UNITED STATES DISTRICT COURT DISTRICT OF NEW JERSEY
September 22, 2011
SUBARU OF AMERICA, INC.,
DDB WORLDWIDE COMMUNICATIONS GROUP, INC., DEFENDANT.
The opinion of the court was delivered by: Honorable Joseph E. Irenas
IRENAS, Senior District Judge:
This is a contract dispute between Subaru of America, Inc., ("Subaru"), and its former advertising agency, DDB Worldwide Communications Group, Inc. ("DDB").*fn1 DDB presently moves for summary judgment on Counts 2 though 4 of the Second Amended Complaint.*fn2 For the reasons stated herein, the Motion will be granted in part and denied in part.
Subaru asserts that DDB breached certain terms of the "Agreement" that governed the parties' relationship during the period of January 1, 2005 through 2007 and part of 2008.*fn3 To understand the contract's provisions, however, some background concerning the advertising business in the United States is necessary.
Large national retailers, such as Subaru (which sells automobiles), hire outside advertising agencies to handle almost every aspect concerning the national advertising of their products. While the ad agencies apparently provide a wide array of services, including the actual production of advertisements, at issue in this case are the "media buying and planning" services DDB performed on Subaru's behalf.*fn4
Media planning is the process whereby the ad agency creates a
"strategic plan" for delivering the "advertiser's creative message" to
the "proper audience in the most cost-effective manner." (Mayer Decl.
¶ 7) Media buying is the purchasing of commercial time from the
appropriate national and local television stations in order to best
achieve the media plan's objectives. (Mayer Decl. ¶ 9)*fn5
The ad agency purchases commercial time for its clients
"based in large part on the GRPs [('gross ratings points')]*fn6
that the stations project will be achieved by a particular
television schedule." (Mattimore Decl. ¶ 4). In other words, through
its media planning and buying, the ad agency tries to ensure that its
clients' "television ads [will] be seen by an advertiser's target
audience" (Mattimore Decl. ¶ 3), by placing the right advertisement on
the right network, at the right time.
After the media planning and buying has occurred, ad agencies also conduct "post-buy analyses" to determine whether the television stations performed as expected. (See Mattimore Decl. ¶ 7; Mayer Decl. ¶ 15) The post-buy analyses generally look for two problems: "underdeliveries" and "violations."
An underdelivery occurs when a television station fails to deliver a minimum number of viewers (expressed in GRPs) for the commercial time purchased. (Mayer Decl. ¶ 12; Mattimore Decl. ¶ 4) Because the price of commercial time is based upon GRPs (Mattimore Decl. ¶ 4; Mayer Decl. ¶ 11), when a station underdelivers, an advertiser such as Subaru has quite literally not gotten what it paid for.
Violations, on the other hand, can occur in several different situations. Most commonly, a station commits a violation by running a commercial too frequently ("double-spotting"), running a commercial during a prohibited program ("restricted programming"), or simply running the wrong commercial ("trafficking"). (Mayer Decl. ¶ 14)
When post-buy analyses reveal underdeliveries or violations, the ad agency asks the television stations for "make goods"-- free additional commercial time intended to make up for the problem. (Mattimore Decl. ¶ 6; Mayer Decl. ¶ 16) "Sometimes the Stations agree to provide make goods, and sometimes they refuse if they disagree that a make good is owed." (Mattimore Decl. ¶ 8) Subaru does not dispute that the stations ultimately decide whether to provide a make good.
Relevant to the instant Motion, Subaru asserts that over the course of the parties' contractual relationship, DDB failed to pursue certain make goods, leaving approximately $5 million-worth of make goods unclaimed. Subaru also asserts that it was entitled to terminate the parties' agreement upon 90-days notice, rather than 180-days, based on its subsequent discovery that a key DDB employee did not bill any time to Subaru's account in 2007.
The relevant provisions of the Agreement are as follows:
1. APPOINTMENT OF AGENCY
[Subaru] (hereinafter 'you') desires to retain the services of [DDB] (hereinafter 'we' or 'us') to provide effective marketing and advertising communications and advice in marketing your products. Accordingly, you hereby engage and appoint us as your Agency of Record in the United States for your automotive products to provide strategy development, creative development and production, media planning, buying, monitoring and post-buy analysis, day-to-day account service, competitive tracking and reporting, billing and budget reporting. . . .
