Altronics of Bethlehem, Inc. v. Repco, Inc.

• Decision Date: 14 February 1992
• Docket Number: No. 91-1694,91-1694
• Citation: 957 F.2d 1102
• Parties: 16 UCC Rep.Serv.2d 966 ALTRONICS OF BETHLEHEM, INC. Altronics of Philadelphia, Inc. v. REPCO, INC. Appellant. . Submitted Under Third Circuit Rule 12(6)
• Court: U.S. Court of Appeals — Third Circuit

Page 1102

957 F.2d 1102

16 UCC Rep.Serv.2d 966

ALTRONICS OF BETHLEHEM, INC. Altronics of Philadelphia, Inc. v. REPCO, INC. Appellant.

No. 91-1694.

United States Court of Appeals Third Circuit.

Submitted Under Third Circuit Rule 12(6)

Feb. 14, 1992.

Decided Feb. 28, 1992.

Donna M. Miller, Fitzpatrick, Lentz & Bubba, Allentown, Pa., for appellees.

Blake L. Berenbaum, Richman & Rudnick, Philadelphia, Pa., for appellant.

Before GREENBERG, COWEN and SEITZ, Circuit Judges.

OPINION OF THE COURT

SEITZ, Circuit Judge.

Defendant Repco, Inc. ("defendant") appeals the order of the district court, after a bench trial, granting judgment in favor of plaintiffs Altronics of Bethlehem, Inc. and Altronics of Philadelphia, Inc. [hereinafter collectively referred to as "plaintiffs"]. The jurisdiction of the district court was based on diversity of citizenship under 28 U.S.C. § 1332 (1988). This court has jurisdiction pursuant to 28 U.S.C. § 1291 (1988).

The findings of fact of the district court will not be disturbed unless clearly erroneous. Levendos v. Stern Entertainment, Inc., 909 F.2d 747, 749 (3d Cir.1990). Conclusions of law, or alleged errors in applying the law to the facts are subject to plenary review. Id. On appeal, the evidence will be viewed in the light most favorable to plaintiffs, as the prevailing party. Rodriguez v. Brunswick Corp., 364 F.2d 282, 284 (3d Cir.1966).

I. FACTS

Plaintiffs are two Pennsylvania corporations engaged in the business of selling and servicing various electronic security and alarm systems to subscribing customers in Eastern Pennsylvania. Defendant manufactures and sells radio equipment and wireless security systems throughout the United States.

Plaintiffs first learned of defendant's products at a trade show where negotiations began. Plaintiffs allege that they informed defendant of their specific security needs and described the locations and terrains of the sites where the second and third systems would be installed. Prior to entering into an agreement of sale, defendant's agent visited the Bethlehem site and stated his belief that the system would be effective in that location with the offset radio frequencies he suggested. Being without expertise on radio operated systems, plaintiffs allege that they relied on defendant's oral and written representations regarding the system and promises of support services, including assistance in obtaining an adequate frequency channel.

Plaintiffs purchased and paid for a total of three systems from defendant. The first was sold by plaintiffs to the Commonwealth of Pennsylvania and is operational. Plaintiffs installed the second in their Bethlehem location to provide service to two of their accounts. It allegedly did not function properly. The third was never installed.

Installation of the second system at the Bethlehem location required plaintiffs to incur additional expenses. Plaintiffs allege that the security system received substantial interference from other frequencies which prevented its use as a reliable alarm system for its subscribers. This was due to the fact that persons monitoring the systems were unable to tell if the signals they received were the result of interference with the frequencies or related to a breach of security at the subscribers' locations. Plaintiffs also received a notice of violation from the Federal Communications Commission ("FCC") due to the interference the second system was creating. Plaintiffs notified defendant of the problems. Another of defendant's agents, Bateman, arrived to examine the installation and to determine the source of the malfunctions. Bateman corrected one problem and suggested further modifications. The system still failed, however, after plaintiffs made the suggested changes.

Ultimately, plaintiffs decided not to install the third system at their Lafayette Hills location. They based their decision on their conclusion that the system was incapable of performing as expected, that defendant was not providing the necessary support services to make the system operational and that incurring further costs was to be avoided. Plaintiffs removed the Bethlehem system and sought satisfaction from the defendant without success. Thereafter plaintiffs attempted to mitigate their damages by advertising one of the systems for sale in a trade magazine. No buyer was found.

