BENCHMARK ELECTRONICS, INC., ET AL. V. CREE, INC.
Filing
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MEMORANDUM OPINION AND ORDER signed by JUDGE WILLIAM L. OSTEEN, JR on 06/27/2018. Cree's counterclaims for breach of contract (first claim for relief), breach of the covenant of good faith and fair dealing (second claim for relief), unjust enrichment (fifth claim for relief, in the alternative), and conversion as tot he XT-E LED bulbs (fourth claim for relief) are DISMISSED WITH PREJUDICE. FURTHER that Benchmark's motion to exclude 49 is GRANTED. (Coyne, Michelle)
IN THE UNITED STATES DISTRICT COURT
FOR THE MIDDLE DISTRICT OF NORTH CAROLINA
BENCHMARK ELECTRONICS, INC.,
and BENCHMARK ELECTRONICS DE
MEXICO, S. DE R.L. DE C.V.,
Plaintiffs,
v.
CREE, INC.,
Defendant.
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1:16CV529
MEMORANDUM OPINION AND ORDER
OSTEEN, JR., District Judge
Benchmark Electronics, Inc., and Benchmark Electronics de
Mexico, S. de R.L. de C.V. (collectively, “Benchmark”) filed
this action seeking recovery from Cree, Inc. (“Cree”) for money
allegedly owed in connection with installing Cree’s lightbulbs
into various products. (Doc. 1.) Cree counterclaimed for
recovery, or offset, for component parts it contends Benchmark
either damaged during the manufacturing process or has failed to
return. (Doc. 8.)
The parties filed cross motions for summary judgment, and
Chief Judge Thomas D. Schroeder granted in part and denied in
part each of the parties’ motions in a Memorandum Opinion and
Order signed January 18, 2018. Benchmark Elecs., Inc. v. Cree,
Inc., 1:16-cv-529, 2018 WL 472819, at *14 (M.D.N.C. Jan. 18,
2018). Summary judgment was granted in favor of Benchmark on its
breach of contract claim, and Benchmark’s unjust enrichment
claim was dismissed. Id. at *9, *14. It was ordered that
Benchmark recover from Cree “(1) $587,229.06 in unpaid invoices
plus interest; (2) $286,371.44 for excess and obsolete
components plus interest; and (3) $457,105.38 for excess amounts
paid for consigned components plus interest, with interest on
these sums accruing from the date the complaint was filed,
May 25, 2016.” Id. at *14. Summary judgment was also granted in
favor of Benchmark on Cree’s claim under North Carolina’s Unfair
and Deceptive Trade Practices Act and granted in part in favor
of Benchmark on Cree’s conversion claim. Id.
The parties submitted pre-trial briefs and proposed
findings of fact and conclusions of law. (Docs. 40-43.) On
January 24, 2018, Cree’s remaining counterclaims proceeded to a
bench trial: breach of contract, breach of the covenant of good
faith and fair dealing, unjust enrichment (in the alternative),
and conversion as to a subset of the lightbulbs. Cree presented
one live witness: David James Power, a senior director of
engineering at Cree in the lighting division. Cree also
presented one witness by deposition: Douglas Ray Stevens, then-
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director of operations for consumer lighting for Cree. 1 Benchmark
presented one live witness: Calvin Lane Clemons, group president
of Benchmark during the dispute.
Cree seeks to recover $2,793,747.50, which it contends
represents the cost of (1) 1,607,518 XT-E LED bulbs and
4,394,757 XB-G LED bulbs Benchmark allegedly scrapped in excess
of the parties’ alleged half a percent scrap allowance, and (2)
395,022 XT-E LEDs Benchmark allegedly retained following the
conclusion of the parties’ relationship. (Cree’s Answer &
Countercls. (Doc. 8) ¶¶ 42, 50, 57-64.) 2 Cree seeks $0.5684 for
each XT-E LED bulb and $0.3767 for each XB-G LED bulb. (Id.
¶¶ 55-56.)
At the close of Cree’s case-in-chief, Benchmark moved for
judgment pursuant to Rule 52(c) of the Federal Rules of Civil
Procedure, on the grounds that Cree had failed to show by a
preponderance of the evidence that a half a percent contractual
agreement existed as to scrap rate; that Cree had failed to
1
The parties consented to a de bene esse deposition of
Stevens, which took place on January 4, 2018. A hard copy of
this deposition was provided to the court on January 24, 2018.
2
Cree originally sought “not less than $2,868,921” in its
counterclaim, including $299,703 for alleged conversion of
395,022 XT-E LEDs and 199,558 XB-G LEDs. (Cree’s Answer &
Countercls. (Doc. 8) ¶¶ 50, 64, 84.) As summary judgment was
entered against Cree as to the XB-G LEDs, the dollar amount Cree
seeks has been adjusted to remove the proposed value of this
claim.
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prove its damages to a reasonable degree of certainty,
specifically as to Cree’s failure to quantify the amount of LED
scrap “forgiven” in excess of the alleged half a percent rate;
and that Cree had failed to prove its conversion claim. This
court took the motion under advisement. At the close of
evidence, Benchmark renewed its motion for judgment on partial
findings and Cree also moved for judgment on partial findings.
The case is now ripe for decision, and this court issues
the following Findings of Fact and Conclusions of Law pursuant
to Rule 52(a) of the Federal Rules of Civil Procedure. For the
reasons set forth herein, this court finds that judgment should
be entered in favor of Benchmark and Cree’s claims should be
dismissed with prejudice.
I.
FINDINGS OF FACT
This court enters the following findings of fact based on
an evaluation of all of the evidence in the record, including
the credibility of witnesses, and the inferences that the court
has found reasonable to be drawn therefrom. 3
1.
Cree, Inc., is a North Carolina corporation with its
principal place of business in Durham, North Carolina. Cree is
3
To the extent any findings of fact constitute conclusions
of law, or any conclusions of law constitute findings of fact,
they are adopted as such.
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an original equipment manufacturer of light-emitting diode
(“LED”) lamps and components used in the manufacture of lighting
products.
2.
Benchmark Electronics, Inc., is a contract
manufacturer and Texas corporation with its principal place of
business in Angleton, Texas. Benchmark Electronics de Mexico,
S. de R.L. de C.V. is a Mexico corporation and wholly-owned
subsidiary of Benchmark Electronics, Inc.
3.
The “Bengal Project” is a Cree line of finished lamp
products. One component of the Bengal Project is an LED board,
which is a metal board that is then mounted with ten or twenty
LED bulbs. The LED board plus components (that is, plus the
installed LEDs) is called a printed circuit board assembly
(“PCBA”). 4
4.
On June 5, 2012, Cree e-mailed a Request for Quote
(“RFQ”) to Benchmark seeking an estimate for producing PCBAs.
(Cree Ex. 4.) 5 The e-mail included a line labeled, “Yield,”
followed by a bullet point “LED Board — 99.9%.” The RFQ does not
specify a maximum allowable rate of scrap or rate of loss or
4
Benchmark also manufactured driver boards, another
component of the Bengal Project, for Cree. The driver boards are
not part of this dispute.
5
All exhibits were admitted during the trial in hard copy
form, with the exception of certain electronic exhibits that
were provided on thumb drives.
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destruction for consigned LED bulbs. (Cree Ex. 4; Clemons Test.
Jan 25, 2018; Power Test. Jan 25, 2018.) 6
5.
“Scrap” is waste generated during the manufacturing
process. “Attrition” is part of scrap; that is, attrition means
components that are not placed correctly or are damaged during
rework or otherwise rendered unusable. (Stevens Dep. 33:2334:21.) Cree representatives also used the term “attrition” at
times in a way that did not refer to scrap at all. For example,
in creating particular LED combinations, attrition referred to
extra usable LEDs rather than unusable LEDs. (Cree Ex. 20; Power
Test. Jan. 24, 2018.)
6.
“Yield” measures how much of something is produced
from what is inputted and is a term that can be used to measure
several different processes throughout the manufacturing
process. The term can refer to multiple measures, for example:
first-pass, second-pass, first-pass after rework. (Stevens Dep.
39:2-40:1.)
6
Stevens asserted in his deposition that the scrap rate
throughout Benchmark’s entire manufacturing process would have
to be lower than a tenth of a percent in order to achieve the
99.9% yield listed in the RFQ. (See Stevens Dep. 46:8-16.) Along
those lines, 100% yield would generate 0% scrap. This view is
contradicted by Power’s testimony, (see Power Test. Jan. 25,
2018), and by Stevens’ own testimony that yield and scrap are
“not directly tied to each other,” (see Stevens Dep. 167:4-20).
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7.
“Rework” can have at least two meanings: (1) adjusting
a good during various stages of the production process so that
it passes through all the manufacturer’s various testing states
and (2) returning goods that have been shipped from the contract
manufacturer to the customer back to the contract manufacturer
to fix some problem. (Stevens Dep. 30:10-23.) Rework produces at
least some scrap.
8.
On June 12, 2012, Benchmark responded to the RFQ for
the LED board, providing a per-unit price for completed LED
boards. (Cree Ex. 7.) Benchmark used an internal quote model to
develop pricing for Cree that included a zero cost for the LEDs.
(See Benchmark Ex. 135, Tab LEA0635 Costed BOM (spreadsheet
located on thumb drive, Benchmark Ex. 214); Clemons Test.
Jan. 25, 2018.) Benchmark’s proposal included a line item for
“Scrap (and Other MOH),” which calculated the cost that
Benchmark would charge Cree for scrapped components as well as
the cost of material overhead (“MOH”). 7 Benchmark used a “[v]alue
of $0.15 per Cree consigned LED . . . for MOH calculations on
the LED Board.” (Cree Ex. 7 at 12, 14.) Cree had communicated to
Benchmark a “high volume price” of $0.15 per LED. (Cree Ex. 6.)
