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Bobrow Palumbo Sales, Inc. v. Broan-Nutone

January 4, 2008

BOBROW PALUMBO SALES, INCORPORATED, PLAINTIFF,
v.
BROAN-NUTONE, LLC, DEFENDANT.



The opinion of the court was delivered by: Hon. E. Thomas Boyle United States Magistrate Judge

MEMORANDUM OPINION AND ORDER

The plaintiff, Bobrow Palumbo Sales Incorporated ("Bobrow Palumbo"), commenced this action on December 8, 2004, alleging causes of action for unjust enrichment, fraud and misrepresentation, and breach of contract, with jurisdiction grounded on diversity of citizenship. Plaintiff initially sought damages in the amount of $1,113,000. On February 18, 2005, the defendant, Broan-Nutone LLC ("Broan"), filed its Answer, asserting a counterclaim for indemnification for all costs, disbursements and attorney's fees associated with this action.

By Memorandum Decision and Order, dated January 4, 2007, the district judge assigned to this case, the Honorable Denis R. Hurley, granted Broan's motion for summary judgment dismissing the unjust enrichment cause of action, as well as the cause of action for breach of contract, to the extent that the cause of action sought commissions through December 2004. See Bobrow Palumbo Sales, Inc. v. Broan-Nutone, LLC, No. 04 CV 5334, 2007 U.S. Dist. LEXIS 250, at *20 (E.D.N.Y. Jan. 4, 2007). Summary judgment was denied with respect to the breach of contract claim for the cost of the 2004 reset at issue in this action, as well as the fraud claim and Broan's counterclaim for the attorney's fees and costs of defending this action. Plaintiff now seeks $258,000 in damages. A bench trial was held before the undersigned on June 12 and 13, 2007.

The plaintiff seeks to enforce an alleged oral modification of the written Manufacturer's Representative Agreement, dated February 8, 1999 (the "Agreement"), consideration for which plaintiff asserts was the foregoing by it of the contractual right to terminate the contract on thirty (30) days prior written notice. Broan denies any agreed modification, asserting that plaintiff was obligated, under the terms of the Agreement, to absorb all costs, including the cost of any merchandise setups and resets, in return for the agreed upon compensation of a three percent (3%) commission of net sales. Plaintiff further contends that he was defrauded by Broan through false representations, which induced the plaintiff to perform the reset.

In its counterclaim, Broan seeks reimbursement for all of its expenses in connection with defending this action, including attorney's fees, pursuant to the indemnification clause of the Agreement.

FINDINGS OF FACT

I. Introduction

Defendant Broan, whose corporate headquarters are located in Hartford, Wisconsin, manufactures a variety of household products, particularly kitchen range hoods and bath fans, with total annual sales of approximately $800 million. (Tr. 87-88.)*fn1 Broan's largest customer is Home Depot, with annual sales totaling more than $100 million. (Tr. 88-89.)

Plaintiff Bobrow Palumbo is one of Broan's manufacturer's representatives, pursuant to the Agreement entered into by the parties in February 1999. (Tr. 4; Ex. 2.) The Agreement, which was drafted by Broan, provides for compensation to Bobrow Palumbo at a rate of three percent (3%) of Broan's net sales.*fn2 (Tr. 6; Ex. 2, Art. VI.) In exchange for this compensation, Bobrow Palumbo was required to perform both sales and service functions on behalf of Broan at various Home Depot locations. (Tr. 6.) Included in the Agreement was Bobrow Palumbo's obligation to perform "resets" in the stores that it serviced. (Tr. 7.) A reset consists of either replacing an old product in a store with a new product or rearranging a product currently in the store to make it more saleable. (Tr. 8.) The Agreement encompassed all Home Depot stores in the Northeast United States. (Ex. 2, at Ex. A.) Home Depot accounted for approximately ninety percent (90%) of Bobrow Palumbo's revenue generated between 1999 and 2004. (Tr. 62.) The Agreement provides that it may not be modified except "by written amendment" executed by the parties. (Ex. 2, Art. IX, § 9.3.)

Under the terms of the Agreement, either party had the ability to terminate on thirty days written notice. (Tr. 7.) Broan provided Bobrow Palumbo with such notice by letter dated August 30, 2004, with termination effective as of October 2, 2004. (Tr. 59-60, 145; Ex. 29.) Bobrow Palumbo never terminated the Agreement. (Tr. 8.)

