Servo Kinetics v. Tokyo Precision Instruments
| Decision Date | 30 January 2007 |
| Docket Number | No. 05-2741.,05-2741. |
| Citation | 475 F.3d 783 |
| Parties | SERVO KINETICS, INC., Plaintiff-Appellant, v. TOKYO PRECISION INSTRUMENTS CO. LTD.; Moog, Inc., Defendants-Appellees. |
| Court | U.S. Court of Appeals — Sixth Circuit |
Wright, PLLC, Detroit, Michigan, for Appellees.
Before CLAY and SUTTON, Circuit Judges; SHARP, District Judge.*
CLAY, J., delivered the opinion of the court, in which SHARP, D.J., joined. SUTTON, J. (pp. 802-05), delivered a separate opinion concurring in part and dissenting in part.
Plaintiff Servo Kinetics, Inc. ("SKI") appeals the district court's grant of summary judgment in favor of defendants, Tokyo Precision Instruments Co. Ltd., ("TSS") and its parent, Moog, Inc. ("Moog").1 On appeal, SKI argues that (1) TSS breached its contract with SKI; (2) Moog is liable for TSS's breach of contract under a veil-piercing theory; and (3) Moog is liable for tortious interference with the contract between TSS and SKI. SKI also argues that the district court improperly denied partial summary judgment in its favor on the liability issue of the same claims. The contract at issue established an exclusive distribution agreement between TSS and SKI for a period of five years, whereby SKI would distribute servo valves manufactured by TSS. This is an action in diversity. The breach of contract claim is governed by Japanese law; the other claims are governed by Michigan law. Applying such law, we REVERSE the district court's grant of summary judgment in favor of TSS on the issue of breach of contract and REVERSE summary judgment in favor of Moog on the issue of veil-piercing liability. We AFFIRM the district court's grant of summary judgment in favor of Moog on the tortious inference with contract claim, and AFFIRM the district court's denial of summary judgment in favor of SKI on all its claims.
This case involves Moog's acquisition of TSS, which had a contractual relationship with SKI. All three companies were involved in the business of servo valves. A servo valve is an electro-hydraulically controlled mechanism used in such products as flight simulators. Prior to changes instituted at TSS as a result of Moog's acquisition, TSS manufactured servo valves. SKI repairs and rebuilds servo valves, and distributes servo valves in North America, frequently under its own name, but does not produce servo valves. TSS and SKI had engaged in a business relationship since 1990, whereby SKI distributed TSS servo valves in North America. According to SKI, SKI never dealt with another servo valve manufacturer.
Moog also manufactures servo valves. Moog is a large international distributor of servo valves, operating in multiple regions of the world, including North America, through its subsidiaries. Prior to Moog's acquisition of TSS, Moog servo valves were a substitute for TSS servo valves, and the companies competed for customers.
Sometime in 2000, Moog began to consider acquiring a controlling interest in TSS. While doing its due diligence in November of 2001, Moog learned that SKI was TSS's largest foreign customer, with an agreement for SKI to distribute TSS servo valves in North America. At the time, TSS and SKI operated under agreements lasting one year, which were renewed automatically unless the other party gave notice to the contrary.
In January of 2002, under the specter of Moog buying TSS, SKI and TSS sought to execute an agreement that would last for a longer duration (hereinafter the "Agreement"). The Agreement was dated February 8, 2002,2 and provided that TSS and SKI agreed that SKI would be the exclusive distributor of TSS servo valves in North and South America for a five-year period, with an automatic renewal for an additional year unless either party gave written notice to the contrary. As relevant to this appeal, the Agreement additionally contained the following terms:
ARTICLE 16. GOVERNING LAW
This Agreement shall be governed by and construed with the laws of Japan.
ARTICLE 19. TERM
(1) This Agreement shall become effective on the date first above written and shall continue in full force and effect for a period of five (5) year. [sic] This Agreement may be renewed for a further period of one (1) year unless either party hereto gives written notice of its intention not to renew this Agreement to the other party not later than six (6) month [sic] prior to the expiration of this Agreement or any renewal thereof.