2. AGENCY SERVICES
We will perform for you the specific services set forth in . . . Exhibit A [to this Agreement.]*fn7 In addition, we will perform the following general services . . . . . (iv) Through our affiliated company . . . provide media planning.
(v) Through our affiliated company . . . contract . . . for and otherwise obtain . . . time . . . for . . . broadcasting . . . your advertising, endeavoring to secure the most advantageous rates available.
(vi) Check and verify . . . broadcasts . . . to such degree is normally performed by advertising agencies.
(vii) Audit invoices for space, time, material preparation and services.
(viii) Review, approve and pay invoices for media, production and other third party charges.
(ix) Provide post-buy analyses and obtain 'make goods' or credits.
(a) The term of this agreement shall commence as of the date hereof and shall continue in full force and effect unless terminated by either party giving the other not less than 180 days prior written notice of such termination. . . . You may terminate this agreement on 90 days prior written notice if there is a personnel change or reduction in the job responsibilities of . . . Peter Hempel, the Executive Vice President, Managing Director. . . .
17. GENERAL PROVISIONS
(f) We will endeavor to the best of our ability to guard against any loss to you through failure of media or suppliers to execute properly their commitments but we shall not be held responsible for any failure on their part in the absence of gross negligence or willful misconduct on our part.
(g) To the extent we are able to do so, we will verify all media invoices by obtaining from the media . . . proof of performance of . . . television time and we will confirm the accuracy of all media charges. These services will include post buy analyses and negotiation of make goods. Upon reasonable notice . . . we will make our files and records pertaining to the above material available to you for examination.
(Epstein Decl. Ex. B)
Count 2 of the Second Amended Complaint asserts that DDB breached the Agreement "by failing to ensure that Subaru obtained the full amount of credits and make goods for its media buying expenditures." (Second Amend. Compl. ¶ 52) Count 3 asserts that DDB breached the Agreement by "failing to accede to Subaru's demand to terminate the [Agreement] on 90 days notice, and accordingly Subaru is entitled to a refund of the monthly fees it paid during the 90 day period beyond the proper 90 day notice period." (Id. ¶ 59) Count 4 seeks a declaratory judgment that DDB is "obligated under the terms if the Agreement to negotiate any and all available credits and make goods due to Subaru in connection with media charges expended in 2006 and 2007." (Id. ¶ 64)*fn8
DDB moves for summary judgment on Counts 2 through 4.
"Under Rule 56(c), summary judgment is proper 'if the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law.'" Celotex Corp. v. Catrett, 477 U.S. 317, 322 (1986) (quoting Fed. R. Civ. P. 56(c)).
In deciding a motion for summary judgment, the Court must construe the facts and inferences in a light most favorable to the nonmoving party. Pollock v. Am. Tel. & Tel. Long Lines, 794 F.2d 860, 864 (3d Cir. 1986). "'With respect to an issue on which the nonmoving party bears the burden of proof, the burden on the moving party may be discharged by 'showing'-that is, pointing out to the district court-that there is an absence of evidence to support the nonmoving party's case.'" Conoshenti v. Pub. Serv. Elec. & Gas, 364 F.3d 135, 145-46 (3d Cir. 2004) (quoting Celotex, 477 U.S. at 325). The role of the Court is not "to weigh the evidence and determine the truth of the matter but to determine whether there is a genuine issue for trial." Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 249 (1986).
"Summary judgment, of course, looks only to admissible evidence." Arnold Pontiac-GMC, Inc. v. Budd Baer, Inc., 826 F.2d 1335, 1339 (3d Cir. 1987); see also Blackburn v. United Parcel Service, 179 F.3d 81, 95 (3d Cir. 1999)(noting that hearsay statements that are inadmissible at trial should not be considered when determining whether Plaintiff has established a triable issue of fact).
The Court first addresses the Counts related to make goods (Counts 2 and 4) and then turns to Count 3 concerning termination.*fn9
With regard to Subaru's contention that DDB breached the Agreement by failing to pursue make goods (Count 2 of the Second Amended Complaint), DDB makes two arguments in support of its Motion for Summary Judgment: (1) pursuant to paragraph 17(f), Subaru must establish that DDB was grossly negligent in failing to pursue make goods, and Subaru's evidence fails to meet this standard; and (2) Subaru has come forth with no admissible evidence proving that DDB failed to obtain make goods (i.e., Subaru cannot prove that DDB breached the Agreement). Both arguments fail.
