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Full Opinion
DECISION AND ORDER DENYING EMIRAT’S MOTION FOR PARTIAL SUMMARY' JUDGMENT (DOC. 71) AND GRANTING WS PACKAGING’S MOTION FOR SUMMARY JUDGMENT (DOC. 68)
In this diversity action, Emirat AG sues WS Packaging Group; Inc. and High Point
Summary judgment is proper if the depositions, documents or electronically stored information, affidavits or declarations, stipulations, admissions, interrogatory answers or other materials show that there is no genuine dispute of material fact and the moving party is entitled to judgment as a matter of law. Fed. R. Civ. P. 56(a), (c); Celotex Corp. v. Catrett, 477 U.S. 317, 322, 106 S.Ct. 2548, 91 L.Ed.2d 265 (1986). The moving party bears the initial burden of demonstrating it is entitled to summary judgment. Celotex, 477 U.S. at 323, 106 S.Ct. 2548. Once this burden is met, the nonmoving party must designate specific facts to support or defend each element of its cause of action, showing that there is a genuine issue for trial. Id. at 322-24, 106 S.Ct. 2548. In analyzing whether a question of fact exists, the court construes the evidence in the light most favorable to the party opposing the motion. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 255, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986).
The mere existence of a factual dispute does not defeat a summary judgment motion; there must be a genuine issue of material fact for the case to survive. Id. at 247-48, 106 S.Ct. 2505. “Material” means that the factual dispute must be outcome-determinative under governing law. Contreras v. City of Chicago, 119 F.3d 1286, 1291 (7th Cir. 1997). Failure to support any essential element of a claim renders all other facts immaterial. Celotex, 477 U.S. at 323, 106 S.Ct. 2548. To establish that a question of fact is “genuine,” the nonmoving party must present specific and sufficient evidence that, if believed by a jury, would support a verdict in its favor. Fed. R. Civ. P. 56(e); Anderson, 477 U.S. at 249, 106 S.Ct. 2505.
FACTS
Emirat AG is a foreign corporation registered in Germany, with its principal place of business in Munich, Germany. Emirat’s business is risk management and related promotional aspects, which include commercial promotions and sweepstakes.
Defendant High Point Printing LLC was an Ohio limited liability company with its principal place of business in Aurora, Ohio. High Point’s two members were citizens of Ohio and Pennsylvania. (Doc. 18 at 1-2.) However, High Point has not appeared in this action and has filed a Certificate of Dissolution with the Ohio Secretary of State on April 19, 2013. Prior to its dissolution, High Point was a commercial printer and print broker. Doug Szygenda was an owner and its principal agent.
Defendant WS Packaging Group, Inc., is a Wisconsin corporation with its principal place of business in Green Bay, Wisconsin. It manufactures printing and packaging products, including labels, tags, coupons, decals and game and sweepstakes printed products.
In the summer of 2007, a Dubai-based company introduced Emirat to Sabafon, a telephone services company based in Yemen, which led to a contract between Emirat and Sabafon for the printing of 25 million scratch-off phone cards. The scratch-off phone cards were intended to be purchased by consumers so they could get a prepaid activation code (a “PIN ”) for their telephones. The PIN on each card was to
The scratch-off phone cards would also include a promotional scratch-and-win game, which consisted of twenty-four boxes with a range of prizes also covered by scratch-off coating. According to the rules of the promotional game, if a player scratched six boxes that revealed the same prize, the player would win that prize. If the six boxes scratched off showed more than one prize or more than six boxes were scratched off, the player would get nothing. Every card had six boxes containing the same prize, and the remaining boxes had various other prizes; thus, each card was a potential winner.
On June 7, 2007, Emirat issued a quote to Sabafon for “25,000,000 high level EMI-RAT Security Cards.” The name “high level EMIRAT Security Cards” was a marketing term used by Emirat in the quote. The quote provided no further description of the level of security necessary for the cards, however it did indicate that “[t]he scratch cards have to be printed through EMIRAT.” It is undisputed that Sabafon accepted the quote.
On each card, the chances that a player would pick the correct six boxes to scratch were small. The contract between Emirat and Sabafon detailed what percentage of cards would have the possibility of winning each level of prizes. Additionally, there were to be ten “guaranteed” grand prize winners on which all twenty-four boxes had the same prize of a car—thus a. guaranteed win.
