EMSG SYSTEMS DIVISION, INC., formerly known as KENMAR BUSINESS GROUPS, INC., Plaintiff, v. MILTOPE CORPORATION, Defendant. 
No. 5:97-CV-493-BO(2)
UNITED STATES DISTRICT COURT FOR THE EASTERN DISTRICT OF NORTH CAROLINA, WESTERN DIVISION 1998 U.S. Dist. LEXIS 18363; 37 U.C.C. Rep. Serv. 2d (Callaghan) 39

October 16, 1998, Decided
October 19, 1998, Filed

DISPOSITION: [*1] Defendant`s Motion for Summary Judgment granted on all issues. Plaintiff`s Amended Complaint dismissed in its entirety. 

COUNSEL: For EMSG SYSTEMS DIVISION, INC. fka Kenmar Business Groups, Inc., plaintiff: Carl N. Patterson, Jr., Melinda S. Dumeer, Smith, Anderson, Blount, Dorsett, Mitchell & Jernigan, Raleigh, NC. For MILTOPE CORPORATION, defendant: Michael T. Medford, Manning, Fulton & Skinner, Raleigh, NC. For MILTOPE CORPORATION, counter-claimant: Michael T. Medford, Manning, Fulton & Skinner, Raleigh, NC. For EMSG SYSTEMS DIVISION, INC. fka Kenmar Business Groups, Inc., counter-defendant: Carl N. Patterson, Jr., Melinda S. Dumeer, Smith, Anderson, Blount, Dorsett, Mitchell & Jernigan, Raleigh, NC. 

JUDGES: TERRENCE W. BOYLE, CHIEF UNITED STATES DISTRICT JUDGE. 
OPINION BY: TERRENCE W. BOYLE

OPINION:
ORDER
This matter is before the Court on Defendant`s Motion for Summary Judgment, pursuant to Rule 56 of the Federal Rules of Civil Procedure. Plaintiff`s Amended Complaint alleges alternative breach of contract claims and a quantum meruit claim based on a purported oral agreement for the manufacture of circuit boards for an airline ticket printer. Upon consideration of the parties`  [*2]  arguments, and for the reasons discussed below, the Court will grant Defendant`s instant motion and dismiss Plaintiff`s Amended Complaint in its entirety.

BACKGROUND

The Plaintiff, EMSG Systems Division, Inc., formerly known as Kenmar Business Groups, Inc. ("Kenmar"), is a North Carolina corporation with its principal place of business in Raleigh, North Carolina. Kenmar manufactures custom electronic components. The Defendant, Miltope Corporation ("Miltope"), is an Alabama corporation with its principal place of business in Hope Hull, Alabama. Miltope is engaged in the manufacture of printers and electronic equipment.

In 1995, Miltope was producing an airline ticket and boarding pass printer, named the Model 3800 ("the printer"), which was capable of encoding information on a magnetic strip on the back of airline tickets. At that time, Miltope forecast the sale of significant quantities of the printers for two reasons. First, the International Association of Ticketing Agencies, who sets ticketing requirements within the airline industry, mandated that airlines would have to magnetically encode information on tickets by the year 1997. Second, two major airlines - American and [*3]  United - had existing agreements with Miltope to purchase an undetermined quantity of the printers.

In the Spring of 1995, John Quinn, Kenmar`s sales representative from Atlanta, contacted Miltope to solicit business from them. Initial discussions between the companies raised the possibility of Kenmar producing circuit boards for use in the printers made and sold by Miltope. On October 19, 1995, representatives from the two companies met at Miltope`s facility in Montgomery, Alabama. At that meeting, Miltope presented its sales projections, which worked out to approximately 250 printers per month for 1996 and 1997. Each of the printers would require a set of four circuit boards. John Dautel, Miltope`s Senior Director of Operations, told Kenneth Marks, Kenmar`s President, that Miltope wanted Kenmar to be its supplier of the circuit board sets.