7
MOH is the cost “associated with the ordering, receiving,
inspection, and kitting of the LED’s [sic] required for
production.” (Cree Ex. 7 at 14; see also Stevens Dep. 55:2156:2.)
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9.
Cree awarded the Bengal Project to Benchmark.
10.
In August 2012, Cree reduced the value per LED from
$0.15 each to $0.10 each, with an “extended” cost of zero. (See
Benchmark Ex. 8; Cree Ex. 124 (describing the value as an
“inventory value”).) This price factored into Benchmark’s Bill
of Materials (“BOM”) 8 to determine how much Benchmark would
charge Cree for each completed assembly.
11.
In April 2013, Clemons e-mailed Stevens:
I need to model the target LED attrition cost for my
P&L analysis. At one time, I thought each LED was
$0.10, but now I am seeing freight value invoices in
the $0.75-$0.83 range if I am reading correctly.
Please advise what unit cost I should plug in for each
LED.
(Cree Ex. 124.) Stevens replied: “LED cost should remain $0.10
each for inventory value.” (Id.) Aside from the initial $0.15
that was adjusted in August 2012, there is no evidence of a
costed BOM showing an LED price in excess of $0.10. This
communication between Stevens and Clemons illustrates certain
diverging understandings the parties held during the course of
their relationship. Stevens seemed to understand the ten cent
cost of the LEDs to have been a minimal charge by Benchmark to
Cree for handling of the LEDs. Benchmark seems to have
understood the ten cent charge to have been Cree’s cost or value
8
The BOM is analogous to a list of ingredients in a recipe
for making the finished good, in this case, a light bulb.
-8-
of the LEDs. Nevertheless, because Benchmark never paid Cree for
consigned LEDS, and Cree never sought payment or a credit toward
the ten cent LED cost, Benchmark’s unilateral misunderstanding
does not change the agreement as understood by Cree and
reflected in the parties’ performance: the $0.10 was a fee Cree
approved for Benchmark’s handling and storage of the LEDs (an
“inventory value”).
12.
At some point before the start of production, at least
one meeting to discuss the Bengal Project was held in
Guadalajara, Mexico, between senior members of the Benchmark and
Cree teams. (See Stevens Dep. 61:21-62:12; Clemons Test.
Jan. 25, 2018; Power Test. Jan. 24, 2018.) Both of Cree’s
witnesses contended a half a percent scrap rate was discussed at
this meeting, and Stevens also contended that Benchmark
representatives agreed it could achieve a half a percent scrap
rate. (See Stevens Dep. 61:21-62:4, 63:4-22; Power Test.
Jan. 24, 2018.) Benchmark’s witness denies discussion of a
mandatory scrap rate above which Benchmark would be responsible
for reimbursing Cree. (Clemons Test. Jan. 25, 2018.) No
documentation from this meeting has been introduced.
13.
The parties and their legal teams exchanged drafts of
a Contract Manufacturing Agreement (“CMA”) (also known as a
Master Supply Agreement or “MSA”). Two drafts of the CMA were
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introduced, both sent from Benchmark to Cree: one from June 29,
2012, (Cree Ex. 183), and one from September 20, 2012,
(Benchmark Ex. 52). Benchmark’s September 2012 draft includes
the CMA and four exhibits, including an Exhibit B Materials
Consignment Agreement. (Benchmark Ex. 52.) Paragraph 20 of the
draft CMA states:
Notwithstanding anything herein to the contrary, Cree
shall retain all right, title and ownership to the
Consigned Materials at all times. Cree will bear the
risk of loss to the Consigned Materials, provided,
however that Contract Manufacturer shall be
responsible for and shall indemnify, defend, and hold
Cree harmless from and against any loss, damage or
theft of Consigned Materials due to Contract
Manufacture’s negligence, willful misconduct, or
failure to perform its obligations.
(Id. ¶ 20.1.) Exhibit B, labeled “NOTE: need to review[,]”
allocates the risk of loss between the parties differently
for materials in the contract manufacturer’s possession:
Contract Manufacturer shall be responsible for
any loss, damage or theft of Consigned Materials for
any reason while in Contract Manufacturer’s
possession; provided that Contract Manufacturer shall
not be responsible for actual defective or nonconforming Consigned Materials if Contract
Manufacturer accounts to Cree for such Consigned
Materials and follows Cree’s instructions for return
or disposal thereof.
(Id. Ex. B ¶ 4.) Consigned materials means:
materials that are owned by Cree and consigned by Cree
to Contract Manufacturer pursuant to the Materials
Consignment Agreement, which materials are to only be
incorporated into Products and/or packaging of such
Products as part of the Contract Manufacturing
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Services performed by the Contract Manufacturer or
otherwise used by the Contract Manufacturer in
connection with the Services.
(Benchmark Ex. 52 ¶ 1.6.)
The draft states that the contract
manufacturer is responsible for maintaining complete and
accurate records of consigned materials. (Id. Ex. B ¶ 2(e).) The
drafts do not include a maximum allowable scrap rate. (See
Benchmark Ex. 52; Cree Ex. 183.)
14.
In spite of the draft CMAs and some limited
discussion, a CMA was never signed, (see Stevens Dep. 67:2369:3, 187:13-188:3; Clemons Test. Jan. 25, 2018), nor was there
any agreement reached between the parties with respect to the
provisions of the CMA. Instead, the parties began their
manufacturing venture based on their oral discussions. On
September 13, 2012, only a week before Benchmark’s last known
draft CMA was sent to Cree, Stevens informed Benchmark that “I
met with legal yesterday and reviewed the objectives & timeline.
Cree [employs] an outside counsel for MSA type agreements, as
such, the plan is to met [sic] with them today. After that I am
sure there will be a number of sessions and red-lined documents
moving back & forth between us.” (Benchmark Ex. 51.) The draft
CMAs are of no significant factual relevance except as described
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hereafter with respect to practices or industry standards. 9 As
Stevens admitted, although generally a Cree agreement will
“cover the same areas,” each agreement “will be uniquely revised
in small ways depending on the contract manufacturer’s desire.”
(See Stevens Dep. 69:13-22.)
15.
In or about November 2012, Benchmark began
manufacturing driver boards and LED boards for Cree. (See id. at
63:23-64:5; Power Test. Jan. 25, 2018.)
16.
In December 2012, Benchmark and Cree executed a Letter
of Authorization (“LOA”). (Cree Ex. 182.) This written agreement
“gave Benchmark authorization and Cree responsibility for
materials purchased by Benchmark to support [Cree’s] forecasts.”
(Stevens Dep. 65:9-66:9.) The LOA stated that “[i]f the parties
do not execute an [sic] CMA within one (1) year of the date of
final execution of this LOA, then Benchmark has the right to
invoice Customer for all Components purchased pursuant to this
LOA, whether or not they are Excess and/or Obsolete Components.”
(Cree Ex. 182.) The LOA stated that “[t]he parties are currently
in the process of discussing and negotiating a Contract
Manufacturing Agreement (“CMA”) that will supersede this Letter
9
Typical or standard industry practices with regard to
scrap rates and yield targets are a disputed subject in this
litigation and are addressed as relevant in the court’s legal
analysis.
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of Authorization (“LOA”).” (Id.) Nothing in the LOA relates to
consigned LEDs, and the LOA does not provide a maximum scrap
rate. (See Stevens Dep. 66:22-67:1; Power Test. Jan. 26, 2018.)
The LOA is the only formal written agreement between the parties
and was renewed “a couple of times.” (See Stevens Dep. 67:2-8.)
17.
Cree provided LED bulbs to Benchmark under a
consignment arrangement. (See id. at 57:25-58:3.) As the parties
used the term, consignment simply meant that title to the LEDs
never passed from Cree to Benchmark. 10 Under the arrangement,
10
A “consignment” under North Carolina law ordinarily
creates certain duties between parties. See Wilson v. Burch
Farms, Inc., 176 N.C. App. 629, 641, 627 S.E.2d 249, 259 (2006)
(“A consignment exists where [a] consignor leaves his property
with a consignee who is ‘substantially engaged in selling the
goods of others,’ and will work to sell the goods on behalf of
the consignor. . . . While the consignee may or may not receive
the specific property of the consignment back, depending on if
it is sold, [North Carolina courts have] recognized that a
consignment creates a bailment between the parties.”).
Here, Benchmark did not receive LEDs for the purpose of a
future sale on Cree’s behalf. Rather, Cree authorized Benchmark
to order LEDs and other components to process into completed
assemblies and return to Cree, and Cree agreed to pay Benchmark
for these components. (See Cree Ex. 182.) A $0.10 charge per LED
was contemplated by the parties. (See Benchmark Ex. 8; Cree Ex.
124.) While the parties’ understanding of the meaning of this
$0.10 charge seemed to diverge somewhat, see supra, the express
agreement and communications between the parties show that
neither party intended this relationship to be one of
“consignment” as described above.
This conclusion is bolstered by Article 9 of the Uniform
Commercial Code (“UCC”), which governs secured transactions and
defines consignment as “a transaction, regardless of its form,
in which a person delivers goods to a merchant for the purpose
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Cree supplied LEDs “at zero cost to Benchmark.” (See id. at
58:4-59:3.) Cree produced the LEDs and transferred them to
Benchmark’s Mexico facility at Cree’s cost, which meant the LEDs
were “free on board with Cree bearing all the costs.” (See id.
at 59:4-14.) Cree preferred this arrangement because (1) Cree
did not want to share with a third party its cost to make LEDS,
information Cree considered proprietary, and (2) consignment
removed the burden on Benchmark of having to manage a cash flow
to get the LEDs, which Cree hoped would optimize the price Cree
paid for the finished product. (Power Test. Jan. 24, 2018.)
