Royal Pacific Limited v. Faith Electric Manufacture Company, Ltd.
Filing
113
MEMORANDUM OPINION AND ORDER by District Judge David H. Urias denying 80 MOTION for Summary Judgment . (arp)
Case 1:17-cv-00357-DHU-JFR Document 113 Filed 05/03/22 Page 1 of 26
UNITED STATES DISTRICT COURT
DISTRICT OF NEW MEXICO
ROYAL PACIFIC LIMITED, a
New Mexico Corporation,
Plaintiff/Counter-Defendant,
v.
No. 1:17-cv-00357-DHU-JFR
FAITH ELECTRIC MANUFACTURE
COMPANY, LTD., a Chinese Corporation,
Defendant/Counter-Claimant.
MEMORANDUM OPINION AND ORDER
This matter is before the Court on Plaintiff/Counter-Defendant Royal Pacific
Limited (“Royal”)’s Motion for Summary Judgment (Pl.’s Mot., Doc. 80).
Defendant/Counter-Claimant Faith Electric Manufacture Company, Ltd., (“Faith”)
filed a response brief in opposition (Def.’s Resp., Doc. 89), to which Royal replied
(Pl.’s Reply, Doc. 98). Having reviewed the parties’ submissions, arguments,
relevant law, and being fully informed of the premises, the Court concludes that
the motion will be DENIED.
Case 1:17-cv-00357-DHU-JFR Document 113 Filed 05/03/22 Page 2 of 26
FACTUAL BACKGROUND
A.
The Parties’ Operations
Royal is a company that distributes lighting fixtures, ceiling fans and
electrical supplies to retail outlets and electrical contractors. Declaration of Jim
(“Brewer Decl.”) ¶ 3, Pl.’s Ex. A, Doc. 80-2. Faith is a foreign corporation that
manufactures electrical equipment. Pl.’s Compl., ¶¶ 3, 7, Doc. 1. Mr. Ziggy Chen
formed Faith in 2013. Def.’s Statement of Additional Material Facts (“Def.’s
AMF”), ¶ 1, Doc. 89. His father, Chen Gui, owned and operated Fujian Hongan
Electric Co., Ltd. (“Hongan”), an electrical component manufacturer. Id., at ¶ 2.
Around 2008, Hongan began selling ground fault circuit interrupters (“GFCIs”) to
Menards1, a home improvement chain store in the United States, and the two
businesses maintained a good relationship. Id., at ¶ 4, 5.
After Hongan’s supplier to Menards began having financial problems, the
Chens became concerned about servicing the Menards account, so they began
looking for another distributor. Id., at ¶¶ 3, 6. The elder Mr. Chen was friends with
Royal’s owner, Andy King. Id., at ¶ 7. Mr. Chen and Mr. King made a “handshake agreement” appointing Royal as Hongan’s representative to sell Hongan’s
GFCI products to Menards beginning around 2012. Id. Royal had not done
The parties refer to this company as “Menard” or “Menards.” Because the company is
identified in business documents as “Menards” with a registered trademark symbol, see Def.’s
Ex. A, 113-124, Doc. 89-1, the Court refers to the company as “Menards.”
1
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business with Menards at that point. Id., at ¶ 8. In addition to engaging Royal as its
distributor to Menards, Hongan was also making GFCIs for Royal to sell to
electrical trade distributors. Id., at ¶ 9.
In 2013, the elder Mr. Chen reduced his work hours and agreed that his son
Ziggy could assume Hongan’s obligations for the Menards account subject to
Menards’ approval. Id., at ¶ 11. Menards consented, and in December 2013 Faith
began manufacturing GFCIs and other electrical equipment for Menards. Id., at ¶
12.
B.
The Distributorship Agreement
In the summer of 2015, Faith executives entered into a written contract with
Royal governing the Menards account and other home improvement stores that
Royal had agreed to approach on Faith’s behalf. Id., at ¶ 17. In July 2015, the
parties signed a written “Distributorship Agreement.” Id., at ¶ 19; Distributorship
Agreement 2, Pl.’s Ex. C, Doc. 80-4. Under the agreement, Faith and Royal agreed
as follows:
1.1.
Faith appoints [Royal], an independent contractor, as an exclusive
authorized distributor within North America for products
manufactured by Faith … including but not limited to USB
Receptacle and Self-testing GFCI … (the “Products”) with respect to
the companies (Company) listed in Appendix A [i.e. Home Depot,
Lowes, Menards, etc.] …
1.2
The exclusivity period shall be for a period of 3 years[.] In case
[Royal] secures an order from a Company, [Royal]’s exclusivity
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period for this Company should be extended to 5 years from the
effective date of this agreement.
1.3
[Royal] agrees to diligently market and sell the Products to the
retailers listed in Appendix A during the exclusivity period.
