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BAE Systems Information and Electronics Systems Integration, Inc. v. SpaceKey Components, Inc.

United States District Court, D. New Hampshire

April 22, 2013

BAE Systems Information and Electronics Systems Integration, Inc.
v.
SpaceKey Components, Inc

Page 198

For BAE Systems Information and Electronic Systems Integration, Inc., Plaintiff, Counter Defendant: Jonathan M. Shirley, Joshua M. Wyatt, Daniel E. Will, Devine Millimet & Branch PA (Manchester), Manchester, NH.

For SpaceKey Components, Inc., Defendant, Counter Claimant: Jeffrey C. Spear, Orr & Reno PA, Concord, NH.

OPINION

Page 199

ORDER

Landya McCafferty, United States Magistrate Judge.

In an order dated January 11, 2013, the court directed the parties to show cause why three legal issues in this case should not be decided in the manner described in that order. The parties' show-cause briefing is now before the court. Based upon that briefing, and for the reasons that follow, this order resolves the issues described in the show-cause order largely along the lines proposed in that order.

Page 200

Issue One

In their assented-to statement of the case, the parties frame the first issue this way:

The first [issue] is a dispute over purchase order SKC12508 and BAE Systems' delivery of flight RH1280B field programmable gate arrays (" FPGAs" ) to SpaceKey in 2009 and 2010. BAE Systems seeks to recover the balance under purchase order SKC12508 that remains unpaid by SpaceKey as well as the costs and attorneys' fees it has incurred to pursue collection of this amount. (Amended Complaint Counts III, IV, V, IV.) SpaceKey contends it is entitled to damages because the flight RH1280B FPGAs BAE Systems delivered did not conform to BAE's express warranties. (Counterclaim Count Four.)

Def.'s Pretrial S'ment (doc. no. 115) 1; Pl.'s Pretrial S'ment (doc. no. 119) 1-2. In its previous order, the court directed

SpaceKey [to] show cause why BAE should not be granted judgment as a matter of law on: (1) the claim for breach of contract stated in Count IV of BAE's amended complaint; and (2) the claim for breach of warranty stated in Count Four of SpaceKey's counterclaim.

Order (doc. no. 122) 13.

The court's proposed resolution of Issue One is based upon a three-part rationale. First, the Uniform Commercial Code (" U.C.C." ) permits a buyer and seller to limit the buyer's remedies for breach of warranty by agreement, so long as the agreed-upon remedy does not fail of its essential purpose. See N.H. Rev. Stat. Ann. (" RSA" ) § § 382-A:2-719(1)(a) & (2). Second, Section 8(b) of the 2007 Terms of Sale (" TOS" ) [1] provides that if the hardware BAE delivered thereunder did not substantially conform to BAE's specifications, then SpaceKey's sole remedy was " return within 60 days of delivery of any nonconforming Deliverables for credit, repair or replacement, at BAE SYSTEMS' sole option." Pl.'s Mot. for Leave, Rea Decl., Ex. G (doc. no. 112-3), at 27. Third, the remedy provided by the TOS did not fail of its essential purpose, which precludes SpaceKey from receiving any remedy for BAE's asserted breach of warranty other than the one described in the TOS.

SpaceKey raises a host of objections to the reasoning outlined above. Specifically, it argues that: (1) the cases the court cited in its previous order are irrelevant because they involve contracts with purchase-price damage ceilings and claims for consequential damages; (2) the cases the court cited do not state a general rule that a refund never fails of its essential purpose, and there is no difference between the " value" and the " benefit" of a bargain; (3) while the return-for-credit remedy described in Section 8(b) of the TOS is apparently fair and reasonable, it failed in its purpose because of circumstances; (4) the cases the court cited are distinguishable because they do not address the sufficiency of a credit remedy, and the failure of BAE's RH1280s to conform to BAE's warranties was latent; and (5) there is no procedural basis for the court to grant judgment as a matter of law as it proposed to do in its previous order. The court considers each of those five arguments, beginning with the last one.

