Aerotronics, Inc. v. Pneumo Abex Corp.

• Decision Date: 09 August 1995
• Docket Number: No. 94-3430,94-3430
• Citation: 62 F.3d 1053
• Parties: AEROTRONICS, INC., Appellee, v. PNEUMO ABEX CORPORATION, Appellant.
• Court: U.S. Court of Appeals — Eighth Circuit

Page 1053

62 F.3d 1053

AEROTRONICS, INC., Appellee, v. PNEUMO ABEX CORPORATION, Appellant.

No. 94-3430.

United States Court of Appeals Eighth Circuit.

Submitted May 15, 1995.

Decided Aug. 9, 1995.

David A. Streubel, St. Louis, MO, argued (David W. Harlan, on the brief), for appellant.

Michael Anthony Fisher, St. Louis, MO, argued (Donald G. Wilkerson, on the brief), for appellee.

Before MAGILL, Circuit Judge, HENLEY, Senior Circuit Judge, and LOKEN, Circuit Judge.

MAGILL, Circuit Judge.

Pneumo Abex Corporation appeals from a final judgment entered by the district court ¹ upon a jury verdict in favor of Aerotronics, Inc. For reversal, Pneumo argues that the district court: (1) violated the parol evidence rule; (2) erred in its instructions to the jury; (3) improperly applied Missouri's ten-year statute of limitations; and (4) erred in refusing to grant Pneumo's motion for judgment as a matter of law. We affirm.

I. BACKGROUND

Pneumo Abex Corporation (Pneumo) and its subsidiaries design and manufacture components for commercial and military aircraft. As a major part of its business, Pneumo attempts to win subcontracts for major subsystems of new airplane programs (initial development contract), such as the landing gear or flight controls, from a "prime contractor." A "prime contractor" is an airplane manufacturer such as McDonnell Douglas or Boeing who is responsible for the design, development and manufacture of a complete aircraft program. Competition among subcontractors to win an initial development program is extremely fierce. There are few opportunities to win an initial development program and the process is typically very time-consuming and expensive, lasting anywhere from five to ten years from the initial conception to actual manufacture and sale of the aircraft.

If a subcontractor wins an initial development contract for a major subsystem from a prime contractor, such as the flight controls for the F-15 from McDonnell Douglas, it is virtually guaranteed to continue on the program throughout the program's life, unless the subcontractor cannot perform. The life of an airplane program is long, usually ranging from twenty to thirty years. In addition, the subcontractor also receives the secondary sales market of spares, repairs and retrofits. Spare parts include an entire landing gear or flight control or portions of either that replace parts of the subsystem that have broken, worn out, or are replaced as a part of a safety program. The repair service includes repairing damaged or worn out subsystems and providing other types of maintenance service. Retrofitting encompasses the furnishing of new parts or equipment not available at the time of manufacture. This secondary market is an important part of the subcontractor's incentive and investment to win a new aircraft program. The sales in the secondary market sometimes exceed sales of the original production unit, and spares have a greater profit margin than the original production sales.

Foreign governments almost always made their purchases in the secondary market directly from the subcontractor. Until approximately the mid-1980s, the United States Government usually made its purchases in the secondary market through the prime contractor, such as McDonnell Douglas. The prime contractor would obtain the spare from the subcontractor and pass it along to the government at an increased price. However, after a scandal arose over the inflated prices the government was being charged, the United States began purchasing its spares directly from the subcontractor.

For slightly over twenty years, Aerotronics acted as a sales representative for two divisions of Pneumo: Cleveland Pneumatic Company (CPC) and NWL Control Systems (NWL). ² Aerotronics had separate sales agreements with CPC and with NWL. Under both agreements, Aerotronics represented CPC and NWL in their respective attempts to obtain initial development subcontracts and subsequent sales of flight controls and landing gear for military fighter aircraft programs, and provided a range of customer services.

Aerotronics and NWL entered into a written agreement in March 1969 (NWL agreement). This agreement authorized Aerotronics to act as NWL's exclusive sales representative in a territory which included Missouri, Texas, ³ Arkansas, Kansas, Oklahoma and Southern Illinois. Major prime contractors in this territory include McDonnell Douglas Aircraft Company in St. Louis, Missouri, and Boeing Military Airplane Company in Wichita, Kansas. Under the NWL agreement, Aerotronics promoted the sale of NWL's products in its territory and kept NWL informed of major aircraft programs and activities. The NWL agreement provided that it was governed by Michigan law. NWL terminated this agreement, pursuant to its terms, on May 11, 1991.