Id., at 2.
If a party defaulted, then the non-defaulting party had the option to terminate
the agreement by providing a 30-day written notice to the defaulting party. Id., at
4. The defaulting party then “ha[d] the option of preventing the termination of th[e]
Agreement by taking corrective action that cure[d] the default, if such corrective
action [was] taken with 60 days after receiving the notice ….” Id. In addition, the
agreement constituted the final agreement and “supersede[d] all prior
communications, agreements and discussions.” Id., at 3.
C.
Promulgation of Underwriters Laboratories Standard 943 and
Customer Complaints
A GFCI prevents a person from getting shocked if the GFCI senses a ground
fault. Expert Report of Andrew Paris (“Paris Report”), 7, Doc. 80-7. GFCIs
traditionally only had a user operated “push-to-test” button. Id., at 9. Underwriters
Laboratories (“UL”), a testing laboratory that establishes safety standards,
promulgated UL 943, which required GFCI receptacles made after June 28, 2015,
to contain self-test functionality without relying on the user to manually test the
GFCI. Id.; Deposition of Kevin Nett (“Nett Depo.”), 34:22-25 – 35:1-2, Pl.’s Ex.
D, Doc. 80-5.
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To meet the new UL 943 standard, Faith redesigned its GFCIs so that a light
indicated the unit’s ground fault capability. Nett Depo., at 38:4-12. Pl.’s Statement
of Undisputed Material Facts (“Pl.’s UMF”) ¶ 1, Doc. 80, at 7. If the unit’s light
was green, then there was GFCI protection. But if the light was red, then it lacked
GFCI protection. Nett Depo., at 38:20-25 – 39:1-6. In October 2015, another
laboratory called Intertek Testing Services NA, Inc. (“Intertek”) certified Faith’s
redesigned GFCIs as compliant with UL 943 and authorized Faith to apply the
Electrical Testing Laboratory (“ETL”) mark on its products. Def.’s Resp. to Pl.’s
Fact No. 1, Doc. 89.
Beginning January 2016, Menards began selling the redesigned GFCIs under
its private label called “Smart Electrician.” Pl.’s UMF, at ¶ 1; Def.’s Resp. to Pl.’s
Fact No. 1. In February and March 2016, Royal told Faith that about 20 customers
returned the items to Menards because of functionality issues. Def.’s Resp. to Pl.’s
Fact No. 2.2 Customers complained that the units lacked GFCI protection
2
Royal submitted a database of customer complaints from around 65 Menards customers from
February 2016 – January 2017. Faith objected that the complaint log is hearsay. Normally a court
disregards hearsay on summary judgment when there is a proper objection to its use, see Montes
v. Vail Clinic, Inc., 497 F.3d 1160, 1176 (10th Cir. 2007), because “[t]o determine whether
genuine issues of material fact make a jury trial necessary, a court necessarily may consider only
the evidence that would be available to the jury.” Argo v. Blue Cross & Blue Shield of Kan., Inc.,
452 F.3d 1193, 1199 (10th Cir. 2006). “The burden is on the proponent to show that the material
is admissible as presented or to explain the admissible form that is anticipated.” Brown v. Perez,
835 F.3d 1223, 1232–33 (10th Cir. 2016) (quoting Fed. R. Civ. P. 56(c)(2) adv. comm. cmt.).
Royal submitted the complaint log and Mr. Brewer’s declaration that Royal “maintained a log of
the complaints.” Brewer Decl., at ¶ 14. Although Royal did not identify how the complaint log
could be admissible at trial, at the summary judgment stage the Court will consider it because
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capability but nonetheless “would still have power at the outlet,” and that the units
essentially “would not function as a GFCI.” Nett Depo. 39:21-25 – 40:1-11. Royal
refers to this issue as the “no GFCI protection/power still on” defect. Pl.’s Mot. at
2. Menards was concerned that “somebody was going to get seriously injured or
killed.” Nett Depo., at 41:3-7. However, Menards never actually verified whether
customers’ complaints were accurate because Menards’ policy was to accept
returns to maintain consumer good will. Id., at 134:19-25 – 135:1-7.
According to Faith, though, the redesigned GFCIs in fact “performed
consistent with the new UL 943 [s]tandard.” Def.’s Resp. at 6. Under that standard,
a GFCI had to indicate its “end of life” status either by making a visual and/or
audible signal or by cutting off its own power. Expert Report of Joe Nowikowski
(“Nowikowski Report”), 13, Doc. 89-5 (emphases added). Faith’s GFCIs flashed
red, meaning the units were not required to cut off power so long as a visual signal
indicated that the unit needed replacing. See Def.’s Resp. to Pl.’s Fact No. 3
Nonetheless, meeting the UL standard did not necessarily make the units
acceptable to Menards. Charles Ochs, a Menards buyer, testified that Faith’s
GFCIs “met UL specification,” but nevertheless Menards “was not satisfied with
how they performed.” Deposition of Charles Ochs (“Ochs Depo.”), 20:20-22, Pl.’s
Ex. V, Doc. 98-5. Ochs testified that Menards “could not buy from somebody that
Mr. Brewer’s declaration tends to indicate that it would qualify under Fed. R. Evid. 803(6) as a
business record.
