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MERTON CO. v. PEPSICO INC.

February 6, 1995

THE MERTON COMPANY, LIMITED, Plaintiff,
v.
PEPSICO INC., Defendant.



The opinion of the court was delivered by: BARRINGTON D. PARKER, JR.

 This Memorandum Opinion constitutes the findings of fact and conclusions of law of the Court after a bench trial. Plaintiff, The Merton Company, Ltd. ("Merton"), brought this lawsuit against Defendant, PepsiCo Inc. ("PepsiCo"). Merton asserts two claims against PepsiCo: the tort of negligent misrepresentation and breach of contract.

 A. Findings of Fact

 1. Merton, a manufacturer of toys and related items, is a Hong Kong corporation with its principal place of business in Hong Kong. PepsiCo, is a New York corporation with its principal place of business in Purchase, New York. The matter in controversy, exclusive of interest and costs, exceeds $ 50,000.00.

 2. Merton maintains its executive offices in Hong Kong. Merton has a factory in Mainland China that employs over 5,000 workers. Merton is in the business of manufacturing various novelty items, including so-called "premium" items -- items that often accompany promotional campaigns. These items are used from time to time by companies such as McDonald's, Mars, Burger King or Denny's.

 4. PepsiCo is, among other things, the manufacturer and distributor of "concentrate" from which soft drinks are manufactured. PepsiCo has operations throughout the world, and is comprised of various different divisions and subsidiaries that focus on various areas of PepsiCo's business. One such division is PepsiCo's Latin American Division ("Pepsi LAD"), which focuses on sales and marketing activities in various of the Latin American countries. Another division is Pepsi World Trade which concentrates on currency exchange and trade balance issues.

 5. PepsiCo, like many companies, considers numerous potential promotional matters, only some of which actually ever proceed to fruition. During 1991, Pepsi LAD was involved in considering a potential promotional campaign known as the "Pepsi Gang" project, which, in essence, involved consideration of the production of certain figurines that would be designed to represent positive characteristics associated with various PepsiCo beverages. Working with Pepsi LAD in considering the Pepsi Gang project was the CDM Company ("CDM"), a California-based marketing company. This litigation had its genesis in the Pepsi Gang project.

 6. After an initial consideration of the proposed Pepsi Gang project, Pepsi LAD made a limited business decision to proceed with construction of certain molds, known as "tooling," from which sample Pepsi Gang figurines could be produced.

 7. Pepsi LAD asked CDM to arrange for the production of the Pepsi Gang tooling and agreed to advance approximately $ 300,000 to CDM for the costs of the tooling. In agreeing to the production of the tooling, Pepsi LAD expressly limited its commitment to CDM to $ 300,000 for tooling costs. Pepsi LAD ultimately paid $ 345,000 to CDM for tooling costs and to cover a cost overrun.

 8. Pepsi LAD and CDM also agreed, in writing, upon the manner in which Pepsi LAD ultimately would pay for production of the Pepsi Gang figurines if Pepsi LAD decided to proceed beyond the tooling stage. Among other things, Pepsi LAD and CDM agreed that if Pepsi LAD were to decide to go forward with the project, Pepsi LAD would first be required to issue a purchase order and post a letter of credit for the benefit of the entity that might ultimately be retained to manufacture the full number of figurines required.

 9. CDM, without direction from Pepsi LAD, exercised its discretion to retain Dyna Toys to prepare the tooling. Dyna Toys, not a party to this action, is a Hong Kong company that manufactures toys and promotional merchandise similar to that manufactured by Merton. Dyna Toys, which typically was a competitor of Merton, cooperated with Merton on the tooling efforts for the Pepsi Gang project. Dyna Toys went out of business in 1994.

 10. After having been paid for tooling by Pepsi LAD, CDM paid Dyna Toys. CDM was the only company with which Pepsi LAD had direct dealings on the contemplated Pepsi Gang project, and it never provided any authorization to Dyna Toys (or anybody else) to proceed beyond the tooling stage.

 11. Pepsi LAD, the division within PepsiCo that actually was considering the proposed Pepsi Gang project, never had any dealings, or communicated in any fashion, with Merton.

 12. After considering the potential advantages and disadvantages of the contemplated Pepsi Gang project, Pepsi LAD ultimately decided not to proceed with the project and did not pursue the project beyond the preliminary tooling stage. Pepsi LAD was the only ...


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