Conopco, Inc. v. McCreadie

• Citation: 826 F. Supp. 855
• Decision Date: 12 July 1993
• Docket Number: Civ. A. No. 90-2298(MTB).
• Parties: CONOPCO, INC., Plaintiff, v. John T. McCREADIE, an individual as a representative of a class comprised of all partners in the general partnership doing business as Ernst & Young, Defendants.
• Court: U.S. District Court — District of New Jersey

826 F. Supp. 855

CONOPCO, INC., Plaintiff, v. John T. McCREADIE, an individual as a representative of a class comprised of all partners in the general partnership doing business as Ernst & Young, Defendants.

Civ. A. No. 90-2298(MTB).

United States District Court, D. New Jersey.

July 12, 1993.

COPYRIGHT MATERIAL OMITTED

Carpenter, Bennett & Morrissey by Michael S. Waters, Newark, NJ and Cadwalader, Wickersham & Taft by H. Peter Haveles, Jr. and Steven G. Brody, New York City, for plaintiff.

Ernst & Young by Melissa Zelen Neier, Herbert J. Sue, and Karen Y. Bitar, Office of the Gen. Counsel, New York City, for defendants.

OPINION

BARRY, District Judge.

I. Introduction

Plaintiff, Conopco, Inc., has sued the partners of Ernst & Young ("E & Y")¹ alleging breach of contract, professional negligence and malpractice, and breach of the implied warranty of fitness for use under the Uniform Commercial Code ("UCC") in connection with a computer management consulting agreement between Faberge, Inc. ("Faberge") and E & Y, which agreement was subsequently assigned by Faberge to Conopco's parent, Unilever United States, Inc. ("Unilever"). E & Y now moves for summary judgment on all three counts of the complaint. For the reasons which follow, E & Y's motion will be granted in part and denied in part.

II. Factual Background

This action revolves around the computer support systems of the Elizabeth Arden Company ("Arden"). Arden is in the business of manufacturing, distributing, and selling cosmetics and fragrances under various names in the United States and Europe. At all relevant times, Arden maintained manufacturing or distribution facilities in the United States, England, and Italy and had affiliates with offices in Austria, France, the United Kingdom, Switzerland, and Germany. Arden's sales personnel took orders for Arden cosmetics and fragrances, typically for different quantities of various items, which were entered in a computer system. The orders were transmitted to a distribution center, where the products ordered were packed for shipment. At the distribution center, the computer system generated invoices and shipping documents for orders. In addition, Arden used the computer system for generating customer invoices, monitoring the receipt of payments from customers, and maintaining inventory levels. The various systems in use throughout Arden in both the United States and Europe totalled over 150.

In December, 1987, Faberge acquired Arden from Eli Lilly and Company ("Lilly"). In connection with the sale of Arden, Faberge and Lilly entered into an agreement under which Lilly would continue to provide Arden with computer services for eighteen months after the sale, until June 22, 1989, at which point Arden would have to "migrate" off Lilly's system. In anticipation of the Arden acquisition and the date by which Arden would have to be off the Lilly computer system, Faberge retained E & Y in September, 1987 to conduct a strategic assessment of the options open to Arden with respect to its computer system.

A. Assessment

The terms of the initial engagement of E & Y were set forth in a letter dated September 8, 1987. The letter, sent by E & Y to James E. Treanor, Director of Corporate Services at Arden, and Charles W. Callahan, Director of Management Information Systems ("MIS") Worldwide, at Faberge, began "This letter will confirm our understanding of the management consulting services you requested to assist Arden in the migration of information services from Lilly." Affirmation of Herbert J. Sue, dated April 27, 1992 (hereinafter "Sue Aff."), Exh. 3 at 1. It further stated that

Ernst & Whinney will act as Arden's Project Manager for the migration project. In this capacity, we will serve as facilitators and implementors of the recommended information systems strategy, and work with Arden, Faberge, and Lilly personnel world-wide to accomplish the migration effort with maximum speed, technical accuracy and minimal disruption to Arden.

Id. at 3.² In addition, the letter laid out a five-stage process according to which the project would proceed. Stages I and II, Situation Assessment and Strategy Development, were expected to be completed within four calendar months of the date of the letter. A new letter agreement was to be submitted before Stages III, IV, and V, Migration Activity, Custom/Package Implementation, and Long-Range Planning, respectively, would begin.