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continued to ship us GFCIs like that,” and stated that Menards “would not have
continued to purchase a GFCI that had a red failure light and power at the
receptacle.” Id., at 85:14-15, 95:7-9.
D.
April 2016 Meeting Between Royal, Faith and Menards
On April 21, 2016 officials from Royal, Faith and Menards met. Pl.’s UMF,
at ¶ 18. The purpose of the meeting was for Faith to “present Menard[s] with
concrete information on the functions permitted by the new UL 943 [s]tandard.”
Def.’s Resp. to Pl.’s Fact No. 11. Eric Chan, Faith’s then-executive director,
attended the meeting. Faith officials explained that the GFCI problems could be
among customers in areas where the input voltage was low. Declaration of Eric
Chan (“Chan Decl.”), ¶¶ 2, 42, Def.’s Ex. B, Doc. 89-2. Mr. Chan told Menards
officials that Faith was going to consult with Intertek to address the situation. Id.,
at ¶ 42. Menards representatives never threatened to stop using Faith as its supplier
nor demanded that the Faith GFCIs function like those of a competitor brand. Id.
Menards in fact believed that its relationship with Royal “was good” and Menards
anticipated “get[ting] a product that functioned the way [Menards] thought it
should.” Nett Depo., at 48:18:25 – 49:1. Moreover, Menards never asked Royal to
provide GFCIs from vendor other than Faith. Pl.’s Answer to Def.’s Request for
Admis. No. 6, Def.’s Ex. G, Doc. 89-7, 4.
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Another attendee, Menards employee Kevin Nett, testified that the meeting
was in fact convened “[t]o discuss [Menards’] concerns with” the GFCIs. Nett
Depo., at 46:17-24. According to Nett, Menards officials expressed dissatisfaction
with the Faith-made GFCIs and indicated that Menards was contemplating
terminating the purchase of GFCIs from Royal and Faith because of product
defects. Id., at 46:25 – 47:1-13. Menards was scared that its private label and
image would suffer and Menards officials “discussed whether [Menards] should
find a new source.” Id., at 47:21-22, 48:7-9. According to Mr. Nett, Menards
officials “provide[d] specific guidance” during the meeting that they wanted the
units to shut off power and for the lights to function like a competitor brand’s
GFCIs. Id., at 49:8-19, 51:6-15. Chris Berglund of Royal also attended the
meeting. Pl.’s UMF, at ¶ 18. Mr. Berglund’s post-meeting notes also state that
throughout the meeting, Royal officials asked for the GFCIs to shut off all power.
Ex. 8 to Deposition of Chris Berglund (“Berglund Depo.”), Pl.’s Ex. E, Doc. 80-6.
E.
Faith Redesigns the GFCIs
Immediately after the April 2016 meeting, Faith consulted with Intertek.
Chan Decl., at ¶ 43. Faith received Intertek’s approval and adjusted the units to
include an audio signal and adjusted voltage range capabilities. Id., at ¶¶ 48-49;
Declaration of Gary Frush (“Frush Decl.”), ¶¶ 24, 25, Def.’s Ex. H, Doc. 89-8.
Faith began production in May 2016, shipped the adjusted units to Menards in June
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2016, and by July the adjusted units were on Menards’ shelves. Def.’s Resp. to
Pl.’s Fact No. 11.
Royal claims that the alleged problems with the GFCIs persisted.
Complaints in August 2016 were “particularly heavy” and “memorably bad,”
according to Mr. Brewer. Brewer Depo., at 63:8-9, 63:19-21. In August 2016,
Menards also received an email from Jon Mattson, a Wisconsin residential
building inspector. Deposition of Jon Mattson (“Mattson Depo.”), 10:15-16, Pl.’s
Ex. G, Doc. 80-8. In the email, which was also sent to a public safety department,
Mattson wrote about “serious issues” with the GFCIs and stated that consumers
“are not going to know that there [sic] GFCI receptable will NOT be protecting
them if the green light is not illuminated.” Ex. 1 to Mattson Depo. Doc. 80-8, at 21.
However, Faith “never claimed that it had created a Smart Electrician that”
cut off power. Def.’s Resp. to Pl.’s Fact No. 24. Moreover, Royal’s own board
meeting notes from August 2016 reflect that “[t]he GFCI business ha[d] stabilized
with Menard[s],” Def.’s Ex. K, Doc. 89-11, 24-25, even though Mr. Brewer
claimed that complaints from the same period were memorably bad. As for Mr.