Emirat is not a printing company, and prior to its contract with Sabafon it had been involved with only one project involving the printing of scratch-off cards. Under the contract between the two companies, Emirat agreed to arrange for the printing of the 25 million scratch-off cards as requested. Initially, Sabafon agreed to pay Emirat an amount that included the cost of printing the cards and the cost of the prizes. Emirat assumed all responsibility for the prizes and agreed to obtain insurance for the prizes.
At some point representatives of Emirat contacted High Point regarding obtaining the scratch-off cards. Then, on or about March 28, 2008, Andrea Bargholz and Stephanie Sohr of Emirat and Doug Szygenda of High Point visited WS Packaging’s Nee-nah, Wisconsin, plant and discussed WS Packaging’s ability to print the cards. According to Bargholz, at this initial meeting, a WS Packaging employee represented that WS Packaging could print the cards securely. (Doc. 57, ¶ l.
On May 6, 2008, Emirat obtained a quote from High Point regarding the printing of the 25 million scratch-off cards (also called “scratch-and-reveal cards” or “scratch-n-reveal cards” or “game cards” in the evidence and this opinion) with over-wrap. On May 9, 2008, Emirat accepted the quote, entering a contract with High Point. (Doc. 61 Ex. 2.) Nothing in the quote or acceptance of the quote referenced WS Packaging in any way. (Doc. 61 Ex. 2.)
The High Point quote as accepted by Emirat contained no reference to card security or “high-level EMIRAT Security Cards.” (Doc. 79 Ex. L at 46-47; Doc. 75, additional ¶ 1; Doc. 87, ¶ 1.) According to Emirat’s Ralph Martin, “we all assumed that everybody understands the same talking about secure prepaid phone cards, so
Martin of Emirat and Szygenda of High Point visited WS Packaging’s plant in Nee-nah on' May 20, 2008, to “address and see revisions made to graphics from original 2nd press proof.” WS Packaging’s Sue Rohde listed both High Point Printing’s Szygenda and Emirat’s Martin on a “Customer Visit Form.” (Doe. 61, Ex. 3;. see Doc. 57, ¶ 3.) The form is a standard frm to document visits by any outside parties. (Doc. 76, ¶ 3.)
On May 23, 2008, High Point and WS Packaging entered a Letter of Indemnification agreement, stating among other things, that WS Packaging “assumes responsibility only for the accuracy of the printing” and states that WS Packaging does not “guarantee that a game construction cannot be tampered with, counterfeited or foiled.” By its terms, the May 23, 2008 Letter of Indemnification covered game orders submitted by High Point to WS Packaging from May 2008 to June 2009. (Doc. 63, ¶3; Doc. 61 Ex. 4 at 1.) (The letter’s contents are further discussed below.) WS Packaging says that the Letter of Indemnification was required to allow WS Packaging to properly price and perform the work requested by High Point and that WS Packaging would not have been willing or able to perform the contemplated work without the Letter of Indemnification. (Doc. 63, ¶ 4.)
Emirat’s Martin and High Point’s Szy-genda again visited WS Packaging’s Nee-nah plant on June 6, 2008, to “address and see revisions made to graphics from original 3rd press proof.” WS Packaging’s Roh-de again listed Martin and Szygenda on a “Customer Visit Form” (Doc. 61, Ex. 6; see Doc. 57, ¶ 3.)
Thereafter, High Point subcontracted with WS Packaging to print the cards. WS Packaging provided a quotation to High Point on September 16, 2008, for printing 25 million scratch-n-reveal cards. (Doc. 61 Ex. 7.) High Point then submitted a purchase order on September 23, 2008, to WS Packaging for 25 million “Scratch-N-Reveal” cards to be delivered to Yemen. Under the High Point/Emirat and WS-Pack-agingHigh Point contracts, the cards were to be folded in half and sealed individually in a clear plastic overwrap. On September 23, 2008, Emirat’s Martin signed off on proofs and provided minor changes and suggestions for the cards to be printed by WS Packaging.
