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ROBOTIC VISION SYS. v. CYBO SYS.

September 15, 1998

ROBOTIC VISION SYSTEMS, INC., Plaintiff, against CYBO SYSTEMS, INC., a/k/a CYBOT SYSTEMS, INC., Defendant.


The opinion of the court was delivered by: GERSHON

Memorandum & Order

 GERSHON, United States District Judge:

 Robotics Vision Systems, Inc. ("RVSI") is a Delaware corporation that, prior to September 30, 1990, made and sold adaptive robotic welding systems, which are preprogrammed robots designed to weld pieces of metal used in manufacturing tanks and excavators. Cybo Systems, Inc. ("Cybo") is an Ohio corporation that sells robots and robot systems. In September 1990, RVSI and Cybo entered into a contract (the "Agreement") that provided for the sale of certain assets to Cybo in exchange for $ 537,000.

 RVSI filed this action against Cybo in October 1992, to recover the balance of the purchase price, $ 156,000, and other monies owed pursuant to the Agreement. Cybo's answer asserts nine counterclaims for breach of contract and fraud and seeks, among other things, more than ten million dollars in damages for lost profits. RVSI moves, in two separate motions, for partial summary judgment dismissing Cybo's counterclaims for fraud and lost profits and its demand for damages on the breach of contract claims in excess of the purchase price set forth in the contract.

 FACTS

 The Agreement provides that RVSI sell Cybo certain assets required to construct a turn-key adaptive robotic welding system. Section 1.1 of the Agreement states:

 
The Seller shall sell, assign, transfer and deliver to the Buyer all of the Seller's purchase orders, contracts, machinery and equipment, trade secrets, welding technology, software, software development codes, inventory, work-in-process, customer lists and all other non-cash assets (all of the foregoing, including those particular assets, properties and rights specified in Exhibit A hereto, as collectively referred to herein as the "Assets") which related to the Seller's Turn-key Adaptive MIG Welding and Cutting Systems business (the "Business").

 A turn-key system is installed in the customer's factory and delivered with a "key" so that the customer can run the system itself. In this case, the key was a software program known as Weld Planner I. Upon receipt, Cybo intended to sell the system to Caterpillar, Inc. and to install it in a Caterpillar plant.

 Cybo asserts that RVSI misrepresented which assets were to be sold pursuant to Section 1.1 of the Agreement. In particular, Cybo claims that Section 1.1 provides for the sale of RVSI's alignment and calibration equipment. RVSI contends that the parties reached an understanding prior to the execution of the Agreement that the alignment and calibration equipment would not be provided. RVSI further relies on Exhibit A to the Agreement, entitled "Description of Assets," which refers to Schedule A-1 for the prices on the stick and boom welding systems, to Schedule A-2 for a description of "Finished Goods Inventory", and to Schedule A-3 for a description of "Capital Assets." Neither Schedule A-2 nor Schedule A-3 mentions alignment or calibration equipment.

 RVSI's robotic welding system--including the Weld Planner I software--had previously been installed at Caterpillar and General Dynamic plants, although the parties disagree as to whether those systems were functioning properly when RVSI and Cybo executed the Agreement. The system that RVSI agreed to sell to Cybo required the development of an enhanced version of Weld Planner I.

 Cybo asserts that RVSI misled it into believing that the basic Weld Planner I software was a "standard" and "stable" product and that the only risk involved in purchasing the system would be in implementing the enhancements. "Standard" and "stable" are industry terms meaning that the product is production proven (i.e., working well in the field) and that it is "in a box" (i.e., can be taken off the shelf). RVSI contends that it made no such misrepresentations and that, even if it did, Cybo did not justifiably rely on them, both because it knew of RVSI's previous problems with Weld Planner I and because it had tested the software itself. Cybo asserts that it relied on software demonstrations provided by RVSI.

 In light of the risks involved in purchasing the enhancements, Cybo agreed to pay for the software in stages, sending RVSI a portion of the total contract price each time it successfully developed an additional feature. RVSI asserts that these "performance milestones" were jointly agreed to by the parties. Cybo contends, however, that it relied on RVSI's misrepresentations as to the adequacy of the proposed milestones in gauging the success of the project and that, at each juncture, it also relied on RVSI's misrepresentations as to whether the milestones had been met.

 Cybo further contends that it relied on RVSI's misrepresentations regarding its gross margins on orders, its profits from after-sale service and provision of parts and the amount of technical support to be provided by RVSI in installing the system. With respect to each of these assertions, RVSI claims either that it made no such misrepresentations or that, even if it did, Cybo was not entitled to rely on them because it had researched the relevant issues itself.

 In November 1990, the parties executed an Engineering Purchase Order pursuant to which Cybo agreed to pay RVSI $ 54,000 in exchange for additional engineering services required to install the system. Cybo asserts that it agreed to the Engineering Purchase Order solely because it could not complete the work required on its own, but that the engineering should have been provided pursuant to the Agreement. RVSI asserts that the Engineering Purchase Order was within the terms of the Agreement and that, regardless, it informed Cybo of the necessity of additional engineering prior to the November 15, 1991 deadline for the satisfaction of post-closing conditions on the contract.

