the problems, Ardex used approximately 810,000 labels on the Ancient Oils bottles, of which, approximately 660,000 bottles were sent to Family Dollar. P-47; Tr. 240. On November 5, 1997 Nubar Sukljian sent a check to Logotech, over the protest of Moses Sukljian, in the amount of $25,322.42 ($30,982 minus the challenged production costs), with the notation "payment full" [sic]. P-6; D-7,8. A second check was given to Bombardier and Fiorey at the February 1998 meeting in the amount to $1,200 with the same notation. P-28; D-10. No further negotiations occurred between the parties after February 1998. Replacement of the labels was never offered by Logotech nor any other remedied provided. D-26, p. 30.
Sometime in 1998, Bombardier left Logotech and began working for a competitor, Mid-Atlantic Labels, Inc. ("Mid-Atlantic"). He was a manager of systems sales and his expertise was in selling and repairing labeling machines and not the production of the labels. Tr. 244. Very interested in gaining Ardex's business, it appears that he approached Moses Suklijan on two accounts: purchase of machinery and purchase of labels for the Ancient Oil line of products. As discussed above, Bombardier knew about Ardex's difficulties with the Logotech labels. In an attempt to secure Ardex's business, Bombardier represented to Moses and Nubar Sukljian that Logotech's president Leibovitz knew the labels were defective and further subscribed the cause of the defect to the use of second hand materials. D-26, p. 14, 15, 22. Bombardier later retreated from this claim and testified that it was his opinion that Leibovitz knew about the defect but never said that he had direct knowledge or attributed a cause of the problem to Logotech. D-26, p. 23-24, 57.
While this is conflicting testimony, Bombardier made these representations to Ardex in an attempt to secure its business; therefore, little, if any, credence is afforded his statements.
Eventually Mid-Atlantic secured an order from Ardex for one million labels at a price substantially lower than the contract price for the same labels with Logotech. Tr. 250. These labels were used immediately upon their delivery on or about December 17, 1998. P-35. The Mid-Atlantic labels adhered to the bottles without the bottles being washed, although approximately 100,000 Mid-Atlantic labels were placed on bottles that had been pre-washed by Ardex. Tr. 248. The successful implementation of these Mid-Atlantic labels dispelled the notion for Moses Sukljian that a "film" or "residue" was the caused for the Logotech labels not sticking to the bottles. Id. Rather, this was a "red flag" for him that Logotech's product was defective and the sole cause for this label debacle. Id.
In January 1999, Logotech sent a bill for the balance it believed still due. P-27, 36. In the same month, Ardex sent a letter to Logotech advising that "we never accepted these labels as useable merchandise," reiterated the problem with the labels, informed them that they had more than one million "defective" labels remaining and sought a refund for the "unuseable" labels. P-37; Tr. 250. The unused labels were not returned to Logotech because Ardex felt they were unuseable for anyone and thus worthless. P-38; Tr. 69-70. Ardex commenced this breach of contract action on or about December 13, 1999.
CONCLUSIONS OF LAW
This matter concerns the sale of goods (labels) in New York; therefore, the parties' rights and obligations are governed by Article 2 of the New York Uniform Commercial Code (N.Y.U.C.C.). The Inn Between, Inc. v. Remanco Metropolitan, Inc., 662 N.Y.S. 1011, 1012-13 (Nassau Co. Dist. Ct. 1997). Under N.Y.U.C.C. § 2-601, upon deliver of goods, the buyer has the right to accept or reject, in whole or in part, such goods that fail to conform to the contract. "Acceptance of the goods occurs when the buyer after a reasonable opportunity to inspect the goods signifies to the seller that the goods are conforming or that he will take or retain them in spite of their non-conformity. . . ." N.Y.U.C.C. § 2-606(1)(a).
When a buyer accepts non-conforming goods, he may revoke his acceptance of the goods pursuant to N.Y.U.C.C. § 2-608, which provides:
(1) the buyer may revoke his acceptance of a lot or commercial unit whose non-conformity substantially impairs its value to him if he has accepted it
(a) on the reasonable assumption that its non-conformity would be cured and it has not been seasonably cured; or
(b) without discovery of such non-conformity if his acceptance was reasonably induced either by the difficulty of discovery before acceptance or by the seller's assurance.
(2) Revocation of acceptance must occur within a reasonable time after the buyer discovers or should have discovered the ground for it and before any substantial change in condition of the goods which is not caused by their own defects. It is not effective until the buyer notifies the seller of it.
(3) A buyer who so revokes has the same rights and duties with regard to the goods involved as if he had rejected them.
