Animal Hospital of Nashua, Inc. v. Antech Diagnostics et al
Filing
131
///ORDER granting in part 89 Motion for Summary Judgment; denying as moot 96 Motion to Strike 89 Motion for Summary Judgment; granting as to Antech and deferring a decision as to Sound-Elkin, pending receipt of show-cause briefing as ordered, 98 Motion for Summary Judgment; denying 118 Motion for Summary Judgment. So Ordered by District Judge Landya B. McCafferty.(gla)
UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF NEW HAMPSHIRE
Animal Hospital of Nashua,
Inc.
v.
Civil No. 11-cv-448-LM
Opinion No. 2014 DNH 106
Antech Diagnostics and
Sound-Elkin
_
VCA Cenvet, Inc. d/b/a Antech
Diagnostics
v.
Animal Hospital of Nashua,
Inc.; AHN Pet Hospitals, Inc.;
AHN Animal Hospital Services
Inc.; and Dr. Leo Bishop,
individually and d/b/a The
Animal Hospital of Nashua
O R D E R
This case arises from a now-defunct business relationship
involving Animal Hospital of Nashua, Inc. (“AHN”) and a supplier
of laboratory services and medical equipment, VCA Cenvet, Inc.
(“Antech”).
The dispute concerns AHN’s dissatisfaction with the
quality of certain services and equipment provided to it by
Antech, and Antech’s unhappiness over AHN’s termination of the
business relationship.
More specifically, the case consists of:
(1) AHN’s claims against Antech for breach of contract, breach of
the covenant of good faith and fair dealing, and unjust
enrichment (Counts I, II, and VII of the complaint); (2) AHN’s
claims against Sound-Elkin (“Sound”) under the same three
theories (Counts VIII, IX, and XIII); and (3) Antech’s
counterclaims against AHN and two related corporate entities for
breach of contract (Count I of the counterclaim) and breach of
the covenant of good faith and fair dealing (Count II), plus
Antech’s counterclaim for unjust enrichment against the three
corporate entities and AHN’s president, Dr. Leo Bishop (Count
III).
Now before the court are: (1) a motion for partial summary
judgment filed by counterclaim defendants (collectively “AHN”) in
which they asks the court to rule that the damages to which
Antech might be entitled on its counterclaims are limited by
several provisions in the service agreements that governed the
parties’ business relationship; (2) Antech’s motion to strike
certain summary-judgment exhibits; (3) a motion for partial
summary judgment filed by Antech and Sound in which they argue
that they are entitled to judgment as a matter of law on AHN’s
claims that the equipment Antech provided was deficient; and (4)
AHN’s motion for partial summary judgment that Antech is not
entitled to damages in the form of lost profits.
The parties
made oral arguments on all four pending motions on April 10,
2014.
The court considers each motion in turn, but begins by
addressing the briefing the parties submitted in response to the
show-cause order of February 10, 2010, document no. 117.
2
Discussion
A. The Parties’ Show-Cause Briefing
In its show-cause order, the court expressed concerns
arising from the imprecision of the written documents the parties
had identified as memorializing the agreement under which they
conducted their business relationship.
Without belaboring the
point, the court is now satisfied that there was, indeed, an
enforceable contract between AHN and Antech, as described in the
two service agreements in the record.
B. Document No. 89
All three counts of Antech’s counterclaim are based upon
AHN’s decision to walk away from its business relationship with
Antech approximately three years into the six-year term of the
two service agreements.
While the parties agree, as a factual
matter, that AHN stopped using Antech’s laboratory services and
began to use the services of one of Antech’s competitors, AHN
contends that its actions were a permissible response to Antech’s
prior breach of the agreement, while Antech disagrees.
In any
event, in document no. 89, AHN asks the court to rule that in the
event Antech prevails on any of its counterclaims,
the damages to which it is entitled are limited in a variety of
ways.
Antech objects.
Antech’s objection is well taken.
3
1. Summary-Judgment Standard
“Summary judgment is appropriate when there is no genuine
issue of material fact and the moving party is entitled to
judgment as a matter of law.”
Ponte v. Steelcase Inc., 741 F.3d
310, 319 (1st Cir. 2014) (quoting Cortés–Rivera v. Dept. of
Corr., 626 F.3d 21, 26 (1st Cir. 2010)); see also Fed. R. Civ. P.
56(a).
When ruling on a motion for summary judgment, the court
must “view[] the entire record ‘in the light most hospitable to
the party opposing summary judgment, indulging all reasonable
inferences in that party’s favor.’”
Winslow v. Aroostook Cty.,
736 F.3d 23, 29 (1st Cir. 2013) (quoting Suarez v. Pueblo Int’l,
Inc., 229 F.3d 49, 53 (1st Cir. 2000)).
“The object of summary judgment is to ‘pierce the
boilerplate of the pleadings and assay the parties’ proof in
order to determine whether trial is actually required.’”
Dávila
v. Corp. de P.R. para la Diffusión Púb., 498 F.3d 9, 12 (1st Cir.
2007) (quoting Acosta v. Ames Dep’t Stores, Inc., 386 F.3d 5, 7
(1st Cir. 2004)).
“[T]he court’s task is not to weigh the
evidence and determine the truth of the matter but to determine
whether there is a genuine issue for trial.”
Noonan v. Staples,
Inc., 556 F.3d 20, 25 (1st Cir. 2009) (citations and internal
quotation marks omitted).
