Systemized of New England, Inc. v. SCM, Inc., 83-1772

• Decision Date: 27 April 1984
• Docket Number: No. 83-1772,83-1772
• Citation: 732 F.2d 1030
• Parties: 1984-1 Trade Cases 65,958, 39 UCC Rep.Serv. 387 SYSTEMIZED OF NEW ENGLAND, INC., Plaintiff, Appellant, v. SCM, INCORPORATED, Defendant, Appellee.
• Court: U.S. Court of Appeals — First Circuit

Page 1030

732 F.2d 1030

1984-1 Trade Cases 65,958, 39 UCC Rep.Serv. 387

SYSTEMIZED OF NEW ENGLAND, INC., Plaintiff, Appellant, v. SCM, INCORPORATED, Defendant, Appellee.

No. 83-1772.

United States Court of Appeals First Circuit.

Argued March 9, 1984.

Decided April 27, 1984.

Ira L. Schreiber, Providence, R.I., with whom Ralph Gonnella, and Guy R. Bissonnette, Providence, R.I., were on brief, for appellant.

George M. Vetter, Jr., Providence, R.I., with whom Benjamin V. White III, Vetter & White, Providence, R.I., and Peter Dreilinger, New York City, were on brief, for appellee.

Before COFFIN, BOWNES and BREYER, Circuit Judges.

BOWNES, Circuit Judge.

In this commercial case, plaintiff-appellant, Systemized of New England, Inc., makes three claims: breach of contract, breach of the warranty of merchantability in the sale of goods, and violation of the antitrust laws, specifically the Sherman Act, 15 U.S.C. Sec. 1, and the Clayton Act, 15 U.S.C. Sec. 14. The antitrust claims are premised on a theory of illegal tying. The issues are whether the district court erred in directing a verdict for the defendant-appellee, SCM Corporation (SCM), on the breach of contract and antitrust claims and in granting a judgment notwithstanding the verdict on the breach of warranty claim. We recount the evidence in the light most favorable to the nonmoving party in ruling on the propriety of the district court's grant of directed verdicts and judgment n.o.v.

The Evidence

Systemized of New England, Inc. (Systemized) is in the business of selling, supplying, and servicing photocopiers. Its principal place of business is Providence, Rhode Island. SCM Corporation is a New York corporation. During the 1970's SCM marketed several models of photocopiers to its authorized dealers, including Systemized, and also provided photocopiers to businesses and government agencies on a contractual system similar to leasing. These contracts ran between SCM and the users, and contained SCM's promises to maintain and service the equipment. SCM then paid its local dealers to service the photocopiers so provided. Large national companies and government agencies with photocopying needs of 50,000 copies per month were known as K-Accounts. Substantial and reliable monthly cash commissions accrued to the dealers having responsibility for the major K-Accounts, and were not dependent upon the number of service calls made. The dealers' commissions were paid at a flat rate dependent upon the type and number of photocopiers in the K-Account.

During July, 1978, Systemized ordered five of the model 1200 copiers from SCM. After receipt of these machines, Systemized ordered ten more 1200s in September and an additional ten in November of 1978. The last group of SCM 1200s was delivered in early December. Shortly after the new year, Joseph Ryan and John Fitzgerald, the principals of Systemized, were informed by William Curran, the National Retail Sales Manager for SCM, that the Boston SCM photocopier branch was for sale and they expressed an interest in purchasing it. Approximately two weeks later, Ryan and Fitzgerald met with Curran in Boston to discuss the purchase of the Boston branch. At that meeting, Curran told the principals of Systemized that they would have to buy a minimum of ten 1200s and a total minimum of $25,000 worth of equipment and supplies, as a precondition to the purchase of the branch. In response, Ryan told Curran that they did not want to buy any more 1200s. Ryan explained that they had purchased some of these machines as early as July of the previous year and by late fall were experiencing difficulties. The copiers were not functioning properly and were causing numerous customer complaints. Curran's response was that, unless they agreed to place the order as specified, he was unable to begin negotiations or allow them to see the financial worksheets of the branch.

Ryan and Fitzgerald then agreed to the purchase conditions with Ryan admonishing Curran that SCM would have to correct the problems with the 1200 copier. Despite dissatisfaction with the 1200, Systemized fulfilled its entire minimum inventory purchase requirement of $25,000 by purchasing on January 30, 1979, fifteen SCM 1200s, five more 1200s than SCM required as part of start-up branch inventory. At trial, Ryan explained that the branch was overstocked with toners and other supplies; apparently the 1200s constituted the only alternative for fulfilling the inventory requirement because it was the only photocopier SCM was marketing at that time. Systemized then purchased an additional ten 1200s on February 5, 1979. On February 13, 1979, SCM sent a letter to all of its Boston area customers announcing the appointment of Systemized as its dealer and service provider for the area.

