January 11, 1996 UNITED STATES COURT OF APPEALS
FOR THE FIRST CIRCUIT
____________________
No. 95-1220
KNAPP SHOES, INC.
Plaintiff, Appellant,
v.
SYLVANIA SHOE MANUFACTURING CORPORATION,
Defendant, Appellee.
____________________
ERRATA SHEET
The opinion of this court, issued on December 20, 1995, is
amended as follows:
On page 36, line four, replace "$233,626.47" with
"$223,626.47".
On page 36, line five, replace "$243,911.62" with
"$253,911.62".
On page 36, line five, add to the end of the paragraph the
following sentence: "In addition, the magistrate judge's order
terminating the injunction against Sylvania, as entered on May
31, 1991 and amended on June 10, 1991, is vacated; the magistrate
judge is free to reduce the amount embargoed to the net award
plus anticipated costs and interest."
UNITED STATES COURT OF APPEALS UNITED STATES COURT OF APPEALS
FOR THE FIRST CIRCUIT FOR THE FIRST CIRCUIT
____________________
No. 95-1220
KNAPP SHOES, INC.
Plaintiff, Appellant,
v.
SYLVANIA SHOE MANUFACTURING CORPORATION,
Defendant, Appellee.
____________________
APPEAL FROM THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF MASSACHUSETTS
[Hon. Lawrence P. Cohen, U.S. Magistrate Judge] _____________________
____________________
Before
Cyr, Boudin and Lynch,
Circuit Judges. ______________
____________________
Bernard J. Bonn III with whom Timothy C. Blank, Kara W. Swanson ____________________ ________________ _______________
and Dechert Price & Rhoads were on briefs for appellant. ______________________
Joseph B. Green with whom Steven L. Katz and Kotin, Crabtree & ________________ _______________ __________________
Strong were on brief for appellee. ______
____________________
December 20, 1995
____________________
BOUDIN, Circuit Judge. Over the course of three years, _____________
beginning in early 1987, Knapp Shoes, Inc. ("Knapp")
purchased nearly 300,000 pairs of shoes from Sylvania Shoe
Manufacturing Corp. ("Sylvania"). The relationship between
the two companies underwent strains during its final year,
and broke off early in 1990. Knapp filed suit in April 1990
claiming that Sylvania had manufactured defective shoes;
Sylvania counterclaimed for unpaid bills. In March 1995, the
magistrate judge awarded net damages of less than $65,000 in
favor of Sylvania. Knapp appeals. We affirm in part,
reverse in part, and remand for the entry of a new judgment
as specified in this opinion.
I. THE UNDERLYING FACTS I. THE UNDERLYING FACTS
Knapp, a Massachusetts corporation, manufactures and
distributes work shoes. In addition to selling and
distributing shoes that it manufactures, Knapp also sells and
distributes shoes manufactured by other shoe companies under
the Knapp logo. Sylvania, a Pennsylvania corporation, was
one such supplier to Knapp.
In late 1986, Jack Esser, then Knapp's vice president
for merchandising and manufacturing, told Knapp personnel to
contact Sylvania to arrange for the manufacture of shoes
Knapp was selling to the U.S. Postal Service. Sylvania
delivered over 10,000 pairs of two styles of shoes--models
1249 and 1250--by mid-February 1987. By all accounts, there
-2- -2-
were few problems with these shoes, nor were there problems
with over 5,000 pairs of 1249s delivered between September
1987 and May 1988.
Thus encouraged, Sylvania and Knapp expanded their
collaboration, and by early 1988 Sylvania had made or was
making over two dozen models of shoes for Knapp. These later
models all differed in construction from the 1249s and 1250s.
While the latter in each case consisted of a leather upper
cemented to a polyurethane sole, the new models were
constructed of three parts: a rubber outsole, an ethyl vinyl
acetate (EVA) midsole, and a leather upper. Among Knapp's
various problems with Sylvania shoes, the most serious
complaint was that the leather upper and the EVA midsole
tended to fall apart.
The bulk of Knapp's purchases were in three categories.
The first, style 1251, accounted for nearly 25,000 pairs.
These shoes were athletic-style postal shoes. The second
category was the 2600 series, which accounted for over
140,000 pairs. These shoes were steel-toed shoes, intended
for use in industrial settings where OSHA regulations
required protective footwear. The final category was the
2800 and 2900 series of non-steel-toe shoes, of which perhaps
70,000 pairs were sold. A number of models that Sylvania
produced for Knapp are not implicated in this litigation.
Quality control problems with shoes in these three lines
-3- -3-
appeared almost immediately and continued throughout the
history of the two companies' relationship. In mid-1987,
Knapp found that the toe bumpers of style 2600 were
improperly bonded to the shoe and could be peeled off; these
shoes were returned to Sylvania for repair before being
shipped to Knapp's customers. A further problem--this time
with sole adhesion--appeared soon afterwards, affecting white
shoes in the 2600 and 2800 lines. Sylvania, on the advice of
its cement company, had in late 1987 added white pigment to
the cement for cosmetic reasons, and this seemed to affect
the bond. This difficulty led to the recall of thousands of
shoes in early 1988.
By summer 1988, the sole separation problems had spread
to black shoes. In a letter sent by John Sprague, the
individual at Knapp charged with quality control and product
development, to Colin Elliot, a vice president at Sylvania,
Sprague wrote that the problems reported with the black shoes
"scare[s] the hell out of us" and reported also that a
"[r]ash of telephone calls" had complained of sole
separations on style 1251. Following these complaints, a
number of shoes were sent to the Footwear Institute of
America for pull testing.1 These tests indicated that some
____________________
1Pull tests, standard in the industry, allow for
measurement of the strength of shoe construction. In
addition to measuring the pounds of pressure that can be
applied to a particular area of the shoe before it will fail,
the tests indicate whether the failure was caused by material
-4- -4-
sole adhesion problems were caused by improper manufacture.
Esser later testified that he concluded at the time that
the problems were minimal and he authorized continued
purchases from Sylvania. However, both Sprague and Esser
remained in almost daily contact with Elliot in an effort to
correct the defects. In addition, Knapp began to place a
legend on the bottom of some of its purchase orders, "ORDER
PENDING CORRECTION OF SOLE SEPARATION PROBLEM."
