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AcBel Polytech, Inc. v. Fairchild Semiconductor International, Inc.

United States Court of Appeals, First Circuit

June 20, 2019

ACBEL POLYTECH, INC., individually and as assignee of EMC CORPORATION, Plaintiff-Appellant/Cross-Appellee,
v.
FAIRCHILD SEMICONDUCTOR INTERNATIONAL, INC., FAIRCHILD SEMICONDUCTOR CORPORATION, Defendants-Third Party Plaintiffs-Appellees/Cross-Appellants, SYNNEX ELECTRONICS HONG KONG LTD., SYNNEX TECHNOLOGY INTERNATIONAL CORP., Third Party Defendants.

          APPEALS FROM THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF MASSACHUSETTS [Hon. Denise J. Casper, U.S. District Judge]

          Zeb Landsman, with whom Richard Chassin, Jesse Travis Conan, and Becker Glynn Muffly Chassin & Hosinski LLP were on brief, for appellant/cross-appellee.

          Matthew Iverson, with whom Daniel E. Rosenfeld, Stephen W. Hassink, Yasmin Ghassab, DLA Piper LLP, Jeffrey A. Rosenfeld, and Alston & Bird LLP were on brief, for defendants-third party appellees/cross-appellants.

          Before Torruella, Kayatta, and Barron, Circuit Judges.

          TORRUELLA, CIRCUIT JUDGE.

         We often fail to notice the complex interplay between the numerous components that make up electronic equipment. This is a case about one of these components -- a miniscule microcircuit that serves as a voltage regulator, the KA7805ERTM ("KA7805").

         Defendant-Appellee Fairchild Semiconductor Corporation's ("Fairchild US") subsidiaries manufactured the KA7805. Plaintiff-Appellant AcBel Polytech, Inc. ("AcBel") purchased KA7805s from Fairchild's agent and installed them into power supply units ("PSUs") it then sold to EMC Corporation ("EMC"). EMC used the PSUs for its data storage devices. In 2010, one of Fairchild US's subsidiaries began to manufacture a new "shrunk-die"[1] version of the KA7805 ("shrunk-die KA7805"). After Fairchild transitioned to the shrunk-die KA7805, EMC began to experience problems with AcBel's PSUs. The shrunk-die KA7805s were failing.

         AcBel attributed EMC's problems with its PSUs to the design of Fairchild's shrunk-die K8705. As a result, it filed a diversity suit against Fairchild U.S. and its holding company, Fairchild Semiconductor International, Inc. ("Fairchild International") (collectively, "Fairchild"), asserting claims of breach of warranty (Counts I, II, XII and XIII); fraud and negligent misrepresentation (Counts III, IV and V); "design defect -- implied warranty/strict liability" (Counts VI and XIV); "design defect -- negligence" (Counts VII and XV); "failure to warn --implied warranty/strict liability" (Counts VIII and XVI); "failure to warn -- negligence" (Counts IX and XVII); and violation of Mass. Gen. Laws ch. 93A (Counts X and XVIII).[2] AcBel asserted all claims on its own behalf and on behalf of EMC, as its assignee, except for its fraud and misrepresentation claims (Counts III, IV, and V).

         At the summary judgment stage, the district court dismissed all claims except those involving breach of implied warranty (Counts I, II, XII, and XIII). After a nine-day bench trial, the district court dismissed AcBel's remaining breach of implied warranty claims. AcBel appeals from the dismissal of its implied warranty of merchantability (Count I), fraud (Counts III and IV) and negligent misrepresentation (Count V) claims. Fairchild cross-appeals, contending that, even if the district court's grounds for dismissal were improper, it is still not liable to AcBel because the district court erred in determining that Fairchild's subsidiaries were its agents for liability purposes. Additionally, Fairchild avers in its cross-appeal that, in the event of reversal, this court should order discovery regarding certain documents produced by AcBel after discovery had closed (the "late-produced documents").

         After careful review, we affirm the district court's finding of Fairchild's liability for the actions of its subsidiaries, vacate the district court's judgment dismissing AcBel's implied warranty of merchantability, fraud, fraud by omission, and negligent misrepresentation claims, and remand for further proceedings consistent with this opinion. Because it will likely help develop the record for trial on the remanded claims, we also grant Fairchild's request for additional discovery in relation to the late-produced documents.