Stevens testified that “once we established that we were going
to provide consigned materials at no cost, [Clemons] felt free
to give a much more aggressive quote to Cree because he . . .
wasn’t going to have a financial carrying cost for buying LEDs.”
(Stevens Dep. 61:15-19.)
of sale[,]” subject to several exceptions not relevant here.
N.C. Gen. Stat. § 25-9-102(a)(20) (emphasis added). When the
party receiving goods processes them into a finished product,
whether the goods received are “for the purpose of sale” depends
on the ultimate destination of the goods. Courts have drawn a
distinction between component goods that are processed and
“returned to the owner and not sold to a third person” and those
that are “processed and then sold by the processor to persons to
be selected by him.” See In re Georgetown Steel Co., LLC, 318
B.R. 352, 357–58 (Bankr. D.S.C. 2004) (citing cases) (citation
omitted). In the former case, as here, the transaction is not a
“consignment” as contemplated by the UCC.
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18.
In April 2013, a Cree product engineer requested
Benchmark to provide a weekly Fault Rate Analysis (“FRA”) report
and LED Scrap report. (Cree Ex. 185; Power Test. Jan. 24, 2018.)
This request included two Microsoft Excel attachments: a
document titled FRA report Benchmark and a document titled LED
Scrap Benchmarck [sic]. The e-mail states that “[f]or any yield
below 99.5%, we would need a 1st level paretos and a corrective
action to be listed on the action log . . . .” (Cree Ex. 185.)
19.
An FRA looks for deviations from an expected yield
target and works to identify ways to put the yield back on
track. (Power Test. Jan. 24, 2018.) The report’s “Yields” tab
included three sections with conditional formatting that turned
the cells a certain color based on the percentage in the cell.
(Cree Ex. 185, CREE_00146891 (spreadsheet located on thumb
drive, Cree Ex. 212).) In weeks 18 through 21, a cell value of
more than 0.98 resulted in green; a cell value greater than or
equal to 0.9 resulted in yellow; a cell value less than 0.9
resulted in red; and a cell value of 0 resulted in black. In
weeks 22 through 42, a cell value greater than or equal to 0.995
resulted in green; a cell value greater than or equal to 0.9
resulted in yellow, and a cell value less than 0.9999 resulted
in red.
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20.
The LED Scrap report or “stoplight report” also used
conditional formatting and calculated a total scrap percentage
on a weekly basis. (Cree Ex. 185, CREE_00146892 (spreadsheet
located on thumb drive, Cree Ex. 212).) Red indicated a
significant departure from an expected target. (Power Test.
Jan. 24, 2018.) Yellow indicated that the percentage was close
to achieving the target. (Id.) Green indicated success in
achieving the target. (Id.) A cell value less than or equal to
0.005 resulted in green; a cell value greater than 0.005
resulted in yellow, and a cell value greater than or equal to
0.015 resulted in red. (Cree Ex. 185, CREE_00146892 (spreadsheet
located on thumb drive, Cree Ex. 212).) On the second tab of the
stoplight report, several column labels described various types
of LED scrap that was generated through the manufacturing
process. For example, Column C described scrap generated from
the surface mount assembly process, which was the technique used
to place LEDs on the LED board. (Power Test. Jan. 24, 2018.)
Column I includes a “% Waste Goal” of 0.500% for each week.
(Cree Ex. 185, CREE_00146892 (spreadsheet located on thumb
drive, Cree Ex. 212).)
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21.
It is unclear how often the FRA report and LED Scrap
report were created and shared between the parties, 11 but this
reporting makes sense in light of the manufacturing process
Benchmark undertook for Cree. LED bulbs are small, roughly the
size of a pencil eraser, and delivered on a tape, which is wound
on a spool. The LED bulbs are situated on the tape in a single
line roughly two inches apart. As part of Benchmark’s
manufacturing process, some form of picker removed a bulb or
bulbs from the tape and placed them in a predetermined pattern
on an LED board. A number of variables affected the amount of
scrap bulbs generated in this process. These variables include
the adhesiveness of the bulb to the tape, which could result in
the bulb failing to be properly picked, or failure of the picker
to successfully pick and place the bulb, and it appears from the
evidence that both Cree and Benchmark were aware of the
potential for the generation of scrap during the manufacturing
process. (See, e.g., Cree Ex. 153; Benchmark Exs. 17, 18, 122.)
22.
Cree was actively involved in working with Benchmark
to address manufacturing issues that arose over the course of
the relationship with respect to the LEDs. However, there was
11
Two internal Cree emails showing evidence of similar
types of meetings or reporting appear to have been reviewed with
attachments during Stevens’ deposition, (Cree’s Exs. 186-87),
but the court notes that only the emails and not the attached
spreadsheets were submitted by Cree.
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also some uncertainty as to who was at fault for generating
scrap. 12 At certain times during the course of the relationship,
Cree sent Benchmark non-conforming goods that caused Benchmark’s
reported scrap rate to be higher than half a percent. For
example, in some instances, Cree may have been responsible as a
result of changes to the packaging material used to hold the
LEDs to the tape. (See, e.g., Benchmark Exs. 17-18 (noting that
3.5% of LEDs were not being picked and placed correctly in early
2013); Power Test. Jan. 25, 2018.) In some instances, Benchmark
was responsible as a result of problems with picking and
placement due to, for example, issues stemming from the
temperature and humidity of Benchmark’s manufacturing facility.
(See, e.g., Cree Ex. 153; Power Test. Jan. 24, 2018.) Because
the Bengal Project was a new product introduction, this court
finds that Cree had certain goals with respect to scrap
generation, but neither Cree nor Benchmark had sufficient
experience with this particular project to know what may be
12
It should be noted that the parties’ definitions of scrap
diverged somewhat. Cree representatives testified that scrap
includes material that becomes unusable during the manufacturing
process, but does not include non-conforming goods. (Stevens
Dep. 29:13-30:4; Power Test. Jan. 24, 2018.) Benchmark’s
representative testified that scrap could be board level, where
a whole finished good is unusable, or component level, where
defective parts had to be replaced or components were otherwise
rendered unusable during the manufacturing process. (Clemons
Test. Jan. 25, 2018.) In light of this court’s ultimate
conclusion, the distinction is not consequential.
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reasonable, nor, in reality what factors may have caused the
generation of scrap or which company might be responsible for
that scrap. Manufacturing issues arose throughout the
relationship that affected scrap rates to varying degrees. (See,
e.g., Benchmark Exs. 17-18; Benchmark Ex. 44 (introduction of a
new LED height in September 2013); Benchmark Ex. 48 (discussing
out-of-specification material during a July 2014 LED transition
period); Benchmark Ex. 122 (discussing attrition due to various
issues in early 2013); Cree Ex. 153; Power Test. Jan. 25, 2018.)
Additionally, an LED transition in 2013 was “messier than
expected” and required optimization with new tooling and
software which increased scrap and rework for a period. (See
Benchmark Ex. 34; Clemons Test. Jan. 25, 2018.)
23.
It remains unclear how much scrap was due to Cree
sending non-conforming goods and how much scrap was due to
Benchmark’s manufacturing processes. (See Stevens Dep. 261:24262:9.) What is clear, and this court so finds, is that although
there were times when Benchmark’s scrap rate exceeded a half a
percent, the subject was never raised as a breach of contract
issue. Instead, the discussions were directed toward an effort
to identify and resolve the issue. 13
13
This court finds these facts suggestive that the scrap
rate was a target rather than a contractual limit which would
support a claim for breach of contract.
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24.
In May 2013, Benchmark provided Cree with an XT-E LED
reconciliation. (Cree Ex. 39.) The XT-E LEDs were being
reconciled because: one, Cree’s finance department had tasked
the team to start undertaking a monthly reconciliation of
consigned materials, and two, the Bengal project was
transitioning away from using XT-E LEDs. (See Stevens Dep.
107:7-108:7.) 14 Benchmark’s presentation to Cree included a table
titled “Delta Brake [sic] down.” (Cree Ex. 39.) This
presentation, which was presented by Benchmark to Cree in a
meeting, is the first appearance in the record of Benchmark
using the term “delta” in its reporting to Cree. The delta
breakdown included several line items relating to the XT-E
program accounting for 1,742,087 XT-E LED bulbs that were sent
to Benchmark and that, for various reasons relating to start-up
and production issues, were not returned to Cree on a finished
LED board. (See id.; Stevens Dep. 109:6-111:16; Clemons Test.
Jan. 25, 2018.) Another table in the presentation shows the
1,742,087 delta number plus two other rows:
DELTA
Attrition
Delta
6.01%
2.00%
4.00%
14
2,468,827
726,740
1,742,087
Cree representatives offered conflicting testimony as to
the reason for the XT-E reconciliation. (See Power Test.
Jan. 24, 2018.) This court finds Stevens’ testimony credible
because Stevens was responsible for business and operational
issues relating to the Bengal Project.
-20-
(Cree Ex. 39.) A 2% flat attrition figure was added, 726,740,
for a final total “DELTA” of 2,468,827.
26.
Cree representatives understood the issues in the
delta breakdown to be closed items, that is, to be resolved as
of the date of the email. (Stevens Dep. 111:17-23; Power Test.
Jan. 24, 2018.) Benchmark’s representative thought Cree
understood and accepted the 1.7 million scrap XT-Es. (Clemons
Test. Jan. 25, 2018.)
27.
Around the May 2013 timeframe, the Bengal Project
transitioned from XT-E LEDs to XB-E and XB-G LEDs. 15
28.
