Bausch & Lomb Inc. v. Bressler

• Decision Date: 09 October 1992
• Docket Number: Nos. 1529,1711,D,s. 1529
• Citation: 977 F.2d 720
• Court: U.S. Court of Appeals — Second Circuit
• Parties: 18 UCC Rep.Serv.2d 1130 BAUSCH & LOMB INCORPORATED, Plaintiff-Appellee-Cross-Appellant, v. Bernard BRESSLER and Louis Katz, Defendants, Sonomed Technology, Inc., Defendant-Appellant-Cross-Appellee. ockets 92-7034, 92-7130.

Page 720

977 F.2d 720

18 UCC Rep.Serv.2d 1130

BAUSCH & LOMB INCORPORATED, Plaintiff-Appellee-Cross-Appellant, v. Bernard BRESSLER and Louis Katz, Defendants Sonomed Technology, Inc., Defendant-Appellant-Cross-Appellee.

Nos. 1529, 1711, Dockets 92-7034, 92-7130.

United States Court of Appeals Second Circuit.

Argued May 28, 1992.

Decided Oct. 9, 1992.

Harry P. Sacks, New York City (Jeffrey A. Aronson, Steven J. Brill, Christopher L. Gallinari, Sacks Montgomery, P.C., of counsel), for plaintiff-appellee-cross-appellant.

David A. Barrett, New York City (William F. Duker, Duker & Barrett, of counsel), for defendant-appellant-cross-appellee.

Before: MINER and WALKER, Circuit Judges, and RONEY ^*, Senior Circuit Judge.

WALKER, Circuit Judge:

This case involves Bausch & Lomb, Inc.'s ("B & L") claims for damages arising from the alleged breach by Sonomed Technology, Inc. ("Sonomed") of a contract whereby B & L agreed to purchase and distribute ophthalmic diagnostic instruments manufactured and supplied by Sonomed. The district court, after a bench trial, entered judgment in favor of B & L in the amount of $555,000 in damages plus interest. On appeal, Sonomed attacks the judgment by challenging: (1) the finding that Sonomed, not B & L, breached the purchase and distribution agreement, (2) the damage award to B & L, and (3) the denial of Sonomed's counterclaims. Sonomed also seeks to amend its pleadings to assert a claim for goods sold and delivered. On cross-appeal, B & L challenges the district court's denial of its damage claim for lost inventory value. For reasons that will be discussed, we affirm the district court's denial of Sonomed's counterclaims, its denial of B & L's claim for lost inventory value and its determination that Sonomed is liable to B & L for breach of contract. We also affirm the district court's disallowance of an amendment to the complaint. However, we vacate in part the district court's damage award.

BACKGROUND

The district court's decision, reported at 780 F.Supp. 943 (E.D.N.Y.1992), includes detailed findings of facts. We will reiterate only those facts necessary for disposition of this appeal.

Sonomed develops, manufactures and markets ultrasound devices used for ophthalmologic diagnosis. Sonomed makes two complementary products, the "A-Scan"--which measures distances in the eye--and the "B-Scan"--which provides a two-dimensional image of the eye. B & L is engaged in the optical products business, including the purchase and distribution of ophthalmic devices manufactured by other companies. On December 21, 1984, Sonomed On July 1, 1986, the parties rescinded the 1984 Agreement and entered into a new contract (the "1986 Agreement" or the "Agreement"). Among other things, the 1986 Agreement reduced the size of B & L's exclusive distributorship to a territory including the United States, Puerto Rico and Canada and extended the expiration date of the distributorship until December 31, 1989, two years beyond the expiration date of the 1984 Agreement. It is the 1986 Agreement that is largely at issue in this case. Unless otherwise indicated, the contract provisions we refer to are those of the 1986 Agreement.

                and B & L entered into a sale and distribution agreement (the "1984 Agreement").   Under the terms of the 1984 Agreement, B & L was to become the exclusive world-wide distributor of Sonomed's A-Scan and B-Scan products for a period of three years.   In return for the exclusive distributorship rights, B & L paid $500,000 to Sonomed and agreed to make annual minimum purchases of Sonomed's products beginning in 1985
                

Section 10.01 provided that B & L would be granted a license to self-manufacture A-Scans and B-Scans if Sonomed failed to make a timely delivery of products to B & L and failed to cure such a default within 90 days after receiving notice. The parties do not dispute that, under such circumstances, B & L would be relieved of its duties to purchase products from Sonomed. Pursuant to § 10.02, B & L would pay Sonomed royalties for any self-manufactured products, with a minimum royalty computed in accordance with the Agreement's product purchase requirements.

Section 8.02 provided that, upon a material breach, the non-breaching party could give notice of its intention to terminate the Agreement. The breaching party then had 30 days to cure the breach. Failing a timely cure, the Agreement would terminate.

