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RELIABLE TIRE DISTRIBS. v. KELLY SPRINGFIELD TIRE

April 1, 1985

RELIABLE TIRE DISTRIBUTORS, INC.
v.
THE KELLY SPRINGFIELD TIRE COMPANY and BOBBY UNSER and THE BARNES TIRE COMPANY, INC.


Norma L. Shapiro, United States District Judge.


The opinion of the court was delivered by: SHAPIRO

NORMA L. SHAPIRO, UNITED STATES DISTRICT JUDGE

 This action arises out of an agreement, dated April 20, 1972, between plaintiff Reliable Tire Distributors, Inc. ("Reliable"), a corporation engaged in wholesale tire distribution, and Sports Headliners ("Headliners"), agent of defendant Bobby Unser ("Unser"), internationally-known race car driver, and a second agreement, dated May 23, 1972, between Reliable and defendant Kelly Springfield Tire Company ("Kelly"), a manufacturer and distributor of tires. The court held separate trials on liability and damages. On March 9, 1984, 592 F. Supp. 127, this court's Findings of Fact and Conclusions of Law determined the following:

 The earlier Reliable-Headliners agreement provided for the registration of the "Bobby Unser" trademark and granted plaintiff *fn1" an exclusive license to make or have made tires bearing this trademark and thereafter to use or sell them. Reliable agreed to pay royalties to Unser for each tire sold and Unser agreed to use his best efforts to promote and sell the tires. Defendants Unser and Kelly ratified the provisions of the agreement regarding their respective duties.

 But instead of producing tires to fill orders obtained by Reliable, in accordance with the Kelly-Reliable agreement, Kelly manufactured quantities of "Bobby Unser" tires in varied sizes and held them in inventory for future sale to Reliable. As a result, by 1974 Kelly had acquired a substantial excess inventory of "Bobby Unser" tires, particularly in uncommon or less popular sizes. In February, 1974, Kelly requested Reliable's permission to dispose of the surplus "Bobby Unser" tires. By letter dated February 6, 1974, Samuel Vill, Reliable's General Sales Manager, authorized Kelly to dispose of the surplus "Bobby Unser" tires subject to certain restrictions: the parties had to agree mutually which tires were excess; Kelly had to maintain an adequate inventory for estimated future sales and remove the "Bobby Unser" name from the excess tires or pay a fifteen-cent (15 cent) per tire royalty; Kelly could sell the tires only in Japan, Kansas City or the West Coast of the United States, excluding San Francisco. Kelly declined to dispose of the excess tires in inventory on those terms. Reliable subsequently signed a letter, dated June 28, 1974, authorizing Kelly to dispose of the excess tires "without strings."

 In September, 1974, Kelly contacted Reliable and offered to sell the excess inventory tires to Reliable at a discounted price if Reliable would accept the entire inventory immediately and make payment in full within thirty (30) days of shipment. But Kelly would not drop ship these tires as it did for the Bobby Unser tires Reliable ordered under its contract with Kelly. Reliable rejected that offer. Kelly then offered to sell the tires to defendant Barnes Tire Company ("Barnes") for the same price and on the same terms and conditions offered to Reliable. Barnes also rejected the offer but made a counter-offer accepted by Kelly. Without first reoffering the tires to Reliable, Kelly agreed to sell the excess tires to Barnes at a price lower than the Kelly-Reliable contract price and lower than the discounted price originally offered to Reliable. Kelly also agreed to drop ship the tires for Barnes and did not require immediate full payment.

 Kelly also agreed to and did manufacture additional "Bobby Unser" tires for sale to Barnes in November and early December, 1974, at the same discounted price and on the same favorable terms as the excess tires. Kelly was then manufacturing and selling tires to Reliable for prices set under the 1972 contract (which permitted Kelly to set the price each half year). Therefore, during November and early December, 1974, Kelly manufactured and sold tires to Reliable and Barnes at different prices and on different terms.

 In December, 1974, Reliable sought to purchase 30,000 tires at the Barnes price but Kelly refused to sell them to Reliable at that price. Reliable then contacted other tire manufacturers to determine whether it could have "Bobby Unser" tires produced at lower cost elsewhere. Mohawk Rubber Company ("Mohawk") agreed to manufacture the tires for a lower price than that charged by Kelly; in the Spring of 1975 Reliable requested Kelly to release the tire molds for transfer to Mohawk. The Kelly-Reliable agreement stated that, "no mold will be removed from [Kelly's] plant as long as any balance remains unpaid on such mold." para. 17(d). Kelly refused to release the molds because Reliable owed Kelly $ 46,000 for the molds and Reliable declined to pay the remaining amount in advance of the due date.

 Reliable's complaint against defendants alleged that: Kelly and Barnes violated the Robinson-Patman Act, 15 U.S.C. § 13, by Kelly's manufacture and sale of the "Bobby Unser" tires to Barnes at lower prices than it would sell to Reliable; Kelly, Barnes and Unser conspired to restrain trade and eliminate Reliable as a distributor of tires in violation of Section 1 of the Sherman Act, 15 U.S.C. § 1; Barnes and Kelly infringed Reliable's registered "Bobby Unser" trademark; Kelly breached its contract with Reliable by manufacturing and selling tires to Barnes, refusing to manufacture tires for Reliable, and terminating the agreement; and Barnes tortiously interfered with Reliable's contract with Kelly by inducing the sale of "Bobby Unser" tires that were not in inventory but were specially manufactured for Barnes.