A. SpaceKey's Fifth Argument

SpaceKey argues that the court's show-cause order lacks a procedural foundation,

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and contends that the court should not: (1) treat proposed findings of fact as if they are facts found at trial; (2) grant summary judgment sua sponte without identifying evidence appropriate to that procedural posture; or (3) find facts and draw inferences unfavorable to it.

In particular, SpaceKey objects to the following portion of the court's previous order:

[T]he court turns to the undisputed facts of this case. All agree that . . . after it learned of the alleged TID shortfall, SpaceKey submitted purchase order (" PO" ) SKC12508(C) to BAE, in which it offered to buy 535 FPGAs with a TID of 100K rad(Si) and 100 more FPGAs with a TID of 50K rad(Si).

Order (doc. no. 122) 10. In support of its objection to that statement, SpaceKey points to evidence that it mentioned TIDs of 50K and 100K rad(Si) in its purchase order not because it was ordering FPGAs with those specifications but, rather, to create contemporaneous documentation of BAE's inability to produce FPGAs with a TID of 300K rad(Si).

Based upon the parties' pretrial statements, it became evident that the trial in this case could involve several complex factual issues. For example, BAE proposes to prove that the FPGAs it delivered to SpaceKey actually conformed to its warranty, and plans to do so by showing that the standards for measuring TID have changed over time such that an FPGA that would have been rated at 300K rad(Si) at some point in the past would only test out at 100K rad(Si) today. For its part, SpaceKey proposes to prove the value of the allegedly nonconforming FPGAs that BAE delivered, based upon the diminished use life of a 50K or 100K rad(Si) FPGA as opposed to one rated at 300K rad(Si). The point of the court's previous order was to determine whether the complicated and no doubt costly trial the parties envision is actually necessary, based upon the undisputed facts and the relevant law.

In the discussion that follows, the court: (1) assumes that the FPGAs BAE sold SpaceKey did not meet the warranted specifications; (2) accepts as true, for purposes of this order, SpaceKey's explanation for the inclusion of TIDs of 50K and 100K rad(Si) in PO SKC12508(C); and (3) relies only upon facts that were undisputed on summary judgment, plus those contained in the 2007 TOS, which has made a belated appearance in this case. In sum, the order that follows engages in no factfinding, only a legal analysis of the undisputed facts, undertaken in an effort to conserve judicial resources and those of the parties by avoiding a costly trial of factual matters that are immaterial to resolving the claims in this case.

B. SpaceKey's First Argument

In its first argument, SpaceKey devotes considerable attention to four of the opinions to which the court turned for guidance on the question of when and how a contractual remedy fails of its essential purpose. Those opinions are PDC Laboratories, Inc. v. Hach Co., No. 09-1110, 2009 WL 2605270 (C.D. Ill. Aug. 25, 2009); Cox v. Lewiston Grain Growers, Inc., 86 Wn.App. 357, 936 P.2d 1191 (Wash. Ct. App. 1997); Leprino v. Intermountain Brick Co., 759 P.2d 835 (Colo. App. 1988); and Viking Yacht Co. v. Composites One LLC, Civ. Action No. 05-538(JEI), 2007 WL 2746713 (D.N.J. Sept. 18, 2007). SpaceKey's point is that the cases that resulted in PDC Labs, Cox, Leprino, and Viking Yacht are distinguishable from this case, making those opinions irrelevant, because unlike this case, those cases all involved claims for consequential damages asserted in the face of contractual clauses limiting damages to the contract price. SpaceKey also contends that the

Page 202

court erred by relying upon those four cases because the courts that decided them all did so in ways that run counter to New Hampshire law as stated in Xerox Corp. v. Hawkes, 124 N.H. 610, 475 A.2d 7 (1984).

