within a company is called a "local area network" ("LAN").
Proteon has sold LAN products through traditional channels, namely, through its own LAN Products Division sales personnel and sales offices. Traditional channel sales are principally to national distributors who, in turn, resell the products through intermediate dealers to ultimate consumers. Proteon also has had original equipment manufacturer ("OEM") arrangements with other companies to whom Proteon sells its LAN products bearing the Proteon trade name and logo for use, as well as for resale.
While at a computer trade show in November 1992, Proteon's then Director of OEM Sales, Robert Otten, approached PC COM to inquire whether PC COM was interested in becoming an OEM purchaser and reseller of Proteon products. Thereafter, Proteon and PC COM entered into an OEM Purchase Agreement, dated March 17, 1993 (the "Agreement"), for the purchase and sale of Proteon products to PC COM.
The parties operated amicably under the first year of the Agreement, which ended March 15, 1994. Both parties realized profit from the relationship, and no major disputes are on record.
Early in the second year, however, a disagreement arose regarding pricing. PC COM alleges that, on June 16, 1994, one of Proteon's sales support personnel telephoned PC COM to advise that defendant Dutzy, then Director of LAN Product Sales, had placed a "pricing hold" on PC COM orders.
On June 17, 1994, Lisa Huber, a Proteon sales support person, sent a memo by fax to PC COM advising that Proteon would not honor an order received from PC COM due to the pricing dispute. Specifically, the memo indicated that Proteon would not honor the purchase order unless PC COM agreed to pay $ 432.25 per ISA NIC instead of the "agreed upon price" of $ 215.00 per card,
which had been the price paid during the first year of the Agreement.
As a result of this pricing dispute, PC COM withheld payments on several orders already received, with the first of these payments becoming due on June 20, 1994, pursuant to a 30-day credit arrangement. PC COM claims that Proteon's actions on June 16-17, 1994 constituted a breach and termination of the Agreement, thus warranting discontinued performance (i.e., payment) by PC COM. Proteon denies that its actions constituted a breach, and counters that PC COM's refusal to pay for the past orders already received and overdue (as of June 20, 1994) constituted a breach of the Agreement. Proteon and PC COM exchanged a volley of letters attempting to resolve their differences, all to no avail.
On July 5, 1994, PC COM filed its complaint in the Supreme Court for the State of New York, Westchester County. PC COM sought compensatory damages of no less that $ 5 million from Proteon for its alleged breach of the Agreement and compensatory damages of no less that $ 5 million and punitive damages in the sum of $ 500,000 from Dutzy for his alleged intentional interference with PC COM's contractual advantages.
Since the dispute, PC COM was able to link up with a competitor of Proteon, namely Olicom Corp. ("Olicom"), a Danish manufacturer of LAN products similar to those manufactured by Proteon. On July 11, 1994, Friedman wrote a memorandum addressed to PC COM's existing customers "to coax them to continue to do business with PC COM, and to now buy Olicom manufactured token ring adapter products instead of Proteon manufactured products." Friedman Aff., p. 18, P 56. The letter reads:
As you may know, PC COM does not manufacture its Token Ring products. We have relied on Proteon to provide us with industry leading products. Our value added includes an overwhelming commitment to Unparalleled Customers Support . . . of its products that carry the PC COM name. The recent chaos at Proteon has impacted our ability to provide these functions at the high level we insist on. . . . In light of these daunting facts I have elected to terminate PC COM's OEM agreement with Proteon. Quite frankly, I cannot in good conscious [sic] continue to recommend products manufactured by this company nor can I ask our salespeople to. I am concerned that Proteon's woes would reflect poorly on PC COM. . . . That is why, we've negotiated and signed an OEM agreement with Olicom to provide the industry's highest performing NIC card. Olicom's sentiments towards Customer Satisfaction reflect our own. . . . I now ask you to consider this same dilemma. It seems a perfect time to switch. All trends indicate you and your clients may be forced into such a decision soon anyway. . . .
Ex. F (emphasis added). Proteon points to the underlined language as an admission that PC COM, and not Proteon, terminated the Agreement. PC COM describes this language as just "puffing" to customers and in no way an admission that it terminated the Agreement.
On July 29, 1994, Proteon and Dutzy removed the action from state court to the United States District Court for the Southern District of New York. On August 22, 1994, Proteon and Dutzy filed an answer to the complaint, denying liability to PC COM and raising several affirmative defenses. In addition, Proteon counterclaimed against PC COM for $ 347,867.37 due for products sold and shipped to PC COM between February 16 and June 29, 1994, and for damages arising out of PC COM's breach of the Agreement by selling other than private label products. PC COM filed a reply to the counterclaim denying that it breached the Agreement and asserting several defenses, including a right to setoff its damages against the $ 347,867.37 allegedly due Proteon.
