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
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
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.