National Controls Corp. v. National Semiconductor Corp., No. 86-3784

CourtU.S. Court of Appeals — Third Circuit
Writing for the CourtBefore BECKER, SCIRICA and ROSENN; ROSENN
Citation833 F.2d 491
Decision Date23 November 1987
Docket NumberNo. 86-3784
Parties5 UCC Rep.Serv.2d 626 NATIONAL CONTROLS CORPORATION v. NATIONAL SEMICONDUCTOR CORPORATION, Appellant.

Page 491

833 F.2d 491
5 UCC Rep.Serv.2d 626
NATIONAL CONTROLS CORPORATION

v.
NATIONAL SEMICONDUCTOR CORPORATION, Appellant.
No. 86-3784.
United States Court of Appeals,
Third Circuit.
Argued Oct. 5, 1987.
Decided Nov. 23, 1987.

Page 493

David A. Brownlee (argued), Kenneth M. Argentieri, Jeffrey T. Barbour, Kirkpatrick & Lockhart, Pittsburgh, Pa., for appellant.

T. Lawrence Palmer (argued), Wexford, Pa., for appellee.

Before BECKER, SCIRICA and ROSENN, Circuit Judges.

OPINION OF THE COURT

ROSENN, Circuit Judge.

Defendant, National Semiconductor Corporation (NSC), appeals an adverse jury verdict in a breach of contract and warranties suit brought in diversity by National Controls Corporation (NCC) in the United States District Court for the Western District of Pennsylvania. NSC asserts that it was entitled to a judgment notwithstanding the verdict (judgment N.O.V.) because the jury's award of $1,400,000 in damages was based on its improper consideration of consequential damages and the trial court's erroneous instructions with respect to such damages. NSC also contends that the district court committed reversible error in several of its evidentiary rulings. We reverse.

I.

NCC is a small Pennsylvania company involved in the design and production of control systems and electrical devices for

Page 494

its various customers. It also was participating in the development and production of a new or "SNAP" type of telephone for MCI, a national telephone company exclusively engaged in providing long distance service. This "SNAP" telephone would allow consumers direct access to MCI's long distance telephone services by automatically dialing the MCI code numbers and would also reach the rotary market. The development of the project was to proceed in four phases and the project was subject to termination at any time for a variety of business reasons. The proposed new telephone was to use certain specific devices called COPS, microcontroller units which are a type of integrated circuit, essentially a computer on a chip, produced by NSC, a Delaware corporation based in California. NCC participated in the first, or "development," phase of MCI's project by supplying ten test telephones. The telephones contained COPS microcontroller units produced by NSC and sold to NCC in the summer of 1982. NCC raises no claim with respect to this phase and none of the damages awarded relate to it.

NCC also participated in the next, pre-test, phase of the project. MCI ordered 200 test telephones from NCC in December of 1982 for a total price of $27,400. Purchase orders for additional quantities were to be authorized "only after the 200 sets are tested, approved and accepted." Dissatisfied with the small quantity of telephones ordered, NCC sought to gain MCI's commitment to an order for 60,000 telephone units. MCI was unwilling to place such a large order and, after further negotiations, MCI issued a final purchase order on February 7, 1983, for an aggregate of 450 test telephone units at a total price of $55,400. MCI's purchase order specifically limited its purchase commitment to the 450 telephones. 1

NCC planned to use NSC's chips to produce the phones. Late in 1982, NCC entered into a contract with NSC, through NSC's agent CAM/RPC, in which it ordered a total of 1,200 microprocessor 2 units from NSC. NSC breached its contract and its warranties of merchantability and fitness for a particular purpose with respect to this order by delivering only a small number of defective microcontroller units. As a consequence, NCC supplied only 126 of the first 200 test telephone sets, and some of those failed because of the poor quality of the microprocessors supplied by NSC.

Notwithstanding the failure to make the required delivery for the 450 test telephones, MCI ordered 6,000 NSC COPS units from NCC in May of 1983 in anticipation of the third, or pilot test, phase of the SNAP phone project. The total purchase price of the order was $38,580. NCC in turn ordered 6,100 microcontroller units from the defendant for a purchase price of $35,014. 3 In addition, NCC sent MCI a price quotation for 5,000 telephones for this pilot test phase of the project, but MCI never issued a purchase order accepting that quotation.

NSC failed to deliver any of the 6,100 chips ordered by NCC and MCI eventually cancelled the purchase order for chips that it had placed with NCC. Some five months later, MCI terminated the SNAP phone project in its entirety.

