Wiseco, Inc. v. Johnson Controls, Inc.

                NOT RECOMMENDED FOR FULL-TEXT PUBLICATION
                           File Name: 05a0884n.06
                           Filed: November 4, 2005

                                           No. 04-6200

                          UNITED STATES COURT OF APPEALS
                               FOR THE SIXTH CIRCUIT


WISECO, INC.,                                    )
                                                 )
       Plaintiff-Appellant,                      )
                                                 )
v.                                               )    ON APPEAL FROM THE UNITED
                                                 )    STATES DISTRICT COURT FOR THE
JOHNSON CONTROLS, INC.,                          )    EASTERN DISTRICT OF KENTUCKY
                                                 )
       Defendant-Appellee.                       )




       Before: NELSON and SUTTON, Circuit Judges; ZATKOFF, District Judge.*


       SUTTON, Circuit Judge. Wiseco, Inc., a Kentucky-based tool-and-die company, seeks

review of a ruling summarily rejecting its claim that Johnson Controls, Inc. (JCI) breached a

requirements contract between the two companies. Because Wiseco has failed to establish a material

fact dispute that JCI acted in bad faith in reducing its requirements under the contract, we affirm.


                                                 I.


       In 1998, JCI produced metal headrest stays for several DaimlerChrysler vehicles. In

December of that year, an employee at JCI’s Foamech plant in Georgetown, Kentucky sought to out-



       *
        The Honorable Lawrence P. Zatkoff, Senior United States District Court Judge for the
Eastern District of Michigan, sitting by designation.
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Wiseco, Inc. v. Johnson Controls, Inc.

source two aspects of the stay-manufacturing operation to Wiseco: bending the metal rods into a

staple shape and chamfering (rounding) the ends. The parties agreed orally that Wiseco would

prepare the necessary tooling for the job at its own expense and that it would receive 50¢ per part

with a manufacturing capacity of approximately 4000 parts per day (with actual requirements to be

set by DaimlerChrysler’s needs). JCI also informed Wiseco that the life of the part was at least four

years, which Wiseco took to be the expected term of the contract. Using manufacturing plans for

the part provided by JCI, Wiseco “tooled-up” for the production, which is to say it bought and

prepared equipment to handle the manufacturing work, and for six months produced approximately

4000 parts per day, which were then sent to the Foamech plant for finishing (notching and applying

protective coating) before being shipped to JCI’s Tillsonberg, Canada plant for assembly into

finished headrests.


        About six months after beginning production, JCI told Wiseco that it soon would be

terminating orders of part 684F, as the part Wiseco had been producing was called—and indeed over

the next six months JCI’s requirements for the part decreased substantially. At the same time,

however, JCI asked Wiseco to take over the finishing functions for part 684F, formerly performed

by JCI at its Foamech plant, so that not only would Wiseco bend and chamfer the rods, it also would

notch and finish them, creating a finished part referred to as 684B. While JCI’s orders to Wiseco

for part 684B were well under 4000 parts per day, the company paid Wiseco more for its additional

work.




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       According to JCI, the decline in its requirements for parts 684F and 684B stemmed from

changes at DaimlerChrysler. Originally part 684F was used in DaimlerChrysler’s 1999 Cherokee

and 1999 Grand Cherokee models. The part was not used in the 2000 Grand Cherokee and

subsequent models, but part 684B was used in the 2000 and 2001 Cherokee. DaimlerChrysler

retired the Cherokee after the 2001 model year.


       The newer Grand Cherokee’s headrest used part 611, a metal rod that is 40 millimeters

longer than part 684, has two additional notches and is chamfered to pointed rather than rounded

ends. Part 611 was made by Guelph Tool and Die, a company located near the Tillsonberg, Canada

plant where the headrests were finally assembled.


       On May 14, 2001, Wiseco sued JCI in Kentucky state court for breach of the 684 contract

as well as claims relating to several other parts that Wiseco manufactured for JCI. JCI removed the

case to federal court based on diversity jurisdiction. After numerous thrusts and parries over a

proposed preliminary injunction designed to prevent JCI from pulling other business from Wiseco

(denied) and after extensive discovery on all of the claims, Wiseco voluntarily dismissed with

prejudice all but its 684F contract claim on October 3, 2003. Initially, with respect to that claim, the

district court granted partial summary judgment for Wiseco, ruling that JCI and Wiseco had formed

an oral requirements contract under KRS § 355.2-306(1) for the production of part 684F that was

ratified, but not controlled, by subsequent purchase orders. At some point after this ruling, Wiseco

made several requests for additional discovery to determine whether JCI was buying parts from

other suppliers that were “substantially” the same as part 684. The district court allowed further

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discovery and a further deposition but limited it to “the headrest assembled at the Foamech plant.”