In preparation for another plant visit by Martin and Szygenda, WS Packaging’s Rohde referred to both men as the “customer.” (Doc. 59, Ex. 12; see Doc. 57 ¶ 3.) And on September 26, 2008, Martin and Szygenda again visited WS Packaging’s plant in Neenah to observe printing and approve the press run, and for Martin to take certain pieces back with him. According to WS Packaging’s Greg Braun, Szy-genda went over what WS Packaging was going to do and how the company would do it, and Martin was the decision-maker who was able to sign off on a run. (Doc. 51, Ex. 1 at 73; see Doc. 57, ¶ 4.) WS Packaging admits that as High Point’s customer, Emirat was ultimately responsible for providing direction on the project to High Point and, by extension, WS Packaging. (Doc. 75, ¶ 4.) While at the Neenah plant, Martin signed two agreements drafted by WS Packaging regarding the “High Point Printing Phone Card Project,” releasing, indemnifying and holding harmless WS Packaging relating to “Destruction of Spoilage and Product Overage's” and the approval of the “Number of Winning pieces.”
At deposition, WS Packaging’s Paula Hagen defined “candling” as “[s]how-through of game data.” (Doc. 59 Ex. 10 at 28.) She agreed that a card is considered candled if someone “is able to read a sig
Pursuant to its contract with High Point, WS Packaging printed an initial run of 12.5 million cards and delivered them to Yemen in October 2008. Upon delivery of the first shipment of cards in October 2008, WS Packaging’s Rohde emailed Bar-gholz of Emirat and Szygenda of High Point, inquiring about Emirat’s address in Munich, Germany for the FedEx of a CD containing scratch-off card data.
A few weeks after the initial run of 12.5 million cards was shipped, Emirat' contacted Szygenda at High Point to report that Sabafon had complained that “the pin numbers are readable with a light behind the card (candling) [sic].” Szygenda relayed that complaint to WS Packaging. WS Packaging requested that High Point return the 12,5 million scratch-off cards printed during the initial run of cards in 2008 and issued a return authorization, indicating that “[g]ame data is visible under the scratch off area on some cards when a high intensity light is flashed through the back of the card.” WS Packaging’s Hagen sent an email to WS Packaging’s quality-management and customer-relations teams on November 12, 2008, discussing, among other things, the new equipment to be used for testing candling of scratch-off cards.
Although WS Packaging agreed to reprint the cards at no charge, Emirat communicated to High Point a number of changes to the cards’ configuration. (Doc. 63, ¶8; Doc. 81 ¶8.) On February 11, 2009, WS Packaging issued a new quote to High Point for the reprinting of the cards; the quote reflected the requested changes. (Doc. 63, ¶ 8; Doc. 81 ¶ 8.)
On April 30, 2009, WS Packaging and High Point entered a second Letter of Indemnification containing nearly identical terms to the May 2008 Letter of Indemnification. By its terms, the April 30, 2009 Letter of Indemnification covered game orders submitted from April 2009 to May 2010. (Doc. 63, ¶ 3; Doc. 61 Ex. 5 at 1.) On May 21, 2009, WS Packaging’s Kevin Fitzgerald emailed “game notes” to colleagues, stating that “GAME CARD MUST NOT CANDLE WHEN USING STRONGEST LIGHT BEAM WE HAVE IN HOUSE!!!” (Doc. 59 Ex. 19.)
On May 27, 2009, High Point issued a new purchase order to WS Packaging for 25 million scratch-n-reveal cards for a total remaining cost of over $700,000. The new purchase order likewise reflected the changes' requested by Emirat. (Doc. 63, ¶ 9; Doc. 81, ¶ 9.) Pursuant to the revised purchase order, WS Packaging printed proofs of the new scratch-off cards. Those proofs were provided to Emirat, and Emi-rat gave them to its customer, Sabafon. On June 1, 2009, Emirat emailed High Point to notify it that Sabafon had inspected the proofs. Two days later.Emirat forwarded the email to Hagen at WS Packaging.
Before WS Packaging began production of the second run of cards (the first run of the “re-run”), Emirat requested that WS Packaging send sample cards -to an independent lab. for testing. Emirat identified and selected the third party testing facility: Force Technology in Denmark. It also selected the testing methods to be used by
When Force Technology was asked to check for “candling,” Force Technology’s employees did not know what that meant. (Doc. 79 Ex. G at 11.) But Force Technology tested nine sample cards provided to it by conducting the five tests chosen by Emirat: light penetration (by both daylight and fluorescent tube), UV light, thermal imaging, x-ray, and laser light. On June 2, 2009, Ole Bundgaard of Force Technology reported to Emirat that Force Technology had successfully run the security tests requested by Emirat and that “[t]he preliminary conclusion is, that it is not possible—with the techniques used—to disclose the symbols underneath the scratch layer.” On June 3, 2009, Emirat’s Martin forwarded this preliminary conclusion to WS Packaging.