Here, Ardex noticed that the test labels did not properly adhere to the bottles and suggested that Logotech use a different adhesive on the remaining 2 million labels. When the first shipment arrived on or about August 15, 1997, the labels again failed to properly adhere to the bottles and again Ardex immediately informed Logotech of the problem. The parties then began negotiating a solution. While the best solution was washing the bottles prior to applying the labels, Ardex never expressed its satisfaction with the labels, but neither did Ardex unequivocally express its dissatisfaction. Despite these problems, on November 5, 1997, Ardex paid Logotech $25,322.42 for the labels. P-26; D-7, 8. This payment constitutes acceptance of the non-conforming goods. However, Ardex's continued complaints to Logotech demonstrates that it accepted the non-conforming labels under the reasonable assumption that the adhesion problem would be seasonably cured. Thus, the issues are: whether the non-conformity was a "substantial impairment; and whether Logotech seasonably cured the non-conformity and, if not, whether Ardex revoked its acceptance within a reasonable time.
There is no dispute that the labels did not properly adhere to the bottles, regardless of whether the bottles were pre-washed. This defect clearly substantially impaired the value of the labels to Ardex. Logotech, however, contends that Ardex failed to prove that the labels did not stick because of a defect in the labels. Rather, Logotech contends that a residue or film on the bottles may have caused the problem. Ardex, however, sent sample bottles to Logotech for it to determine what adhesive needed to be used on the labels so they would properly adhere to the bottles. Logotech sent the labels to Ardex without indicating that it experienced any problems affixing the labels to the bottles. Therefore, Logotech sent non-conforming goods.
Logotech's contention is also undercut by the fact that the Mid-Atlantic labels properly adhered to the unwashed bottles.
The next issue is whether the solution of washing the bottles "seasonably cured" the non-conformity. Washing the sample bottles worked for Logotech (D-26, p.) and appeared to work relatively well for Ardex. Indeed, more than 600,000 Ancient Oils bottles were sent out to Family Dollar. Nonetheless, Ardex continued to lodge complaints with Logotech and the parties continued to discuss the issue until February 1998. Since Ardex never accepted Logotech's "cure" of pre-washing the bottles, and Logotech did not provide any other acceptable alternative, Logotech failed to "seasonably cure" the non-conforming labels.
The final issue is whether Ardex's revocation of acceptance in January 1999 was both timely and reasonable. "Reasonable time is not an inflexible term. It depends commonly on the circumstances of each case." Zahn v. Gulf Oil Corp., 125 N.Y.S.2d 55, 57 (N.Y. Supr. Ct. 1953), aff'd, 130 N.Y.S.2d 882 (N.Y.App.Div. 195 4) (citation omitted). Furthermore, the buyer need only alert the seller that "the transaction is still troublesome." N.Y.U.C.C. § 2-607, Official Comment 4.
Here, Ardex continued to discuss the problems with the labels through February 1998. These negotiations were sufficient to extend Ardex's time to revoke its acceptance of the goods. See N.Y.U.C.C. § 2-607(2) (3); Xuchang Rihetai Human Hair Goods Co., Ltd., v. Hanyu Int'l USA Inc., 2000 Civ. 5585, 2001 WL 883646, at *4 (S.D.N.Y. Aug. 7, 2001); Cliffstar Corp. v. Elmar Industr., Inc., 678 N.Y.S.2d 222, 223 (4th Dept. 1998). The parties' mutual attempts to cure the non-conformity, however, ended in February 1998. Since no other cure was proffered by Logotech after February 1998, it should have been readily apparent to Ardex that it had to either retain the non-conforming goods or revoke its acceptance. See N.Y.U.C.C. § 2-608(2).
Ardex contends that it did not become aware of the non-conformity until it secured new labels from Mid-Atlantic in December 1998. However, Ardex did not formerly notify Logotech of its revocation until it received a bill from Logotech for the balance due on the account. It is this Court's opinion that it was this bill, and not the Mid-Atlantic labels, that raised the ire of Ardex. Thus, Ardex's contention is unpersuasive and it should have known it had an obligation to provide timely revocation of acceptance in February 1998. See, e.g., The Inn Between, Inc., 662 N.Y.S.2d at 1014.
Ardex did not send its unequivocal notice of revocation until January 1999. Waiting approximately one year to revoke is unreasonable under these circumstances. CITE This untimely notice precludes Ardex from recovering the contract price. See Saunders Concrete Co., Inc. v. Tri-State Design Constr. Co., Inc., 899 F. Supp. 916, 923 (N.D.N.Y. 1995).