Paragraph 17(f) of the agreement provides, "[DDB] will endeavor to the best of our ability to guard against any loss to [Subaru] through failure of media or suppliers to execute properly their commitments but [DDB] shall not be held responsible for any failure on their part in the absence of gross negligence or willful misconduct on [DDB's] part." (Epstein Decl. Ex. B) (emphasis added) With this provision in mind, DDB attempts to characterize Subaru's breach of contract claim for make goods not as a failure on its part, but rather "a result of the [television] Stations' purported failure to provide make goods for underdelivery and violations." (Moving Brief, p. 22) According to DDB, it is the Stations, not DDB, that are responsible for delivering ratings and complying with Subaru's guidelines [concerning double-spotting, restricted programs, and trafficking]. As a result, the only way for Subaru to recover the dollar value of any underdelivery or violation from DDB is to demonstrate that Subaru's loss was caused by DDB's gross negligence. . . . Subaru cannot possibly meet this burden. (Id., p. 22-23)(italics in original).
DDB mischaracterizes Subaru's claim. Subaru's breach of contract claim is based upon its assertion (supported by the evidence discussed further infra) that DDB simply failed to ask the television stations for make goods in the first place. Perhaps paragraph 17(f) would apply if DDB asked the television stations for the make goods and the stations refused,*fn10 but here Subaru's claim is based on evidence that DDB simply failed to act on underdeliveries and violations revealed by the post-buy analyses.
The Agreement's language is clear. DDB agreed to "verify all media invoices by obtaining from the media . . . proof of performance of . . . television time and . . . confirm the accuracy of all media charges. These services will include post buy analyses and negotiation of make goods." (Epstein Decl. Ex. B, paragraph 17(g)) DDB's asserted failure to "negotiate" make-goods after discovering underdeliveries and violations-- as opposed to any failure of the television stations to actually provide a make good-- is a breach of paragraph 17(g) the Agreement. Paragraph 17(f) simply is not implicated because Subaru asserts DDB's failure, not the stations' failure. Thus, Subaru need not prove DDB's gross negligence in order to prove that DDB breached its clear obligation to ask the television stations for make goods.*fn11
Next, DDB challenges the sufficiency of Subaru's proof that it failed to pursue certain make goods.*fn12 There is no genuine dispute that Subaru has put forth evidence from which a reasonable factfinder might conclude that DDB failed to pursue make goods, but DDB contends Subaru's evidence, which the Court describes next, is inadmissible, and therefore cannot be considered. Subaru, on the other hand, contends its evidence is admissible.
Subaru almost exclusively relies upon audit reports created by its "media auditor" Performance Analysis Group, Inc. ("PAG"), which was retained by Subaru from the beginning of Subaru's contractual relationship with DDB specifically to double-check DDB's post-buy analyses. (See Mayer Decl. ¶ 41; Shain Decl. ¶¶ 13, 15) According to Kevin Mayer, who was Subaru's Director of Marketing Communications during the relevant time period, "Subaru . . . engaged PAG to prepare  quarterly repots as a tool to help DDB identify and obtain make-goods." (Mayer Decl. ¶ 41)
PAG performed quarterly audits beginning in the first quarter of 2005 through the fourth quarter of 2007. (Shain Decl. ¶ 15; Shain Decl. Ex. F-- quarterly audit reports for 2006 and 2007) In creating these audit reports, PAG worked directly with DDB. DDB gave PAG all of the data upon which PAG's audits were based, and PAG submitted drafts of its quarterly reports to DDB so that DDB could "rectify any inaccuracies." (Shain Decl. ¶ 17; Mayer Decl. ¶¶ 42, 43; see, e.g., Shain Decl. Ex. C-- email to PAG from DDB's affiliate, Prometheus, transmitting data for PAG's use in its "4Q 2006 audit")
Each quarterly audit report specifically documents that DDB failed to act on certain underdeliveries and violations, and ascribes a monetary value for the make goods and credits*fn13 it recommends DDB should negotiate. (See Shain Decl. Ex. F-- audit reports)
DDB makes two attacks on the audit reports, and Shain's accompanying declaration and deposition testimony.
First, DDB argues that the evidence is inadmissible because paragraph 16 of the Agreement requires all audits to be performed by a CPA, and there is no dispute that neither Shain, nor anyone else employed by PAG, are CPAs. The Court rejects this argument because paragraph 16 does not apply to audits of post-buy analyses.
