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Sun Coast Merchandise Corp. v. Myron Corp.

May 15, 2007

SUN COAST MERCHANDISE CORPORATION, A CALIFORNIA CORPORATION, AND J.M. WECHTER & ASSOCIATES, INC., A CONNECTICUT CORPORATION, PLAINTIFFS-RESPONDENTS/ CROSS-APPELLANTS,
v.
MYRON CORPORATION, A NEW JERSEY CORPORATION, AND MYRON MANUFACTURING CORPORATION, A NEW JERSEY CORPORATION, DEFENDANTS-APPELLANTS/ CROSS-RESPONDENTS.
SUN COAST MERCHANDISE A-2965-04T5 CORPORATION, A CALIFORNIA CORPORATION, AND J.M. WECHTER & ASSOCIATES, INC., A CONNECTICUT CORPORATION, PLAINTIFFS-APPELLANTS,
v.
MYRON CORPORATION, A NEW JERSEY CORPORATION, AND MYRON MANUFACTURING CORPORATION, A NEW JERSEY CORPORATION, DEFENDANTS-RESPONDENTS.



On appeal from the Superior Court of New Jersey, Law Division, Bergen County, Docket No. BER-L-8865-02.

The opinion of the court was delivered by: Fisher, J.A.D.

NOT FOR PUBLICATION WITHOUT THE APPROVAL OF THE APPELLATE DIVISION

APPROVED FOR PUBLICATION

Argued December 6, 2006

Before Judges Parker, C.S. Fisher and Yannotti.

Following a thirteen-day jury trial, judgment was entered in the amount of $2,792,603.32, which included $700,000 in punitive damages, in favor of plaintiffs Sun Coast Merchandise Corporation and J.M. Wechter & Associates, Inc., the alleged sellers of certain goods. In this appeal, defendants Myron Corporation and Myron Manufacturing Corporation, the alleged buyers, contend that a number of issues -- including whether a binding contract was formed -- should have been resolved in their favor as a matter of law, and also that even if there were factual issues to be resolved by the jury, the trial judge failed to provide adequate jury instructions. Although we reject the contention that the chief issues in this case could have been resolved as a matter of law in this factually convoluted matter, we agree that the judge's jury instructions were inadequate, and, thus, reverse and remand for a new trial.

I.

Plaintiff Sun Coast Merchandise Corporation, a California corporation, is in the business of designing various products, which are manufactured in factories in China, and sold to entities who then offer them as promotional items or gifts to clients or potential clients. Plaintiff J.M. Wechter & Associates, Inc., a Connecticut corporation, is one of Sun Coast's largest distributors. Wechter's involvement included the identification of potential clients in the marketplace and relaying their needs to Sun Coast, which then attempted to design and create the product.

Defendants Myron Corporation and Myron Manufacturing Corporation, both New Jersey corporations, are engaged in the business of marketing such products to small and medium-sized companies through the internet and by sampling programs, which involved sending small samplings of personalized products to potential customers.

The claims asserted by Sun Coast and Wechter (hereafter often collectively referred to as "sellers") against the Myron corporations (hereafter "Myron") largely revolve around the submission by Myron of purchase orders to the sellers for small calculators with flip-tops. Myron's intention was to engrave the names of its customers on the calculators so that the customers could distribute them as gifts to their clients. At a meeting on June 15, 2000, Myron indicated to sellers its interest in a flip-top calculator if it could be produced in a small enough size to fit into its mailings and at the right price.

A. Version I Calculators

In pursuing these intentions, Myron first entered into a series of transactions regarding what the parties have referred to as the "Version I calculators." Between December 2000 and May 2001, Myron purchased nearly 400,000 Version I calculators. With the exception of a May 8, 2001 order for 100,000 calculators, there were no disputes regarding Myron's other purchases of Version I calculators.

Myron received the goods referred to in the May 8, 2001 purchase order but withheld payment, contending that the sellers breached the warranty against infringement, N.J.S.A. 12A:2-312(3), and also that it was entitled to withhold payment as an offset against damages it claimed to have suffered as a consequence of the sellers' actions regarding the Version II calculators.

Evidence was adduced during the trial that, on January 23, 2001, the United States Patent and Trademark Office granted a patent to CCL Products Enterprises, Inc. (CCL), a Sun Coast competitor, for a flip-top calculator similar to the Version I calculator. Sun Coast learned about this a few days after the patent was granted, when CCL representatives approached a Sun Coast representative at a trade show and asserted that the "flipping mechanism" on the Version I calculators infringed on CCL's patent. The next day, Sun Coast sued CCL in the United States District Court for the Central District of California, seeking a declaratory judgment that the Version I calculators did not infringe and that CCL's patent was invalid.

