LANDYA McCAFFERTY, District Judge.
This case arises from a now-defunct business relationship involving Animal Hospital of Nashua, Inc. ("AHN") and a supplier of laboratory services and medical equipment, VCA Cenvet, Inc. ("Antech"). The dispute concerns AHN's dissatisfaction with the quality of certain services and equipment provided to it by Antech, and Antech's unhappiness over AHN's termination of the business relationship. More specifically, the case consists of: (1) AHN's claims against Antech for breach of contract, breach of the covenant of good faith and fair dealing, and unjust enrichment (Counts I, II, and VII of the complaint); (2) AHN's claims against Sound-Elkin ("Sound") under the same three theories (Counts VIII, IX, and XIII); and (3) Antech's counterclaims against AHN and two related corporate entities for breach of contract (Count I of the counterclaim) and breach of the covenant of good faith and fair dealing (Count II), plus Antech's counterclaim for unjust enrichment against the three corporate entities and AHN's president, Dr. Leo Bishop (Count III).
Now before the court are: (1) a motion for partial summary judgment filed by counterclaim defendants (collectively "AHN") in which they asks the court to rule that the damages to which Antech might be entitled on its counterclaims are limited by several provisions in the service agreements that governed the parties' business relationship; (2) Antech's motion to strike certain summary-judgment exhibits; (3) a motion for partial summary judgment filed by Antech and Sound in which they argue that they are entitled to judgment as a matter of law on AHN's claims that the equipment Antech provided was deficient; and (4) AHN's motion for partial summary judgment that Antech is not entitled to damages in the form of lost profits. The parties made oral arguments on all four pending motions on April 10, 2014. The court considers each motion in turn, but begins by addressing the briefing the parties submitted in response to the show-cause order of February 10, 2010, document no. 117.
In its show-cause order, the court expressed concerns arising from the imprecision of the written documents the parties had identified as memorializing the agreement under which they conducted their business relationship. Without belaboring the point, the court is now satisfied that there was, indeed, an enforceable contract between AHN and Antech, as described in the two service agreements in the record.
All three counts of Antech's counterclaim are based upon AHN's decision to walk away from its business relationship with Antech approximately three years into the six-year term of the two service agreements. While the parties agree, as a factual matter, that AHN stopped using Antech's laboratory services and began to use the services of one of Antech's competitors, AHN contends that its actions were a permissible response to Antech's prior breach of the agreement, while Antech disagrees. In any event, in document no. 89, AHN asks the court to rule that in the event Antech prevails on any of its counterclaims, the damages to which it is entitled are limited in a variety of ways. Antech objects. Antech's objection is well taken.
"Summary judgment is appropriate when there is no genuine issue of material fact and the moving party is entitled to judgment as a matter of law."
"The object of summary judgment is to `pierce the boilerplate of the pleadings and assay the parties' proof in order to determine whether trial is actually required.'"
The agreement that underlies the parties' business relationship is memorialized in two documents, each captioned "Service Agreement." Each service agreement required AHN to use Antech as its exclusive provider of laboratory services for six years starting on August 1, 2008, and also required AHN to use and pay for $1.2 million worth of Antech's services over those six years. The agreements further provided that AHN was to receive "pricing consideration" in the form of billing at a rate of "35% off Antech's list fee schedule." AHN's Mem. of Law, Ex. A (doc. no. 89-2), at A033946;
One of the two service agreements (hereinafter "Loan Agreement") includes terms related to a loan made by Antech to AHN as an incentive for AHN to use Antech as its exclusive provider of laboratory services. The Loan Agreement includes the following relevant provisions:
AHN's Mem. of Law, Ex. A (doc. no. 89-2), at A033942-43 (emphasis in the original).
The other service agreement (hereinafter "Equipment Agreement") includes terms related to certain x-ray equipment, manufactured by Sound, with a retail value of approximately $139,000, that Antech provided to AHN, also as an incentive. The Equipment Agreement includes the following provisions:
AHN's Mem. of Law, Ex. B (doc. no. 89-3), at A033948-49 (emphasis in the original).
By letter dated August 4, 2011, Dr. Bishop notified Antech that AHN had "entered into a new, multi-year, strategic agreement with IDEXX Laboratories" to provide the laboratory services it had been getting from Antech. AHN's Mem. of Law, Ex. C (doc. no. 89-4), at 2. By letter dated September 7, 2011, Dr. Bishop transmitted to Antech: (1) a check in the amount of the most recent invoice AHN had received from Antech; and (2) a second check, for $62,500, to cover the amount of the loan it had not yet repaid. Dr. Bishop also indicated that AHN did not intend to purchase the Sound equipment it had been provided by Antech, and asked Antech to make arrangements to retrieve it. Antech has neither cashed AHN's checks nor picked up the equipment. Moreover, Antech appears never to have terminated the service agreements pursuant to the termination provisions included in each of them.
