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Neville Chemical Co. v. Union Carbide Corp.

decided: February 6, 1970.

NEVILLE CHEMICAL COMPANY
v.
UNION CARBIDE CORPORATION, APPELLANT



Hastie, Chief Judge, and Van Dusen and Adams, Circuit Judges.

Author: Adams

Opinion OF THE COURT

ADAMS, Circuit Judge.

This is an appeal from a judgment of the District Court for the Western District of Pennsylvania, entered after a jury found that Union Carbide Company (Carbide) had been negligent and breached its warranties in the sale of a certain unsaturated oil to Neville Chemical Company (Neville).

Carbide is a leading producer of various chemical products. One of these products is a hydrocarbon oil, used for forming resins, originally referred to as "unsaturated oil" and later called "U-171". Unsaturated oil is produced from dripolene, a product of Carbide's "cracking" operations, in which natural gas and other materials are processed into ethylene and additional commodities.

Neville is in the business of manufacturing hydrocarbon resins from products which it purchases from petrochemical companies such as Carbide. Neville produces resins at plants located at Neville Island near Pittsburgh, Pennsylvania, and Anaheim, California. It sells its resins to customers throughout the United States and parts of Canada for use in the manufacture of such items as floor tile, shoe soles, rubber matting, pigments for printing ink, paper packaging products, paint and varnish.

Over a period of fifteen years prior to the events in question, Carbide sold Neville large quantities of unsaturated oil. Carbide was aware of the particular purposes for which Neville purchased this product and knew the end uses of the resins which Neville manufactured.

By 1959, Neville was dissatisfied with the yield and color qualities of Carbide's unsaturated oil. In order to "get more money for their product" and because of Neville's dissatisfaction, Carbide instituted a program to improve the quality of its unsaturated oil. Beginning in January, 1960, it submitted to Neville several samples of refined unsaturated oil which it developed in an effort to meet Neville's requirements. None of these samples was satisfactory. In February, 1961, Carbide delivered to Neville a sample of refined unsaturated oil which Carbide called "UO-171". Neville then ordered on a trial basis and received in October, 1961, a barge shipment of approximately 300,000 gallons of this material, then designated "U-171" by Carbide. The trial shipment produced a satisfactory resin and Neville, in 1961 and 1962, purchased ten more 300,000 gallon barge lots of U-171. In February, 1963, Carbide also commenced shipment of U-171 to Neville's Anaheim plant.

After negotiations in Pittsburgh, Carbide drafted a year-to-year contract, dated February 12, 1963, to be effective October 1, 1962, by which Neville agreed to purchase from Carbide its requirements of "Resin Intermediate, U-171", "estimated to be 1,500,000 gallons per year", at "17.5 cents per gallon". The agreement was signed by Neville in Pittsburgh and then transmitted to New York where it was signed by Carbide.

Although the contract does not define "Resin Intermediate, U-171", it specifies the required maximum or minimum limits on four of its physical properties, and states that "the material is a derivative of Dripolene a by-product from Ethylene production." The four properties itemized are "Polymerizable Content", "Resin Color", "Aniline Point", and "Resin Solubility". The contract contains Carbide's warranty "to deliver to Buyer material conforming to the specifications" and an "escape clause" in the event a "change in the character of Dripolene, for any reason whatsoever, render(s) it impossible * * * for [Carbide] to produce material conforming to the specification limits * * *". Paragraph 7, entitled "Claims", requires that notice of claims against Carbide be given "within fifteen (15) days after the receipt of such material"; provides that Neville "assumes all risk and liability for the results obtained by the use of any material * * * in manufacturing process * * * or in combination with other substances"; and provides that "No claim * * * shall be greater in amount than the purchase price of the material in respect of which such claim is made." Paragraph 9, states that the contract "contains all of the representations and agreements between the parties hereto and no warranties shall be implied."

All the U-171 sold to Neville was produced at and delivered from Carbide's Kanawha Valley facilities at Institute and South Charleston, West Virginia. Beginning January, 1963, dripolene from Carbide's Seadrift, Texas plant was imported into the Kanawha Valley by Carbide and, without Neville's knowledge, was used to produce U-171.

Without notice to Neville, but with notice to its own personnel,*fn1 Carbide in early June, 1963, changed its Seadrift, Texas ethylene process to permit ethyl acrylate, a chemical additive made from ethylene and used in the production of polyethylene, to be recycled into the ethylene stream, and thus into the dripolene. Prior to the change at Seadrift any ethyl acrylate was, from its first use in 1959, destroyed in the cracking furnaces before it could get into the ethylene stream. No ethyl acrylate of any significance could have survived the cracking furnace heat to which it was subjected before June, 1963. The earliest time at which ethyl acrylate could have reached any Neville plant as part of U-171 was early August, 1963.