Throughout this period, the evidence indicates that
Sylvania and Knapp worked together to attempt to solve the
problems that were affecting the shoes. Various design
changes were suggested by Knapp, and Sylvania implemented
many of them. The suggestions included adding toe bumpers to
models that lacked them and substituting a polyurethane
midsole for the EVA midsole in certain models. In addition,
Sylvania changed cement companies in mid-1988.
In 1989, the relations between the two companies began
to deteriorate. Sylvania blames this deterioration on
Knapp's then-parlous financial state. Knapp established a
cash committee in February 1989 (of which John Esser was a
member); Richard Nedder, Knapp's president, was replaced by
Joel Murray in April. Knapp fell behind on its account with
Sylvania, prompting Sylvania president Robert Pearlstein to
____________________
failure--a tearing of the upper or of the sole--or by a bond
failure.
-5- -5-
send letters of complaint in the summer of 1989.
Knapp insists that defects in Sylvania shoes were
jeopardizing some of its most important accounts and it
offered evidence that failures in models 2810 and 2930 were
of particular concern. In the summer of 1989 Knapp attempted
to return 1000 pairs of 2810's that were produced with the
EVA midsole; Sylvania refused to accept the returns. At
trial, Sylvania offered evidence, credited by the magistrate
judge, that many of these 2810 and 2930 shoes were not
manufactured by Sylvania, but were instead imported by Knapp
from Taiwan. There was also evidence that sole adhesion
problems affected some models that were never produced by
Sylvania.
In an effort to work out a payment schedule, Pearlstein
met with Murray and others at Knapp twice in the summer and
fall of 1989. At the latter meeting on October 17, Knapp
sought to demonstrate that there were quality problems with
Sylvania shoes by twisting the soles and uppers apart
manually. This was done, but the ease, and the significance,
of the demonstration were disputed. At that meeting, Knapp
agreed to pay $40,000 for every $35,000 of product sent by
Sylvania, the extra $5,000 being part of Knapp's attempt to
repay earlier amounts owned to Sylvania.
Records of both companies show that shipments continued
in October and November 1989. Payments were also made by
-6- -6-
Knapp against its outstanding balance in January 1990. O n
December 1, 1989, Dick Sebastiao joined Knapp as executive
vice president with the understanding that he would become
president in February 1990. By the end of 1989, Sprague had
been fired and Esser, who had been on the board of directors
of the company, also had left.
A final shipment of Sylvania shoes was delivered in
February 1990, after Knapp made an advance payment. James
Crabtree, a Knapp employee, testified that when the shoes
were inspected, he was able to pull them apart with his bare
hands; he alerted Sebastiao, who called Pearlstein at
Sylvania. Pearlstein asked for a sample to inspect, and
disputed Crabtree's findings. The magistrate judge later
found Crabtree's testimony incredible and credited
Pearlstein's assertion that the shoes in the February 1990
shipment were not defective, although two Sylvania employees-
-Elliot and John Cartwright (Sylvania's manufacturing
supervisor)--admitted that they had been able manually to
separate the soles on some of the shoes.
Crabtree further testified that he then began to test
Knapp's existing inventory of Sylvania shoes and found that
it was "95% defective." Again, this testimony was not
credited by the magistrate judge. Knapp also performed
various tests on the shoes from the February shipment and on
shoes in inventory after the start of litigation; its
-7- -7-
evidence at trial was that these tests consistently found
problems with the bonding of the shoes. This evidence was
also not credited by the magistrate judge.
-8- -8-
II. PRIOR PROCEEDINGS II. PRIOR PROCEEDINGS
On April 10, 1990, Knapp filed this diversity action
against Sylvania under Massachusetts law for breach of
contract (count 1), breach of express warranty and implied
warranties of merchantability and fitness for a particular
purpose (counts 2-4), breach of the duty of good faith and
fair dealing (count 5), fraud and negligent misrepresentation
(counts 6 and 7), and violation of Mass. Gen. L. ch. 93A
(count 8).2 Sylvania also counterclaimed, seeking $277,000
for unpaid bills, plus multiple damages and attorney's fees
under Chapter 93A.
Both parties consented to proceed before a magistrate
judge without a jury, and the magistrate judge bifurcated the
trial into a liability phase and a damages phase. Evidence
in the liability phase was completed on January 31, 1991,
after nine days of testimony. That same day, the magistrate
judge entered a four-page memorandum and order that devoted
one paragraph each to five of Knapp's eight counts, without
discussing Sylvania's counterclaims.
In this decision, the magistrate judge ruled that
Sylvania had breached its warranties only insofar as Knapp
had shown, or could show, that shoes delivered to it were
____________________
2Chapter 93A outlaws "[u]nfair methods of competition
and unfair or deceptive acts or practices in the conduct of
any trade or commerce," and permits awards of multiple
damages and attorneys' fees.
-9- -9-
defective. The magistrate judge also found that Knapp had
failed to prove fraud, negligent misrepresentation or--
"except to the extent that plaintiff has shown, or can show,"
a refusal by Sylvania to credit returned defective shoes--
breach of the duty of good faith and fair dealing. As for
Knapp's chapter 93A claim, the decision said that Sylvania
had not been shown to have engaged in unscrupulous conduct;
it noted, but did not decide, the question whether some
payments might still be due Knapp under chapter 93A based on
a regulation of the state's attorney general.
In May 1991, prior to the damages phase of the trial,
Knapp learned that Sylvania was going out of business and
liquidating its assets. Fearful that Sylvania would soon be
judgment-proof, Knapp obtained a temporary restraining order
precluding Sylvania from dissipating assets in the amount of
$3,775,657.22--the amount of damages that Knapp hoped to
prove in the damage phase of the trial. The magistrate judge
modified this order on June 10, 1991, converting it into a
preliminary injunction and amending it to allow Sylvania to
make limited payments to its creditors and lawyers.
The damages phase of the trial took place over five days
in June 1991; at Sylvania's behest, an additional day of
evidence was heard on November 25, 1991. Proposed findings
of fact and conclusions of law were filed by the parties in
March 1992. Then, in March 1993, the magistrate judge issued
-10- -10-
an order proposing to certify certain questions to the
Massachusetts Supreme Judicial Court. Both sides opposed
certification, but on April 8, 1993, the magistrate judge
certified two questions, both relating to the possible
application of Chapter 93A to "a simple breach of warranty."