Starting in June 2013, Benchmark began providing Cree
weekly LED inventory reconciliation reports. (See, e.g., Cree
Ex. 209.) The first report, sent June 7, 2013, and internally
dated 06-03-13, includes a delta of 1,591,671. The delta formula
in the report is: total receipts of XT-E LEDs, minus on-hand,
minus LEDs in WIP, 16 minus shipments. (See Cree Ex. 209
(spreadsheet located on thumb drive, Cree Ex. 212); Stevens Dep.
119:8-15.)
15
XT-E LEDs are a different shape than XB-G and XB-E LEDs.
XB-G and XB-E LEDs are identical from a product standpoint.
(Power Test. Jan. 24, 2018.) Only XT-E and XB-G LEDs are at
issue in this case.
16
“WIP” means materials that have been pulled from the
warehouse and handed off to the production team but not yet
processed into the finished good. (See Stevens Dep. 116:23117:23.)
-21-
29.
The term delta does not have a standard meaning in
contract manufacturing. (See Stevens Dep. 108:22-24; Power Test.
Jan. 24, 2018.)
30.
Stevens testified that he was told this delta number
represents the amount of LEDs that could not be
accurately identified for this report. They could be - by Benchmark’s definition to me, they could be
received, but in a loading -- in a receiving location,
but not dedicated to a warehouse yet, so thus not able
to identify part number.
Or they could be inventory that had been pulled
from the warehouse and was being staged for work, so
they were WIP on a production floor. Or it could be
completed work orders, inventory that was remaining
that needed to be backflushed in the system to then be
returned to the warehouse.
(Stevens Dep. 116:4-16.) Stevens did not understand delta in
this context to mean scrap. (See id. at 117:24-118:5, 120:14121:3.) Clemons contends that the use of delta to consist of
rework, attrition, and scrap was defined in the XT-E LED
reconciliation and carried forward to the weekly inventory
reconciliation reports, where scrap in the XB-G and XB-E program
accumulated for similar reasons as it had during the XT-E
program. (Clemons Test. Jan. 26, 2018.) Clemons contends the
delta value was intended to give Cree’s finance team a clear
view of maximum scrap exposure, where some amount of the delta
number may represent useable LEDs that would be returned to the
warehouse. (Id.) After evaluating the credibility of this
-22-
conflicting testimony, this court finds that the parties never
had a mutual, or consistent, understanding of the information
contained in the reports or the conclusions to be reached from
the numbers provided. The parties simply failed to communicate
effectively as to the information that was provided.
Furthermore, this court finds that Clemons intended Benchmark to
provide accurate information to Cree, but his intent was
undermined to some degree by what appear to have been lax
record-keeping practices as to the LEDs by the Benchmark team
within the manufacturing facility. On the other hand, this was a
new project and relationship, and Cree did not effectively
communicate its expectations to Benchmark. As a result, this
court finds generally that disputes between the parties as to
Benchmark’s reporting did not arise from an intent by Benchmark
to mislead Cree, but instead from a failure by the parties to
clearly communicate during the business relationship.
31.
From June 2013 to December 2014, Benchmark sent Cree
LED inventory reconciliation reports, generally on a weekly
-23-
basis. 17 Each report contained a field with a value labeled delta
for “Current LED” (pertaining to the XT-E LEDs that were being
phased out) and a field with a value labeled delta for “New LED”
(pertaining to the XB-G and XB-E LEDs). (Benchmark Ex. 55.) The
delta formula in these reports is the same as in Cree Ex. 209
except inverted: on hand plus LEDs in WIP plus shipments minus
total receipts, resulting in a negative number.
32.
Starting with the September 17, 2013, report,
Benchmark reported an XT-E delta value of negative 1,607,518,
which was consistently reported through the end of Benchmark’s
inventory reconciliation reporting. (Benchmark Ex. 55,
CREE_00277824 (spreadsheet located on thumb drive, Benchmark Ex.
214).)
17
Benchmark and Cree “agreed to [a] weekly LED inventory
report (like used in the LED reconciled process) to be published
on Sunday.” (Benchmark Ex. 41.) This report evolved into a
monthly reconciliation. (See Stevens Dep. 251:18-24.) Stevens
testified that the report discussed in Benchmark Ex. 41 and Cree
Ex. 209 is not the same as the Ex. 55 reports. (See generally
Stevens Dep. 246:18-254:17.) However, a comparison of the two
finds them to be similar in format, except that the report in
Cree Ex. 209 does not include WIP, and both include a delta
number. At least one other Cree employee also requested
inventory reconciliation data, (see Cree Ex. 13), although this
employee was not copied on the weekly inventory reconciliation
reports from Benchmark to Cree.
-24-
33.
Benchmark’s inventory reconciliation reports included
at least two errors with respect to the “New LED” data. 18 First,
there was an error in the 08-26-13 report that caused delta to
be a positive number. (Benchmark Ex. 55, CREE_00267997
(spreadsheet located on thumb drive, Benchmark Ex. 214); Clemons
Test. Jan. 25, 2018.) 19 The next week, delta returned to
negative. (Benchmark Ex. 55, CREE_00268664 (spreadsheet located
on thumb drive, Benchmark Ex. 214).) The delta formula is the
same in both weeks’ reports (On Hand + Total Used LEDs + WIP WO
+ WIP FG – Total Receipts). Second, Clemons testified that
around August 2014, Benchmark returned approximately 900,000
LEDs to Cree, which erroneously recorded as a negative receipt.
(Clemons Test. Jan. 26, 2018.) The error corresponds to the
“Receipts” table in the weekly report and caused the total delta
18
Rather than an intentional misrepresentation on the part
of Benchmark, this court finds that these errors are the result
of lax accounting practices and a failure of both parties to
communicate and reach a mutual understanding as to the items
included in the report. At all times throughout the
relationship, Cree knew how many LEDs were provided to Benchmark
and how many LEDs were returned on completed boards. (See, e.g.,
Stevens Dep. 118:14-16 (“We understood what we shipped in. We
understood what Benchmark shipped out.”).)
19
Clemons did not prepare the reports himself and is not
copied on the emails Benchmark sent to Cree providing the
reports but testified that part of his management responsibility
was watching the reports. (Clemons Test. Jan. 26, 2018.)
-25-
number to be misreported for several months until the error was
discovered in the final LED reconciliation in early 2015. (Id.)
34.
The delta value on the XB-G and XB-E side of the
inventory reconciliation report also fluctuated, at times
dramatically. For example, the February 2, 2014, report’s delta
was positive 1,101,414. (Benchmark Ex. 55, CREE_00311389
(spreadsheet located on thumb drive, Benchmark Ex. 214).) The
next week, delta was negative 1,003,580. (Benchmark Ex. 55,
CREE_00311715 (spreadsheet located on thumb drive, Benchmark Ex.
214).) The formula used to create delta was consistent across
these two weeks.
35.
In March 2014, a new table appeared in the LED
inventory reconciliation reports titled Scrap, and later, Scrap
History. (Benchmark Ex. 55, CREE_00319476 (spreadsheet located
on thumb drive, Benchmark Ex. 214); Benchmark Ex. 55,
CREE_00377860 (spreadsheet located on thumb drive, Benchmark Ex.
214).) Clemons testified that this table represented finished
goods scrap. (Clemons Test. Jan, 26, 2018.) Each board was
multiplied by the total number of LEDs on the board (either ten
or twenty) to get the total number of scrapped LEDs for that
segment of the waste. Cree representatives had conflicting
understandings of the meaning of this table: Power understood
these to be LED assemblies that had been scrapped, but Stevens
-26-
thought the table referred to LEDs scrapped for any reason, not
just at the LED-assembly level. (See Power Test. Jan. 24, 2018;
Stevens Dep. 222:1-223:17.)
36.
The final inventory reconciliation report provided in
the same reporting format from Benchmark to Cree was dated
December 29, 2014, and contained a delta of negative 3,552,188.
(Benchmark Ex. 55, CREE_00381646 (spreadsheet located on thumb
drive, Benchmark Ex. 214).)
37.
Benchmark showed ability to track exact numbers of LED
waste to a certain extent, (see, e.g., Benchmark Ex. 38), but
also used somewhat lax and clearly unusual methods of accounting
for scrapped LEDs, (see, e.g., Cree Ex. 156). In one instance in
February 2014, Benchmark’s program manager notified Cree that
Benchmark had two “huge bins” of LEDs that had been lost due to
attrition, vacuumed, and suggested weighing the scrapped LEDs to
determine how many there were. (Cree Ex. 156.) Clemons countered
that Benchmark never weighed components for inventory purposes
but rather the scrapped LEDs in the bins were simply cumulative
scrap components that had generally been reported over time to
Cree. (Clemons Test. Jan. 26, 2018.) However often this practice
occurred, under these circumstances it reasonably caused Cree
concern, but it appears there was still some uncertainty by both
-27-
parties as to how to proceed with and address scrap. 20 Benchmark
also used rounded numbers even in the final LED reconciliation
in 2015. (Cree Ex. 210.) 21
38.
The expense of LED scrap was discussed as well as
measures to reduce the amount of LEDs scrapped and to achieve
scrap rate targets, including a target of a half a percent.
(See, e.g., Cree Ex. 124 (“Once the package issue is resolved
Cree’s [expectation] is the Attrition Rate will move below
20
Regardless of whether there was uncertainty, it does not
appear Cree communicated any concern as to a breach of contract,
further suggesting any scrap rate was a target rather than a
contractual provision.
21
Benchmark objected to Cree Ex. 210’s introduction during
Stevens’ deposition as an incomplete exhibit. Cree Ex. 210 was
introduced in its entirety at the close of Cree’s case-in-chief
without objection.
-28-
[0.5%][.]”); Cree Ex. 185; Power Test. Jan. 24, 2018; Stevens
Dep. 84:25-85:22.) 22
39.
