Consolidated Data Terminals v. Applied Digital Data Systems, Inc.

• Decision Date: 10 May 1983
• Docket Number: 81-4176,Nos. 81-4152,s. 81-4152
• Citation: 708 F.2d 385
• Parties: 36 UCC Rep.Serv. 59 CONSOLIDATED DATA TERMINALS, a California corporation, Plaintiff, Appellee and Cross-Appellant, v. APPLIED DIGITAL DATA SYSTEMS, INC., a corporation, Defendant, Appellant and Cross-Appellee.
• Court: U.S. Court of Appeals — Ninth Circuit

Page 385

708 F.2d 385

36 UCC Rep.Serv. 59

CONSOLIDATED DATA TERMINALS, a California corporation, Plaintiff, Appellee and Cross-Appellant, v. APPLIED DIGITAL DATA SYSTEMS, INC., a corporation,

Defendant, Appellant and Cross-Appellee.

Nos. 81-4152, 81-4176.

United States Court of Appeals, Ninth Circuit.

Argued and Submitted Sept. 13, 1982.

Decided May 10, 1983.

Perez & McNabb Law Offices, Richard L. Perez, Orinda, Cal., for plaintiff, appellee and cross-appellant.

Alan R. Wentzel, New York City, Craig H. Casebeer, Cooley, Godward, Castro, Huddleson & Tatum, San Francisco, Cal., for defendant, appellant and cross-appellee.

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

Before FLETCHER and BOOCHEVER, Circuit Judges, and EAST, Senior District Judge.

FLETCHER, Circuit Judge:

Applied Digital Data Systems, Inc. (ADDS), a manufacturer, appeals from a district court judgment for $585,489.61 entered against it and in favor of Consolidated Data Terminals (CDT), a distributor, for damages arising from transactions involving computer terminals. The district court awarded these compensatory and punitive damages based on ADDS's negligent manufacture and sale of defective terminals to CDT, its fraudulent misrepresentations concerning the terminals, and also based on its tortious interference with a contract between CDT and Intel, a purchaser of computer terminals. We affirm the district court's conclusion that ADDS was liable to CDT for compensatory damages based on breach of contractual warranty; however, we find that these damages were calculated and awarded in part upon an erroneous theory, and reduce the amount of the award. Further, we conclude that ADDS was denied a fair trial on the tort issues of fraud and interference with contract, and remand the case for a new trial limited to these issues. We likewise vacate and remand the district court's award of punitive damages since they are dependent upon the outcome of the retrial on the tort issues.

BACKGROUND

ADDS is a manufacturer of computer equipment, including cathode-ray computer terminals (CRT's). CDT distributes such terminals in California. In December, 1976, ADDS and CDT entered into a written distributorship agreement that made CDT a non-exclusive sales outlet for ADDS terminals. Under the agreement, ADDS promised to accept CDT purchase orders according to a fixed schedule of prices, while CDT promised to use "best efforts" to promote the lease and sale of ADDS products. CDT further promised to refrain from selling any other terminals deemed "competitive" by ADDS. Paragraph 2 of the contract provided that it was subject to cancellation by either party at any time upon 90-day notice. Paragraph 22 contained a merger clause stating in effect that no agreements between the parties existed outside of the written agreement, and specified that New York law would govern the agreement. The terms of this distributorship agreement were incorporated by reference into the sales contracts covering every item of equipment sold by ADDS to CDT.

For a time, relations between ADDS and CDT were satisfactory. But in late 1977, CDT ordered for the first time some of ADDS's newest and supposedly most advanced terminals, the Regent 100's. In written specifications, ADDS stated that these rather inexpensive CRT's would operate at the relatively high speed of 19,200 baud (1920 characters per second). In promotional literature, ADDS also claimed that the Regents would be "inherently reliable." In fact, as it turned out, none of the Regent 100 terminals was capable of attaining the 19,200 baud performance rate. Also, the Regent 100's were plagued by design errors and production problems that caused many of them to malfunction seriously. The district court found that "as many as 25%" were totally inoperative upon delivery. "When introduced, the terminals did not operate properly at any level above 4,800 baud and occasionally did not operate properly at 1,200 baud." CDT received a steady stream of complaints and returns from the customers to whom it distributed Regent 100's.

When informed of the problems with the Regent 100 terminals, ADDS attempted to perform its warranty obligations. ADDS distributed "releases" with proposed solutions for specific problems encountered with the terminals, established a repair depot where CDT customers could ship the defective equipment for service, and on one occasion, sent a special team of engineers to customer sites to work on the malfunctioning terminals. As a result of these efforts, all or most of the Regent 100's became functional within a year after the first terminal deliveries, but these terminals never operated at rates approaching 19,200 baud. According to testimony by a former ADDS salesman, the specifications on the Regent 100 model were eventually lowered to 1,900 baud.