4
2. Background
The agreement that underlies the parties’ business
relationship is memorialized in two documents, each captioned
“Service Agreement.”
Each service agreement required AHN to use
Antech as its exclusive provider of laboratory services for six
years starting on August 1, 2008, and also required AHN to use
and pay for $1.2 million worth of Antech’s services over those
six years.
The agreements further provided that AHN was to
receive “pricing consideration” in the form of billing at a rate
of “35% off Antech’s list fee schedule.”
AHN’s Mem. of Law, Ex.
A (doc. no. 89-2), at A033946; id., Ex. B (doc. no. 89-3), at
A033950.1
Hereinafter, the court uses the terms “pricing
consideration” and “laboratory-fee discount” interchangeably.
One of the two service agreements (hereinafter “Loan
Agreement”) includes terms related to a loan made by Antech to
AHN as an incentive for AHN to use Antech as its exclusive
provider of laboratory services.
The Loan Agreement includes the
following relevant provisions:
3.3. Default. If . . . (ii) Animal Hospital
Owner breaches the exclusivity provisions set forth in
Section 1 hereof . . . then such [breach] shall
constitute an event of default with respect to the
Loan. At any time after the occurrence of an event of
default, Antech may declare the entire amount of the
Loan to be due and payable, whereupon the Loan shall
1
The pagination of the two service agreements is confusing,
at best. For the sake of clarity, the court uses the Bates
numbers stamped on the lower right-hand corner of each page of
each of those two exhibits.
5
become forthwith due and payable without presentment,
demand, protest or other notice of any kind, all of
which are expressly waived . . . . The remedies
available to Antech hereunder are intended to
compensate Antech for the Loan and discounts provided
hereunder, which Loan and discounts would not have been
provided unless Animal Hospital agreed to the Minimum
Average Annual Fee requirements set forth herein, the
requirements set forth in Section 1 regarding
exclusivity, and the payment for Laboratory Services
hereunder in a timely manner.
. . . .
5. Termination. If (i) a default with respect to
the loan occurs as described in Section 3.3 . . . then
Antech may terminate this Agreement upon written notice
to Animal Hospital Owner.
AHN’s Mem. of Law, Ex. A (doc. no. 89-2), at A033942-43 (emphasis
in the original).
The other service agreement (hereinafter “Equipment
Agreement”) incudes terms related to certain x-ray equipment,
manufactured by Sound, with a retail value of approximately
$139,000, that Antech provided to AHN, also as an incentive.
Equipment Agreement includes the following provisions:
3.1 . . . . If (i) the term of this
Agreement is terminated in accordance with Section 5 .
. . Antech shall cause to be removed from the premises
[of AHN] the [Sound] Equipment, and Animal Hospital
shall provide reasonable access to its premises in
order for Antech to remove such equipment. If the
Agreement is terminated in accordance with Section 5,
Animal Hospital will have the option to purchase the
[Sound] Equipment on the following schedule; During
Year 1 100% of original price, year 2 80% of original
price, year 3 60% of original price, year 4 40% of
original purchase price, year 5 20% of original
purchase price.
. . . .
6
The
5.
Termination. If (i) Animal Hospital breaches
the exclusivity provision set forth in Section 1 hereof
. . . , then Antech may terminate this Agreement upon
written notice to Animal Hospital.
AHN’s Mem. of Law, Ex. B (doc. no. 89-3), at A033948-49 (emphasis
in the original).
By letter dated August 4, 2011, Dr. Bishop notified Antech
that AHN had “entered into a new, multi-year, strategic agreement
with IDEXX Laboratories” to provide the laboratory services it
had been getting from Antech.
89-4), at 2.
AHN’s Mem. of Law, Ex. C (doc. no.
By letter dated September 7, 2011, Dr. Bishop
transmitted to Antech: (1) a check in the amount of the most
recent invoice AHN had received from Antech; and (2) a second
check, for $62,500, to cover the amount of the loan it had not
yet repaid.
Dr. Bishop also indicated that AHN did not intend to
purchase the Sound equipment it had been provided by Antech, and
asked Antech to make arrangements to retrieve it.
Antech has
neither cashed AHN’s checks nor picked up the equipment.
Moreover, Antech appears never to have terminated
the service agreements pursuant to the termination provisions
included in each of them.
In their initial disclosures, Antech and Sound responded to
a question about computation of Antech’s damages in the following
way:
As discovery has not yet begun, any estimate of
Antech’s damages is, necessarily, preliminary and
7
incomplete at this time, and is subject to revision.
However, based on currently available information,
Antech estimates its current damages as approximately
$885,000 (exclusive of interest, costs and, where
applicable, attorneys’ fees), consisting of
approximately: (a) $315,000 in lost profits for the
balance of the contract term; (b) $306,000 in
laboratory fee discounts; (c) $139,000 worth of
equipment; (d) loan balance of approximately $85,000;
and (e) accounts receivable of approximately $40,000.
AHN’s Mem. of Law, Ex. D (doc. no. 89-5), at 10.
3. Discussion
AHN asks the court to rule that Antech may not recover: (1)
lost profits; (2) $306,000 in laboratory-fee discounts; and (3)
$139,000 for the equipment.
It further asks the court to rule
that Antech’s remedies are limited to: (1) repayment of the loan
balance; (2) return of the Sound equipment; and (3) payment of
outstanding invoices.
