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PC COM, INC. v. PROTEON

November 15, 1996

PC COM, INC., Plaintiff, against PROTEON, INC. and JACK DUTZY, Defendants.


The opinion of the court was delivered by: CONNER

 Conner, Senior D.J.

 Plaintiff PC Com, Inc. ("PC COM") has sued Defendant Proteon, Inc. ("Proteon") for breach of contract and Defendant Jack Dutzy ("Dutzy") for tortious interference with contract. Proteon has counterclaimed for breach of contract and payment of $ 347,867.37 allegedly due under the contract. PC COM has moved for partial summary judgment on the issue of liability; Proteon has moved for partial summary judgment on damages. This court has diversity jurisdiction pursuant to 28 U.S.C. § 1332 (a)(1).

 BACKGROUND

 For the sake of convenience, the summary of the facts and this Court's determination that Massachusetts law shall apply (as per the parties' choice of law provision), are reproduced from the earlier summary judgment ruling in this matter. See PC COM v. Proteon, Inc., 906 F. Supp. 894 (S.D.N.Y. 1995).

 Plaintiff PC COM is a Florida corporation maintaining a principal place of business in Elmsford, New York. Defendant Proteon is a Massachusetts corporation maintaining its principal place of business in Westborough, Massachusetts, and is duly qualified and licensed to do business in New York. Defendant Dutzy is an individual residing in New Hampshire employed by Proteon during all times relevant in this case.

 Defendant Proteon has been in the business of manufacturing and selling electronic devices known as token ring adapter network interface cards ("NICs") and networking equipment, enabling the contemporaneous use by many computers of a central computer containing a central memory and programs (called a "file server"). This aggregation is known as a "network," and the network 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. *fn1" 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. *fn2"

  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, *fn3" which had been the price paid during the first year of the Agreement. *fn4" 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 numerous 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 than $ 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 set off its damages against the $ 347,867.37 allegedly due Proteon.

 In April 1995, Proteon and Dutzy filed a 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. These motions were denied. In November 1996, plaintiff moved for partial summary judgment on liability against Proteon, and Defendant moved for partial summary judgment on damages. *fn5"

 DISCUSSION

 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(d). 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); Associated 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 modified 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 denying partial summary judgment to PC COM on the issue of liability. First, Proteon asserts that the Agreement was not modified, and even if it was, such modification was not permanent. Second, even if the Agreement was modified, Proteon did not breach the modified Agreement but rather it was PC COM itself that was in breach of, and then terminated, the Agreement. In its motion for partial summary judgment on damages, Proteon argues that, even assuming, arguendo, that it did breach the Agreement, provisions in the Agreement preclude claims for ...


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