Clements Auto Company v. Service Bureau Corporation

• Citation: 298 F. Supp. 115
• Decision Date: 31 March 1969
• Docket Number: No. 3-68 Civ. 240.,3-68 Civ. 240.
• Parties: CLEMENTS AUTO COMPANY, dba Southern Minnesota Supply Company, SM Supply Company, a Wisconsin corporation, and SM Supply Company, a Minnesota corporation, Plaintiffs, v. The SERVICE BUREAU CORPORATION, Defendant.
• Court: U.S. District Court — District of Minnesota

298 F. Supp. 115

CLEMENTS AUTO COMPANY, dba Southern Minnesota Supply Company, SM Supply Company, a Wisconsin corporation, and SM Supply Company, a Minnesota corporation, Plaintiffs, v. The SERVICE BUREAU CORPORATION, Defendant.

No. 3-68 Civ. 240.

United States District Court D. Minnesota, Fourth Division.

March 31, 1969.

COPYRIGHT MATERIAL OMITTED

COPYRIGHT MATERIAL OMITTED

Blethen, Ogle, Gage & Krause, by William C. Blethen and Kelton Gage, Mankato, Minn., for plaintiffs.

Rider, Bennett, Egan, Johnson & Arundel by Stuart W. Rider, Jr., and Richard J. Nygaard, Minneapolis, Minn., and Michael Wolcott, New York City, for defendant.

FINDINGS OF FACT, CONCLUSIONS OF LAW, AND ORDER FOR JUDGMENT

MILES W. LORD, District Judge.

This case arises out of a business relationship between the plaintiffs and the defendant which began in 1962 and continued through January, 1967. During that period a number of contracts were entered into by the parties pursuant to which the defendant provided data processing services. The plaintiffs seek damages on various theories—misrepresentation, breach of contract, reformation, and recission. The defendant denies these claims and seeks, in a counterclaim, to recover certain sums still owing under the contracts.

The plaintiffs are Clements Auto Company, a Minnesota corporation, SM Supply Company, a Minnesota corporation, and SM Supply Company, a Wisconsin corporation. Clements Auto Company conducts two businesses at Mankato, Minnesota—a Chevrolet dealership, which is not involved in this lawsuit, and the Southern Minnesota Supply Company, a wholesale house. SM Supply Company, a Minnesota corporation, conducts a similar wholesale supply house at Rochester, Minnesota. The Wisconsin corporation operates a wholesale supply house at Eau Claire, Wisconsin. During the time in issue it operated a similar business in La Crosse, Wisconsin. All three corporations are wholly owned subsidiaries of F. B. Clements & Company, a partnership. This family business owns the stock of various other corporations doing business in southern Minnesota. Since all of the contracts and business transactions involved in this case were executed on behalf of all of the plaintiffs, they shall be referred to jointly as SM Supply.

The defendant, Servic Bureau Corporation (SBC), is a New York corporation. It is a wholly owned subsidiary of International Business Machines Corporation (IBM). SBC is engaged in the business of electronic data processing and offers its services to the public in 84 branch offices throughout the United States. It sells data processing services in the following areas: payroll, personnel records, accounts receivable, billing, sales accounting, marketing studies, cost accounting, inventory records, budgets, and general accounting.

The amount in controversy exceeds $10,000. This Court has jurisdiction under 28 U.S.C. § 1332.

The Court has concluded that the plaintiffs have established their cause of action for misrepresentation and are entitled to substantial damages. Before the misrepresentations which form a basis for this cause of action are discussed in detail, it is necessary to give an outline of the business relationship between SM and SBC and to describe in general terms the data processing system SM adopted.

The wholesale houses operated by SM Supply handled automotive parts and supplies; electronic parts, supplies and equipment, including radios and TV sets; and electrical materials used in all types of industrial and residential construction and lighting fixtures. Each of the four stores stocked and maintained more than 60,000 items of inventory in amounts ranging from one to several thousand each. In general, the accounting for all four stores was done from the store at Mankato, Minnesota, which can be considered the headquarters of SM Supply.

Prior to 1962 both Charles R. Butler, one of the plaintiffs' officers,¹ and Vernon L. Droog, the general manager of SM Supply, thought that inventory problems in the four stores kept the business from being more profitable. Specifically, these men thought that the dollar amount of inventory was too high and the turnover rate too low for effective operation. Because of the large number of parts kept in stock, SM Supply buyers would, on occasion, lose track of the amount of stock on hand. They would buy either too much or too little. SM Supply would then either have an excessive amount of stock on hand which would become obsolete, or encounter out-of-stock situations. Whatever the result, in the opinion of Mr. Droog and the senior Mr. Butler, SM Supply's business would suffer.