AHN’s primary argument is that it is
entitled to all of the relief seeks because the two service
agreements provide that Antech’s remedies are limited to
liquidated damages, which would preclude the recovery of lost
profits, laboratory-fee discounts, and money damages for the
value of the Sound equipment.
AHN also makes a separate argument
with regard to the laboratory-fee discounts.
categorically.
Antech disagrees,
The court begins with the liquidated-damages
issue and then turns to the laboratory-fee discounts.
a. Liquidated Damages
AHN argues that the Loan Agreement and the Equipment
Agreement, taken together, include a provision that limits
8
Antech’s recovery to liquidated damages in the form of repayment
of the loan, return of the Sound equipment, and payment of
outstanding invoices.
AHN is mistaken.
To rule upon AHN’s liquidated-damages argument, the court
must construe the two service agreements, both of which provide
that they are to be construed under California law.
See AHN’s
Mem. of Law, Ex. A (doc. no. 89-2), at 3, Ex. B (doc. no. 89-3),
at 3.
Under California law, “contract interpretation is a legal
question for the court.”
Legendary Investors Grp. No. 1, LLC v.
Niemann, 169 Cal. Rptr. 3d 787, 793 (Cal. Ct. App. 2014) (citing
Morrow v. L.A. Unified Sch. Dist., 57 Cal. Rptr. 3d 885, 901
(Cal. Ct. App. 2007)).
The basic goal of contract interpretation is to give
effect to the parties’ mutual intent at the time of
contracting. When a contract is reduced to writing,
the parties’ intention is determined from the writing
alone, if possible. The words of a contract are to be
understood in their ordinary and popular sense.
[California] Civil Code section 1638 states [that] the
language of a contract is to govern its interpretation,
if the language is clear and explicit, and does not
involve an absurdity.
Lueras v. BAC Home Loans Servicing, LP, 163 Cal. Rptr. 3d 804,
822-23 (Cal. Ct. App. 2013) (citations, internal quotation marks,
and brackets omitted).
One fundamental problem with AHN’s argument is its
conflation of two different kinds of contractual provisions,
i.e., liquidated-damages provisions and those that limit the
liability of the defendant or the remedies available to a
9
successful plaintiff.
While AHN devotes considerable attention
to liquidated damages, the real issue here is whether the
agreement between AHN and Antech limits AHN’s liability or the
remedies available to Antech.
It does not.
In its memorandum of law, AHN cites H.S. Perlin Co. v.
Morse Signal Devices of San Diego, 209 Cal. App. 3d 1289 (Cal.
Ct. App. 1989), as a case in which a plaintiff’s recovery was
limited by a liquidated-damages provision.
In H.S. Perlin, the
court of appeals affirmed the trial court’s enforcement of a
contractual provision that resulted in an award of $250 in
liquidated damages to a shop owner on a negligence claim against
its burglar-alarm service, after a burglary resulted in losses
of $959,000.
See id. at 1291-92.
The opinion in H.S. Perlin
quotes extensively from the agreement between the shop owner and
the alarm service, and based upon the language of the agreement,
it is clear that the court’s decision was not based upon the
agreement’s reference to liquidated damages but, rather, its
express limitation of the alarm service’s liability to
liquidated damages.
See id. at 1292; see also Guthrie v. Am.
Prot. Indus., 206 Cal. Rptr. 834, 835 (Cal. Ct. App. 1984)
(enforcing similar contractual provision); Better Food Mkts. v.
Am. Dist. Tel. Co., 253 P.2d 10 (Cal. 1953) (same).
Here,
however, there is no language anywhere in either the Loan
Agreement or the Equipment Agreement that is remotely similar to
10
the language in the agreements in H.S. Perlin, Guthrie, and
Better Food Markets.
That is, neither of them says anything
about limiting AHN’s liability for a breach, and neither
purports to limit the remedies available to Antech.
Thus, there
is nothing in either service agreement, or in both of them read
together, that would preclude Antech from being awarded damages
in addition to repayment of the loan it made AHN, recovery of
the equipment it provided AHN, and payment of any outstanding
invoices.
The court’s interpretation, in turn, is consistent with the
language of the contract as a whole.
See Cal. Civ. Code § 1641
(“The whole of a contract is to be taken together, so as to give
effect to every part, if reasonably practicable, each clause
helping to interpret the other.”).
For example, with respect to
the remedy of declaring the loan Antech made to AHN due and
payable in the event of a default, Section 3.3 of the Loan
Agreement makes that remedy permissive.
Ex. A (doc. no. 89-2), at 3.
See AHN’s Mem. of Law,
Moreover, that same section
explains that the remedies available under it “are intended to
compensate Antech for the Loan and discounts provided
hereunder.”
Id.
What is missing from section 3.3, however, is
any indication that the remedies available thereunder were
intended to compensate Antech for other losses, such as lost
11
profits on sales it did not make to AHN over the last three
years of the term of the agreement.
In sum, there is nothing in the contractual descriptions of
the remedies that AHN calls liquidated damages that would
preclude an award of the full range of damages Antech seeks from
AHN in this case.
b. Laboratory-Fee Discount
In addition to relying upon its liquidated-damages argument,
AHN advances a second basis for a ruling that Antech is not
entitled to recover the value of the pricing consideration
described in Annex 1 to each of the two agreements.
