China Consulting Group, LLC v. Rubbermaid Commercial Products, LLC et al

Filing 54

MEMORANDUM Opinion and Order. Signed by the Honorable Young B. Kim on 12/2/2010.(aac, )

China Consulting Group, LLC v. Rubbermaid Commercial Products, LLC et al

Doc. 54

UNITED STATES DISTRICT COURT N O R T H E R N DISTRICT OF ILLINOIS E A S T E R N DIVISION C H I N A CONSULTING GROUP, LLC, P la in tif f , v. R U B B E R M A I D COMMERCIAL P R O D U C T S , LLC., D e f e n d a n t. ) ) ) ) ) ) ) ) )

C a s e No. 10 CV 4825 M a g is tr a te Judge Young B. Kim

D e c e m b e r 2, 2010

M E M O R A N D U M OPINION and ORDER B e f o re the court is plaintiff China Consulting Group, LLC's ("CCG") motion to c o m p e l defendant Rubbermaid Commercial Products, LLC ("Rubbermaid") to permit the in s p e c t i o n of certain records. For the following reasons, the motion is granted in part and d e n ie d in part: B ackground In March 2000, CCG and Rubbermaid entered into an asset purchase and sale a g re e m e n t. (R. 15, Attach. 1 ("Agreement").) Pursuant to the terms of the Agreement, R u b b e rm a id -- a s the buyer of certain assets related to CCG's business of designing, m anufacturin g , distributing, marketing and selling waste receptacles--agreed to pay royalties to CCG on a quarterly basis. Agreement § 1.4(b). Rubbermaid also agreed to maintain c e rta in books and records for purposes of calculating the correct royalty amounts and to p e rm it CCG to inspect these records once a year. (Id.)

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The record suggests that the parties maintained a dispute-free contractual relationship f o r the last 10 years. However, in or about July 2010, CCG began to question Rubbermaid's c o m p lia n c e with the terms of the Agreement. (R. 40, Ex. 2.) The following month, on A u g u s t 2, 2010, CCG filed a federal complaint against Rubbermaid for alleged breach of c o n tra c t. (R. 1.) CCG amended its complaint two days later and claimed that Rubbermaid b re a c h e d the Agreement by failing to comply with the inspection provision under § 1.4(b) a n d the accelerated payment provision under § 4.6. (R. 4 ¶¶ 12, 16.) C C G claims that Rubbermaid agreed to make certain royalty payments until R u b b e rm a i d has paid a total of $1.5 million in royalty and that Rubbermaid agreed to pay C C G the portion of the $1.5 million royalty not yet made in full within 20 days of taking c e rta in actions. Sections 1.4(b) and 4.6 provide in relevant part that: R o ya lty Payments. Buyer shall pay Seller, on a quarterly basis commencing o n the Closing Date, royalty payments equal to five percent (5%) of Buyer's c u rre n t cost (FOB China Facility) of any finished goods used in the Business a n d produced at the Shanghai Xing Te Hao Corporation Facility (the "China F a c ility" ). Such finished goods are herein referred to as the "Royalty Goods", a n d such royalty payments are herein referred to as the "Royalty Payments". The amount of the Royalty Payment due each calendar quarter shall be d e te rm in e d based on the amount of such Royalty Goods sold commercially (e x c lu d in g inter-company sales by Buyer to Buyer's affiliate) by Buyer in the a p p lic a b le quarter, less returns actually credited on Buyer's books and re c o rd s . . . . The Royalty Payments and obligations of Buyer to make Royalty P a ym e n ts hereunder shall terminate at such time as the aggregate Royalty P a ym e n ts paid hereunder equal $1,500,000, the duration of such period to be k n o w n as the "Royalty Period." Buyer will maintain books and records during th e Royalty Period in sufficient detail to enable the royalties payable to Seller h e re u n d e r to be determined. Seller will have the right to inspect such records o n c e a year during the Royalty Period during normal business hours upon five d a ys prior written notice to Buyer. 2

