656 F.2d 1309 (9th Cir. 1981), 79-4616, McDonnell Douglas Corp. v. Commodore Business Machines Inc.

Docket Nº:79-4616.
Citation:656 F.2d 1309
Party Name:McDONNELL DOUGLAS CORPORATION, Appellee, v. COMMODORE BUSINESS MACHINES INC. and Commodore Business Machines (Canada) Limited, Appellants.
Case Date:August 31, 1981
Court:United States Courts of Appeals, Court of Appeals for the Ninth Circuit
 
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Page 1309

656 F.2d 1309 (9th Cir. 1981)

McDONNELL DOUGLAS CORPORATION, Appellee,

v.

COMMODORE BUSINESS MACHINES INC. and Commodore Business

Machines (Canada) Limited, Appellants.

No. 79-4616.

United States Court of Appeals, Ninth Circuit

August 31, 1981

Argued and Submitted May 13, 1981.

Page 1310

John W. Clark, Trepel & Clark, San Jose, Cal., for appellants.

Theodore Dunn, Huntington Beach, Cal., for appellee.

Appeal from the United States District Court for the Northern District of California.

Before GOODWIN and POOLE, Circuit Judges, and WYATT, [*] District Judge.

POOLE, Circuit Judge:

Commodore Business Machines (Commodore) appeals the judgment of the United States District Court for the Northern District of California, awarding plaintiff McDonnell Douglas the full $432,000 claimed in its breach of contract action, and denying Commodore's claim for a set off in the amount of $261,000. Commodore does not contest its liability for the balance of the debt.

The dispute arose out of a contract between subsidiaries of the two parties. McDonnell Douglas' subsidiary, Nitron, supplied Commodore with semiconductors for use in electric calculators. The product supplied by Nitron was a wafer containing a number of individual chips. When Commodore received the wafers it sent them to Electronic Arrays, a subcontractor, where the wafers were tested and diced and the individual chips were packaged. The $261,000 at issue is the value of the approximately 319,000 chips that were rejected as defective during the Electronic Arrays packaging process from February, 1975 through June, 1976.

Commodore introduced evidence that several months after the chips were rejected in its testing process, Commodore presented a debit memorandum for their value to Nitron. Commodore's then president testified that Nitron's executives requested that Commodore withdraw the memorandum because its adverse effect on Nitron's profit reports would likely induce McDonnell Douglas to cause Nitron to retire from the production of chips. Commodore had an interest in Nitron's continued participation in this industry because Nitron was its only supplier. For this reason, Commodore agreed to withdraw the memorandum. There was apparently some discussion about reconsidering the memorandum when Nitron was in better financial condition. However, Commodore does not contend that any representative of Nitron ever expressly stated that Commodore was entitled to any specific amount of credit. The matter appears to have been left for later agreement. Commodore contends that Nitron's failure to object at this time to the amount of the credit claimed constituted some sort of assent to liability in that amount. McDonnell Douglas later sold Nitron and disavowed any credit to Commodore for defective chips.

Pursuant to the parties' stipulation waiving the right to trial by the court and consenting to trial before a magistrate, the case was referred to U.S. Magistrate Frederick J. Woelflen. At trial, Commodore based its claim for a set off to its contract liability on two theories: (1) that the goods rejected during the testing by Electronic Arrays were defective and therefore in

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breach of the contract warranty; and (2) that representatives of the parties agreed that Commodore would be entitled to set off $261,000 against sums due for future deliveries.

The magistrate issued his first report on April 19, 1979. He found that the rejected dice had latent process defects, as required to trigger the warranty clause, and hence were in breach of the contract. He concluded that Commodore was liable to McDonnell Douglas in the amount of $432,000...

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