II. Testimony

A. William Palumbo

The plaintiff's only witness was William Palumbo ("Palumbo"), a partner and the Chief Executive Officer ("CEO") of Bobrow Palumbo. (Tr. 4.) Palumbo testified that between 1999 and 2004, Bobrow Palumbo was required to perform at least six resets on behalf of Broan, pursuant to the Agreement. (Tr. 8.) Such resets are both time consuming and costly. (Tr. 24.) In 2004, Bobrow Palumbo was instructed to undertake a "major reset" of Broan's kitchen range hoods on display in Home Depot stores in Bobrow Palumbo's service territory (the "2004 reset"). (Tr. 9.) Palumbo testified that this reset was "quite extensive" in that it required Bobrow Palumbo to "move steel, change beam heights, change beam display heights and cut different pieces of wood." (Tr. 10.)

Palumbo stated that Bobrow Palumbo was made aware of this reset in 2003 and was concerned about it due to the anticipated future implementation of a new program at Home Depot known as the In-Store Service Initiative ("ISSI"), also referred to as the "Roadrunner" program. (Tr. 11.) Under this program, Home Depot would take a direct role in hiring the manufacturer's representatives, such as Bobrow Palumbo, rather than contracting with the manufacturers to provide for such services. (Tr. 11.) Thus, under the Roadrunner program, Home Depot would hire and compensate the manufacturer's representatives directly. (Tr. 11.) As of 2003, the Roadrunner program had been implemented in the electrical department, Department 27, but was not yet in effect in the plumbing department, Department 26, where Broan's kitchen range hoods were displayed. (Tr. 12-13.) Palumbo testified that he was informed that the Roadrunner program would begin in Department 26 in 2004, at which time Bobrow Palumbo's Agreement with Broan would be terminated. (Tr. 12-13, 20.) However, since Home Depot was an integral part of Bobrow Palumbo's business, Bobrow Palumbo viewed the Roadrunner program as an opportunity to increase the amount of business that it did with Home Depot if it were selected to be employed as a manufacturer's representative directly for Home Depot under the new program. (Tr. 62-63.)

Palumbo testified that during the week of April 7, 2003, he attended a kitchen and bath show in Chicago, Illinois, where he specifically scheduled a meeting with representatives of Broan to discuss the situation concerning the 2004 reset and the Roadrunner program. (Tr. 16.) Palumbo stated that, during this show, he met with Steve Swenerton ("Swenerton"), the Vice President of Sales for Broan, Dave Pringle ("Pringle"), Broan's CEO, and Annette Mullins ("Mullins"), a regional manager for Broan, as well as her counterpart, Ray Hilding ("Hilding").*fn3

(Tr. 16.) According to Palumbo, he spoke with these four individuals about the 2004 reset and was informed that they would "work something out," such that Bobrow Palumbo would be additionally compensated - in excess of its contractual three percent (3%) of net sales commission - for performing the 2004 reset. (Tr. 17.) Palumbo, however, stated that he informed everyone present at that meeting that he would not commence the 2004 reset until a "payment term" was agreed upon and a "fee confirmation" was received. (Tr. 17-18.) Plaintiff offered a handwritten diary entry, dated April 8, 2003, as proof of this conversation and Palumbo identified the entry as written by him on April 8, 2003. (Tr. 64; Ex. 5.) I do not credit Palumbo's testimony that he attended a trade show in Chicago on that date, nor do I credit his testimony that he informed Broan's representatives that he would not commence the 2004 reset without additional compensation. Nor do I credit the handwritten diary entry dated April 8, 2003, discussed further, infra, at page 13.

Palumbo further testified that following this meeting in April 2003, any time he spoke with a Broan representative, specifically Swenerton and Mullins, the conversation pertained to the additional compensation he would receive for going forward with the 2004 reset. (Tr. 20.) According to Palumbo, he spoke with Mullins on a "weekly basis" or, at the very least, every two weeks. (Tr. 21) Palumbo further testified that Broan asked him "numerous times" to provide it with a quote of what he thought it would cost Bobrow Palumbo to undertake the 2004 reset. (Tr. 20.)

By email dated October 14, 2003, Bobrow Palumbo submitted the requested quote for the services it would render in connection with the 2004 reset, which amounted to $336,000, at an estimated cost of $420 per bay. (Tr. 23, 25; Ex. 7.) This was the first time Bobrow Palumbo had ever requested additional compensation to perform a reset. (Tr. 23.) However, such compensation was necessary because the "rules of the game had changed" such that, due to the implementation of the Roadrunner program, Bobrow Palumbo would not have an opportunity to recoup in sales commissions the money it was going to be required to spend to perform the 2004 reset. (Tr. 23-24.)

Broan responded to Bobrow Palumbo's quote by email dated October 21, 2003, wherein Mullins stated the issue of the 2004 reset in connection with the Roadrunner program was being considered by Broan but that a solution had not been reached as of yet. (Tr. 26-27; Ex. 8.)