Section 12.07 stated that the $500,000 payment made by B & L to Sonomed in connection with the 1984 Agreement constituted a "prepaid royalty" and that "[i]n the event of any dispute with respect to this Agreement, such payment shall be deemed to be payment for exclusive distribution rights." Section 3.04 provided that an additional $55,000 payment by B & L to Sonomed was a "down payment" to be refunded by Sonomed upon "the termination of [the] Agreement...."

Between July 21, 1986 and December 17, 1987, Sonomed violated the terms of the Agreement by selling its products in B & L's exclusive territory. During 1987, Sonomed hired distributors for its products in Canada and Puerto Rico and began to set up a sales force in the Northeastern United States. B & L apparently did not learn of these violations until it conducted discovery in this litigation.

In a letter to Sonomed dated April 15, 1987, B & L complained that Sonomed had fallen behind in its deliveries of B-Scans and that B & L was unable to fill orders it had received. B & L attached to the letter a schedule comparing B & L's purchase orders with Sonomed's product deliveries, and asserted that Sonomed was in default of its delivery obligations pursuant to the Agreement. The April 15 letter triggered the default notice provision of § 10.01 that gave Sonomed 90 days to cure the default.

In a May 14 letter, Sonomed agreed that it had failed to make timely deliveries of B-Scans to B & L, stating that it was "in a backorder situation with B-Scans, being behind 47 units", but would be able to work off the entire backlog within three months. Sonomed annexed to its letter a table indicating a shortfall of 18 products out of 48 ordered by B & L for delivery during the fourth quarter of 1986 and 29 out of 44 products ordered for delivery during the first quarter of 1987. Even taking into account a contractual provision permitting a 15 percent delivery shortfall, Sonomed was clearly in default.

Between May 14 and October 23, Sonomed and B & L tried to work out their difficulties, conferring and exchanging memoranda on the question of whether Sonomed had cured its default within the 90 day cure period. B & L also examined its own delivery records to try to determine whether Sonomed had timely cured its delivery default.

At the same time that B & L was expressing concern over Sonomed's ability to provide timely supplies of new products, an October 13 internal B & L memorandum indicated that B & L was itself experiencing problems in selling its existing stock of Sonomed products. The memorandum stated that B & L had over two hundred Sonomed products in stock, that B & L's sales of Sonomed products were declining and that retail prices for competitive ophthalmic instruments were also declining. The district court found that, during 1987, B & L engaged in a crash sales operation and discounted its prices for Sonomed products by as much as 40 percent.

After its internal reviews and communications with Sonomed, B & L concluded that Sonomed had failed to cure its default. Pursuant to the Agreement's terms, on October 23, B & L sent a letter to Sonomed stating that B & L was discharged from its duty to purchase further products and invoking its right to self-manufacture the A-Scan and B-Scan products. The letter stated that B & L planned to continue to sell A-Scans and B-Scans throughout its exclusive territory "in accordance with the provisions of the Agreement."

At a November 2 meeting with B & L, Sonomed asserted, based on supporting documentation, that Sonomed had timely cured its default. A November 3 letter from Sonomed's counsel reiterated this assertion and stated that the Agreement remained in full force "except to the extent that [B & L had] repudiated it...." Sonomed asserted that B & L's refusal to purchase products from Sonomed "constitutes an anticipatory breach and repudiation of the Agreement." Sonomed claimed that B & L's alleged repudiation occurred one week prior to a meeting of ophthalmologists, a "critical selling period" for Sonomed products, and contended that B & L's "decision to advise us, one week before the Academy meeting, of your repudiation of your obligations does not afford us the luxury of waiting 30 days while you reconsider your ill-advised decision." Sonomed also demanded that B & L provide "assurance of your willingness to live up to all the terms of the Agreement by 1:00 P.M. Friday, November 6", two days following B & L's receipt of the November 3 letter.

B & L did not respond to the November 3 letter by November 6 and, on November 9, Sonomed served B & L in an action filed in New York State Supreme Court. Thereafter, B & L conducted a comprehensive inventory and a second review of its purchase and delivery records. Finding its records to be in disarray, making it difficult for B & L to establish that Sonomed had failed to timely cure its default, B & L then reversed course. In a November 17 letter and by telephone the same day, B & L withdrew its October 23 letter and informed Sonomed that it intended to resume purchases of products from Sonomed.

In a November 19 letter to B & L, Sonomed refused to accept B & L's withdrawal of the October 23 letter, stating that "[t]he time for a retraction of a repudiation such as yours has passed. It ended at 1:00 P.M. on November 6, 1987, when you failed to respond to our November 3 letter." Sonomed declared that B & L's failure to withdraw the October 23 letter within the two day period terminated the Agreement. Sonomed stated that it would no...