In their initial disclosures, Antech and Sound responded to a question about computation of Antech's damages in the following way:
AHN's Mem. of Law, Ex. D (doc. no. 89-5), at 10.
AHN asks the court to rule that Antech may not recover: (1) lost profits; (2) $306,000 in laboratory-fee discounts; and (3) $139,000 for the equipment. It further asks the court to rule that Antech's remedies are limited to: (1) repayment of the loan balance; (2) return of the Sound equipment; and (3) payment of outstanding invoices. AHN's primary argument is that it is entitled to all of the relief seeks because the two service agreements provide that Antech's remedies are limited to liquidated damages, which would preclude the recovery of lost profits, laboratory-fee discounts, and money damages for the value of the Sound equipment. AHN also makes a separate argument with regard to the laboratory-fee discounts. Antech disagrees, categorically. The court begins with the liquidated-damages issue and then turns to the laboratory-fee discounts.
AHN argues that the Loan Agreement and the Equipment Agreement, taken together, include a provision that limits Antech's recovery to liquidated damages in the form of repayment of the loan, return of the Sound equipment, and payment of outstanding invoices. AHN is mistaken.
To rule upon AHN's liquidated-damages argument, the court must construe the two service agreements, both of which provide that they are to be construed under California law.
One fundamental problem with AHN's argument is its conflation of two different kinds of contractual provisions,
In its memorandum of law, AHN cites
The court's interpretation, in turn, is consistent with the language of the contract as a whole.
In sum, there is nothing in the contractual descriptions of the remedies that AHN calls liquidated damages that would preclude an award of the full range of damages Antech seeks from AHN in this case.
In addition to relying upon its liquidated-damages argument, AHN advances a second basis for a ruling that Antech is not entitled to recover the value of the pricing consideration described in Annex 1 to each of the two agreements. Specifically, AHN argues that: (1) nothing in either agreement indicates that the pricing consideration was intended as an incentive for AHN to enter into its Agreements with Antech; (2) even if pricing consideration was intended as an incentive, Section 3.3 of the Loan Agreement provides that calling the loan was the single remedy intended by the parties as compensation for the loan and associated discounts, in the event of a breach by AHN; and (3) Antech cannot recover the laboratory-fee discount because such a recovery, combined with lost profits going forward from the alleged breach, would put Antech in a better position than it would have occupied if AHN had performed its obligations under the contract. The court agrees with AHN's third argument.
In support of its argument that it is entitled to recover the laboratory-fee discounts it gave AHN, Antech says that "AHN has cited no law — and Antech is aware of none — that would allow AHN to keep the consideration it received from Antech while failing to render the consideration it agreed to provide in exchange." Antech & Sound's Mem. of Law (doc. no. 95-1) 15. But, if Antech recovers the profits it lost as a result of AHN's breach, that will fully compensate Antech for the consideration AHN failed to provide. Allowing Antech to recover both its lost profits and the laboratory-fee discount would overcompensate Antech, allowing it to recover the full consideration that AHN promised it, plus part of the consideration it gave AHN in exchange for AHN's promise to use Antech's laboratory services for six years. In other words, it would not be fair to make AHN give up the discount without also relieving it of the obligation it assumed in exchange for the discount,
The court has rejected the only argument advanced by AHN that would preclude Antech from recovering the cash value of the equipment it provided to AHN. Even so, the court offers the following observation for the guidance of the parties as this case moves forward. If this case goes to trial, and the jury finds that AHN is liable to Antech for breach of contract, then the jury may need to determine the value of the Sound equipment.
AHN's motion for summary judgment on the limitation of damages, document no. 89, is granted in part, but only to the extent that Antech is barred from recovering both the pricing consideration it gave AHN on the services it purchased before it stopped doing business with Antech and the profits it lost afterward. Otherwise, the motion is denied.
In document no. 96, Antech asks the court to strike three exhibits attached to document no. 89, the summary-judgment motion the court disposed of in the previous section. Antech argues that because the three exhibits are inadmissible, they should be stricken from the summary-judgment record, but offers no legal authority for the relief it seeks. Because the court did not rely upon the disputed evidence in ruling on document no. 89, Antech's motion to strike, document no. 96, is denied as moot.
In document no. 118, AHN takes another shot at limiting the kinds of damages to which Antech might be entitled if it prevails on its counterclaims. Specifically, it asks the court to rule that Antech is not entitled to recover lost profits. Antech objects. Again, Antech's objection is well taken.
