Industrial Graphics, Inc. v. Asahi Corp.

• Decision Date: 30 January 1980
• Docket Number: Civ. No. 2-77-176.
• Citation: 485 F. Supp. 793
• Parties: INDUSTRIAL GRAPHICS, INCORPORATED, a Minnesota Corporation, and MGA, Inc., a Minnesota Corporation, Plaintiffs, v. ASAHI CORPORATION, a Japanese Corporation, Defendant.
• Court: U.S. District Court — District of Minnesota

485 F. Supp. 793

INDUSTRIAL GRAPHICS, INCORPORATED, a Minnesota Corporation, and MGA, Inc., a Minnesota Corporation, Plaintiffs, v. ASAHI CORPORATION, a Japanese Corporation, Defendant.

Civ. No. 2-77-176.

United States District Court, D. Minnesota, Second Division.

January 30, 1980.

COPYRIGHT MATERIAL OMITTED

Peter Etzell and Douglas E. Sinclair, Etzell & Sinclair, North Mankato, Minn., for plaintiffs.

Keith E. Goodwin and Edward M. Laine, Oppenheimer, Wolff, Foster, Shepard & Donnelly, St. Paul, Minn., for defendant.

MEMORANDUM AND ORDER

MacLAUGHLIN, District Judge.

This is a breach of warranty action for damages brought by plaintiffs, two Minnesota corporations, which involves the purchase by plaintiff Industrial Graphics, Inc., of 4,000 defective 23 channel citizens band radios in 1976. The radios in question were manufactured by defendant Asahi Communications, Inc. and sold by Asahi to an intermediary, which in turn sold the radios to the plaintiffs. The Court, having considered all of the evidence presented at trial and all the arguments of counsel, hereby makes the following findings of fact and conclusions of law pursuant to Federal Rule of Civil Procedure 52(a). The Court has jurisdiction over the subject matter of this dispute under 28 U.S.C. § 1332.

The Parties

Plaintiff Industrial Graphics, Incorporated (hereinafter IGI) is a Minnesota corporation with its principal place of business in Mankato, Minnesota. IGI is a wholly owned subsidiary of plaintiff Mankato Graphic Arts, Inc. (hereinafter MGA), which is also a Minnesota corporation with its principal place of business in Mankato, Minnesota. Francis J. Murray is the chairman of the board and chief executive officer of MGA, as well as the president of IGI. During 1976, John (Jack) C. Daugherty functioned as the vice-president of operations for IGI. The defendant, Asahi Corporation (hereinafter Asahi) is a trading company organized under the law of Japan with its principal place of business in Tokyo, Japan, and at all relevant times was engaged in the export of electronic products. Asahi Communications, Inc. is engaged in the manufacturing of electronic products, including the radios which are the subject matter of this dispute.

IGI, beginning in 1974, became involved in marketing products for use in conjunction with motor vehicles, the market being known as the "automobile after market." IGI's product line during 1974-76 included walkie talkies, tape players, tape recorders, cruise controllers, pocket radios and portable radio phonographs. IGI marketed its products either through direct sales or through the efforts of its independent sales representatives who were located in various parts of the United States.

The Transaction

In late 1975, IGI decided to enter the then burgeoning wholesale market in citizen band radios (hereinafter CBs). In 1975, IGI contacted Foreign Trades Corporation (hereinafter FTC), a Minnesota corporation headquartered in Mankato which was engaged in brokering products imported from countries located in the Orient. The sole shareholder of FTC was Eugene J. Biedscheid, a Mankato resident. Biedscheid was also one of the principal owners of Bakco, Ltd. (hereinafter Bakco) which had offices in Hong Kong and Taiwan, and which was also engaged in importing and exporting goods. IGI's purpose in contacting FTC was to arrange for the purchase of CBs from a manufacturer in the Orient, as there were no domestic manufacturers of CBs willing to sell at competitive levels to independent wholesalers.

Biedscheid traveled to Japan on behalf of IGI to arrange for the purchase of CBs. Ultimately, Biedscheid negotiated with Ken Adachi of Asahi in Tokyo in 1975 for the sale of 23 channel CB radios to be marketed as the Fairmate AC-500 (hereinafter AC-500). Biedscheid and Adachi agreed that samples and specifications for the AC-500s would be sent to FTC in Minnesota. The specifications for the AC-500 were sent by Asahi to FTC in January of 1976. As Asahi was just beginning its efforts in manufacturing CBs, Ken Adachi could only promise Biedscheid that Asahi could produce 2,000 CBs per month, and that the first shipment could not be made until May of 1976. Although Asahi was aware that Biedscheid and his companies were engaged in a brokerage function and that the CBs would be resold, Asahi officials were not aware in early 1976 of the identity of IGI as the ultimate purchaser. The price quoted to Bakco by Asahi was $50.30 per unit on a total order of 6,000 radios.