(2) During the term of this Agreement each party may terminate this Agreement by giving six (6) month [sic] prior written notice to the other party, provided however, such right of termination shall not be exercised without good reason.
On February 28, 2002, Moog signed an agreement to purchase TSS by acquiring TSS stock. The deal closed on March 29, 2002. By the spring of 2002, Moog owned 98% of TSS shares. On March 30, 2002, there was a shareholders meeting where Moog employees replaced TSS's resigning directors as the new directors of TSS.
On April 8, 2002, TSS sent a letter to SKI providing notice that it was terminating the Agreement with SKI in six months, which TSS interpreted as being in accordance with Article 19 of the Agreement. The letter stated:
There has been a change in ownership of TSS and a change in management. As you will be aware by now, Moog-Japan acquired a controlling interest in TSS on 1st April, 2002. The TSS/SKI Exclusive Distributor Agreement dated January 1, 2002 would place in serious conflict and disarray the product distribution arrangements around the world of TSS and Moog and all Moog subsidiaries, including Moog-Japan.
The relationship between TSS and SKI deteriorated in the period following TSS's notice that it was terminating the Agreement. SKI met with TSS on May 2, 2002, to discuss potential cooperative strategies for the future, but the meeting was not fruitful. Shortly thereafter, a dispute arose over a "ball welding" machine. The machine, which would have provided SKI with some degree of manufacturing capacity for TSS valves, was scheduled to be delivered on April 22, 2002. The delivery date was subsequently delayed until May 10, 2002. On May 8, 2002, SKI informed TSS that it would withhold all payments until the machine was delivered. TSS did not ship the ball welding machine by May 10, 2002, instead informing SKI that it needed more time for the assembly and testing of certain parts. On June 5, 2002, SKI cancelled its order for the ball welding machine, stating that it had ordered a comparable machine from a supplier from whom delivery could be assured. Problems also arose because of money that SKI owed to TSS. SKI was in arrears to TSS, owing over $250,000, and was over sixty days behind on $100,000 of the amount owed. Starting in the summer of 2002, due to the increasingly antagonistic relationship between SKI and TSS, TSS refused to ship or accept new orders from SKI until the arrearages were satisfied. On June 26, 2002, TSS informed SKI that it would not be accepting any new orders after the end of that month. In June and July of 2002, SKI cancelled large orders of servo valves from TSS.
Throughout the spring and summer of 2002, Moog made drastic changes to TSS. These changes amounted to shutting down TSS's operations as an independent entity, integrating some components of TSS's business into Moog's, and selling the other components. Moog sold the TSS facility in September of 2002. Moog also transferred TSS's customers to Moog during the spring and summer of 2002. Certain TSS employees were hired as Moog employees; however, the majority of TSS employees were laid off when the TSS facility closed in September. Moog also shifted the manufacturing of some, but not all, of TSS's products to Moog facilities. Furthermore, TSS cancelled all of its foreign distribution agreements. The parties dispute Moog's motivation for the drastic changes at TSS. SKI asserts that Moog had planned to dismantle TSS's operations since before the acquisition of TSS. Moog claims that, after Moog acquired TSS, it learned that TSS was in worse financial condition than expected due to fraudulent accounting practices, and this new information caused TSS's new management to decide to undertake this course of action.
According to SKI, the changes precipitated by Moog's acquisition of TSS have been damaging to SKI's business. SKI alleges that, although it made efforts to find an alternative source of supply of servo valves, no other company could meet its demands. SKI asserts that other companies have different products, in terms of design, function, and quality, and that no other product could be taken to SKI's customers or potential customers successfully. SKI estimates that developing manufacturing capacity for servo valves would be expensive and time-consuming, taking up to five years. Operating under its relationship with TSS, SKI sold servo valves under its own name, and had input into the quality and design of the servo valves, as well as favorable pricing deals which allowed it to price its servo valves competitively. Thus, SKI offered its customers a package that included both the servo valves and the service on those servo valves. SKI claims that it cannot replicate this relationship with other producers. Moreover, SKI alleges that it has lost customers on account of the fact that it can no longer offer TSS servo valves.
On August 4, 2003, SKI filed suit against Moog and TSS (collectively "Defendants") alleging...
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