Cree did not invoice Benchmark for LEDs scrapped in
excess of a half a percent scrap rate. (See Stevens Dep. 156:9157:18.) Cree contends that it forgave instances of scrap rates
in excess of the alleged maximum allowable scrap rate in
multiple instances. (Power Test. Jan. 25, 2018.) There is no
evidence that Cree ever communicated to Benchmark that it was
forgiving or waiving Benchmark’s violation of a contractual
obligation.
40.
Cree decided to discontinue the relationship with
Benchmark. As of January 2015, end-of-life volumes were
established and production was ramping down. (See Stevens Dep.
218:14-24.) Although the exact dates are unclear, by May 2015,
22
This court has considered evidence to the contrary. For
example, in an April 2013 email, Power wrote to Stevens he “had
no discussions regarding target attrition.” (Cree Ex. 26.) Power
testified that this email merely referred to adjustments of
preexisting standard target levels of a half a percent. (Power
Test. Jan. 24, 2018.) Additionally, Cree from time to time
optimized LED combinations and sent them to Benchmark to use in
its manufacturing process. The combinations assumed “2%
attrition.” (Cree Exs. 19; 20; 175.) “Attrition” as used in this
context did not mean waste; rather, it meant extra LEDs that
would still be available to be consumed by Benchmark into a
finished good. (Power Test. Jan. 24, 2018.) This court finds
more persuasive other competent evidence in the record,
including emails and the testimony from Benchmark’s own
representative, that shows a half a percent target or goal was
communicated between Benchmark and Cree.
-29-
production had ended and Cree and Benchmark were working on
reconciliations, “looking to have [Cree consigned inventory]
either returned or shipped forward to the next contract
manufacturer.” (Stevens Dep. 125:1-7.)
41.
On May 28, 2015, Stevens wrote to Benchmark’s business
unit director:
We thought that we understood the logic in the meeting
concerning the LED accountability, but upon further
study the following question arises:
If the number reported as total attrition is correct
and cumulative, why/how can it decrease from one day
to the next?
The report may not be acting as we believe.
(Benchmark Ex. 131; Cree Ex. 165.) Clemons emailed the employee
separately:
I think we need to say that the Qty in the Warehouse
could vary week to week based on the RTS Qty’s...and
that could account for the small fluctuations. Is that
the only part of the report that could vary....or
could the Receipt Qty also vary week to week if there
were errors/reversals?
(Cree Ex. 164.) The Benchmark employee then replied to Stevens:
The delta quality would experience variations
depending on how much material was pending to be
returned to the warehouse at the moment the snapshot
was taken from Baan. 23 The reported cumulative trend
would resume the expected upward trend as the
warehouse got caught up with returning materials to
stock.
23
BAAN is Benchmark’s materials management system.
-30-
(Benchmark Ex. 131; Cree Ex. 165.) There is no indication that
anyone at Cree investigated or asked anyone at Benchmark about
delta’s fluctuation prior to this time.
42.
Cree’s position as of June 12, 2015, was that
Benchmark “shall either return the missing LED’s [sic] listed as
“Delta” or compensate Cree for the missing consigned inventory.”
(Cree Ex. 166.) By this point at least, Clemons realized that
Cree expected payment for the scrapped LEDs, stating in an
internal Benchmark e-mail thread later that day: “This is a
potential $1M write off if we cannot convince Cree that they
were getting the correct data all along.” (Cree Ex. 167.)
43.
Benchmark presented an LED reconciliation presentation
dated June 25, 2015, which included examples of production
issues that Benchmark had reported to Cree as well as corrected
reconciliation numbers. (Cree Ex. 210; Clemons Test. Jan. 25,
2018.) The presentation showed an XT-E final reconciliation
number of 1,607,518 and an on-hand number of 395,022. It showed
an XB-G/XB-E final LED number of 4,052,477 and an on-hand number
of 199,598. Clemons worked with internal controllers and used
BAAN inventory records and various data systems to get to this
final reconciliation number of approximately 4 million XB-G/XB-E
LEDs. (Clemons Test. Jan. 26, 2018.) The presentation included
an updated slide, which was not presented to Cree because at
-31-
that time the parties had reached an impasse, noting a “0.8%
attrition agreed to by Cree” for LEDs “dropped in the machines,”
which was adjusted in an updated table to “0.49%.” (Cree Ex.
210; Clemons Test. Jan. 25, 2018.)
44.
Benchmark communicated internally into June and July
2015 in a continued attempt to reconcile the numbers of scrapped
LEDs. (Cree Exs. 167, 171.) In particular, Benchmark’s thencurrent program manager described issues accounting for the
near-finalized delta value, including attrition through two
rework stations, scrapping reels with 300 LEDs or less, and
missing materials in reels. (Cree Ex. 167.) Clemons testified
that scrapping reels with 300 LEDs or less only occurred
periodically at the end of work orders and disputed other parts
of the program manager’s email. (Clemons Test. Jan. 26, 2018.) 24
Clemons inquired into certain practices the program manager had
made in her reporting but never received an answer. (Id.)
24
It appears to this court that Benchmark’s practice of
scrapping reels in certain circumstances was not appropriate,
even if, as Clemons testified, splicing together reels could
raise quality concerns. Nevertheless, in the absence of a
contractual agreement as to scrap rate, see infra II.A, or a
showing that Benchmark understood that it would have to pay for
scrapped LEDs, see infra II.C, this court merely notes that this
practice seems to illustrate yet another failure of the parties
to communicate as to appropriate standards in Benchmark’s
manufacturing process.
-32-
45.
Benchmark returned materials to Cree in March 2014.
The documentation for this material shipment includes two
packing slips, a Benchmark proforma invoice, a Benchmark
shipment instruction, a shipping document associated with the
company “Glen Raven,” and a Benchmark proof of delivery.
(Benchmark Ex. 53.) The proforma invoice, dated March 10, 2014,
is from Benchmark to Cree and contains three descriptive lines,
each with a part number starting with XTEHVW, a Spanish
Description of “Diodo emisor de luz” and an English Description
of “diode.” “Diodo emisor de luz” means “light-emitting diode”
in English. The first line includes 156,554 listed in the
quantity column; the second, 44,952; and the third, 223,626. The
combined quantity of LEDs listed on the proforma invoice totals
425,132, which is more than the 395,022 Cree alleges Benchmark
failed to return. The invoice is labeled with the number
GSJ261024. The Glen Raven document includes a description: the
first line reads 4 Pallets Assemblies 1997 [pounds], and the
second line reads “-Invoice Nos. GSJ261024//GSJ261221//36.” Cree
signed this document in the “Received by Customer” section on
March 13, 2014.
II.
CONCLUSIONS OF LAW AND ANALYSIS
This court has diversity jurisdiction pursuant to 28 U.S.C.
§ 1332. The substantive law of North Carolina applies to the
-33-
claims in this case. Venue is proper pursuant to 28 U.S.C.
§ 1391.
A.
Breach of Contract
This court first considers Cree’s claim that Cree and
Benchmark entered into an enforceable agreement of a half a
percent maximum allowable scrap rate for LED components.
1.
Applicable Law
“The elements of a claim for breach of contract are: (1)
existence of a valid contract; and (2) breach of the terms of
the contract.” B.E.E. Int’l, Ltd. v. Hawes, 381 F. Supp. 2d 488,
493 (M.D.N.C. 2005), aff’d, 202 F. App’x 463 (Fed. Cir. 2006)
(per curiam) (citing Poor v. Hill, 138 N.C. App. 19, 26, 530
S.E.2d 838, 843 (2000)). The parties’ contract is governed by
North Carolina’s version of the Uniform Commercial Code (“UCC”).
Under the UCC, “[a] contract for sale of goods may be made in
any manner sufficient to show agreement, including conduct by
both parties which recognizes the existence of such a contract.”
N.C. Gen. Stat. § 25-2-204(1); see also id. § 25-2-207(3). “Even
though one or more terms are left open a contract for sale does
not fail for indefiniteness if the parties have intended to make
-34-
a contract and there is a reasonably certain basis for giving an
appropriate remedy.” Id. § 25-2-204(3).
At the summary judgment stage, it was determined that
Benchmark and Cree had an enforceable agreement, as evidenced by
the signed and executed LOA, accompanying documents, and the
parties’ course of performance. Benchmark Elecs., Inc., 2018 WL
472819, at *9. It was also determined that the evidence then
before the court created a genuine dispute of material fact as
to whether the parties’ conduct or communications showed that
they entered into an agreement as to a scrap rate allowance and
risk of loss. Id. at *10.
-35-
A court may consider the parties’ course of performance, 25
course of dealing, or a particular usage of trade 26 to supplement
or interpret a prior written agreement. Id. §§ 25-1-303(d),
25-2-202.
[T]he express terms of an agreement and any applicable
course of performance, course of dealing, or usage of
trade must be construed whenever reasonable as
consistent with each other. If such a construction is
unreasonable: (1) Express terms prevail over course of
performance, course of dealing, and usage of trade;
(2) Course of performance prevails over course of
dealing and usage of trade; and (3) Course of dealing
prevails over usage of trade.
Id. § 25-1-303(e). The Fourth Circuit has held that, under North
Carolina law, a “well-established custom” may automatically be
included in an agreement reached between parties. See In re
25
“A ‘course of performance’ is a sequence of conduct
between the parties to a particular transaction that exists if:
(1) The agreement of the parties with respect to the
transaction involves repeated occasions for performance by a
party; and
(2) The other party, with knowledge of the nature of the
performance and opportunity for objection to it, accepts the
performance or acquiesces in it without objection.”
N.C. Gen. Stat. § 25-1-303(a).
26
“A ‘usage of trade’ is any practice or method of dealing
having such regularity of observance in a place, vocation, or
trade as to justify an expectation that it will be observed with
respect to the transaction in question. The existence and scope
of such a usage must be proved as facts. If it is established
that such a usage is embodied in a trade code or similar record,
the interpretation of the record is a question of law.” N.C.
