Fashion House, Inc. v. K mart Corp., s. 89-1330

• Decision Date: 31 July 1989
• Docket Number: Nos. 89-1330,89-1331,s. 89-1330
• Citation: 892 F.2d 1076
• Parties: FASHION HOUSE, INC., Plaintiff, Appellee, v. K MART CORPORATION, Defendant, Appellant. FASHION HOUSE, INC., Plaintiff, Appellant, v. K MART CORPORATION, Defendant, Appellee. . Heard
• Court: U.S. Court of Appeals — First Circuit

Page 1076

892 F.2d 1076

15 Fed.R.Serv.3d 429

FASHION HOUSE, INC., Plaintiff, Appellee, v. K MART CORPORATION, Defendant, Appellant.

FASHION HOUSE, INC., Plaintiff, Appellant, v. K MART CORPORATION, Defendant, Appellee.

Nos. 89-1330, 89-1331.

United States Court of Appeals, First Circuit.

Heard July 31, 1989.

Decided Dec. 19, 1989.

Richard M. Sharfman, with whom Charles I. Poret, Daniel A. Ross, Sharfman, Shanman, Poret & Siviglia, P.C., New York City and Robert W. Lovegreen, Providence, R.I., were on brief, for Fashion House, Inc.

David M. Heilbron, with whom Leslie G. Landau, McCutchen, Doyle, Brown & Enersen, San Francisco, Cal., Steele, Goldman & Silcox, Robert W. Steele, J. David Gibbs and Cheryl M. Browning, Washington, D.C., were on brief, for K mart Corp.

Before BOWNES and SELYA, Circuit Judges, and HARRINGTON ^*, District Judge.

SELYA, Circuit Judge.

In the mercantile world, turning a profit never goes out of fashion. So it was that, in June of 1983, K mart Corporation, defendant and counterclaimant, anticipating commercial advantage, joined forces with plaintiff Fashion House, Inc. (FHI). Expectancies notwithstanding, the road to increased revenues rarely does run smooth--and this proved to be an especially bumpy ride. Cf. All About Eve (Twentieth Century-Fox 1950) (statement delivered by Bette Davis). Well before the term of the parties' contract expired, they had moved from the fitting room to the courtroom.

The short of the matter is that FHI sued K mart (which it believed was concealing information); K mart attempted unilaterally to cancel the contract midstream; and FHI broadened and intensified its litigatory efforts. Plaintiff's expanded suit, filed in the United States District Court for the District of Rhode Island, claimed (1) that K mart had bypassed Fashion House in placing certain orders during the contract's currency, and thus owed FHI commissions referable to the merchandise; and (2) that FHI was also entitled to what it would have earned had K mart refrained from prematurely terminating the arrangement. Defendant denied any breach, blamed plaintiff for the parties' troubles, and asserted a bevy of counterclaims. The jury found K mart's excuses to be out of style and awarded damages in excess of $59,000,000. These appeals followed. ¹

Jurisdiction below was premised on diversity of citizenship and the existence of a controversy in the requisite amount. 28 U.S.C. § 1332. For the most part, with small exceptions as noted herein, the parties acknowledge that Michigan supplies the substantive law. We honor their agreement. See Kali Seafood, Inc. v. Howe Corp., 887 F.2d 7, 8 (1st Cir.1989); Moores v. Greenberg, 834 F.2d 1105, 1107 n. 2 (1st Cir.1987). The assigned errors are many, and diverse. We begin with an overview of the parties' dealings and then address their contentions to the extent required, relating additional facts in connection with our discussion of particular issues.

I. BACKGROUND

K mart is one of the nation's largest retailers, operating an extensive chain of discount stores. These emporia sell an assortment of items, clothing included. During the early 1980s, K mart was experiencing a decline in earnings. It entered into a flirtation with FHI, a young but highly successful jobber. On November 1, 1982, the parties agreed to live together on a trial basis. Under their written memorandum of understanding, FHI was to act as a buying agent for K mart. Evidently, both parties were pleased by the results of the experiment: on June 30, 1983, during a ceremony marked by pomp and rosy prediction, they consummated the marriage, executing a long-term agreement (Agreement). We have excerpted the Agreement's key provisions in an attached appendix.