Starting with SpaceKey's second argument, the court cannot agree that PDC Labs, Cox, Leprino, and Viking Yacht are contrary to New Hampshire law. In Xerox, the New Hampshire Supreme Court explained that a seller can limit the remedies available for a breach of warranty to repair or replacement, under RSA 382-A:2-719(1)(a), and may limit or exclude consequential damages as an available remedy, under RSA 382-A:2-719(3). See 124 N.H. at 617. A limited remedy is permissible under RSA 382-A:2-719(1)(a) so long as it does not fail of its essential purpose, see RSA 382-A:2-719(2), and a limitation or exclusion of consequential damages is permissible so long as the limitation or exclusion is not unconscionable, see RSA 382-A:2-719(3). Substantively, the Xerox court determined that in the case before it, " the allegations [did] not provide the basis for a ruling that a material issue may exist regarding possible unconscionability of the clauses in dispute." 124 N.H. at 618.

Regarding the interplay between RSA 382-A:2-719(2) and (3), the court in Xerox explained:

[O]ther courts, interpreting the effect of the " failure of essential purpose" Code provision in cases where there is proof of an inability to repair non-conforming goods, have not invalidated contractual limitations on incidental or consequential damages. Those portions of a contract disallowing incidental and consequential damages are considered separate and distinct from the language dealing with repair and replacement. Such damage limitations survive even if the contractual provision limiting the buyer's remedies to repair or replacement is judicially stricken. See Polycon Industries, Inc. v. Hercules, Inc., 471 F.Supp. 1316, 1324-25 (E.D. Wis. 1979); County Asphalt, Inc. v. Lewis Welding & Engineering Corp., 323 F.Supp. 1300, 1309 (S.D.N.Y. 1970); S.M. Wilson & Company v. Smith Intern., Inc., 587 F.2d [1363,] 1375 [(9th Cir. 1978)]. In County Asphalt, Inc. v. Lewis Welding & Engineering Corp.[,] supra, the federal district court held that a consequential damage limitation would not be affected by a finding of failure of essential purpose due to inability to repair or replace. Supra at 1309.

Xerox, 124 N.H. at 619-20. To paraphrase, the rule of Xerox is that if an agreement between a buyer and seller includes an exclusion of consequential damages that is not unconscionable, that exclusion is not rendered inoperative when an agreed-upon limited remedy fails of its essential purpose. Under such circumstances, the buyer may seek remedies as provided elsewhere in Article 2 of the U.C.C. See Colonial Life Ins. Co. of Am. v. Elec. Data Sys. Corp., 817 F.Supp. 235, 240-41 (D.N.H. 1993). There is nothing in PDC Labs, Cox, Leprino, or Viking Yacht that runs counter to the rule stated in Xerox.

In PDC Labs, the agreement between the buyer and the seller included a limitation on remedies, see 2009 WL 2605270, at *2, subject to analysis under section 2-719(2) of the U.C.C., but does not appear to have included an exclusion of consequential damages. As a result, there was no call for the court in PDC Labs to choose between the Xerox rule, or the alternative rule, situated on the other side of the " deep division of opinion," Colonial Life, 817 F.Supp. at 240 (quoting McKernan v. United Techs. Corp., Sikorsky Aircraft Div., 717 F.Supp. 60, 71 (D. Conn.

Page 203

1989)) (internal quotation marks omitted), on the issue of the relationship between sections 2-719(2) and (3) of the U.C.C. So, too, with Leprino. Like the court in PDC Labs, the court in Leprino was faced with a contract that included a limitation of remedies but not an express exclusion of consequential damages. See 759 P.2d at 836. Like the PDC Labs court, the Leprino court assessed the conscionability of the limitation of remedies provision under section 2-302 of the U.C.C., see PDC Labs, 2009 WL 2605270, at *2; Leprino, 759 P.2d at 836-37, but did not assess the conscionability of an exclusion of consequential damages because neither agreement included such a provision. Thus, as in PDC Labs, the court in Leprino never had the opportunity to consider the application of the Xerox rule, much less make a decision that ran contrary to it.