Following the meeting, the parties agreed that Kenmar would produce an initial run of 323 sets of circuit boards on a "consignment" basis, which meant that Miltope would supply the component parts (left over from the time when Miltope would manufacture small quantities of the circuit boards itself). Miltope forwarded a purchase order for the [*4]  323 sets on November 5, 1995. Def. Ex. 19. Included in the purchase order is provision for one-time costs of over $ 32,000 for test fixtures to test the ordered circuit boards. Id.

On November 17, 1995, Kenmar provided Miltope with a quotation to supply circuit board sets on a "turnkey" basis, which meant that Kenmar would both procure the parts and supply the labor for the manufacture of the sets. Def. Ex. 5. The quotation stated that "quantities quoted are assumed to be shipped in lots of 200 or more sets per month." Id. Prices were quoted for quantities of 500, 1000, and 2500. Id. A discount was provided for orders of increasing quantity. Id. The quotation also provided prices for "non-recurring costs ... for the tooling and the electrical test fixtures required to produce the raw printed circuit boards." Id.

In a December 22, 1995 letter, Miltope informed Kenmar of Miltope`s intention to issue a purchase order for 1000 sets, with final price and other terms and conditions to be included the purchase order, and also authorized Kenmar to procure the necessary materials. Def. Ex. 6. In a letter dated January 17, 1995, Miltope requested that Kenmar provide cost and pricing information [*5]  for use in a fixed price purchase order. Def. Ex. 12. Kenmar responded with that information by fax dated January 22, 1996. Def. Ex. 13. In February 1996, Miltope issued a purchase order for 1000 circuit board sets. Def. Ex. 20. The purchase order included a clause that stated that "the terms and conditions of the purchase and sale contract arising herefrom constitute the entire agreement between Buyer and Seller and supercede all previous communications, representations or agreements between the parties." Id. Over the next four months, Kenmar delivered the 1000 sets to Miltope, at the rate of 250 sets per month.

In the early Spring of 1996, Miltope discovered that its sales of the printers were going to be less than originally forecasted. One of its major airline customers - American Airlines - ceased ordering large quantities of printers from Miltope. The International Association of Ticketing Agencies decided to delay for two years its requirement of magnetically-encoded tickets, for which Miltope`s printer had been designed. For these and other reasons, Miltope`s printer sales totaled 1151 in 1996. Def. Ex. 44. In 1997, only 114 printers were ordered from Miltope. Def. Ex. 45.  [*6] 

After its February 1996 purchase order, Mitope did not place any additional orders with Kenmar. Miltope representatives told Kenmar that Miltope would not be placing any more orders with Kenmar. Then, in a letter dated June 12, 1996, Kenmar informed Miltope that it no longer retained the ability to manufacture circuit boards for the printers. Pl. Ex. 55.

Plaintiff brought the instant suit in this Court on June 19, 1997, and filed an Amended Complaint in this matter on June 18, 1998. In its Amended Complaint, Plaintiff asserts three possible causes of action, two for breach of contract and another for recovery under a quantum meruit theory of liability. On June 22, 1998, Defendant filed a Motion for Summary Judgment on all of Plaintiff`s claims, along with an appendix of materials in support thereof. Plaintiff responded to that motion with a memorandum of law and its own appendix of materials on July 15, 1998. Defendant filed a reply on July 31, 1998. The motion is now ripe for adjudication.

DISCUSSION

Summary judgment is appropriate if there is no genuine issue as to any material fact and the moving party is entitled to judgment as a matter of law. Federal. R. Civ. P. 56(c);  [*7]  Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 247, 91 L. Ed. 2d 202, 106 S. Ct. 2505 (1986). A movant is entitled to summary judgment when the record, taken as a whole, could not lead a rational trier of fact to find for the non-movant.  Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 587, 89 L. Ed. 2d 538, 106 S. Ct. 1348 (1986).