Paragraph 16 provides, in relevant part,
We will keep accurate records of transactions executed on your behalf in accordance with Generally Accepted Accounting Principles. You will have the right . . . to audit our books and records relating to third party vendor charges, and actual staffing hours compared to the applicable Annual Fee/Staffing Schedule (Schedule C). . . . Audits must be conducted by a licensed Certified Public Accounting firm or individual.
On its face, paragraph 16 makes no sense when applied to post- buy analyses because the information contained in those reports simply cannot be kept "in accordance with Generally Accepted Accounting Principles," and a CPA, who has no specialized knowledge of the advertising field, could not conduct a meaningful audit of the information.
Moreover, the Court concludes that paragraph 17(g) applies to post-buy analyses, and notably that provision does not require a CPA audit. Paragraph 17(g) provides:
To the extent we are able to do so, we will verify all media invoices by obtaining from the media . . . proof of performance of . . . television time and we will confirm the accuracy of all media charges. These services will include post buy analyses and negotiation of make goods. Upon reasonable notice . . . we will make our files and records pertaining to the above material available to you for examination.
Thus, the Court concludes that paragraph 16 of the Agreement does not prevent this Court from considering the PAG Reports and Shain's testimony in opposition to DDB's Motion for Summary Judgment.*fn14
Second, DDB argues that the audit reports and accompanying testimony by Shain is "impermissible lay opinion." In essence, DDB reasons that the audit reports and testimony are the product of specialized knowledge, therefore such evidence may only be introduced by way of an expert.*fn15 According to DDB, because Subaru has not proffered Shain as an expert witness, the Court cannot consider the audit reports or his testimony.
In response, Subaru argues that the audit reports themselves are business records created in the ordinary course of business, and therefore: (1) they are admissible, and (2) such evidence is sufficient to establish a genuine issue of material fact as to whether DDB breached the agreement.
With regard to the quarterly audit reports, the Court agrees that there is no hearsay problem. (Indeed, DDB has not raised such an objection.) Subaru's Declarations from Mayer and Shain establish that each audit report is: (1) a "report . . . or data compilation . . . of acts, events, conditions, [or] opinions . . . made at or near the time by . . . a person with knowledge;" (2) "kept in the course of a regularly conducted business activity;" and (3) "it was the regular practice of that business activity to make the . . . report . . . or data compilation." Fed. R. Evid. 803(6).
The question is whether there is an independent bar precluding the audit reports. DDB asserts that Rule 701 bars the reports, but the Court disagrees. First, Rule 701 specifically addresses "Opinion Testimony by Lay Witnesses" speaking only to limits on "witness testimony in the form of opinions or inferences." The audit reports are documentary evidence, not testimonial evidence by a witness.*fn16 Second, rather than drawing an inference or stating an opinion, the reports tend to prove a disputed fact: that DDB failed to pursue certain make goods on Subaru's behalf.*fn17 To the extent that Subaru wants to use the audit reports for that purpose, they are admissible, and sufficient to raise a triable issue of fact as to what efforts DDB made or failed to make in pursing make goods.
Indeed, the record before the Court is murky as to the quantity of make goods DDB did pursue and obtain, and the quantity it did not pursue. As noted previously, no one asserts that DDB failed to pursue any make goods, the factual question for the jury will be: to what extent did DDB pursue make goods? The PAG reports contribute to this factual uncertainty and therefore summary judgment is inappropriate.
It appears that there may be a legitimate question as to whether portions of Shain's testimony will be based on specialized knowledge, and may not be admissible as lay testimony. But the scope of Shain's testimony at trial, and the admissibility of the audit reports for purposes not encompassed by this Opinion are issues that are more appropriately decided closer to, or during, trial.
DDB's Motion for Summary Judgment on Count 2 of the Second Amended Complaint will be denied.
While DDB is not entitled to summary judgment on Count 2, it is entitled to summary judgment on Count 4, which seeks a declaration that DDB has a present obligation to pursue make goods owed to Subaru from 2006 and 2007.