Dist. Ct. Op. at 3. On Aug 31, 2004, the District Court granted summary judgment to JCI. In doing

so, it concluded that “JCI purchased all of its requirements for part 684 from Wiseco and did not

breach the contract in this regard” and that because there was no proof that any replacement part was

ever used in “any headrest assembled in the Foamech plant,” the undisputed evidence showed that

JCI had reduced its requirements in good faith. Dist. Ct. Op. at 18.


                                                  II.


        We review a district court’s grant of summary judgment de novo. Beecham v. Henderson

County, 422 F.3d 372 (6th Cir. 2005). Summary judgment should be granted where the party tasked

with the burden of proof at trial fails to establish a factual dispute about the existence of an element

essential to its case. Id at 374.


        As with many contract disputes, this one would not have fueled such long and costly

litigation had the parties adequately memorialized their intentions. Despite that failing, the district

court concluded that the parties’ oral agreement was effectively removed from the statute of frauds

and became a valid requirements contract through JCI’s purchase orders, notwithstanding the

conflicting terms of those later writings. The U.C.C.’s statute-of-frauds provision appears to

demand little of the writing that confirms an oral “agreement.” See § 355.2-201(1); 1 Official

Comments to U.C.C. §2-201; O’Sullivan v. Duro-Last, Inc., Nos. 99-2190, 99-2373, 00-1521, 2001

U.S. App. LEXIS 5859 (6th Cir. March 28, 2001) (concluding that a letter following an oral



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Wiseco, Inc. v. Johnson Controls, Inc.

agreement, even though non-conforming, removed the agreement from the statute of frauds); C. Itoh

& Co. v. Jordan Int’l Co., 552 F.2d 1228, 1233 (7th Cir. 1977) (noting that it is easier to remove an

oral agreement from the statute of frauds than to modify it under the U.C.C.). While JCI challenges

the enforceability of this oral agreement as an alternative ground for affirmance here, it does so

solely on the ground that its purchase orders constitute the whole contract between the parties,

despite the fact that the purchase orders, in order to be binding, explicitly require Wiseco’s signature

and Wiseco never signed the orders. Given the dearth of attention paid to this matter in the appellate

briefs and given the reality that the existence of the contract does not change the outcome of the

case, we will accept (for purposes of argument) the district court’s ruling on this point.


       That leaves the issue we will resolve: Did JCI’s significant reduction in its requirements for

part 684 six months after production began breach this requirements contract? Under the U.C.C.,

as adopted in Kentucky and as adopted in almost every jurisdiction, a requirements contract

demands that the buyer order from the seller “such actual output or requirements as may occur in

good faith, except that no quantity unreasonably disproportionate to any stated estimate . . . may be

tendered or demanded.” KRS § 355.2-306(1). With just one exception, courts addressing this

provision have concluded that it applies differently to increased and decreased requirements. “[T]he

majority of authorities have construed U.C.C. § 2-306(1) as permitting good faith reductions in

requirements, as opposed to increases, even though the reductions may be highly disproportionate

to stated estimates.” Godchaux-Henderson Sugar Co., Inc. v. Dr. Pepper-Pepsi Cola Bottling Co.,

No. 83-5730, 1985 U.S. App. LEXIS 14121, at *18 (6th Cir. August 29, 1985); see also Brewster



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of Lynchberg, Inc. v. Dial Corp., 33 F.3d 355, 364–65 (4th Cir. 1994); Empire Gas Corp. v. Am.

Bakeries Co., 840 F.2d 1333, 1337 (7th Cir. 1988). In view of this distinction, courts generally have

concluded that “the seller assumes the risk of all good faith variations in the buyer’s requirements

even to the extent of a determination to liquidate or discontinue the business.” Empire Gas, 840

F.2d at 1337–38; Brewster, 33 F.3d at 365; see also U & W Industrial Supply, Inc. v. Martin

Marietta Alumina, Inc., 34 F.3d 180, 188 (3rd Cir. 1994).


       Whether a breach occurred in this case, then, depends in part on Kentucky’s understanding

of the good faith required by KRS § 355.2-306. While no Kentucky or Sixth Circuit case evaluates

the meaning of good faith under Kentucky’s U.C.C. law, Judge Posner’s decision in Empire Gas

Corporation v. American Bakeries Co., 840 F.2d 1333 (7th Cir. 1988), appears to be the most

frequently consulted case in analyzing the good faith component of a requirements contract under

the U.C.C. See, e.g., A & A Mech., Inc. v. Thermal Equip. Sales, 998 S.W.2d 505, 512 (Ky. Ct. App.

1999) (relying upon Empire Gas in determining Kentucky requirements-contract law). In Empire

Gas, the court explained that a requirements contract is not an option contract and thus the decision

to forgo purchasing goods under the contract cannot be made for any reason or for no reason at all.

