Lancaster Glass Corp. v. Philips ECG, Inc.

• Decision Date: 17 December 1987
• Docket Number: Nos. 86-3926,86-4049,s. 86-3926
• Citation: 835 F.2d 652
• Parties: 5 UCC Rep.Serv.2d 1306 LANCASTER GLASS CORPORATION, Plaintiff-Appellee, v. PHILIPS ECG, INC.; and GTE Products Corporation, Defendants-Appellants.
• Court: U.S. Court of Appeals — Sixth Circuit

Page 652

835 F.2d 652

5 UCC Rep.Serv.2d 1306

LANCASTER GLASS CORPORATION, Plaintiff-Appellee, v. PHILIPS ECG, INC.; and GTE Products Corporation Defendants-Appellants.

Nos. 86-3926, 86-4049.

United States Court of Appeals Sixth Circuit.

Argued Oct. 2, 1987.

Decided Dec. 17, 1987.

Melvin D. Weinstein, argued, S. Noel Melvin, Emens, Hurd, Kegler & Ritter, S. Martijn Steger, Columbus, Ohio, for defendants-appellants.

Alan L. Briggs, Steven W. Tigges, argued, David J. Young, Murphy, Young & Smith, Columbus, Ohio, for plaintiff-appellee.

Before MARTIN and NELSON, Circuit Judges, and CONTIE, Senior Circuit Judge.

BOYCE F. MARTIN, Jr., Circuit Judge.

Lancaster Glass Corporation, a manufacturer and seller of glassware, brought this diversity action against Philips ECG, Inc., and GTE Products Corporation to recover the contract price for bulbs Philips contracted to purchase but refused to accept. ¹ Philips defended on the ground that the tendered bulbs were defective. Philips also counterclaimed to recover for allegedly-defective bulbs it had already paid for. At the conclusion of a bench trial, the district court entered a judgment against Philips for $714,511.23. The district court subsequently added $26,463.20 to the award for additional prejudgment interest.

I.

At the heart of this dispute is an electronic glass bulb known as the LEA-1015B. The LEA-1015B was manufactured by Lancaster and sold to manufacturers of cathode ray tubes. Philips is one such manufacturer.

A.

The LEA-1015B is essentially an empty television picture tube made entirely of glass. The bulb consists of three parts: the faceplate, the funnel, and the neck. The diagonal measurement of the faceplate is 12 inches. Lancaster first designed and produced the bulb in 1964, and the latest drawing revision is dated February 2, 1973. When Philips began purchasing LEA-1015B bulbs, it requested and received a copy of Lancaster's engineering drawing for the bulb. Philips provided copies of the drawing to its customers to assist them in selecting and ordering television and display monitor tubes made from LEA-1015B bulbs.

During the 1970's, Philips became one of Lancaster's largest customers, and the LEA-1015B was the largest volume item sold by Lancaster to Philips. From 1974 to 1979, Philips purchased more than a half-million of the bulbs, including more than 200,000 in 1979 alone. Throughout this period, though, Philips also purchased 12-inch bulbs from other suppliers. Lancaster last produced the LEA-1015B in 1980.

After buying the bulbs from Lancaster, Philips converted them into cathode ray tubes for eventual use as computer screens and similar video display monitors. Philips' standard procedure was to install various electronic components into the bulb, coat the interior, and then draw the air out of the bulb to create a vacuum. Philips then placed the sealed tubes into storage until an order was placed by one of its customers.

After Philips received an order, it would treat the tubes with "implosion protection." Because the sealed tubes are under a vacuum, the glass is subject to excessive atmospheric pressure. If a hole is made through the face of the tube, this pressure will cause the glass all around the tube to implode. To minimize the risk of violent implosions, and to meet industry safety requirements, Philips would provide implosion protection systems to the finished tubes. Implosion protection systems prevent the glass in the tubes from flying outward and causing injury if the tubes are shattered. The two implosion protection systems most prevalent during the relevant time period were "shellbonding" and "T-banding." Shellbonding, whereby a seal is placed over the face of the tube, was the traditional method. T-banding is a more recent innovation.

In T-banding, a steel strip is placed around the perimeter of the bulb and then tightened. When the T-band is tightened, it compresses the glass, making the tube more resistant to implosion. The T-band serves another purpose, as well. Before a T-band is tightened around a tube, a metal, L-shaped "ear" with holes in it is placed beneath the T-band at each of the four diagonal corners of the tube faceplate. These ears act as mounting fixtures that enable Philips' customers to install the tubes in their cabinets or chassis. T-banding replaced shellbonding as the predominant implosion protection system because T-banding was a less-expensive process and because a T-banded tube can fit into a smaller cabinet. This shift to T-banding was not unique to Philips and was known by Lancaster.