Within a day or so of issuing the February 12, 2001 purchase order for 70,000 Version I calculators, sellers informed Myron of CCL's patent infringement claim. According to Myron, sellers advised that they could nevertheless continue to sell the Version I calculators, but would have to pay a "royalty," which would cause an increase in the purchase price by six cents per calculator. Myron contended at trial and provided evidence to suggest that this additional payment was a "royalty." Sellers disputed this, providing testimony that it only advised Myron that this "upcharge" represented a payment toward "potential royalties" and litigation costs regarding the suit with CCL, and that such a charge was not unusual in this industry.

Myron claimed that it understood from these communications that the patent problem regarding the calculators would be "resolved" with this additional payment per calculator and, therefore, agreed to the upcharge. A revised purchase order regarding the February 12, 2001 purchase was sent by Myron to sellers on March 2, 2001.

On May 23, 2001, Myron representatives attended a trade show in New York City. At that time they spoke with the president of CCL, who said he had heard Myron was selling flip-top calculators and warned Myron to be careful because CCL was suing all those who violated its patent. According to Myron, these discussions generated concern about whether sellers were authorized to sell the Version I calculators.

An e-mail sent from sellers to Myron on June 1, 2001 provided an explanation for what Myron claims was represented as a "royalty," and for what sellers claim was represented as a cost toward "potential royalties" and litigation expenses in the CCL lawsuit:

When we first sold this calculator . . . your cost was $.60 cents F.O.B. [Hong Kong].

Then what happened is that someone (not us) was issued a patent on the flipping device.

We then had to increase the unit by 10% (making it $.66 cents each) so that there were royalties built in to each calculator.

At that point, [we] began to design, and patent, [our] own flipping mechanism. That is why, with the new molds being made for your larger quantities, your cost is down to $.57 cents F.O.B. [Hong Kong].

Myron also provided testimony that it received confirmation from CCL through a telephone conversation on June 4, 2001 that sellers were not authorized by CCL to sell the Version I calculators and should not have been charging a "royalty." As indicated, sellers provided competing evidence that this upcharge was only for "potential royalties" and litigation costs in defending the product, and that Myron should have understood that it was not a royalty per se because of the pending lawsuit, of which Myron was aware. The jury resolved this dispute by concluding that sellers had negligently misrepresented that the 10% upcharge on the Version I calculators was a "royalty" payment when in fact it was not.

B. Version II Calculators

As the patent infringement issues arose during the final purchases of Version I calculators, sellers agreed to attempt a redesign, leading to the creation of what the parties have referred to as the Version II calculators. Prior to the issuance of any purchase order for Version II calculators, Sun Coast represented to Myron that the goods "would not infringe the CCL patent."

In March or April 2001, Myron indicated its desire to purchase a very large quantity of Version II calculators. The sellers offered a discounted price of $.57 per unit, three cents less than that paid for Version I calculators before the "royalty/potential royalty" upcharge was added. By April 22, 2001, Sun Coast had completed its re-design work for the Version II calculators, and representatives of the parties met in Hong Kong on either April 24 or 25, 2001. Sellers claimed at trial that Myron was then provided with a sample of the Version II calculator; Myron disputed this, providing evidence and arguing that it did not receive a sample until June 1, 2001.

In either event, on April 25, 2001, Myron issued a purchase order for 1,216,000 Version II calculators, providing both shipping dates and delivery dates. Sellers sent an e-mail on April 30, 2001, which approved a delivery schedule compatible with the schedule contained in the first purchase order.

In early May, Myron communicated its intent to make an even larger purchase, requiring the production of a total of 4,000,000 Version II calculators. A Myron representative sent an e-mail to sellers on May 7, 2001, questioning whether 4,000,000 calculators could be manufactured and shipped by November 1, 2001:

We are now trying to work out a schedule to deliver [4,000,000] units by the first of December. . . . [We] had a conference call and looked at the current schedule based on [2,200,000]. We pretty much figured out that with adding the [sixth] mold, we could deliver [3,000,000] units in time (confirming everything this week). My question is if we add a [seventh] and possibly an [eighth mold] -- can the factory get to the [4,000,000] pieces -- shipping by November 1?

Sellers responded by e-mail on May 8, 2001 with a revised delivery schedule, which would bring the last shipment of Version II calculators "in by mid-December."*fn1 Sellers also emphasized that the schedule was "based on confirming everything by this Thursday, May 10th." Myron expressed its satisfaction with this schedule on May 8, 2001.

By the time of the early May discussions regarding the delivery of the last of the 4,000,000 units by mid-December, Myron had not yet issued its second, third and fourth purchase orders, and the only extant purchase order was the initial April 25, 2001 order for 1,216,000 units. On May 16, 2001, sellers sent an e-mail advising that "if an order is confirmed today, the factory has stated that they can manufacture [4,000,000] units based on the schedule" provided on May 8, 2001; Myron responded that it was in the process of revising its purchase orders to conform to that schedule.