 On liability, the court found that Kelly breached its agreement with Reliable by: 1) specially manufacturing additional Bobby Unser tires over and above the excess inventory and selling them to or for Barnes in November and December, 1974; and 2) unilaterally terminating its agreement with Reliable in May, 1975. The court also found that Barnes tortiously interfered with the Reliable-Kelly contract by inducing Kelly to manufacture additional Bobby Unser tires for Barnes' customers. The court found in favor of all defendants on all other claims. This opinion constitutes the court's findings of fact and conclusions of law on damages.

 I. DAMAGES AGAINST KELLY

 The court has determined that Reliable is entitled to damages from Kelly for breach of contract as a result of its sale of specially manufactured tires and its unilateral termination of the Kelly-Reliable agreement. In determining the law to be applied in measuring the damages for breach of contract, a federal district court is required to apply the choice of law doctrine of the state in which it is sitting. Klaxon v. Stentor Mfg. Co., 313 U.S. 487, 85 L. Ed. 1477, 61 S. Ct. 1020 (1941). Under the law of Pennsylvania, issues in contract actions are governed by the law of the place with the most significant relationship to the parties and the transaction. See, e.g., Neville Chemical Co. v. Union Carbide Corp., 422 F.2d 1205 (3d Cir.), cert. denied, 400 U.S. 826, 27 L. Ed. 2d 55, 91 S. Ct. 51 (1970). Because the contract at issue was negotiated in New Jersey, the tires were manufactured in New Jersey and the parties agreed that the contract should be governed by New Jersey law, Reliable's claim against Kelly for breach of contract is governed by New Jersey law.

 Under New Jersey law, when a party has breached a contract, the non-breaching party has a right to recover the lost profits it reasonably expected to earn under the contract. See, e.g., Bak-A-Lum Corp. v. Alcoa Building Products, 69 N.J. 123, 351 A.2d 349 (1976). The non-breaching party has the burden of proving the amount of damages it sustained. Moreover, it must establish that the damages are the direct and proximate result of the breach. Sandler v. Lawn-A-Mat Chem. & Equip. Corp., 141 N.J. Super. 437, 454, 358 A.2d 805, 814 (App. Div. 1976). Lost profits for breach of contract must be related to the consequences of the breach. Donovan v. Bachstadt, 91 N.J. 434, 453 A.2d 160 (1982). Lost profits are recoverable as damages only when they might have been realized and are capable of being estimated with a reasonable degree of accuracy. Van Dusen Aircraft Supplies v. Terminal Const. Corp., 3 N.J. 321, 70 A.2d 65 (1949). In order to prove lost profits, plaintiff must provide the finder of fact with a reasonably fair basis for calculating the loss sustained as a result of the breach. Rempfer v. Deerfield Packing Corp., 4 N.J. 135, 72 A.2d 204 (1950).

 II. WRONGFUL TERMINATION

 To determine the amount of damages Kelly's wrongful termination in May, 1975 caused Reliable, two factors must be considered: first, the length of time the contract would have continued but for Kelly's wrongful termination; and second, the amount of profits lost during that time as a result of Kelly's wrongful termination.

 The agreement entered into between Reliable and Kelly on May 23, 1972 was a requirements contract; Kelly agreed to manufacture all Unser tires ordered by Reliable. The contract was renewable year-to-year until April, 1980 but either party had an option to cancel the agreement by giving written notice ninety (90) days prior to the end of each calendar year.

 
This agreement will be effective as of June 1, 1972. It shall be renewed without further action for additional successive periods of one calendar year each, provided, however, that either party may terminate this agreement, or any renewal thereof, at the end of any calendar year upon three (3) months' prior written notice given and effective upon mailing by registered mail.

 Agreement, Paragraph 2.

 Reliable contends that it is entitled to damages sustained from May 25, 1975 to April 20, 1980. But in May, 1975, Kelly clearly expressed its intent to terminate its contract with Reliable. Although the court has found that the Kelly termination letter was not immediately effective, the Kelly letter of May 25, 1975 did provide written notice of termination. Under the terms of the contract, termination was effective "at the end of any calendar year upon three (3) months' prior written notice given." The letter of May 25, 1975 was a written notice mailed more than ninety (90) days prior to December 31, 1975 and it effectuated termination as of that date.

 Reliable has argued that Kelly could not exercise its right to terminate so long as Reliable was fulfilling its obligations under the contract because an implied covenant of good faith and fair dealing is applied to the termination of contracts under New Jersey law. Shell Oil Co. v. Marinello, 63 N.J. 402, 307 A.2d 598 (1973), held that Shell Oil Co.'s termination of a service station franchise breached the contract even though there was a ten-day termination clause; the Court found the bargaining power of the parties grossly disproportionate and the termination provision unfair. Here, Reliable and Kelly were dealing at arms length. Reliable was one of the largest tire wholesalers in the country. The contract's requirement of ninety (90) days' notice permitted Reliable to obtain another supplier; Reliable could obtain the molds for manufacturing Unser tires on termination of the Kelly-Reliable contract by paying ...


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