On June 3, 2009, Martin signed the WS Packaging Variable Image Proof and Games Checklist, affirming, among other things, that the card layout, color, graphics, and “candling”/“see thru” of game data with the green variable imaging ink had been reviewed and approved and that a statement or confirmation from Force Technology had been received. On June 4, 2009, Force Technology issued a report that concluded “based on the cards received and the tests done on the cards, that the symbols can not be disclosed and the security of the scratch card game ’Match Win’ is good.”
Force Technology received additional sample cards on June 11, 2009, for more security testing. Force Technology employed the same security tests identified in its June 4, 2009, report, as requested by Emirat, and once again concluded based on these same tests that “the symbols can not be disclosed and the security of the scratch card game “Match Win” is good.” Force Technology issued a report with its conclusions on June 25, 2009.
After Emirat approved the sample cards and proofs, WS Packaging proceeded to press startup for the second run of cards. WS Packaging internal job production instructions dated July 24, 2009, state, among other things, that “THERE CAN BE NO CANDLING—USE HIGH INTENSITY LIGHT. PRODUCT HAS BEEN TESTED BY'3RD PARTY TESTING LAB IN DENMARK.” (Doc. 59 Ex. 20.) WS Packaging’s instructions regarding testing of the game cards called for two cards to be checked for candling using a high-intensity light, every half hour, commencing at start-up and ending at shut-down. (Doc. 57 ¶ 18; Doc. 59 Ex. 22.)
According to WS Packaging employees, for a secure printing job, “zero” candling “is the level that you need to have,” candling on the Emirat job was not acceptable, and the specifications for the Emirat job indicated that there could be no candling. (Doc. 59 Ex. 1 at 52, 65, Ex. 10 at 78-79, Ex. 6 at 177.)
The candling testing done by WS Packaging on the production line consisted of using a high-intensity light, to see if the tester could see what was printed behind the scratch-off layer. (Doe. 57, f 8.) During production, WS Packaging checked the Emirat game cards for candling using Scorpion flashlights, pulling “retains” at intervals during the manufacturing process. (Doc. 79 Ex. 4 at 57-58.) It checked the game cards on the press-room floor and in a quality lab by holding the light beam behind the game-card data. (Id. at 58.) A run of approximately 10 million
WS Packaging may have bent the cards a little over a flashlight during that testing. (Doc. 59, Ex. 11 at 128; see Doc. 57, ¶ 9; Doc. 75, ¶ 9.) Emirat’s Sarah Spanna-gel watched WS Packaging test cards during one of the runs and said at deposition that WS Packaging personnel bent the cards “a little” over a flashlight, though she also testified that she could not recall specifically what WS Packaging personnel were doing and questioned the meaning of “bend.” (Doc. 59, Ex. 11 at 128, 150; Doc. 79, Ex. F at 33.) On the other hand, WS Packaging’s Greg Braun has declared that
[flor scratch-off printing jobs like the High Point Project, it is WS Packaging’s normal process to document a standard for the manner in which those cards will be tested for candling, including the frequency with which product retains will be pulled for examination during the production process. When testing scratch-off cards for cards along the production line, WS Packaging shines a high-intensity light beam behind the cards to determine whether the secure printing can be revealed, but WS Packaging does not bend or manipulate the cards in any way during that process. WS Packaging demonstrated this protocol for testing for candling for its customer High Point, as well as Emirat.
(Doc. 76, ¶4.) WS Packaging’s Hagen averred at deposition that the company’s internal documents “would have stated no candling if viewed under agreed-upon procedures ... what we would agree upon is not candling if viewed under some high-intensity light source.” (Doc. 79 Ex. D at 17.)
