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N.A. Sales Co. v. Chapman Industries Corp.

June 6, 1984

N.A. SALES COMPANY, INC., PLAINTIFF-APPELLEE,
v.
CHAPMAN INDUSTRIES CORP., DEFENDANT-APPELLANT



Appeal from an order of the United States District Court for the Eastern District of New York (Jacob Mishler, Judge) holding the appellant in contempt, imposing a fine of treble damages and awarding costs and attorney's fees. Affirmed in part, reversed in part and remanded.

Friendly, Pierce and Winter, Circuit Judges.

Author: Winter

WINTER, Circuit Judge:

Chapman Industries Corp. ("Chapman") appeals from an order holding it in contempt for violating an injunction by selling its product to a major competitor of the appellee N.A. Sales Company, Inc. ("N.A.") with whom Chapman has an exclusive distributorship agreement. The district court imposed a treble damages fine, assessed costs and attorney's fees against Chapman and issued a clarifying order supplementing the permanent injunction.

We reverse the contempt finding as to the period before the entry of the permanent injunction, but we affirm for the period thereafter. We remand for a recalculation of the fine because of the partial reversal of the contempt finding and because of doubt as to the length of the relevant period for which we uphold the contempt finding. We affirm the clarifying order.

BACKGROUND

Chapman is an Illinois corporation which manufactures and sells automobile anti-theft devices, including the patented Chapman Kar-Lok. N.A. is a New York corporation which sells automotive security devices. N.A. has been selling Chapman Kar-Koks pursuant to the terms of a twenty-year exclusive distributorship agreement ("Agreement") entered into by the parties on March 23, 1972. By the terms of that Agreement, Chapman granted N.A. the sole right to sell its merchandise in the "area encompassed in a fifty-mile radius from the Empire State Building," and agreed not to allow any other entity to sell Chapman's products within this exclusive area.

In the latter part of 1980, a dispute caused N.A. to bring this diversity action against Chapman for breach of contract. In January, 1981, Judge Mishler issued a temporary restraining order directing Chapman to comply with the terms of the Agreement, and in March of that year, he granted a preliminary injunction to the same effect. In June, 1981, Judge Mishler found Chapman in contempt for violating the temporary restraining order by selling products to firms operating within N.A.'s exclusive territory, but he reserved imposition of a penalty under trial on the merits. Despite the court orders, Chapman continued to sell merchandise to N.A.'s competitors in the exclusive area and to accept direct orders from customers of N.A.

A trial was held in December, 1981, before Judge Mishler and a jury. The jury returned a special verdict awarding N.A. damages for Chapman's breach of the Agreement by selling Chapman products to customers within N.A.'s exclusive distribution area and by delaying or failing to supply products ordered by N.A.

As part of the final judgment for N.A., Judge Mishler entered a permanent injunction on March 23, 1982 ordering Chapman to comply with the terms of the Agreement. We affirmed on appeal. N.A. Sales Co. v. Chapman Industries, 714 F.2d 115 (2d Cir. 1982). On that date, Judge Mishler also issued a memorandum denying N.A.'s request for imposition of a penalty for Chapman's violation of the temporary restraining order, noting that N.A. had recouped its full damages in the breach of contract action. He noted, however,

The defendant's contempt indicates a continuous course of conduct designed to deny plaintiff's rights under the [Agreement]. The court will not overlook future violations of the court's permanent injunction issued this day. The court will impose fines equal to three times the amount of damages shown to have resulted from defendant's violation of the court's injunction.

In July, 1982, N.A. moved for an order citing Chapman in civil contempt. N.A. claimed that Chapman was selling its products to J&J Corporation ("J&J"), a retailer of automotive supplies which was selling Chapman products within N.A.'s exclusive distribution area. N.A. also alleged other violations, noting that Chapman was including a warranty disclaimer with all Kar-Loks shipped to N.A. and had altered the appearance of Kar-Loks delivered to N.A. by changing the color of the wires from red to green, thus distinguishing them from Kar-Loks delivered to other Chapman distributors.

An order to show cause why Chapman should not be held in contempt for violating the March 23 order was issued on July 15, 1982. Following a hearing, Judge Mishler cited Chapman for contempt of the preliminary and permanent injunctions on February 25, 1983. He found that during the effective period of the preliminary injunction and following entry of the final judgment, Chapman had continued to sell its products to J&J. Although Chapman ceased making direct sales to J&J on March 12, 1982, just prior to the entry of the permanent injunction, Judge Mishler found that Chapman had continued to supply J&J with Chapman products by using an Indiana corporation, Vehicle Specialties, Inc. ("VSI") as a conduit. Judge Mishler also found that Chapman's warranty disclaimers and change of wire colors were "reprehensible." However, he noted these acts were not specifically prohibited by the permanent injunction and did not, therefore, constitute contempt. In order to prevent such acts in the future, he issued a clarification which ordered Chapman to "manufacture, package and deliver its products to N.A. Sales in the same manner as it did prior to January 1, 1981 and in the same manner it generally does to all its other customers," and "to accompany the product with the usual warranty and to discontinue insertion of the disclaimer cards."

Finding that Chapman had previously been warned to cease infringing upon N.A.'s exclusive territory and had received notice that treble damages would be imposed for future violations, the district judge assessed a fine of $141,000 based on his calculation of N.A.'s damages resulting from Chapman's ...


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