Gen. Stat. § 25-1-303(c).
-36-
Cotton Yarn Antitrust Litig., 505 F.3d 274, 279-80 (4th Cir.
2007) (holding that arbitration is a usage of trade in the
textile industry where the parties’ writings incorporated
industry rules discussing arbitration and “numerous cases”
described arbitration as standard in that industry and thus
inferring that the parties’ oral contracts included an agreement
to arbitrate).
2.
Writings, course of performance, and usage of
Trade
Neither the RFQ nor the response to the RFQ includes a
maximum allowable scrap rate above which Benchmark would be
responsible to pay Cree. Cree’s argument that the “Scrap (and
other MOH)” line item in Benchmark’s RFQ response “allocated to
Cree the risk of a particular maximum scrap rate of LED
components” is unavailing. (Cree’s Proposed Findings of Fact and
Conclusions of Law (Doc. 42) ¶ 27.) While Benchmark charged Cree
a certain amount ($0.15 per LED, which was reduced to $0.10 per
LED) for storage and handling of the LEDs, there is nothing in
the response to the RFQ that purports to limit the scrap rate in
the way that Cree alleges. And the LOA — the only document
executed and signed by both parties — is silent as to a maximum
allowable scrap rate. As Cree has already conceded, the parties
never entered into a written agreement as to maximum allowable
-37-
scrap rate or risk of loss. See, e.g., Benchmark Elecs., Inc.,
2018 WL 472819, at *9.
Lacking a written agreement, this court must determine
whether Cree has proved the existence of such an agreement
through the parties’ oral discussions or through the parties’
conduct or course of performance. Cree contends that yield and
scrap targets are generally discussed at kickoff meetings, and
in fact, that yield and scrap targets were discussed at such a
meeting between senior Cree and Benchmark representatives in
Guadalajara, Mexico. (Power Test. Jan. 24, 2018; Stevens Dep.
61:21-62:4, 63:4-22.) According to Stevens, at this meeting Cree
received a “verbal handshake” from Benchmark that a half a
percent scrap rate could be achieved. (See Stevens Dep. 63:422.) Clemons denies that during the meeting Cree informed him of
a mandatory half a percent scrap rate above which Benchmark
would be responsible for reimbursing Cree. (Clemons Test.
Jan. 25, 2018.)
Cree also points to the June CMA draft, arguing that
Benchmark’s failure to mark up the Materials Consignment
Agreement proves that Benchmark accepted the term allocating
risk of loss to Benchmark for conforming consigned materials in
its possession. (Cree’s Trial Brief (“Cree’s Br.”) (Doc. 43) at
-38-
16; see also Cree Ex. 183, Ex. B ¶ 4.) 27 However, a later draft
is noted with the description “needs to review.” (Benchmark Ex.
52, Ex. B.) Moreover, Cree’s representative expected a number of
drafts to be exchanged before the final document was executed.
And ultimately, a final CMA was never executed. Therefore, this
court declines to heavily credit the contents of these drafts.
Cree also contends that Benchmark’s reporting and its
communications with Benchmark throughout the relationship proves
that the parties agreed to a maximum allowable scrap rate of a
half a percent above which Benchmark would be responsible for
reimbursing Cree. (Cree’s Br. (Doc. 43) at 15-16.) There is
evidence that a target scrap rate of half a percent was
communicated from Cree to Benchmark on several occasions. (See,
e.g., Cree Exs. 124, 185.) Cree contends that when Benchmark
exceeded this allowance several times over the course of the
relationship, it “forgave” the obligation.
Cree may have proved that the parties agreed to a half a
percent scrap rate as a goal or aspiration or even an
expectation, and this court credits the undisputed testimony
that scrap was at least discussed in the parties’ kickoff
27
All citations in this Memorandum Opinion and Order to
documents filed with the court refer to the page numbers located
at the bottom right-hand corner of the documents as they appear
on CM/ECF.
-39-
meeting in Mexico. However, this court concludes, after
evaluating all of the evidence before it, that Cree has not met
its burden of proving that the parties’ conduct or
communications reflected the existence of a contractual
agreement of a half a percent scrap rate above which there would
be a financial liability and that this risk of loss was
allocated to Benchmark. Cree’s own witness characterized the
consignment relationship as supplying LEDs to Benchmark at a
“zero cost.” (See Stevens Dep. 58:4-59:3.) Benchmark obviously
benefited from this “zero cost.” Cree also benefited from the
“zero cost” in the form of a lower quote from Benchmark. (Id. at
61:15-19.) When production issues arose over the course of the
relationship, it was in Cree’s interest to work with Benchmark
because scrap rates rolled into the financial cost model of the
finished product. (Power Test. Jan. 24, 2018.) As Cree’s witness
testified, Cree was incentivized to keep those costs down
because, ultimately, Cree was the one who was going to end up
paying those costs. (Id.) The stoplight report describes the
half a percent as a waste goal. ((Cree Ex. 185, CREE_00146892
(spreadsheet located on thumb drive, Cree Ex. 212).) And Cree
never communicated its “forgiveness” of Benchmark’s alleged
contractual scrap exceedance to Benchmark. This court concludes
that Benchmark would not have understood there to have been any
-40-
forgiveness or waiver as there was never a meeting of the minds
as to a maximum allowable scrap rate in the first instance.
Additionally, Cree has not proven a relevant usage of
trade. Cree’s witnesses provided, at best, conflicting testimony
as to relevant standards in the contract manufacturing industry.
Stevens testified that in working with contract manufacturers,
“we have always had the partnership to understand scrap,” (see
Stevens Dep. 40:8-15), and that scrap is manifested in several
different ways in the price a contract manufacturer like
Benchmark charges a customer like Cree in a contract
manufacturing relationship, (see id. at 41:9-42:10). Cree had
“used half a percent” scrap rate for LED components in other
manufacturing arrangements. (See id. at 42:15-21.) Half a
percent is a standard “target” in contract manufacturing. (See
Power. Test Jan. 24, 2018.) But Power also testified that,
typically, a target attrition rate, if it existed, would be
outlined in the RFQ in the beginning of a project. (Power Test.
Jan 25, 2018.) Here, it was not. And Benchmark’s representative
testified that, in his experience, targeted scrap goals were
frequently discussed during the course of doing business, but
not as related to financial liability. (Clemons Test. Jan. 26,
2018.)
-41-
Moreover, aside from a particular standard scrap goal,
Cree put forward no evidence pertaining to financial liability
for scrapped LEDs in the contract manufacturing industry beyond
its reliance on the draft CMA. However, while “cover[ing] the
same areas,” each CMA is unique based on the “contract
manufacturer’s desire.” (See Stevens Dep. 69:13-22.) Cree’s
representative admitted that Cree never invoiced contract
manufacturers for scrapped LEDs in excess of its alleged rates,
just as it had never invoiced Benchmark during this
relationship. Lacking any evidence of a practice “having such
regularity of observance in a place, vocation, or trade as to
justify an expectation that it will be observed with respect to
the transaction in question,” N.C. Gen. Stat. § 25-1-303(c),
this court declines to automatically impose such a term into the
parties’ agreement. See In re Cotton Yarn Antitrust Litig., 505
F.3d at 279-80.
For these reasons, Cree has not proven the existence of a
contractual agreement of maximum scrap rate and risk of loss,
and as a result, Benchmark cannot be found to have breached
these terms.
B.
Breach of the covenant of good faith and fair dealing
Contracting parties are subject to an implied covenant of
good faith and fair dealing under both the UCC and North
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Carolina common law. See N.C. Gen. Stat. § 25–1–304; Bicycle
Transit Auth., Inc. v. Bell, 314 N.C. 219, 228, 333 S.E.2d 299,
305 (1985). “Because the covenant of good faith and fair dealing
is implied in a contract, however, a claim for breach of that
covenant typically is ‘part and parcel’ of a claim for breach of
contract.” Ada Liss Grp. v. Sara Lee Corp., No. 06CV610, 2010 WL
3910433, at *14 (M.D.N.C. Apr. 27, 2010) (quoting Murray v.
Nationwide Mut. Ins. Co., 123 N.C. App. 1, 19, 472 S.E.2d 358,
368 (1996)). Courts may consider breach of good faith claims
independently in limited situations where there is a special
relationship between the parties. Id.
Here, Cree has put forward no evidence of a special
relationship, and Cree’s breach of contract counterclaim is
coextensive with this claim and will not be treated as a
separate claim. Because Cree’s breach of contract claim fails,
this claim also fails.
C.
Unjust enrichment
Having determined that the parties did not have a
contractual agreement as to scrap rate and risk of loss, this
court must next address Cree’s unjust enrichment claim. This
claim is an alternate theory to Cree’s breach of contract claim
and is predicated on the same facts.
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1.
Applicable Law
In North Carolina, “unjust enrichment ‘is a claim in quasi
contract or contract implied in law’ which arises when a party
‘confers a benefit upon another which is not required by a
contract either express or implied [in fact] or a legal duty
[and] the recipient thereof is . . . unjustly enriched and [is]
required to make restitution therefor.’” Ernst v. N. Am. Co. for
Life & Health Ins., 245 F. Supp. 3d 680, 691 (M.D.N.C. 2017)
(quoting M Series Rebuild, LLC v. Town of Mount Pleasant, 222
N.C. App. 59, 67, 730 S.E.2d 254, 260 (2012)) (alterations in
original). “[T]he mere fact that one party was enriched, even at
the expense of the other, does not bring the doctrine of unjust
enrichment into play. There must be some added ingredients to
invoke the unjust enrichment doctrine.” Crump v. City of
Hickory, 240 N.C. App. 602, 772 S.E.2d 873 (2015) (citation
omitted).
