Royal Typewriter Co., a Div. of Litton Business Systems, Inc. v. Xerographic Supplies Corp.

• Decision Date: 14 November 1983
• Docket Number: No. 81-5311,81-5311
• Citation: 719 F.2d 1092
• Parties: 37 UCC Rep.Serv. 429 ROYAL TYPEWRITER COMPANY, A DIVISION OF LITTON BUSINESS SYSTEMS, INC., a corporation, Plaintiff-Appellant, v. XEROGRAPHIC SUPPLIES CORPORATION, a corporation, et al., Defendants-Appellees.
• Court: U.S. Court of Appeals — Eleventh Circuit

Page 1092

719 F.2d 1092

37 UCC Rep.Serv. 429

ROYAL TYPEWRITER COMPANY, A DIVISION OF LITTON BUSINESS SYSTEMS, INC., a corporation, Plaintiff-Appellant, v. XEROGRAPHIC SUPPLIES CORPORATION, a corporation, et al Defendants-Appellees.

No. 81-5311.

United States Court of Appeals, Eleventh Circuit.

Nov. 14, 1983.

Shutts & Bowen, Karl V. Hart and Phillip J. Sheehe, Miami, Fla., Trenam, Simmons Kemker, Scharf, Barkin, Frye & O'Neill, Marvin Barkin, Keith E. Rounsaville, Tampa, Fla., for plaintiff-appellant.

Shelby Highsmith, Philip Glatzer, Coconut Grove, Fla., for defendants-appellees.

Appeal from the United States District Court for the Southern District of Florida.

Before HILL and HATCHETT, Circuit Judges, and HAYNSWORTH ^*, Senior Circuit Judge.

JAMES C. HILL, Circuit Judge:

Plaintiff/appellant Royal Typewriter Company initiated this action on March 2, 1976 by filing a complaint against defendants/appellees Xerographic Supplies Corporation (XSC), Ted Mark, Paula Mark, and Mark Royal Associates. The complaint primarily sought to collect amounts unpaid on promissory notes and guarantees issued by appellees in payment for Royal Bond Copy Machines (RBC-I's). Appellees filed a counterclaim against Royal seeking to recover damages for alleged breaches of warranties, fraud, and tortious interference with business relations while maintaining at trial both that they could properly revoke acceptance and that Royal's action was barred by failure of consideration. After a jury trial, the district judge entered a judgment upon a jury verdict awarding appellees $1,750,000 in compensatory damages and $3,250,000 in punitive damages against Royal and denying Royal's claim against appellees for $846,607.12 owed on promissory notes and guarantees. The district court granted Royal a set-off of $12,508 against the final judgment and reduced the award to $4,987,492. Royal appeals.

The case arose from a series of separate transactions commencing in January 1973 and ending in October 1975 in which XSC purchased 193 RBC-I's, 190 of them on credit. The issues in this case arise primarily under Florida common law and under the Florida version of the Uniform Commercial Code. The issues raised by Royal on appeal include:

(1) whether a new trial is required because erroneous theories of liability and damages were submitted to the jury and a general verdict was returned;

(2) whether the district court erred in not dismissing XSC's breach of warranty claims;

(3) whether the district court erred in not dismissing appellees' fraud claims;

(4) whether the district court should have dismissed appellees' claim of tortious interference with appellees' business relationships;

(5) whether the district court properly allowed the jury to consider the issues of compensatory and punitive damages;

(6) whether XSC properly revoked acceptance of the RBC-I's; and

(7) whether appellant was entitled to a directed judgment on the promissory notes.

We reverse the district court's judgment and remand for proceedings consistent with this opinion.

I. Facts

In 1971, Royal began to market the RBC-I, a first generation plain paper or "bond" copying machine manufactured in Japan for Royal by Konishirou. When the RBC-I was first marketed, plain paper copiers were in their infancy. The RBC-I contained features representing technical improvements over Xerox bond copiers which dominated the market at the time. The RBC-I unquestionably produced high quality copies. When viewed in light of subsequent advances in the state of the art, the RBC-I has obvious limitations. The RBC-I is slow and noisy. To eliminate these problems, some users and dealers installed speed modifications and "quiet down" kits which increased the wear on the machine.

In the early 1970's, Underwriters' Laboratories, an independent organization that tests electrical equipment, promulgated safety specifications for bond copiers. To obtain UL certification, the product had to be tested under UL supervision or UL audit. Royal obtained UL certification for the RBC-I before marketing it in the United States.