Mattson’s statements, Mattson was unfamiliar with the pertinent UL standard
testified that he “had a problem with the UL standards” even though Faith’s GFCIs
complied with those standards. Mattson Depo. at 203:5-8, Def.’s Ex. L, Doc. 8912.
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F.
At Menards’ Request, Third-Party Testing Was Performed on the
GFCIs
Menards wanted third-party testing to verify that the modified GFCIs
complied with Menards’ request and Menards asked Royal to obtain a tester. Pl.’s
UMF ¶ 37; Nett Depo., at 56:1-4. Royal hired Intertek, and Mr. Brewer emailed
Mr. Chan that Royal wanted to be “as prepared as possible should Menards request
another quality review meeting” and that “having a third party endorsement of our
product will certainly help our cause.” Pl.’s UMF, at ¶ 40. Mr. Chan responded that
testing was a good initiative and asked how many units Royal needed for testing.
Id., at ¶ 41. Royal sent Intertek the original and redesigned Faith-made GFCIs and
sent 10 units of made by General Protecht (“GP”), a competitor brand. Intertek’s
testing engineer, Matthew Grunst, testified that his examination showed that
Faith’s redesigned GFCIs alleged still had the “no GFCI protection/power still on”
defect. Depo. of Matthew Grunst, 58:16 – 64:24, Pl.’s Ex. K, Doc. 80-11; Intertek
Test Report, Pl.’s Ex. L, Doc. 80-12.
However, Faith’s expert, Joseph Nowikowski, opined that the ElectroMagnetic Compatibility Test (“EMC Test”) and Highly Accelerated Life Test
(“HALT”) that Intertek performed were not required by UL 943. Declaration of
Joseph Nowikowski (“Nowikowski Decl.”) ¶¶ 6-7, Def.’s Ex. E, Doc. 89-5.
Moreover, although the HALT and EMC tests were not required under UL 943,
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Mr. Nowikowski opined that Faith’s units in fact passed those tests “and performed
substantially equal to both the control competitive samples tested.” Id., at 20.
In addition, Royal’s real purpose behind the Intertek testing was to make
Faith look bad and convince Menards to “drop Faith and switch to GP.” Def.’s
Resp. to Pl.’s Fact No. 37. GP had already been supplying Menards with Smart
Electricians and supplying Royal with GFCIs for Royal’s electrical trade
distributors and Royal made more money on those accounts than it did on the
Menards account. Pl.’s Resp. to Def.’s Interrog. No. 24, Def.’s Ex. N, Doc. 89-13;
Def.’s Statement of Additional Material Facts (“Def.’s AMF”) ¶ 34. Mr. Brewer
engaged Intertek after conversations with GP about GP supplying Menards. Id;
Def.’s Ex. N, Doc. 89-14.
G.
October and November 2016 Email Communications
In October 2016, a Royal official wrote Messrs. Chen and Chan that the
complaint of Mr. Mattson caused “great concern at Menards.” Pl.’s Ex. M. Mr.
Chan responded, “I can see [Mr. Mattson’s] view: if there is ground faults, the
GFCI should detect and cut off the power”; however, the context of Mr. Chan’s
statement was to “determine[e] whether Mr. Mattson had any bona fide
observations.” Pl.’s Ex. N, Doc. 80-14; Def.’s Resp. to Pl.’s Fact No. 47.
In November 2016, Charles Ochs of Menards asked Royal if the Faith-made
GFCIs would cut off power if the unit lost the ability to protect against a ground
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fault. Pl.’s Ex. O, 4, Doc. 80-15. Royal forwarded the email Mr. Chan, who
responded that if there is an “out-of-range low voltage where the tripping
mechanism itself is not working property, in that case, the device may not ‘trip’,
but cannot ‘kill’ the power.” Id., at 2.
H.
December 2016 Meeting Between Royal and Menards
In December 2016, Mr. Brewer, without tell Messrs. Chen or Chan, met
representatives from Menards and told them about the HALT and EMC tests
comparing Faith’s GFCIs to GP’s. Def.’s AUMF, at ¶ 44. His PowerPoint
presentation stated that Royal, “[r]esolved [its] GFCI supply liability by changing
to a new supplier,” and that it had been working “with an attorney to develop a
strategy for termination of our Exclusivity and Indemnification Agreement with
Faith. Our top priority is to protect Menards [sic] supply.” Def.’s Ex. K, 18, Doc.
29-11. During this same period, Menards nevertheless issued purchase orders for
38,652 Faith-made Smart Electricians, and between January 19 – March 7, 2017,
Menards made another 89,132 purchases of the units. Def.’s AUMF, at ¶¶ 56-57.
I.