DDB is entitled to judgment as a matter of law because it is undisputed that the parties' Agreement has been terminated. (Indeed, it was terminated by Subaru, who not only terminated it, but now asserts that it would have terminated the contract earlier if certain facts had been known at the time of termination. See infra Section III. C.) Under New Jersey law, "[t]ermination . . . causes the contract to cease existing" and the parties' respective obligations under the contract are extinguished. Nickels Midway Pier, LLC v. Wild Waves, LLC (In re Nickels Midway Pier), 372 B.R. 218, 222 (D.N.J. 2007); see also 2-6 Corbin on Contracts § 6.10 ("If the power [to terminate a contract] is exercised, both parties are freed from the promissory duties. If it is not exercised, neither one is freed.") Thus, DDB has no current obligation to pursue make goods on Subaru's behalf.
If Subaru successfully proves at trial that DDB failed to pursue valid make goods in 2006 and 2007 its remedy will be compensatory damages, not an order compelling DDB to attempt to obtain make goods from 2006 and 2007.
Summary judgment will be granted to DDB on Count 4 of the Second Amended Complaint.
Lastly, in Count 3 of the Second Amended Complaint, Subaru demands three-months' worth of the fee it paid to DDB (a total of $3,753,708), asserting that while it terminated the Agreement upon 180 days notice, it was entitled to terminate the Agreement upon 90 days notice, and therefore should be refunded the extra 90 days (approximately 3 months) of fees it paid to DDB. According to Subaru, at the time it sent DDB its formal written letter terminating the Agreement upon 180 days notice, it was unaware of grounds for terminating upon 90 days notice-- namely, that Peter Hempel had not worked on the Subaru account at all during 2007.*fn18
Subaru attempts to characterize its claim as one for breach of contract, asserting in its Second Amended Complaint that "DDB has materially breached the Agreement by failing to accede to Subaru's demand to terminate the account on 90 days notice." (Second Amend. Compl. ¶ 59)(emphasis added)
Subaru's claim fails because the undisputed facts demonstrate that DDB did not breach the agreement.
The Agreement does not obligate DDB to terminate the agreement upon a "personnel change or reduction in the job responsibilities of . . . Peter Hempel" (Epstein Decl. Ex. B-- Agreement ¶ 10(a))*fn19 ; nor does the Agreement automatically terminate in 90 days upon the same condition. The Agreement merely gave Subaru a right of termination, which Subaru did not exercise.
The undisputed evidence demonstrates that on October 16, 2007, Subaru gave "Notice . . . pursuant to Section 10(a) of the Agreement, that [Subaru] is exercising its right to terminate the Agreement. The termination shall take effect 180 days from the date of this letter." (Mayer Decl. Ex. A)
Later, on November 12, 2007, Subaru "proposed" that the parties terminate their agreement effective January 15, 2008 (i.e., 90, rather than 180, days from October 16, 2007) writing, "[d]ue to the fact that [Subaru] will not require much work from DDB after January 15th, 2008 we would like to propose January 15th, 2008 as the official end-date of our contractual relationship." (Mayer Decl. Ex. B) But Subaru admits that DDB did not agree to the proposal.*fn20
The undisputed record demonstrates that Subaru never invoked its right to terminate the agreement upon 90 days notice. Its failure to exercise an option to terminate is not tantamount to DDB's breach.*fn21
The fact that Subaru contends that it was not aware of grounds to terminate upon 90 days notice until a staffing audit of DDB's records was completed "during the Summer of 2008" (Subaru's Brief, p. 47)-- i.e., well after the 180 day termination period had expired-- does not change this Court's conclusion. Subaru does not allege that DDB attempted to conceal Hempel's role at DDB nor his involvement with the Subaru account.*fn22 Moreover, it is undisputed that the Agreement gave Subaru the right to conduct a staffing audit prior to terminating the Agreement. (See Epstein Decl. Ex. B-- Agreement, ¶ 16 ("[Subaru] will have the right, upon reasonable advance notice and no more frequently than annually, to audit [DDB's] books and records related to . . . actual staffing and hours.")). Thus, the record evidence suggests that Subaru could have discovered the circumstances concerning Hempel's work and responsibilities vis a vis Subaru before terminating the Agreement.
DDB's Motion for Summary Judgment on Count 3 of the Second Amended Complaint will be granted.
For the reasons stated herein, DDB's Motion for Summary Judgment will be granted as to Counts 3 and 4 of the Second Amended Complaint and denied as to Count 2. The Court will issue an appropriate Order.
JOSEPH E. IRENAS, S.U.S.D.J.