The second, third and fourth purchase orders bear the date May 17, 2001; the second purchase order, for 1,000,000 calculators, was faxed to sellers on May 18. By Monday, May 21, 2001, Myron still had not delivered its third and fourth purchase orders; instead, an e-mail to sellers indicated that on that day and the next, Myron would be "inputting those final numbers into the system." Myron also then indicated that the third and fourth purchase orders "are printed and awaiting authorization," which was expected to occur on Wednesday, May 23, 2001. Notwithstanding that Myron had not delivered the third and fourth purchase orders for the last 1,750,000, this May 21, 2001 e-mail requested that sellers "not stop the making of the molds" for the 4,000,000 units and that, "[i]f necessary," Myron would "put in writing that we will be responsible for the molds, if we do not indeed order the 4,000,000." Sun Coast's chief operating officer testified that he agreed to Myron's May 21, 2001 request and that he informed his supplier to continue with the manufacturing of the molds.*fn2

Despite the indication in the May 21 e-mail that authorization for the issuance of the third and fourth purchase orders was expected by Wednesday, May 23, the purchase orders were not issued until Friday, May 25, 2001.*fn3

On May 29, 2001, two business days after receiving the third and fourth purchase orders, sellers e-mailed to Myron a revised delivery schedule, which called for delays in the original schedule anywhere from seven to twenty-eight days from what was originally indicated. As a result, the last delivery date contained in the May 8 schedule, i.e., November 11, 2001, would not, according to the May 29 schedule, occur until December 9, 2001. In this e-mail, sellers requested that Myron forward "revised purchase orders reflecting" these new shipping dates.

Either that day or the next, Myron advised sellers that it would be reducing its order from 4,000,000 to 3,500,000 Version II calculators. By way of an e-mail on May 31, 2001, which incorporated a letter dated June 1, 2001, sellers provided a revised shipping schedule, which reflected the elimination of the final 500,000 calculators. Therein, sellers also stated:

We can proceed with the current order under condition that you sign the revised delivery schedule that I have attached and fax it to me. Please understand that your purchase order reflects dates that the factory cannot meet. If I accept this order as is, I am obligated by this contract to deliver based upon what is printed. . . . Please sign and fax the attached revised schedule to me today so that I can give the factory the go ahead to proceed with this order.

Following this, e-mails were exchanged on June 1, 2001. A Sun Coast representative indicated that day that Myron should have received "the new samples of the calculator" that morning, and expressed a "need [for] your approval of the calculator today and the revised schedule signed and returned today in order to meet the schedule submitted earlier this week." He further indicated that "the factory is ready to start producing tomorrow" and that "[i]f everything is not confirmed by today, all schedules will change." In response, a Myron representative advised that the samples had been received and were "given . . . to the appropriate people here to evaluate," but that, "[a]t this time, I cannot sign the revised schedule letter" because certain Myron representatives were not then available to make that ultimate decision.

There was also testimony from Sun Coast's chief operating officer that a Myron representative expressed concern that the Version II calculators might infringe the CCL patent. In addition, the record reveals that Myron provided the samples to its attorney, who immediately opined that the flip-top mechanism might infringe the CCL patent.

On June 4, 2001, Myron communicated with CCL to determine whether CCL might be interested in supplying calculators; CCL declined and again stated that sellers were not authorized to sell Version I calculators. Testimony suggested that Myron then arranged for a conference with sellers' representatives because of its concerns about the modification of the delivery schedule and the patent infringement issue.

At meetings over the course of June 5 and 6, 2001, Myron indicated its continued desire to purchase calculators but was concerned that the Version II calculators infringed the CCL patent and indicated that it was not willing to purchase Version II calculators unless they could be redesigned. Sellers agreed to attempt a redesign but ultimately concluded that its efforts were unsuccessful, and, on June 14, proposed that Myron either: accept "the spring mechanism as per the sample sent to you over the last two days," or "wait for additional samples with a new spring mechanism," even though "as advised there will not be much difference," or "go back" to the samples provided on June 1 and consider getting a second opinion from another attorney regarding Myron's infringement concerns.

On June 15, 2001, Myron suggested that it might be willing to proceed with the transaction if sellers provided an acceptable indemnification agreement buttressed by a standby letter of credit to protect Myron in the event it was drawn into litigation. On June 18, 2001, the parties exchanged e-mails regarding the scope and content of an indemnification agreement, as well as a revised delivery schedule. Sellers memorialized these discussions in an e-mail circulated on June 22, 2001, indicating that Myron "would be comfortable proceeding with this order if" sellers signed an indemnification agreement and put up a standby letter of credit for $.25 per unit ordered in case of patent litigation, and Myron would open a letter of credit for the purchase of the calculators. This e-mail also stated that sellers "need[ed] to have the final purchase orders faxed to us," and that they could "start producing the units" as soon as "we all are comfortable with" these terms.

The record indicates that the parties unsuccessfully attempted to negotiate a mutually acceptable indemnification agreement and letter of credit ...


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