         I. BACKGROUND

         AcBel is a Taiwanese company that manufactures and sells PSUs, including Katina, a second-generation PSU used by its customer, EMC, in its data storage devices. The Katina PSU was custom-made for EMC and specifically required the KA7805 voltage regulator, which was designed to emit a constant output of voltage, as one of its approximately 400 components.

         Fairchild U.S. is a Delaware corporation. Its wholly-owned international subsidiaries (the "Asian subsidiaries") manufactured, assembled, and distributed the KA7805s. Specifically, the KA7805s were manufactured by Fairchild Korea Semiconductor Ltd. ("FSC Korea"), assembled by Fairchild Semiconductor Shuzhou Company, Ltd. ("FSC Shuzhou"), and distributed by Fairchild Semiconductor PTE, Ltd. ("FSC Singapore") and Fairchild Semiconductor Hong Kong Ltd. ("FSC Hong Kong"). Although the KA7805 voltage regulators were ultimately utilized in the Katina PSU, Fairchild did not manufacture them specifically for AcBel.

         In 2008, AcBel received a process change notice ("PCN") from Synnex, [3] a company that had apparent authority to act as Fairchild's agent, notifying it that the KA7805 voltage regulator would be redesigned. The new version required that some internal components be moved to accommodate the smaller die, including a part known as the zener diode. In January 2010, FSC Korea began to manufacture the new shrunk-die version of the KA7805. At the end of the design process, FSC Korea performed industry-standard testing on the shrunk-die KA7805, and there were zero failures reported.[4] Fairchild did not assign a new part number to the redesigned shrunk-die KA7805.

         Despite the shrunk-die KA7805's entry into the market in early 2010, its manufacture and shipment was halted sometime in July 2010 when FSC Korea reported a quality incident involving a product that used the same shrunk die. The root cause of the reported quality incident was not immediately known. Fairchild U.S. recommended that FSC Korea permanently cease production of the shrunk-die version KA7805 and revert to the larger die, which was done by week 35 of 2010. No notification of the switch from the shrunk-die KA7805 model back to the large-die model was provided to AcBel and Fairchild's other customers.

         Meanwhile, AcBel had purchased 195, 000 shrunk-die KA7805s, all of which ended up in the second-generation Katina PSUs it manufactured for EMC. On or about December 3, 2010, while FSC Korea was still investigating the quality issue reported in July of that year, AcBel received notice from EMC that thousands of shrunk-die KA7805s had failed, causing the Katina PSUs in its data storage devices to fail as well. Eventually, it was determined that 26, 000 PSUs needed to be replaced for EMC customers.

         No terms and conditions limiting liability in connection with the KA7805 sales were provided to AcBel prior to December 2010. At AcBel's request, a representative from FSC Hong Kong formed a task force to address the shrunk-die KA7805's failure issue. On December 22, 2010, Fairchild executed a letter guaranteeing AcBel that it would revert to the non-shrunk or large-die design of the KA7805.

         The dispute over the cause of shrunk-die KA7805's failures eventually led to the current litigation. AcBel attributed the part's failures to the shrunk-die model's design, which it claimed made the product defective. During trial, Fairchild's expert testified that a certain sequence of events must occur to trigger the shrunk-die KA7805's failure: (1) moisture penetration; (2) a mechanism for the generation of hydrogen from moisture on the die surface; (3) a way for the hydrogen to get underneath the silicon nitride at the edge of the die and find its way to the zener diode; (4) a trigger for the molecular hydrogen to form atomic hydrogen; and (5) that all of these occurrences happen at relatively low temperatures. Evidence demonstrated that the failure symptoms could only be duplicated by creating extreme conditions designed to make devices fail, such as a Highly Accelerated Stress Test ("HAST"), with bias, followed by a Low Temperature Operating Life test ("LTOL"). HAST and LTOL testing are not part of the JEDEC standards, so standard industry testing would not uncover the shrunk-die KA7805's failure systems. Additionally, evidence presented at trial suggested that EMC's problems with the KA7805s may have resulted from the extreme heat produced by AcBel's soldering of the microcircuits to the PSU circuit boards.

         AcBel's expert, on the other hand, concluded the KA7805s had a defective design, and claimed AcBel's soldering process was within industry standards. AcBel's expert believed the new placement of the zener diode in the shrunk-die KA7805 made it susceptible to moisture exposure, thereby impairing the voltage regulator's electrical function. The expert, however, could not identify the specific mechanism that caused the KA7805s to fail and did not perform independent testing.