After hearing evidence regarding NCC's relationship with MCI and its contracts with MCI and NSC, the jury found that NSC had breached its contract and its warranties of merchantability and fitness for a particular purpose and awarded $1,400,000 in damages to NCC. A large portion of this award can only represent the jury's acceptance of NCC's claims of "lost profits" on the potential sale of thousands of telephones to MCI. NSC's motions for a

Page 495

directed verdict and for judgment N.O.V. were denied.

II.

NSC challenges the denial of its motion for a directed verdict and for a judgment N.O.V. on several theories. It asserts that (1) the damages sought by NCC were not recoverable as a matter of law, (2) the evidence was too speculative to support a jury verdict, and (3) the jury's verdict was not supported by the evidence. Our review of the district court's denial of the judgment N.O.V. is determined by whether there is sufficient evidence in the record to sustain the verdict of the jury on the issue of consequential damages. Acosta v. Honda Motor Co., Ltd., 717 F.2d 828, 839-40 (3d Cir.1983). The record must be viewed in the light most favorable to the non-moving party, and the denial of the motion should be affirmed unless the record is " 'critically deficient of that minimum quantum of evidence from which the jury might reasonably afford relief.' " Id. at 840 (citation omitted).

It is undisputed that Pennsylvania law governs the jury's consideration of damages in this action. Pennsylvania has adopted the Uniform Commercial Code (UCC) and permits recovery of consequential damages resulting from breach of warranty or contract by a seller. 13 Penn. Cons. Stat.Ann. Sec. 2714(c) (Purdon 1984). Such consequential damages may include "any loss resulting from general or particular requirements and needs of which the seller at the time of contracting had reason to know and which could not reasonably be prevented by cover or otherwise." 13 Pa. Cons. Stat.Ann. Sec. 2715(b)(1) (Purdon 1984). Lost profits are recoverable as consequential damages in a proper case, such as where a seller knows or has reason to know that a buyer is purchasing a good for resale. See, e.g., Kunststoffwerk Alfred Huber v. R.J. Dick, 621 F.2d 560 (3d Cir.1980). The award of such damages, however, pits the plaintiff's right to the bargain of his contract against the need to prevent jury verdicts based on speculation rather than proper proof. At issue in the present case is the application of section 2715 where the plaintiff attempted to show that the defendant's breaches of contract and warranty in sales aggregating 7,300 microcomputer chips were the proximate cause of lost profits on the sale of up to 180,000 telephones.

The defendant asserts that the consequential damages sought by NCC constitute losses of "good will" or mere speculative profits and, as such, are not recoverable under Pennsylvania law. NCC, however, argues that its consequential damages claim is predicated only on commitments for orders that the jury legitimately found were lost to NSC's breaches of contract and warranty.

Under Pennsylvania law, lost profits are recoverable when they are "lost on a particular sale or contract for the performance of which the goods in question were purchased." Neville Chemical Co. v. Union Carbide Corp., 422 F.2d 1205, 1226 (3d Cir.), cert. denied, 400 U.S. 826, 91 S.Ct. 51, 27 L.Ed.2d 55 (1970). In contrast, a breach of contract or warranty may lead to non-recoverable loss of good will where the defendant's breach causes customer dissatisfaction with the plaintiff which is then translated into a loss of expected profits. Id. at 1225 (citing Kassab v. Central Soya, 432 Pa. 217, 246 A.2d 848 (1968)). The bar to recovery of damages for loss of good will, including proof of such damages, is a matter of law in Pennsylvania, thus precluding the plaintiff from attempting to show that in his case the damages would not be speculative. Comment, Loss of Goodwill and Business Reputation as Recoverable Elements of Damages Under Uniform Commercial Code Sec. 2-715--The Pennsylvania Experience, 75 Dickinson L.Rev. 63, 78 (1970).

Even where the plaintiff's claim truly represents a claim for lost profits, rather than loss of good will, it may be rejected as speculative and unrecoverable. This is particularly true where the claim of lost profits is made in the context of a new and untried business venture. Delahanty v. First Pennsylvania Bank, N.A., 318 Pa.Super.

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90, 117-26, 464 A.2d 1243, 1257-61 (1983) (burden of proof is high with respect to new business profits).

No matter how the lost profits claim is characterized, however, an underlying prerequisite to the recovery of damages is proof of proximate cause. Id., 318 Pa.Super. at 120, 464 A.2d at 1258. Therefore, we need not explore the intricacies of Pennsylvania law to determine whether recovery for lost profits or lost good will is at issue. Instead, we will directly address NCC's contention that its consequential damage claim was based on commitments for orders to determine whether the plaintiff's proof provided a basis upon which the jury could have found that NSC's breach proximately caused the loss of profits on MCI's non-contractual and contractual commitments.