Ardex's failure to reject or revoke the acceptance of the labels, however, does not impair any other remedy provided by Article 2 of the N.Y.U.C.C. for non-conformity. See N.Y.U.C.C. § 2-607(2) ("[B]ut acceptance does not of itself impair any other remedy provided by this Article . . ."); Saunders, 899 F. Supp. at 923 ("[A] buyers claim for damages for non-conforming goods `is separate and apart from its indebtedness for the purchase price." (Citations omitted)). Moreover, repeated complaints made within a reasonable time upon the receipt of the first shipment of labels is sufficient to recover damages. See N.Y.U.C.C. § 2-714; Cliffstar, 678 N.Y.S. at 223 ("[T]he notice given by plaintiff had only to "alert" [defendant] that the transaction [was] troublesome . . ."). Since Ardex almost immediately informed Logotech that the labels were not properly adhering to the bottles, Ardex may recover damages pursuant to N.Y.U.C.C. § 2-714, which states in pertinent part:
(1)Where the buyer has accepted goods and given notification (subsection (3) of Section 2-607) he may recover as damages for any non-conformity of tender the loss resulting in the ordinary course of events from the seller's breach as determined in any manner which is reasonable.
. . .
(3) In the proper case any incidental and consequential damages under the next section [2-715] may also be recovered.
Under New York law, the elements of a breach of contract are: (1) the existence of an agreement; (2) adequate performance of the contract by the plaintiff; (3) breach of contract by the defendant; and (4) damages. Xuchang v. Hanyu, 2001 WL 883646 at *3 (citing Harsco Corp. v. Sequi, 91 F.3d 337, 348 (2dCir. 1996)). In this case, Ardex has met the first three elements. The only issue is whether Ardex has proven damages.
The purpose of damages in a contract claim is "to put the plaintiff in the same economic position he would have been in had the defendant fulfilled his contract." Indu Craft, Inc., v. Bank of Baroda, 47 F.3d 490, 495 (2d Cir. 1995); Adams v. Lindblad Travel, Inc., 730 F.2d 89 (2d Cir. 1984). "To be recoverable, `damages must be not merely speculative or possible and imaginary, but they must be reasonably certain, and such only as actually follow or may follow from the breach of the contract. . . .'" Najjar Industr., Inc. v. City of New York, 451 N.Y.S.2d 410, 414 (1st Dep't. 1982) (quoting Wakeman v. The Wheeler Wilson Mfr. Co., 101 N.Y. 205, 209 (1886)); see also Indu Craft, 47 F.3d at 496. Ardex has failed to provide such proof to this Court.
Ardex withdrew its claim for loss profits prior to trial. Instead, Ardex seeks recovery for labor costs incurred when its employees spent time removing approximately 250,000 labels and washing approximately 910,000 bottles before securing new labels to them. The only evidence provided to the Court is a pile of payroll records and vague testimony by current and former employees that they spent hours a day for approximately one year peeling labels and washing bottles. See, e.g., Tr. 94-5, 116, 130. This evidence is both qualitatively and quantitatively deficient.
First, Ardex failed to detail how many hours its' employees spent performing these "clean up" tasks, a relatively simple accounting function. While the Court was provided payroll records, there were no notations indicating how many hours were spent on "clean up" tasks versus normal production tasks. Ardex attempted to substantiate these payroll records with testimony from former and current Ardex employees who performed these "clean-up" tasks. The employees testified that they spent hours scrapping and washing bottles, but they also testified that they performed these tasks concurrently with their other responsibilities, and if those responsibilities were pressing, they took priority over the "clean-up" tasks.
Ardex attempted to introduce an average time rate to clean the bottles. The exercise, however, was quite unconvincing. The witnesses' testimony regarding their time spent scrapping and washing was vague and they appeared uncertain as to their own testimony about how long it took them to perform their tasks. See, e.g., Tr. 82-3, 96, 98. It would be unreasonable for the Court to ascertain damages on such an extremely unreliable assessment of damages.
Second, it is also unclear how long this "clean-up" process took. While there was testimony that it may have occurred over a year, the Court also heard other factors, such as the weather, impacted greatly when and how quickly the "clean-up" tasks could occur. For example, inclement weather had a dire effect upon the process by requiring bottles drying outside to be brought inside. Tr. 81-2. There was no evidence demonstrating how often such problems occurred.
Another troublesome variable was whether the label even stayed on the bottle after being soaked in water. Similarly, if the label did need to be scrapped off, employees either used their fingernail or a razor. All of these contingencies had an impact on how long it took to "clean-up" the bottles for use. See, e.g., Tr. 130.
To compound this uncertainty, it is unclear to the Court what pay rate should be used to determine damages, since the employees were compensated at various pay rates. While Ardex contends that the Court should, at least, use the lowest pay rate, most of the "clean-up" tasks were performed during regular business hours and very little, if any, overtime could be discerned from the payroll records. Furthermore, there were no employees added to the payroll to perform these "clean-up" tasks. Thus, the labor costs incurred by Ardex are "fixed costs," which are not included in the calculation of damages. Indu Craft, 47 F.3d at 495; Adams v. Lindblad Travel, Inc., 730 F.2d 89, 92 (2d Cir. 1984).
Therefore, Ardex has not met its burden in establishing, even minimally, a reasonable certainty on these damages.
WHEREFORE, it is hereby
ORDERED that judgment be entered for defendant Logotech, Inc.
IT IS SO ORDERED.