In general, subject to various conditions, exceptions, and qualifications, defendant agreed to purchase through plaintiff 85% of its overall requirements of "recognized designer and national brand name fashion and fashion-related apparel merchandise" and to award plaintiff a 5% commission on the net prices paid for the merchandise. The evidence is in sharp contradiction as to the net effect of what transpired after the Agreement solidified. FHI's view is that it performed its contractual obligations well and truly; that K mart prospered because of FHI's unstinting efforts; and that, even while enjoying fruits grown by FHI, K mart brought in great quantities of merchandise through the back door, as it were, depriving plaintiff of deserved commissions. K mart's story is radically different: it abided by the contract terms and gave plaintiff a fair accounting, and more--paying FHI over $32,000,000 in commissions; it received precious little in return, for plaintiff performed ineffectually, well below the level required by the Agreement.

On January 21, 1986, FHI wrote to K mart, articulating suspicions about K mart's commission accounting under the Agreement. Plaintiff demanded access to K mart's financial data for verification purposes. K mart denied that it owed additional commissions, but refused to open its books and records. Thereafter, K mart attempted to extricate itself from a souring relationship by setting FHI to a Sisyphean task: on February 6, it sent FHI a letter purporting to order a large but unspecified amount of apparel under particular brand names and labels then unavailable to FHI. The divorce came in April. Plaintiff broke the news that it had sued to obtain access to defendant's ledgers and to recover commissions earned but unpaid. K mart immediately terminated the Agreement (which at that juncture had over 18 months to run), claiming breach. From that moment on, the protagonists have been at swords' point.

II. THE PRECLUSORY ORDER

A. What Transpired.

To put the trial record into proper context, we must first pass upon a pretrial ruling of considerable consequence. Through interrogatories, FHI sought to obtain, for relevant time periods, the dollar amount of K mart's purchases of apparel bearing any of 138 listed labels. Initially, defendant said that plaintiff could ascertain the requested information from documents to which access had already been provided. FHI tried. It learned--and K mart later admitted--that the data could not be gleaned from the indicated documents. Plaintiff then moved for, and was granted, an order compelling responsive answers to the interrogatories. This time around, K mart represented that its apparel purchase records were kept by manufacturer name, not label name; and that none of its employees were "able to provide the complete information sought in any of the Interrogatorie [sic]...." Defendant proffered a schedule indicating vendor sources for most of the requested label names, and dollar equivalents (presumably representing aggregate purchases) for some of them; subsequently, it supplemented the schedule by providing monetary amounts for 23 additional vendors. Once again, K mart's professed helpfulness was less real than apparent; it later admitted that all of these dollar figures related not to particular labels, but "only to total purchases from the vendors listed." Thus, the schedule, like what had gone before, was totally unresponsive, and misleading to boot.

FHI was exasperated by this cycle of apparent answers, followed by retractions, followed by more apparent answers (this time, in the face of a direct court order), followed by more retractions. It moved for sanctions, contending among other things (1) that K mart's officers had, at various times, publicly announced what percentages of K mart's apparel sales were brand name and designer label merchandise, thereby indicating that defendant had greater knowledge of its labeled apparel purchases than disclosed in discovery; (2) that the evidence showed K mart to have purchased only labeled apparel from certain vendors, but even in those instances, dollar amounts had not been divulged; and (3) that when plaintiff sought discovery from one vendor to ascertain the dollar volume of K mart's purchases of labeled wares, K mart, in support of the vendor's motion to quash, provided an affidavit indicating (falsely) that it had already supplied FHI with the information. The motion was heard by a magistrate. At the hearing, K mart returned to its original position, viz., that the information sought could be obtained by rummaging through papers previously supplied. The magistrate was unimpressed. He determined, supportably in our view, that defendant's failure to furnish the information, despite a direct order of the court, "was intentional, deliberate and willful." The magistrate further found that "K mart did not act in good faith or in an honest and legitimate attempt to make discovery." Consequently, the magistrate ruled:

1. For the purposes of this action the apparel purchases by K mart ... upon which Fashion House was due a commission may be established by Fashion House by applying the percentages set forth in paragraph 2 below to K mart['s] ... total apparel purchases for the applicable time periods and calculating a commission of 5 percent upon 85 percent of such amounts.

2. [This paragraph of the order enumerated percentage figures derived from K mart officers' public statements, for relevant time periods.]

3. K mart is precluded from introducing evidence as to the amount of its direct purchases of any brand or label of apparel.

Defendant appealed the preclusory order to the district judge, who upheld the magistrate's findings and decreed that the first two paragraphs of the magistrate's order "shall stand as written for the sole purpose of determining Fashion House's damages herein with respect to purchases of apparel by K mart ... if Fashion House is later held to be entitled to damages" (emphasis supplied). The judge modified paragraph 3 of the magistrate's order to the effect that K mart was to be "precluded from introducing evidence at trial which would have answered [the disputed interrogatories]." And, the judge...