Keystone Floor Products Co. v. Beattie Mfg. Co.

• Decision Date: 16 May 1977
• Docket Number: Civ. A. No. 73-1016 and 74-2315.
• Citation: 432 F. Supp. 869
• Parties: KEYSTONE FLOOR PRODUCTS CO. v. The BEATTIE MANUFACTURING CO. and Cherokee Corporation. The BEATTIE MANUFACTURING CO. v. Richard A. FREED and Stephen Freed.
• Court: U.S. District Court — Eastern District of Pennsylvania

432 F. Supp. 869

KEYSTONE FLOOR PRODUCTS CO. v. The BEATTIE MANUFACTURING CO. and Cherokee Corporation.

The BEATTIE MANUFACTURING CO. v. Richard A. FREED and Stephen Freed.

Civ. A. Nos. 73-1016 and 74-2315.

United States District Court, E. D. Pennsylvania.

May 16, 1977.

COPYRIGHT MATERIAL OMITTED

James J. McCabe, Jr., Duane, Morris & Heckscher, Philadelphia, Pa., for plaintiff.

Patrick T. Ryan, Drinker, Biddle & Reath, Philadelphia, Pa., for defendants.

MEMORANDUM AND ORDER

HANNUM, District Judge.

Presently before the Court is defendant The Beattie Manufacturing Company's (Beattie) motion for judgment notwithstanding the verdict or, in the alternative, motion for a new trial pursuant to Rules 50(b) and 59, Federal Rules of Civil Procedure, in Civil Action No. 73-1016. Plaintiff, Keystone Floor Products Company (Keystone) makes no separate motion with respect to this action and neither party advances any motion with respect to the consolidated case, Civil Action No. 74-2315.

The amended complaint, by which Keystone originally sought injunctive relief in its action against Beattie,¹ contains four counts, breach of contract, malicious interference with contract, unfair competition and violation of the anti-trust laws. Beattie, by way of counterclaim, asserted claims against Keystone for an outstanding indebtedness, failure to use best efforts and fraud.

The case proceeded to trial before the Court and a jury on all claims. However, upon Beattie's motion at the close of Keystone's case, a directed verdict pursuant to Rule 50(a), Federal Rules of Civil Procedure, was entered on Keystone's antitrust claim and also as to Keystone's claims against defendant Cherokee Corporation. At the close of Beattie's case its count charging failure to use best efforts was withdrawn. The remaining issues were submitted to the jury.

By answers to special interrogatories the jury found that Beattie had breached its contract with Keystone and awarded plaintiff $1,500,000.00 damages. The jury further found that Beattie was liable for malicious interference with contract, however, only nominal damages were awarded. As to the unfair competition claim, the jury found that Beattie was not liable.

In addition, with respect to Beattie's counterclaim, the jury determined that there was an outstanding debt of $119,000.00 owed by Keystone to Beattie but found that Keystone was entitled to an offset of $47,800.00 and thus awarded Beattie $71,200.00, plus interest of $8,544.00. Beattie's claim of fraud was rejected by the jury.

Although defendant's post-trial motions raise a number of questions, the argument most strongly advanced is that the record provides no basis upon which the jury could award damages of $1,500,000.00 on the breach of contract claim. In certain respects Beattie's position on this point is persuasive. Thus, for the reasons set forth herein the Court recommends that Keystone agree to a remittitur of all damages in excess of $149,440.00. In the alternative, a new trial on the issue of damages relating to the breach of contract claim will be granted.

I. FACTS²

Keystone is a Pennsylvania Corporation engaged in the distribution of carpeting to retail outlets in Eastern Pennsylvania, Southern New Jersey, Delaware and the Baltimore-Washington area. The company is equally owned and operated by two brothers, Richard A. Freed and Stephen Freed, who assumed control of the business after their father's death. Beattie is a New Jersey corporation engaged in the manufacture and nationwide distribution of carpeting.

Business dealings between the parties began in 1966 and by 1968 the parties had reached an oral understanding that Keystone was Beattie's distributor in the Philadelphia region. Although there was no written agreement, on May 25, 1970, Beattie sent Keystone a copy of its "General Terms and Policies for Distributors" (General Terms).³ The General Terms covers a number of topics including credit terms and claims handling. As to credit terms it provides in Paragraph 5:

"Terms are either 5% 30 days, net 31, or 4% 60 days, net 61, not both. Confirmation of order will specify which terms apply. No anticipation allowed. Interest at 1½% per month will be charged on all past due invoices."