The magistrate judge prefaced the certified questions
with a ten-page statement. In it, he first repeated the
rulings on the five counts contained in the January 31, 1991,
order. Then, he determined for the first time that the
parties had agreed by express negotiations, express
understandings and express course of dealings that in the
event of defects, "Knapp's remedy, and sole remedy, would be ____
the replacement of [or credit for] those shoes shown to be
defective and returned--nothing more, and nothing less"
(footnote omitted; brackets in the original). The
certification also said, in a footnote, that less than three
percent of the Sylvania shoes delivered to Knapp were
defective.
On Sylvania's motion, the magistrate judge dissolved the
preliminary injunction on May 5, 1993, concluding that Knapp
now had little hope of a substantial recovery. On Knapp's
appeal, this court stayed and then vacated the order
dissolving the preliminary injunction. Knapp Shoes, Inc. v. _________________
Sylvania Shoe Manufacturing Corp., 15 F.3d 1222 (1st Cir. ___________________________________
-11- -11-
1994). We held that Sylvania had waived the affirmative
defense of limitation of remedies by failing to raise it in a
timely fashion. Since the issue of limitation of remedies
had never been litigated by the parties, the waiver could not
be avoided by amending the pleadings to conform to the proof.
Cf. Fed. R. Civ. P. 15(b). Accordingly, we said that "the ___
limitation of remedies defense is out of the case and cannot
support the order vacating the injunction." Id. at 1227. ___
We also rejected Sylvania's alternative argument that
the termination of the injunction could be supported by the
magistrate judge's footnote finding, in the certification,
that the percentage of defects was very small. Our opinion
pointed out that the magistrate judge had not set forth
findings or analysis to support this conclusion as to the
quantity of defects, so we were "unable to make a reasoned
judgment whether, on this critical issue of defects, the
magistrate judge's finding was or was not `clearly
erroneous'" under Fed. R. Civ. P. 52(a). Id. at 1228-29. ___
On October 13, 1994, the Supreme Judicial Court answered
the certified questions that had been submitted by the
magistrate judge. Knapp Shoes, Inc. v. Sylvania Shoe ___________________ ______________
Manufacturing Corp., 640 N.E.2d 1101 (Mass. 1994). The Court ___________________
held that 940 Code Mass. Regs. 3.08, which provides in part
that "[i]t shall be an unfair and deceptive act or practice
to fail to perform or fulfill any promises or obligations
-12- -12-
arising under a warranty," was not meant "to encompass a
contract dispute between businessmen based on a breach of the
implied warranty of merchantability." Id. at 1105. ___
Thus informed, the magistrate judge issued his final
decision on March 1, 1995. With respect to counts 3 and 4
(breach of warranties of merchantability and fitness), he
again held that Sylvania had breached its warranties to the
extent that particular shoes were defective for whatever
reason. On count 1 (breach of contract), the magistrate
judge said again that there was no violation beyond the
breaches of warranty covered by counts 3 and 4. He also
reaffirmed that Knapp had failed to establish its claims in
count 2 (breach of express warranties), count 5 (duty of good
faith and fair dealing), count 6 (common law fraud), count 7
(common law negligent misrepresentation) and count 8 (Mass.
Gen. L. ch. 93A violation).
On Sylvania's counterclaims, the magistrate judge found
that Knapp was liable for the outstanding balance due for
shoes that Sylvania had delivered to Knapp. The magistrate
judge found that Sylvania was not entitled to recover the
contract price of additional shoes it had manufactured for
Knapp but not yet delivered; the reason was that Sylvania had
failed to make a reasonable effort to resell the shoes. He
also rejected Sylvania's own chapter 93A claim against Knapp.
Sylvania does not challenge these rulings on appeal.
-13- -13-
In computing damages, the magistrate judge held that
Knapp should receive credit only for defective shoes still in
its inventory--which he determined to be between 3 and 4
percent of the total--and for specified incidental damages.
He ruled that Knapp had no right to revoke acceptance of any
non-defective goods in inventory, nor to reject the final
shipment of shoes sent in February 1990, nor to recover for
lost profits. In the final tally, Knapp was awarded damages
of $160,062.74, and Sylvania was awarded damages of
$223,626.47. Finally, the preliminary injunction was
dissolved. We stayed the judgment pending disposition of
this appeal.
III. LAW OF THE CASE AND STANDARD OF REVIEW III. LAW OF THE CASE AND STANDARD OF REVIEW
Our review of the facts found by the trial judge is
normally deferential; findings are not to be set aside unless
clearly erroneous, with "due regard . . . given to the
opportunity of the trial court to judge of the credibility of
the witnesses." Fed. R. Civ. P. 52(a); see Williams v. ___ ________
Poulos, 11 F.3d 271, 278 (1st Cir. 1993). Knapp argues that ______
our review should be less deferential in this case, drawing
attention to paragraph 49 of the magistrate judge's findings
of fact and its accompanying footnote.
[Paragraph 49] With respect to all lines of
shoes which Knapp requested be manufactured by
Sylvania, one finding is unmistakenably [sic]
clear: By their express negotiations, by their
express understandings, by their demonstrated
conduct, and by their express course of dealings,
-14- -14-
Sylvania promised Knapp that, in the event that
shoes were defectively manufactured, Knapp's
remedy, and sole remedy, would be the replacement ____
of [or credit for] those shoes shown to be
defective and returned--nothing more, and nothing
less.
[Footnote] This finding is not made and
reported to suggest that Knapp waived its rights
under Sections 2-601, 2-608, and 2-609 of the
Uniform Commercial Code (M.G.L., ch. 106, 2-601,
2-608 and 2-609). Although it was and is clear to
this court--then and now--that that was the sole
understanding of the parties in terms of remedies
and relief, and that it was clear (then and now) to
all parties that the defense of waiver loomed
throughout, and that plaintiff could not--then or
now--establish any legal prejudice (that is, _____
plaintiff could not--then or now--make any showing
that the case would have been tried differently),
our Court of Appeals, in the context of an
interlocutory appeal relating to the dissolution of
an injunction, has concluded otherwise.