Faith Asks Menards to Remove and Replace Faith-Made USB Wall
Outlets
In this same period, Faith asked Menards to remove and replace Faith-made
USB wall outlets, which were also governed by the distributorship agreement. The
USB wall outlets were new products. Chan Decl., at ¶ 51. Kevin Nett of Menards
testified that the USB wall outlets were ungrounded and could potentially shock a
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person. Nett Depo., at 21:6-13, Doc. 80-5. However, this is because purchasers
were unexpectedly installing the units in plastic rather than metal boxes, rendering
them ungrounded. Chan Decl., at ¶ 54. Faith received Intertek’s permission to
include a grounding wire with the unit to account for those purchasers who
installed the units in plastic boxes. Id., at ¶ 55. Faith then requested that Menards
remove and replace the existing units, which Menards did. Id., at ¶ 56. Mr. Nett
testified that this event hurt the Royal/Menards relationship. Nett Depo., at 33:813.
J.
Royal’s March 20, 2017 Letter
On March 20, 2017, Mr. Brewer sent Mr. Chen a letter telling him that
Royal was terminating its contract with Faith because Faith put Royal’s
relationship with Menards at risk. Chan Decl., at ¶ 58. Mr. Brewer stated that over
13 months, every Faith-made product had been the subject of quality complaints.
Letter of Jim Brewer to Ze Chen (“Brewer Letter”), Pl.’s Ex. C, 2, Doc. 80-16. Mr.
Brewer’s letter cited various alleged problems with the GFCIs, including 64
customer complaints, and alleged problems with USB power outlets and cover
plates. Id., at 2-3.
Faith tendered the expert report of Dr. Allen Parkman, a professor emeritus
of management at the University of New Mexico, to opine about the rate of
complaints compared to the number of sales. Expert Report of Allen Parkman
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(“Parkman Report”), 4, 6, Def.’s Doc. 89-6. According to Dr. Parkman, in 2016
Menards sold 543,891 Faith-made units. Id., at 4. Of those sales, 490 were
complained about as noted in Mr. Brewer’s letter – a complaint rate of 0.090%. Id.
The period between January to March 2017 (the month Mr. Brewer sent the letter)
shows a complaint rate of 0.026%. Id. Mr. Parkman opined that the complaint rate
was “miniscule.” Id. at 16. Mr. Parker also opined that complaints dropped further
after Faith redesigned its units following the April 2016 meeting. Id. There were
428 complaints from February to August 2016. Id. From September 2016 to March
2017, that number dropped to 92. Id.
PROCEDURAL BACKGROUND
On March 21, 2017, Royal brought a complaint in this Court based on the
parties’ diverse citizenship under 28 U.S.C. § 1332(a) and the distributorship
agreement’s stipulation that the “parties submitted … to the non-exclusive
jurisdiction of the courts of the State of New Mexia [sic] and, if applicable, the
United States District Court for the District of New Mexico.” Pl.’s Compl. ¶¶ 4-5,
Doc. 1. Royal alleged in its complaint that, in 2016, quality problems arose several
of Faith’s products, including the GFCIs. Id., at ¶¶ 13-14. Royal further alleged
that it notified Faith but that Faith failed to remedy the problems and that, because
the quality problems “damaged Royal Pacific’s reputation and harmed Royal
Pacific’s
business
relationship
with
14
Menards,”
Royal
terminated
the
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Distributorship Agreement in March 2017. Id., at ¶¶ 29, 26. Royal sought a
declaratory judgment that Faith breached the contract between them and breached
the implied warranty of merchantability.
Faith denied that any of its products were defective and alleged in
counterclaims that Royal breached the distributorship agreement, defamed Faith,
violated the New Mexico Unfair Practices Act, interfered with Faith’s prospective
business advantage, and committed prima facie tort. Def.’s Answer, Affirmative
Defenses and Counterclaim, 12-16, Doc. 10. The Court previously dismissed
certain of Faith’s counterclaims and permitted Faith leave to amend its
counterclaims, which Faith declined to do. As a result, Faith presently only
maintains a counterclaim for breach of contract of the distributorship agreement.
On September 30, 2020, Royal moved for summary judgment in its favor,
which the Court proceeds to analyze below.
STANDARD OF REVIEW
A party is entitled to a summary judgment “if ‘there is no genuine dispute as
to any material fact and the movant is entitled to judgment as a matter of law.’”
Hamric v. Wilderness Expeditions, Inc., 6 F.4th 1108 (10th Cir. 2021) (quoting
Fed. R. Civ. P. 56(a)). “A fact is material if it can have an impact on the outcome
of the lawsuit and genuine if a rational jury could find in favor of the non-moving
party based on the evidence presented.” New Mexico Oncology & Hematology
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Consultants, Ltd. v. Presbyterian Healthcare Servs., 994 F.3d 1166, 1171 (10th
Cir. 2021). The party seeking summary judgment bears the initial burden of
demonstrating an absence of a genuine issue of material fact. Sally Beauty Co. v.
