Opinion
01-CV-4272 (JG)
March 19, 2002
CHARLES D. DONOHUE
Drinker Biddle Reath, LLP, Florham Park, New Jersey. Attorney for Plaintiff
TRICIA TROY ALDEN
Vice-President and General Counsel, LIRR Law Department, Jamaica, New York. By: Kelly A. Reape, Attorney for Defendant
MEMORANDUM AND ORDER
Plaintiff Dienes Corp. ("Dienes") brings this breach of contract action against the Long Island Rail Road Company ("LIRR"). The alleged breach is LIRR's failure to purchase a sufficient number of replacement parts for air conditioning compressors pursuant to its requirements contract with Dienes. The LIRR moves for summary judgment. For the reasons set forth below, the motion is granted.
BACKGROUND
A. The Facts
In early 1998, the LIRR solicited bids for various air conditioning compressor parts and repair kits. The parts were replacement parts for air conditioning units on LIRR trains; the kits were apparently for use by the workers in making repairs. Among the various parts for which bids were sought was a part called an "unloader." The Invitation for Bid specified 20 repair kits and 100 unloaders as the "Two Year Estimated Quantity," and stated:
This solicitation is for the establishment of a release order. The quantities shown are estimates only, based upon the LIRR past usage history. Quantities shown do not obligate the LIRR to purchase specified amounts.
(Ex. C to Reape Aff., at 2.)
On May 19, 1998, Dienes submitted a bid for repair kits at a price of $92.85 per unit, and for unloaders at a price of $218.25 per unit. (Ex. C to Reape Aff., at 5, 12.) On July 13, 1998, the LIRR's Maintenance of Equipment Department gave instructions to its purchasing department to "adjust" the "estimated quantity" for the unloaders to "720 over the next two years." (Ex. 4 to Donohue Aff.) On July 16, 1998, the LIRR issued Purchase Order Number ME-25C-R866 (the "Purchase Order") to Dienes, stating that the "Est.2 Year Quantity" was 20 repair kits and 720 unloaders. (Ex. D to Reape Aff., at 2.)
On July 23, 1998, the LIRR placed its first "individual releasing purchase order," for 90 unloaders. This was the only order placed by the LIRR in the year following the issuance of the Purchase Order. (Ex. 7 to Donohue Aff.) In June 1999, Dienes' representative, Alan Gamache, inquired of Joan Bilardello in LIRR's procurement department about the status of the order. (Id.) Bilardello in turn sent several e-mails to the individuals responsible for rebuilding the compressors. (Exs. 7 and 8 to Donohue Aff.) Noting that only 90 unloaders had been purchased in the first year, she observed that the LIRR was "way off" its two-year estimate of 720 unloaders. (Ex. 8 to Donohue Aff.)
James Palmieri, of the LIRR's Maintenance of Equipment Department, responded to Bilardello by e-mail, and explained as follows: "We originally isolated this part as a problem part which needed to be changed out more often but it has since been determined that it was not the main cause of compressor failures." (Ex. 9 to Donohue Aff.) Palmieri indicated that the LIRR would only need 100 unloaders per year "as we install more new Carrier compressors." (Ex. 9 to Donohue Aff.)
The replacement parts were for air conditioning compressors manufactured by Trane Corp. The LIRR had decided that those compressors would be replaced by new compressors manufactured by Carrier Corp.
By letter dated August 27, 1999, Bilardello notified Dienes that:
The [LIRR's] Maintenance of Equipment Department originally isolated [the unloadler] as a problem part which needed to be changed out more often than in the past; however, it has since been determined that it was not the main cause of compressor failures. Due to this fact, the LIRR now estimates that we will only use 100 [unloaders] per year.
(Ex. E. to Reape Aff.)
Over the two-year period of the purchase order, the LIRR ordered and received a total of 268 unloaders and 0 repair kits. (Ex. F to Reape Aff.)
