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September 29, 1999


The opinion of the court was delivered by: Larimer, Chief Judge.


Plaintiff, BBS Power Mod, Inc. ("BBS"), commenced this action for breach of contract, fraud and related causes of action in New York State Supreme Court, Ontario County, in May 1997. Defendants, Prestolite Electric, Inc. ("Prestolite") and Apsco, Inc. ("Apsco") removed it to this court on June 6, 1997, invoking this court's diversity jurisdiction under 28 U.S.C. § 1332. Defendants have moved for summary judgment. Plaintiff has cross-moved for summary judgment, and for an order precluding Prestolite from introducing at trial any evidence beyond that already produced by Prestolite regarding damages on Prestolite's counterclaims against BBS.


BBS, a New York corporation with its principal place of business in Victor, New York, is a design and manufacturing company whose specialty is "electronic packaging," which involves using computer-assisted design and manufacturing programs to turn products existing only as designs on paper into actual products. Prestolite manufactures and supplies regulators and alternators for heavy-duty trucks. The regulators control the voltage output from the alternator to the truck battery.

In early 1995, William Kelly, a Prestolite electrical engineer, designed a new type of regulator that would allow a truck driver to adjust the voltage output for optimum vehicle performance. Prestolite decided to hire an outside firm to design the necessary circuit board and to manufacture the new regulators. To that end, Prestolite approached BBS regarding the creation of a layout for the circuit board. BBS thereafter came up with a mechanical design for the regulators, for which Prestolite paid BBS the agreed-upon price of $10,000.

Prestolite then solicited bids for the manufacture of the regulators. Several companies, including BBS and Apsco, submitted bids. BBS submitted the lowest bid, and Prestolite decided to award it the contract.

Representatives of BBS and Prestolite met on September 19, 1995 to work out the details of the contract. On September 25, 1995, Prestolite sent BBS a "letter of intent" memorializing their agreement. The letter stated, inter alia, that BBS would be "a supplier of Prestolite C Regulator[s]" to Prestolite. Defendants' Motion for Summary Judgment Ex. I. The letter called for an initial shipment of 1000 regulators on December 1, 1995. It further stated that BBS would produce regulators for one of Prestolite's customers, Freightliner, with "EAU [estimated annual usage, i.e., the quantity to be shipped] estimated at 10K/year," and that "EAU for the remainder of this product line is 100K/year." Full production of the regulator was "to be no later than 4/96."

Under the heading, "Proprietary Rights," the letter stated:

  Prestolite will provide to BBS such technical
  specifications, drawings and other information as is
  necessary to permit BBS to manufacture Prestolite's C
  Regulators. BBS shall have a limited license to use
  such technological information solely for the purpose
  of manufacturing such regulators for Prestolite
  hereunder and shall not have the right to use such
  technological information for the manufacture of any
  other product and shall be prohibited from disclosing
  such technological information to any third party
  without the prior written consent of Prestolite.

The letter also stated that "[t]he term of this manufacturing agreement shall be three (3) years. The contract can be terminated by either party without cause upon 90 days written notice." Id.

At this point begins an ever-widening gap between the two sides' versions of events. BBS claims that Prestolite made a number of changes in the design of the circuit board, which increased BBS's costs, and that BBS discovered flaws in Prestolite's design. Prestolite contends that BBS had grossly overestimated its capabilities to produce this sophisticated product, that BBS took longer than expected to get the project up and running, and that BBS kept raising the cost per unit. Although Prestolite agreed to pay the increased costs, defendants claim that BBS's original bid was simply unrealistically low.

Regardless of the reasons, it is clear that there were some problems with the design that needed to be addressed. One problem in particular involved a physical gap in the regulator, which the design specified was to be filled with an epoxy substance referred to as a "potting compound." The potting compound tended to leak out through a hole in the circuit board housing, however, and so to prevent that from happening, BBS conceived the idea of fashioning a gasket out of a material sold by a company known as Ray-Chem under the name GelTek.

BBS alleges that it also came up with the idea of a "dome cap," a snap-fit cover over a hole in the casting of the regulator. According to BBS, this eliminated the need for an expensive threaded nylon screw that Prestolite had specified which was designed to act as a dust cover over the hole.

According to defendants, not only was BBS falling behind in its production, in terms of both time and quantity, but the regulators that were manufactured failed with alarming frequency. Prestolite alleges that it therefore responded with interest when Apsco, with whom Prestolite had an ongoing relationship, approached it with a proposal that Apsco manufacture the regulators in place of BBS.

BBS, however, alleges that Prestolite and Apsco had long before conceived a scheme under which Prestolite would supply Apsco with all of BBS's designs and other technological information, with the intent that Prestolite would eventually transfer the manufacture of the regulators from BBS to Apsco. BBS has submitted a copy of a letter from Apsco to Prestolite dated September 1, 1995, containing a "summary of the working relationships" between Apsco and Prestolite. Under the heading "PEI Products" (Regulators), the letter states that "Apsco would manufacture for PEI under standard supplier arrangements."

BBS alleges that Prestolite would have liked to award the contract immediately to Apsco instead of BBS, but that at the time that Prestolite was looking for a supplier, Apsco was not able to "tool up" rapidly enough. BBS claims that defendants therefore decided simply to use BBS to perform the necessary design work. When BBS supplied Prestolite with its designs and revisions, Prestolite allegedly turned them over to Apsco, so that at very little cost and effort to Apsco, Apsco would be able to be in a position to begin producing the regulators as soon as its manufacturing facilities were ready.

Defendants admit that Prestolite gave Apsco some of BBS's designs, but they allege that those designs contained no proprietary information of BBS, and that far from simply copying the designs, Apsco identified and corrected a number of flaws in the designs.

During 1996, orders for regulators from Prestolite's customers were much lower than had been anticipated. Prestolite alleges that this was because BBS kept raising its prices, and Prestolite could not effectively pass the cost on to its customers, because the customers simply refused to pay the high prices.

In November 1996, BBS submitted a cost claim to Prestolite totaling $219,600. BBS contended that this sum represented its increased costs concerning various matters, e.g. overhead and development costs, attributable to low order volumes. Defendants' Motion for Summary Judgment Ex. Q. Prestolite responded by letter dated December 20, 1996, indicating that Prestolite would not agree to pay the amounts requested, but proposing another solution. Prestolite stated that "[t]he failure of BBS to provide product of acceptable quality on a timely basis is a major contributor to the events that led to the cost in question, and may ultimately cost Prestolite far more than the $219,000 [sic] requested by BBS." Defendant's Motion for Summary Judgment Ex. R. After describing some of the problems that Prestolite and its customers had encountered with BBS's regulators, Prestolite stated, "we are not willing to retain BBS as the sole source for the regulators in question," although the letter did not identify any other suppliers that Prestolite intended to use.

Prestolite therefore proposed an alternative solution under which it would purchase about 7000 regulators from BBS during the first quarter of 1997, and pay BBS $40,000 "in settlement of all outstanding claims by BBS." Prestolite called for BBS to return to Prestolite all "equipment purchased by Prestolite and used by BBS as a part of this project or begin payment to Prestolite fair market rent of $1,000 per month for the use of ...

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