1. Choice of Law

In resolving choice of law issues, a federal court must follow the conflicts-of-law rules of the state in which the court sits. See Klaxon Co. v. Stentor Elec. Mfg. Co., 313 U.S. 487, 496, 85 L. Ed. 1477, 61 S. Ct. 1020 (1941). In contract claims, North Carolina applies the substantive law of the state where the contract was made. See Tolaram Fibers, Inc. v. Tandy Corp., 92 N.C. App. 713, 375 S.E.2d 673, 675 (N.C. App. 1989), disc. review denied, 324 N.C. 436, 379 S.E.2d 249 (N.C. 1989). Because the alleged oral contract in the instant case was made in Alabama, this Court will apply Alabama law. See Pl. Am. Comp. P 12.

2. First Breach of Contract Claim

In count one of its amended complaint, Plaintiff Kenmar alleges that Miltope entered into an express oral contract with Kenmar to [*8]  purchase a minimum of 6,000 circuit board sets, at a price of $ 617 per set. Id. PP 12, 18-19. Kenmar alleges that Miltope breached that contract after purchasing 1,000 sets. Id. P 19. In response, Miltope asserts the Statute of Frauds as a defense to the alleged contract. See Def. Ans.

In Alabama, "a contract for the sale of goods for the price of $ 500 is not enforceable ... unless there is some writing sufficient to indicate that a contract for sale has been made between the parties and signed by the party against whom enforcement is sought." Ala. Code §  7-2-201 (1997). See also Cox v. Cox, 292 Ala. 106, 289 So. 2d 609, 612 (Ala. 1974) (holding that an oral contract for goods over $ 500 is unenforceable pursuant to §  7-2-201). Circuit board sets are goods. See Ala. Code §  7-2-105.

One exception to the statute of frauds for goods involves oral contracts for specially manufactured goods. See id. §  7-2-201(3)(a). The exception makes such contracts enforceable when "the seller ... has made either a substantial beginning of their manufacture or commitments for their procurement." Id. The contracts subject to the exception are only excluded from the [*9]  statute of frauds for that quantity of goods for which there has been a "substantial beginning of their manufacture," which usually requires some actual production of each individual good. See id.; Chambers Steel Engraving Corp. v. Tambrands, Inc., 895 F.2d 858, 860-61 (1st Cir. 1990) (finding that the manufacture of one prototype machine did not constitute a "substantial beginning" sufficient to take an alleged oral contract for twenty to thirty more machines out of the statute of frauds) (applying Massachusetts` 2-201(3)(a), which uses the same language as Alabama`s version); Epprecht v. IBM Corp., 36 U.C.C. Rep. Serv. (Callaghan) 391 (E.D. Pa. 1983) (holding that the actual manufacture of 7,000 specially-made machine parts, as part of an alleged oral contract for 50,000, does not constitute a "substantial beginning" sufficient to make the alleged oral contract for the remainder enforceable) (applying Pennsylvania law, which uses the same language as Alabama law); Riley v. Capital Airlines, Inc., 185 F. Supp. 165, 170 (S.D. Ala. 1960) (finding that the executory portion of an alleged oral contract for specially manufactured goods is unenforceable).

In this case, Kenmar can provide no [*10]  writing which is sufficient to indicate an enforceable contract between the parties with the terms Kenmar alleges in count one of its complaint. Instead, Kenmar argues that the alleged oral contract is enforceable because the circuit board sets were specially manufactured, and a contract for such goods is excluded from the statute of frauds. Kenmar claims that its manufacture of 1,000 sets, pursuant to the second purchase order from Miltope, is a sufficient "substantial beginning" to justify the exception for the alleged oral contract for a minimum of 6,000 sets. However, Kenmar never actually produced more than 1,000 sets on a "turnkey" basis (plus 323 made on a "consignment" basis), and Kenmar does not dispute that those sets were actually purchased by Miltope.