 Initially, Cybo hired two "robot technicians", Al Bove and Al Treu, to install the system. Neither technician proved sufficiently skilled to solve the problems which arose, and in September 1991, Cybo hired Robert Rongo, an engineer who had previously worked at RVSI, to debug the software. Cybo asserts that RVSI made misrepresentations regarding the level of skill required to install the system and the amount of assistance required from Rongo. RVSI contends that Cybo understood prior to executing the Agreement that it would have to hire Rongo on a full-time basis. Despite Rongo's efforts, the system never worked properly and in the spring of 1992, Caterpillar issued a stop work order. Caterpillar canceled the two purchase orders with Cybo and negotiated a settlement.

 Cybo asserts that it lost ten million dollars in future profits as a result of RVSI's wrongful conduct. According to Cybo, RVSI represented at a meeting on August 29, 1990, that Cybo could expect to obtain more than thirty sales and to receive specific profit margins on each sale. RVSI contends that the contracts specified by Cybo were not contemplated by the parties when they executed the Agreement and that Cybo is unable to prove that it lost the opportunities as a result of RVSI's alleged breach of contract.

 The final issue in dispute is the amount of damages permitted on a breach of contract claim. RVSI argues that the amount of damages should be limited to the purchase price listed in the Agreement. Cybo contends that a contractual limitations clause will not limit its damages for fraud.

 DISCUSSION

 Motions for summary judgment are granted if there is no genuine issue as to any material fact, and the moving party is entitled to judgment as a matter of law. See Lipton v. Nature Co., 71 F.3d 464, 469 (2d Cir. 1995). The moving party must demonstrate the absence of any material factual issue genuinely in dispute. See id. The court must view the inferences to be drawn from the facts in the light most favorable to the party opposing the motion. See Matsushita Elec. Indus. Co., Ltd. v. Zenith Radio Corp., 475 U.S. 574, 587, 89 L. Ed. 2d 538, 106 S. Ct. 1348 (1986). However, the non-moving party may not "rely on mere speculation or conjecture as to the true nature of the facts to overcome a motion for summary judgment." Knight v. U.S. Fire Ins. Co., 804 F.2d 9, 12 (2d Cir.), cert. denied, 480 U.S. 932, 94 L. Ed. 2d 762, 107 S. Ct. 1570 (1987). The party must produce specific facts sufficient to establish that there is a genuine factual issue for trial. Celotex Corp. v. Catrett, 477 U.S. 317, 322-23, 91 L. Ed. 2d 265, 106 S. Ct. 2548 (1986).

 A federal court sitting in diversity must follow the choice-of-law rules of the state in which the suit is brought. See Belmac Hygiene, Inc. v. Belmac Corp., 121 F.3d 835, 838 (2d Cir. 1997). Since this case was brought in New York, New York's choice-of-law rules apply. New York uses the "paramount interest" approach pursuant to which the law of the jurisdiction having the greatest interest in the litigation will be applied. See id. "Great deference is to be given to a contract's designation of the law that is to govern disputes arising from the contract." Zerman v. Ball, 735 F.2d 15, 19-20 (2d Cir. 1984).

 Section 10.5 of the Agreement provides for the application of Ohio law to all contract claims. Ohio is the situs of impact of the alleged fraud, see David Tunick, Inc., v. Kornfeld, 813 F. Supp. 988, 995 (S.D.N.Y. 1993), and Cybo is an Ohio corporation. There being no objection to the application of Ohio law and every reason to apply it, Ohio law shall govern this action.

 Cybo's Fraud Claims

 Cybo's counterclaims contain three sets of fraud claims. Cybo asserts that RVSI (1) fraudulently induced it into entering the Agreement, (2) made fraudulent misrepresentations during performance, and (3) made additional misrepresentations that prevented Cybo from discovering that RVSI had not performed its obligations pursuant to the Agreement. Specifically, Cybo claims that RVSI misrepresented (1) the assets to be sold, (2) the reliability of the software, (3) the adequacy of the proposed performance milestones and whether the milestones had been met, (4) the need for additional engineering, (5) the need for additional engineers, (6) RVSI's gross margins and its profits from after-sale service and provision of parts, and (7) the amount of technical support it would provide. RVSI submits that one or more of the elements necessary to establish a claim of fraud is missing with respect to each of these alleged misrepresentations.

 In Ohio, the elements of an action in fraud are:

 
(a) a representation or, where there is a duty to disclose, concealment of a fact, (b) which is material to the transaction at hand, (c) made falsely, with knowledge of its falsity, or with such utter disregard and recklessness as to whether it is true or false that knowledge may be inferred, (d) with the intent of misleading another into relying upon it, (e) justifiable reliance upon representation or concealment, and (f) a resulting injury proximately caused by the reliance. Gaines v. Preterm-Cleveland, Inc., 33 Ohio St. 3d ...

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