Zurn Constructors, Inc. v. BF Goodrich Co.
| Decision Date | 24 March 1988 |
| Docket Number | Civ. A. No. 88-2071. |
| Citation | 685 F. Supp. 1172 |
| Parties | ZURN CONSTRUCTORS, INC., d/b/a Vinylplex, Plaintiff, v. The B.F. GOODRICH COMPANY, Defendant. |
| Court | U.S. District Court — District of Kansas |
Mark D. Hinderks, Stinson, Mag & Fizzell, Overland Park, Kan., John M. Edgar, Julie M. Cheslik, Craig S. O'Dear, Stinson, Mag & Fizzell, Kansas City, Mo., for plaintiff.
Walter J. Kennedy, Thomas M. Bradshaw, Kathleen A. Clark, Hoskins, King, McGannon & Hahn, Kansas City, Mo., C. Owen Paepke, Ray K. Harris, Fennemore Craig, Phoenix, Ariz., for defendant.
This matter is presently before the court on plaintiff's motion for a preliminary injunction against defendant B.F. Goodrich Company requesting (1) that defendant continue supplying plaintiff with polyvinylchloride (PVC) powder compound pursuant to the terms of a February 15, 1982, contract until defendant Goodrich properly terminates the contract or until the merits of the case are decided at trial, whichever occurs first, and (2) that defendant Goodrich specifically comply with the Most Favored Nations provision of the February 15, 1982, contract. The parties were allowed to engage in limited, accelerated discovery to prepare for a hearing on plaintiff's preliminary injunction motion, which hearing was held March 3, 1988. After considering the parties' briefs, oral arguments, and exhibits, we are now prepared to rule on this motion and make the following findings of fact and conclusions of law.
1. Plaintiff Vinylplex is one of several divisions of Zurn Constructors, Inc., a California corporation. Zurn Constructors is a wholly-owned subsidiary of Zurn Industries, Inc., a Pennsylvania corporation. Vinylplex's principal place of business is located in Pittsburg, Kansas. At its plant in Pittsburg, Kansas, Vinylplex manufactures polyvinylchloride (PVC) pipe, which pipe is sold to contractors and distributors for use as sewer and water pipes. The essential raw material used to manufacture PVC pipe is PVC pipe grade resin, which is combined with certain additives to make PVC pipe compound. Vinylplex converts the PVC compound into PVC pipe through an extrusion process.
2. Defendant Goodrich is a New York corporation with its principal place of business located in Ohio. Goodrich, a large diversified corporation, has a business group known as the GEON Vinyl Division, which produces various grades of PVC resin and compound. Pipe grade resin is used to manufacture PVC pipe, while higher grade PVC resins are used in other manufacturing processes and for other applications.
3. Because Vinylplex does not have the capability of blending PVC resin with the necessary additives to produce PVC compound, it must purchase blended PVC compound from a limited number of suppliers who can provide this material.
4. Vinylplex employs fifty-three people at its plant in Pittsburg, Kansas, forty of whom are directly involved in production (four production crews of approximately ten people each), and thirteen of whom are management, sales and clerical personnel. The plant currently operates at full capacity; i.e., seven days per week, twenty-four hours per day. To operate at full capacity, Vinylplex requires an average of 14-16 standard railcars of PVC compound per month. Because of the substantial costs of starting up and shutting down the plant, a full capacity production schedule allows the plant to be operated at optimum efficiency and profit levels. Additionally, the low profit margins in the PVC conversion business necessitate that the plant operate at full capacity in order for the fixed production costs to be allocated over the maximum pounds of production, thus allowing Vinylplex to achieve competitive per-unit production costs. In the past, when market demand made it impossible for Vinylplex to sell its full-capacity output, Vinylplex operated its plant at less than full capacity and suffered financial losses as a result. Current market demand for PVC pipe is high, and this strong demand is projected to continue until 1990. Consequently, Vinylplex must operate at full capacity to take advantage of the high demand and the resulting profits in order to balance out the losses normally experienced during low demand periods.
5. Prior to 1981, Vinylplex obtained its PVC compound from Diamond Shamrock in Deer Park, Texas. After Goodrich acquired the Deer Park PVC resin manufacturing and powder blending facilities in late 1981, Vinylplex began purchasing its PVC powder compound from Goodrich.