         II. DISCUSSION

         A. AcBel's Implied Warranty of Merchantability Claim (Count I)

         The district court held that Fairchild did not breach the KA7805's implied warranty of merchantability. It based its holding on AcBel's failure to establish that the design defect of Fairchild's shrunk-die KA7805 was foreseeable. AcBel contends that the district court's analysis was legally flawed, inasmuch as it held that AcBel was required to establish that the design defect of Fairchild's shrunk-die KA7805 was foreseeable in order to prevail in its implied warranty of merchantability claim. Because AcBel challenges a legal determination made by the district court during the course of the bench trial, our review is de novo. United States v. 15 Bosworth St., 236 F.3d 50, 53 (1st Cir. 2001).

         Under Massachusetts law, with certain exceptions not applicable here, "a warranty that the goods shall be merchantable is implied in a contract for their sale if the seller is a merchant with respect to goods of that kind." Mass. Gen. Laws ch. 106, § 2-314(1) (adopted by Massachusetts from the Uniform Commercial Code ("UCC") § 2-314(1)). Thus, manufacturers impliedly warrant that their products will be "fit for the ordinary purposes for which such goods are used." Back v. Wickes Corp., 378 N.E.2d 964, 969 (Mass. 1978) (quoting Mass. Gen. Laws ch. 106, § 2-314(2)(C)). The cornerstone of the duty of warranty of merchantability "is the anticipation of foreseeable uses." Cigna Ins. Co. v. Oy Saunatec, Ltd., 241 F.3d 1, 16 (1st Cir. 2001).

         In its complaint, AcBel alleged that Fairchild breached the implied warranty of merchantability by selling to AcBel defective shrunk-die KA7805s that were unfit for their ordinary purpose. As correctly noted by the district court, for AcBel to succeed on its breach of the implied warranty of merchantability claim presented on its behalf and on behalf of EMC, it must have demonstrated at trial that: (1) Fairchild manufactured or sold the shrunk-die KA7805s; (2) a defect or unreasonably dangerous condition existed that rendered the shrunk-die KA7805s not suitable for the ordinary uses for which voltage regulators were sold; (3) AcBel and EMC were using the shrunk-die KA7805s in a manner that Fairchild intended or could have reasonably foreseen; and (4) the defect or unreasonably dangerous condition was a legal cause of AcBel's and EMC's injuries. See Provanzano v. MTD Prods. Co., 215 F.Supp.3d 134, 138 (D. Mass. 2016) (citing Lally v. Volkswagen Aktiengesellschaft, 698 N.E.2d 28, 43 (Mass. App. Ct. 1998)).

         As to the first prong, Fairchild challenges on appeal the district court's determination that it is liable for the acts of its subsidiaries. Specifically, the district court found that, because Fairchild was so intermingled with the conduct of its subsidiaries, they were its agents for liability purposes.[5] This is relevant for our implied warranty of merchantability analysis because the shrunk-die KA7805s were manufactured by FSC Korea and sold to AcBel by Synnex, which acted as FSC Hong Kong's agent.[6]Thus, if Fairchild is not liable for its subsidiaries' actions, AcBel is unable to meet the first element of this implied warranty of merchantability inquiry. See Provanzano, 215 F.Supp.3d at 138.

         Fairchild accepts the district court's factual findings regarding its relationship with its Asian subsidiaries, but on appeal makes three strictly legal arguments in support of its contention that the district court improperly held it liable for its subsidiaries' conduct.

         First, Fairchild sustains that the district court based its agency determination on the "pervasive control" theory but did not make the requisite finding that Fairchild also used the corporate form to engage in improper conduct. Fairchild contends that the absence of improper conduct is dispositive because "control, even pervasive control, without more, is not a sufficient basis for a court to ignore corporate formalities . . . without a showing of improper conduct." (quoting Scott v. NG U.S. 1, Inc., 881 N.E.2d 1125, 1132 (Mass. 2008)).

         Second, Fairchild argues that, even in the absence of improper conduct, the district court's agency determination was erroneous because the facts it found do not establish its pervasive control over its subsidiaries, as required to create liability.

         And third, Fairchild asserts it would not be liable for the Asian subsidiaries' conduct under the apparent manufacturer doctrine, as suggested by the district court in dicta, because for the doctrine to apply, Fairchild must have "participate[d] substantially in the design, manufacture, or distribution of the [KA7805s]" and the district court made no finding to ...


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