Specifically, AHN argues that: (1) nothing in either agreement
indicates that the pricing consideration was intended as an
incentive for AHN to enter into its Agreements with Antech; (2)
even if pricing consideration was intended as an incentive,
Section 3.3 of the Loan Agreement provides that calling the loan
was the single remedy intended by the parties as compensation for
the loan and associated discounts, in the event of a breach by
AHN; and (3) Antech cannot recover the laboratory-fee discount
because such a recovery, combined with lost profits going forward
from the alleged breach, would put Antech in a better position
than it would have occupied if AHN had performed its obligations
under the contract.
The court agrees with AHN’s third argument.
12
In support of its argument that it is entitled to recover
the laboratory-fee discounts it gave AHN, Antech says that “AHN
has cited no law – and Antech is aware of none – that would allow
AHN to keep the consideration it received from Antech while
failing to render the consideration it agreed to provide in
exchange.”
Antech & Sound’s Mem. of Law (doc. no. 95-1) 15.
But, if Antech recovers the profits it lost as a result of AHN’s
breach, that will fully compensate Antech for the consideration
AHN failed to provide.
Allowing Antech to recover both its lost
profits and the laboratory-fee discount would overcompensate
Antech, allowing it to recover the full consideration that AHN
promised it, plus part of the consideration it gave AHN in
exchange for AHN’s promise to use Antech’s laboratory services
for six years.
In other words, it would not be fair to make AHN
give up the discount without also relieving it of the obligation
it assumed in exchange for the discount, i.e., its agreement to
use Antech’s services, exclusively, for six years.
Without that
agreement, however, Antech would have no basis for a breach-ofcontract claim against AHN.
To sum up, Antech has cited no law,
and the court is aware of none, that would allow it to both: (1)
recover the consideration it gave AHN; and (2) recover for AHN’s
breach of the promise it gave in exchange for that consideration.
13
c. Value of the Equipment
The court has rejected the only argument advanced by AHN
that would preclude Antech from recovering the cash value of the
equipment it provided to AHN.
Even so, the court offers the
following observation for the guidance of the parties as this
case moves forward.
If this case goes to trial, and the jury
finds that AHN is liable to Antech for breach of contract, then
the jury may need to determine the value of the Sound equipment.2
When it does so, it will have before it a variety of evidence,
including: (1) the list price of that equipment; (2) the lesser
amount that Antech actually paid Sound for the equipment;3 and
(3) the “depreciation” schedule in the Equipment Agreement, which
gave AHN, under certain circumstances, the right to purchase the
equipment for a percentage of its “original” price that
diminished over time.
The point is that the jury is likely to
have before it a substantial amount of evidence from which it
could reasonably determine that, at the time of breach, the
equipment in AHN’s possession was worth considerably less than
2
As noted, the court has already ruled that nothing in the
two service agreements requires Antech to take back the equipment
rather than being compensated for it, in cash, and the court is
aware of no legal basis that would allow a breaching party to
choose the remedy available to the party who was the victim of
the breach.
3
Annex 2 to the Equipment Agreement includes documentation
suggesting that Sound gave Antech two separate discounts, thus
lowering the cost of the equipment from $138,770 to $95,000. See
AHN’s Mem. of Law, Ex. B. (doc. no. 89-3), at S00001.
14
the $139,000 Antech claims in damages resulting from AHN’s
possession of the equipment.
4. Summary
AHN’s motion for summary judgment on the limitation of
damages, document no. 89, is granted in part, but only to the
extent that Antech is barred from recovering both the pricing
consideration it gave AHN on the services it purchased before it
stopped doing business with Antech and the profits it lost
afterward.
Otherwise, the motion is denied.
C. Document No. 96
In document no. 96, Antech asks the court to strike three
exhibits attached to document no. 89, the summary-judgment motion
the court disposed of in the previous section.
Antech argues
that because the three exhibits are inadmissible, they should be
stricken from the summary-judgment record, but offers no legal
authority for the relief it seeks.
Because the court did not
rely upon the disputed evidence in ruling on document no. 89,
Antech’s motion to strike, document no. 96, is denied as moot.
D. Document No. 118
In document no. 118, AHN takes another shot at limiting the
kinds of damages to which Antech might be entitled if it prevails
on its counterclaims.
Specifically, it asks the court
15
to rule that Antech is not entitled to recover lost profits.
Antech objects.
Again, Antech’s objection is well taken.
AHN’s basic argument is this: (1) Antech’s lost profits
equal the amount AHN would have paid for services from Antech,
less the costs Antech would have incurred to provide those
services; (2) Antech’s costs are made up of both variable costs
and fixed costs; and (3) Antech’s expert opinion on lost profits
takes into account only fixed costs.
As a result, AHN argues,
Antech’s expert opinion is invalid as a matter of law, which
entitles it to an order precluding Antech from recovering lost
profits.
Antech raises a number of objections.
To make a long
story short, nothing in AHN’s briefing and nothing said at oral
argument has persuaded the court that, as a matter of law, the
jury would be incapable of determining Antech’s lost profits.
Accordingly, AHN’s motion for summary judgment on this issue,
document no. 118, is denied.
E. Document No. 98
In document no. 98, Antech and Sound seek judgment as a
matter of law on AHN’s claims against them to the extent those
claims are based upon any alleged deficiencies in the equipment
that Antech provided to AHN.
AHN objects.
