On appeal from the Superior Court of New Jersey, Law Division, Mercer County, L-1730-97.
NOT FOR PUBLICATION WITHOUT THE APPROVAL OF THE APPELLATE DIVISION
Before Judges Winkelstein, Yannotti and LeWinn.
Plaintiffs, Litton Industries, Inc. and Litton Systems, Inc. (collectively, Litton or plaintiff), purchased defendants' optical system business in 1995. A provision of the purchase agreement (the Agreement)*fn1 prohibited defendants from making any bid or contract that would result in a net loss. Plaintiff claims that defendants breached the Agreement and committed fraud with regard to a contract defendants bid with the Army for eyesafe laser rangefinders for M1A2 Abrams tanks (the Tank Contract), causing plaintiff to sustain a multimillion dollar loss.
The case was tried to a jury over twenty-nine days between September 21 and November 15, 2004. Following the court's denial of defendants' motion for judgment at the close of the evidence, the jury returned a verdict that defendants violated section 5.3(ii) of the Agreement and awarded plaintiff $2.3 million, and the court awarded counsel fees and prejudgment interest. The court entered a final judgment on October 6, 2006, for $2.1 million in compensatory damages (the parties agreed to reduce the $2.3 million verdict), prejudgment interest of $1,204,536.29, and counsel fees and costs of $5,975,903. By order of November 6, 2006, the court reduced the amount of prejudgment interest to $810,504.03. Defendants have appealed and plaintiff has cross-appealed from these orders.
Defendants claim that the court erred in denying their motion for judgment because section 5.3(ii) of the Agreement did not apply to the Tank Contract; a letter agreement signed several months after the Agreement absolved defendants of liability; and plaintiff brought its action beyond the Agreement's limitations period. Defendants also appealed from the court's counsel fee and prejudgment interest awards, contending that they were either improper or excessive. In its cross-appeal, plaintiff asserts that the court made numerous evidentiary rulings and improperly barred plaintiff from asserting claims for lost profits and administrative costs.
Although we find no merit to the majority of the parties' arguments, because the court improperly precluded plaintiff's claims for lost profits and administrative expenses, we reverse the final judgment and remand for further proceedings.
Defendant IMO manufactures night vision components and systems, laser and other optical products. Defendant Varo is a wholly owned subsidiary of IMO, and was also in the business of designing and manufacturing night vision components and systems. Defendant Baird sold substantially all of its assets to Varo and defendant Optic-Electronic International is a Varo subsidiary.
Experiencing financial difficulties, in January 1995 IMO approached Litton, seeking to sell Litton two parts of its business, night vision equipment and military lasers. On February 7, 2005, H. Thomas Hicks, a Litton vice-president, wrote a letter of intent*fn2 to William Brown, IMO's chief financial officer, agreeing to purchase those parts of defendants' business for $52 million. The transaction was subject to conditions, which included a more definitive agreement, and approval by "all governmental authorities necessary to consummate a proposed transaction."
Consequently, on May 11, 1995, Litton and IMO entered into an agreement, identified on the first page of the document as the "PURCHASE AND SALE AGREEMENT." The agreement called for the transfer of assets to take place on the later of May 31, 1995, or "the fifth business day following the day on which the conditions set forth in Sections 6 and 7 are satisfied or waived." Those sections provide conditions precedent to the parties' obligations to close. The conditions included approval by governmental authorities.
The parties entered into a second agreement on June 2, 1995. The cover sheet to that agreement, labeled as "APPENDIX A," states as follows:
PURCHASE AND SALE AGREEMENT AMONG [PLAINTIFF] AND [DEFENDANTS] May 11, 1995 AMENDED AND RESTATED AS OF JUNE 2, 1995
Appendix A also included a table of contents, a list of exhibits, a list of schedules and a definition section, all of which were not included in the agreement signed on May 11. The definition section, titled "Appendix I," states that the definitions were "[a]s used in the Purchase and Sale Agreement dated as of May 11, 1995 (amended and restated as of June 2, 1995)." Page one of the second agreement states the agreement was "made and entered into on and as of May 11, 1995 (amended and restated as of June 2, 1995)."