840 F.2d at 1339–40. The “good faith” requirement, the court reasoned, places several constraints

on the buyer: The buyer may not purchase the good in question from another seller; the buyer may

not “merely have had second thoughts about the terms of the contract”; and the “buyer assumes the

risk of [small] change[s] in his circumstances.” Id. at 1340–41. At the same time, the buyer does




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not act in bad faith if it reduced its requirements for “business reasons . . . independent of the terms

of the contract or any other aspect of its relationship with the [seller].” Id. at 1339.


       In applying this good-faith rule, several court decisions have helped to clarify its contours.

Empire Gas dealt with a contract to shift the energy supply for a bakery’s delivery fleet from gas

to propane. The court found bad faith when the buyer sought to reduce its requirements to zero and

the seller established evidence that the buyer’s fleet size and ability to pay remained unchanged, a

charge that the buyer did not (and apparently could not) rebut. Empire Gas, 840 F.2d at 1341. The

First Circuit had found no bad faith when a buyer chose to shut down an unprofitable manufacturing

plant and ended its requirements under a supply contract as a result. Brewster, 33 F.3d at 366. To

like effect, several other cases have found no bad faith for reducing and eliminating orders where

the buyer wanted to reduce existing inventory, where an existing operation had become more

efficient, where the buyer’s customers no longer required the product or where a part was needed

less than expected. See U & W Industrial, 34 F.3d at 187; Technical Assistance Int’l, Inc. v. United

States, 150 F.3d 1369, 1373 (Fed. Cir. 1998); Tri-State Generation and Transmission Assoc., Inc.

v. Shoshone River Power, Inc., 874 F.2d 1346, 1356 (10th Cir. 1989); Vulcan Materials Co. v.

Atofina Chems. Inc., 355 F. Supp. 2d 1214, 1234 (D. Kan. 2005).


       The seller bears the burden of demonstrating bad faith. See Technical, 150 F.3d at 1373 (“In

the absence of such a showing [of bad faith], the buyer will be presumed to have varied its

requirements for valid business reasons, i.e., to have acted in good faith, and will not be liable for

the change in requirements.”); Atlantic Track & Turnout Co. v. Perini Corp., 989 F.2d 541, 545–46

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(3d Cir. 1991); Tigg Corp. v. Dow Corning Corp., 962 F.2d 1119, 1123–24 (3d Cir. 1991); Tri-State

Generation, 847 F.2d at 1372; Schawk, Inc. v. Donruss Trading Cards, Inc., 319 Ill. App. 3d 640,

651 (Ill. App. Ct. 2001).


       When it comes to the application of these cases here, JCI argues that Wiseco met all of its

requirements for part 684F and part 684B and that no other company ever sold that part to JCI.

Wiseco initially supplied the headrest stay for the Jeep Cherokee contract as well as for the Jeep

Grand Cherokee contract—using part 684F and part 684B. But DaimlerChrysler asked JCI to

produce longer metal rods to allow for an additional notch in the headrest stay for the Jeep Grand

Cherokee. And JCI’s engineering department requested that the ends of the Jeep Grand Cherokee

headrest stay be chamfered differently, with pointed ends instead of rounded ones, for ease of

assembly. As JCI sees the matter, once DaimlerChrysler “ceased to have requirements” for the part

in question, that became “a good faith” reason for shrinking orders, and the change in orders

accordingly did not amount to “a breach of contract.” See Tri-State Generation, 874 F.2d at 1360.

Likewise, the decision of JCI’s engineering department to alter the specifications for the parts was

a legitimate business reason for reducing requirements because it would be “unreasonable” to make

JCI continue to manufacture with inefficient parts simply to honor a requirements contract. See

Empire Gas, 840 F.2d at 1340; Sw. Natural Gas Co. v. Okla. Portland Cement Co., 102 F.2d 630,

633 (10th Cir. 1939). Under these circumstances, without some evidence that it had continuing

needs for part 684, JCI contends that its circumstances changed in a material way and that it

accordingly did not breach the requirements contract. Cf. Empire Gas, 840 F.2d at 1339.



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       Wiseco responds that the allegedly different part is substantially the same part. To

substantiate this claim, Wiseco introduced an expert report concluding that the 684 parts were

substantially similar to part 610. See Report of David Smith, JA 596–622. But part 610 is used in

European production of the Chrysler Grand Cherokee. The part was made from November 1999 to

August 2000 by Guelph Tool and shipped directly to Austria by the supplier. There is no indication

that Wiseco ever supplied part 684 for use in the European Chrysler Grand Cherokee. All evidence

suggests that each of the parts made by Wiseco was used only in the North American versions of

the Jeep Cherokee and Jeep Grand Cherokee.