6. In mid-December 1981, Vinylplex and Goodrich began negotiating a long-term PVC compound supply contract. On or about February 15, 1982, the parties entered into a supply contract. The five contract provisions relevant to plaintiff's motion are as follows:
a. The parties agreed to an "evergreen" provision.1 This "evergreen" clause provides a one-year primary contract from March 1, 1982, to February 28, 1983. This contract is automatically renewed for another year, unless either party gives written notice of termination at least sixty days prior to the February 28th expiration date.
b. The parties also agreed to a post-termination supply provision, which entitles Vinylplex to a continuing supply of PVC compound for nine months if Goodrich terminates the contract under Amendment A.2 This provision allows Vinylplex sufficient time to secure a replacement resin supply in the event of termination. Reading Amendments A and I together, Goodrich could only terminate the contract by giving written notice on or before December 31st, and would be obligated to supply Vinylplex's compound needs through November of the following year.
c. The contract contains a competitive offer clause which allows Goodrich three options if Vinylplex receives and accepts a written competitive offer from a major domestic PVC resin producer for any of the PVC compound remaining to be supplied under the Goodrich contract.3 If Vinylplex gives written notice to Goodrich stating Vinylplex's intent to purchase a specific quantity from the competitive supplier and stating all the terms and conditions of the offer, Goodrich could: (1) meet the competitive offer; (2) not meet the competitive offer and allow Vinylplex to purchase from the other supplier, but continue to supply Vinylplex the balance of its PVC compound requirements; or (3) cancel the contract.
d. The pricing clause provides that the PVC compound price would consist of a negotiated net PVC resin price plus an "add-on" charge for blending the PVC resin into PVC compound.4 Additionally, the pricing provision requires the parties to negotiate the PVC resin price on a monthly basis. Generally speaking, these negotiations took place by telephone, with Vinylplex's general manager informing Goodrich of the going market price.
e. Finally, the parties agreed to a Most Favored Nations clause, which, under certain circumstances, entitles Vinylplex to receive the lowest PVC resin price Goodrich was giving any customer.5
7. The "evergreen" and Most Favored Nations provisions are not typical provisions for Goodrich PVC resin supply contracts. In 1984, Goodrich decided it was unhappy with the contract terms and attempted to renegotiate its terms with Vinylplex. Vinylplex did not wish to modify the contract, however, and Goodrich continued to supply Vinylplex with PVC compound pursuant to the February 15, 1982, contract.
8. By June 1986, Robert Rosenau, Goodrich's senior marketing manager for PVC pipe and siding resin and compound sales, and Frank DeWolf, Mr. Rosenau's superior and Director of Marketing for vinyl resins, again began discussing the unfavorable contract with Vinylplex. According to an internal Goodrich "strategy summary" developed in approximately June 1986, Goodrich planned to cancel the Vinylplex contract early and renegotiate it in 1987 because Goodrich considered the contract to be unprofitable. Mr. Rosenau and Mr. DeWolf testified they understood that if Goodrich chose to terminate the contract under Amendment A's evergreen provision, Goodrich would be obligated to supply Vinylplex with PVC compound through November 1987, pursuant to Amendment I. On the other hand, both Messrs. Rosenau and DeWolf testified that they understood cancellation of the contract under Amendment D would result in immediate termination of Goodrich's supply obligations.
9. In early April 1987, Vinylplex received via telephone a spot offer from Shintech, another major domestic producer of PVC resin, for six railcars of resin for 30¢ per pound. On or about April 6, 1987, Jack Freeman, general manager of the Vinylplex plant, called Mr. Rosenau to discuss an order for 4.2 million pounds of PVC compound. Pursuant to Vinylplex's general practice under Amendment B of the February 15, 1982, contract, Mr. Freeman informed Mr. Rosenau that the current competitive market price for PVC resin was 30¢ per pound, and requested Goodrich to supply Vinylplex's next order at that price. Although Goodrich had usually acquiesced to the market price in the past, the price differential between Goodrich's price and Mr. Freeman's understanding of the competitive market price was unusually large in April 1987; thus, Mr. Rosenau informed Mr. Freeman that he would call back with regard to the 30¢ per pound price.
10. On or about April 9, 1987, Mr. Rosenau called Mr. Freeman to continue price negotiations. Mr. Rosenau informed Mr. Freeman that Goodrich could not meet the 30¢ price. Mr. Freeman reiterated that he considered the 30¢ price to be the current market price, and also told Mr. Rosenau about Shintech's spot offer for six railcars at 30¢ per pound. Pursuant to Goodrich's standard policy in negotiation situations where wide price differentials existed, Mr. Rosenau requested that Mr. Freeman confirm their telephone negotiations and the Shintech offer in writing. Upon receipt of this written confirmation, Mr. Rosenau was going to discuss...
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