Level 3 Communications, LLC v. Liebert Corp.

• Decision Date: 30 July 2008
• Docket Number: No. 06-1247.,06-1247.
• Citation: 535 F.3d 1146
• Parties: LEVEL 3 COMMUNICATIONS, LLC, Plaintiff-Appellee, v. LIEBERT CORPORATION, and Stillwell-Hansen, Inc., Defendants-Appellants.
• Court: U.S. Court of Appeals — Tenth Circuit

535 F.3d 1146

LEVEL 3 COMMUNICATIONS, LLC, Plaintiff-Appellee, v. LIEBERT CORPORATION, and Stillwell-Hansen, Inc., Defendants-Appellants.

No. 06-1247.

United States Court of Appeals, Tenth Circuit.

July 30, 2008.

Andrew M. Low (Dale R. Harris, Rudy E. Verner, and Elizabeth H. Titus with him on the briefs) Davis Graham & Stubbs LLP, Denver, CO for Appellants.

Richard P. Barkley (James S. Hardy with him on the brief) Brownstein Hyatt Farber Schreck, P.C., Denver, CO for Appellee.

Before HARTZ, McKAY, and TYMKOVICH, Circuit Judges.

TYMKOVICH, Circuit Judge.

Level 3 Communications, LLC and Liebert Corporation entered into a contract in 2000 to purchase several uninterruptible power supply (UPS) systems for Level 3's New York City data center. The UPS systems contain batteries to provide power during outages. When the batteries for the New York order were delayed by the batteries' manufacturer (not Liebert), Level 3 pressured Liebert to come up with an alternative solution. In response, Liebert located another set of batteries and sold them to Level 3 as a supplement to the existing order.

Level 3 eventually discovered that the additional batteries were approximately two years old when Liebert sold them. The contract, Level 3 argued, required all equipment sold by Liebert, including UPS system batteries, to be new. Liebert, however, concluded the contract did not apply to the batteries and rejected Level 3's demand to indemnify it against any losses on account of the old batteries.

Level 3 sued Liebert and Liebert's agent, Stillwell-Hansen, Inc.,¹ alleging breach of contract and various tort claims. The district court ruled as a matter of law that the batteries at issue in this case were covered by the contract and instructed the jury accordingly. The jury found for Level 3 on all claims.

On appeal from the jury's verdict, Liebert argues the district court erred in construing the contract to apply to the batteries at issue in this case. We conclude the contract is ambiguous on whether it applies to the batteries, and thus Liebert should have been allowed to present extrinsic evidence and argue to the jury that the contract does not cover the batteries. The district court erred in concluding otherwise.

Accordingly, we VACATE the jury's verdict and REVERSE and REMAND for new trial.

I. Background

A. Factual History

During a three-day jury trial, the parties presented the following evidence.

Equipment for Telecommunications Data Centers

Level 3 creates telecommunications networks — a kind of data highway — that form the internet's backbone. To operate its networks, Level 3 builds data facilities, known as co-location centers, about every 60 miles. Each co-location center, typically located in a metropolitan area, represents an internet-ready facility that Level 3 can lease to companies whose businesses rely heavily on internet connectivity.

By leasing one of Level 3's co-location centers, a customer can install its computers and take advantage of Level 3's networks. Because damage to computers can lead to loss of data, which carries potentially disastrous consequences for the center's lessees, Level 3 offers a host of protections. A high quality co-location center comes equipped with raised floors and powerful air conditioning units to prevent overheating; surge protectors to guard against equipment damage from sudden spikes in the power supply; and power generators to ensure against long-term loss of power from a utility.

Most critically, Level 3 installs in each co-location center multiple UPS systems. UPS systems, as their name suggests, guarantee that absolutely no loss of power occurs. In the event of a power outage from the utility company, power generators take over, but only after the initial 7 to 15 seconds that it takes for them to start. In this short interval, when no other power source is available, a UPS system ensures that all critical components of a co-location facility — for example, data storage devices — continue to receive power. Not surprisingly, one of UPS systems' main components are their batteries, which contain the power these systems need to function.

Liebert manufactures various equipment used in co-location centers. Among other things, Liebert manufactures UPS systems, although not the accompanying batteries. Those are produced by GNB Technologies (GNB), among other battery manufacturers. Stillwell-Hansen is Liebert's authorized sales representative and represented Liebert in its business transactions with Level 3.

