The opinion of the court was delivered by: Laura Taylor Swain, United States District Judge
Plaintiffs Federated Retail Holdings, Inc., Macy's Department Stores, Inc., Macys.com, Inc., and Macy's Merchandising Group, Inc. (collectively "Macy's" or "Plaintiffs") brought this action against Defendant Sanidown, Inc. ("Defendant" or "Sanidown"), asserting claims under the New York Uniform Commercial Code ("N.Y. U.C.C.") and New York General Business Law Section 349 ("Section 349"), as well as claims for fraud in the inducement and unjust enrichment, all arising from the parties' dealings with respect to down and feather bedding to be sold by Plaintiffs in the spring and fall of 2006. Defendant interposed counterclaims pursuant to the N.Y. U.C.C.*fn1 The Court has jurisdiction of the action pursuant to 28 U.S.C. § 1332.
Plaintiffs' claims and Defendant's remaining counterclaims were tried to the bench in November and December 2009. After the conclusion of Plaintiffs' case in chief, the Court granted in part Defendant's motion pursuant to Rule 50 of the Federal Rules of Civil Procedure, dismissing Plaintiffs' Section 349 claim, claims relating to the Fall 2006 contract, and claims relating to the Spring 2006 contract insofar as they were premised on N.Y. U.C.C. § 2-612. (See docket entry no. 112 ("Dec. 16, 2009, Order").) The parties submitted post-trial proposed findings of fact and conclusions of law and memoranda in support thereof. The Court observed carefully the demeanor and testimony of the witnesses and has considered thoroughly all of the parties' submissions and arguments as well as the trial record.
This Opinion and Order constitutes the Court's findings of fact and conclusions of law in accordance with Rule 52 of the Federal Rules of Civil Procedure. To the extent any finding of fact constitutes or incorporates a conclusion of law it is to be deemed a conclusion of law. Similarly, any conclusion of law that constitutes or incorporates a finding of fact is to be deemed a finding of fact.
The Court's findings of fact are based on the trial record.
For approximately fifteen years, Defendant supplied Plaintiffs with down- and feather-filled products, including pillows, comforters, and featherbeds, which Plaintiffs resold in their retail stores. (Tr. 435:10-13, 745:7-11.) The parties ordinarily contracted for the supply of these goods, according to specifications agreed upon by the parties and in quantities determined by Plaintiffs, for each of two seasons, spring and fall, each year. (Tr. 384:25-386:1 (discussing the process with respect to the "spring 2006 assortment"), 386:5-15 (discussing the fall 2006 season), 387:11-388:5, 775:2-776:4; Ex. 21 (specifications for Fall 2006 products).) These contracts were memorialized in "projections" reflecting the price and anticipated number of goods that were to be supplied by Defendant each month during each season's "six-month delivery cycle." (Tr. 385:19-386:1, 399:4-10; Exs. B, SS.)
Over the course of each contract period, Plaintiffs periodically ordered specific quantities of goods that roughly corresponded to the quantities forecast in the projection document, and Defendant then manufactured and delivered the ordered goods to Plaintiffs. (Tr. 399:11-400:6.) In a given season, Plaintiffs sold that season's products along with any products left over from the prior season. (Tr. 385:10-13, 387:6-8.) Defendant agreed to adhere to Plaintiffs' procedures pertaining to shipping and labeling (Tr. 392:9-24), and to incur expense offsets, or "chargebacks," for procedural non-compliance (Tr. 400:7-401:2). The procedures that Plaintiffs' vendors are required to follow in the packaging and delivery of merchandise are delineated in a manual that is available on Plaintiffs' internet site. (Tr. 491:2-16; Ex. 86 (the "vendor standards manual").)
George Frenkel, the president of Sanidown (Tr. 812:2-4), testified that when he negotiated the prices at which Defendant would sell merchandise to Plaintiffs, he "would usually start [negotiations] at 140 percent" of Defendant's cost and that he "usually" achieved a profit margin of thirty percent on the agreed price. (Tr.779:5-781:12, 870:18-871:11.) Frenkel testified credibly that Defendant earned a similar profit margin on goods sold to other retailers. (Tr. 781:13-25.) If Defendant had sold merchandise at 140 percent of its costs, then 28.57 percent (i.e., 40/140) of its revenue would have exceeded its costs, and thus constituted profit. Since Frenkel testified that he opened negotiations with a price forty percent greater than his costs, and since even that price would produce a profit margin of less than twenty-nine percent, the Court construes Frenkel's testimony as evidence that he typically settled for a price thirty percent greater than his costs, yielding a profit margin of 23.08 percent (i.e., 30/130). The Court finds that Defendant has proved by a preponderance of the evidence that its typical profit margin on the relevant goods was 23.08 percent.