The special manufacture of 1,000 sets would remove an oral contract for 1,000 sets out of the statute of frauds. However, those 1,000 sets are not sufficient to except an additional 5,000 sets, which were never actually produced, from the writing requirement of §  7-2-201. The writing requirement of Alabama`s statute of frauds is "for the purpose of preventing fraud and perjury in actions brought on substantial contracts."  [*11]  Port City Constr. Co. v. Henderson, 48 Ala. App. 639, 266 So. 2d 896, 900 (Ala. Civ. App. 1972). That purpose would be undermined by extending the exception found in §  7-2-201(3)(a) and allowing the enforcement of an alleged oral contract for specially manufactured goods which the seller has not begun to produce. Otherwise, the actual manufacture of 1,000 sets could potentially support an alleged oral contract for any number of additional sets, be it 5,000 or 50,000 or 500,000.

In the instant case, the 1,000 sets actually produced by Kenmar pursuant to a written purchase order do not constitute a "substantial beginning" for any additional sets not actually manufactured. Consequently, the statute of frauds prevents the enforcement of the oral contract alleged by Kenmar beyond the 1,000 sets already purchased. Therefore, Miltope`s Motion for Summary Judgment must be granted as to count one of Kenmar`s amended complaint.

3. Alternative Breach of Requirements Contract Claim

In count two of its amended complaint, Plaintiff Kenmar alleges in the alternative that Miltope entered into an express oral contract with Kenmar to purchase Miltope`s requirements for circuit boards [*12]  sets, estimated to be 250 sets per month for two to three years. Pl. Am. Comp. PP 12, 22-23. Kenmar alleges that Miltope breached that contract after purchasing 1,000 sets "by failing to use its best efforts to promote the sale of its printers, by decreasing its requirements in a manner unreasonably disproportionate to its estimated requirements, and by failing to conduct its business in good faith." Id. P 26. In response, Miltope again asserts the Statute of Frauds as a defense to the alleged contract. See Def. Ans.

A contract which measures quantity by the requirements of the buyer can be as valid as a fixed quantity contract. See Ala. Code §  7-2-306. As is a contract for a fixed quantity, a requirements contract is subject to the requirements of the statute of frauds. See Varnell v. Henry M. Milgrom, Inc., 78 N.C. App. 451, 337 S.E.2d 616, 618 (N.C. App. 1985) (referring to N.C. Gen. Stat. §  25-2-306, which is identical to Ala. Code §  7-2-306).

In this case, Plaintiff can not satisfy the statute of frauds` writing requirement for the alleged requirements contract between Kenmar and Miltope. Furthermore, as discussed above, the exception for specially manufactured [*13]  goods does not apply. Consequently, the oral requirements contract alleged by Kenmar can not be enforced. Miltope`s Motion for Summary Judgment must be granted as to count two of Kenmar`s amended complaint.

4. Quantum Meruit / Unjust Enrichment Claim

In the last count of its amended complaint, Kenmar alleges an alternative claim for quantum meruit / unjust enrichment. Pl. Am. Comp. PP 33-38. Kenmar asserts that it provided engineering and design services, id. PP 31-33, and purchased in-circuit test equipment, id. P 34, for the benefit of Miltope without reasonable compensation, which Kenmar expected to receive. Id. PP 36-37.

A claim for unjust enrichment is based on a theory of implied contract in which the plaintiff has a reasonable expectation that it will be compensated for the benefit it confers on the defendant, who knowingly accepts that benefit. See Utah Foam Products, Inc. v. Polytec, Inc., 584 So. 2d 1345, 1350 (Ala. 1991). However, "it has long been recognized in Alabama that the existence of an express contract generally excludes an implied agreement relative to the same subject matter." Betts v. McDonald`s Corp., 567 So. 2d 1252, 1255 (Ala.  [*14]  1990). The only situation in which a plaintiff can recover on an implied agreement in the face of an express contract`s existence is when "it is shown that the express contract has been performed as to all but payment of services, or that the other party has breached the express contract and thus prevented performance." Stewart v. Robertson, 490 So. 2d 13, 15 (Ala. Civ. App. 1986) (citing Hendrix, Mohr & Yardley, Inc. v. City of Daphne, 359 So. 2d 792, 796 (Ala. 1978)).