       Wiseco next claims that part 684 mirrors part 611, the part that replaced the 684 in the 2000

Jeep Grand Cherokee and the later models of this Jeep. But in arguing that the parts are similar,

Wiseco refers only to the expert report of David Smith, which as noted addressed only part 610.

Wiseco thus has presented no evidence that the two parts are essentially one and the same. JCI, by

contrast, introduced evidence about the differences between the parts, namely that the rods used to

make part 611 were 40 millimeters longer and that the two rods were chamfered differently. JCI

also introduced evidence that it would take substantial retooling to produce the 611 instead of the

684. And to produce the two parts interchangeably on the same equipment, JCI showed, would cost

over $20,000, and the transition would take eight weeks. On this record, we cannot conclude

Wiseco has met its burden of establishing a triable issue of fact that JCI reduced requirements under

the 684 contract in bad faith simply by identifying the existence of a part that succeeded 684 in the

construction of the Grand Cherokee headrest.



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       Doubtless, the law would not permit JCI to change the number of the part that Wiseco was

manufacturing to avoid the demands of a requirements contract. But Wiseco has not supported its

burden of proof in bringing this claim. And lacking sufficient evidence to prove such a claim,

Wiseco began expanding its premise, from a contract to produce a particular part, to a contract to

produce similar parts, to a contract to produce all headrest stays, regardless of the part involved, for

all Jeep vehicles. Because the requirements contract recognized by the district court made no such

promise and because the good-faith restrictions imposed on the buyer by the U.C.C. impose no such

requirement, the district court correctly rejected this claim.


       On top of the difference between the parts—whether between the 684 and the 610 or between

the 684 and the 611—JCI offered another reason for the change: the shift in production and

finishing of the headrest stays from the Foamech plant in Kentucky to a plant in Tillsonberg,

Canada. When Wiseco and JCI together produced the final part 684 at the Foamech plant, JCI

shipped the finished stays to Tillsonberg for assembly into the final headrest. JCI based its decision

to manufacture part 611 at the Canada plant on business efficiencies (shipping costs, time delay,

etc.) and on its conclusion that the Foamech plant had repeatedly failed to produce parts effectively,

both of which constitute legitimate business reasons independent of the terms of the contract with

Wiseco. Cf. Technical, 150 F.3d at 1373; Brewster, 33 F.3d at 366. Wiseco never offered any

evidence to rebut these legitimate business reasons, and in fact acknowledged that it did not know

why JCI had shifted manufacture of the headrest stays to Canada. This additional explanation for




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the decline in part 684 orders also supports the district court’s decision to reject this claim as a

matter of law.


         Wiseco offers one further response to the claim that it failed to meet its burden of

demonstrating bad faith. It contends that because the district court limited its interpretation of the

requirements contract to parts produced for JCI’s Foamech plant, Wiseco was not given sufficient

discovery to show that JCI acted in bad faith. The truth of the matter, however, is more complex.

Wiseco initially was granted wide-ranging discovery to seek information about how JCI had violated

contracts on several different parts, including the 684 parts. Then, one week before trial, Wiseco

sought further discovery. The court granted the discovery request but limited it to discovery

regarding the “headrest assembled at the Foamech plant,” which had not been a limitation on earlier

discovery. Attempting to convince the court to alter its ruling, Wiseco argued several times that

this limitation was unreasonable. While the court did not remove this limitation, it did allow a

further deposition to be taken of Kenneth Tidd, a JCI employee, to determine the basis for the

company’s contention that Wiseco produced all of the 684 parts. That deposition led to information

about parts 610 and 611, which Wiseco (as we have seen) attempted to use to bolster its claim of bad

faith.


         Appellate challenges to the scope of discovery receive abuse-of-discretion review, Lott v.

Coyle, 261 F.3d 594, 602 (6th Cir. 2001), a standard that Wiseco cannot overcome. Wiseco claimed

in its original complaint that JCI breached the 684 contract and as a result it received discovery on

this claim in the initial discovery phase. That Wiseco later dismissed all of its other claims does not

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guarantee further discovery on its only remaining claim later in the case. See Tate v. Boeing

Helicopters, 140 F.3d 654, 661 (6th Cir. 1998). The district court, even so, still allowed an

additional 60 days of discovery, with the restriction that Wiseco limit its inquiries to headrest stays

manufactured at Foamech. Despite this restriction, Wiseco discovered information about the most

likely “replacement part,” the 611, that JCI could have used instead of the 684 parts. While at the

outset we would not have imposed this limitation on discovery—and neither did the district

court—we can well understand why the district court chose to limit it here in the context of an “eve

of trial” discovery request. The court did not abuse its discretion.


                                                 III.


       For these reasons, we affirm.




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