Nevertheless, this finding and conclusion bear
heavily on the credibility of the witnesses called
by Knapp, and other issues to be determined herein.
Knapp argues that this discussion violates the law of
the case by contradicting our holding in Knapp that Sylvania _____
had waived any such limitation of remedies defense, that the
issue of limitation of remedies had not been litigated at
trial, and that it was now "out of the case." 15 F.3d at
1227. Knapp further insists that this error by the
magistrate judge tainted his other factual findings,
requiring us to subject these findings to heightened
scrutiny. Paragraph 49 has certainly complicated matters on
this appeal, but we conclude that Knapp has somewhat
exaggerated its import and consequences.
-15- -15-
The law of the case doctrine has more than one dimension
and certain complexities, but as applied to the problem
before us, the doctrine provides that when a court of appeals
makes a ruling of law, whether on appeal of a final judgment
or in an interlocutory appeal, that ruling becomes the law of
the case in any subsequent proceedings in the trial court.
Elias v. Ford Motor Co., 734 F.2d 463 (1st Cir. 1984). Such _____ ______________
a ruling is "[a] mandate [that] is completely controlling as
to all matters before the appellate court and disposed of by
its decree." Id. at 465. ___
We agree with Sylvania that the magistrate judge did not
contradict our legal ruling in Knapp that the defense of _____
limitation of remedies was waived and now out of the case.
He did not rest any of his own legal rulings on the
proposition that Knapp had limited its remedies by contract
to credit for returned shoes; indeed, he awarded Knapp
damages for defective shoes still in its possession (although
he found the number of such shoes to be very small). To that
extent, Knapp's law-of-the-case claim is something of a
diversion.
At the same time, on an intermediate proposition of fact
a direct conflict exists between our earlier opinion and the
most recent decision of the magistrate judge. The magistrate
judge repeats in the footnote to paragraph 49, quoted above
in text, his earlier conclusion that Knapp and Sylvania did
-16- -16-
agree in fact to limit Knapp's remedies; and he recognizes
that this court on the prior appeal "concluded otherwise."
Our actual conclusion was slightly narrower--we said that the
parties had not purported to litigate the issue and we could
find no evidence of such an agreement--but the fact remains
that the magistrate judge has reasserted his view that such
agreement has been proved.
All this might matter little if the magistrate judge's
disagreement with us played no role in his decision, but he
goes on to say that "this finding and conclusion bears
heavily on the credibility of the witnesses called by Knapp,
and other issues to be determined herein." No resort to law
of the case doctrine is required for us to determine that his
"finding and conclusion" that such an agreement existed
limiting remedies is clearly erroneous. The very same
defect--the lack of evidence to show such an agreement--
identified in our earlier decision remains, utterly
unaltered.
We explained in our earlier opinion why we were not
persuaded of such an agreement by the magistrate judge's
reliance on Esser's testimony that a return remedy existed--
testimony that did not even purport to address the
exclusivity of the remedy--and also why we saw no course of
dealing by the parties that could prove such a limitation.
15 F.3d at 1226-27. No new evidence was taken on remand to
-17- -17-
prove this limitation; no additional support for it is
mustered by the magistrate judge out of the pre-existing
record.
About the best we can do in this disturbing situation is
to defer to the usual extent as to those findings of the
magistrate judge that we are confident have not been infected
by his belief in the supposed agreement limiting remedies;
and, on all other findings, to consider them in the knowledge
that the magistrate judge has credited or discredited certain
witnesses based (at least in part) on a premise that we have
already held to be mistaken. Sorting out findings in this
way, and deciding how to treat infected findings, is
something of a task but better than an outright remand on all
issues to a new judge.
IV. THE MERITS IV. THE MERITS
Our analysis of the merits is divided in three parts.
Knapp raises some rather half-hearted objections to the
magistrate judge's rulings that reject most of its counts; we
find that these rulings are sustainable on this record.
Knapp's next objections concern the magistrate judge's
rulings on remedies; here we find that the magistrate judge's
analysis of the remedies available to Knapp was correct on
one issue (Knapp's purported revocation of acceptance of all
shipments) but flawed on another (Knapp's rejection of the
first February 1990 shipment). Finally, we find that
-18- -18-
elements of the magistrate judge's determinations on damages
were clearly erroneous but that the necessary corrections can
be made on the existing record.
A. Liability _________
Knapp's complaint alleged eight causes of action. The
magistrate judge ruled that Knapp had failed to persuade on
all except for counts 3 and 4, breaches of implied warranties
of merchantability and fitness; these warranties were held to
be breached only with respect to those shoes that were
actually defective. Sylvania does not appeal that limited
finding of liability; Knapp appeals from the decision
rejecting its other counts, but its arguments are without
merit.
Breach of Contract. With respect to count 1, breach of ___________________
contract, Knapp objects that the magistrate judge in
rejecting this count relied upon his footnote 49 finding that
the parties had previously agreed to limit remedies. But
Knapp's own count 1 alleged only that Sylvania failed to
deliver shoes of promised quality; and it has not shown how
this claim exceeds the breach of warranty claims that the
magistrate judge allowed under counts 3 and 4. We therefore
affirm the magistrate judge's disposition of count 1.
Breach of Express Warranty. On count 2, the breach of __________________________
express warranty, Knapp argues that Sylvania warranted that
it would produce a defect-free shoe and that the high defect
-19- -19-
rate caused each entire shipment to be in breach of
Sylvania's express warranty. Knapp points to two letters
sent to Knapp by Sylvania in mid-1988, when sole bond
problems were affecting shoes in the 2600 line. In the
first, Elliot wrote, "We know the industrial consumer wants
this product and it is up to us to give it to him or her
without defect." In the second, Elliot wrote "As always, we
stand behind our product and fully warrant the product
against manufacturing defect."
If Knapp means to suggest that Sylvania had warranted
that each and every shoe in a given shipment would be free of
defects and that a shipment could be rejected based on any
such defect, that suggestion is not reasonable. At trial
witnesses for both parties agreed that no one in the shoe
industry expects that any shipment of shoes will be entirely
free of defects. Sylvania's quoted statements can at most be
read to mean that it was capable of producing shoes that met
industry standards as to the percentage of defects.