AHN's basic argument is this: (1) Antech's lost profits equal the amount AHN would have paid for services from Antech, less the costs Antech would have incurred to provide those services; (2) Antech's costs are made up of both variable costs and fixed costs; and (3) Antech's expert opinion on lost profits takes into account only fixed costs. As a result, AHN argues, Antech's expert opinion is invalid as a matter of law, which entitles it to an order precluding Antech from recovering lost profits. Antech raises a number of objections. To make a long story short, nothing in AHN's briefing and nothing said at oral argument has persuaded the court that, as a matter of law, the jury would be incapable of determining Antech's lost profits. Accordingly, AHN's motion for summary judgment on this issue, document no. 118, is denied.
In document no. 98, Antech and Sound seek judgment as a matter of law on AHN's claims against them to the extent those claims are based upon any alleged deficiencies in the equipment that Antech provided to AHN. AHN objects. For the reasons that follow, the court agrees with Antech and Sound.
The Equipment Agreement provides, in pertinent part, that "[a]s an incentive to enter into this Agreement, Antech will provide to Animal Hospital Owner the Sound Technologies equipment described [in]
Annex 2 to the Equipment Agreement provides, in pertinent part:
Antech & Sound's Mem. of Law, Ex. B (doc. no. 98-3), at A033951. Without going into undue technical detail, the STI Equipment provided by Antech consisted of: (1) an x-ray machine (with a list price of $79,000); (2) an associated workstation (with a list price of $8,070); (3) two additional free-standing workstations (each with a list price of $4,500; and (4) a server (with a list price of $19,850). The specifications for the workstations indicated that each of them came loaded with the Windows XP operating system and a license to run certain STI software known as VetPACS. More specifically, the order summary from Sound indicates that it provided AHN with: (1) a "VetPACS DICOM Digital Enterprise License,"
The warranty mentioned in Section 3 of the Equipment Agreement was memorialized in a Warranty Agreement.
With regard to the scope of its coverage, Section 11 of the Warranty Agreement provides, in pertinent part:
Antech & Sound's Mem. of Law, Ex. B (doc. no. 98-3), at S00008. While Section 11 excludes workstations from any renewal term, the executive summary of the Warranty Agreement provides an exception to the exclusion, and allows for renewal of the warranty on the workstation associated with the x-ray machine.
Section 8 of the Warranty Agreement, in turn, describes several elements of the STI Equipment that were not warranted:
Antech & Sound's Mem. of Law, Ex. B (doc. no. 98-3), at S00007.
The Warranty Agreement also includes the following provision regarding limitation of liability:
AHN received and began using the STI Equipment in the late summer of 2008. It used the equipment, without incident, until February of 2011. At that point, AHN's information technology consultant began upgrading AHN's computer system to run the Windows 7 operating system. Among other things, the consultant attempted to run VetPACS on a computer on which Windows 7 had been installed, but was unable to do so. Then, Sound confirmed that: (1) VetPACS ran on Windows XP, the operating system that Sound installed on the three workstations that Antech provided to AHN, but did not run on Windows 7; and (2) it had replaced VetPACS with a new product, called "eSeries," and stopped developing VetPACS.
All three of AHN's claims against Antech and all three of its claims against Sound are based, in part, on some version of an allegation that the defendant "provid[ed] an X-Ray System that became obsolete," Am. Compl. (doc. no. 17) ¶ 103, and was "non-responsive[] in dealing with . . . the obsolete X-Ray System,"
Antech & Sound's Mem. of Law (doc. no. 98-1) 7 (quoting AHN's Supp. Answers to Antech's First Set of Interrogs. (Answer No. 24) 19 (emphasis added by Antech & Sound). In other words, AHN appears to argue that for the STI Equipment to have been free from defects, it was necessary for VetPACS to have anticipated and accommodated the next six years' worth of Microsoft's development of the Windows operating system. To borrow a phrase from Judge Siggins of the California Court of Appeals, "[t]o state [AHN's] premise is to refute [its] logic."
Defendants argue that all of AHN's claims and defenses based upon the alleged obsolescence of the STI Equipment fail as a matter of law because: (1) Antech's only obligation under the Equipment Agreement was to purchase the equipment described therein from Sound and deliver it to AHN, which it did; (2) in the Warranty Agreement, Sound expressly disclaimed any obligation to undertake any additional development of VetPACS; (3) the Warranty Agreement precludes AHN from recovering damages; and (4) AHN breached the Warranty Agreement by trying to combine VetPACS and Windows 7. AHN contends that: (1) Antech had an obligation to deliver equipment that would function for the six-year term of the Equipment Agreement; (2) the Warranty Agreement is unenforceable because it is both procedurally and substantively unconscionable and because it fails of its essential purpose; (3) even if the Warranty Agreement is enforceable, it does not preclude the claims asserted against Sound in this case; (4) it,
Antech's obligations to AHN were spelled out in the Loan Agreement and the Equipment Agreement. In the Equipment Agreement, Antech promised to provide AHN with certain pieces of hardware and software. It is undisputed that Antech provided exactly the hardware and software specified in the Equipment Agreement. In an attempt to establish that Antech provided the equipment it promised to provide yet breached its agreement with AHN, AHN invokes the implied warranty of merchantability. AHN's reliance upon that warranty is unavailing.