Because of the dual functions which a T-band performs, though, it is critical that the T-band not move or slip on the tube after the band is tightened. If a T-band slips, the tube is no longer held in compression, and the implosion protection which the T-band would otherwise provide is compromised. In addition, slippage of a T-band causes the metal ears to move so that the tube will no longer fit properly into the customer's cabinet or chassis.

B.

The events relevant to this case occurred over a span of 16 months. The contract had its beginning in January 1980 when Philips ordered 20,000 LEA-1015B bulbs. Releases on this order were made throughout the month, and the final release was on January 31, 1980. This final release, however, included an additional 1,029 bulbs not previously ordered by Philips. Lancaster discovered the over-shipment the following day, February 1, and Lancaster called Philips to ask how to handle the matter. Philips told Lancaster that it needed an additional 20,000 bulbs anyway so the 1,029 overshipment could just be considered part of this new order. The parties agreed to a price of $8.90 per bulb.

But the terms of this new order changed. One week after the order for 20,000 bulbs was placed, officials of both companies met to discuss Lancaster's 1980 bulb prices and Philips' 1980 bulb needs. Because Philips' sales forecasts were very favorable while Lancaster was predicting substantial cost increases, a Lancaster official suggested that it would be mutually advantageous for Philips to place a large order then so that Lancaster could buy the necessary materials immediately at the lowest possible price. Lancaster then offered to sell the LEA-1015B at $8.25 each if Philips would increase its outstanding order to 100,000 bulbs.

On February 14, 1980, Philips called Lancaster to say that it would accept the offer. Philips then placed an order for 101,029 LEA-1015B bulbs, the first 1,029 (those already released on January 31, 1980) at $8.90 each and the remaining 100,000 bulbs at $8.25 each. After placing this order, Philips prepared one of its standard purchase orders and sent it to Lancaster. The appropriate Lancaster employee signed the purchase order, and Lancaster returned it to Philips.

The purchase order contained several provisions relevant to this dispute. A section entitled "WARRANTIES" provided:

Seller warrants that all goods ... provided by it (i) shall be ... free from defects, ... (ii) shall conform to all specifications, drawings, [and] descriptions furnished, specified or adopted by buyer, (iii) shall be merchantable and suitable and sufficient for their intended purposes and (iv) shall be free of any claim of any third party.... Buyer's ... acceptance of and/or payment for goods shall not constitute a waiver by it of any warranties. Buyer's ... acceptance of any goods shall not relieve Seller from responsibility to deliver goods ... conforming to specifications, drawings and descriptions.

A section entitled "CANCELLATION AND REMEDIES" provided:

Buyer may cancel this order in whole or in part if (i) the goods ... furnished do not conform to warranties.... In the event of any such cancellations, Buyer shall have the rights ... (i) to refuse to accept delivery of goods ... [and] (ii) to recover all payments made therefore....

The purchase order also provided that shipment of the order was to be "as released." Lancaster understood this language to mean that the order was to be completed in calendar year 1980.

At the time the order was increased, Lancaster had some glass in inventory, but not enough to cover the entire order. By the end of April 1980, however, Lancaster had made enough inventory of parts to fabricate the 100,000 bulbs. Lancaster had produced all of the parts by that time in order to avoid an expected cost-increase later in the year.

Lancaster began to release completed bulbs pursuant to the contract in March 1980. In April 1980, however, Philips was notified by one of its customers that the T-bands on a shipment of tubes made from 12-inch bulbs had slipped. Philips examined the returned tubes, and it discovered that all of the tubes with slipped bands had been made from Lancaster's LEA-1015B bulbs. But Philips continued to request new releases until the end of June 1980. At that point, Philips had accepted and paid for over 15,000 bulbs.

Despite Philips' efforts to prevent T-bands from slipping, the band slippage problem continued. Philips' engineers began to suspect that the band slippages were related to the size of the diagonal panel skirt taper angle, the angle at each of the four diagonal corners of the bulb faceplate. Lancaster's engineering drawing shows the diagonal angle to be one-and-one-half degrees, with no "tolerance" indicated. Other dimensions on the drawing have "tolerances," that is, plus and/or minus symbols follow the dimensions indicating that there is a specific range within which the bulb may vary from the drawing and yet still be considered in conformance with it. Because Philips had difficulty measuring the angles, Philips sent three bulbs to Owens-Illinois for measurement during the summer of 1980. From this examination, Philips learned that some of the angles on these bulbs exceeded one-and-one-half degrees. At the same time, however, the market for 12-inch tubes declined; Philips' predictions for a banner year were...