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May 16, 1977

The BEATTIE MANUFACTURING CO. and Cherokee Corporation. The BEATTIE MANUFACTURING CO. v. Richard A. FREED and Stephen Freed

The opinion of the court was delivered by: HANNUM

 HANNUM, District Judge.

 Presently before the Court is defendant The Beattie Manufacturing Company's (Beattie) motion for judgment notwithstanding the verdict or, in the alternative, motion for a new trial pursuant to Rules 50(b) and 59, Federal Rules of Civil Procedure, in Civil Action No. 73-1016. Plaintiff, Keystone Floor Products Company (Keystone) makes no separate motion with respect to this action and neither party advances any motion with respect to the consolidated case, Civil Action No. 74-2315.

 The amended complaint, by which Keystone originally sought injunctive relief in its action against Beattie, *fn1" contains four counts, breach of contract, malicious interference with contract, unfair competition and violation of the anti-trust laws. Beattie, by way of counterclaim, asserted claims against Keystone for an outstanding indebtedness, failure to use best efforts and fraud.

 The case proceeded to trial before the Court and a jury on all claims. However, upon Beattie's motion at the close of Keystone's case, a directed verdict pursuant to Rule 50(a), Federal Rules of Civil Procedure, was entered on Keystone's antitrust claim and also as to Keystone's claims against defendant Cherokee Corporation. At the close of Beattie's case its count charging failure to use best efforts was withdrawn. The remaining issues were submitted to the jury.

 By answers to special interrogatories the jury found that Beattie had breached its contract with Keystone and awarded plaintiff $1,500,000.00 damages. The jury further found that Beattie was liable for malicious interference with contract, however, only nominal damages were awarded. As to the unfair competition claim, the jury found that Beattie was not liable.

 In addition, with respect to Beattie's counterclaim, the jury determined that there was an outstanding debt of $119,000.00 owed by Keystone to Beattie but found that Keystone was entitled to an offset of $47,800.00 and thus awarded Beattie $71,200.00, plus interest of $8,544.00. Beattie's claim of fraud was rejected by the jury.

 Although defendant's post-trial motions raise a number of questions, the argument most strongly advanced is that the record provides no basis upon which the jury could award damages of $1,500,000.00 on the breach of contract claim. In certain respects Beattie's position on this point is persuasive. Thus, for the reasons set forth herein the Court recommends that Keystone agree to a remittitur of all damages in excess of $149,440.00. In the alternative, a new trial on the issue of damages relating to the breach of contract claim will be granted.

 I. FACTS *fn2"

 Keystone is a Pennsylvania Corporation engaged in the distribution of carpeting to retail outlets in Eastern Pennsylvania, Southern New Jersey, Delaware and the Baltimore-Washington area. The company is equally owned and operated by two brothers, Richard A. Freed and Stephen Freed, who assumed control of the business after their father's death. Beattie is a New Jersey corporation engaged in the manufacture and nationwide distribution of carpeting.

 Business dealings between the parties began in 1966 and by 1968 the parties had reached an oral understanding that Keystone was Beattie's distributor in the Philadelphia region. Although there was no written agreement, on May 25, 1970, Beattie sent Keystone a copy of its "General Terms and Policies for Distributors" (General Terms). *fn3" The General Terms covers a number of topics including credit terms and claims handling. As to credit terms it provides in Paragraph 5:

"Terms are either 5% 30 days, net 31, or 4% 60 days, net 61, not both. Confirmation of order will specify which terms apply. No anticipation allowed. Interest at 1 1/2% per month will be charged on all past due invoices."

 The document also refers to termination of the distributorship agreement in Paragraph 15 which provides:

"The mill distributorship relationship may be discontinued without cause, provided 60 days notice is given by either party. This practice will be considered as common usage and both parties will be notified where the communication was made as was this by certified mail, return receipt requested."

 In addition the Freeds' oral testimony indicated that the understanding of the parties was that Keystone had a sole and exclusive distributorship. Consistent with their testimony was a letter from John Beattie, President of defendant, to Richard Freed dated January 17, 1972, in which he stated:

"As we have discussed in recent weeks, your company [Keystone] handles the Beattie line in your trading area, including Philadelphia, Baltimore, Washington and North Jersey. In this territory you have sole distribution of the Beattie Carpet Line.
If you have any further questions relative to this arrangement, please get in touch with me." *fn4"

 Sometime after receipt of this letter plaintiff became aware that defendant was distributing its carpets through David Hockstein Associates (Hockstein) in the Baltimore-Washington-Virginia region. On March 2, 1972 Richard Freed directed a letter to John Beattie complaining of the sales to Hockstein. *fn5" Receiving no response he sent a second complaining letter to John Beattie on March 15, 1972 *fn6" which took a harsher tone. John Beattie replied by letter dated March 17, 1972, wherein he stated:

"I wish to acknowledge receipt of your recent letters again calling our attention to a condition discussed previously relative to David Hockstein Assoc. Upon receipt of your first letter two weeks ago, I began an investigation into the actual facts. You have my complete assurance that we will abide by our letter dated January 17, 1972.
You will be hearing from me shortly, relative to the outcome of this investigation." *fn7"

 Unbeknownst to Keystone, Beattie continued shipments to Hockstein.