Aerotronics and CPC entered into a written agreement in March 1970 (CPC agreement). The CPC agreement provided that it was governed by Ohio law. Except for the choice of law provision, this agreement is identical in all relevant respects to the NWL agreement. Under the CPC agreement, Aerotronics' territory included St. Louis, Missouri, and Wichita, Kansas. In 1984, Aerotronics' territory changed to McDonnell Douglas in St. Louis, Boeing in Wichita, and Tinker Air Force Base in Oklahoma City. CPC terminated its contract with Aerotronics, pursuant to its terms, on January 9, 1989.

One reason Pneumo wanted Aerotronics to represent both CPC and NWL was because Pneumo believed it was vital for both NWL and CPC to obtain a subcontract on the new F-15 military fighter program at McDonnell Douglas. As a result of Aerotronics' efforts, NWL won the flight control business and CPC won the landing gear business on the F-15, F-18 and AV8B military fighter aircraft development programs at McDonnell Douglas; NWL retained the F-4 program at McDonnell Douglas; and CPC won the landing gear business on the KC-135R military cargo transport plane program at Boeing (collectively referred to as "Aircraft Programs").

Under both agreements, Aerotronics' compensation was solely in the form of commissions. These commissions were determined by a scheduled rate on receipts of all sales of products within Aerotronics' territory. Aerotronics also received one-half of its normal commission for any sales of products outside its territory if Aerotronics could establish to Pneumo's satisfaction that the sales were due to Aerotronics' efforts with a prime contractor within Aerotronics' territory. The parties dispute whether the agreements provided for commissions to Aerotronics on posttermination orders received relating to Aircraft Programs awarded to Pneumo prior to termination.

Pneumo failed to pay Aerotronics commissions on sales in the secondary market of spares directly to the United States government, foreign governments and firms. Past presidents of both NWL and CPC testified at trial that they intended to pay Aerotronics commissions on all extraterritorial sales of spares on the Aircraft Programs regardless of whether Aerotronics' contract was terminated. Pneumo discovered that it was not paying commissions to Aerotronics on these sales in October 1985. In early 1989, an employee of NWL informed Aerotronics that, although not certain, he did not believe that Aerotronics was being paid commissions by NWL on third-party, secondary market, sales of spares, repairs and retrofits outside of Aerotronics' territory.

Shortly thereafter, Aerotronics unsuccessfully attempted to obtain an accounting from Pneumo. Aerotronics then filed this diversity action in federal district court against Pneumo for failure to pay extraterritorial and posttermination commissions due under both agreements. Pneumo counterclaimed for recoupment for erroneous payment of certain commissions. The action proceeded to a jury trial. The jury returned a verdict in favor of Aerotronics on its claims under both agreements in the amount of $3,388,124. This appeal followed. Further details will be developed as we treat those specific issues.

II. DISCUSSION

In a federal diversity action, state law governs the substantive issues. Morrison v. Mahaska Bottling Co., 39 F.3d 839, 842 (8th Cir.1994). We will honor the agreements' choice of law provisions. Accordingly, Ohio law governs the substantive issues concerning the CPC agreement, and Michigan law governs the substantive issues concerning the NWL agreement.

A. Parol Evidence

Pneumo argues that the district court erred in: (1) determining that paragraph 11 of both agreements is ambiguous and denying its motion in limine to exclude evidence that allegedly varies or contradicts the language of paragraph 11 with respect to Aerotronics' entitlement to posttermination commissions; (2) failing to remove paragraph 7B from the jury's consideration because the court had previously ruled that paragraph 7B was unambiguous; and (3) denying its motion in limine to exclude evidence that contradicts or varies the terms of paragraph 7B regarding Aerotronics' entitlement to extraterritorial commissions.

The parol evidence rule is a matter of substantive law, not the admissibility of evidence. American Anodco, Inc. v. Reynolds Metals Co., 743 F.2d 417, 422 (6th Cir.1984) (applying Michigan law); National City Bank, Akron v. Donaldson, 95 Ohio App.3d 241, 642 N.E.2d 58, 60 (1994). Thus, state law applies to the resolution of this issue. We review the district court's interpretation of state law de novo, giving its decision no deference. Carvin v. Arkansas Power & Light Co., 14 F.3d 399, 403-04 (8th Cir.1993) (citing Salve Regina College v. Russell, 499 U.S. 225, 231, 111 S.Ct. 1217, 1220-21, 113 L.Ed.2d 190 (1991)).

Under Ohio and Michigan law, the parol evidence rule prevents the admission of extrinsic evidence of prior or contemporaneous agreements that contradict or vary the terms of a written agreement. American Anodco, Inc., 743 F.2d at 422 (applying Michigan law); Potti v. Duramed Pharmaceuticals,...