To establish an unjust enrichment claim, a plaintiff must
show that: “(1) plaintiff conferred a measurable benefit to
defendant, (2) defendant knowingly and voluntarily accepted the
benefit, and (3) the benefit was not given gratuitously.” TSC
Research, LLC v. Bayer Chems. Corp., 552 F. Supp. 2d 534, 540
(M.D.N.C. 2008) (citing Booe v. Shadrick, 322 N.C. 567, 570, 369
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S.E.2d 554, 556 (1988)). As part of establishing that the
benefit was not given gratuitously,
the plaintiff must show that it rendered the services
at issue with an expectation of compensation. Britt v.
Britt, 320 N.C. 573, 359 S.E.2d 467, 470 (1987);
Jonson v. Sanders, 260 N.C. 291, 132 S.E.2d 582, 584
(1963). The burden rests upon the plaintiff to “show
circumstances from which it might be inferred that the
services were rendered and received with the mutual
understanding that they were to be paid for . . . .
[S]uch an inference is permissible when a person
knowingly accepts from another services of value, or
. . . under circumstances calculated to put a
reasonable person on notice that the services are not
gratuitous.” Lindley v. Frazier, 231 N.C. 44,
55 S.E.2d 815, 816 (1949).
Metric Constructors, Inc. v. Bank of Tokyo-Mitsubishi, Ltd.,
72 F. App’x 916, 921–22 (4th Cir. 2003) (alterations in
original) (emphasis added). “The expectation of payment must
arise at the time the alleged enrichment was rendered, and not
thereafter.” Volumetrics Med. Imaging, Inc. v. ATL Ultrasound,
Inc., 243 F. Supp. 2d 386, 412 (M.D.N.C. 2003) (citing Twiford
v. Waterfield, 240 N.C. 582, 585, 83 S.E.2d 548, 551 (1954)).
“The law creates a presumption that an expectation of payment
exists unless ‘the services are rendered gratuitously or in
discharge of some obligation.’” Id. (emphasis removed) (quoting
Atl. Coast Line R.R. Co. v. State Highway Comm’n, 268 N.C. 92,
96, 150 S.E.2d 70, 73 (1966)).
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2.
Cree and Benchmark’s understanding with respect
to expectation of payment 28
Cree provided LEDs to Benchmark to incorporate into LED
boards, which benefited Benchmark as a party to the ongoing
business relationship. Benchmark disputes this benefit is
measurable, but such dispute is not dispositive because Cree’s
28
An unjust enrichment claim is subject to a three-year
statute of limitations. See N.C. Gen. Stat. § 1-52(1), (9); see
also Christenbury Eye Ctr., P.A. v. Medflow, Inc., 370 N.C. 1, 7
n.4, 802 S.E.2d 888, 892 n.4 (2017); Doub v. Hauser, 256 N.C.
331, 337, 123 S.E.2d 821, 825 (1962) (“For indefinite and
continuous service, without any definite arrangement as to time
for compensation, payment may be required [as the services are
rendered,]” and therefore the statute continually excludes the
portion of the claim that is beyond the limitation.).
This court finds that Cree did not send Benchmark any XT-E
LEDs after May 2013. The parties agree that the transition from
XT-E to XB-G and XB-E bulbs occurred around May 2013, and
Benchmark’s XT-E LED reconciliation was provided to Cree in May
2013. (See Cree Ex. 39.) Cree filed its answer and counterclaim
on July 26, 2016, (Cree’s Answer & Countercls. (Doc. 8), and
Benchmark answered, asserting an affirmative defense of statute
of limitations, (Benchmark’s Reply to Countercl. (Doc. 11) at
10). Benchmark’s inventory reconciliation reports to Cree,
starting in June 2013, showed 43,389,500 XT-E LEDs in “receipts”
(i.e., received LEDs), and never varied, except to decrease to
43,378,500 in July 2013. (Benchmark Ex. 55, CREE_00247369
(spreadsheet located on thumb drive, Benchmark Ex. 214).) Cree’s
delivery of LEDs occurred more or less continuously throughout
their relationship, see Doub, 256 N.C. at 337, 123 S.E.2d at
825, and so the applicable statute of limitations excludes goods
delivered beyond the three-year limit, that is, the 1,607,518
XT-E LEDs for which Cree seeks recovery.
Nevertheless, Benchmark did not argue this defense at
trial, and in the alternative, this court has analyzed Cree’s
unjust enrichment claim on the merits for XT-E LEDs and finds
that it fails for the same reasons as the claim for XB-G LEDs.
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claim turns on the third element, specifically, what Cree has
proved with respect to the parties’ understanding as to
expectation of payment with respect to scrapped LED bulbs.
Cree contends that it is entitled to recover the value of
the consigned LEDs that Benchmark scrapped in excess of Cree’s
expectations and seeks recovery for 4,394,757 XB-G LED bulbs,
the delta value provided in Benchmark’s BEI Analysis 01-30-15
EOL Meeting 071715 report, (Cree Ex. 191, BEI00000217
(spreadsheet located on thumb drive, Cree Ex. 212)), and
1,607,518 XT-E LEDs, (Benchmark Ex. 55, CREE_00277824
(spreadsheet located on thumb drive, Benchmark Ex. 214)), which
Benchmark reported to Cree starting in September 2013. Benchmark
claims that Cree failed to demonstrate that the parties
understood that the LEDs were provided with the expectation of
payment and that such an expectation existed at the time of the
alleged enrichment.
After carefully reviewing all of the evidence in the
record, this court agrees that Cree has failed to prove that the
LED bulbs were provided to Benchmark with a mutual understanding
that Benchmark was expected to pay for scrapped LEDs, and that
Benchmark has overcome any presumption or inference that such a
payment was expected.
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First, the LOA says nothing about Cree’s right to collect
payment for scrapped LEDs. In fact, the LOA says nothing about
scrapped LEDs at all. Payment for LEDs and other components is
discussed only in terms of Benchmark’s ability to invoice Cree
for components in certain circumstances. (Cree Ex. 182.)
Second, the communications between the parties during the
ongoing relationship, taken as a whole, do not show that the
parties expected Benchmark to pay for LEDs scrapped in excess of
a certain rate as the enrichment occurred.
For Cree’s part, although Cree employees at times knew that
the scrap rate was more than a half a percent, Cree never
invoiced Benchmark for scrapped LEDs throughout the course of
the relationship. (See Stevens Dep. 156:9-14.) Stevens testified
that Cree’s typical practice was not to regularly invoice
contract manufacturers, and Cree did not invoice Benchmark
“[b]ecause we believed that Benchmark week over week was
efforting to hit the .5 percent scrap target, was in many
occasions meeting it, and over the life of the program, had
accomplished it. It wasn’t until the end [of the program] when
we were trying to do the reconciliation of LEDs that we learned
over 4 million LEDs were scrapped in addition to what we thought
was scrapped.” (See id. 156:9-157:18.) This testimony tends to
show that Cree’s expectation of payment did not arise until the
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end of the relationship, not throughout the relationship as
benefits were conferred and LEDs were consumed by Benchmark as
part of its manufacturing process. This expectation is
insufficient, see Volumetrics, 243 F. Supp. 2d at 412, to
support a claim for unjust enrichment.
As to Benchmark’s expectation, notwithstanding Clemons’
testimony that he believed that the total cost of the LEDs was
$0.10 each, 29 Clemons and other Benchmark representatives saw
29
The parties dispute Benchmark’s knowledge of Cree’s cost
to produce LEDs and the value assigned to them by Cree. In
response to what Cree perceived as a new legal theory put forth
by Benchmark centered on LED value, Cree supplemented its pretrial disclosures, (Cree’s Suppl. Pre-Trial Disclosures (Doc.
48)), seeking to introduce what Cree characterized as rebuttal
evidence: witnesses and shipping invoices showing Cree’s
internal transfer costs for LEDs. Benchmark moved to exclude the
shipping invoices under Federal Rules of Civil Procedure
26(e)(1)(A), 26(a)(3)(B), and 37(c)(1). (Benchmark’s Objs. to &
Mot. to Exclude Cree’s Suppl. Pre-Trial Disclosures (Doc. 49);
Benchmark’s Br. in Support of Mot. to Exclude Cree’s Suppl.
Pre-Trial Disclosures (Doc. 50).) During discovery, Benchmark
had served an interrogatory for “All documents and
correspondence that support or relate to the cost and/or price
of the XT-E and XB-G LEDs.” (Decl. of Rebecca K. Lindahl, Ex. 1
(Doc. 52-1 at 8); Decl. of Rebecca K. Lindahl, Ex. 2 (Doc. 52-2
at 6).) Cree objected to this interrogatory and apparently
eventually produced some documents in response, but not these
shipping invoices. At trial, the parties stipulated to the
introduction of an internal Benchmark spreadsheet, showing data
from some of these shipping invoices, to impeach Clemons’
testimony that he never saw a cost other than other than $0.10
associated with the LEDs. (Cree Ex. 213 (spreadsheet located on
thumb drive, Cree Ex. 215).)
This court took the matter under advisement and now finds
that the invoices were clearly responsive to Benchmark’s
interrogatory, are not merely rebuttal evidence, and should have
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been disclosed without objection under Rule 26. Moreover, the
late disclosure violated Rule 26(a)(3)(B) because it occurred
less than thirty days before the originally scheduled trial date
and violated Rule 26(e)(1)(A) because it appears that Cree was
aware of the existence of these invoices and did not supplement
its incomplete response to Benchmark’s interrogatory until it
attempted to put forth this evidence as rebuttal evidence.