In this case, Kenmar and Miltope had two enforceable express contracts. The first contract was for the production of 323 circuit board sets on a "consignment" basis; it is evidenced by the November 5, 1995 purchase order. No dispute between the parties exists as to the first contract for 323 sets. The second express contract between the parties involved the manufacture of 1,000 sets on a "turnkey" basis; it is evidenced by the February 15, 1996 purchase order.

According to Alabama law, this express contract precludes the enforcement of the implied agreement, that is the basis of Plaintiff`s quantum meruit claim, to the extent that it is related to the same subject matter. In the instant case, the alleged [*15]  implied agreement for additional services - engineering and design work, and the purchase of a tester - is indeed related to same subject matter considered in the express contract. n1

n1 Furthermore, no other exception to the general rule precluding implied agreements applies because Plaintiff Kenmar does not claim that Miltope failed to pay for the production of the 1,000 circuit board sets or that Miltope otherwise breached the express contract thereby preventing Kenmar`s performance.

The first subject of the alleged implied agreement - engineering and design services - was an important part of the express contract for the production of 1,000 circuit board sets, evidenced by the February 1996 purchase order. That express contract followed extensive negotiations between the parties, both of which are sophisticated businesses. Negotiations referred to engineering services as early as the October 19, 1995 meeting, according to Ken Marks, Kenmar`s President. Marks Depo. at 99. More specific discussions regarding [*16]  necessary engineering changes occurred over the following months as the parties moved closer to agreement. Taylor Aff. at P 16. Then Kenmar prepared a quotation in November 1995, and Miltope responded with a letter in December 1995 expressing its intent to issue a purchase order for 1,000 sets, with final price and other terms and conditions to be determined at the time. Def. Ex. 5,6. After further negotiation regarding price and engineering issues that stretched into 1996, Def. Ex. 12, 13, Miltope forwarded to Kenmar a purchase order for 1,000 sets in February 1996. Def. Ex. 20. Kenmar did not object to the terms of the purchase order and delivered all 1,000 sets.

The second subject of the alleged implied agreement -the purchasing of the tester - is also related to subject matter of the express agreement. Buying circuit boards that had already been tested was important to Miltope, who asked Kenmar about its testing capability. Dautel Depo. 38. Early in the discussions between the parties, Kenmar mailed a letter, dated October 6, 1995, to Miltope explaining that Kenmar planned to acquire a tester. n2 Pl. Ex. 57. Based on these and further negotiations, an express contract was formed,  [*17]  as evidenced by the purchase order for 1,000 sets.

n2 The tester purchased by Kenmar was not purchased solely for testing circuit boards for Miltope`s printer. Marks Depo. 40.

Consequently, Kenmar`s recovery in quantum meruit is barred because the parties previously had an express contract covering the same subject matter. To allow recovery on the implied contract theory underlying quantum meruit despite the existence of an express contract would be a departure from Alabama case law. See, e.g., Betts, 567 So. 2d at 1255; Vardaman v. Florence City Bd. of Educ., 544 So. 2d 962, 965 (Ala. 1989). Therefore, Miltope`s Motion for Summary Judgment must be granted as to count three of Kenmar`s amended complaint.

CONCLUSION

For the reasons discussed above, the Court hereby grants the Defendant`s Motion for Summary Judgment on all issues. Plaintiff`s Amended Complaint is dismissed in its entirety.

SO ORDERED.

This 16th day of October, 1998.

TERRENCE W. BOYLE

CHIEF UNITED STATES DISTRICT JUDGE [*18] 

Judgment in a Civil Case

Decision by Court. This action came to trial or hearing before the Court. The issues have been tried or heard and a decision has been rendered.

IT IS ORDERED AND ADJUDGED that the Defendant`s motion for summary judgment is granted and the Plaintiff`s amended complaint is dismissed in its entirety. (BOYLE, Terrence W., Chief U.S. District Judge)

October 19, 1998