Due in part to the continuing problems with Regent terminals, CDT discontinued efforts to sell Regent 100 terminals to its customers. For several months, CDT placed no additional orders for Regents. But in June, 1978, Intel Co., a large user of computer terminals, asked for bids to supply 127 Regent terminals and other computer equipment. ADDS, which had previously sold Regents directly to Intel, submitted a bid to supply terminals for the order. CDT submitted a bid to fill the entire order, including other equipment in addition to the Regent terminals. Upon receiving the initial bids, Intel informed CDT that its bid was successful because it was lowest, and notified ADDS that its bid was too high. Afterwards, ADDS learned the amount of CDT's bid on the terminals, lowered its asking price, and was awarded the final contract to supply the terminals. CDT was awarded the contract to supply the remainder of the equipment specified in the bid. When it learned of the ADDS-Intel terminal contract, CDT ceased dealing with ADDS. It entered into a new agreement to distribute terminals made by Hazeltine, another manufacturer whose products CDT could not previously sell under the ADDS distributorship agreement, since ADDS deemed Hazeltine terminals to be "competitive" with its models. Later, in 1979, CDT entered into another such agreement with Televideo, another "competitive" concern. CDT enjoyed considerable success selling these terminals, and also increased its sales of Lear-Siegler CRT products, which it had been permitted to sell under the ADDS distributorship agreement.

In December, 1978, CDT filed this diversity action against ADDS, alleging several breaches of contract, breach of an implied covenant of good faith and fair dealing, unlawful interference with prospective business advantage, and fraud in the inducement to enter the distributorship agreement. ADDS answered and counterclaimed against CDT for $68,117.17, the unpaid balance owed by CDT to ADDS upon terminals delivered to CDT. Upon ADDS's motion before trial, District Judge Spencer Williams dismissed the breach of covenant of good faith and fair dealing cause of action. CDT's other claims were tried before District Judge Daniel H. Thomas. On the third day of the four-day bench trial, CDT was permitted to amend its complaint to add new claims for fraud and negligence by ADDS in its design, manufacture, and sale of Regent 100 terminals.

At the close of trial, the district court concluded that ADDS had breached its warranties contained in the sales contracts governing the Regent 100 terminals that it sold to CDT. The court ruled that the purported limitation on remedies contained in the distributorship agreement did not absolve ADDS from either direct or consequential damages stemming from this breach. The court also found that ADDS had negligently designed and sold the Regent 100 line of terminals, fraudulently representing that they were "inherently reliable" while knowing that the Regent terminals it had already sold were experiencing operational problems. Finally, the court ruled that ADDS, by submitting its second, lower bid to Intel, tortiously interfered with CDT's economic relationship with Intel. (N.D.Cal.1981).

By way of damages, the court found that CDT had incurred $15,000.00 in expenses and lost sales time because of the services it had provided customers who had bought defective Regent terminals. The court also concluded that ADDS's breaches of warranty caused the termination of the ADDS-CDT distributorship agreement. Absent the Regent controversy, the court reasoned, CDT would have continued to realize profits through 1980 on sales of ADDS products. Therefore, the court awarded the projected profits on these sales as consequential damages in the amount of $11,842.50. Further, the court refused to deduct profits earned by CDT on sales of Hazeltine and Televideo equipment between 1978 and 1980 in mitigation of these damages, since it found that this equipment was not "in actuality" competitive with ADDS terminals. Next, the court found that CDT would have realized a profit of $266 on each of the 127 terminals it should have sold to Intel, and awarded $28,702.00 in compensatory tort damages. Finally, the court found that ADDS's "fraudulent conduct and wrongful interference with CDT's advantageous economic relationship with Intel was in knowing and conscious disregard of CDT's rights and interests," and awarded CDT punitive damages of $500,000.00. .

From the total liability of $655,544.50 imposed upon ADDS, the court subtracted $70,054.89 to satisfy ADDS's counterclaim. The district court accordingly entered judgment for CDT in the amount of $585,489.61.

Pursuant to Federal Rule of Civil Procedure 59(a), ADDS filed a motion requesting the district court to amend its judgment. ADDS specifically objected to the finding of liability for tortious interference, arguing that a business is always free to "interfere" with negotiations of a competitor by lowering its bid. The district court responded by entering an amended finding that an actual contract had...