For the reasons that
follow, the court agrees with Antech and Sound.
16
1. Background
The Equipment Agreement provides, in pertinent part, that
“[a]s an incentive to enter into this Agreement, Antech will
provide to Animal Hospital Owner the Sound Technologies equipment
described [in] Annex 2 attached hereto, and subject to the terms
and conditions set forth in Section 3.”
Antech & Sound’s Mem. of
Law, Ex. B (doc. no. 98-3), at A033947 (emphasis in the
original).
Section 3, in turn, provides as follows:
Sound Technologies Equipment. As additional
consideration for Animal Hospital’s agreement to use an
Antech lab as its primary laboratory services provider,
Antech shall provide to Animal Hospital for its use the
Sound Technologies equipment identified in Annex 2
attached hereto (the “STI Equipment”); provided,
however, that during the Term, Antech shall purchase
from Sound Technologies, Inc., Silver Sound Assurance
coverage under standard terms and conditions applicable
to maintenance and warranty coverage for such STI
Equipment. Antech shall retain title to the STI
Equipment at all times during the Term.
Id. at A033948 (emphasis in the original).
The requirement that
Antech purchase warranty coverage is a handwritten amendment to
the printed Equipment Agreement, which originally required AHN
to purchase the warranty.4
negotiated by AHN.
That amendment, in turn, was
See Antech & Sound’s Reply, Ex. A, Bishop
4
Antech’s obligation to pay for the warranty is also
reflected in Sound’s Order Summary, which includes as a “special
instruction,” the following notation: “ANTECH is responsible for
financial obligation of equipment costs and Silver Sound
Assurance coverage for months 13-60.” Antech & Sound’s Mem. of
Law, Ex. B (doc. no. 98-3), at A033960.
17
Dep. (doc. no. 113-1) 84:9-13, 122:7-123:15, June 27, 2013.5
While section 3 of the Equipment Agreement was amended to shift
the responsibility for paying for the warranty to Antech, it was
not amended to require the warranty Antech purchased to exceed
“standard terms and conditions.”
Annex 2 to the Equipment Agreement provides, in pertinent
part:
The laboratory services agreement will include [a] DR
system installed in each [of] your hospitals in
exchange for your commitment to utilize [the] ANTECH
Diagnostics Reference Library. . . . You would own
the systems free and clear after 5 years.
Antech & Sound’s Mem. of Law , Ex. B (doc. no. 98-3), at A033951.
Without going into undue technical detail, the STI Equipment
provided by Antech consisted of: (1) an x-ray machine (with a
list price of $79,000); (2) an associated workstation (with a
list price of $8,070); (3) two additional free-standing
workstations (each with a list price of $4,500; and (4) a server
(with a list price of $19,850).
The specifications for the
workstations indicated that each of them came loaded with the
Windows XP operating system and a license to run certain STI
5
In support of the proposition that “AHN did not negotiate
the terms of . . . either of the Services Agreements,” AHN’s Mem.
of Law (doc. no. 103-1) 5, AHN cites deposition testimony from
AHN employee Donna Cole in which she agreed that she was “the
lead negotiator” for AHN in its dealings with Antech, id., Ex. C,
Cole Dep. (doc. no. 103-7) 88:2, Mar. 28, 2013, and that, with
regard to various terms in the service agreements, “Antech was
offering and we were counter-offering,” id. at 89:8-10.
18
software known as VetPACS.
More specifically, the order summary
from Sound indicates that it provided AHN with: (1) a “VetPACS
DICOM Digital Enterprise License,” id. at A033954, (with a list
price of $10,000); and (2) a “VetPACS OrthoPlan Software
License,” id., (with a list price of $5,000).
The warranty mentioned in Section 3 of the Equipment
Agreement was memorialized in a Warranty Agreement.
See Antech &
Sound’s Mem. of Law, Ex. B. (doc. no. 98-3), at S00005-S00011.
The warranty had an initial term of one year, which was included
with the purchase of the equipment.
See id. at S00005.
The
Warranty Agreement also provided for the purchase of two-year
renewal terms, at a cost of $2,500 per year.
See id.
Antech
purchased a two-year renewal term at the same time it purchased
the equipment.
See id.
With regard to the scope of its coverage, Section 11 of the
Warranty Agreement provides, in pertinent part:
STI warrants that the Covered Products and each Work
Station will (1) be free from defects in material,
workmanship, and title, and (2) conform to our
published product specifications in effect on the date
of order of the products[.] . . . STI may, in its
sole discretion, repair and/or replace such stations
during the warranty period. . . . This warranty is
renewable . . .; provided, however, that with respect
to each Work Station, the maximum term of the warranty
is ONE (1) YEAR, and such warranty is not and may not
be included in any Renewal Term.
Antech & Sound’s Mem. of Law, Ex. B (doc. no. 98-3), at S00008.
While Section 11 excludes workstations from any renewal term,
19
the executive summary of the Warranty Agreement provides an
exception to the exclusion, and allows for renewal of the
warranty on the workstation associated with the x-ray machine.
See id. at S00005.
Section 8 of the Warranty Agreement, in turn, describes
several elements of the STI Equipment that were not warranted:
No guarantee or commitment as to the type of products,
functionality, enhancements, additions, usability or
uptime with respect to the Software is implied or
expressed by STI.
a.