Acceleration of Royalty Payments. In the event Buyer decides in its sole d is c re tio n to either (a) cease purchasing the Royalty Goods from the China F a c ility and use an alternate source for such finished goods, or (b) reduce the to ta l quantity of Royalty Goods purchased by Buyer from the China Facility in any calendar year by 50% of the previous calendar year's purchases of R o ya lty Goods by Buyer, Buyer agrees to provide Seller written notice within te n business days of the occurrence of either event described in (a) or (b) a b o v e , and Buyer agrees to pay Seller within 20 business days of such event's o c c u rre n c e the remaining Royalty Payments due hereunder, and upon which f in a l Royalty Payment all obligations of Buyer to make any Royalty Payments h e re u n d e r shall terminate. O n August 24, 2010, CCG served a set of requests for production of documents p u rs u a n t to Federal Rule of Civil Procedure 34(a). (R. 40, Ex. 3 at 1.) On September 27, 2 0 1 0 , Rubbermaid served its responses on CCG. (Id.) After the required meet-and-confer c o n f e re n c e , CCG filed a motion to compel Rubbermaid to permit the inspection of d o c u m e n ts responsive to its request numbers 1, 2, 3 and 5. (R. 40 at 3.) Rubbermaid o p p o se s the motion and asserts that it has tendered all documents relevant to this action. O n November 23, 2010, the assigned District Judge referred CCG's motion to compel to this court for resolution. In response to the referral order, CCG promptly re-noticed the m o tio n to compel before this court and presented the motion on December 1, 2010. At the m o tio n hearing, the parties presented oral arguments in support of their respective positions. Analysis C C G 's motion to compel is granted in part and denied in part as some of the d o c u m e n ts CCG seeks in its request to produce fall within the scope of Rule 26(b). Rule 3 4 (a )(1 ) provides that a party may request, among other things, the production of documents

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that constitute matters within the scope of Rule 26(b) and are in the possession, custody, or c o n tro l of another party. According to Rule 26(b)(1), "[p]arties may obtain discovery re g a rd in g any nonprivileged matter that is relevant to any party's claim or defense." The p a rty from whom the documents are requested "must either state that inspection and related a c t iv itie s will be permitted as requested or state an objection to the request, including the re a s o n s ." Fed.R.Civ.P. 34(b)(2)(B). Under Rule 34, a party is permitted to seek an order c o m p e llin g disclosure when the opposing party fails to allow inspection of the requested d o c u m e n ts . Fed.R.Civ.P. 37(a)(3)(B)(iv). The court has broad discretion when reviewing a discovery dispute between parties and "should independently determine the proper course o f discovery based upon the arguments of the parties." Gile v. United Airlines Inc., 95 F.3d 492, 496 (7th Cir. 1996). The value of the materials sought and the burden of providing the s a m e should also be considered when ruling on motions to compel. See Patterson v. Avery D e n n iso n Corp., 281 F.3d 676, 681 (7th Cir. 2002). A . CCG's Requests 1 and 2 R u b b e rm a id 's objections to these two requests are sustained to the extent that the s c o p e of the requests is too broad and these requests seek documents that are not relevant to th e instant action. CCG requested "[a]ll documents for the past 10 years regarding purchase o rd e rs , receiving reports, bills of lading, and customs clearance documents for waste re c e p ta c le s imported from China by Rubbermaid" and payment records for the past 10 years p e rta in in g to waste receptacles Rubbermaid purchased "directly or indirectly" from 13 China

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based companies, including Shanghai Xing Te Hao Corporation ("XTH"). (R. 40, Ex. 3.) Rubbermaid objected on the grounds that CCG is only entitled to those "documents sufficient to show the calculation and payment of royalties under the contract at issue" and produced f o r CCG's inspection document numbers RCP-1979 to RCP-6497. Rubbermaid represented in open court on December 1, 2010, that these records reflect Rubbermaid's purchase of X T H manufactured waste receptacle goods since the execution of the Agreement. C C G 's requests 1 and 2 are too broad in scope because the Agreement spells out that th e 5% royalty payment calculation is based on Rubbermaid's cost of finished goods p ro d u c e d by a specific vendor, XTH, not by any and all vendors in China. Also, whether C C G is entitled to an accelerated royalty payment is based on whether Rubbermaid stopped p u rc h a s in g goods specifically from XTH or reduced the total quantity of goods purchased f ro m XTH in any calendar year by 50% of the previous calendar year's purchases. Both the ro ya lty payment calculation and the answer to whether Rubbermaid stopped buying goods o r reduced its purchase by half may be determined by the records Rubbermaid has already p ro d u c e d . C C G did not explain in its motion to compel why it requires the inspection of a b ro a d e r scope of records in order to prosecute this breach of contract case. CCG asserted in its reply brief in support of its motion to compel that "[r]ecords of all Rubbermaid waste re c e p ta c le purchases from China should be provided." (R. 43 at 2.) However, CCG again