The Agreement Between Level 3 and Liebert

In December 1999, Level 3 and Liebert signed a basic purchase agreement (Agreement) for buying Liebert "hardware[,] referred to as the `Products'" in the Agreement. Aplt. App. 56. The Products to which the Agreement applies "and other terms and conditions relevant thereto shall be described in a Product and Pricing Attachment to be executed by the parties hereto (the `P & P Attachments')." Id. The P & P Attachment accompanying the Agreement lists various hardware, including UPS systems. The batteries, however, are not specifically mentioned as one of the Products, although without a battery a UPS system loses its functionality.

The Agreement also contains Liebert's general warranty for the Products. Liebert "represents and warrants that all Products ... purchased and delivered hereunder shall be new, of good quality and workmanship, and shall be free from defects in material and workmanship." Id. at 61. But the "warranty for third-party accessories shall be limited to those provided by such third parties." Id. (emphasis added). The Agreement does not define the term "third-party accessories."

After entering into the Agreement, Level 3 purchased from Liebert somewhere between 50 and 100 UPS systems in the first half of 2000 alone. All of these orders included batteries, which were shipped from the third-party battery manufacturer directly to Level 3's job sites. At the sites, Level 3's contractors installed the batteries and connected them to Liebert's UPS systems. In every order, the batteries were brand new.

July 2000 Order for UPS Systems and Batteries

In 1999 and 2000, in the midst of the dot-com boom when demand for co-location facilities was high, Level 3 was developing a co-location project in a New York City building, known as the Mondo Condo. An eleven-story building, the Mondo Condo was to provide several co-location centers on different floors, each leased to a different customer. This case centers around equipment ordered for the seventh floor.

For that floor, on July 11, 2000 Level 3 ordered from Liebert a number of UPS systems. As part of this order, Level 3 also purchased UPS system batteries rated for 15 minutes of ride-through time, which is the specification indicating how long a battery can carry power to a UPS system in the event of a power outage. As with all previous orders, Liebert was to ship the UPS systems and the battery manufacturer was to ship the batteries directly to the Mondo Condo, where Level 3's contractor would assemble them.

Keith Driscoll, a Stillwell-Hansen employee, handled sales for the Mondo Condo site. On September 27, 2000, at a weekly meeting between Level 3 and Liebert, Driscoll informed Anthony Sirotka, Level 3's project manager for the Mondo Condo, that the batteries order would be delayed until March 2001. The battery manufacturer was about six months behind in production because of the dot-com boom. Sirotka became very upset, shouted and cursed at Driscoll, and demanded that Driscoll find replacement batteries within, a matter of hours. According to Driscoll's testimony, Sirotka even suggested that a ride-through time shorter than 15 minutes would suffice if Driscoll could quickly locate replacement batteries. But Sirotka and other Level 3 representatives testified that Driscoll was the one to suggest a shorter, six-minute alternative.

Still on September 27, right after the meeting, Driscoll was able to locate four six-minute batteries to replace the delayed order of 15-minute batteries. The six-minute batteries were in storage after a cancelled order, and some were up to two years old, but Driscoll also learned the batteries were in good condition. Immediately after he located the six-minute batteries, Driscoll sent an email to Sirotka. In that email, Driscoll noted the $156,828 "deduct to change the battery from GNB 15 minute to the 6 minute GNB," and also mentioned "[t]his new battery can be on site in four weeks." Id. at 1615.

Although Sirotka and Driscoll both testified that Sirotka had never asked about the replacement batteries' age or storage conditions, their testimonies diverge regarding what Driscoll had disclosed about the batteries. According to Driscoll's testimony, he had specifically told Sirotka on September 27 — as well as repeating the same to Sirotka and other Level 3 representatives during the next-day conference call — that the batteries were coming from storage because of a cancelled order, and were up to two years old but in good condition. Sirotka, on the other hand, testified Driscoll had never explained the six-minute batteries were anything but factory-fresh, coming to Level 3 directly from the manufacturer. In fact, Sirotka and his two managers at Level 3 all testified they had understood Driscoll's use of the word "new" in reference to the six-minute batteries to mean the batteries would be brand-new, just like all other batteries Level 3 had been ordering from Liebert.

Approximately two weeks later, on October 6, 2000, Driscoll sent Sirotka another email. In the email, Driscoll explained Level 3's two options regarding the six-minute batteries. He told Sirotka, "If you [sic] intention is to use both batteries, you will need to buy these in addition to the original order," quoting a total price of $448,280. Id. at 1619. If, on the other hand, Level 3 "want[s] to just replace the battery ... it will be a deduct," just as...