Beautyco, Inc., 304 F.3d 964, 971 (10th Cir. 2002) (citing Celotex Corp. v. Catrett,
477 U.S. 317, 323 (1986)). “If the moving party does not bear the burden of proof
at trial on a dispositive issue, that party may make such a showing simply by
indicating to the court a lack of evidence for the nonmovant on an essential
element of the nonmovant’s claim.” Id. “Once the moving party has properly
supported its motion for summary judgment, the burden shifts to the nonmoving
party to go beyond the pleadings and set forth specific facts showing that there is a
genuine issue for trial.” Id.
“Summary judgment in favor of the party with the burden of persuasion,
however, is inappropriate when the evidence is susceptible of different
interpretations or inferences by the trier of fact.” Hunt v. Cromartie, 526 U.S. 541,
553 (1999). Thus, if the moving party has the burden of proof, its showing “must
be sufficient for the court to hold that no reasonable trier of fact could find other
than for the moving party.” Leone v. Owsley, 810 F.3d 1149, 1153 (10th Cir. 2015)
(citation omitted, alteration in original). “In other words, the evidence in the
movant’s favor must be so powerful that no reasonable jury would be free to
disbelieve it. Anything less should result in denial of summary judgment.” Id.
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(citation omitted). The district court’s role in analyzing a motion for summary
judgment is to simply “assess whether the evidence presents a sufficient
disagreement to require submission to a jury or whether it is so one-sided that one
party must prevail as a matter of law.” Sierra Club v. El Paso Gold Mines, Inc.,
421 F.3d 1133, 1150 (10th Cir. 2005).
DISCUSSION
1.
Breach of Contract (Count I)
Royal moves for summary judgment on its breach of contract claim, arguing
that Faith materially breached an essential purpose of the distributorship agreement
– namely, to make a functional GFCI. Faith contends that there are triable issues
whether the GFCIs were in fact defective. The Court concludes that the differing
accounts present a genuine question of fact and that, at this stage, Royal has failed
to carry its summary judgment burden to show that its evidence is “so powerful”
that a jury would be compelled to find in its favor. Leone, 810 F.3d at 1153.
Neither party disputes that New Mexico law governs Royal’s breach of
contract claim. In New Mexico, a plaintiff is required to prove a valid contract,
breach of the contract, and damages to prevail on a breach of contract claim.
Alderete v. City of Albuquerque, No. 33,151, 2015 WL 1143085, at *1 (N.M. Ct.
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App. Feb. 23, 2015) (citing Constr. Contracting & Mgmt., Inc. v. McConnell, 112
N.M. 371, 815 P.2d 1161 (N.M. 1991) (unpublished)).3
The parties’ dispute centers on the second element – breach of a contract.
Under New Mexico law, “[a] person may breach a contract by failing to perform a
contractual obligation when that performance is called for (unless that performance
is otherwise excused).” NMRA CIV UJI Rule 13-822 (brackets omitted). The nonbreaching party may be excused from further performance under the contract if the
breach is material. KidsKare, P.C. v. Mann, 350 P.3d 1228, 1234 (N.M. Ct. App.
2015) (citing Famiglietta v. Ivie–Miller Enters., Inc., 126 N.M. 69, 966 P.2d 777)
(N.M. Ct. App. 1998)). A breach is material if it results in the “failure to do
something that is so fundamental to the contract that the failure to perform that
obligation defeats an essential purpose of the contract.” Id.
To determine whether a breach of contract is material, New Mexico courts
consider five factors: (1) the extent to which the injured party will be deprived of
the benefit it reasonably expected to receive from the contract, (2) the extent to
which the breaching party will suffer forfeiture if the breach is deemed material,
(3) whether the injured party can be adequately compensated in damages for the
Faith contends that factual questions exist about Royal’s alleged fiduciary duties as Faith’s
agent and whether Royal actually incurred damages. However, neither party requested summary
judgment on either of these theories. The Court therefore does not address or decide Faith’s
contentions given that neither party requested judgment on those theories.
3
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breach (4) the likelihood that the breaching party will cure his or her failure to
perform under the contract (5) whether the breaching party’s conduct comported
with the standards of good faith and fair dealing. Famiglietta, 126 N.M. at 74, 966
P.2d at 782.4 The materiality of a breach is a specific question of fact. KidsKare,
350 P.3d at 1234.
Royal first contends that summary judgment in its favor is appropriate
because the Faith-made GFCIs were defective. Pl.’s Mot. at 16. Despite Royal’s
argument that the GFCIs were defective, the Court finds that Faith has provided
evidence to raise a triable issue of fact on defectiveness. Faith submitted evidence
that after the UL change Intertek certified Faith’s redesigned GFCIs as compliant
in January 2016 and again in May 2016 after Faith adjusted the units following the
April 2016 meeting. In each instance, Faith received Intertek’s authorization to
mark, which “signifies compliance with the UL 943 requirements.” Nowikowski
Report, at 16. Royal claims that “UL compliance is … a red herring” because
Menards was aware that the GFCIs complied with the UL standard, but Menards
was nonetheless unsatisfied with their performance. Pl.’s Reply, 19-20, Doc. 98.