In Cox, when the buyer picked up a load of winter wheat seed from the seller, the seller " issued a delivery ticket to the truck driver . . . [that] limited [the seller]'s liability to the purchase price of the seed." 936 P.2d at 1194. Judge Thompson referred to the provision set forth in the delivery ticket in a manner that evokes both sections 2-719(2) and (3), as " the limitation of remedies clause (exclusionary clause)." Cox, 936 P.2d at 1195. There is no indication, however, that the delivery ticket in Cox included an express exclusion of consequential damages of the sort addressed by section 2-719(3). Absent an exclusion of consequential damages other than the exclusion that might be implied by the limitation of remedies to the purchase price of the seed, the facts of Cox are similar to those of PDC Labs and Leprino. But, in any event, whatever the legal status of the language in the delivery ticket, Judge Thompson ruled that " the [trial] court did not err in finding the exclusionary clause unconscionable." Id. at 1198. Because the decision in Cox did not involve an award of consequential damages in the face of a conscionable exclusion of consequential damages, nothing in that opinion contravenes the Xerox rule.

Finally, there is Viking Yacht. Of the four opinions SpaceKey identifies as making rulings that run contrary to New Hampshire law, this is the only one that unambiguously involved both a limitation of remedies and an exclusion of consequential damages. See 2007 WL 2746713, at *4. The problem with SpaceKey's analysis of Viking Yacht is that Judge Irenas followed the Xerox rule. First, he determined that if the limitation of remedies to replacement or refund applied, that remedy would fail of its essential purpose. See Viking Yacht, 2007 WL 2746713, at *6. Having made that determination, Judge Irenas continued:

This leaves the question of the validity of the exclusion of consequential and incidental damages clause. As noted in Chatlos Sys., Inc. v. Nat'l Cash Register Corp. (NCR Corp.), 635 F.2d 1081, 1086 (3d Cir. 1980), " [s]everal cases have held that when a limited remedy fails of its purpose, an exclusion of consequential damages also falls, but approximately the same number of decisions have treated that preclusion as a separate matter." In Chatlos, the Third Circuit adopted the latter approach. Chatlos involved an exclusive repair remedy, which the Court held was unenforceable due to the untimeliness of the repair of the faulty installation of a computer system. Id. at 1086. The Court held that the exclusion of consequential damages should be reviewed independently, and should stand if not unconscionable. Id.; see also N.J. Stat. § 12A:2-719(3). However, it also stated that unconscionability is to be decided under the circumstances, and it is relevant to consider the failure of the essential purpose of

Page 204

a contractual remedy when making this determination. Id.

2007 WL 2746713, at *7. In other words, the law of the Third Circuit as expressed in Chatlos, which Judge Irenas applied in Viking Yacht, is identical to New Hampshire law, as announced in Xerox. And, indeed, after determining that the limited remedy in Viking Yacht failed of its essential purpose, Judge Irenas conducted a separate analysis of unconscionability. See Viking Yacht, 2007 WL 2746713, at *7. Accordingly, there is no basis for arguing that Viking Yacht runs counter to New Hampshire law.

Not only is there nothing in PDC Labs, Cox, Leprino, or Viking Yacht that runs counter to New Hampshire law, but, perhaps more importantly, even if any of those opinions had taken the approach to the relationship between sections 2-719(2) and (3) that the Xerox court rejected, this court relied on those opinions for what they had to say on an issue unrelated to the interplay between sections 2-719(2) and (3) of the U.C.C. In its show-cause order, the court agreed with SpaceKey that Xerox offers little guidance on the question of how to determine whether a limited remedy fails of its essential purpose, and then turned to opinions in cases from outside New Hampshire. But, the court drew no rules of law from those opinions other than their discussions of the principles and mechanics for determining whether a limited remedy fails of its essential purpose.