According to High Point’s Szygenda, WS Packaging knew that Emirat was High Point’s customer but that WS Packaging was printing the cards for Emirat. (Doc. 75, ¶ 4; Doc. 59 Ex. 3 at 37.) Also, according to Szygenda, throughout 2009, Emirat became more involved in dealing directly with WS Packaging and Szygenda and High Point became less involved. (Doc. 59 Ex. 3 at 37.) For instance, Hagen at WS Packaging emailed Andrea Bargholz of Emirat and Szygenda of High Point on May 15, 2009, requesting confirmation of “prize spreading” requirements for the printing project. Bargholz then emailed Kelly Amundson of WS Packaging May 26, 2009, with printing specifications and a request that the specifications be printed and given to Szygenda. On June 5, 2009, Hagen emailed Martin and Spannagel at Emirat enclosing a document that “summarizes [WS Packaging’s] packaging process.” Karen Naze at WS Packaging reported to other WS Packaging personnel on August 5, 2009, regarding conversations with Emirat employees about payments for the next two shipments. And on August 13, 2009, WS Packaging’s Greg Braun wrote to Bargholz at Emirat regarding new payment dates, and Bargholz responded a few days later, indicating that Emirat would pay WS Packaging after Emirat was paid in full by Sabafon. (Doc. 57, ¶ 28; Doe. 59 Ex. 27.) WS Packaging agrees that by the first run of the re-run, WS Packaging was dealing with and emailing Emirat as well as High Point and that Martin of Emirat was the decision-maker able to sign off on the run of cards because that was how Sygenda “wanted it to work.” (Doc. 59 Ex. 1 at 73; Doc. 79 Ex. D at 36 (Hagen stating that “it became direct communication [with Emirat] at some point midway through 2009” at Szygenda’s request).)
High Point ceased operations sometime in late 2009. (Doc. 59 Ex. 3 at 15.)
When the July 2009 shipment reached Sabafon, Sabafon told Emirat that the cards were not in numerical order and that there were not 500 cards in each tray.
Over the next several months, WS Packaging, High Point, and Emirat negotiated a Settlement Agreement that was executed on October 23, 2009. The Settlement Agreement indicated, among other, things, that a dispute had arisen between the parties concerning certain matters, including numerical sequencing of the game cards, and that the parties agreed to settle the dispute “to avoid litigation and related expenses, without admission of liability.” (Doc. 61 Ex. 32 ¶¶ C, D.) Under the Settlement Agreement, WS Packaging agreed to issue to High Point, who in turn agreed to issue to Emirat, a credit toward the invoices for the next shipments of scratch-off cards. (The terms of the Settlement Agreement are discussed more fully below.) Simultaneous with the execution of the Settlement Agreement, WS Packaging and Emirat executed an Escrow Agreement with JP Morgan Chase, N.A. as escrow agent, to provide “an available source of funds ... to compensate [WS Packaging] for the delivery of the Cards.”
Representatives of Emirat were present at WS Packaging’s' plant in Neenah on October 23, 2009, to inspect the next shipment of cards and arrange for their shipment to Dubai. Upon execution of the Settlement Agreement, on October 23, 2009, the next shipment of approximately 7.6 million cards was sent to Dubai. The cards printed in 2009 contained an expiration date of December 31, 2010. (Doc. 63, ¶ 7.)
Again, Force Technology was provided samples of cards-for testing, according to the same testing protocol selected by Emi-rat and used previously. On October 30, 2009, Force Technology issued a report concluding that “based on the cards received and the tests done on the cards, that the symbols can not be. disclosed and the security of the scratch card game ’Match Win’ is good.”
The October 23rd shipment of cards reached Dubai in November. Bargholz and Spannagel of Emirat were present in Dubai, along with representatives of Sabafon. Spannagel has testified that she and Bar-holz observed a representative of Sabafon use a flashlight to candle a game card and successfully scratch off six matching symbols out of twenty-four. (Doc. 57k, ¶ 32; Doc. 75, ¶ 32.) Bargholz and Spannagel have testified that, upon examination of some of-the cards with an ordinary household flashlight, they were able to see phone-card PINs, When Spannagel and Bargholz tested the game cards in Dubai, they bent the cards, cracking the scratch layer/though the cracks could not be seen by the naked eye. (Doc. 79 Ex. F at 102.)
On November 17, 2009, Bargholz and Spannagel prepared a spreadsheet of some cards from the delivery made to Dubai in October >2009 that they claimed they were able to read by examining the cards with a flashlight. However, Emirat no longer has possession or control of the cards listed in that document.
