SMI/USA Inc. v. Profile Technologies Inc.

• Decision Date: 17 January 2001
• Docket Number: No. 10-99-011-CV,10-99-011-CV
• Parties: (Tex.App.-Waco 2001) SMI/USA, INC., ET AL., Appellants v. PROFILE TECHNOLOGIES, INC., Appellee
• Court: Texas Court of Appeals

Page 205

38 S.W.3d 205 (Tex.App.-Waco 2001)

SMI/USA, INC., ET AL., Appellants v. PROFILE TECHNOLOGIES, INC., Appellee

No. 10-99-011-CV

Court of Appeals of Texas, Waco.

January 17, 2001.

Rehearing Overruled Feb. 7, 2001.

From the 170th District Court McLennan County, Texas Trial Court # 94-1700-4

Before Chief Justice Davis, Justice Vance, and Justice Gray.

OPINION

DAVIS, Chief Justice.

Appellee Profile Technologies, Inc. (Profile) brought a declaratory judgment action against Appellants SMI/USA, Inc. and two of its subsidiaries, Enrichment Resources, Inc. (Enrichment) and Leadership Management, Inc.(Leadership), requesting that the court construe certain distribution agreements and declare such agreements terminated.¹ Profile also asserted claims against Enrichment and Leadership for breach of the agreements, as well as a claim against all the Appellants for breach of an implied covenant of good faith and fair dealing. At the conclusion of a bench trial, Profile withdrew its claims for damages and proceeded only on its declaratory judgment action against the Appellants. The trial court rendered judgment declaring the licencing agreements terminated, and the Appellants brought this appeal.

FACTUAL AND PROCEDURAL HISTORY

Profile is a Texas corporation that develops aptitude and personality tests for use by employers in evaluating potential employees. SMI/USA is a Texas corporation that markets and distributes such tests. In 1972, Profile and SMI/USA executed an agreement allowing SMI/USA to distribute Profile products in the United States (the SMI agreements). Those agreements were subsequently terminated by the mutual agreement of the parties. PEI is a Canadian company also engaged in the business of marketing and distributing such tests.² In 1987, Profile entered into two agreements with PEI (the PEI agreements) which granted PEI a nonexclusive right to print, market, and distribute Profile's personality tests and the software used to grade the tests in the United States and an exclusive right to do so in Canada, France, Australia, and Great Britain. Each agreement stated that it was to continue until "cancelled by mutual agreement or terminated for cause as set out in this memorandum." However, the agreements did not define the term "cause," nor did they delineate a process for termination. On January 15, 1993, PEI entered into a contract assigning all its rights under the PEI agreements to Enrichment.

On January 31, Profile's President and CEO, Milton Cotter, sent a letter to PEI stating that the PEI agreements were cancelled, effective February 28. As grounds for cancellation, the letter recited lack of performance, "non-fulfillment of various other provisions of the contract," and certain errors contained in the printed test booklets and the software distributed by PEI. A copy of the letter was also sent to a representative of Enrichment, as PEI's assignee. On February 18, Cotter sent a letter to PEI further detailing the basis for Profile's termination of the PEI agreements. The letter's stated reasons included an alleged failure of PEI to devote its best efforts to market the tests in the distribution territory, failure to pay royalties in a timely manner, failure to provide certain customer information to Profile, failure to keep certain provisions of the distribution agreements confidential, and failure to allow Profile advance approval of the printers to be used in printing the test booklets. A copy of this letter was also sent to Enrichment.

Due to its belief that Profile could not unilaterally terminate the agreement, Enrichment treated the agreement as if it were in effect by continuing to distribute the tests (through another corporation, Leadership) and continuing to make corresponding royalty payments to Profile. On March 14, Cotter sent a letter to Enrichment acknowledging receipt of a royalty payment for March and indicating Profile's belief that the payment represented the final royalty payment due under the PEI agreements. For the next several months, Enrichment continued to distribute the tests and make royalty payments to Profile. On September 21, 1993, Profile's attorney sent a letter to Enrichment reiterating Profile's position that the PEI agreements had been terminated. Thereafter, Enrichment continued to tender royalty payments to Profile.

Profile instituted this action in McLennan County District Court on May 16, 1994, seeking a declaratory judgment terminating both the Enrichment agreements and the SMI agreements. In alternative pleadings, Profile sought damages of $200,000 against Enrichment for breach of the distribution agreements or damages of $207,000 for unpaid royalties under the agreements. Also in the alternative, Profile sought $200,000 in damages from the Appellants for breach of an implied covenant of good faith and fair dealing.

