HONEYWELL INTERN. v. AIR PRODUCTS & CHEM.
| Decision Date | 06 August 2004 |
| Citation | 858 A.2d 392 |
| Court | Court of Chancery of Delaware |
| Parties | HONEYWELL INTERNATIONAL INC. and GEM Microelectronic Materials, L.L.C., Plaintiffs, v. AIR PRODUCTS & CHEMICALS, INC. Defendants. |
Martin P. Tully, John E. Abramczyk, Jason A. Cincilla, Morris, Nichols, Arsht & Tunnell, Wilmington, Delaware; Johnathan F. Putnam, Lee Ann Stevenson, Zachary S. Brez, Joshua B. Simon, Kirkland & Ellis, LLP, New York, New York, for Plaintiffs.
Lewis H. Lazarus, Matthew F. Lintner, Morris, James, Hitchens & Williams, LLP, Wilmington, Delaware; Thomas F. Cullen, Jr., Jones Day, Washington, DC; Barry R. Satine, Richard H. Sayler, Jennifer Seraphine, Jones Day, New York, New York, for Defendant.
STRINE, Vice Chancellor.
A few years ago, two businesses formed a strategic alliance by contract. One of the businesses, Air Products, was a supplier of many goods and services that semiconductor manufacturers needed to operate their facilities and a provider of so-called total management services to facilities. The other business, Honeywell, was a manufacturer of a key product that chip makers needed—wet process chemicals— to make chips. The idea was to exploit the relationship that Air Products, as a total services provider, had with manufacturers into a sales opportunity for the products of the wet process chemical producer, Honeywell. To that end, the parties undertook certain obligations, including an obligation on Air Products' part to fill any order for certain wet process chemicals placed by certain customers exclusively through Honeywell during the life of the alliance.
After a few years, the "Alliance" had failed to meet its original expectations, and the parties were haggling over the scope of the Alliance but were continuing to make sales. An opportunity arose to buy the nation's leading wet process chemical manufacturing business, operated by Ashland, which also made other products interesting to Air Products. Air Products pursued this opportunity after obliquely inquiring of Honeywell if it wished to pursue the opportunity jointly. Separately, Honeywell knew of the opportunity but failed to pursue it on its own.
Eventually, Air Products signed a contract to purchase Ashland and informed Honeywell that it wished to terminate the Alliance on mutually agreeable terms. Those terms were never reached and Honeywell sued.
After losing a motion to enjoin the Ashland sale, Honeywell set its sights on receiving contract damages and essentially dropped its specific performance claim seeking to compel Air Products to stay in the Alliance. In this opinion, I conclude that Air Products has breached its contractual obligations to Honeywell by turning its back on its duty to buy all of its requirements for sales within the scope of the Alliance from Honeywell, a scope that was defined by the parties' actual performance rather than the written terms of the agreement. Moreover, under New York law, which governs the agreement, Air Products cannot now avoid contractual liability on the basis of Honeywell's alleged past breaches because Air Products both elected to continue performance with knowledge of those breaches and failed to provide Honeywell with its contractually secured opportunity to cure.
Contrary to Honeywell's wishes, however, I only award it damages that approximate the lost profits it would have earned if the contract had been performed as the parties reasonably contemplated. In this regard, I deny Honeywell's request for me to award it damages on the theory that but for Air Products' breach, Honeywell would have had the right to supply all the wet process chemicals that Air Products is now selling through the business purchased from Ashland. Based on my best reading of New York law, Honeywell is only fairly entitled to those profits it would have earned had the Alliance continued to operate in the manner the parties reasonably anticipated at the time of contracting. Those profits do not include sales made because Air Products decided to buy Ashland's wet process chemical business. But, the time period for which Honeywell may claim damages is limited, because Air Products properly exercised its right to terminate the agreement on two years' notice.