The second agreement changed the date assets were to be transferred from May 31 to June 2, 1995. Sections 3.12(a)(iv) and 5.3(ii) of both agreements, the provisions that Litton claimed defendants breached, were substantially unchanged from the May 11 agreement to the June 2 agreement. Both agreements, in section 12.17, contained the following language: "This Agreement . . . constitute[s] the entire agreement and understanding between the parties . . . and supersedes and cancels any and all prior . . . agreements between the parties . . . ." On the last page of the second agreement, above the signatures of the parties, the agreement states: "the parties . . . have caused this Agreement to be executed . . . on and as of May 11, 1995."
Defendants' primary competition for Army laser contracts was the Hughes Aircraft Company. IMO's director of marketing, retired Army Colonel Alexander Evans, believed that the government favored Hughes, which was the contractor for noneyesafe laser rangefinders in M1A2 Abrams tanks.*fn3 In 1993, Hughes submitted an unsolicited proposal to the Army to replace the non-eyesafe units with eyesafe laser rangefinders (ELRFs). Varo submitted a similar unsolicited proposal. The Army suggested that Varo convert ten non-eyesafe lasers to ELRFs at no cost to the Army.
The Army had 5000 M1A2 tanks and approximately 10,000 Bradley tanks, and Varo could potentially retrofit the M1A2 laser into the Bradley, which gave Varo "enormous potential." Accordingly, Varo delivered the prototypes to the Army in early 1994. That fall, the Army requested an estimate for 1000 ELRFs. Jeff Sheridan, Varo's marketing manager, asked Colonel Christopher Cardine, the Army's project manager for Abrams tanks, when he was going to release the solicitation for the ELRF for the M1A2; Cardine allegedly responded: "[T]hat belongs to Hughes."
As a result, Evans filed a complaint with the Army. Although the Army took no action on the complaint, in January 1995 it issued a formal solicitation for bids for the ELRF for its M1A2 Abrams tanks. Colonel Evans testified: "We absolutely had to win this contract." The M1A2 contract had the potential for follow-up business for the 10,000 Bradley units. Evans declared a "must-win" strategy to Varo's highest-ranking manager, Dwayne Attaway; Optic-Electronic's general manager, Pat Thurman; Optic-Electronic's director of engineering, research and development and proposal manager, Thomas Milson; and Optic-Electronic's comptroller, Ann Barney. Barney recalled a February 1, 1995 memo from Milson to the team working on Varo's strategy, that winning the Tank Contract would enable Varo to "continue as a viable competitor for the armored vehicle eyesafe laser market. If we do not win this procurement, we will most likely be excluded from further US armored vehicle eyesafe laser business."
According to William Wilson, Litton's vice-president of engineering, the rangefinders were required to operate at specific wavelengths; fire once per second for two minutes; repetitively range on a moving target; and range targets 2.3 by 2.3 meters from a distance of 200 to 7990 meters with a range error not to exceed 10 meters.
Sheridan was the Army's point person for the ten M1A2 ELRF prototypes. He recalled that the Army had not issued specifications when the prototypes were built, but that the prototypes used the APD (Avalanche Photo Diode) receiver. He traveled to Arizona in April 1995 with Jerry Baker and Mark Walker, Varo engineers, for the Army's testing of two of the prototypes. Both units failed the range accuracy tests.
Sheridan, Baker and Walker returned to Garland, Texas, where Varo was located, and told management what had occurred. In a meeting with Brian Morgan, Varo's manager for the M1A2 program, and Milton Woodall, a Varo engineer, Sheridan learned that Varo intended to obtain "spec relief" and replace the APD receiver with a less expensive PIN receiver (which was used in the MELIOS*fn4 units). Dale Gentry, a consultant hired by Thurman to provide an independent cost estimate, wrote to Milson in January 1995 that Varo had to submit "a real lowball price if we are to have a chance" to win the contract.
Anthony Johnson, a consultant on Varo's M1A2 ELRF proposal, explained that to attain the desired range of approximately eight kilometers, the receiver had to have a certain sensitivity. The Varo "technical people" all concurred that the APD receiver was necessary to meet the Army's specifications.
Milson confirmed that Varo originally "envisioned using a PIN diode," which was less expensive than the APD, but in January 1995 it became clear from testing and discussions with Tony D'Agosto, an Army systems engineer, that the PIN was not acceptable because of its lesser performance. Milson recalled that in March 1995, Woodall attempted to convince the Army to allow use of the PIN instead of the APD. Christine Hansen, an Army price analyst, testified that when Varo considered a proposal to change the performance specification to lower the sensitivity of the receiver, which would lower the cost, the Army responded that Varo should submit a proposal as soon as possible, but unless the specifications were amended, compliance was required.