In April 1995, Proteon and Dutzy filed this motion seeking (1) summary judgment on PC COM's claim for breach of contract against Proteon, (2) summary judgment on Proteon's counterclaim against PC COM for unpaid charges of $ 347,867.37, and (3) dismissal of PC COM's claim for tortious interference with contract against Dutzy for lack of in personam jurisdiction.
I. PC COM'S claim against Proteon for breach of the Agreement
Summary judgment is appropriate if "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). A court may grant summary judgment "only if the evidence, viewed in the light most favorable to the party opposing the motion, presents no genuine issue of material fact." Cable Science Corp. v. Rochdale Village, Inc., 920 F.2d 147, 151 (2d Cir. 1990). On a motion for summary judgment, all evidence must be viewed and all inferences must be drawn in the light most favorable to the nonmoving party. United States v. Diebold, Inc., 369 U.S. 654, 655, 8 L. Ed. 2d 176, 82 S. Ct. 993 (1962); City of Yonkers v. Otis Elevator Co., 844 F.2d 42, 45 (2d Cir. 1988).
Under New York choice of law principles applicable in this diversity action, Klaxon Co. v. Stentor Elec. Mfg. Co., 313 U.S. 487, 85 L. Ed. 1477, 61 S. Ct. 1020 (1941), the contractual selection of governing law is generally determinative so long as the chosen state has sufficient contacts with the transaction, absent fraud or violation of public policy. See CBS, Inc. v. Tucker, 412 F. Supp. 1222, 1226 n.5 (S.D.N.Y. 1976). The Agreement provides that "the validity, performance and all matters relating to the interpretation and effect of this agreement and any amendments hereto shall be governed by the laws of the State of Massachusetts." Ex. A, P 20(f). The parties do not dispute that Massachusetts law should control. When a transaction bears a reasonable relation to this state and also to another state, the parties may agree that the law either of this state or of such other state shall govern their rights and duties. N.Y.U.C.C. § 1-105(1) (McKinney 1995); Eastern Artificial Insemination Coop. Inc. v. La Bare, 210 A.D.2d 609, 619 N.Y.S.2d 858, 859 (App. Div. 1994); Capital Nat'l Bank of New York v. McDonald's Corp., 625 F. Supp. 874, 879-80 (S.D.N.Y. 1986); Assoc. Metals & Minerals Corp. v. Sharon Steel Corp., 590 F. Supp. 18, 20 (S.D.N.Y.), aff'd, 742 F.2d 1431 (2d Cir. 1983). We see no reason to depart from the parties' contractual choice of law. In the instant case, the matter in controversy has sufficient relation to Massachusetts. Therefore, Massachusetts law will control all matters relating to the interpretation and effect of the Agreement.
The gravamen of PC COM's claim is that Proteon breached the Agreement -- or committed an anticipatory breach -- by refusing to deliver on purchase orders unless PC COM agreed to pay a unilaterally increased price. Proteon offers two principal arguments for granting summary judgment in its favor on PC COM's claim. First, Proteon asserts that it did not breach the Agreement, and that PC COM itself was in breach of, and then terminated, the Agreement. Second, Proteon argues that, even assuming, arguendo, that it did breach the Agreement, provisions in the Agreement preclude claims for consequential damages, thus warranting summary judgment. We discuss each argument below.
A. Whether or not Proteon breached the Agreement
Proteon characterizes its communications with PC COM on June 16-17, 1994 as justified and lawful negotiations to get PC COM to comply with pricing guidelines set forth in the Agreement. Proteon reasons that, because its actions as a matter of law could not constitute a breach, PC COM was the party that breached the Agreement by intentionally withholding payments beyond the 30-day credit allowance.
Proteon raises three independent grounds for finding that PC COM, and not Proteon, breached the Agreement. First, Proteon asserts that it could not have breached the Agreement by refusing on June 16-17 to honor PC COM's order because, under the terms of the Agreement, PC COM was not entitled to the $ 215.00 per card price assumed in its purchase order. Defendants correctly assert that Proteon's June 17 fax demanded prices set forth in the Agreement. Furthermore, the Agreement contains a provision that "no modification, amendment, recession, waiver or other changes shall be binding upon Buyer or Proteon unless and until made in writing and signed by authorized representatives of Buyer and Proteon." Ex. A, p. 8, P 12. However, in Massachusetts it is a settled principle of law that a written contract may be varied by subsequent oral agreement based upon a valid consideration. Cambridgeport Sav. Bank v. Boersner, 413 Mass. 432, 597 N.E.2d 1017, 1021 (Mass. 1992); First Pennsylvania Mortgage Trust v. Dorchester Sav. Bank, 395 Mass. 614, 481 N.E.2d 1132, 1138 (Mass. 1985). PC COM's alleged agreement to purchase additional goods as purportedly requested by Proteon would constitute valid consideration for oral modification of prices.