The Court concludes that evidence of compliance with industry standards may not
be sufficient to obtain or defeat summary judgment, but such evidence is for the
Royal’s motion did not explicitly cite the Famiglietta factors, which only reinforces the Court’s
conclusion that summary judgment in Royal’s favor is inappropriate.
4
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jury to consider when determining the merits of Royal’s claim that Faith materially
breached the contract.
Royal next contends that the facts show that Menards refused to continue
purchasing the units unless the defect was remedied, and that Menards wanted the
GFCIs to work like GFCIs made by other brands. Pl.’s Mot. at 16. However, the
evidence supporting Royal’s arguments are genuinely disputed. Royal submitted
statements from Messrs. Nett and Berglund that during the April 2016 meeting,
Menards officials stated they wanted the GFCIs to shut off power, to replicate the
GFCIs of another brand, and that Menards was contemplating terminating the
purchase of GFCIs. Faith, meanwhile, submitted the declaration of Mr. Chan, an
attendee at the meeting, who stated that Menards never threatened to stop using
Faith as its supplier nor demanded that the Faith GFCIs function like the those of
another brand. The Court cannot enter summary judgment in favor of Royal based
on its evidence. To do so would be improperly deciding motion based on a
weighing of the witnesses’ statements that is reserved for the trier of fact. See
Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 255 (1986) (“Credibility
determinations, the weighing of the evidence, and the drawing of legitimate
inferences from the facts are jury functions, not those of a judge.”)
Finally, Royal contends that Faith’s attempted redesign of the GFCIs “failed
to cure the defect” as confirmed by third-party testing, and that Faith eventually
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admitted that it was unable to cure the defect. Pl.’s Mot. at 16-17. There is a
genuine dispute about whether Faith’s redesign of the units failed to cure an
alleged defect given that the parties dispute what the “defect” in question was. The
trier of fact will have to evaluate the parties’ competing evidence about whether
the Faith-made GFCIs passed the HALT testing and whether Intertek’s testing
implicated the UL standard. As to Royal’s assertion that Faith admitted that it was
unable to cure the alleged defect, Royal points to Mr. Chan’s email after learning
about Mr. Mattson’s complaint. Mr. Chan stated, “I can see his view: if there is
ground faults, the GFCI should detect and cut off the power,” which Royal
interprets as an “admission.” Pl.’s Ex. N, Doc. 80-14. Royal also believes Mr.
Chan admitted fault when he said in email correspondence that if there is an outof-range low voltage scenario, “the device may ‘trip’, but can not ‘kill’ the power.”
Pl.’s Ex. O, Doc. 80-15. However, the Court must draw inferences in Faith’s favor.
Accordingly, the Court assumes that the context of Mr. Chan’s statement
concerning Mr. Mattson’s complaint was to “determin[e] whether Mr. Mattson had
any bona fide observations.” Def.’s Resp. to Pl.’s Fact No. 47. Also drawing
inferences in Faith’s favor, as the Court must, Mr. Chan second statement
demonstrates compliance with the UL standard, which did not require a power
shut-off if the unit reached end-of-life status as long as the unit signaled.
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In summary, Royal’s motion for summary judgment on its breach of contract
claim is denied because genuine factual controversies exist.
2.
Breach of Implied Warrant of Merchantability (Count II)
Royal seeks summary judgment that Faith breached the implied warranty for
merchantability under the New Mexico Uniform Commercial Code, N.M.S.A.
1978, § 55-2-314. “To establish a claim for breach of the implied warranty of
merchantability, a plaintiff must prove that the seller sold goods or products that
failed to meet the statutory definition of ‘merchantable.’” Suttman-Villars v. Argon
Med. Devices, Inc., 553 F. Supp. 3d 946, 959 (D.N.M. 2021) (quoting Am. Mech.
Sols., L.L.C. v. Northland Process Piping, Inc., 184 F. Supp. 3d 1030, 1059
(D.N.M. 2016)). Section 55-2-314 states that, inter alia, goods are merchantable if
they “pass without objection in the trade under the contract description,” “are fit
for the ordinary purposes for which such goods are used,” and “run … of even
kind, quality and quantity within each unit and among all units involved.” N.M.