B. The Procedural History
Dienes commenced this diversity action against LIRR on June 25, 2001. (Exhibit A to Reape Aff.) It alleges a breach of contract "arising out of LIRR's failure to perform a contract whereby it agreed to purchase certain compressor parts (unloaders) and repair kits from Dienes." (Complaint, ¶ 5.) Because LIRR purchased only 268 out of the 720 unloaders it estimated and none of the repair kits, Dienes claims that it now has in stock more than $60,000 of materials that it is unable to put to any other use. (Jaillet Aff., ¶ 6.)
DISCUSSION
A. The Standard for Summary Judgment
Summary judgment is appropriate where "the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law." Fed.R.Civ.P. 56(c). In determining whether material facts are in dispute, courts must resolve all ambiguities and draw all inferences in favor of the non-moving party. See Kerzer v. Kingly Mfg., 156 F.3d 396, 400 (2d Cir. 1998).
The moving party bears the initial burden of demonstrating the absence of any genuine issues of material fact. See Gallo v. Prudential Residential Servs., Ltd., 22 F.3d 1219, 1223 (2d Cir. 1994). "When the moving party has carried its burden under Rule 56(c), its opponent must do more than simply show that there is some metaphysical doubt as to the material facts. In the language of the Rule, the nonmoving party must come forward with specific facts showing that there is a genuine issue for trial.'" Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 586 (1986) (quoting Fed.R.Civ.P. 56(e)). The non-moving party cannot survive a properly supported motion for summary judgment by resting on its pleadings "without offering `any significant probative evidence tending to support the complaint.'" Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 249 (1986) (quoting First Nat'l Bank of Ariz, v. Cities Serv. Co., 391 U.S. 253, 290 (1968)). Moreover, the moving party is not required to affirmatively disprove unsupported assertions made by the non-movant. See Celotex Corp. v. Catrett, 477 U.S. 317, 323 (1986). Conclusory allegations, conjecture, and speculation are "insufficient to create a genuine issue of fact." Kerzer, 156 F.3d at 400 (citing D'Amico v. City of New York, 132 F.3d 145, 149 (2d Cir.), cert. denied. 118 S.Ct. 2075 (1998)).
B. The Application of UCC § 2-306(1)
Because this is a diversity case, New York substantive law applies.Travelers Ins. Co. v. 633 Third Associates, 14 F.3d 114, 119 (2d Cir. 1994). Moreover, the parties agreed that New York law would apply to disputes arising from their contractual relationship. (Ex. D to Reape Aff., at 4.) Under New York law, a contact for the sale of goods is governed by New York's version of the Uniform Commercial Code. Canusa Corporation v. AR Lobosco, Inc., 986 F. Supp. 723, 727 (E.D.N.Y. 1997). The contract in this case provided for the sale of goods in an amount measured by the buyer's requirements. This is commonly referred to as a requirements contact. See N.Y. Uniform Commercial Code § 2-306 (McKinney 1993) ("UCC § 2-306"). UCC § 2-306(1) provides that:
A term which measures the quantity by the output of the seller or the requirements of the buyer means such actual output or requirements as may occur in good faith, except that no quantity unreasonably disproportionate to any stated estimate . . . may be tendered or demanded.
This case presents two issues relating to UCC § 2-306(1): (1) whether plaintiff has alleged facts that could support an inference of bad faith on the part of the defendant; and (2) whether the "unreasonably disproportionate" provision in § 2-306(1) applies to disproportionate decreases in demand.
1. Good Faith
Article 2 of the UCC defines "good faith" for merchants as "honesty in fact and the observance of reasonable commercial standards of fair dealing in the trade." UCC § 2-103(1)(b). Dienes has not alleged facts sufficient to support a conclusion that the LIRR did not act in "good faith," under this definition or any other.
