Teradyne, Inc. v. Teledyne Industries, Inc., s. 81-1509
| Citation | 676 F.2d 865 |
| Decision Date | 30 March 1982 |
| Docket Number | Nos. 81-1509,81-1510,s. 81-1509 |
| Parties | 33 UCC Rep.Serv. 1669 TERADYNE, INC., Plaintiff, Appellee, v. TELEDYNE INDUSTRIES, INC., et al., Defendants, Appellants. TERADYNE, INC., Plaintiff, Appellant, v. TELEDYNE INDUSTRIES, INC., et al., Defendants, Appellees. |
| Court | United States Courts of Appeals. United States Court of Appeals (1st Circuit) |
James E. McGuire, with whom Goodwin, Procter & Hoar, Boston, Mass., was on brief, for Teledyne Industries, Inc., Etc.
Bernard J. Bonn, III., with whom Testa, Hurwitz & Thibeault, Boston, Mass., was on brief, for Teradyne, Inc.
Before CAMPBELL and BOWNES, Circuit Judges, and WYZANSKI, * Senior District Judge.
In this diversity action, Teradyne, Inc. sued Teledyne Industries, Inc. and its subsidiary for damages pursuant to § 2-708(2) of the UCC, Mass.Gen.Laws c. 106 § 2-708(2) (hereafter " § 2-708(2)"). 1 Teledyne does not dispute the facts that it is bound as a buyer under a sales contract with Teradyne, that it broke the contract, and that Teradyne's right to damages is governed by § 2-708(2). The principal dispute concerns the calculation of damages.
The district court referred the case to a master whose report the district court approved and made the basis of the judgment here on appeal.
The following facts, derived from the master's report, are undisputed.
On July 30, 1976 Teradyne, Inc. ("the seller"), a Massachusetts corporation, entered into a Quantity Purchase Contract ("the contract") which, though made with a subsidiary, binds Teledyne Industries, Inc., a California corporation ("the buyer"). That contract governed an earlier contract resulting from the seller's acceptance of the buyer's July 23, 1976 purchase order to buy at the list price of $98,400 (which was also its fair market value) a T-347A transistor test system ("the T-347A"). One consequence of such governance was that the buyer was entitled to a $984 discount from the $98,400 price.
The buyer canceled its order for the T-347A when it was packed ready for shipment scheduled to occur two days later. The seller refused to accept the cancellation.
The buyer offered to purchase instead of the T-347A a $65,000 Field Effects Transistor System ("the FET") which would also have been governed by "the contract." The seller refused the offer.
After dismantling, testing, and reassembling at an estimated cost of $614 the T-347A, the seller, pursuant to an order that was on hand prior to the cancellation, sold it for $98,400 to another purchaser (hereafter "resale purchaser").
Teradyne would have made the sale to the resale purchaser even if Teledyne had not broken its contract. Thus if there had been no breach, Teradyne would have made two sales and earned two profits rather than one.
The seller was a volume seller of the equipment covered by the July 23, 1976 purchase order. The equipment represented standard products of the seller and the seller had the means and capacity to duplicate the equipment for a second sale had the buyer honored its purchase order.
Teradyne being of the view that the measure of damages under § 2-708(2) was the contract price less ascertainable costs saved as a result of the breach-see Jericho Sash and Door Company, Inc. v. Building Erectors, Inc., 362 Mass. 871, 872, 286 N.E.2d 343, (1972) (hereafter "Jericho")-offered as evidence of its cost prices its Inventory Standards Catalog ("the Catalog")-a document which was prepared for tax purposes not claimed to have been illegitimate, but which admittedly disclosed "low inventory valuations." Relying on that Catalog, Teradyne's Controller, McCabe, testified that the only costs which the seller saved as a result of the breach were:
direct labor costs associated
with production $ 3,301
material charges 17,045
sales commission on one T-347A 492
expense 1,800
-------
TOTAL $22,638
McCabe admitted that he had not included as costs saved the labor costs of employees associated with testing, shipping, installing, servicing, or fulfilling 10-year warranties on the T-347A (although he acknowledged that in forms of accounting for purposes other than damage suits the costs of those employees would not be regarded as "overhead"). His reason was that those costs would not have been affected by the production of one machine more or less. McCabe also admitted that he had not included fringe benefits which amounted to 12% in the case of both included and excluded labor costs.