Beyond that, the factual distinction SpaceKey uses to argue the irrelevance of those out-of-state cases, i.e., the fact that they involved buyers who sought consequential damages, played no part in the court's discussion or analysis. Thus, the possibility of an award of consequential damages in those cases does nothing to undermine the validity of the court's reliance on them. Moreover, the fact that the plaintiffs in PDC Labs, Cox, Leprino, and Viking Yacht sought consequential damages is a distinction without a difference. In those cases, the plaintiffs argued that they were entitled to seek consequential damages because a contractual limitation of remedies to a refund of the purchase price failed of its essential purpose. Here, SpaceKey argues that it is entitled to seek a partial refund of its purchase price because a contractual limitation of remedies to return for credit failed of its purpose. The remedies sought and the contractual limitations in the out-of-state cases are different from those in this case. However, the legal principle is the same: in order to be entitled to seek a remedy for breach of warranty other than one specified by a contract between a buyer and a seller, the buyer must establish that the agreed-upon remedy, whatever it may be, fails of its essential purpose. In sum, SpaceKey's first argument is without merit.

C. SpaceKey's Second Argument

SpaceKey's second argument is that: (1) the cases the court cited do not establish a general rule that a refund never fails of its essential purpose; and (2) there is no meaningful difference between the " value" and the " benefit" of a bargain.

The court begins by noting that, notwithstanding the argument that SpaceKey appears to be making in Section II of its memorandum, the resolution of Issue One proposed in the show-cause order does not rely on a general rule that a refund remedy can never fail of its essential purpose. Such a remedy can fail. Cox, Leprino, Viking Yacht, and PDC Labs describe circumstances under which that might happen. That said, the court turns to the argument SpaceKey makes in the body of Section II.

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SpaceKey develops the main part of its second argument by contending that: (1) the purpose of a remedy for breach of warranty is to receive conforming goods; (2) nothing in White v. Microsoft Corp., 454 F.Supp.2d 1118 (S.D. Ala. 2006); Stearns v. Select Comfort Retail Corp., No. 08-2746 JF, 2009 WL 1635931 (N.D. Cal. June 5, 2009); or Taylor Investment Corp. v. Weil, 169 F.Supp.2d 1046 (D. Minn. 2001), stands for the proposition that " the mere availability of a refund - without regard to whether conforming goods can be obtained with that sum - is enough to prevent a remedy from failing of its essential purpose," Def.'s Mem. (doc. no. 124) 14; and (3) both Stearns and White " involved remedies that did, in fact, provide the plaintiffs with what they wanted - conforming goods," id. at 15. SpaceKey summarizes the main part of that argument this way:

Neither Stearns [v. Select Comfort Retail Corp., No. 08-2746 JF, 2009 WL 1635931 (N.D. Cal. June 5, 2009)] nor White [v. Microsoft Corp., 454 F.Supp.2d 1118 (S.D. Ala. 2006)] stands for " the proposition that a buyer who returns a defective product for a refund does receive the substantial value of his or her bargain," irrespective of whether a conforming product can be obtained. Nor do any of the other authorities the Court cites. With respect, SpaceKey suggests that the law is to the contrary - a refund cannot serve its essential purpose unless it permits the acquisition of a conforming substitute.

Id. at 20 (quoting Order (doc. no. 122) 9) (citation to the record omitted).

SpaceKey gets off on the wrong foot by contending that the purpose of any remedy is to provide the buyer with conforming goods. The purpose of a remedy is not a one-size-fits-all proposition. Rather,

both the statutory language [of the U.C.C.] and the comment [to section 2-719(2)] refer to " its [i.e., the remedy's] essential purpose * * * " (emphasis added). That is, 2-719(2) should be triggered when the remedy fails of its essential purpose, not the essential purpose of the Code, contract law, or equity.

James J. White & Robert S. Summers, Uniform Commercial Code § 13-10(a), at 603 (6th ed. 2010); see also 4B Lary Lawrence, Lawrence's Anderson on the Uniform Commercial Code § 2-719:128, at 110 (3d ed. 2010) (" The determination that a limited remedy has failed of its essential purpose is a two-step process. First, the essential purpose of the limited remedy must be determined." ) (citing Cooley v. Big Horn Harvestore Sys., Inc., 813 P.2d 736, 744 (Colo. 1991)); id., § 2-719:129, at 111 (" Whether a remedy has failed of its essential purpose is limited to an examination of the essential purpose of the limitation . . . ." ) (citing Waukesha Foundry, Inc. v. Indus. Eng'g, Inc., 91 F.3d 1002, 1010 (7th Cir. 1996)) (emphasis added).