"If the buyer `had a legitimate business reason for eliminating its requirements, as opposed to a desire to avoid its contract,' the buyer acts in good faith." Brewster of Lynchburg. Inc., v. Dial Corp, 33 F.3d 355, 366 (4th Cir. 1994) (quoting NCC Sunday Inserts, Inc. v. World Color Press, Inc., 759 F. Supp. 1004, 1009 (S.D.N.Y. 1991)). As the Seventh Circuit has explained, "[t]he essential ingredient of good faith in the case of the buyer's reducing his estimated requirements is that he not merely have had second thoughts about the terms of the contract and want to get out of it" Empire Gas Corp. v. American Bakeries Co., 840 F.2d at 1340-41. Absent a showing that the buyer acted in bad faith, the buyer "will be presumed to have varied its requirements for valid business reasons, i.e., to have acted in good faith, and will not be liable for the change in requirements." Technical Assistance International, Inc., v. U.S., 150 F.3d 1369, 1373 (Fed. Cir. 1998). Providing an estimate does not transform a requirements contract into a fixed quantity contract. See Canusa, 986 F. Supp. at 730 ("[W]here an output contract provides for a certain amount of goods to be produced, the appropriate test for a seller's reduction in output is good faith rather than the estimate in the contract").
In this case, the contract between the parties was a requirements contract. The Invitation for Bid specifically stated that the specified quantities given were estimates only, and "[did] not obligate the LIRR to purchase specified amounts." (Ex. C to Reape Aff., at 2.) The Purchase Order, which incorporated by reference the terms and conditions of the Invitation for Bid, increased those estimated quantities to 720 unloaders and 20 repair kits but did not obligate the LIRR to purchase these amounts. Rather, the LIRR was required only to exercise good faith in purchasing items pursuant to the contract.
The issue of whether the LIRR has acted in good faith may be resolved by motion if, viewing the evidence in the light most favorable to Dienes, no reasonable trier of fact could find against the LIRR. Zilg v. Prentice-Hall, Inc., 515 F. Supp. 716, 719 (S.D.N.Y. 1981). There is no evidence in this case that supports an inference of bad faith on the part of the LIRR. Its actual requirements for unloaders (268) fell short of its estimated requirements (720) for the simple reason that the part did not need to be replaced as often as was initially expected.
Dienes' "bad faith" argument has two bases. First, it argues that the LIRR decided to switch to new compressors, rather than use the replacement parts' and asserts that the notion that the unloaders were no longer a problem was mere "pretext" for this change of heart. . . (Plaintiff's Memorandum of Law, at 11.) But there is no evidence of this. No rational juror could find that the internal e-mails from the LIRR (upon which Dienes relies) indicate anything of the kind. Those e-mails establish that the diminished need for unloaders was due solely to the fact that they were less often the cause of compressor failures than the LIRR had predicted. It is true that the railroad chose to switch from Trane compressors to Carrier compressors, which over time would further reduce the need for replacement parts, but that fact does not help Dienes. The Carrier compressors were a substitute for the Trane compressors; they were not a substitute for the unloaders manufactured by Dienes.
Second, Dienes argues that the LIRR must have known (1) that Dienes did not normally manufacture unloaders; (2) that Dienes would have to purchase materials and commence production in advance of the LIRR's orders in order to fulfill those orders on a timely basis; and (3) that Dienes would be unable to find alternate buyers for the unloaders (or the raw materials) if the orders were not made. liven if the LIRR knew these things, it is irrelevant to the LIRR's "good faith" in dealing with Dienes. The point of a requirements contract is that the buyer is not locked into buying a fixed quantity; the buyer does not assume the risk that the seller fails to appreciate this elementary principle of commercial dealing.
In short, Dienes has presented no evidence that the LIRR acted in bad faith when its requirements fell below the estimates. The LIRR simply did not order parts that it did not need. It did not order these parts from another source, and there is no evidence that the LIRR reassessed its business relationship with Dienes and decided that it would be to the LIRR's advantage to reduce its requirements solely to save money.
The parties' submissions focus almost exclusively on the unloaders, and fail to address in detail the 20 repair kits the LIRR estimated it would purchase. This is understandable, as the total cost of 20 repair kits would have been $1,857, or approximately 1% of the total amount of the contact if all of the estimated items were purchased. In any event I am satisfied that there is no evidence from which a jury could infer that the LIRR's failure to order repair kits was anything other than a good faith determination that no kits were needed to make the repairs to the compressors.