During that same period, the plaintiff, Clements Auto Company, had had a successful experience with a data processing system providing inventory control reports in the Chevrolet dealership at Mankato. This system, known as AID, was installed and operated by SBC. It provided regular reports showing what parts were on hand or on order and automatically computed an anticipated order based on a predetermined level of supply. The Clements Auto Company found that this system provided excellent control of the Chevrolet parts inventory.

Mr. Droog, prior to 1962, had described the SM Supply operation to various data processing experts. He had been told that it would not be possible to obtain an effective inventory control report for a business like SM Supply with a large number of items in stock from various manufacturers. The senior Mr. Butler had also contacted SBC representatives from time to time asking if they could install a similar data processing system for inventory control at SM Supply. The defendant's agents at first advised him that they lacked the computer capacity to install such a system. In the summer of 1962, SBC advised SM Supply that early in 1963 it would acquire an IBM 1401 computer which would have the capacity to produce data processing services for SM Supply.

Representatives of SBC offered to study SM Supply's business and methods of operation during the summer or fall of 1962 in order to propose data processing services. The defendant's agents spent approximately eight to ten days on the plaintiffs' premises inspecting the inventory, books and records to determine the amount of business conducted by SM and to assess its data processing requirements. At this time SM Supply maintained manual inventory records of a "Cardex" or "Buchan" type. If properly maintained, such records would provide a history of movement of the item as well as an on-hand figure. However, this system was not always kept up to date, and did not apply to all of the items in inventory. The SBC representatives agreed with Mr. Droog and the senior Mr. Butler that the inventory and other existing records were generally incomplete and inadequate.

On or about December 20, 1962, SBC presented a proposal to SM Supply (Plaintiffs' Exhibit 1), which was accompanied by a letter of transmittal dated December 19, 1962 (Plaintiffs' Exhibit 2), a letter dated December 19, 1962 (Plaintiffs' Exhibit 3) from the Friden Company, and two proposed contracts (Plaintiffs' Exhibits 4 and 5). The letter from Friden presented a proposal to SM Supply (incorrectly called "3M Supply Company") concerning the sale or lease to SM Supply of eight Friden Flexowriters to be used to provide input for SBC's computer operation.

The defendant proposed, in essence, an automated accounting system. SBC representatives stated that it was necessary for SM Supply to automate its accounting if inventory control information was ever to be obtained. SBC proposed to supply invoices, monthly statements to customers, monthly sales analysis reports, aged accounts receivable trial balances, and certain other reports described in the first contract (Plaintiffs' Exhibit 4). From information supplied by SM Supply, SBC was also to produce weekly sales reports which would show sales movement of each item in each of the four stores during the current week and five previous weeks.

SBC proposed that Friden Flexowriters be used by SM Supply as the input device for this data processing system. The Flexowriter is a device which can produce punched paper tape for computer input and simultaneously type the information on a piece of paper (often referred to as a "hard copy"). Input to the Flexowriter can be provided by edgepunched cards which are read by the machine or by hand-keying information on a keyboard similar to an electric typewriter keyboard.

In addition to being able to produce this "hard copy", the Flexowriter could be used in a system which uses "numbers" consisting of letters of the alphabet and characters such as dashes and slants as well as numerals. It could also read cards with more than 80 items of information recorded on them. These capabilities met requirements which SM Supply desired in its data processing system. SBC represented that with the Flexowriter SM Supply could, as it wished, send a typed copy of the invoice with the shipment to the customer. SBC also indicated that it would train SM Supply personnel to be Flexowriter operators, and that such personnel could operate the device in such a manner that input for the data processing system could effectively be supplied. SBC also stated that the proposed system, using Flexowriters, could be operated without additional personnel.

As outlined in SBC's proposal, the first step in the new SM Supply operation was for a salesman to fill out an order form. A copy of this form was then edited and given to the Flexowriter operator. She would select a customer card from tub files alongside the machine. When this card was inserted in the machine, the customer's name and address would be printed out, together with other information such as the branch number, the date, and a portion of the invoice number. The operator could hand-key in the remainder of the invoice number.

For each item sold to this customer the Flexowriter operator was to select an item card from the...