Systemized did not purchase additional SCM 1200s after its February order, apparently because SCM introduced a new model, 1201, in the spring of 1979. Although the record is somewhat unclear, it appears that the New England Wholesales Manager, William Pawluk, contacted Systemized about purchasing the 1201s. Ryan and Fitzgerald then sat down with SCM representatives and told them that they were leery about the so-called improvements in the 1201. The SCM people must have been persuasive, however, because Systemized ordered ten 1201s on April 25, 1979. The 1201s failed to perform any better than the 1200s.

On visits during June, July, and August, Pawluk inquired whether Systemized was interested in purchasing additional 1201s. Each time, beginning in June, Ryan told Pawluk that Systemized did not want to do so because those machines were, in his opinion, as unreliable as the 1200s. Systemized did not place any more orders for 1200s. During Pawluk's July visit, Ryan reiterated Systemized's resolve not to purchase more 1201s. In August, the 1201s were discussed again both with Pawluk and with another SCM executive, Herb Aaron, the regional account manager. According to Ryan, Aaron called the 1201s "pieces of junk" after Ryan informed Aaron that Systemized would not purchase any more 1201s. These three conversations comprise the entire communication from Systemized to SCM regarding the 1201's deficiencies.

Further evidence indicates that Systemized purchased the 1200s for $1,795 and the 1201s at $1,895 per machine. Systemized resold the 1200s at prices ranging from $1,995 to $4,000 per machine, with the majority selling for approximately $3,000. The 1201s, to the extent that they were resold, were sold in the range of $2,600 to $3,100. The average price Systemized received for the photocopiers was below the retail price SCM expected dealers to obtain.

Ryan testified that Systemized had twelve or thirteen of the defective photocopiers in its storeroom at the time of trial; they had been sold but were returned when they failed to live up to customer standards. Besides the returned machines, Systemized was apparently involved in litigation over some of the other 1200s and 1201s, whose description was excluded from evidence. There is no evidence that Systemized made any mention to SCM of these suits prior to the institution of this litigation.

In mid-July, after Ryan had told SCM representatives on at least two different occasions that Systemized would not purchase any more 1201s, Systemized was informed that SCM had been receiving complaints regarding the servicing of K-Account photocopiers. A summit meeting was held at Ryan's request between Aaron, Pawluk, Ryan and Fitzgerald in an attempt to resolve the problems. Apparently no resolution was achieved because SCM initiated inquiries among other dealers in the Boston area to determine whether they would be willing to assume some of Systemized's service work. On December 15, 1979, SCM contacted the Woburn, Massachusetts, branch of Systemized and informed the workers that two-thirds of the Boston area accounts were being transferred from Systemized to other dealers in the area. A significant reduction in Systemized's income resulted from this action.

Breach of Contract

Plaintiff Systemized alleges that SCM breached their written contract by unilaterally removing from it two-thirds of the K-Accounts. It contends that its purchase of the Boston branch was predicated on and contained a transfer of the right to service the K-Accounts for valuable consideration. Defendant denies that plaintiff had any contractual right to service the K-Accounts and argues that it had the unilateral right to remove the accounts from plaintiff and transfer them to other dealers.

The parties also differ on which state's law is to be applied in interpreting the contract. Plaintiff submits that because the contract was executed in Massachusetts and concerned the sale of a business located in Massachusetts, the law of Massachusetts should be applied. Defendant points to a passage in the contract by which the parties designated New York law to govern disputes under the contract.

The pertinent contract language states: "15. APPLICABLE LAW. This agreement shall be construed and enforced in accordance with the laws of the state of New York." While plaintiffs would have us apply Massachusetts law, Massachusetts, we believe, would apply New York law. Where the parties to a contract have expressed their intent as to the applicable governing law, Massachusetts has upheld the parties' expectations and looked to that state's law provided that the specified state bears some minimum contact with the transaction. Maxwell Shapiro Woolen Co v. Amerotron Corp., 339 Mass. 252, 257, 158 N.E.2d 875, 878 (1959). SCM is a New York corporation, a sufficient minimum contact for us to effectuate the parties' intentions and apply New York law on this issue. We agree with the district court that rules governing contracts of adhesion are inapplicable here because the contract documents on their face reveal evidence of bargaining. Moreover, plaintiff's own witnesses testified to effective bargaining on...