Of course, to the extent that Sylvania breached its
various commitments, it may as remedial measures be liable--
under certain circumstances--to rejection of more than the
particular shoes shown to be defective and to consequential
damages that exceed the price paid for the particular
defective shoes. See IV(B) and (C), below. But so far as ___
Knapp's claim depends on the notion that Sylvania promised no
-20- -20-
defects at all, we think no such warranty was made.
Breach of Duty of Good Faith and Fair Dealing. Count 5 ______________________________________________
alleged that Sylvania breached its duty of good faith and
fair dealing.3 In his January 31, 1991, memorandum, the
magistrate judge found that Knapp had failed to carry its
burden on this claim, ruling that "the defendant acted in the
utmost good faith in an attempt to correct a problem not
reasonably foreseen by any of the parties to the
relationship." Knapp insists that Sylvania's failure to
correct its manufacturing processes, despite its assurances
to Knapp that the quality of its shoes would improve,
breached its duty.
Whether conduct violates the duty of good faith and fair
dealing is necessarily a fact-specific inquiry, see E. Allan ___
Farnsworth, Contracts 7.17 (2d ed. 1990), and the _________
magistrate judge's finding here is not clearly erroneous.
There was ample untainted record evidence that Sylvania
strove to improve the quality of the shoes it delivered; it
changed its cement suppliers and implemented various design
changes suggested by Knapp. There is no evidence that
Sylvania's failure to improve its manufacturing process was
____________________
3In Massachusetts, "[e]very contract implies good faith
and fair dealing between the parties to it." Warner Ins. Co. _______________
v. Commissioner of Ins., 548 N.E.2d 188, 193 n.9 (Mass. 1990) ____________________
(quoting Kerrigan v. Boston, 278 N.E.2d 387, 393 (Mass. ________ ______
1972). Similarly, Mass. Gen. L. ch. 106 ("UCC") 1-203
imposes an "obligation of good faith."
-21- -21-
motivated by bad faith rather than by a simple failure to
root out and remedy all of the problems.
Fraud and Negligent Misrepresentation. Counts 6 and 7 ______________________________________
charged fraudulent and negligent misrepresentation, claims
that in Massachusetts require a false representation of a
material fact, knowledge of falsity or carelessness on the
part of the defendant, and reasonable reliance by the
plaintiff.4
The magistrate judge found, in his memorandum of January
31, 1991, that Knapp's misrepresentation claims failed
because Sylvania had done what it said it would do--use its
best efforts to produce shoes free of defects. On appeal,
Knapp insists that Sylvania had repeatedly and falsely
assured Knapp that it would correct any problems with the
shoes, and that Knapp reasonably relied on these
representations in continuing its purchases.
We need not decide whether such reliance would be
reasonable, but cf. IV(C) below, because we agree that no _______
false representation has been shown. The evidence at trial
indicated that Knapp and Sylvania remained in regular contact
regarding proposed design and manufacturing changes, and
Sylvania never misrepresented the changes it proposed to
carry out. In this context, Sylvania's conclusory statements
____________________
4VMark Software, Inc. v. EMC Corp., 642 N.E.2d 587, 593 ____________________ _________
n.8 (Mass. App. Ct. 1994); Zimmerman v. Kent, 575 N.E.2d 70, _________ ____
77 (Mass. App. Ct. 1991).
-22- -22-
that its quality would improve--and Knapp calls our attention
to no more specific alleged misstatement--are no more than an
"expectation, estimate, opinion, or judgment." See Powell v. ___ ______
Rasmussen, 243 N.E.2d 167, 168 (Mass. 1969). _________
Chapter 93A. On count 8--Knapp's ch. 93A claim--we ____________
again affirm the magistrate judge. For Knapp to prevail, it
must prove that Sylvania's conduct included an "unfair or
deceptive act," a phrase that the Massachusetts courts read
as requiring a showing of "rascality;" the showing is
especially difficult where the case involves arm's-length
transactions between sophisticated business entities.
Anthony's Pier Four, Inc. v. HBC Assocs., 583 N.E.2d 806, 821 _________________________ ___________
(Mass. 1991).
The crux of Knapp's argument is that Sylvania was aware
that there were problems with its manufacturing process and
failed to make the needed changes. But as the magistrate
judge held, there was no evidence at trial that Sylvania's
failure to improve the quality of its shoes was deliberate or
willful; on the contrary, it made repeated efforts on its own
and in consultation with Knapp to correct perceived problems.
Knapp's claim for multiple damages and attorney's fees was
therefore properly denied.
B. Revocation and Rejection Remedies _________________________________
Even if liability is based only on counts 3 and 4, Knapp
argues on appeal that the magistrate judge nevertheless erred
-23- -23-
in determining the remedies available to it. It says that he
improperly denied to Knapp remedies of "revocation of
acceptance" (with respect to all prior shipments) and
"rejection" (with respect to the shipment of February 1990)
and that these errors led him into a further error, namely,
to direct his damage assessment only to those shoes actually
shown to be defective.
Revocation of Acceptance as to All Shoes. Knapp first _________________________________________
argues that it is entitled to revoke acceptance of all
inventory purchased from Sylvania--including non-defective
shoes--because the rate of defects was so high as to make it
impossible for Knapp to sell shoes from that inventory. The
magistrate judge rejected this remedy because he found a very
low rate of defects. Although this finding is not adequately
supported, see IV(C) below, we agree with the result because ___
Knapp failed to make an effective revocation of its
acceptance under UCC 2-608.
When a buyer "accepts" goods, as defined in UCC 2-606,
the buyer forfeits the right to "reject" the tender. UCC
2-607. However, a buyer may be able to "revoke acceptance"
under UCC 2-608 as follows:
(1) The buyer may revoke his acceptance of a lot
or commercial unit whose non-conformity
substantially impairs its value to him if he has
accepted it
(a) on the reasonable assumption that its non-
conformity would be cured and it has not been
seasonably cured; or
(b) without discovery of such non-conformity
-24- -24-
if his acceptance was reasonably induced either by
the difficulty of discovery before acceptance or by
the seller's assurances.
(2) Revocation of acceptance must occur within a
reasonable time after the buyer discovers or should
have discovered the ground for it and before any
substantial change in condition of the goods which
is not caused by their own defects. It is not
effective until the buyer notifies the seller of
it.