Presuming, for the sake of argument, that it is even proper to consider an argument based upon a legal theory inserted into the case at this late date, the implied warranty of merchantability is inapplicable to the facts of this case because: (1) Antech was not a merchant; (2) it did not sell any goods to AHN; and (3) at the time of sale, the goods were merchantable.
In an order on which AHN relies, Judge Fogel explained that "[t]here exists in every contract for the sale of goods by a merchant a warranty that the goods shall be merchantable."
Moreover, merchantability is measured at the time of delivery.
Turning from the law to the facts of this case, the court offers the following observations. AHN argues that the implied warranty of merchantability required Antech to provide it with equipment that included software that would be compatible with the next six years' worth of Windows operating systems. But, AHN also says that it, Antech, and Sound all knew that Windows XP was very likely to be replaced during the term of the Equipment Agreement.
To conclude, because the California version of the UCC does not apply to Antech's provision of equipment to AHN, and because VetPACS was merchantable for more than two years after AHN acquired it, AHN's reliance upon the implied warranty of merchantability does it no good. Accordingly, as to any claim or defense asserted by AHN that relies upon the implied warranty of merchantability, Antech is entitled to judgment as a matter of law.
In Count VIII of its amended complaint, AHN claims that Sound breached the Warranty Agreement by "providing an X-Ray System that became obsolete and [by] its non-responsiveness in dealing with the obsolete X-Ray System."
In the Equipment Agreement, Sound obligated itself to provide covered products and workstations that were "free from defects in material, workmanship, and title," and that "conform[ed] to [its] published product specifications." Antech & Sound's Mem. of Law, Ex. B (doc. no. 98-3), at S00008. Here, AHN says nothing about defects in title or a failure to conform to specifications, so its claim must be that some product or workstation it received from Sound had either a defect in materials or a defect in workmanship.
AHN alleges a defect in the VetPACS software that was installed on the workstation associated with the x-ray machine, which is the only workstation that was still under warranty in February of 2011. That defect is the inability of VetPACS to run on Windows 7. The problem is that such a defect does not appear to be a defect in either materials or workmanship. Rather, as Judge Wigenton points out,
If indeed the defect on which AHN bases its claim is a design defect rather than a manufacturing defect, then Sound would be entitled to judgment as a matter of law that it did not breach the Warranty Agreement by providing AHN with equipment and/or a workstation that included software that was not compatible with Windows 7. In the face of this issue, the court could simply assume, as defendants appear to, that Count VIII is based upon a defect in materials or workmanship and then wade into the complicated warranty-based defenses on which Sound relies. Or, the court could request further briefing, pursuant to Rule 56(f)(2) of the Federal Rules of Civil Procedure, on the question of whether, in the first instance, the defects alleged by AHN could possibly support a claim for breach of the warranty against defects in materials and workmanship expressed in Section 11 of the Warranty Agreement. In the interest of judicial economy,
Accordingly, AHN is ordered to show cause why Sound should not be granted Summary Judgment on Counts VIII and IX of AHN's amended complaint. Similarly, given the undisputed fact that Antech rather than AHN bore the cost of the warranty, and AHN's allegation in its amended complaint that it paid for the warranty coverage, AHN is directed to show cause why Sound should not be granted summary judgment on the claim for unjust enrichment stated in Count XIII.
For the reasons described above: (1) AHN's first motion for partial summary judgment on the issue of damages, document no. 89 is granted, but only to the extent that Antech is barred from recovering both the pricing consideration it gave AHN on the services it purchased before it stopped doing business with Antech and the profits it lost afterward; (2) Antech's motion to strike, document no. 96, is denied as moot; (3) AHN's second motion for partial summary judgment on the issue of damages, document no. 118, is denied; and (4) defendants' motion for partial summary judgment, document no. 98, is granted as to Antech, while the court's decision as to Sound is deferred, pending receipt of the show-cause briefing the court has requested. With regard to timing, AHN has ten days from the date of this order to respond, and Sound has ten days to respond to AHN's briefing.
SO ORDERED.