On November 17, 2009, Emirat contacted Force Technology, stating that “[b]y checking some more cards,..randomly, we came across some cards which.seemed -to be not secure,” and further stating that Emirat wanted “to inform -you in the upfront that you are not surprised why we are sending cards again.” Emirat requested that Force Technology test additional sample cards. Emirat’s Spannagel made a video and sent it to Force Technology showing Force Technology how to do Emi-rat’s new test. In the video, she bent a game card around a flashlight (similar to
On November 18, 2009, Emirat’s Martin emailed Braun and Hagen at WS Packaging stating that the second delivery of cards did not pass security. WS Packaging’s Mark Kraftzenk at some point examined the “retains” kept by WS Packaging for candling and was able to identify some numbers from PINs on a couple of cards and' all fourteen numbers of the PIN on two cards without removing the scratch-off material. However, no one from WS Packaging could candle any of the game symbols on the cards. (Doc. 57, ¶ 35; Doc. 75, ¶ 35; Doc. 61 Ex. 39.) Hagen told Braun that “[t]here were only 2 pieces that Mark Kraftzenk could see all the numbers in the serial number but he could not at any time candle any of the game data.”
On November 24, 2009, Emirat’s Span-nagel emailed Susann Geschke and Ole Bundgaard of Force Technology stating that “our client already told us that he is not accepting the cards. What we need right now is an official report which says that the cards are not secure.” Force Technology performed the additional testing requested by Emirat, including the same tests used during its previous examinations of the cards, which the cards again passed. Force Technology then used the new method shown in the video from Emi-rat, which Force Technology called the “torch light” test. Prior to this additional testing at the request of Emirat, Geschke and Bundgaard had never performed or heard of the torch-light test. Bundgaard described the torch-light test as removing the scratch-off card from its sealed wrapper and “bend[ing] it over a pencil, not bending, but in a manner so that it’s possible to repeat—repeat the test in the same way. And then you will use Mag lights, or the torch, on the back side of the card in a dark room, and look from different angles, changed the angle of the light, looking at different angles. And in this way it was possible to look, see through, but look underneath the scratch layer.” (Doc. 57, ¶ 38; Doc. 59 Ex. 5 at 100.)
On December 3, 2009, Force Technology issued a new report concluding that fifteen sample cards tested passed all five previous tests: daylight, fluorescent tube, UV light, thermal imaging, x-ray and laser light, and that neither the" PINs nor the prize symbols of the cards could be disclosed under those techniques without destroying the scratch layer. However,'the report further indicated that when the additional torch-light or high-intensity light test was employed the -“figures could be disclosed by the ‘torch light test’ ” and that “examination leaves the scratch’ layer intact, i.e., no damage can be seen with the naked eye.” The report described the torch-light test as follows:
The scratch cards are carefully bended around a pencil without destroying the scratch layer and afterwards the scratch layer of the.recharge code is examined by shining through the card from the backside with the help of a focussed [sic] torch light (the bulb' of a small MA-GLITE), to check if the numbers of 'the rechard code can be read through the scratch layer. This test is done in a dark room.
(Doc. 61, Ex. 41 at 2.) And according to the report,
[t]he careful bending of the scratch card around a pencil results in a “cracking” of the recharge scratch layer. The result of this manipulation is that on some cards the green type underneath the scratch layer becomes visible, while shining through the recharge scratch layer from the backside and' bending the card around the bulb. It was possible with the naked eye to. read the. numbers of the recharge code through the scratch layer. The examination leaves the scratch layer*924 intact, i.e. no damage can be seen with the naked eye. It is also found that the quality of the scratch layer is varying between the individual cai’ds, and it seems to be easier to see through the scratch cards starting with number 800 0087 6620 than it is on the other two series because there are already many pinholes present in the recharge scratch layer on series 800 0037 6620, which makes it easier to see the recharge code. It was not possible to document the disclosure of the numbers on a photo. The human eye is better in disclosing the green numbers than a photo is.
(Doc. 61, Ex. 41 at 2.) Force Technology concluded that “the security of the scratch card game ‘Match Win’ is thus considered not to be good.” (Id.)
Emirat paid High Point a total sum of over $700,000 for the printing of the scratch-off cards at issue in this case. WS Packaging was paid a lesser sum by High Point for this project. Emirat never made any payments directly to WS Packaging for any scratch-off cards or for any other purpose. Emirat has not received a refund of any amounts it paid to High Point in connection with the game-card project. (Doc. 57, ¶ 44; Doc. 75, ¶ 44.)