So long as Customer remains in good standing
under the Sound Assurance program . . .
patches, fixes and minor enhancements to
VetPACS software will be provided to
Customer free of charge.
. . . .
c.
Nothing in this Agreement shall obligate STI
to develop, create, test, release, support
or provide for use, or sell any new
software, software patches, or software
functionality (“Software Enhancements”).
Customer has no implied nor specific right,
to receive or demand any Software
Enhancements.
Antech & Sound’s Mem. of Law, Ex. B (doc. no. 98-3), at S00007.
The Warranty Agreement also includes the following provision
regarding limitation of liability:
IN NO EVENT, WHETHER AS A RESULT OF BREACH OF
CONTRACT, WARRANTY, TORT, STRICT LIABILITY, STATUTE OR
OTHERWISE, SHALL EITHER PARTY BE LIABLE TO THE OTHER
FOR ANY SPECIAL, INDIRECT, INCIDENTAL OR
CONSEQUENTIAL, PUNITIVE OR EXEMPLARY DAMAGES RELATED
TO THIS AGREEMENT (INCLUDING, BUT NOT LIMITED TO,
DAMAGES FOR LOST BUSINESS PROFITS, LOSS OF DATA,
INTERRUPTION IN USE OF EQUIPMENT OR UNAVAILABILITY OF
20
DATA), INCLUDING CLAIMS OF ANY THIRD PARTY. STI’S
ENTIRE LIABILITY AND CUSTOMER’S EXCLUSIVE REMEDY SHALL
BE FOR STI TO REPERFORM SERVICES WITHIN A REASONABLE
TIME FRAME; PROVIDED, THAT IN THE EVENT STI IS UNABLE
TO CORRECT ANY BREACH OR DEFAULT OF THIS AGREEMENT,
STI MAY ELECT TO REFUND TO CUSTOMER AN AMOUNT EQUAL TO
THE ANNUAL FEE FOR A RENEWAL TERM (REGARDLESS OF
WHETHER SUCH BREACH OR DEFAULT OCCURS DURING THE
INTIAL TERM OR DURING A RENEWAL TERM) IN FULL
SATISFACTION OF STI’S OBLIGATIONS UNDER THIS
AGREEMENT. SUCH REPERFORMANCE OR REFUND SHALL
CONSTITUTE STI’S ENTIRE LIABILITY AND CUSTOMER’S
EXCLUSIVE REMEDY WITH RESPECT FOR SUCH DEFAULT OR
BREACH.
Id. at S00008-09.
AHN received and began using the STI Equipment in the late
summer of 2008.
It used the equipment, without incident, until
February of 2011.
At that point, AHN’s information technology
consultant began upgrading AHN’s computer system to run the
Windows 7 operating system.
Among other things, the consultant
attempted to run VetPACS on a computer on which Windows 7 had
been installed, but was unable to do so.
Then, Sound confirmed
that: (1) VetPACS ran on Windows XP, the operating system that
Sound installed on the three workstations that Antech provided to
AHN, but did not run on Windows 7; and (2) it had replaced
VetPACS with a new product, called “eSeries,” and stopped
developing VetPACS.
2. Discussion
All three of AHN’s claims against Antech and all three of
its claims against Sound are based, in part, on some version of
an allegation that the defendant “provid[ed] an X-Ray System
21
that became obsolete,” Am. Compl. (doc. no. 17) ¶ 103, and was
“non-responsive[] in dealing with . . . the obsolete X-Ray
System,” id.
AHN defends against Antech’s three counterclaims
on similar grounds.
The obsolescence to which AHN refers is the
incompatibility of Sound’s VetPACS software with the Windows 7
operating system to which AHN upgraded.
Here is the crux of
AHN’s position:
At the time AHN entered into the Equipment Service
Agreement, it used workstations that ran on versions of
Microsoft Windows older than Windows 7. Given the
history of Microsoft’s releases of Windows software,
there was no question that new versions of Microsoft
Windows would be released during the six-year term of
the Agreement. Therefore, it was reasonable for AHN,
Antech, and [Sound] to expect that Vet-PACS should
function with future versions of Windows, including
Windows 7 and any other versions of Windows that AHN
would install in its workstations.
Antech & Sound’s Mem. of Law (doc. no. 98-1) 7 (quoting AHN’s
Supp. Answers to Antech’s First Set of Interrogs. (Answer No. 24)
19 (emphasis added by Antech & Sound).
In other words, AHN
appears to argue that for the STI Equipment to have been free
from defects, it was necessary for VetPACS to have anticipated
and accommodated the next six years’ worth of Microsoft’s
development of the Windows operating system.
To borrow a phrase
from Judge Siggins of the California Court of Appeals, “[t]o
state [AHN’s] premise is to refute [its] logic.”
Samaniego v.
Empire Today LLC, 140 Cal. Rptr. 3d 492, 500 (Cal. Ct. App.
2012).
22
Defendants argue that all of AHN’s claims and defenses
based upon the alleged obsolescence of the STI Equipment fail as
a matter of law because: (1) Antech’s only obligation under the
Equipment Agreement was to purchase the equipment described
therein from Sound and deliver it to AHN, which it did; (2) in
the Warranty Agreement, Sound expressly disclaimed any
obligation to undertake any additional development of VetPACS;
(3) the Warranty Agreement precludes AHN from recovering
damages; and (4) AHN breached the Warranty Agreement by trying
to combine VetPACS and Windows 7.