As a result of its assessment, E & Y identified three alternative courses of action with respect to the Arden computer systems. These options are set forth both in an outline prepared during the course of the assessment, in November, 1987, and in a report presented to Faberge management on February 4, 1988. One option was to copy the Lilly software for Arden such that the applications would remain the same. This option was given little consideration. Another alternative was to use a third-party computer service bureau for approximately two years while new computer systems were developed for Arden. This plan was followed by a reference of "(insurance)" in the November outline and recommended by E & Y in the February 4, 1988 report as having the best fit vis-a-vis the project objectives and the least risk to the ongoing business. The third option was to immediately develop and implement new computer systems at Arden prior to the June 22, 1989 "drop dead" date set by Lilly. This plan, followed by a reference of "(Star Wars)" in the November outline, was rated by E & Y as the highest risk alternative of the three.

In a graphic which listed seven potential problems associated with the Arden computer systems project, the risk associated with the completely new systems option rated an "H" (High) for five of the seven possible pitfalls: disruption to the business — quality of system support; disruption to the business — loss of system features; conversion of Faberge system may not be complete within 16 months; converted unique applications (Demo) may not be ready in 16 months; and technical staffing will not be accomplished in required time frame. Sue Aff., Exh. 4. By comparison, the third-party service bureau option was deemed highly risky with respect to only one problem: ability to contain costs. Id. With respect to the new systems option, Conopco further points to an E & Y document dated January, 1987 which states as a key strategy issue "Time required to implement a consolidated Arden/Faberge systems environment will exceed 18 month Lilly service agreement." Haveles Aff., Exh. 41.

Faberge's chairman, Daniel Manella, rejected outright E & Y's recommendation at the February 4, 1988 meeting that a third-party service bureau be used while new systems were developed and implemented because the cost of that alternative was too high. Several weeks after that presentation, following another meeting between E & Y and Faberge management at which E & Y presented another analysis of the third-party service bureau and new systems options, Faberge elected to follow the lower cost, higher risk alternative of developing and implementing new systems at Arden prior to the June, 1989 cutoff. Significantly, the parties differ in their characterizations of how this decision was reached.

Conopco claims that E & Y, having had its initial recommendation rejected, did a complete about face and recommended the option which called for the development of new computer systems at Arden before the Lilly cutoff date. As evidence of this, Conopco points to a document entitled "Arden MIS Proposal" submitted by E & Y to Faberge management. This report sets forth the three available options and discusses the costs and benefits associated with each. The report then makes a recommendation:

In evaluating systems migration alternatives, we looked at issues of risk and cost. The risks are primarily focused on the amount of time available to implement new systems and the potential for business disruption in an extended Lilly service relationship. The alternatives that offer substantial risk reduction (third party alternative) by providing early exit from Lilly demonstrate that the cost to migrate these risks is substantial. However, we believe that several factors work to offset them particularly the assumption that there is a reasonably good fit between Arden's systems needs and Faberge's existing ASI computer systems. Accordingly, we recommend that a least cost, higher risk approach be followed in the systems migration from Lilly.

Sue Aff., Exh. 6 at EY16.

E & Y, on the other hand, contends that Faberge reached the decision to develop and implement new systems at Arden prior to the Lilly cutoff date on its own. E & Y cites the deposition testimony of Patrick DeMartino, Faberge's Director of Management Information Systems for the United States, as support for that contention. DeMartino testified that following Manella's February 4, 1988 rejection of the third-party service bureau approach advocated by E & Y and supported by DeMartino's superior, Charles Callahan, he and Callahan decided that the new systems option should be followed and implemented by using American Software, Inc. ("ASI") software for the manufacturing and distribution systems in the United States and Europe as well as for the financial systems in the United States and the United Kingdom. This decision was based largely on the fact that Faberge had recently implemented new systems for its own business using ASI software and its personnel, therefore, had experience and familiarity with it.

B. Implementation

The parties do not dispute that Faberge made the decision to use ASI software in the new Arden systems. The deposition testimony of both Callahan and DeMartino of Faberge indicates that Faberge's senior management felt comfortable with ASI software because of the company's previous experience with it and because Faberge had applied it to a reasonably related business, i.e. cosmetics and health and beauty aids. E &...