Stat. Ann. § 55-2-314. “A breach of the implied warranty of merchantability claim
‘thus requires proof of a defect.’” Am. Mech. Sols., L.L.C., 184 F. Supp. 3d at 1060
(citations omitted). “However, to establish a breach of the implied warranty, a
buyer is not required to prove a specific defect in the goods.” Salazar v. D.W.B.H.,
Inc., 144 N.M. 828, 834, 192 P.3d 1205, 1211 (N.M. 2008) (citation omitted,
emphasis in original). “Rather, a buyer can use circumstantial evidence to show
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that the goods were not fit for the ordinary purpose for which they were intended.”
Id.
The parties dispute whether Faith was a “merchant” under the UCC. Royal
claims that Faith was a merchant; Faith claims that Royal was its agent. A
“‘merchant’ means a person who deals in goods of the kind or otherwise by his
occupation holds himself out as having knowledge or skill peculiar to the practices
or goods involved in the transaction ….” N.M. Stat. Ann. § 55-2-104(1). Merchant
status under the UCC appears to be a question of fact. See Citizens Bank of Clovis
v. Runyan, 109 N.M. 672, 676, 789 P.2d 620, 624 (N.M. 1990) (“a material issue
of fact remains concerning whether Clower’s status was that of a cattle merchant or
an ordinary buyer” under the UCC.) However, even if the jury were to find that
Faith is a merchant, there are further questions of fact as to whether the goods were
merchantable because of any alleged defect and whether any breach proximately
caused Royal’s economic injury, the latter of which Royal did not address in its
motion. See Am. Mech. Sols., 184 F. Supp. 3d at 1060 (“a breach of the implied
warrant of merchantability claim also requires proof of proximate cause.”) Because
Royal cannot show the absence of a dispute of fact and has not demonstrated that it
is entitled to judgment as a matter of law, the Court denies its motion for summary
judgment on its implied warranty claim.
3.
Faith’s Affirmative Defense of “Lack of Proper Notice”
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Royal moves for summary judgment on Faith’s affirmative defense that
Royal did not comply with the distributorship agreement’s notice provision when
terminating that agreement. See Pl.’s Mot. at 24-25. Royal argues that the
affirmative defense fails because the notice provision is non-sensical, Faith had
actual notice of a pending termination given that it did not cure a defect, and that
Faith’s breach excused Royal’s further performance under the notice provision.
However, each of Royal’s arguments necessarily assumes that Faith did, in fact,
breach the agreement or default under the terms of the agreement. Because Faith
has provided sufficient evidence to survive summary judgment on Royal’s breach
of contract and implied warranty claims, the Court denies Royal’s request for
summary judgment on Faith’s affirmative defense of lack of proper notice.
4.
Declaratory Judgment (Count III)
The Declaratory Judgment Act provides that a federal court “may declare the
rights and other legal relations of any interested party seeking such declaration.” 28
U.S.C. § 2201(a). Royal seeks a declaratory judgment that Faith breached the
distributorship agreement, that the agreement’s notice provision is non-sensical,
and that Faith had the right to terminate the agreement and right to reject Faith’s
products and “cover” by obtaining substitution goods. Pl.’s Compl., ¶ 56 (A)-(D).
Once again, because each of these requests necessarily depend on a resolution of
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fact issues for the jury, the Court denies Royal’s motion for summary judgment on
its declaratory judgment claim.
5.
Request to Limit Faith’s Damages
On the final page of its motion, Royal states that, in the alternative, if it does
not obtain summary judgment, then Faith “should be limited in the period it can
claim damages to the thirty (30) day termination period,” Pl.’s Mot. at 28, because
“the only legally protectible expectation interest in the party to a contract
terminable by either party upon notice is the prospect of profit over the length of
the notice period.” Osborn v. Commanche Cattle Indus., Inc., (Okla. Civ. App.
1975), 545 P.2d 827, 831. However, the Court does not read Faith’s breach of
contract counterclaim as being predicated solely on Royal’s alleged violation of the
notice provision. Faith contended, instead, that Menards was a “significant longterm purchaser” and that Royal’s allegedly “false assertion that Faith’s products
were defect and/or posed a safety hazard – was a breach of contract,” and it sought
it compensatory, consequential and incidental damages, “including damages for
lost good will and harm to Faith’s reputation.” Def.’s Counterclaim, at ¶¶ 4, 19, 21.
Because Royal has not pointed to any New Mexico law establishing that damages
are not recoverable in the scenario at hand, the Court denies its request to limit
damages to the period of the notice provision. Royal may, of course, renew this
argument in an appropriate motion in limine before trial.
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CONCLUSION
Plaintiff/Counter-Defendant Royal Pacific Limited’s Motion for Summary
Judgment (Doc. 80) is DENIED. The Court will set trial by separate notice.
IT IS SO ORDERED.
________________________________
HON. DAVID H. URIAS
UNITED STATES DISTRICT JUDGE
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