Plaintiffs brought this action to recover the purchase price of the two systems, and all incidental and consequential damages. They obtained an Arbitrators' Award in their favor and defendant then demanded a trial de novo in the district court. At the conclusion of a non-jury trial, the district court held that under Pennsylvania law, the application of which defendant does not challenge, defendant breached its implied warranties of merchantability and fitness for a particular purpose. 13 Pa.C.S.A. §§ 2314 & 2315 (Purdon 1984). Having decided that plaintiffs were entitled to recover for the breaches of the implied warranties, the court stated that it need not address plaintiffs' express warranty claim. It entered judgment in favor of plaintiffs for the costs of both systems and consequential damages. This appeal followed.

II. DISCUSSION

A. Breach of the Implied Warranties

The district court concluded that the defendant breached its implied warranties of merchantability and fitness after finding that the system generally failed to operate in a reliable manner at plaintiffs' Bethlehem location. In support of its conclusion, the district court stated that it need not identify any specific defect in order to show that the equipment did not perform as goods of its kind should. Defendant asserts that the district court misconstrued the law relating to the amount of evidence required to establish a breach of the implied warranties. Specifically, defendant contends that plaintiffs failed to prove by a preponderance of the evidence any defect in the equipment it manufactured and supplied.

Both the implied warranty of merchantability and the warranty of fitness for a particular purpose arise by operation of law and serve to protect buyers from loss where the goods purchased are below commercial standards or are unfit for the buyer's purpose. Vlases v. Montgomery Ward & Co., 377 F.2d 846, 849 (3d Cir.1967). In order to be merchantable, goods must be "fit for the ordinary purposes for which such goods are used." 13 Pa.C.S.A. § 2314(b)(3). The warranty of fitness for a particular purpose is more exacting. It requires that the seller had reason to know of the buyer's particular purpose at the time of contracting and that the buyer was relying on the seller's expertise. In that case, the goods are implicitly warranted to be fit for that particular purpose. 13 Pa.C.S.A. § 2315. To establish a breach of either warranty, plaintiffs must show that the equipment they purchased from defendant was defective.

One way to demonstrate a defect is by the submission of circumstantial evidence. Greco v. Bucciconi Engineering Co., 407 F.2d 87, 89-90 (3d Cir.1969); MacDougall v. Ford Motor Company, 214 Pa.Super. 384, 257 A.2d 676, 679-80 (1969), overruled by implication on other grounds, REM Coal Co., Inc. v. Clark Equipment Co., 386 Pa.Super. 401, 563 A.2d 128 (1989). Under Pennsylvania law a product may be found defective if it "functioned improperly in the absence of abnormal use and reasonable secondary causes." Greco, 407 F.2d at 89-90. We believe that plaintiffs were required to shoulder the burden not only of demonstrating a malfunction, but of negating abnormal use and other causes. Id. at 89-90 & n. 3; see also Brill v. Systems Resources, Inc., 405 Pa.Super. 603, 592 A.2d 1377, 1379 (1991). Therefore, in order to carry their burden plaintiffs were required to show: (1) that the product malfunctioned; (2) that plaintiffs used the product as intended or reasonably expected by the manufacturer; and (3) the absence of other reasonable secondary causes.

The district court made several findings of fact regarding the improper functioning of the system. It found that plaintiffs experienced communications failures after installation; that there were major problems with the transmitter; and that after making the modifications suggested by defendant, the system still failed. These findings based on the evidence presented by plaintiffs are supported on the record: (1) by the testimony of Lubsen, the owner and president of plaintiffs, (2) by one subscriber's computer printout showing system failures four out of fifteen days in May of 1987, and (3) by the FCC notice. Under the clearly erroneous standard, it is evident that there was sufficient evidence for the district court to conclude that the system malfunctioned. Thus, plaintiffs met their burden as to the first requirement.

Turning to the remaining elements of a breach of warranty claim, defendant does not contend that plaintiffs failed to negate the second burden placed on them, i.e. the possibility of abnormal use of the system. It does argue, however, that the communication failures may be traceable to a number of other factors beyond its control which plaintiffs did not eliminate in their case in chief. Thus, defendant asserts that plaintiffs selected an inferior radio tower, may have improperly installed the system, or failed to make the suggested modifications. Additionally, it states that the frequency assigned by the FCC may have been incompatible with the requirements of a radio security system. Bateman, defendant's agent, also testified as an expert witness to a variety of other factors that could inhibit the effectiveness of the system.

Lubsen, testifying in plaintiffs' case in chief, stated that plaintiffs selected the WFMZ tower after hiring an outside firm to evaluate the options. Each option had its own advantages and disadvantages. Plaintiffs knew that placing the antenna on the WFMZ tower would decrease the effective range of the system due to "line loss." In order to combat...