III.

To sustain a damages award, NCC...

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47 practice notes
  • Fineman v. Armstrong World Industries, Inc., Civ. A. No. 84-3837.
    • United States
    • U.S. District Court — District of New Jersey
    • October 8, 1991
    ...722 F.Supp. 1146, 1147 (D.Del.1989), aff'd, 904 F.2d 694 (3d Cir.1990) (citing National Controls Corp. v. National Semiconductor Corp., 833 F.2d 491, 495 (3d Cir.1987); Aloe Coal v. Clark Equipment Co., 816 F.2d 110, 113 (3d Cir.), cert. denied, 484 U.S. 853, 108 S.Ct. 156, 98 L.Ed.2d 111 (......
  • Tunis Bros. Co., Inc. v. Ford Motor Co., No. 90-1797
    • United States
    • United States Courts of Appeals. United States Court of Appeals (3rd Circuit)
    • February 12, 1992
    ...evidence in the record to sustain the verdict on compensatory damages. See National Controls Corp. v. National Semiconductor Corp., 833 F.2d 491, 495 (3d We will consider first whether there was sufficient evidence to support the jury's selection of a ten year period of time for the damage ......
  • Dunn v. Owens-Corning Fiberglass, Civ. No. 1987/238.
    • United States
    • United States District Courts. 3th Circuit. District of the Virgin Islands
    • September 27, 1991
    ...evidence to support the jury's verdict, a court is required to grant a JNOV. See National Controls Corp. v. National Semiconductor Corp., 833 F.2d 491 (3d Cir.1987). In making such a determination, the court views the evidence in the light most favorable to the non-moving party. Keith, 909 ......
  • Crown Coal & Coke Co. v. Powhatan Mid-Vol Coal Sales, L.L.C., No. 2:12cv222.
    • United States
    • United States District Courts. 3th Circuit. United States District Courts. 3th Circuit. Western District of Pennsylvania
    • March 8, 2013
    ...to the recovery of lost profits, not a measure of additional damages.” National Controls Corp. v. National Semiconductor Corp., 833 F.2d 491, 499 (3d Cir.1987) (citing Restatement (Second) of Contracts §§ 347, 349). Reliance damages are limited to those amounts which reasonably were expende......
  • Request a trial to view additional results
47 cases
  • Fineman v. Armstrong World Industries, Inc., Civ. A. No. 84-3837.
    • United States
    • U.S. District Court — District of New Jersey
    • October 8, 1991
    ...722 F.Supp. 1146, 1147 (D.Del.1989), aff'd, 904 F.2d 694 (3d Cir.1990) (citing National Controls Corp. v. National Semiconductor Corp., 833 F.2d 491, 495 (3d Cir.1987); Aloe Coal v. Clark Equipment Co., 816 F.2d 110, 113 (3d Cir.), cert. denied, 484 U.S. 853, 108 S.Ct. 156, 98 L.Ed.2d 111 (......
  • Tunis Bros. Co., Inc. v. Ford Motor Co., No. 90-1797
    • United States
    • United States Courts of Appeals. United States Court of Appeals (3rd Circuit)
    • February 12, 1992
    ...evidence in the record to sustain the verdict on compensatory damages. See National Controls Corp. v. National Semiconductor Corp., 833 F.2d 491, 495 (3d We will consider first whether there was sufficient evidence to support the jury's selection of a ten year period of time for the damage ......
  • Dunn v. Owens-Corning Fiberglass, Civ. No. 1987/238.
    • United States
    • United States District Courts. 3th Circuit. District of the Virgin Islands
    • September 27, 1991
    ...evidence to support the jury's verdict, a court is required to grant a JNOV. See National Controls Corp. v. National Semiconductor Corp., 833 F.2d 491 (3d Cir.1987). In making such a determination, the court views the evidence in the light most favorable to the non-moving party. Keith, 909 ......
  • Crown Coal & Coke Co. v. Powhatan Mid-Vol Coal Sales, L.L.C., No. 2:12cv222.
    • United States
    • United States District Courts. 3th Circuit. United States District Courts. 3th Circuit. Western District of Pennsylvania
    • March 8, 2013
    ...to the recovery of lost profits, not a measure of additional damages.” National Controls Corp. v. National Semiconductor Corp., 833 F.2d 491, 499 (3d Cir.1987) (citing Restatement (Second) of Contracts §§ 347, 349). Reliance damages are limited to those amounts which reasonably were expende......
  • Request a trial to view additional results

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