The document also refers to termination of the distributorship agreement in Paragraph 15 which provides:

"The mill distributorship relationship may be discontinued without cause, provided 60 days notice is given by either party. This practice will be considered as common usage and both parties will be notified where the communication was made as was this by certified mail, return receipt requested."

In addition the Freeds' oral testimony indicated that the understanding of the parties was that Keystone had a sole and exclusive distributorship. Consistent with their testimony was a letter from John Beattie, President of defendant, to Richard Freed dated January 17, 1972, in which he stated:

"As we have discussed in recent weeks, your company Keystone handles the Beattie line in your trading area, including Philadelphia, Baltimore, Washington and North Jersey. In this territory you have sole distribution of the Beattie Carpet Line.

If you have any further questions relative to this arrangement, please get in touch with me."⁴

Sometime after receipt of this letter plaintiff became aware that defendant was distributing its carpets through David Hockstein Associates (Hockstein) in the Baltimore-Washington-Virginia region. On March 2, 1972 Richard Freed directed a letter to John Beattie complaining of the sales to Hockstein.⁵ Receiving no response he sent a second complaining letter to John Beattie on March 15, 1972⁶ which took a harsher tone. John Beattie replied by letter dated March 17, 1972, wherein he stated:

"I wish to acknowledge receipt of your recent letters again calling our attention to a condition discussed previously relative to David Hockstein Assoc. Upon receipt of your first letter two weeks ago, I began an investigation into the actual facts. You have my complete assurance that we will abide by our letter dated January 17, 1972.

You will be hearing from me shortly, relative to the outcome of this investigation."⁷

Unbeknownst to Keystone, Beattie continued shipments to Hockstein.

John Reilly of Beattie testified that Hockstein was a "private label" distributor as distinguished from a "running line" distributor. Running line carpet is a product sold by the distributor under the manufacturers label or brand designation. Private line carpet is exactly the same product sold under the private label of a particular distributor. Although the distinction is recognized in the industry it seems to be, largely, one without a difference. In any event, as Richard Freed testified, he later learned that Beattie shipped running line carpet to Hockstein through November 1972 using coded invoices as a subterfuge. These circumstances eventually led to discontinuance by Keystone of its operations in the Baltimore-Washington vicinity.

Beginning with the Hockstein matter, 1972 turned out to be an eventful year for the Keystone enterprise. In July of that year it moved from its small warehouse facility on Hunting Park Avenue in Philadelphia to a newly constructed, larger warehouse in Cornwells Heights, Pennsylvania. The move resulted in an increase in Keystone's physical plant costs from $22,000.00 per year to approximately $80,000.00 per year and was made, according to Richard Freed, partly at the suggestion of John Beattie as a measure intended to increase the volume of sales. An employees' strike which lasted from August to October, also highlighted the year. During the strike Stephen Freed, who had been an outside salesman from the time he joined the company, came inside and took an active part in the day to day management. Another noteworthy development occurred after Stephen Freed found he was greatly satisfied by his new role in the management of the company. That is, he informed his brother, Richard, that he sought to buy out his interest. Richard Freed was apparently receptive to the idea and as of late January 1973 for all intents and purposes he had removed himself from the management of the company.

During the latter part of 1972 Keystone's leading seller was a product called "Supervelour," supplied by a company other than Beattie, Vernon Carpet Mills. The next two leading sellers were, however, supplied by Beattie and, in fact, Beattie merchandise constituted approximately 80% of Keystone's inventory of carpet. In purchasing such a large quantity of its inventory from Beattie, Keystone was, naturally, quite dependent upon the relationship. When certain delivery problems began to occur, they were not without considerable adverse effect upon plaintiff's organization.

The delivery problem manifested itself in two ways. First, because of late deliveries Keystone could not adequately supply its retail outlet customers. Kathryn Kucinskas, an order clerk at Keystone, testified that during Christmas 1972, poor deliveries caused Keystone to suffer a number of cancellations. Second, when Beattie filled orders Keystone found that faster moving inventory was supplied in a disproportionately low percentage compared to slower selling inventory. For example, if Keystone placed an order for a brand of carpet called "Treasure Island" broken down into ten rolls of gold and ten rolls of green (fast sellers) and two rolls of purple and two rolls of white (slow sellers), when Beattie would fill the order they would supply only two rolls of each color. Over a period of time this resulted in Keystone's inventory becoming overstocked in slow moving merchandise. As a consequence of the inventory problems, according to the testimony of Stephen Freed, plaintiff had to cancel 1000 rolls in early 1973.

It was also during the latter stages of 1972 that Keystone's outstanding account with Beattie began to reach substantial proportions. As of October 14,...