According to WS Packaging’s expert, Jim Carides, scatch-off material ages and becomes brittle and “generally [has] a one year or less shelf life for the most part.” (Doc. 79 Ex. B at 178.) Carides first saw the game cards at issue in 2014. (Doc. 80 Ex. 6 at 181.) He was able to identify fragments of up to three or four numbers or one full digit of a PIN on certain cards. However, in his opinion the security of that card would not be considered compromised. (Doc. 59 Ex. 8 at 130, 144, 165.) Moreover, it took Carides six hours using a fiberoptic light to find one digit of one PIN. (Doc. 59 Ex. 8 at 144.) Carides has opined that the cracking from bending in the cards he tested was most likely the result of the age of the cards. (Doc. 79 Ex. B at 180.)
Emirat’s expert James Blanco was asked to use the torch-light method after bending the cards. (Doc. 79 Ex. I at 53.) It took Blanco thirteen or fourteen hours to “hone” a method of getting good enough at bending the game cards such that they could be candled but flattened back out to look like they had not been bent. (See Doc. 79 Ex. I at 72.) Blanco says he was able to identify all fourteen numbers of a PIN and some game symbols without removing any of the scratch-of coating and leaving the card looking “clean” such that a person would not know it had been bent during the torch-light method. (Doc. 57, ¶ 40; Doc. 59, Ex. 9 at 148.)
Emirat’s expert Larry Stewart testified at deposition that when he had the game cards flat on a light box or other test, “it did not work as far as being able to read through it. It wasn’t until I began rolling it and bending it and putting intense light behind it, and you can’t do that on a flat box .... ” (Doc. 79 Ex. J at 105.) Stewart concluded after inspecting the cards in 2014 that the game cards were “not secure and can be easily compromised with a readily available light source.” (Doc. 57, ¶ 42; Doc. 75, ¶ 42; Doc. 59 Ex. 30.) Stewart indicated that he started with other testing methods before he found the bending technique that worked. But after figuring out what to do “it would take me five minutes to do that test” and he could do it “rapid fire.” (Doc. 86 Ex. 2 at 121-22.) Stewart stopped testing once he saw portions of printing and did not decipher an entire PIN, as “[tjhat would take many more hours than I was provided here.” (Doc. 79 Ex. J at 117.)
Stewart and Blanco conceded that the game cards were not a security risk according to the World Lottery Association standard under which a scratch-off ticket
DISCUSSION
This case is in federal court based on diversity jurisdiction, as the parties are citizens of different states and the amount in controversy exceeds $75,000. See 28 U.S.C. § 1332. The parties agree that Wisconsin law applies.
The court begins by holding that at the very least there are genuine disputes of material fact as to what the security standard for the cards was and whether the scratch-off cards were defective in consideration of such a standard.
No contract specified the security level required for the game cards. Emirat agreed to provide Sabafon with “high level security” cards without defining what that meant. Neither the Emirat/High Point contract nor the High Point/WS Packaging contract contained any specific security requirements. Emirat’s Martin said he just assumed that everyone would know that the cards had to be secure. But what does “secure” mean? Meeting the World Lottery Association standards? Inability to candle a significant portion of a PIN or game symbol as WS Packaging’s Hagen and Carides have indicated? Inability to candle any fragment of any character or symbol as Emirat argues?
Emirat argues that as shown by WS Packaging’s internal documents, WS Packaging knew that the standard was “zero” candling. However, WS Packaging’s internal quality expectation does not establish what the requirements for security were for purposes of the contracts. And even “zero” is ambiguous here—zero cards as a whole being compromisable or zero fragments of characters being descipherable? Does a secure card require inability to candle the card when flat or after bending and cracking (or more aggressive manipulation)? WS Packaging, which printed such scratch-off tickets, checked flat game pieces, as did Force Technology when doing the first five tests Emirat requested. Force Technology had never heard of or seen the torch-light test prior to the video it received from Emirat. Also, the Letters of Indemnification (further discussed below) disclaimed any liability for cards that were manipulated.
And importantly, whether the cards could be candled under Emirat’s purported standard is in dispute. Retains tested on the line and in WS Packaging’s quality lab seem to have passed the Scorpion-light tests. Emirat approved Force Technology’s testing of the cards using five different tests, with the cards dry and wet, and the sample cards passed all of those tests at least twice. Only after Emirat employees directed Force Technology to report that the cards could be candled did Force Technology do so. And only after Emirat or Force Technology employees bent or otherwise manipulated the cards, cracking the scratch-off material (though not visible to the naked eye), were the cards able to be candled.