2. The "Unreasonably Disproportionate" Test
Plaintiff argues that even if the LIRR acted in "good faith," UCC § 2-306 still contains a limit on the permissible variation between an estimate and the amount actually demanded by the buyer. The argument stems from the text of § 2-306(1) of the UCC, which says that "no quantity unreasonably disproportionate to any stated estimate. . . may be tendered or demanded."
Courts are split on the question whether the "unreasonably disproportionate" provision applies only to disproportionate increases in demand. On its face, the text of the statute appears to apply to both increases and decreases. The commentary to the section is unhelpful and ambiguous. On the one hand, section 2 of the commentary indicates that "good faith variations from prior requirements are permitted even when the variation may be such as to result in discontinuance," providing support for the idea that the statute applies only to disproportionate increases. On the other hand, section 3 states that "the agreed estimate is to be regarded as a center around which the parties intend the variation to occur," clearly contemplating variation in both directions.
I agree with the reasoning of the majority of courts and commentators, who have concluded that the "unreasonably disproportionate" provision does not apply to cases of decreased demand. See Atlantic Track Turnout Co. v. Perini Corp., 989 F.2d 541, 545 (1st Cir. 1993) (output contract case) ("[E]xploitation, beyond bad faith, is not a concern if a buyer demands less than a stated estimate."); Empire Gas Corp. v. American Bakeries Co., 840 F.2d 1333, 1339 (7th Cir. 1988) ("The [`unreasonably disproportionate'] proviso does not apply, though the requirement of good faith does, where the buyer takes less rather than more of the stated estimate in a requirements contract."); Brewster of Lynchburg. Inc., v. Dial Corp, 33 F.3d 355, 364-65 (4th Cir. 1994) ("[W]hile a buyer may not increase its requirements by an unreasonably disproportionate amount, it may reduce its requirements to any amount, including zero, so long as it does so in good faith."); R.A. Weaver and Associates, Inc. v. Asphalt Construction, Inc., 587 F.2d 1315, 1322 (D.C. Cir. 1978) (§ 2-306 permits "good faith reductions that are highly disproportionate to . . . stated estimates") (emphasis omitted); Angelica Uniform Group, Inc. v. Ponderosa Systems, Inc. 636 F.2d 232, 232 (8th Cir. 1980) (same); Canusa Corporation v. AR Lobosco, Inc., 986 F. Supp. 723, 729 (E.D.N.Y. 1997) (output contract) ("[T]he `unreasonably disproportionate' language in § 2-306 has no application in the context of an underdemanding case."); but see Simcala, Inc. v. American Coal Trade, Inc. 2001 WL 1391992, at *4 (Ala. Nov. 9, 2001) (holding under Alabama law that UCC 2-306(1) "prohibits unreasonably disproportionate decreases [even if] made in good faith").
I conclude that when a buyer takes less than the stated estimate in a requirements contract, the sole test is good faith. See Canusa, 986 F. Supp. at 729 ("[T]he `unreasonably disproportionate' language in § 2-306 is a specific construction of good faith in the context of increased output or demand, and has no relationship to a good faith analysis of a decrease."). The buyer is required merely to exercise good faith in determining its requirements, and the seller assumes the risk of all good faith variations in the buyer's requirements, even to the extent of a determination to liquidate or discontinue business. See HML Corp. v. General Foods Corp., 365 F.2d 77 (3d Cir. 1966).
Finally, if the "unreasonably disproportionate" provision applied to instances of decreased demand, I find that no rational juror could conclude that the amount actually demanded here was "unreasonably disproportionate" to the estimate given in the Purchase Order. Where the buyer has (1) purchased almost 40 percent of the initial estimate (268 out of 720) and (2) purchased less than anticipated simply because it found that it did not require as many parts as it had once thought, no rational factfinder could find the amount actually purchased to be unreasonably disproportionate to the estimate.
CONCLUSION
For the reasons stated, the LIRR motion for summary judgment is granted.
So Ordered.