One month later, Profile filed a petition for bankruptcy protection in the Fort Worth Division of the U.S. Bankruptcy Court for the Northern District of Texas. The present suit was stayed pursuant to 11 U.S.C. §362. On June 29, Profile filed a "Motion of Debtor in Possession to Reject Executory Contracts" in the bankruptcy proceeding. The motion sought permission to reject the distribution agreements that are the subject of this action as "burdensome and unnecessary executory contracts" under 11 U.S.C. § 365. That motion was denied. On November 27, 1996, Profile filed a motion to dismiss the Chapter 11 case, indicating that all the remaining claims of Profile's creditors could be satisfied in the ordinary course of its business, and that bankruptcy relief was no longer necessary for Profile to conduct its business affairs. On January 15, 1997, the bankruptcy judge granted Profile's motion to dismiss and lifted the stay on the present action, which was tried to the court on August 10, 1998.

Profile's sole witness at the bench trial was its president and CEO, Milton Cotter. Cotter explained that the agreements executed by the parties granted PEI an exclusive distributorship of Profile products in Canada, France, Australia, and Great Britain in return for a 20% royalty on gross sales and PEI's promise to devote its best efforts to sell the products to sub-distributors and independent agents in its territories. The agreements further required PEI to provide gross sales reports to Profile as well as monthly marketing data reports containing the identity and geographic location of each of PEI's sub-distributors.

Cotter testified that the decision to terminate the agreements was a result of PEI's failure to comply with several provisions thereof. Specifically, Cotter asserted that PEI failed to devote its best efforts to distribute the product in its designated territory, failed to provide sales information or make timely royalty payments, and failed to provide marketing information regarding its sub-distributors. Cotter also complained of the existence of gaps in the sales reports provided by PEI and of PEI's extra-territorial distribution activities.

Cotter testified that his attempt to terminate the agreements was based on his conclusion that PEI's failures of performance provided sufficient cause for termination under the agreements, although he admitted on cross-examination that "cause" is not defined by the agreements. He related his attempts to cancel the agreements by four letters sent to PEI's assignee, Enrichment, in January, February, March, and September of 1993. Each letter was admitted into evidence. Cotter acknowledged accepting and depositing royalty checks from Enrichment for seven months after his decision to terminate the agreement was first communicated to Enrichment, but testified that it was his belief that he could do so without prejudice to his right to terminate the agreements.

At the conclusion of Cotter's testimony, Profile's counsel formally withdrew its claim for damages in open court, stating an intention to proceed solely on its claim for a declaratory judgment that the agreements were terminated. Each attorney then testified to the reasonableness and necessity of his fee. The following exchange then occurred:

[COUNSEL FOR ENRICHMENT]: As I understand the state of the proceedings, the plaintiff has rested after withdrawing its claim for damages. It is now only asking this court to rule whether and when the [PEI agreements] are terminated and when, and also whether or not plaintiff is awarded attorney's fees in the amount of $5,200. The only issue for defendants is whether I'm - we're awarded attorney's fees of $35,000. Have I fairly stated the . . .

[COUNSEL FOR PROFILE]: You have.

[COUNSEL FOR ENRICHMENT]: In other words, there's no - there's no chance of any money damages, no matter how it happens, correct?

[COUNSEL FOR PROFILE]: That's correct.

[COUNSEL FOR ENRICHMENT]: The only issue is whether or not the contracts are terminated and when, right?

[COUNSEL FOR PROFILE]: That's correct.

[COUNSEL FOR ENRICHMENT]: In that case, we rest, Your Honor. Defendant rests.

Appellants rested without calling any witnesses in the case. The trial court rendered judgment that the distribution agreements between Profile and PEI were "cancelled and of no further force or effect." The court also rendered judgment cancelling the agreement between Profile and SMI/USA, however SMI/USA does not attack this portion of the judgment on appeal.³

The Appellants filed a "Motion for Rehearing and to Modify, Correct, Reform, Clarify, or Vacate Judgment or for New Trial" in which they challenged the legal and factual sufficiency of the evidence. This motion was overruled by operation of law. In response to Appellants' timely request, the trial court filed its findings of fact and conclusions of law. Appellants present five issues for review.

ISSUES PRESENTED

In their first issue, Appellants claim the Findings of Fact filed by the trial court do not sufficiently support the judgment. In issues two through four, Appellan...