Hgi Associates, Inc. v. Wetmore Printing Co.

• Citation: 427 F.3d 867
• Decision Date: 04 October 2005
• Docket Number: No. 04-11931.,04-11931.
• Parties: HGI ASSOCIATES, INC., Plaintiff-Appellant Cross-Appellee, v. WETMORE PRINTING COMPANY, a Texas corporation, Defendant-Appellee Cross-Appellant.
• Court: United States Courts of Appeals. United States Court of Appeals (11th Circuit)

Page 867

427 F.3d 867

HGI ASSOCIATES, INC., Plaintiff-Appellant Cross-Appellee, v. WETMORE PRINTING COMPANY, a Texas corporation, Defendant-Appellee Cross-Appellant.

No. 04-11931.

United States Court of Appeals, Eleventh Circuit.

October 4, 2005.

COPYRIGHT MATERIAL OMITTED

Michael Laurence Feinstein, Michael L. Feinstein, P.A., Ft. Lauderdale, FL, for HGI Associates, Inc.

Paul J. Lawrence, Preston, Gates & Ellis, LLP, Seattle, WA, Richard C. Hutchison, Holland & Knight, LLP, Fort Lauderdale, FL, Lucinda A. Hofmann, Shook, Hardy & Bacon, L.L.P., Miami, FL, for Wetmore Printing Co.

Appeals from the United States District Court for the Southern District of Florida.

Before BIRCH, CARNES and HILL, Circuit Judges.

BIRCH, Circuit Judge:

In this appeal, we determine whether Wetmore Printing Company ("Wetmore") improperly breached its contracts to sell Microsoft software to HGI Associates, Inc. ("HGI"), and, if so, what damages HGI properly can recover from Wetmore. After a bench trial, the district court found that Wetmore formed and breached three of four putative contracts with HGI, that HGI was entitled to accrued lost profits but no future lost profits caused by the breach, and that HGI was entitled to punitive damages because of the knowingly fraudulent actions Wetmore undertook when forming and later breaching those contracts. We AFFIRM in part and VACATE and REMAND in part.

I. BACKGROUND

In this case, the Microsoft Corporation ("Microsoft"), through its subsidiary, Microsoft Licensing, Inc. ("MSLI"), and business partner, Wetmore, attempted to set an ill-conceived trap to ensnare a suspected software pirate, HGI. The trap, however, only managed to ensnare Wetmore. From the district court's findings of fact, we summarize the relevant facts as follows.

HGI is a reseller of computer software and hardware that purchases software in the secondary market because the costs of obtaining software through authorized distribution channels are prohibitive. Other than the contracts involved here, HGI never purchased or distributed software through any manufacturer's authorized distribution channels. HGI's president, Ronald Swartz, has worked for HGI since 1993 and is responsible for all of HGI's acquisition and distribution of software, and he approves all purchases and sales.

At all times relevant to this appeal, Wetmore was an authorized replicator ("AR") for Microsoft's original equipment manufacturer ("OEM") distribution channel. Wetmore was authorized by Microsoft to sell Microsoft software kits¹ to approved Microsoft distributors or licensees. Wetmore's customers include OEMs and authorized distributors ("AD") such as Compaq, Wal-Mart, and JCPenney. Wetmore sells its software kits for approximately $2.50 each; however, after the sale, Wetmore notifies MSLI, who then charges the OEMs and ADs a separate licensing fee. The $2.50 price for the software kits does not include any licensing or royalty fees.

In February of 2001, Swartz contacted Wetmore and inquired about purchasing Microsoft software. After the initial contact, Wetmore notified MSLI about HGI's interest. MSLI requested that Wetmore help it investigate HGI's activities because Microsoft believed HGI was illegally selling unlicensed software. Before any further contact or transactions, both MSLI and Wetmore knew that HGI was not an AD for Microsoft.

Despite this knowledge, Wetmore invited Swartz to its Houston, Texas facility on 26 February 2001. While in Houston, Swartz met Wetmore's Sales Manager, Steven Herbst; Wetmore's Director of Operations, Karl Kluetz; Wetmore's Sales Support Manager, Todd Bond; and Wetmore's project manager that would be assigned to HGI, Shane Hatler. During the visit, Swartz toured the facility, was given a credit application, and told that Wetmore would supply specific Microsoft pricing and part numbers.

Wetmore's representatives let Swartz believe that he could buy Microsoft products from Wetmore even though it knew HGI was not an authorized Microsoft dealer, and they did so with no intention to establish a "bona fide business relationship with HGI." R5-189 at 6. Wetmore was only pretending to do business with HGI in order to assist in Microsoft's investigation.

