International Business Machines Corp. v. Catamore Enterprises, Inc.

• Decision Date: 30 September 1976
• Docket Number: No. 76-1086,76-1086
• Citation: 548 F.2d 1065
• Parties: INTERNATIONAL BUSINESS MACHINES CORPORATION, Plaintiff, Appellant, v. CATAMORE ENTERPRISES, INC., Defendant, Appellee.
• Court: U.S. Court of Appeals — First Circuit

Page 1065

548 F.2d 1065

INTERNATIONAL BUSINESS MACHINES CORPORATION, Plaintiff, Appellant, v. CATAMORE ENTERPRISES, INC., Defendant, Appellee.

No. 76-1086.

United States Court of Appeals, First Circuit.

Sept. 30, 1976.

Jack E. Brown, Phoenix, Ariz., with whom George E. Hilty, Paul V. Bonn, Lois W. Abraham, Neil S. Cumsky, Philip R. Higdon, Michael J. Malley, Phoenix, Ariz., Nicholas deB. Katzenbach, Armonk, N. Y., Palmer & Dodge, Boston, Mass., Edwards & Angell, Providence, R. I., Cravath, Swaine & Moore, New York City, and Brown & Bain, P. A., Phoenix, Ariz., were on brief, for plaintiff-appellant.

Thomas K. Christo and Albert P. Zabin, Boston, Mass., with whom Rosann C. Madan, Boston, Mass., was on brief, for defendant-appellee.

Before COFFIN, Chief Judge, McENTEE, Circuit Judge, and FREEDMAN, ^* District Judge.

COFFIN, Chief Judge.

This case is a paradigm of complex litigation, rivalling the complexity of the cybernetics era from which it arises. It involves the unhappy relationships between a supplier of electronic data processing equipment and services, International Business Machines Corporation (IBM) and a customer, Catamore Enterprises, Inc. (Catamore), ¹ a manufacturer and distributor of jewelry. The events at issue here spanned the years between 1967 and 1971 and concern the efforts of Catamore to computerize, and thus expand, its operations with leased IBM equipment and the assistance of IBM services the scope and quality of which are the heart of this suit.

Suit began in October, 1972, with the filing of a simple complaint by IBM in which it sought to collect $68,453.23 from Catamore for rental of equipment and payment for services. Catamore filed an answer containing a simple denial of the facts that would give rise to liability and a counterclaim asserting that IBM had breached numerous express and implied warranties of performance and claiming damages of $250,000. A year and a half later, Catamore filed eight additional counterclaims, principally identifying different elements of alleged damage but adding specific allegations of breach of contract and false representations, and claiming damages of $15,554,210. Trial began on March 10, 1975. On or about May 16, 1975 Catamore again amended its counterclaims in various particulars, adding a ninth counterclaim charging IBM with wanton, reckless, and negligent conduct and claiming $18,887,800 in actual damages and $7,293,234 in punitive damages. After 56 days of trial and 9 days of deliberation, the jury returned a verdict for IBM on its claim against Catamore in the amount of $68,453.23 and a verdict for Catamore on its counterclaims in the amount of $11,400,000. ² IBM now appeals from the $11,400,000 judgment entered against it. Catamore has not appealed from the judgment against it.

IBM argues on appeal that, as a matter of law, there is no basis for liability for breach of contract or for negligence. In addition, it challenges the evidence and instructions as to damages and maintains that a number of rulings at trial and the allowance of excessive latitude to Catamore's counsel contributed to confusion and error.

In reviewing this case, we are not insensitive to the fact that we are dealing with a most arduously protracted trial, in which the district court took the utmost pains to avoid captious rulings, be fair to both parties, and to give both sides advance notice of its problems and proposed instructions. Equally weighty in our minds is the deference to be given the jury, which, faced with a host of complex issues on both liability and damages, spent nine days deliberating over the evidence of this 56 day trial. We are nevertheless compelled to vacate the judgment below and remand for a new trial. For reasons which are stated below, we deal only with the questions of contract liability.

What we might term the contract history of this case is the following. In the mid-1960's Catamore was a thirty-year old family company, which had specialized in selling religious jewelry to wholesalers and was in the process of expanding and diversifying its business. It was not only selling a general line of jewelry but, by 1965, was experimenting with a new sales method, "program selling", in which wholesalers were bypassed and, after market tests were run, prepackaged units of jewelry items were placed directly in retail stores of some of the large chains. Reordering would take place several times a year.