After Biedscheid presented the various alternatives as to possible manufacturers,¹ IGI decided to purchase 6,000 CBs from Asahi through FTC. IGI officials reached this decision in part because of Asahi's good reputation and in part with the purpose that a long term relationship as a purchaser of Asahi's electronic products could develop. On March 19, 1976, IGI sent a purchase order to Bakco, at Biedscheid's direction, for 6,000 AC-500 CBs at a price of $54.80 per unit. On March 23, 1976, this purchase order was amended to allow for later shipping dates. IGI thereafter entered into a written brokerage contract with FTC, and agreed to pay FTC a commission of $3.29 per unit on the 6,000 AC-500s. Unbeknownst to plaintiffs, Bakco received a "commission" as well on the difference between the $54.80 IGI purchase price and the $50.30 price quotation from Asahi to Bakco. This was accomplished through Bakco submitting its own purchase order to Asahi on April 7, 1976, for 6,000 AC-500s at a purchase price of $50.30 per unit. Asahi and Bakco entered into a "sales note" on April 16, 1976, which specified certain conditions of the sale.² Payment for the radios was accomplished through the use of a transferable letter of credit.

The only express representation³ made by Asahi with respect to the quality of the CBs was that the radios would receive "type acceptance" from the Federal Communications Commission (FCC), which was necessary for the radios to be sold in the United States. FCC "type acceptance" for the AC-500 was received on May 26, 1976.

Prior to the time the CBs were actually shipped, IGI made a number of purchases in anticipation of its entry into the wholesale CB radio market. In the spring of 1976, IGI purchased 6,000 CB antennas from a third party for a total cost of $37,226.00 for resale along with its inventory of CBs, including the AC-500s. On April 30, 1976, MGA purchased Key City Communications, Inc. (hereinafter Key City), an ongoing business engaged in the repair and maintenance of electronic products, primarily CB radios, for the price of $60,000.00. IGI planned to use Key City for warranty and repair service for the purchasers of its radios. At the time Asahi entered into its contractual obligations for the sale of the 6,000 CBs, it had no actual knowledge of IGI's purchase of the antennas or Key City as a part of IGI's foray into the CB market.

After FCC type acceptance was obtained, Asahi shipped 500 of the 23 channel AC-500s to IGI about June 1, 1976, via air freight. The initial 500 radios were shipped by air rather than ocean freight because IGI perceived a high demand for the radios. IGI received the initial 500 radios by June 10th, and sold approximately 380 radios to mostly local customers by June 22, 1976. The next 3,500 radios were shipped by ocean freight, and were all received by IGI by approximately July 10, 1976.

On July 28, 1976, the FCC stunned the CB radio market by announcing that as of January 1, 1977, only 40 channel radios could be manufactured and that the sale of 23 channel radios would be banned. Although the FCC later revised this announcement to allow the sales of 23 channel units such as the AC-500 after January 1, 1977, the FCC's actions caused a rapid and dramatic decline in the wholesale and retail price of 23 channel radios during the latter part of 1976. By the time of the FCC announcement, IGI had sold 484 AC-500s. Due to the defects which developed in the AC-500s, as well as the marketing conditions, IGI refused to accept the last 2,000 of the 6,000 CBs sold by Asahi.⁴

Quality Problems and Negotiations

Beginning in early July of 1976, IGI became aware through customer complaints and returns of the AC-500s that the wattage output on a large number of the units was too low. Upon checking the wattage levels of various radios, IGI discovered that a significant number of the radios failed to possess an output of three watts, which was a generally acceptable minimum level. The low wattage output seriously affected the transmission capabilities of the AC-500, as the radios lacked the power to transmit the communications of the user a sufficient distance. In addition to the wattage problem, towards the end of July IGI also became aware of a problem with respect to the public address (PA) feature of the AC-500. Once an external speaker was connected to the PA jack on the rear of the AC-500s, all outgoing transmissions were broadcast over the external PA speaker, regardless of whether the PA switch was turned on or off by the user and regardless of which of the 23 channels were selected for transmission. The only way to transmit messages without the transmission also coming over the PA system was to disengage the PA jack from the back of the radio. Apart from these two significant problems, various other warranty repairs were made by IGI on the AC-500s during July of 1976.

Initially, IGI and Asahi attempted to cope with the wattage problems by Asahi forwarding instructions by telex through Eugene Biedscheid of FTC. Both IGI and Asahi made various proposals through FTC, all of which culminated in an August 15-16 meeting in Mankato between IGI officials Murray and Daugherty, Hirofaburo Kanoh of Asahi, and others. Prior to the meeting, IGI at one point had demanded that Asahi take back the goods for repair and while it is apparent that Asahi considered that proposal, it was not accepted. Rather, since taking back the units would have...