Garden Ridge, L.P. v. Advance Int'l, Inc.

• Decision Date: 09 April 2013
• Docket Number: No. 14–11–00624–CV.,14–11–00624–CV.
• Citation: 403 S.W.3d 432
• Parties: GARDEN RIDGE, L.P., Appellant v. ADVANCE INTERNATIONAL, INC., and Herbert A. Feinberg, Appellees.
• Court: Texas Court of Appeals

403 S.W.3d 432

GARDEN RIDGE, L.P., Appellant

v.ADVANCE INTERNATIONAL, INC., and Herbert A. Feinberg, Appellees.

No. 14–11–00624–CV.

Court of Appeals of Texas, Houston (14th Dist.).

April 9, 2013.

Leif Alexander Olson, Jared Gregory LeBlanc, Houston, TX, for Appellant.

Constance H. Pfeiffer, Jeffrey Todd Bentch, Houston, TX, for Appellees.

Panel consists of Justices FROST, CHRISTOPHER, and JAMISON.

OPINION

TRACY CHRISTOPHER, Justice.

Appellant Garden Ridge, L.P. (Garden Ridge) sued Advance International, Inc., and Herbert A. Feinberg (collectively, Advance) for breach of contract and a declaratory judgment that Garden Ridge had complied with its contracts with Advance. Advance counterclaimed for breach of contract. The jury found in favor of Advance. Although Garden Ridge accepted two shipments of inflatable snowmen from Advance, Garden Ridge refused to pay anything for either shipment, claiming that one shipment was nonconforming. Garden Ridge based its refusal to pay on chargeback provisions outlined in the parties' contracts. Advance argued that the chargeback provisions are unenforceable penalties.

On appeal, Garden Ridge argues that the trial court committed reversible error when it (1) refused to submit a question on prior material breach, (2) improperly instructed the jury on damages, and (3) commented on the weight of the evidence in its instructions on breach of contract. We conclude that the chargeback provisions as applied in this case are unenforceable as a matter of law as penalties, and we overrule Garden Ridge's jury charge issues. We therefore affirm the trial court's judgment.

I. Factual and Procedural Background

Garden Ridge is a Houston-based chain of housewares and home décor stores. Advance International, a company owned by Feinberg, is one of Garden Ridge's vendors. In 2009, Advance sent Garden Ridge quote sheets for lighted inflatable holiday snowmen, which included a color photo of each item and described its cost, weight, dimensions, and packaging. The two snowmen on the quote sheets each wore a scarf, held a broom that stated “Merry Christmas” on it, and waved; one stood eight feet tall, and the other stood nine feet tall. We refer to this snowman as “waving snowman.” Advance then sent two sample snowmen ¹ to Garden Ridge; one of the samples did not match its quote sheet. The sample eight-foot snowman wore a Santa-type hat and held a “Merry Christmas” banner. We refer to this snowman as “banner snowman.”

Garden Ridge sent Advance two purchase orders, one for approximately 950 nine-foot waving snowmen (PO '721), and the other for approximately 3,500 eight-foot waving snowmen (PO '743), based on the quote sheets. Garden Ridge planned to sell each nine-foot waving snowman for $59.99, and each eight-foot waving snowman for $39.00. Garden Ridge planned to mark down the eight-foot waving snowmen to $20.00 each during its one-day Thanksgiving Shop–a–Thon sale, and it prepared and had printed an advertising circular promoting this special price and picturing the eight-foot waving snowman.

Five days before Thanksgiving, Garden Ridge realized that the eight-foot snowmen that Advance sent were not waving snowmen, but instead were banner snowmen. The nine-foot snowmen that Advance sent were waving snowmen. Garden Ridge decided to honor the $20.00 Shop–a–Thon price on the nine-foot waving snowmen. There were no customer complaints, and both the eight-foot banner snowmen and the nine-foot waving snowmen sold well.

The parties' contracts consist of the purchase orders, the vendor cover letter, and the vendor compliance manual. Based on liquidated-damages provisions outlined in the vendor compliance manual, Garden Ridge assessed chargebacks against Advance for its alleged noncompliance violations. For Advance's “purchase order” violation—by sending the eight-foot banner snowman instead of the waving snowman, Garden Ridge charged back to Advance the entire merchandise cost plus the cost of freight on PO '743 as a “unauthorized substitution” chargeback, which totaled $49,176.00. In addition to paying nothing for the eight-foot banner snowmen, Garden Ridge paid nothing for the nine-foot waving snowman despite the fact that those snowmen complied with PO '721. Garden Ridge charged back to Advance the entire merchandise cost plus the cost of freight on the nine-foot waving snowmen as a “merchant initiated” chargeback, which totaled $29,178.00. Additionally, from September through November 2009, Garden Ridge assessed another $13,241.84 in noncompliance chargebacks to Advance on other merchandise for “ticketing/packing” violations involving not marking cartons sequentially or otherwise mislabeling them, and for “purchase order” violations involving short or incomplete orders.