Catamore's tests led to increasing sales and expectations and the recognition that for it to develop capacity to process dramatically increased quantities of retail orders, and to coordinate production with demand, it would require a system of production control using electronic data processing equipment. Conversations between Catamore's President, Robert Catanzaro, and an IBM salesman, Davitt, led to a study of Catamore's needs by an IBM systems engineer. Thereafter, IBM's representative staged a presentation for Catamore, in which he explained through the use of schematic charts the different steps necessary to computerize Catamore's production control system. ³ At this point, in September, 1968, Catamore decided to adopt such a system. It proceeded to sign a Machine Service Agreement, providing for the lease of a computer. Both parties understood that it was to be installed in December of 1969, after the necessary preparatory work had been done.

The core of this dispute is the opposite understandings of the parties as to who had the responsibility for doing this preparatory work, which consisted of general systems design (as to overall flow of the system), a more refined detail systems design, ⁴ and programming. ⁵

It is Catamore's contention that IBM orally agreed to furnish, along with the computer, a completely computerized production control system on a "turnkey" basis, so that Catamore personnel (who would have had training in operating the system) could take over all operations. Even the ordinarily time-consuming task of programming was allegedly assumed by IBM since it would use and merely modify preexisting programs already in its library of programs. Catamore had only the obligations of hiring a programmer/maintenance man to run and keep updated the system after installation and of converting basic data used in its manual system so that the data could be used by the computer.

It is IBM's view that, on ordering the computer equipment, Catamore would have available to it, at no extra cost, both the education of Catamore's employees in data processing and assistance in systems engineering design. The latter, according to one IBM witness, Davitt, meant that, to take one of the four operations of production control, the order entry system, IBM, working with Catamore, would develop a "systems design flow chart of order entry", i. e., more detailed design of this function, on the basis of which a programmer could begin to work. ⁶ The programmer then would write even more explicit instructions and then translate those into a coding language understood by the computer. Catamore would be allowed to use IBM facilities for testing. But all programming would be Catamore's responsibility, IBM not at that time performing this service for customers. IBM did, however, offer Catamore any of the package programs in its library which might be useful.

These contrasting views as to who was to do what were the seeds of what followed. While a chart of steps to be taken, and times within which they should be taken, to prepare for the December, 1969, installation of the computer and start-up of the new system had been a part of IBM's sales presentation, little seemed to be happening by way of joint consultation or implementation by either party during the next nine months. Some work on systems design was done by IBM; in April of 1969 Catamore had hired a controller, Correra, to supervise its data processing project; a start had been made on converting the items of Catamore's inventory to computer compatible numbers and a larger computer had been placed on order. But no Catamore employee had obtained any data processing education. In the meantime, Catamore had pushed ahead with its new sales approach, bringing back a significantly increased number of orders as the result of testing its product lines and packages in many retail outlets. It also prepared for expansion by making arrangements for additional facilities, financing, and new products.

In June, 1969, IBM announced a new policy to all its customers, stating that systems engineering services would be supplied on a charge basis, except that assistance which had earlier been mutually planned would be continued to be supplied without charge until January 1, 1970. In addition, rental charges would be reduced 3 per cent. This came to be called "unbundling". Catanzaro testified that he was assured by IBM's Davitt that unbundling would not affect Catamore since IBM's commitments would be fulfilled before January 1, 1970. When a new IBM marketing representative, O'Reilly, took over the Catamore account in September, 1969, from Davitt, he saw that the time remaining until December was inadequate to perform all the tasks necessary to launch the new system, and recommended to Catamore that delivery of the equipment be deferred to March or April of 1970. This was agreeable to Catamore, which was seeking a new building and which would not face another business season until the fall of 1970. It set an outside installation date of September, 1970. ⁷

In November of 1969 IBM wrote Catamore, referring to the provision in the unbundling announcement that services earlier "mutually planned" would be continued without charge until January 1, 1970. It listed the areas so agreed upon as: "Production Control, Inventory, Order Entry, Invoicing, Accounts Receivable, and Accounts Payable." ⁸ It then noted that "the system design for production control has been 90% completed with the remaining accounting application...