In October 1998, plaintiff Honeywell International, Inc.'s predecessor and defendant Air Products & Chemicals, Inc., signed the Strategic Alliance Agreement (the "Agreement") that is at the heart of this dispute.1 For purposes of simplicity, I will refer to both Honeywell International and its predecessor as "Honeywell." At that time, Honeywell manufactured and sold, among other things, wet process chemicals — chemicals used in the process of manufacturing semiconductors. Air Products was a leading seller of industrial gases to the semiconductor industry and also provided gas and chemical management services, known as "Megasys," to that industry. The parties to the Agreement hoped to capitalize on what they expected to be an increasing desire on the part of semiconductor manufacturers to purchase "bundles" of products and services — that is, to look to a single provider for all their gas, chemical and management services needs.
To that end, the parties structured the Agreement in such a manner as to exploit their strengths in the semiconductor market. The basic concept was that Air Products — which had relationships with several customers in that market due to its gas and services offerings — would sell chemicals manufactured by Honeywell — which had "know-how and capability"2 to manufacture wet process chemicals — to the semiconductor industry under Air Products' labels, and the parties would share the profits from those sales after Honeywell was reimbursed for the costs of producing the chemicals. The hope was that semiconductor manufacturers would find value in the ability to purchase bundles of gases, chemicals and services, all from Air Products, which would increase sales of both Air Products' and Honeywell's offerings.
The scope of the relationship created by the Agreement was not unlimited, however. Rather, the parties identified the specific "Customers" and "Products" initially covered by the Agreement in exhibits to the Agreement, exhibits that were supposed to be revised annually in writing3 as the relationship and market conditions developed:
The purpose of the strategic alliance is to sell globally the high purity wet process chemicals identified in Exhibit A (the "Products") to the customers identified in Exhibit B (the "Customers"). Exhibits A and B may be changed from time to time by mutual agreement of the parties. No less than once per year the parties agree to review in good faith and to modify Exhibit A and as appropriate Exhibit B to reflect the parties' current assessment as to the focus of the efforts of the alliance.4
Within the scope of the so-called "Alliance," the parties undertook various obligations intended to commit them to that Alliance to a certain degree. Thus, § 1(b) provided:
[Air Products] will purchase from [Honeywell] its total requirements of the Products to be sold by [Air Products] to Customers under any [Air Products] label. [Air Products] (i) will use reasonable efforts to promote the sale of the Products to the Customers, and (ii) will not actively promote the sale to the Customers of Products manufactured by [Air Products] or purchased from other suppliers excluding products that are manufactured at the Customer's site using Air Products' gas chemical generator. Further, [Air Products] will not enter into any strategic alliance or similar arrangement with any other manufacturer or seller of the Products for the purpose of selling the Products to the Customers.5
Under this provision, if Air Products sold a "Product" covered by the Agreement to a "Customer" covered by the Agreement, it was unconditionally required to obtain that Product from Honeywell.
But, the Agreement did not impose a parallel exclusivity obligation on Honeywell. That is, Honeywell was not completely prohibited from directly selling "Products" to "Customers" itself under its own labels and keeping the entire profit, although three separate provisions in the Agreement did limit its ability to conduct such direct selling. First, Honeywell and Air Products had the joint obligation to "[i]dentify [Air Products] as the primary distribution channel for wet chemicals to the Customers."6 This helped ensure that Air Products would be the Alliance's "primary face to the market."
Second, Honeywell agreed in § 1(c) not to "actively promote the sale of Products under [Honeywell's] own labels to the Customers" or "enter into a strategic alliance or similar arrangement with any other industrial gas supplier or provider of total chemical management services for the purpose of selling the Products to the Customers."7 But, unlike the obligations imposed on Air Products in § 1(b), Honeywell could be released from the strictures of § 1(c) if certain contractually defined performance targets were not met. Specifically, Exhibit C of the Agreement set out sales targets for 2000, 2001, and 2002 of $25 million, $50 million, and $75 million, respectively, and provided that targets for later years would be "established by mutual agreement" after "good faith" negotiations.8 Section 1(c) further provided that continued failure to meet these targets could result in a suspension of Honeywell's obligations under that provision:
If during any two (2) consecutive calendar years beginning on or after January 1, 2000, sales to the Customers of Products supplied by [Honeywell] hereunder are less than 60% of the sales targets set forth in Exhibit C, or established pursuant to the mechanism set forth in Exhibit C, the provisions of this paragraph (c) shall no longer be applicable for the remainder of the term of this Agreement.9
Thus, if the...
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