Experts have indicated that the cards would be considered secure under the standards of the World Lottery Association. WS Packaging’s expert, Carides, reported that despite his aggressive efforts to compromise the cards using a variety of techniques, he could not reveal complete PINs or game symbols so as to compromise the security of the Cards, and it took him hours to do that. (Doc. 59 Ex. 8 at 130.) Further, the testing by Emirat’s experts, performed after the scratch-off material aged for several years, does not definitely determine that the cards as delivered could be candled under any possible standard. Thus, unless the resolution of other issues makes trial unnecessary, a jury would have to decide whether the
A. Breach of contract claims
1. The Settlement Agreement argument
Emirat’s primary argument for liability is that WS Packaging breached their Settlement Agreement by providing defective scratch-off cards. The Settlement Agreement is. the only agreement to which WS Packaging and Emirat are parties, and it is to be interpreted in accord with Wisconsin substantive law. (Doc. 61 Ex. 32, ¶ 11.)
Under Wisconsin law, the court’s goal in interpreting a contract is to ascertain the intentions of the parties as expressed by the contractual language. Town Bank v. City Real Estate Dev., LLC, 2010 WI 134, ¶ 33, 330 Wis.2d 340, ¶ 33, 793 N.W.2d 476, ¶ 33; State ex rel. Journal/Sentinel, Inc. v. Pleva, 155 Wis.2d 704, 711, 456 N.W.2d 359 (1990). When the terms of a contract are clear and unambiguous, the court construes the contract according to its literal terms. Gorton v. Hostak, Henzl & Bichler, S.C., 217 Wis.2d 493, 506, 577 N.W.2d 617 (1998). Contracts should be construed according to their plain or ordinary meaning. Huml v. Vlazny, 2006 WI 87, ¶ 52, 293 Wis.2d 169, ¶ 52, 716 N.W.2d 807, ¶ 52. Contracts should be interpreted to avoid absurd results. Chapman v. B.C. Ziegler & Co., 2013 WI App 127, ¶ 2, 351 Wis.2d 123, ¶2, 839 N.W.2d 425, ¶ 2. Contract language should be construed to give meaning to every' word, avoiding constructions that render portions of the contract meaningless, inexplicable, or mere surplusage. Kasten v. Doral Dental USA, LLC, 2007 WI 76, ¶ 48, 301 Wis.2d 598, ¶ 48, 733 N.W.2d 300, ¶48. An unambiguous integration clause demonstrates that the parties intended the contract to be a final and complete expression of their agreement. See Towm Bank, 2010 WI 134, ¶ 37, 330 Wis.2d 340, 793 N.W.2d 476.
The Settlement Agreement by its terms acknowledged that WS Packaging had already agreed to sell, and High Point had agreed to purchase, 25 million scratch-n-reveal cards and that, in turn, High Point had agreed to sell and Emirat had agreed to buy those cards/ (Doc. 61 Ex. 32 ¶¶ A, B.) As stated above, the Settlement Agreement noted a dispute had arisen between the parties concerning certain matters and that the parties agreed to settle, the dispute to avoid litigation. (Doc. 61 Ex. 32 ¶¶ C, D.) Importantly, the Settlement Agreement provided that “[t]he scope of this agreement is strictly limited to the Dispute and the additional matters covered in Sections 5 and 6, below (the ‘Additional Matters’).”
The Settlement Agreement defined the “Disputed Items,” which together constituted the defined term “Dispute,” as follows:
(i) unscanned Cards (Cards bearing official serial numbers that are in trays but that are not referenced in the serial number database); (ii) Cards not being in sequential order in the trays; (iii) incorrect number of Cards in the trays (trays with either more or less than 500 Cards); (iv) the serial number database not matching the Cards in the trays (Cards bearing official serial numbers that have been scanned to be located in a certain tray, but are actually in another tray); and (v) missing serial numbers.
5. Numbering of Cards, Subject to Emirat’s responsibilities set forth in this Section 5, WSPG [i.e., WS Packaging] Entitites agree that they will not ship two or more Cards bearing the same serial number.
With respect to the third shipment of Cards, once WSPG runs out of serial numbers, it will initiate the shipment of those Cards in accordance with Section
6, below.
With respect to the fourth shipment of Cards, Emirat will either (i) provide WSPG with the missing serial numbers (gone missing during the previous Card production runs) to enable WSPG to complete at least 99% of the Card order, or (ii) provide WSPG with both the mi