Peter Morris, a Varo employee, obtained pricing for the parts needed for the M1A2 ELRF. Morris had three and one-half weeks to complete the assignment, but some of the complex mechanical parts required at least six to eight weeks to price. He testified that his task was "virtually impossible if you're going to get good, solid data." He said that the parts list, known as the bill of materials, included a Marconi receiver, which was a PIN receiver, which had not been "tested as a good part to be used in a laser system." The list also omitted other items, and did not account for Army options to purchase additional units.
According to Michael Quintanilla, a Varo manufacturing engineer, in February 1995 his supervisor, Dale Boyette, asked him to generate "labor touch hours" for the M1A2 laser rangefinder. "Touch hours" are hours in which hourly employees expend physical labor to build or assemble a product, "such as turning nuts, bolts, screws, bonding." Varo engineer Jerry Baker showed Quintanilla the components of the M1A2 rangefinder and demonstrated how to disassemble and retrofit it with an eyesafe laser unit. In accordance with Boyette's directions, Quintanilla assumed that the design was perfect, that the unit would pass its test the first time, that the materials would arrive on time and be 100% compliant with the drawings, and that there would be no further technical issues after the fiftieth unit. Based on these assumptions, Quintanilla determined that it would take 18.34 hours to disassemble, realign and test the laser.
Boyette directed Quintanilla to "revise and scrub" his estimate, to ensure that it represented "the perfect world" and was as lean as possible. Quintanilla revised his estimate to 14.96, which he did not believe was realistic. Gentry told Quintanilla to delete time needed to ensure quality. Quintanilla shared his concern with Boyette, who responded that "the environment is that we generate a table of numbers with touch hours that are at the bare minimum."
Soon after, Gentry directed Quintanilla to further reduce his estimate. Quintanilla submitted a final draft on February 20, 1995, setting 13.71 hours to retrofit the M1A2 ELRF. Quintanilla also provided a labor, or "new build," estimate for the M1A2 ELRF, assuming that the new parts were cleaned and ready, at 12.63 hours, which Boyette reduced to 11.88 hours. Quintanilla noted that the MELIOS unit was comparable to the ELRF, which took approximately forty hours per unit to build. He estimated the cost of testing the ELRF at $7118, based solely on a testing setup that Baker had made. Quintanilla was not aware of, and had not been provided with, the performance specifications for the ELRF.
Joe Swearingen, an Optic-Electronic's cost estimator, was responsible for rolling, or adding up, the Tank Contract cost estimate. He used the PIN receiver in his bill of materials. The total materials cost for the refurbished units using the PIN was $2754; using the APD would have increased the cost to $4857.
The type of receiver to be used, either the PIN receiver or the APD receiver, was the subject of substantial testimony during the trial as the decision about which receiver to use would substantially affect the bid. There was extensive testimony as to which of defendants' employees directed that the PIN receiver be used, which employees directed that the APD receiver be used, and when those decisions were made. Swearingen recalled that sometime between February 10 and 22, 1995, Barney directed him to replace the APD receiver with the PIN. On February 23, 1995, Gary Denney, Varo's optics design manager, wrote a memo to Morgan, which said: "Due to technical difficulties (i.e., meeting spec), it is necessary to put the APD receiver back into the cost along with the added power supply (8 volt) AMI."
Morris recalled that at the end of a February 24, 2005 meeting, Thurman "rolled back in his chair . . . and said, it's going to be Litton's problem anyway." Swearingen testified that at that meeting he was directed to use the cost of the PIN receiver. When Morgan asked Morris to sign an approval of the bid proposal of February 27, 1995, which included the cost of the PIN receiver, Morris refused because he "did not believe it was achievable." Swearingen received Denney's February 23 memo a few days later, but did not change his cost roll-up to include the additional cost of the APD because Barney told him to use the PIN.
On March 13, 1995, the day before the bid for the Tank Contract was to be submitted, Barney informed Scott Williams, an estimator, that she wanted to review the backup. Williams provided cost and pricing (CAPE) sheets, and the bill of materials listed two different receivers from different suppliers at different prices. After Barney called Woodall and asked which receiver should be used, she instructed Williams to put the more expensive receiver in the bill of materials and delete the less expensive receiver. Barney explained that the cost of the APD was higher than the amount set forth on the CAPE sheet, but Morris said there would be cost savings in other materials. Barney thus felt comfortable that the proposal could go out. Morris denied telling Barney that cost reductions in other materials would offset the price of the APD receiver. Thurman explained that, although the APD receiver was more expensive, he was told that there would be other cost savings that would offset the additional cost.