Ted Mark organized XSC in Miami, Florida in 1969. Mark had worked for Xerox as a sales representative from October 1966 until May 1969. During its first four years of operation, XSC primarily marketed supplies for electrostatic copiers. The company had no experience with bond copiers. In 1971, XSC hired Joseph B. Stryhal as sales manager. Mark first saw the RBC-I at a trade show in Atlanta in July 1972. Upon his return to Miami, he instructed Stryhal to study trade literature and to call existing dealers in Florida to inquire about the RBC-I. After investigation by both men, Stryhal reported to Mark that the RBC-I was "the greatest machine that is going to replace Xerox...."

In 1973, Gordon Waters, then vice-president of Royal, met Mark at a trade show. Mark asserts that Waters told him that the RBC-I had been properly tested and was ready to be marketed, that the RBC-I had a useful life of one million copies calculated at the rate of 8000 copies per month, and that if XSC became an RBC-I dealer, Royal would not compete with XSC in Miami. Mark also maintains that another Royal representative, Dick Thomas, told him that it would cost XSC 1/2 cent per copy to service and maintain RBC-I's on a rental basis. Mark claims that other Royal representatives represented to him and Stryhal in 1972 that the RBC-I had been tested by Royal, that it was a good and reliable machine being successfully marketed, and that the machine would cost approximately 1/2 cent per copy to maintain.

XSC received its first RBC-I on January 13, 1973. From January 1973 through June 1975, in eleven separate transactions, XSC received from Royal 193 RBC-I's, 190 of which were purchased on credit.

The RBC-I required regular service to assure proper operation. Royal recommended that the RBC-I receive preventive maintenance every 4800 to 5000 copies, a schedule known to both Mark and Stryhal. XSC sent service people to schools provided by Royal to train dealer service personnel. XSC's records indicate, however, that on the average, XSC performed preventive maintenance on its RBC-I's every 11,000 copies. Royal's program also specified a comprehensive overhaul every 100,000 copies, called the "100,000 copy PM." XSC failed and neglected to perform any 100,000 copy PMS.

To solve the problems with noise and speed, independent RBC-I dealers invented and manufactured certain devices called "quiet down" and "speed up" kits for installation on the RBC-I. Appellees alleged that Royal assisted dealers in installing these kits. Appellees also alleged that Royal itself used the quiet down kit on its RBC-I's for demonstration at trade shows and published a newsletter in November 1973 heralding the "good news" to its dealers that these kits manufactured by private dealers were now available and telling dealers where and how to obtain them. The only proviso from Royal was that the quiet down kit had to be installed with the speed up kit. Royal simultaneously published a letter to dealers informing them that installation of unauthorized modifications would void all warranty protection attendant to its sale of RBC-I's.

XSC alleged that the RBC-I was susceptible to frequent paper jams. When paper copies became jammed in the exit or heater (fuser) section of the machine, the paper would smoke, char, burn and could catch on fire. XSC also alleged that Royal did not maintain a sufficient supply of spare parts and was aware of fire-related problems with the design of the machine itself as early as August 1971. XSC contends that it continued to purchase RBC-I's from Royal while relying on the latter's assurances that problems with spare parts would be corrected.

Appellees also complained that though Royal had represented to Mark that it would not compete with XSC as an RBC-I dealer in Miami, Royal addressed several letters to XSC's rental customers inviting them to do business with Royal on a "straight purchase" basis and suggesting that it would be better to do business with Royal directly than with a local dealer. After the date of these letters, XSC lost at least one customer, Southeast First National Bank of Miami, which cancelled its leases of RBC-I's.

XSC claims that it did not receive notice from rental customers regarding electrical shock problems related to the potential fire hazard until January and August 1976. Appellees introduced expert witnesses, one of whom examined the machine in October 1976, who testified that the RBC-I and its component parts were substantially defective in several respects, that the RBC-I as manufactured violated UL standards, and that with its interlocks "bypassed," the RBC-I presented an electrical shock hazard to the user.

On March 2, 1976, Royal filed its complaint to recover amounts unpaid on the notes issued by appellees in payment for the RBC-I's. Royal sought to replevy the RBC-I's still in XSC's possession. On November 1, 1976, United States District Judge C. Clyde Atkins held a hearing on an order to show cause why XSC should not deliver its remaining RBC-I's. At this hearing, appellees' counsel, three weeks after filing a counterclaim against Royal, announced that XSC was "revoking acceptance" of all machines in issue based on the October 1976 inspection which revealed alleged defects in the machines. XSC also informed its customers to return their RBC-I's to Royal. Inspection of the returned machines by Royal revealed the RBC-I's to be in poor, neglected condition. Many of the machines had been used for over three years without proper maintenance. Royal claims that many machines had parts that did not meet Royal specifications and that 106 of 122 had unauthorized quiet down kits installed by XSC. XSC never returned the seventy-one machines that it had sold to customers.

II. District Court's Use of a General Verdict

Each of the appellees asserted several claims against Royal...