In October, 1963, personnel at Neville's Anaheim plant began receiving serious complaints from the Flintkote Company branch in California. Flintkote used Neville's resin to make floor tile, and several of Flintkote's customers were complaining to it about an unusual, persistent and intolerable odor in the floor tile which had been manufactured from Neville's resin. Neville's President, Lee V. Dauler, immediately went to the West Coast to investigate. Thereafter, in November, 1963, he went to New York City and met with Carbide officials. Mr. Dauler advised Carbide of the Flintkote complaints and told Carbide he suspected a change had been made in U-171. A sample of the malodorous Flintkote tile was left with Carbide for analysis. Carbide did not advise Neville of the results of its analysis.

Although Neville claimed that the October, 1963, complaint was the first serious odor complaint, Neville described at least one floor-tile complaint from Flintkote before August, 1963, and conceded that before mid-July, 1963, Flintkote had asked for a "deskunking" of Neville's resin.*fn2 In January, 1964, personnel at the Neville Island plant began receiving numerous complaints from customers in Eastern United States and Canada who had purchased resin made from U-171 and used it in the manufacture of material for shoe soles, paper packaging products, rubber matting, pigments for printing inks, paints and varnishes. There were, however, customers of Neville who used resins made from U-171 during this same period and did not complain, including Armstrong Cork, which like Flintkote used Neville resin in manufacturing floor tile.

Neville stopped purchasing U-171 after December, 1963.

Investigation by Neville and its customers established that after the various end products made with resins containing U-171 were distributed, they developed an intolerable odor, which persisted for long, indeterminate periods of time. Efforts to mask or otherwise abate the odor proved fruitless.

During 1964, Mr. Dauler and D. W. Kelso, Vice President and Treasurer of Neville, wrote several letters to Carbide advising of the claims asserted and the litigation threatened against Neville. On July 17, 1964, Neville's counsel wrote to Carbide setting forth the number and gravity of the claims, listing each of the complaining customers, the dollar amount of each claim, and notifying Carbide of Neville's claim against it for full reimbursement of amounts paid in respect of such claims and related costs. In reply to these communications, Carbide denied any responsibility in the matter, refused to provide any information to Neville regarding the possible cause of the odor problem, and did not advise Neville of any change in its process of manufacturing U-171. Neville investigated and then settled its customers' complaints and claims.

Neville brought suit on July 20, 1965, under diversity jurisdiction, charging Carbide with negligence in allowing ethyl acrylate to enter the dripolene, and failing to notify Neville of the change, with breach of its express warranties, and with breach of the implied warranties of merchantability and fitness for a particular purpose. Neville sought to recover $696,534 it paid to settle claims asserted by customers which had purchased its resin; $128,075.40 in interest on this amount; $53,965 claimed from Neville by Liberty Mutual Insurance Company for money paid to Beebe Rubber Company, a customer of Neville; $281,063 it claimed was spent on technical research, settlement expenses, and disposition of defective materials; and $1,519,145 estimated loss of profits for a ten year period.

Carbide counterclaimed for the cost of merchandise which had been shipped to Neville and not paid for, and for the loss of profits sustained by it because Neville refused to accept the remaining U-171 which Neville had contracted to purchase.*fn3

The case was tried in two stages before Judge Gerald J. Weber and a jury. In the first stage, all issues as to liability were submitted to the jury on special interrogatories. In answer to 15 interrogatories, the jury found: (1) the contact with ethyl acrylate during Carbide's processing was the proximate cause of the odor which made Neville's resin unacceptable to users; (2) Carbide was negligent in delivering such material to Neville; (3) Carbide was negligent in failing to notify Neville of the change in its process; (4) there was no negligence on the part of Neville which contributed to the odor problem; (5) Neville did not assume the risk of objectionable odor; (6) Carbide did not breach its contract with Neville to supply Neville with the material agreed upon; (7) Carbide agreed to deliver material conforming to a sample labeled "UO-171" and (8) failed to do so; (9) Carbide agreed to deliver material substantially conforming to the material delivered by barge loads in 1961 and 1962 and (10) failed to do so; (11) Carbide agreed to deliver material that "had been identified by a verbal description which identified the material" and (12) did deliver such material; (13) Carbide failed to deliver material which would pass as a resin former oil without objection in the trade or was of fair average quality or which was fit for the ordinary purposes of such material in the trade; (14) Carbide had reason to know of Neville's particular purposes for the material, Neville relied on Carbide's skill and judgment, Carbide had reason to know this; and (15) Carbide failed to supply material fit for Neville's purposes.