Plainly, the essential purpose of a repair or replacement remedy is to put conforming goods in the hands of the buyer. A repair remedy fails of its essential purpose, which is " to cure the defect," when " the seller is unwilling or unable to repair the defective goods within a reasonable period of time," White & Summers, supra, § 13-10(a), at 603, or " when the seller is willing and able to repair, but the repairs cannot be done," id. Indeed, all of the opinions SpaceKey cites for the proposition that the purpose of a remedy is to provide the buyer with conforming goods were issued in cases involving repair and/or replacement remedies. See Def.'s Mem. (doc. no. 124) 12-14.

SpaceKey, however, has cited no opinion in which a court has determined that the purpose of a refund remedy is to provide the buyer with conforming goods,

Page 206

and the court's own research has uncovered no authority for that proposition. A refund remedy fails of its essential purpose under the circumstances described in PDC Labs, Leprino, Cox, and Viking Yacht, and may also fail if the seller: (1) is " unable or unwilling to provide a refund . . . within a reasonable time" Arias/Root Eng'g v. Cinn. Milacron Mktg. Co., 945 F.2d 408 (table decision), 1991 WL 190114, at *6 (9th Cir. Sept. 25, 1991); or (2) " conceal[s] facts regarding the breach of warranty until such time that recision by the buyer could not be pursued . . . because it would cause sever[e] financial strain," Evans Indus., Inc. v. Int'l Bus. Machs. Co., No. Civ.A. 01-0051, 2004 WL 241701, at *9 (E.D. La. Feb. 6, 2004) (quoting Ritchie Enters., Inc. v. Honeywell Bull, Inc., 730 F.Supp. 1041, 1049 (D. Kan. 1990)). That a refund remedy does not fail in the same way as a repair or replacement remedy would fail tends to suggest that the essential purposes of those two kinds of remedies are also different as well.

The lack of authority for the proposition that the purpose of a refund remedy is to provide the buyer with conforming goods is entirely understandable. With a repair or replacement remedy, the power to put a conforming product in the hands of the buyer rests with the seller. If the seller repairs or replaces a defective product, the result is that the buyer will end up with the product it bargained for, provided by the seller.

A refund remedy is different. Rather than placing the buyer in the position it bargained for, such a remedy puts the buyer back in the position it occupied before it struck a bargain the seller could not fulfill and could not correct through repair or replacement. Instead of putting a conforming product into the hands of the buyer, the seller puts the buyer's money back into his or her hands. The purpose of such a remedy is to make the buyer whole financially, not to provide it with a conforming product. See White & Summers, supra, § 13-10(b), at 607 (describing purchase-price refund as " an alternate, or 'backup,' remedy for cases where the primary repair-or-replace remedy fails of its essential purpose" ).

A buyer might use a refund to purchase a conforming product from another vender, if available, but that is the buyer's choice, not the purpose of the refund remedy. Thus, SpaceKey overstates the essential purpose of a refund remedy when it argues that " [t]he plaintiff in White was assured of receipt of a functional Xbox 360 either directly from Microsoft [as a result of a repair-or-replacement remedy], or by buying a new unit himself with his refund." Def.'s Mem. (doc. no. 124) 18. Repair or replacement would have provided the plaintiff in White with a functional Xbox 360; a refund would have provided him with the ability to purchase a new Xbox, or anything else that cost as much as a new Xbox.

The distinction between putting the buyer where it hoped to end up and putting the buyer back on the starting line is the source of the court's distinction between giving the buyer the benefit of its bargain, i.e., a conforming product, and giving the buyer the value of its bargain. In this context, a bargain's value is measured relatively broadly, and encompasses more than just its benefit. As Judge Irenas explained in Viking Yacht: " the Court recognizes that a remedy need not put a party in precisely the same position as the party would have been had the breach not occurred, [but] a party is nonetheless entitled to the substantial value of his ...


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