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failed to explain the nexus between the records it sought in its request to produce and the is su e s in this case. C C G argued on December 1, 2010, that it must be allowed to inspect all purchase re c o rd s showing Rubbermaid's transactions with any and all vendors located in China b e c a u s e it cannot trust the documents already produced by Rubbermaid. When asked for its f a c tu a l basis for this assertion, CCG responded that the purchase records produced by R ubberm a id contain records showing purchases of waste receptacles from vendors other than X T H . But this is not an adequate basis for CCG to be suspicious of Rubbermaid's p ro d u c tio n of documents responsive to its request. In fact, in order for Rubbermaid to have p ro d u c e d all relevant and responsive records to CCG's request, the production of purchase re c o rd s must include 10-years worth of records showing the cost of finished goods produced b y XTH even if Rubbermaid purchased such goods from vendors other than XTH. The re le v a n t records are determined by the specific finished goods purchased, not the identity of th e vendor. This means that if Rubbermaid purchased waste receptacles manufactured by X T H but sold by a different vendor in China, Rubbermaid must include such records in its re s p o n s e to the request or permit the inspection of those records. As such, the fact that the p u rc h a s e records produced by Rubbermaid reflect vendors/manufacturers different from X T H does not constitute a reasonable basis to compel Rubbermaid to open all of its tra n s a c tio n files for a general inspection.

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Moreover, Rubbermaid explained in court that it has not used other vendors to p u rc h a s e XTH goods other than from XTH. The purchase records reflect different vendor n a m e s because Rubbermaid used vendors other than XTH to have the goods shipped to the U n ite d States and because XTH, at some time after the execution of the Agreement, changed its business name several times. CCG did not offer any information to rebut Rubbermaid's re p re se n ta tio n . Rubbermaid also offered to provide an affidavit to address CCG's concerns a b o u t the different vendor names reflected in the purchase records. B . Request 3 R u b b e rm a id 's objections are sustained in part to the extent that the scope of CCG's r e q u e s t 3 is too broad and sought documents that are not relevant. According to the A g re e m e n t, the amount of the quarterly royalty payments is to be determined by the amount o f XTH waste receptacles Rubbermaid sold commercially during the applicable time period w ith certain deductions. There is no nexus between the royalty amount CCG is entitled to re c e iv e under the Agreement and the records reflecting Rubbermaid's sale of all waste re c e p ta c le s in its inventory. B u t, Rubbermaid's objections are overruled in part to the extent that CCG is entitled to records reflecting Rubbermaid's sale of XTH goods for the past 10 years. Rubbermaid a r g u e s that because it calculated the royalty payments made to CCG based on the cost of X T H goods purchased, these payments must be either equal to or higher than the royalty p a ym e n t amounts calculated based on the cost of XTH goods sold. Under Rubbermaid's

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theory, the sales records are not necessary for purposes of determining whether Rubbermaid s h o rtc h a n g e d CCG on its royalty payments. However, the parties do not dispute that CCG's ro ya lty payments are in fact calculated based on the quarterly sales data and not purchase d a ta . Based on the plain reading of Section 1.4(b), CCG is entitled to inspect the sales re c o rd s and its request to inspect them is reasonable. C . Request 5 T h e motion to compel is denied as to this request based on the court's ruling on re q u e s ts 1, 2 and 3. Based on this ruling, Rubbermaid is required to either produce or permit C C G to inspect 10-years worth of Rubbermaid's purchase and sales records pertaining to X T H waste receptacles. These records are more than adequate to determine whether R u b b e rm a id has been paying CCG the correct royalty payments and whether CCG is entitled to an accelerated payment of outstanding royalty under the terms of the Agreement. Moreover, pursuant to the terms of the Agreement, these are the records CCG is entitled to in s p e c t.

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Conclusion F o r the foregoing reasons, the motion is granted in part and denied in part. To the e x te n t that the court has granted CCG's motion to compel, Rubbermaid is ordered to either p ro d u c e the documents ordered herein or grant CCG access to inspect those documents at R u b b e rm a id 's facilities by no later than December 17, 2010.1 Also, because Rubbermaid has o f f e re d to provide an affidavit to supplement its document production response and because th e court considered this offer in ruling on this motion, Rubbermaid is ordered to provide an a f f id a v it, by December 17, 2010, explaining the various vendor names reflected in its p u rc h a s e records already produced to CCG.

ENTER:

_________________________________ Y o u n g B. Kim U n ite d States Magistrate Judge

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The parties must be mindful of the discovery cutoff date of February 11, 2011. 9