The buyer who revokes has the same rights and duties as if
the buyer had rejected the goods. UCC 2-608.
Knapp argues that this case falls squarely within
section 2-608 (1)(b). It says that the sole-bond problems
were hard to discover because they could not be detected by
visible inspection and that it reasonably relied upon
Sylvania's assurances that it had corrected the bond problem.
Knapp cites to S & R Metals, Inc. v. C. Itoh & Co. _____________________ _______________
(America), 859 F.2d 814 (9th Cir. 1988), as authority for the _________
view that a buyer can revoke acceptance when the prior
acceptance was made without knowledge of the defect and the
defect was "latent and difficult to discover."
The difficulty with Knapp's position is that by mid-1988
it had ample knowledge that customers were complaining about
separation, and its own experience confirmed that Sylvania
was not successfully solving the underlying problems. Knapp
itself points to pull-tests done in 1988 which, it argues,
prove that Sylvania's manufacturing process was flawed. Yet
not until spring 1990--the precise date is disputed--did
Knapp purport to revoke acceptance for all shoes delivered to
-25- -25-
it over the entire period.
This is not a revocation occurring within "a reasonable
time" after the buyer discovered the ground for rejection,
and the contrast between the present facts and those of S & R _____
Metals underscores the point. In that case, the buyer had no ______
reason to doubt the quality of the steel until complaints
were received; advance testing would have been expensive and
destroyed the valuable product tested; and the revocation of
acceptance was made within nine days after the defect had __________
been discovered and confirmed. S & R Metals, 859 F.2d at _____________
817. Nothing in this decision, or any other cited by
Knapp,5 suggests that a buyer can accept deliveries of a
vast number of items over a period of a year and a half and
then suddenly revoke the acceptance of all of them based on
defects whose presence was known or suspected during the
entire period.
Rejection of the February 1990 Shipment. A much ____________________________________________
narrower and stronger claim by Knapp is that it properly
rejected the single shipment of shoes received in February
1990. Section 2-601 of the UCC provides that if goods or
____________________
5In Fortin v. Ox Bow Marina, Inc., 557 N.E.2d 1157 ______ _____________________
(Mass. 1977), also cited by Knapp, the court allowed the
buyer to revoke acceptance of a boat delivered four months
earlier when the seller had provided repeated assurances that
it would cure the identified defects in the boat. The case
involved a different problem--a promise to repair a specific
item already delivered--and is governed by a different
provision (section 2-608(1)(a)).
-26- -26-
tender fail to "conform" to the parties' contract, the buyer
may reject the whole delivery;6 but this rejection must be
within a reasonable time, and the buyer must seasonably
notify the seller of the rejection. UCC 2-602(1). The
magistrate judge found that Knapp failed to prove that the
February shipment was nonconforming, and further found that
Knapp's rejection was untimely.
Knapp insists that the shipment was nonconforming
because all of the shoes in the shipment were defective
inasmuch as they could be pulled apart manually. Crabtree,
Knapp's key witness on this issue, so testified at trial.
The magistrate judge made clear that he did not accept
Crabtree's testimony, but this appraisal may well have been
affected by the magistrate judge's mistaken finding on
limitation of remedies: Crabtree also testified to the fact
that the procedure of return of customer defects was
established only in mid-1988 and that before that time
customer returns were discarded, a fact that the magistrate
judge found surprising in view of the "clear understanding
between the parties."
Knapp did carry out a prompt inspection of the shoes
____________________
6To permit rejection of the entire shipment for
nonconformity, Knapp had to show not just that there were
defective shoes but that the defect rate was higher than
agreed upon or, lacking specific agreement, than the standard
in the industry. See Agoos Kid. Co. v. Blumenthal Import ___ ______________ __________________
Corp., 184 N.E. 279, 281 (Mass. 1932). _____
-27- -27-
that arrived in the February 1990 shipment, complained
immediately to Pearlstein that the shoes were 100 percent
defective, and sent him a case for his own inspection. When
the formal "rejection" occurred is disputed--the magistrate
judge found that it did not occur until May--but Knapp's
actions were certainly consistent with its claim of
substantial defects and represented steps toward rejection.
It immediately placed the seller on notice that the defects
were pervasive and began to negotiate the seller's response.
The magistrate judge chose to credit fully the testimony
of Pearlstein, Sylvania's president, to the effect that no
shoes from the sample case sent by Knapp to Sylvania from the
February shipment separated. But quite apart from other
Knapp witnesses who supported Crabtree, other Sylvania ________
employees--Elliott and Cartwright--both agreed that at least
some of the shoes could be pulled apart by hand. Thus we
find it hard to accept the magistrate judge's finding that
"plaintiff has failed to establish by a preponderance of the
evidence that any of the shoes--much less the whole of the
lot--failed to conform."7
This court finds clear error only where, "on the whole
____________________
7The magistrate judge suggested that the "hand" pull
test is not standard in the industry and that evidence that
shoes could be pulled apart by hand did not necessarily prove
them defective. Common sense, buttressed by ample evidence
at trial, confirms that an industrial work shoe is defective
where it can readily be pulled apart by hand.
-28- -28-
of the record, we form a strong unyielding belief that a
mistake has been made." Cumpiano v. Banco Santander P.R., ________ ____________________
902 F.2d 148, 152 (1st Cir. 1990) (citations omitted). In
this instance, we conclude that the magistrate judge was
clearly in error in finding that the February 1990 shipment
was free of defects and conformed to industry standard. The
question whether Knapp gave prompt notice is more difficult,
but we need not resolve the issue because whether Knapp
rightfully rejected the nonconforming shipment has no
practical impact on the damages to which it is entitled.
With the magistrate judge's finding on defects set to one
side, Knapp's ordinary damages as to the February shipment
produce essentially the same amount as it would receive under
the "rejection" remedy. See IV(C) below. ___
C. Damages _______
Knapp's damage claims were based upon its allegation
that Sylvania shoes suffered from a very substantial rate of
defects. In his final damages calculation, the magistrate
judge found that the rate of defects in the inventory shoes
involved in this litigation was less than four percent.