During McCabe's direct examination, he referred to the 10-K report which Teradyne had filed with the SEC. On cross-examination McCabe admitted that the 10-K form showed that on average the seller's revenues were distributed as follows:
profit 9%
"selling and administrative" expense 26%
interest 1%
"cost of sales and engineering"
(including substantial research and
developmental costs incidental to
a high technology business) 64%
He also admitted that the average figures applied to the T-347A.
Teledyne contended that the 10-K report was a better index of lost profits than was the Catalog. The master disagreed and concluded that the more appropriate formula for calculating Teradyne's damages under § 2-708(2) was the one approved in Jericho, supra -" 'gross profit' including fixed costs but not costs saved as a result of the breach." He then stated:
In accordance with the statutory mandate that the remedy "be liberally administered to the end that the aggrieved party may be put in as good a position as if the other party had fully performed," M.G.L. c. 106 § 1-106(1), I find that the Plaintiff has met its burden of proof of damages, and has established the accuracy of its direct costs and the ascertainability of its variable costs with reasonable certainty and "whatever definiteness and accuracy the facts permit." Comment 1 to § 1-106(1) of the UCC.
In effect, this was a finding that Teradyne had saved only $22,638 as a result of the breach. Subtracting that amount and also the $984 quantity discount from the original contract price of $98,400, the master found that the lost "profit (including reasonable overhead)" was $74,778. To that amount the master added $614 for "incidental damages" which Teradyne incurred in preparing the T-347A for its new customer. Thus he found that Teradyne's total § 2-708(2) damages amounted to $75,392.
The master declined to make a deduction from the $75,392 on account of the refusal of the seller to accept the buyer's offer to purchase an FET tester in partial substitution for the repudiated T-347A.
At the time of the reference to the master, the court, without securing the agreement of the parties, had ordered that the master's costs should be paid by them in equal parts.
Teradyne filed a motion praying that the district court (1) should adopt the master's report allowing it to recover $75,392, and (2) should require Teledyne to pay all the master's costs. The district court, without opinion, entered a judgment which grants the first prayer and denies the second. Teledyne appealed from the first part of the judgment; Teradyne appealed from the second part.
1. The parties are agreed that § 2-708(2) applies to the case at bar. Inasmuch as this conclusion is not plain from the text, we explain the reasons why we concur in that agreement.
Section 2-708(2) applies only if the damages provided by § 2-708(1) are inadequate to put the seller in as good a position as performance would have done. Under § 2-708(1) the measure of damages is the difference between unpaid contract price and market price. Here the unpaid contract price was $97,416 and the market price was $98,400. Hence no damages would be recoverable under § 2-708(1). On the other hand, if the buyer had performed, the seller (1) would have had the proceeds of two contracts, one with the buyer Teledyne and the other with the "resale purchaser" and (2) it seems would have had in 1976-7 one more T-347A sale.
A literal reading of the last sentence of § 2-708(2)-providing for "due credit for payments or proceeds of resale"-would indicate that Teradyne recovers nothing because the proceeds of the resale exceeded the price set in the Teledyne-Teradyne contract. However, in light of the statutory history of the subsection, it is universally agreed that in a case where after the buyer's default a seller resells the goods, the proceeds of the resale are not to be credited to the buyer if the seller is a lost volume seller 2-that is, one who had there been no breach by the buyer, could and would have had the benefit of both the original contract and the resale contract. 3
Thus, despite the resale of the T-347A, Teradyne is entitled to recover from Teledyne what § 2-708(2) calls its expected "profit (including reasonable overhead)" on the broken Teledyne contract. 4
2. Teledyne not only "does not dispute that damages are to be calculated pursuant to § 2-708(2)" but concedes that the formula used in Jericho Sash & Door Co. v. Building Erectors Inc., 362 Mass. 871, 286 N.E.2d 343 (1972), for determining lost profit including overhead-that is, the formula under which direct costs of producing and selling manufactured goods are deducted from the contract price in order to arrive at "profit (including reasonable overhead)" as that term is used in § 2-708(2)-"is permissible provided all variable expenses are identified." 5
What Teledyne contends is that all variable costs were not identified because the cost figures came from a catalog, prepared for tax purposes, which did not fully reflect all direct costs. The master found that the statement of costs based on the catalog was reliable and that Teledyne's method of calculating costs based on the 10-K statements was not more accurate. Those findings are not clearly erroneous and therefore we...
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