Varo submitted its bid on March 14, 1995, noting that the bid was "fully compliant with all required specifications in the solicitation." According to Milson, the cost included the APD receiver, but Evans said that the final cost included the PIN receiver.
In April 1995, the Army requested a list of parts, with their respective prices, that were common to both MELIOS and the M1A2 ELRF. Although Swearingen provided Morgan with a list that included the PIN receiver, Sheridan responded to the Army's request with a list that did not include the PIN receiver and, according to Sheridan, was "absolutely not" truthful. He recalled that on May 9, 1995, the Army issued Varo an "item for discussion" (IFD), stating that Varo had not selected a receiver for the ELRF. Sheridan was aware that Varo had selected the PIN receiver, and that it was not compliant with the specifications, but he responded to the IFD that Varo had selected the APD receiver. He later admitted that his response was not truthful.
On May 10, 1995, Sheridan, Milson, Woodall and Morgan met with Army representatives including Hansen and Tim Donohoe, the Army's contracts representative, to discuss Varo's bid. Donohoe "indicated that the Government didn't believe that [Varo] could do the job for the price quoted." Hansen told the Varo representatives that she believed that their price was low and that they might want to revise it.
On May 31, 1995, defendants submitted their "Best and Final Offer," known as a BAFO, to the Army. Under the BAFO, the charge for the refurbished units was $10,754 each for the first order period, with a minimum quantity of 100 and a maximum of 600. The charge for the new units was $18,048 each for the first order period, with a minimum quantity of 25 and a maximum of 266. Hughes charged $26,000 per unit for similar laser systems.
When Varo submitted its BAFO on May 31, 1995, it had not performed tests on the prototypes to determine if the design would meet the specifications. But, Milson insisted that its proposed costs were "consistent with the use of the APD receiver for both new and refurbished units." It was his opinion that defendants' design, although untested, had a high probability of meeting the spec requirements.
Many of defendants' employees testified that the Tank Contract was bid at a profit. Consequently, Barney testified that the Tank Contract was not included in the Agreement's schedule of contracts in which IMO anticipated a loss.
An issue at trial was whether Litton had properly reviewed Varo's proposal before entering into the Agreement. According to Hicks, federal law required government approval of agreements such as the one between Litton and defendants, so as to avoid an unfair monopoly, restraint of trade, or collusion. Thus, Litton did not review the Tank Contract before it closed because Hicks was concerned about jeopardizing that approval. He did not consider it to be "appropriate for [Litton] to be exposed to the details of that program at that stage," so as to avoid allegations of collusion. Nor did he want Litton to be liable for decisions made before it owned the business.
A week after the June 2 transfer date, on June 9, 1995, the Army awarded the Tank Contract to Varo. Wilson managed the M1A2 program upon its transfer from Varo to Litton. He planned to do the engineering in Garland, Texas and the manufacturing in Orlando, Florida. Litton had sixty-five percent excess capacity in Orlando in July 1995, and the transfer of Varo's programs there increased its utilization of the facility.
After the Tank Contract was awarded, Wilson asked Morgan to prepare a budget. Morgan informed Wilson that without "spec relief" he could not prepare a budget that would show a profit because Varo "had bid a receiver technology [the PIN] that didn't meet the specification."
At a post-award meeting with Army representatives, Wilson questioned whether the $1.5 million Varo had budgeted for the program would be sufficient. Although Morgan told Wilson that the design had been validated, that information was incorrect, as the design work had not been finished. Wilson was aware that the design was proceeding with the PIN receiver; he was also concerned about the rest of the design.
Wilson assigned Tim Albrecht, a Litton electrical engineer, to Garland as project engineer. According to Albrecht, at the time the production of the product was transferred from Texas to Florida, the product did not meet specifications and required more work. Significant tests remained behind schedule.
In 1993, Rodney Doster, a Varo optical engineer, designed the lenses for the ELRF for use with a PIN receiver. Although he was aware that the prototypes used the APD receiver, after the Tank Contract was awarded he was instructed to prepare a new optical design using a PIN receiver. In formulating his design, Doster did not consider a number of ...