Mullins also informed Palumbo in that email that Tom Armstrong, the individual at Home Depot responsible for implementing the Roadrunner program, had estimated the cost of the reset at $350 per bay, for a total estimated cost of $280,000.*fn4 (Tr. 27-28.) Mullins also stated in the October 21, 2003 email that, until Broan agreed to participate in the Roadrunner program, Bobrow Palumbo's relationship with Broan was still governed by their Agreement, which specifies that resets are a function of Bobrow Palumbo's responsibilities under the Agreement and are compensated thereunder. (Tr. 29.)

According to Palumbo, both Swenerton and Mullins repeatedly instructed him to go forward with the 2004 reset and that, with respect to the compensation issue, they would "work it out." (Tr. 32.) Palumbo stated that he explained to Swenerton and Mullins that if Bobrow Palumbo commenced the reset, it would be at tremendous cost to itself, for which it expected to be compensated. (Tr. 32.) Palumbo further stated that once Bobrow Palumbo began the reset, it would be required to complete it because Home Depot was one of its biggest customers and failing to complete the 2004 reset would "be letting Home Depot down." (Tr. 32-33.)

Palumbo testified that he sent a second quote for the cost of the 2004 reset to Broan in February 2004, which amounted to $469,200. (Tr. 34; Ex. 9.) Palumbo received a response from Mullins, who informed him that his costs were too high. (Tr. 35.) According to Palumbo, Mullins instructed him that, in order for Broan to compensate him, he would have to revise his costs so that they were similar to the costs submitted by Broan's manufacturing representative for the Midwest, EA Langerfeld. (Tr. 35-36.) Mullins provided Palumbo with EA Langerfeld's pricing information, which amounted to $213,768, at an estimated cost of $334 per bay. (Tr. 36-37; Ex. 12.)

Palumbo testified that he attended the kitchen and bath show again in March 2004 and that he again discussed the issue of additional compensation for the 2004 reset with Swenerton and Mullins. (Tr. 39.) Palumbo stated that he was assured that he would be compensated but that Broan was unsure of how to go about it at that time. (Tr. 40.) Plaintiff offered a handwritten diary entry dated March 9, 2004 to substantiate this testimony and testified that the entry was written by him some time during the week of March 9, 2004. (Tr. 64-65; Ex. 11.) On cross-examination, however, Palumbo was shown a letter that he sent to Ed Martin and Tom Armstrong, who Palumbo identified as "high-ranking people" within Home Depot, dated March 24, 2004, which attached a breakdown of his estimated cost of $469,200 for the 2004 reset and stated that "as of now all three companies have no intention on paying us." (Tr. 67-68; Ex. 14.) When asked whether the information contained in this letter was true, Palumbo responded "Except for the fact that the companies had no intention of paying, yes, I believe it's true. I was negotiating and posturing with them to get them to put some heat on [the] manufacturers." (Tr. 68.) When asked more specifically whether the statement that "as of now, all three companies have no intention of paying us" was true at the time he wrote it, Palumbo responded that it was indeed a true statement. (Tr. 69.) I do not credit Palumbo's prior direct testimony that he was advised by any Broan representative that he would be additionally compensated to perform the 2004 reset, nor do I credit the diary entries substantiating such testimony.

On March 30, 2004 Palumbo received an email from Swenerton indicating that all of Broan's management had been briefed on the compensation issue as it pertained to the 2004 reset and that the issue should be concluded by Wednesday or Thursday of that week. (Tr. 41; Ex. 13.) Palumbo responded with an email informing Swenerton that the resets were set to begin on Thursday of that week - April 1, 2004 - and that although the first ten days of resets were scheduled, Palumbo was holding off on scheduling the remaining resets. (Tr. 42.) Palumbo testified that this statement was intended to convey that unless he received confirmation that he was going to be compensated for the 2004 reset, he had no plans of going forward with it. (Tr. 42.) I do not credit any testimony by Palumbo that, on or prior to March 30, 2004, there was an understanding between the parties that Bobrow Palumbo would be provided additional compensation for the 2004 reset.

According to Palumbo, Swenerton and Mullins informed him that in order to be compensated, Bobrow Palumbo would have to submit another quote that was "more in line with the quotes that they received from other [manufacturing representatives] around the country." (Tr. 43-44.) On April 5, 2004, Palumbo submitted the revised quote, which represented a total estimated cost of $258,000. (Tr. 47; Ex. 18.) Palumbo then sent another email to Swenerton on April 8, 2004, stating that the recovery time for Bobrow Palumbo to recoup the cost of the 2004 reset would be 19.2 weeks. (Tr. 51; Ex. 22.) Palumbo testified that the use of the word "weeks" in the email was a mistake and that it actually should have said "months." (Tr. 51.) The email also explained how the cost of $258,000 was determined by Bobrow Palumbo. (Tr. 51.)