AHN contends that: (1) Antech
had an obligation to deliver equipment that would function for
the six-year term of the Equipment Agreement; (2) the Warranty
Agreement is unenforceable because it is both procedurally and
substantively unconscionable and because it fails of its
essential purpose; (3) even if the Warranty Agreement is
enforceable, it does not preclude the claims asserted against
Sound in this case; (4) it, i.e., AHN, did not breach the
Warranty Agreement; and (5) resolution of the issues raised in
defendants’ motion requires expert testimony to assist the trier
of fact in understanding various terms used in the Warranty
Agreement.
In the discussion that follows, the court considers
each defendant separately.
23
a. Antech
Antech’s obligations to AHN were spelled out in the Loan
Agreement and the Equipment Agreement.
In the Equipment
Agreement, Antech promised to provide AHN with certain pieces of
hardware and software.
It is undisputed that Antech provided
exactly the hardware and software specified in the Equipment
Agreement.
In an attempt to establish that Antech provided the
equipment it promised to provide yet breached its agreement with
AHN, AHN invokes the implied warranty of merchantability.
AHN’s
reliance upon that warranty is unavailing.
Presuming, for the sake of argument, that it is even proper
to consider an argument based upon a legal theory inserted into
the case at this late date, the implied warranty of
merchantability is inapplicable to the facts of this case
because: (1) Antech was not a merchant; (2) it did not sell any
goods to AHN; and (3) at the time of sale, the goods were
merchantable.
In an order on which AHN relies, Judge Fogel explained that
“[t]here exists in every contract for the sale of goods by a
merchant a warranty that the goods shall be merchantable.”
Kent
v. Hewlett-Packard Co., No. 09-5341 JF (PVT), 2010 WL 2681767, at
*4 (N.D. Cal. July 6, 2010) (quoting Atkinson v. Elk Corp. of
Tex., 48 Cal. Rptr. 3d 247, 257 (Cal. Ct. App. 2006)).
The
“merchant” to which Judge Fogel refers is “a merchant with
24
respect to goods of that kind,” Cal. Com. Code § 2314(1).
Under
California’s enactment of the Uniform Commercial Code (“UCC”),
Antech does not appear to be a merchant of x-ray equipment.
Cal. Com. Code § 2104(1).
See
Beyond that, the Equipment Agreement
was not a “contract for the sale of goods,” given that “[a]
‘sale’ consists in the passing of title from the seller to the
buyer for a price,” Cal. Com. Code § 2106(1), and the Equipment
Agreement provided that “Antech [would] retain title to the STI
Equipment at all times during the Term [of the agreement],”
Antech & Sound’s Mem. of Law, Ex. B (doc. no. 98-3), at A033948.
Moreover, merchantability is measured at the time of
delivery.
See Mexia v. Rinker Boat Co., 95 Cal. Rptr. 3d 285,
290 (Cal. Ct. App. 2009).
Here, it is undisputed that the STI
Equipment, including VetPACS, functioned as AHN believed it was
supposed to function for the first two and one half years that
AHN used it.
See Bishop Dep. 214:14-18.
Necessarily, then, the
STI Equipment, including VetPACS, was merchantable at the time of
its delivery.
To be sure, the California legislature also
enacted the Song-Beverly Act, which includes provisions more
favorable to consumers than those of the California version of
the UCC, see Mexia, 95 Cal. Rptr. 3d at 290, but even under the
pro-consumer Song-Beverly Act, the implied warranty of
merchantability has a duration of “no[] more than one year
following the sale of new consumer goods,” Cal. Com. Code. §
25
1791.1(c).
And, again, by AHN’s own admission, VetPACS worked
just fine for more than two years after AHN took delivery of the
STI Equipment.
Turning from the law to the facts of this case, the court
offers the following observations.
AHN argues that the implied
warranty of merchantability required Antech to provide it with
equipment that included software that would be compatible with
the next six years’ worth of Windows operating systems.
But, AHN
also says that it, Antech, and Sound all knew that Windows XP was
very likely to be replaced during the term of the Equipment
Agreement.
See Antech & Sound’s Mem. of Law (doc. no. 98-1) 7.
Thus, while AHN concedes that it recognized the threat of
obsolescence, and had an “astute negotiator” working on the
Equipment Agreement, see Bishop Dep. 84:10, it agreed to accept
workstations that ran Windows XP and agreed to accept “warranty
coverage under standard terms and conditions,” Antech & Sound’s
Mem. of Law, Ex. B (doc. no. 98-3), at A033948.
Given AHN’s
admitted knowledge of the potentially limited shelf-life of
Windows XP, and its admitted and demonstrated ability to
negotiate the terms of the Equipment Agreement, it hardly seems
right to hold Antech liable for the consequences of a situation
that AHN itself anticipated and against which it could have
attempted to protect itself.
26
To conclude, because the California version of the UCC does
not apply to Antech’s provision of equipment to AHN, and because
VetPACS was merchantable for more than two years after AHN
acquired it, AHN’s reliance upon the implied warranty of
merchantability does it no good.
Accordingly, as to any claim or
defense asserted by AHN that relies upon the implied warranty of
merchantability, Antech is entitled to judgment as a matter of
law.
b. Sound
In Count VIII of its amended complaint, AHN claims that
Sound breached the Warranty Agreement by “providing an X-Ray
System that became obsolete and [by] its non-responsiveness in
dealing with the obsolete X-Ray System.”6
Am. Compl. ¶ 142.