Knapp argues on appeal that the magistrate judge's defect-
rate finding was clearly erroneous, and insists that the
evidence established a defect rate of at least 40 percent for
the shoes remaining in inventory at Knapp. We think that the
magistrate judge's finding is clearly erroneous and that on
-29- -29-
this record the 40 percent figure is the only alternative
choice.
Knapp's allegations of substantial defect rates in the
shoes remaining in inventory were supported by detailed
testimony by Crabtree; by corroborating testimony of other
Knapp personnel; by evidence of substantial customer returns,
dissatisfaction and cancelled relationships to which the
customers testified; by testimony that the number of
defective shoes held by Knapp plus the number of prior
returns acknowledged by Sylvania was nearly twice the
magistrate's 3-to-4 percent finding; by evidence that both
Knapp and customers threw away additional defective shoes;
and, finally, by a fairly detailed sampling study that
appearedto establish a defect rate of at least 41.7 percent.8
In adopting the 3-to-4 percent defect rate figure, the
magistrate judge accepted the testimony of Esser and Sprague
(both disaffected former Knapp employees) and of Sylvania
personnel, to the effect that there was never a substantial
problem with Sylvania shoes. He disregarded Crabtree as a
liar; and he dismissed customer testimony as not necessarily
____________________
8A biostatistician analyzed the results of pull-tests
performed on randomly selected pairs of unused shoes in
inventory. Using a 20-pound figure for the pull-tests, 60
percent of the shoes failed. Given the sample size tested
and the number of shoes in inventory, the expert concluded
that "we have a 95 percent level of confidence that the
actual proportion of defective pairs in the inventory . . .
is at least 41.7 percent."
-30- -30-
relating to Sylvania shoes but rather to shoes manufactured
in Taiwan. He found the pull tests inconclusive, insisting
that Knapp had failed to present evidence that a pull-test
failure at under 20 pounds showed that a shoe was defective.
He refused to believe Knapp's accounting of the number of
defective shoes in inventory.
Under the Cumpiano standard, we reject as clearly ________
erroneous the magistrate judge's assessment of the percentage
of defects in the Sylvania shoes. We have already explained
why his related appraisal of testimony regarding quality of
the February 1990 shipment is unpersuasive, see IV(B), and ___
this is equally so on the broader question of the remaining
inventory. Knapp's claims of defects came not only from
Knapp but from customers disinterested in the litigation,
from the presence in inventory of defective shoes actually
returned to Knapp, and from the pull-tests conducted by
independent experts--the last of which sampled the entire
remaining Knapp inventory in the contested models.
The notion that any of these defective shoes came from ___
foreign sources rests on doubtful evidence; but, given the
poor quality of the February 1990 shipment admittedly from
Sylvania, it is obvious that foreign sources do not explain
away the problem. From the testimony on pull-tests, it
appears that the 20-pound figure that Knapp asked the expert
to employ was not only plausible but conservative. Knapp's
-31- -31-
accounting of the number of defective shoes in its inventory
was essentially uncontradicted. In sum, the evidence is
overwhelming that the defect rate was considerably higher
than the rate adopted by the magistrate judge.
Each side had its chance to present evidence and neither
side is entitled to introduce further evidence on this issue.
On the present record the stark choice is between Sylvania's
claim that defects were no greater than normal and Knapp's
evidence to the contrary. The Knapp evidence was that it had
6,045 known defective pairs in inventory, comprising shoes
returned by customers, the 1,422 pairs torn-apart from the
February 1990 shipment and other shoes pulled apart during
inspection of inventory, and--in addition--that it had in
inventory 21,010 new shoes of the models involved in this
litigation, at least 41.7 percent of which the statistical
sampling showed to be defective.
The evidence as to raw numbers in inventory was
essentially uncontradicted even though the magistrate judge
declined to accept the numbers. As for the statistical
study, the 20-pound pull-test was (as already noted) a
conservative standard based on the evidence; and the 41.7
percent figure even more so. Sylvania has chosen not to
contest its liability for defective shoes no matter how long
in inventory. "Where, as here, the record is sufficiently
developed that we can apply the law to the facts before us .
-32- -32-
. . that route is available to us." Lipsett v. Blanco, 975 _______ ______
F.2d 934, 943 (1st Cir. 1992). We take it here and find that
Knapp has proved the raw figures and defect rate just
discussed, any other conclusion on this record being clearly
erroneous.
As for the cost of the shoes, we agree with the
magistrate judge that the most accurate figure is the average
price of the shoes purchased by Knapp, rather than Knapp's
"Fifo average cost."9 Using the magistrate judge's price
figures for each model and applying that price to the larger
number of defective shoes that we have found to be present in
Knapp's inventory (14,806), we have calculated Knapp's
damages for defective shoes as $338,138.31. The
calculations, by model number, are set forth in Appendix A.
Knapp argues that regardless of the precise percentage
of defective shoes in its inventory, all of the shoes are
useless to it because the number of defects is too high to
allow Knapp to deliver the shoes to customers without fear
that they will fall apart on their feet. Knapp is
essentially attempting to invoke through the back door the
revocation of acceptance remedy that Knapp failed to invoke
____________________
9Even if we were to accept (as the magistrate judge did
not) that Knapp maintained a strict Fifo inventory procedure,
some of the new shoes in Knapp's Brockton warehouse were
returned from field warehouses; some may have been from early
shipments, and the average price figure therefore appears to
us to be the better measure.
-33- -33-
in a timely manner. Whatever decrease Knapp has suffered in
value of the non-defective shoes, Knapp inflicted this
decrease on itself when it accepted the deliveries and failed
to revoke that acceptance within a reasonable time.
Knapp also claimed a detailed list of incidental
damages, some of which were granted by the magistrate judge
and are not challenged by Sylvania on appeal. Knapp insists
that it is also entitled to reimbursement for a credit it
issued to Federal Express and for storage costs beyond those
granted by the magistrate judge. The magistrate judge found
that Knapp had failed to prove that it had not received
credit from Sylvania or replacements for the defective shoes
for which Federal Express demanded and received credit.
We agree that Knapp failed to prove that this credit
represented actual damages.10 As to the storage charges,
Knapp will be credited only for the amount attributable to
the actually defective shoes, as the magistrate judge held,
but that amount is increased to $4,146 to account for the
enlarged number of defective shoes determined on this appeal.