Following the submission of the revised quote, Bobrow Palumbo commenced the 2004 reset. (Tr. 52.) According to Palumbo, its commitment to go forward with the resets was with the understanding that Bobrow Palumbo would receive the additional $258,000 compensation requested. (Tr. 52, 66.) I do not credit this testimony.

Palumbo confirmed on cross-examination that he does not have any written document from Broan reflecting this alleged agreement. (Tr. 66-67.) According to Palumbo, the agreement stems from the fact that Broan did not reject the quote of $258,000 that he submitted. (Tr. 67.)

Palumbo testified that the 2004 reset began on April 1, 2004. (Tr. 34, 84.) On redirect examination, however, he testified that the reset began on April 8, 2004.*fn5 (Tr. 84.) When he was recalled to testify prior to the close of the trial, Palumbo reaffirmed that the reset commenced on April 8, 2004, which was the Thursday before Easter, although it was scheduled to begin on April 1, 2004. (Tr. 222.) According to Palumbo, he postponed commencing the reset until he was guaranteed additional compensation for performing it. (Tr. 223.) On cross-examination, Palumbo was again shown the email that he sent to Swenerton, dated March 30, 2004, which states that the reset was to begin on Thursday of that week. (Tr. 225; Ex. 17.) After consulting a calendar, Palumbo testified that March 30, 2004 was a Tuesday that year and that Thursday of that week was April 1, 2004. (Tr. 225.) Palumbo confirmed that as of March 30, 2004, the reset was scheduled to commence on April 1, 2004. (Tr. 226.) Palumbo testified that he postponed commencing the reset, however, when he did not get a favorable response from Broan concerning his request for additional compensation. (Tr. 226.) Palumbo further testified that he received a guarantee that he would receive additional compensation from Swenerton at the April 2004 kitchen and bath show - approximately April 4, 2004 - and that, following receipt of that guarantee, he began the 2004 reset. (Tr. 226-27.) I do not credit this testimony of guaranteed payment by Swenerton, discussed infra.

On May 19, 2004, approximately one month after the 2004 reset began, Palumbo received an email from Swenerton attaching what appears to be a form letter sent to all of Broan's manufacturer's representatives, dated May 20, 2004, which stated that none of the manufacturer's representatives would be paid any additional compensation for the 2004 reset. (Tr. 54, 58; Ex. 25.) Palumbo responded via email on May 19, 2007, stating that he felt that he was misled by Broan. (Tr. 55.)

On August 30, 2007, Palumbo received a discharge notice from Broan informing him that the Agreement between Broan and Bobrow Palumbo was being terminated, effective October 2, 2004. (Tr. 59-60.) Bobrow Palumbo was fully compensated for all services rendered through September 2004 but was not paid any additional compensation for the 2004 reset. (Tr. 60.)

B. Steve Swenerton

Steve Swenerton, who has been the Vice President of Sales for Broan for the past fourteen years, testified that during the period 2002 through 2004, Broan employed five manufacturer's representatives in connection with its business at Home Depot, including Bobrow Palumbo. (Tr. 86, 94.) The manufacturer's representatives' territories were divided up geographically and each representative maintained exclusive responsibility for the territory to which it was assigned. (Tr. 94.) Bobrow Palumbo's territory encompassed the entire Northeast United States. (Tr. 94.) All of the manufacturer's representatives' contracts with Broan were identical to the Agreement between Broan and Bobrow Palumbo and each of the representatives' contracts specified a compensation rate of three percent (3%) of net sales. (Tr. 95.)

Swenerton testified that Broan expected its manufacturer's representatives to perform three "essential functions." (Tr. 96.) The first was to "set new stores," which included placing Broan's products within a new store and ensuring they were ready to be sold when the store opened. (Tr. 96.) The second function the representatives were expected to perform was "in-store service." (Tr. 96.) This encompassed "a number of important functions," including "[e]nsuring that surplus inventory on top is brought down so it's accessible for consumers to purchase," training store employees, ensuring that display products are in a saleable condition and processing returns. (Tr. 96-97.) The final function was to perform resets. (Tr. 97.) With respect to resets, Swenerton testified that they were "very periodic" and that "generally speaking," resets were initiated by Home Depot. (Tr. 98.) Swenerton further testified that between 1999 and 2004, there were three major resets conducted at Home Depot stores, including a kitchen range hood reset in 1999, a bath fan reset in 2003 and the 2004 kitchen range hood reset at issue in the within action. (Tr. 98.)

Swenerton testified that all three of the functions performed under the Agreement were compensated by payment of a commission of three percent (3%) of net sales, as specified in the contracts. (Tr. 99.) There was no separate understanding that the representatives would be paid more during a reset or less when a reset was not occurring. (Tr. 99-100.) Swenerton further testified that, prior to the 2004 reset, none of Broan's manufacturer's representatives had ever ...


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