Furthermore, Mark Roenigk, MSLI's Director of OEM Operations, asked Wetmore to record its meetings with Swartz, and he proposed a list of questions to ask Swartz in order to, among other things, "`get Mr. Schwartz [sic] to admit that what he is doing is not a licensed/legal way to distribute [Microsoft] products.'" Id. at 6-7. During the meetings with Swartz, Wetmore asked whether HGI was licensed by Microsoft to sell its software. The district court found that Swartz "replied that he was not licensed and stated that he did not believe HGI was required to have a license to sell Microsoft products because HGI was only a reseller." Id. at 7. Moreover, the court also found that "Swartz stressed his concern that any Microsoft products purchased by HGI be authentic Microsoft software." Id. Both Wetmore and MSLI knew that their actions were designed to deceive Swartz into believing HGI would become a legitimate customer of Wetmore and free to order Microsoft software.

On 2 March 2001, Swartz submitted his credit application to Wetmore, which then shared it with MSLI. Wetmore's project manager, Hatler, then e-mailed price lists of various Microsoft software to Swartz and copied MSLI noting the prices sent to HGI. On or about 7 March 2001, Swartz requested that Wetmore send samples of the software. Wetmore sent the samples with MSLI's full knowledge and under the pretense that Wetmore was "willing and able to carry on a legitimate business relationship" with HGI. Id. at 8.

On 9 March 2001, Hatler told Swartz that Wetmore could begin taking HGI's purchase orders for Microsoft software. Several days later, Hatler notified Swartz that Wetmore could deliver 300 software kits to HGI. HGI ordered the 300 kits on 14 March 2001, and Wetmore accepted. MSLI was informed of the sale and requested descriptions of the 300 units shipped to HGI. Wetmore completely filled the order for 300 units on 15 March 2001. On the same day, HGI ordered the 300 kits, HGI also submitted purchase order 01-0314-107 ("107") for 72,500 Microsoft kits and purchase order 01-0314-108 ("108") for 41,000. Swartz was told that Wetmore would have to "`go to press on [those] orders.'" Id. at 9. When Wetmore notified MSLI of the additional orders, MSLI responded by e-mail saying, "`Thanks. Sounds like a plan.'" Id. On 15 March 2001, Swartz placed an additional purchase order 01-315-101 ("101") for 11,000 kits.

On 26 March 2001 Wetmore confirmed the orders and confirmed that it could make a partial shipment² of orders 107 and 108 in three days. For the remaining balance of the purchase orders 107, 108, and 101, Wetmore's sales manager, Herbst, told Swartz, "`[a]s soon as I get more information on when we can ship the balance of your requirements, I'll let you know.'" Id. at 10. Thus, Wetmore confirmed that it would fill the purchase orders and made no indication that HGI was not authorized to purchase the software.

In order to prepare for the incoming shipments, HGI leased warehouse space in Colorado for three years. On 29 March 2001, HGI received the partial shipments of order 107 and 108 at the Colorado facility; however, the shipments were nonconforming because they were branded with a Compaq logo and not generic as requested. Further, the shipment was missing manuals for some of the kits. Wetmore shipped the missing manuals to HGI; however, it shipped them to HGI's Florida address at the request of MSLI because MSLI wanted to locate HGI's warehouse there.

Wetmore treated HGI as a legitimate client. It invoiced HGI for the completed orders, and HGI paid all invoices in full. Wetmore's invoices showed HGI as customer number 2149. Additionally, MSLI showed Wetmore employees how to enter HGI's orders into MSLI's Orion system for tracking royalty payment.

On 3 April 2001, HGI placed another order with Wetmore for 149,500 kits, but this order was never confirmed. Due to pressure from HGI's customers, Swartz tried to contact Wetmore's representatives to check the status of his orders on 12 April 2001. Several days later, on 17 April 2001, Wetmore indicated that it could no longer supply HGI with Microsoft software because HGI was not an authorized Microsoft distributor. Wetmore told HGI that there had been a mistake and asked HGI to return the prior shipments for a full refund. After this communication, Swartz and HGI had no further contact with anyone at Wetmore.

The district court summarized its findings and stated that, before 17 April 2001, "(1) Wetmore never informed HGI that it could not or would not provide Microsoft products to HGI; (2) never stated to HGI that HGI was required to be an authorized Microsoft dealer; and (3) never stated to HGI that HGI was required to enter a licensing agreement with Microsoft." Id. at 13. Furthermore, the district court found that

Wetmore engaged in a pattern and practice of blatantly false, deceptive and manipulative dealings and misrepresentations to HGI by: (1) confirming HGI's purchase orders; (2) promising to ship outstanding requirements that had been ordered; (3) advising HGI that it would go to press on other products; (4) shipping products to HGI; (5) invoicing HGI; and (6) accepting payment from HGI, all prior to Wetmore's so-called "mistake." At all relevant times, HGI justifiably believed that the pricing provided to it by Wetmore included any royalty that may have been due MSLI, if any, and that HGI was not liable to MSLI for payment of royalties of any Microsoft product purchased from Wetmore.

Id. at 13-14.

In its legal conclusions, the trial court held that, of the four alleged contracts in dispute, three were valid and binding contracts. Orders 107, 108 and 101 were valid; however, HGI's final purchase order was not a valid contract...