Furthermore, a provision that an agreement may not be amended orally but only by a written instrument does not necessarily bar oral modification of the contract. Cambridge Sav. Bank, 597 N.E.2d at 1022; First Pennsylvania, 481 N.E.2d at 1138-39. In addition, mutual agreement on modification of the requirement of a writing may be inferred from the conduct of the parties and from the attendant circumstances of the instant case. First Pennsylvania, 481 N.E.2d at 1139. Proteon does not controvert PC COM's allegations that Friedman's conversation with Otten established an oral modification to the Agreement, other than to assert that the $ 215.00 per card price was to apply only to the first year. Viewing all factual disputes in the light most favorable to PC COM, we assume that Friedman and Otten did orally modify the Agreement so that the prices set forth in the Agreement were not binding. The fact that the parties operated in the first year under a pricing structure that differed from that set forth in the Agreement supports an inference that the written Agreement had indeed been modified.
Therefore, Proteon cannot rely on the prices quoted in the Agreement to refute PC COM's allegations that it breached the Agreement (as modified orally and in practice) by refusing to deliver goods at the allegedly agreed upon price of $ 215.00 per card.
The second ground asserted by Proteon for finding that it did not breach the Agreement is that, even assuming that it had agreed to sell products at $ 215.00 per card, Proteon's actions on June 16-17 constituted nothing more than an attempt to renegotiate the price -- in no way to be taken as repudiation or breach. Proteon claims that it was privileged to renegotiate. However, Proteon cites no Massachusetts case law in support of this privilege. Proteon cites an Ohio case in support of its assertion that an attempt to renegotiate does not constitute repudiation. See Nuco Plastics, Inc. v. Universal Plastics, Inc., 76 Ohio App. 3d 137, 601 N.E.2d 152 (Ohio Ct. App. 1991). This case provides that "[a] demand for additional payment without a refusal to perform until the demand is met, is not a repudiation of the contract." 601 N.E.2d at 154 (emphasis added). However, PC COM has alleged that Proteon did in fact refuse to perform until its demand that PC COM meet the increased price was met. For this reason, among others, this case does not avail Proteon. PC COM cites a New York case more in point. In A. W. Fiur Co. v. Ataka & Co., 71 A.D.2d 370, 422 N.Y.S.2d 419 (App. Div. 1979), the court held that "although the contract conferred upon [defendant] the 'absolute and exclusive right to reject any orders for any reason whatsoever,' such a contract does not import the right arbitrarily to refuse to accept orders." 422 N.Y.S.2d at 422. The court noted that "there is an obligation in every contract requiring the parties to deal in good faith with each other." Id. Under Massachusetts law, every contract for a sale of goods imposes an obligation of good faith in its performance. See M.G.L.A. 106 § 1-203 (1990).
Whether or not certain "negotiations" constitute breach of a duty to sell at certain prices depends on the circumstances. Therefore, summary judgment is precluded.
The third ground asserted by Proteon for finding that it did not breach the Agreement is that it was entitled to withhold shipments from PC COM because PC COM was overdue in its payments. The Agreement provides that Proteon may withhold future shipments in the event that PC COM fails to make payments when due. Ex. A, p. 3, P 7. However, at the time that PC COM alleges that Proteon breached the Agreement -- i.e., on June 16-17, 1994 -- PC COM was not in default of any payments. Proteon does not allege that there was a default prior to June 20. Therefore, Proteon's professed excuse for its refusal to deliver any shipments after June 20 could not justify such a refusal before that date.
Proteon places great reliance on Friedman's letter to PC COM customers where PC COM purportedly admitted that PC COM, and not Proteon, terminated (and therefore breached) the Agreement. PC COM emphatically denies breaching or terminating the Agreement. Its letter to its customers was a mere sales device which was neither intended nor expected to be seen by Proteon. The letter constitutes, at most, evidence to be considered by the trier of fact. It reflects rather than forecloses a genuine issue of material fact.
B. Whether PC COM'S claims for consequential damages are precluded by the Agreement
Proteon's second argument in support of its motion for summary judgment on PC COM's claim for damages for breach of contract is that, even assuming that it terminated and breached the Agreement, provisions in the Agreement preclude an award for consequential damages:
Neither Buyer or Proteon shall by reason of the termination or non-renewal of the OEM relationship hereby created be liable to the other for compensation, reimbursement or damages on account of the loss of prospective profits on anticipated sales or on account of expenditures, investments, or leases on commitments in connection with the businesses or goodwill of Proteon or Buyer.
Ex. A, p. 8, P 22(7). In addition:
In no event shall Proteon be liable for any special, incidental or consequential damages, or for commercial losses from any cause including, but not limited to loss of profit or revenues, whether or not Proteon has received notice of the possibility or certainty of such damages or losses.