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New Hampshire Electrical Cooperative, Inc. v. Elster Solutions, LLC

United States District Court, D. New Hampshire

July 5, 2017

New Hampshire Electrical Cooperative, Inc.
v.
Elster Solutions, LLC, et al. Opinion No. 2017 DNH 131

          MEMORANDUM AND ORDER

          Paul Barbadoro United States District Judge

         This case arises from a contract in which Elster Solutions, LLC (“Elster”) agreed to provide goods, software, and services to the New Hampshire Electrical Cooperative, Inc. (“Cooperative”) to establish an integrated metering system for the Cooperative's 83, 000 electric customers. The Cooperative alleges that “smart” meters delivered and installed by Elster, which are an essential component of the metering system, began to fail at an unacceptably high rate. According to the Cooperative, these meter failures are the result of a manufacturing defect that Elster either knew about or should have discovered before the contract went into effect. It also claims that Elster concealed the defect and misrepresented the rate at which its meters fail during contract negotiations.

         The Cooperative's allegations provide the basis for a complaint asserting that Elster and its parent, Honeywell International, Inc., are liable for breach of contract, intentional and negligent misrepresentation, breach of warranty, unjust enrichment, breach of the duty of good faith and fair dealing, and breach of New Hampshire's Consumer Protection Act. Elster and Honeywell have attacked the complaint in a motion to dismiss for failure to state a claim.

         I. BACKGROUND

         The Cooperative's contract with Elster obligates Elster to provide “certain goods, software and services as determined herein to provide an Advanced Metering Infrastructure (AMI) system (the ‘system') for electric meters purchased by NHEC.”[1]Doc. No. 13-4 at 2. Among other things, the contract obligates Elster to supply smart meters for each of the Cooperative's 83, 000 customers. See Doc. No. 1 ¶ 5-6, 10. The smart meters are designed to provide information to the Cooperative concerning each customer's electric usage and inform the Cooperative of any power outages. Unlike traditional electric meters, smart meters are designed to report usage and outage information to the Cooperative via radio frequency. Each smart meter operates as a link in a chain with other smart meters. Information from one meter is reported to a nearby meter, which in turn adds its own information and reports the collected data up the chain to the next meter. The aggregated data is eventually forwarded to a “gate keeper” unit that transmits the data directly to the Cooperative. A failure of one meter in a chain thus can prevent the Cooperative from receiving information from all downstream meters. See Id. ¶ 7-9.

         The contract contains a warranty that “equipment shall be delivered free of defects in material and workmanship and that services shall be performed in a good and workmanlike manner.” Doc. No. 12-1 at 7. If Elster breaches this warranty, it must, at its option, either “(i) repair or replace the nonconforming portion of the equipment or re-perform the nonconforming services or (ii) refund the portion of the price applicable to the nonconforming portion of equipment or services.” Id. The contract also states that “THE REMEDIES STATED HEREIN CONSTITUTE PURCHASER'S EXCLUSIVE REMEDIES AND VENDOR'S ENTIRE LIABILTY FOR BREACH OF WARRANTY.” Id.

         All 83, 000 meters delivered and installed under the contract contain a manufacturing defect. See Doc. No. 1 ¶ 17, 23. Elster first notified the Cooperative of the defect on March 16, 2012, after approximately 50, 000 of the 83, 000 meters called for by the contract had been installed. Id. ¶ 14. This notice was followed by two bulletins providing additional information concerning the defect. Id. ¶ 15. Although Elster has stated that the defect is present in only the approximately 54, 000 of the Cooperative's meters that were manufactured between December 2009 and March 2012, see Id. ¶ 16, a company representative informed the Cooperative that all of its 83, 000 meters contained the defect, which the representative explained was an improperly sized computer chip, see Id. ¶ 17.

         As the rollout progressed, meters began to fail. They frequently lost usage data or falsely reported power outages. A total of 5, 500 meters have failed so far, sometimes at a rate of 40 meters per week. This represents a failure rate in excess of 6%. Further, because the Cooperative was receiving so many false reports of power outages, it could no longer use the system's power outage reporting feature. Although the Cooperative demanded that Elster replace all of the defective meters immediately, Elster maintained that it was entitled to replace meters one at a time as they failed.

         During the negotiations that led to the contract, Elster told the Cooperative that “Elster's meters, Gatekeepers and repeaters have a failure rate of less than 0.3%. This is calculated by dividing the number of failed units by the number of units shipped.” Id. ¶ 12. It also represented that its meters have a typical lifespan of twenty years. See id. Considering these representations together, the Cooperative reasonably expected that only approximately 250 meters were likely to fail during the first twenty years in which the system was in operation. Id. The Cooperative alleges that Elster knew or should have known when it entered into the contract that its smart meters included a manufacturing defect and that meters containing the defect were failing at a substantially higher rate than Elster had claimed during the contract negotiation process. See Id. ¶ 62, 67-69. Nevertheless, Elster concealed the manufacturing defect from the Cooperative and affirmatively misrepresented the meters' expected failure rate and lifespan. See Id. ¶ 63, 67-69.

         II. STANDARD of REVIEW

         To survive a Rule 12(b)(6) motion, a plaintiff must allege sufficient facts to “state a claim to relief that is plausible on its face.” Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009) (quoting Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570 (2007)). A claim is facially plausible if it provides “factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged.” Id. This plausibility standard “asks for more than a sheer possibility that a defendant has acted unlawfully, ” id., but “simply calls for enough fact to raise a reasonable expectation that discovery will reveal evidence” of wrongdoing. Twombly, 550 U.S. at 556.

         I employ a two-step approach in deciding a Rule 12(b)(6) motion. See Ocasio-Hernández v. Fortuño-Burset, 640 F.3d 1, 12 (1st Cir. 2011). First, I screen the complaint for statements that “merely offer legal conclusions couched as fact or threadbare recitals of the elements of a cause of action.” Id. (citations, internal punctuation, and alterations omitted). I then accept as true all non-conclusory factual allegations and the reasonable inferences drawn therefrom, and determine whether the claim is plausible. Id.

         III. ANALYSIS

         Elster challenges the Cooperative's contract claim by arguing that the contract only requires it to repair, replace, or refund the cost of a meter when it fails, a duty Elster claims it has fulfilled. It challenges the misrepresentation claims by contending both that the Cooperative has failed to plead its claims with the particularity required by Rule 9(b) and that the claims seek only nonrecoverable economic losses. It then challenges the remaining claims on other grounds that are specific to each claim.

         A. Breach of Contract

         The Cooperative alleges that Elster breached its express contractual warranty to provide meters that are free of material defects. To support this assertion, it claims that all of the 83, 000 meters it acquired from Elster contain a manufacturing defect, that the meters have been failing at such an unacceptably high rate that it is unable to operate certain features of the integrated metering system it contracted with Elster to provide, and that Elster has failed to address the problem in the manner required by the contract. Elster argues in response that even if all of its meters contain a manufacturing defect, its only obligation under the contract is to repair, replace, or refund the cost of a ...


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