Advance demanded payment for its snowmen and other items and staged protests at Garden Ridge's headquarters. Thereafter, Garden Ridge sued Advance for breach of contract and a declaratory judgment that Garden Ridge had complied with the contracts. Advance counterclaimed for breach of contract and asserted that Garden Ridge's claims were barred because the chargeback provisions are unenforceable as penalties. Garden Ridge defended against Advance's counterclaim by asserting that Advance breached the contracts first.

At trial, Garden Ridge's divisional merchandise manager/vice president Linda Troy admitted that Garden Ridge made approximately $113,000 in profit on the snowmen it received from Advance, and further testified that Garden Ridge made all the money it would have made if the snowmen were delivered exactly as ordered. One of Garden Ridge's buyers, Sheria Cole, admitted she did not know of any dollar amount that Garden Ridge was harmed by the snowmen shipment and that Garden Ridge had less-than-zero receipt cost for the snowmen. Cole also testified that she was unaware of anyone at Garden Ridge having done any actual-harm calculations from the unauthorized substitution of the eight-foot banner snowmen or any calculations to determine whether Garden Ridge's chargebacks were reasonably proportional to any actual harm it suffered. Garden Ridge acknowledges that it did not argue any amount of actual damages other than zero and that the record reflects no actual damages resulting from Advance's noncompliance violations.

The trial court granted Advance's motion for directed verdict on Garden Ridge's breach-of-contract claim because of lack of evidence on damages resulting from Advance's noncompliance violations, but did not grant Advance's motion for directed verdict on Garden Ridge's declaratory-judgment claim or Advance's motion for directed verdict seeking to have Garden Ridge's chargeback provisions declared legally unenforceable as penalties.

The trial court submitted to the jury questions on Garden Ridge's declaratory-judgment claim and on Advance's breach-of-contract claim, but refused to submit a question on Garden Ridge's prior-material-breach defense. On Garden Ridge's declaratory-judgment claim, the jury found that Garden Ridge did not comply with the terms of the three listed agreements (to purchase the eight-foot snowmen, to purchase the nine-foot snowmen, and to purchase other items listed in the “summary of chargebacks” exhibit). On Advance's breach-of-contract claim, the jury found that Garden Ridge failed to comply with these agreements by failing to pay for the eight-foot snowmen, the nine-foot snowmen, and other items listed in the chargeback exhibit. The jury, in separate findings, awarded Advance damages in the amount of $49,176.00 for the eight-foot snowmen, $29,781.00 for the nine-foot snowmen, and $500.00 for other items listed in the chargeback exhibit. The trial court rendered final judgment on the jury's verdict and on a stipulation for legal fees.

Garden Ridge appeals the trial court's final judgment, arguing in three issues that the trial court committed reversible error in its jury charge. First, Garden Ridge contends that the trial court erred in refusing to submit a jury question on Garden Ridge's affirmative defense of prior material breach. Second, Garden Ridge argues that the trial court erred by improperly instructing the jury in the damages question on the reasonableness of Garden Ridge's chargebacks. Third, Garden Ridge complains that the trial court's inclusion of instructions on acceptance and contract price in the breach-of-contract question were improper comments on the weight of the evidence.

II. Analysis

A. Refusal to submit prior-material-breach question

Garden Ridge concedes that it is not entitled to a jury question on prior material breach if this court determines that the chargeback provisions are unenforceable as penalties. Thus, we first proceed to address the legal question of whether the chargeback provisions are enforceable.

1. Do the chargeback provisions at issue assess liquidated damages or penalties?

The parties agree that this case is governed by the Uniform Commercial Code, as adopted by Texas, which applies to transactions involving goods. Tex. Bus. & Com.Code Ann. § 2.102 (West 2009).² The parties agree that section 2.718(a) of the UCC, on liquidation of damages, governs the enforceability of the chargeback provisions in this case. Section 2.718(a) provides:

(a) Damages for breach by either party may be liquidated in the agreement but only at an amount which is reasonable in the light of the anticipated or actual harm caused by the breach, the difficulties of proof of loss, and the inconvenience or non-feasibility of otherwise obtaining an adequate remedy. A term fixing unreasonably large liquidated damages is void as a penalty.

Id.§ 2.718(a). The parties also agree that if the chargeback provisions governing Advance's noncompliance violations at issue are unenforceable as penalties, Garden Ridge no longer has any basis to argue that Advance committed any prior material breach.³ But what the parties do not agree on is the proper analysis by which courts...