“If a party fails to provide information or identify a
witness as required by Rule 26(a) or (e), the party is not
allowed to use that information or witness to supply evidence
. . . at a trial, unless the failure was substantially justified
or is harmless.” Fed. R. Civ. P. 37(c)(1). “[I]n exercising its
broad discretion to determine whether a nondisclosure of
evidence is substantially justified or harmless [under Rule
37(c)(1)], a district court should be guided by the following
factors: (1) the surprise to the party against whom the evidence
would be offered; (2) the ability of that party to cure the
surprise; (3) the extent to which allowing the evidence would
disrupt the trial; (4) the importance of the evidence; and (5)
the nondisclosing party’s explanation for its failure to
disclose the evidence.” S. States Rack & Fixture, Inc. v.
Sherwin-Williams Co., 318 F.3d 592, 597 (4th Cir. 2003).
Under this five-factor analysis, this court finds that the
evidence should be excluded. Benchmark was surprised by this
evidence: while Benchmark had access to at least some of the
information contained in at least some of the shipping invoices,
as evidenced by the spreadsheet used to impeach Clemons, that
information is different in scope and substance than what
appears to be a fairly complete set of Cree shipping invoices
during the timeframe of the relationship. Allowing additional
time for Benchmark to review the several hundred invoices in
order to cure the surprise could potentially have disrupted the
trial, as the trial date was already set and only approximately
two weeks away when this disclosure occurred. Moreover, a
central issue in this case is how to value the LEDs for the
purpose of any damages or restitution awards. Cree chose not to
put forward any evidence in its case in chief to support its
proposed LED values of $0.5684 for XT-E LEDs and $0.3767 for
XB-G LEDs, beyond the very general testimony of its witnesses,
even though such evidence could have supported Cree’s requested
damages. Like in Southern States, that fact that the shipping
invoices were potentially helpful to Cree’s case “also points
out why it should have been disclosed in a timely manner to
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various monetary amounts associated with various types of LEDs
throughout the course of the relationship. (See, e.g., Cree Ex.
6 (Cree communicating a “high volume price” of $0.15 per LED to
Benchmark); Cree Ex. 124 (Clemons inquiring about a freight
value in the $0.75 to $0.83 range and Stevens confirming that
the “LED cost should remain $0.10 each for inventory value”);
Cree Ex. 213, BEI00072101 (internal Benchmark reporting with
“unit pricing” ranging from $0.002222 to $0.71 for LEDs);
Benchmark Ex. 8 ($0.10 each, with an extended cost of zero).)
Despite Benchmark’s misunderstanding of the total value of each
LED, this court finds persuasive Clemons’ testimony that payment
was not expected for scrapped LEDs, which is consistent with the
documents introduced into evidence. Indeed, Benchmark’s first
documented instance of potential expectation of payment for the
LEDs seems to have occurred as the final LED reconciliation was
taking place. (See Cree Ex. 167.) This understanding was
[Benchmark].” 318 F.3d at 599. Finally, Cree’s misunderstanding
of the responsiveness of the documents does not justify its late
disclosure.
Benchmark’s motion will be granted, and thus Cree Ex. 206
will be excluded. However, even if the evidence had been
admitted, no change would result. This evidence would have been
relevant to the court’s determination of damages or restitution
had Cree prevailed on any of its claims. Because Cree fails to
prove its breach of contract or unjust enrichment claim, and
Benchmark has proved its affirmative defense on its conversion
claim, the need to calculate damages or restitution is obviated.
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reasonable given the parties’ discussions concerning the scrap
rate as a target or goal, the fact that the written agreement
between the parties discussed only the way in which Benchmark,
not Cree, would be paid for certain components, and the fact
that Cree never communicated its alleged position as to
financial liability as to either the XT-E or XB-G LEDs until
2015 after manufacturing had ended.
As a result, Cree has failed to prove that both parties
understood that the consigned LEDs were provided to Benchmark
with the expectation of payment, and thus has failed to prove
its prima facie claim of unjust enrichment as to either the XT-E
or XB-G LEDs.
D.
Conversion
The elements of the tort of conversion are: “(1) the
unauthorized assumption and exercise of the right of ownership;
(2) over the goods or personal property; (3) of another; and (4)
to the exclusion of the rights of the true owner.” B.E.E. Int’l,
Ltd., 381 F. Supp. 2d at 493 (citing Peed v. Burleson’s, Inc.,
244 N.C. 437, 439, 94 S.E.2d 351, 353 (1956)). “[W]hen the
defendant lawfully obtains possession or control and then
exercises unauthorized dominion or control over the property,
demand and refusal become necessary elements of the tort.”
Stratton v. Royal Bank of Canada, 211 N.C. App. 78, 83, 712
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S.E.2d 221, 227 (2011) (citations omitted). Proof of the
surrender of the chattel is a complete defense to a conversion
claim. Herring v. Creech, 241 N.C. 233, 237, 84 S.E.2d 886, 889
(1954).
Here, no one disputes that Cree owned the XT-E LED bulbs
and Benchmark lawfully obtained possession of them. Cree alleges
that Benchmark retained and refused to return 395,022 XT-E
bulbs. Benchmark asserts the complete defense of surrender of
the chattel, pointing to documents that it contends prove that
the XT-E bulbs in question were returned to Cree in March 2014.
(Benchmark Ex. 53.) The documents for Benchmark’s shipment
include a proforma invoice with an invoice number of GSJ261024,
dated March 10, 2014, from Benchmark to Cree and containing
three quantities of XT-E LEDs, totaling 425,132. A Benchmark
shipment instruction also dated March 10, 2014, and including a
matching invoice number GSJ261024, notes that one pallet is to
be shipped to Cree. The shipper’s documentation describes four
pallet assemblies that were delivered to Cree, including invoice
GSJ261024, and signed for by Cree on March 13, 2014.
In response, Cree’s witness David Power 30 testified that
Cree was not able to locate the LEDs. (Power Test. Jan. 24,
30
Power stated that Stevens would be the expert in this
area, (see Power Test. Jan. 24, 2018), but Stevens had no
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2018.) He stated that the documents Benchmark provided are not
probative of LED components because they also describe other
types of materials, including LED assembly boards, and LEDs are
not shipped on pallets except where very large quantities are
involved. (Power Test. Jan. 24, 2018.)
Cree did not address Benchmark’s invoice describing 425,132
X-TE LEDs or Cree’s signing of a document with this matching
invoice number accepting delivery of the goods described. Cree
also does not dispute that this shipment, if it did contain
LEDs, would be the LEDs that are generally the subject of its
conversion claim, notwithstanding the fact that the 425,132 X-TE
LEDs listed in the invoice is greater than the 395,022 that are
the subject of its conversion claim.
Benchmark continued to report a value in the XT-E “on hand”
table after March 2014. (See, e.g., Cree Ex. 191, BEI00000217
(spreadsheet located on thumb drive, Cree Ex. 212).) Benchmark
asserts that it froze the report at the end of the XT-E process
in mid-2013 and that when the on-hand LEDs were sent back in
March 2014, Benchmark did not update the report. (Clemons Test.
Jan. 25, 2018.) This court considers this evidence as weighing
against Benchmark’s defense but ultimately credits the shipping
knowledge of whether Cree received XT-E bulbs from Benchmark in
March 2014, (see Stevens Dep. 265:6-21).
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documentation more heavily. Based on all of the evidence
presented, this court concludes that Benchmark has carried its
burden to show that Benchmark returned the XT-E LEDs that Cree
claims Benchmark converted. 31
31
Although neither party addressed this issue in briefing
or at trial, Cree’s conversion claim may also be barred by the
economic loss rule, which provides that “[o]rdinarily, a breach
of contract does not give rise to a tort action by the promisee
against the promisor.” Legacy Data Access, Inc. v. Cadrillion,
LLC, 889 F.3d 158, 164 (4th Cir. 2018) (alteration in original)
(quoting N.C. State Ports Auth. v. Lloyd A. Fry Roofing Co., 294
N.C. 73, 81, 240 S.E.2d 345, 350 (1978)). As the Fourth Circuit
recently outlined, under North Carolina law:
A “tort action must be grounded on a violation of
a duty imposed by operation of law,” not a violation
of a duty arising purely from “the contractual
relationship of the parties.” Thus, a “tort action
does not lie against a party to a contract who simply
fails to properly perform the terms of the contract.”
“It is the law of contract,” not tort law, “which
defines the obligations and remedies of the parties in
such a situation.” Accordingly, “North Carolina law
requires” courts “to limit plaintiffs’ tort claims to
only those claims which are ‘identifiable’ and
distinct from the primary breach of contract claim.”
Id. (citations omitted).
Here, Benchmark gained lawful possession of Cree’s bulbs as
part of the parties’ agreement for Benchmark to manufacture LED
boards for Cree. An obligation to return unused inventory would
stem from that contractual relationship, not from “a duty
imposed by operation of law.” Id. If Benchmark had an
independent legal duty toward the storage of the unused LEDs,
then Benchmark would have been obligated “to exercise ordinary
care to protect the [property] from negligent loss, damage, or
destruction.” Id. at 166 (citation omitted). Nonetheless,
neither party asserted this theory, and this court concludes
that Benchmark has showed in any case that it surrendered the
chattel at issue in Cree’s conversion claim.
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III. CONCLUSION
For the reasons set forth herein, IT IS HEREBY ORDERED that
Cree’s counterclaims for breach of contract (first claim for
relief), breach of the covenant of good faith and fair dealing
(second claim for relief), unjust enrichment (fifth claim for
relief, in the alternative), and conversion as to the XT-E LED
bulbs (fourth claim for relief) are DISMISSED WITH PREJUDICE.
IT IS FURTHER ORDERED that Benchmark’s motion to exclude
(Doc. 49) is GRANTED.
A judgment consistent with this Memorandum Opinion and
Order will be entered contemporaneously herewith.
This the 27th day of June, 2018.
_____________________________________
United States District Judge
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