 John Reilly of Beattie testified that Hockstein was a "private label" distributor as distinguished from a "running line" distributor. Running line carpet is a product sold by the distributor under the manufacturers label or brand designation. Private line carpet is exactly the same product sold under the private label of a particular distributor. Although the distinction is recognized in the industry it seems to be, largely, one without a difference. In any event, as Richard Freed testified, he later learned that Beattie shipped running line carpet to Hockstein through November 1972 using coded invoices as a subterfuge. These circumstances eventually led to discontinuance by Keystone of its operations in the Baltimore-Washington vicinity.

 During the latter part of 1972 Keystone's leading seller was a product called "Supervelour," supplied by a company other than Beattie, Vernon Carpet Mills. The next two leading sellers were, however, supplied by Beattie and, in fact, Beattie merchandise constituted approximately 80% of Keystone's inventory of carpet. In purchasing such a large quantity of its inventory from Beattie, Keystone was, naturally, quite dependent upon the relationship. When certain delivery problems began to occur, they were not without considerable adverse effect upon plaintiff's organization.

 The delivery problem manifested itself in two ways. First, because of late deliveries Keystone could not adequately supply its retail outlet customers. Kathryn Kucinskas, an order clerk at Keystone, testified that during Christmas 1972, poor deliveries caused Keystone to suffer a number of cancellations. Second, when Beattie filled orders Keystone found that faster moving inventory was supplied in a disproportionately low percentage compared to slower selling inventory. For example, if Keystone placed an order for a brand of carpet called "Treasure Island" broken down into ten rolls of gold and ten rolls of green (fast sellers) and two rolls of purple and two rolls of white (slow sellers), when Beattie would fill the order they would supply only two rolls of each color. Over a period of time this resulted in Keystone's inventory becoming overstocked in slow moving merchandise. As a consequence of the inventory problems, according to the testimony of Stephen Freed, plaintiff had to cancel 1000 rolls in early 1973.

 It was also during the latter stages of 1972 that Keystone's outstanding account with Beattie began to reach substantial proportions. As of October 14, 1972 the debt was approximately $456,770.04. There was, however, some difference of opinion as of the exact amount of the debt, due principally to differences in bookkeeping systems. By letter dated November 14, 1972, *fn8" from Beattie signed by Philip Mintz, credit manager of Beattie, and Richard Freed, Keystone was allowed a credit of $26,383.25 leaving an outstanding balance of $430,386.79. The letter also provided that Keystone waived "any and all claims or deductions pertaining to invoices dated up to and including October 27, 1972." But, there was also an addendum initialed by both parties which provided that "[nothing] in the above agreement shall be construed to preclude either party from seeking further remedies from any and all disputes." Thereafter, on February 28, 1973 Keystone returned $200,000.00 worth of carpeting and made a partial payment leaving, by Beattie's records, an approximate balance of $124,000.00. Richard Freed testified, in effect, that although this figure was substantially correct it was off by several thousand dollars.

 Although the General Terms provides for credit terms, the financial arrangements between the parties involved the practice of factoring. In this case Keystone's account was factored through Citizens and Southern Factors (C & S). According to John Beattie defendant employed factoring in order to assure payment.

 By letter dated April 25, 1973 *fn9" Beattie terminated the Keystone distributorship. Beattie's asserted reasons for termination were the reduction of Keystone's sales of Beattie products, disproportionate claims submitted by Keystone to Beattie, the imminent change in ownership, the worsening condition of plaintiff's business and Keystone's failure to obtain adequate factoring. In short, it was Beattie's position that continuation of the distributorship would have been injurious to it and, thus, it claimed that in March 1973 it began looking for an alternative method of distribution in the Philadelphia area.

 Beattie, however, failed to afford Keystone sixty days notice. It abruptly cut off Keystone's credit and immediately began distribution in Keystone's territory. Albert Levenkron, formerly an employee of Keystone who left shortly before termination and went with Beattie, admitted that by May 1, 1973 Beattie was in direct distribution in Philadelphia. George Sherenian, a Keystone salesman, testified that several of his retail outlet customers had been solicited by Beattie salesmen in April 1973. He cited Modern Carpet as an example. At Modern Carpet, Keystone's price list *fn10" had been modified by Herb Sulkin of Beattie, showing Beattie's new, lower prices. In addition, Robert Levin, a warehouse equipment salesman, testified that he had sold Beattie storage racks for its new warehouse in Philadelphia and that he was first contacted about the transaction on April 18, 1973.

 The abrupt manner in which the distributorship was terminated and the fact that Beattie immediately began to compete caused Keystone a number of problems. First, because Beattie was offering its carpet at lower prices, Keystone could not sell its inventory of Beattie merchandise. Second, as Richard Freed testified, the purpose of the sixty day notice provision was to provide the distributor with some continuity and to protect it from a quick change in the relationship. However, under the circumstances, it took ...

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