Defendant claimed that Plaintiffs withheld $2,782,505.87 in chargebacks between January 1, 2000, and October 31, 2006, all without justification, of which $460,715.71 was ultimately paid to Defendant. (Tr. 966:24-967:1, 1015:7-1018:10; Exs. E, E1, VV.) Defendant failed to proffer credible evidence substantiating its assertion as to outstanding unjustified chargebacks. Defendant relied principally upon documents prepared by Defendant's factor that failed to differentiate between "expense offsets" and other deductions (Exs. E, VV; Tr. 1025:2-1026:21, 1029:13-15), failed to identify the individual deductions with particular invoices (Tr. 1026:22-1027:3), and may have included deductions taken against Defendant by buyers other than Plaintiffs (Tr. 1031:16-1032:3).
Plaintiffs' evidence shows that they withheld $126,193*fn2
in "expense offsets" between January 1, 2000, and December
31, 2005 (Tr. 515:17-517:14; Exs. 117-122, 124-128), and an additional
$28,108.95 in such offsets in 2006 (Tr. 560:21-561:14; Ex. 112). The
expense offsets related to alleged violations of Plaintiffs' vendor
standards manual, such as improper labeling of boxes of merchandise,
untimely shipping notices, and other shipping-related violations of
Plaintiffs' standards. (Tr. 491:3-496:1.) The evidence established
that Plaintiffs thoroughly documented the occurrence of these expense
offsets and had noted the reason given for each by the distribution
centers, but no evidence was presented that those reasons reflected
accurately the actual condition, timeliness or other relevant aspects
of the shipment associated with the expense offsets. (See Tr.
521:2-523:6, 529:2-3, 570:19-572:23.) Plaintiffs have therefore failed
to establish that any of these "expense offsets" was actually
warranted by Defendant's actions.
The parties entered into separate contracts for the Spring 2006 and Fall 2006 seasons. (Tr. 384:25-386:3, 426:18-23, 774:6-11.) In August 2005, Plaintiffs issued projections for the Spring 2006 contract (Tr. 385:19-386:1) which provided that Defendant was to supply to Plaintiffs three types of Appalachian Comforters, three types of Tahoe Comforters, two types of Mt. Evans Pillows, two types of Matterhorn Pillows, two types of Euro Square Pillows, and five types of Matterhorn Featherbeds (Tr. 385:8-13; Ex. SS). In February 2006, Plaintiffs issued projections for the Fall 2006 contract (Tr. 386:5-10) which provided that Defendant was to supply to Plaintiffs four types of Hotel Comforters, three types of Appalachian Comforters, two types of Tahoe Comforters, two types of Matterhorn Pillows, and two types of Euro Square Pillows (Ex.B1; Tr. 386:12-15). The Fall 2006 projections document also listed five types of Matterhorn Featherbeds but, unlike the other products listed, did not indicate a price for those items. (See Ex. B1.) The Matterhorn Featherbeds were listed on the May 31, 2006, and June 26, 2006, inventories, which reflected then-outstanding orders for the Fall 2006 contract, including for Matterhorn Featherbeds, and indicated Fall 2006 "first cost" figures. (Exs. J ("May 31, 2006, Inventory"), K ("June 26, 2006, Inventory").) The Court finds that the Matterhorn Featherbeds were included in the Fall 2006 contract and that the total monetary value of the Fall 2006 contract was $8,432,075, based on the pricing enumerated in the Fall 2006 projections document and the Matterhorn Featherbeds' "first costs" as documented in the June 26, 2006, inventory.
In January 2006, prior to the consummation of the Fall 2006 contract negotiations, Plaintiffs took a $150,000 rebate against their outstanding invoices from Defendant, to which Frenkel claimed he acceded only as part of the complete Fall 2006 program. (Tr. 766:6-11.) The Court finds that Plaintiffs' withholding of this rebate was justified in light of Defendant's accession, in return for which Defendant was able to secure agreement as to the Fall 2006 contract.
In April 2006, Plaintiffs learned that the California Bureau of Home Furnishings and Thermal Insulation ("CBHF"), which licenses and regulates the bedding industry in California, had issued a statewide "withhold from sale order" prohibiting Plaintiffs from selling any of Defendant's products in California. (Tr. 62:8-63:3, 108:6-25, 402:7-9; Ex. 40.) The order was issued after the CBHF determined that Defendant's license to do business in California had lapsed and that certain Matterhorn Comforters produced by Defendant violated a California law requiring that products labeled as "down" contain at least seventy-five percent down. (Ex. 40.) Plaintiffs' Associate Counsel, Fawn Horvath, contacted Defendant's president, George Frenkel, about the CBHF situation. Frenkel told Horvath that the finding of mislabeling was unfounded, that he would resolve the licensing problem, and that the "withhold from sale order" would be withdrawn. (Tr. 109:3-110:10.) Approximately one week later, that order was ...