The result is achieved by using the magistrate judge's own
____________________
10It is apparently undisputed that Knapp gave credit to
its customer Federal Express to resolve complaints about
defective shoes. Nevertheless, the evidence left it
uncertain whether some of the shoes reflected in this figure
had already been returned by Knapp to Sylvania or were among
shoes in Knapp's inventory, damages for which are already
reflected in the calculations in Appendix A. The burden was
on Knapp to show actual damages without double counting, and
it failed to do so.
-34- -34-
formula set forth in his March 1, 1995, decision.
Knapp further claims that it is entitled to lost profits
from the shoes in inventory it could not sell. To recover
lost profits, the plaintiff must show by a preponderance of
the evidence that the actionable breach caused the loss and
that the loss was foreseeable and calculable with reasonable
certainty. Matsushita Electric Corp. v. Sonus Corp., 284 __________________________ ____________
N.E.2d 880, 890 (Mass. 1972). For the pre-February 1990
shipments, Knapp's claim is hopeless. Knapp did not show
that it had an urgent need for any of that inventory, nor
justify its failure to obtain alternative sources given its
knowledge of persisting problems. See UCC 2-715(2)(a) ___
(consequential damages include only those losses "which could
not reasonably be prevented by cover or otherwise").
With respect to the February 1990 shipment, the issue is
closer, because Knapp established at trial that it had an
urgent need for that inventory; the quality of that shipment
was even lower than earlier shipments; and Sebastiao
testified that Knapp lost orders because it could not deliver
these shoes. On the other hand, Knapp was on notice that
Sylvania shoes suffered from a high rate of defects, so its
failure to switch to other, more reliable suppliers at an
earlier date is hard to justify. Knapp knew or should have
known that it might well get defective shoes in the February
shipment, and it chose to take that risk. We affirm the
-35- -35-
magistrate judge's finding that lost profits are not
appropriately awarded.
Knapp also presses on appeal its broader claim for
consequential damages. It presented at trial expert
testimony that because of the defective shoes Knapp lost
future profits of $2,895,326 that it would have enjoyed on
other sales to customers who left Knapp out of _____
dissatisfaction with its product. Its evidence certainly
showed that its relationships with important customers were
irretrievably damaged. But it is equally clear that Knapp
could have minimized the damage through reasonable diligence
by increasing its inspections and, to the extent needed,
finding alternative suppliers.
Although Sylvania was at fault for supplying defective
goods and must reimburse Knapp for those goods proved to be
defective, Knapp cannot recover for any larger harm done to
its own reputation and customer relations. The general
principle is well settled that a party cannot recover for
harms that its own reasonable precautions would have avoided.
Columbia Novelty Co. v. Leslie Dawn, Inc., 6 U.C.C. Rep. _____________________ ___________________
Serv. (Callaghan) 679, 679 (N.Y. App. Term 1969); UCC 2-
715(2)(a). To permit such a recovery on this record would
simply reward Knapp for its own lack of attention, poor
quality control, and bad judgment. In addition, the
magistrate judge's order terminating the injunction against
-36- -36-
Sylvania, as entered on May 31, 1991 and amended on June 10,
1991, is vacated; the magistrate judge is free to reduce the
amount embargoed to the net award plus anticipated costs and
interest.
-37- -37-
CONCLUSION
In summary, Knapp is entitled to damages as follows:
Cost of Defective Inventory: $338,138.31
Storage Costs: $4.146.00
Unpaid Credits: $92,472.97
Credit to Miami Hilton: $9,250.00
Refund to Marriott: $3,194.54
Price concessions to Federal Express: $11,096.25
Replacement shoes supplied to Hilton: $6,401.20
Increased inspection costs: $4,167.30
Freight charges: $6,877.60
Travel expenses: $1,793.92
Total $477,538.09
The first two entries are adjusted to reflect the
corrections explained in the opinion; the others are as
determined by the magistrate judge in rulings that Sylvania
has not appealed. The award against Knapp in favor of
Sylvania for unpaid bills, in the amount of $223,626.47, has
also not been challenged on appeal and so stands as
previously entered.
On remand, the judgment should be modified to award
$477,538.09 to Knapp and $223,626.47 to Sylvania, so that the
net award is now in Knapp's favor in the amount of
$253,911.62. It is so ordered. ________________
-38- -38-
Appendix A
Style Defects New x41.7% Total Ave Cost Cost
1244 150 199 83 233 18.20 4,240.60
1245 63 189 79 142 23.75 3,372.50
1251 493 509 212 705 21.65 15,263.25
1257 111 402 168 279 26.25 7,323.75
2600 914 765 319 1,233 24.25 29,900.25
2601 47 60 25 72 25.75 1,854.00
2605 578 2,034 848 1,426 26.75 38,145.50
2660 485 1,926 803 1,288 23.25 29,946.00
2665 654 955 398 1,052 22.00 23,144.00
2670 464 599 250 714 27.90 19,920.60
2675 566 404 168 734 27.90 20,478.60
2810 514 2,438 1,017 1,531 21.91 33,544.21
2814 53 1,474 615 668 18.75 12,525.00
2815 51 1,311 547 598 22.10 13,215.80
2816 26 87 36 62 22.10 1,370.20
2840 125 548 229 354 27.40 9,699.60
2845 136 1,538 641 777 27.30 21,212.10
2916 39 264 110 149 18.75 2,793.75
2930 339 3,968 1,655 1,994 17.25 34,396.50
2935 211 1,302 543 754 19.90 15,004.60
2950 1 38 16 17 18.75 318.75
2955 25 0 25 25 18.75 468.75 ____ __ _ __ __ _____ ______
Total 6,045 21,010 8,761 14,806 338,138.31
The first column refers to the Knapp shoe style number; the
second column sets out the number of customer returns plus
shoes pulled apart by Knapp personnel in Knapp's inventory;
the third column sets out the number of new shoes in
inventory; the fourth column gives the number of defective
shoes among the new shoes, based on the statistical survey;
the fifth column gives the total number of defective shoes in
Knapp's inventory; the sixth column gives the average price
for each style; the last column gives the price paid by Knapp
for defective shoes still in inventory.
-39- -39-