While AHN identifies the conduct on which its claim is based, it
does not identify the specific contractual obligation that Sound
supposedly failed to fulfill, nor does it explain how Sound’s
conduct constituted a breach of the Warranty Agreement.
Closer
scrutiny is required.
6
Sound does not defend against AHN’s breach-of-contract
claim on grounds that AHN was not a party to the Warranty
Agreement, and the court assumes that AHN has standing, as a
third-party beneficiary, to sue Sound for breaching it. See B
Spinks v. Equity Resid. Briarwood Apts., 90 Cal. Rptr. 3d 453,
468 (Cal. Ct. App. 2009) (“California law permits third party
beneficiaries to enforce the terms of a contract made for their
benefit.”) (quoting Principal Mut. Life Ins. Co. v. Vars, Pave,
McCord & Freedman, 77 Cal. Rptr. 2d 479, 489 (Cal. Ct. App.
1998)); see also Cal. Civ. Code § 1559 (“A contract, made
expressly for the benefit of a third person, may be enforced by
him at any time before the parties thereto rescind it.”).
27
In the Equipment Agreement, Sound obligated itself to
provide covered products and workstations that were “free from
defects in material, workmanship, and title,” and that
“conform[ed] to [its] published product specifications.”
Antech
& Sound’s Mem. of Law, Ex. B (doc. no. 98-3), at S00008.
Here,
AHN says nothing about defects in title or a failure to conform
to specifications, so its claim must be that some product or
workstation it received from Sound had either a defect in
materials or a defect in workmanship.
AHN alleges a defect in the VetPACS software that was
installed on the workstation associated with the x-ray machine,
which is the only workstation that was still under warranty in
February of 2011.
on Windows 7.
That defect is the inability of VetPACS to run
The problem is that such a defect does not appear
to be a defect in either materials or workmanship.
Rather, as
Judge Wigenton points out,
[a] defect in the programming of . . . software is not
akin to a defect in materials or substandard
workmanship . . . . See Brothers v. Hewlett Packard
Co., [No. C-06-02254 RMW,] 2007 WL 485979, at *4 (N.
D. Cal. Feb. 12, 2007) (“Unlike defects in materials
or workmanship, a design defect is manufactured in
accordance with the product’s intended specifications.”) (applying California law) (Emphasis added);
see also Cooper [v. Samsung Elecs. Am., Inc.], 374 F.
App’x [250, 253 (3d Cir. 2010)] (concluding that
breach of express warranty claim failed because
plaintiff’s allegation that “the design deviated from
Samsung’s advertisements and packaging” was not a
“manufacturing defect” that would be covered by this
warranty).
28
Hughes v. Panasonic Consumer Elecs. Co., Civ. Acton No. 10-846
(SDW), 2011 WL 2976839, at *19 (D.N.J. July 21, 2011).
If indeed the defect on which AHN bases its claim is a
design defect rather than a manufacturing defect, then Sound
would be entitled to judgment as a matter of law that it did not
breach the Warranty Agreement by providing AHN with equipment
and/or a workstation that included software that was not
compatible with Windows 7.
In the face of this issue, the court
could simply assume, as defendants appear to, that Count VIII is
based upon a defect in materials or workmanship and then wade
into the complicated warranty-based defenses on which Sound
relies.
Or, the court could request further briefing, pursuant
to Rule 56(f)(2) of the Federal Rules of Civil Procedure, on the
question of whether, in the first instance, the defects alleged
by AHN could possibly support a claim for breach of the warranty
against defects in materials and workmanship expressed in Section
11 of the Warranty Agreement.
In the interest of judicial
economy, i.e., the avoidance of issues requiring the application
of unfamiliar law and issues that that may not need to be
decided, the court choses the second course of action.
Accordingly, AHN is ordered to show cause why Sound should
not be granted Summary Judgment on Counts VIII and IX of AHN’s
amended complaint.
Similarly, given the undisputed fact that
Antech rather than AHN bore the cost of the warranty, and AHN’s
29
allegation in its amended complaint that it paid for the warranty
coverage, AHN is directed to show cause why Sound should not be
granted summary judgment on the claim for unjust enrichment
stated in Count XIII.
Conclusion
For the reasons described above: (1) AHN’s first motion for
partial summary judgment on the issue of damages, document no. 89
is granted, but only to the extent that Antech is barred from
recovering both the pricing consideration it gave AHN on the
services it purchased before it stopped doing business with
Antech and the profits it lost afterward; (2) Antech’s motion to
strike, document no. 96, is denied as moot; (3) AHN’s second
motion for partial summary judgment on the issue of damages,
document no. 118, is denied; and (4) defendants’ motion for
partial summary judgment, document no. 98, is granted as to
Antech, while the court’s decision as to Sound is deferred,
pending receipt of the show-cause briefing the court has
requested.
With regard to timing, AHN has ten days from the date
of this order to respond, and Sound has ten days to respond to
AHN’s briefing.
SO ORDERED.
__________________________
Landya McCafferty
United States District Judge
May 15, 2014
30
cc:
Phillip A. Baker, Esq.
Julie B. Brennan, Esq.
Adam J. Chandler, Esq.
Robert M. Fojo, Esq.
Brian H. Lamkin, Esq.
Christopher T. Vrountas, Esq.
31
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