After the jury made its findings on liability, the issues of damages were tried and the jury returned a verdict for the plaintiff in the amount of $2,151,534.

Carbide filed post trial motions for judgment notwithstanding the verdict, alterations and amendment of judgment and a new trial.*fn4 The motions for judgment n.o.v. and a new trial were denied by Judge Weber. 294 F. Supp. 649 (W.D.Pa.1968). This appeal followed.

The basic question presented on this appeal is whether the District Court properly refused to grant defendant's motion for judgment notwithstanding the verdict, pursuant to Rule 50(b), Federal Rules of Civil Procedure. Such a motion may not be granted unless as a matter of law it is found that Neville failed to present a case for the jury, and a verdict in Carbide's favor should have been directed at the end of the trial. Montgomery Ward & Co. v. Duncan, 311 U.S. 243, 250, 61 S. Ct. 189, 85 L. Ed. 147 (1940); 2B Barron & Holtzoff, Federal Practice & Procedure ยง 1079, p. 414 (1961).*fn5

Carbide advances the following reasons in support of its motion for judgment notwithstanding the verdict:

I. Neville failed to prove a prima facie case of causation.

II. Neville failed to prove negligence, or to establish a breach of warranty.

III. The terms of the contract between Neville and Carbide preclude liability to Neville for either breach of warranty or negligence.

IV. The damage verdict was improper because its various elements were not legally recoverable.

Before reaching any of Carbide's contentions, the question of what state law governs the various issues in this case must be discussed. The parties and trial court apparently assumed without discussion that Pennsylvania law controlled.

A federal court in a diversity case must apply the conflict laws of the state in which it is sitting. Klaxon Co. v. Stentor Elevator Mfg. Co., 313 U.S. 487, 61 S. Ct. 1020, 85 L. Ed. 1477 (1941). The Pennsylvania Supreme Court follows the modern approach and looks to the law of the place with the most significant relationship to the parties and the transaction, on each issue, or the "center of gravity" of the contract. Griffith v. United Airlines, Inc., 416 Pa. 1, 203 A.2d 796 (1964); Auten v. Auten, 308 N.Y. 155, 124 N.E.2d 99, 50 A.L.R.2d 246 (1954) cited in Griffith, 416 Pa. at 20 n. 13, 203 A.2d at 805 n.13. See also Slaughter v. Philadelphia National Bank, 417 F.2d 21, 26 n.8 (3d Cir. 1969).

Pennsylvania has the greatest interest in applying its laws to both the liability and damage issues before this Court. It is the place of negotiation of the contract, the place where the plaintiff, Neville, signed the contract, the principal place of business of Neville, the party seeking damages, the place where a portion of the contract was performed, and the forum state. Although Carbide signed and drafted the contract in New York, and part of the material was delivered to California directly from Carbide's West Virginia plant, the interest of these states is considerably weaker. Under Griffith, reliance by the parties on the law of a particular state is also a consideration in making a choice of law, and it is reasonable to believe that the parties here contemplated the application of Pennsylvania law. This appears to be particularly so in view of the lack of dispute on this point.*fn6

I

Carbide contends that a directed verdict should have been entered against Neville because Neville failed to prove a prima facie case establishing that the ethyl acrylate Carbide allowed to enter the ethylene stream was the proximate cause of Neville's odor complaints. To support this argument Carbide relies heavily on the decision of this Court in Denneny v. Siegel, 407 F.2d 433 (1969), affirming a directed verdict granted in favor of defendant under Rule 50 by the District Court because the plaintiff failed to produce the necessary evidence to establish the negligent act as the proximate cause of the injuries sustained.

It should be noted that the parties here, unlike those in Denneny, have not addressed themselves to the issue whether state or federal standards are to be employed to test the sufficiency of the evidence required to establish a prima facie case. We assume, therefore, that they read the Denneny opinion as saying that there is no difference between the federal standard applied in this Circuit in diversity cases and the standard applied by the Pennsylvania state courts.

In Denneny, this Court after observing the lack of uniformity among the circuit courts on this point, as well as the conflicting decisions in this circuit, nonetheless declined to pass on the issue, since an examination of federal and state standards on the evidence necessary to establish medical causation, the critical issue in that case, revealed that they were substantially similar. We adhere to this determination.

The Pennsylvania test, as stated in Smith v. Bell Telephone Co. of Pa., 397 Pa. 134, 153 A.2d 477 (1959) was summarized in Denneny as requiring "the trial judge [to] determine as a minimum requirement of a prima facie case whether the plaintiff has produced 'substantial evidence' of 'sufficient facts' having the ...


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