The following 2009 case is about the microwave ceramics industry but cites to the “ninja” of Hasbro v Child’s Play – see NinjaLaw #7.
UNITED STATES DISTRICT COURT
FOR THE SOUTHERN DISTRICT OF OHIO
Case No. 2:06-CV-00543
Filed – March 30, 2009
Opinion by Magistrate Judge Abel and signed by District Court Judge George C. Smith
OPINION AND ORDER
Plaintiffs John Chabria (“Chabria”), Zenix, Inc. (“Zenix”), and Zenix Ltd. (collectively “Plaintiffs”), have brought this action seeking payment of approximately $ 1,164,000 in unpaid royalties. On February 20, 2007, this Court granted in part and denied in part EDO Western Corporation’s (“EDO”) Motion to Dismiss Plaintiffs’ Amended Complaint (Doc. 25). EDO now moves for summary judgment dismissing all remaining claims (Doc. 47). For the reasons that follow the Court GRANTS Defendant EDO’s Motion for Summary Judgment.
I. FACTUAL BACKGROUND
This litigation was commenced by Plaintiffs in 2006 to recover $ 1,164,000 of unpaid royalties Plaintiffs claim they are owed under the Asset Purchase Agreement (“APA”). On February 20, 2007, this Court granted in part and denied in part Defendant EDO’s Motion to Dismiss Plaintiffs’ Amended Complaint, holding, inter alia, that Plaintiffs had sufficiently alleged EDO’s failure to use its best efforts when performing under the APA, EDO’s breach of the implied covenant of good faith and fair dealing and EDO’s fraudulent inducement of Plaintiffs to enter into the APA (Doc. 25). EDO has now moved for summary judgment, contending that Plaintiffs’ claim for breach of an implied contractual obligation to reasonable efforts must fail because no such obligation should be implied in this case, and even if such an obligation is implied, EDO fulfilled the obligation by making extensive efforts to sell the Zenix line and by acting in good faith at all times in operation of the business. EDO further contends that it is entitled to summary judgment on Plaintiffs’ fraudulent inducement claim for the following reasons: (1) it is barred by the statute of limitations; (2) the alleged misrepresentations all relate to the performance of the APA and cannot give rise to a separate cause of action for fraud; (3) Plaintiffs’ reliance on the alleged misrepresentations were not reasonable; and (4) the alleged misrepresentations were all statements of future intent, which Plaintiffs cannot establish were false when made.
A. Plaintiff Chabria’s Background in the Microwave Ceramics Industry
In or around 1964, Plaintiff Chabria started Xtalonix, a microwave ceramics business, in Columbus, Ohio. He sold the business to Harshaw Chemical in 1966, but stayed on as manager. The business changed hands a number of times, and Chabria eventually repurchased it in the early 1980s. In April 1996, Xtalonix attempted to expand and moved its operations to Maryland, transferring most of the equipment previously located in Columbus. The attempted expansion failed because Xtalonix “racked up debt by spending money faster than it could bring it in . . . .” (Chabria Depo. at 200:3-19). To avoid bankruptcy, Xtalonix was forced to enter into receivership. Trak Ceramics purchased the assets of Xtalonix’s business in 1997 for $ 1,760,000.
The facts of Hasbro v. Child’s Play, supra, are analogous in that the defendant in Hasbro also failed to take all of the steps it had originally anticipated when it entered into the agreement at issue. Hasbro obtained an exclusive license to manufacture and sell Child’s Play’s line of ninja action figures. During negotiations, Hasbro represented that it anticipated spending $ 2-5 million on television advertising. 1991 U.S. Dist. LEXIS 10794, 1991 WL 156282 at *2. Notwithstanding Hasbro’s significant efforts, it was unable to sell the action figures at levels it had anticipated and ultimately determined that the number of action figures ordered by its customers did not warrant television advertising. Hasbro therefore abandoned its plan to launch a television advertising campaign. 1991 U.S. Dist. LEXIS 10794, [WL] at *3-4. Child’s Play sued and Hasbro moved for summary judgment. The Hasbro court, in its opinion granting summary judgment, took note of Hasbro’s description of its efforts to exploit the line, and observed that Child’s Play had failed to come forward in response with any evidence that such efforts were insufficient. 1991 U.S. Dist. LEXIS 10794, [WL] at *5. The Hasbro court also noted that if a best efforts duty were to be implied, “it, of course, would not have required Hasbro slavishly to devote its efforts to marketing the Line.” 1991 U.S. Dist. LEXIS 10794, [WL] at *6.
In the instant case, Defendant EDO purchased and operated the Zenix product line for 3.5 years, investing in excess of $ 3 million after purchasing. The evidence shows that the Zenix product line continued to lose money and sales were not as expected. As the Hasbro court noted, implication of a best efforts duty does not require slavish devotion to the marketing of the line, especially in light of the continued and unanticipated monetary losses and low sales. Reasonable efforts does not require every possible effort, to the detriment of one’s own interests or finances. See e.g., Scott-Macon Securities, Inc. v. Zoltek Companies, 2005 U.S. Dist. LEXIS 9034, 2005 WL 1138476, *14 (S.D.N.Y. 2005) (under a reasonable efforts clause “a party is entitled to give ‘reasonable consideration to its own interests’ in determining an appropriate course of action to reach the desired result”), aff’d in relevant part, vacated in part, and reversed in part, 2007 U.S. App. LEXIS 23356, 2007 WL 2914873 (2d Cir. 2007). See also Johns v. Rexam , 2005 WL 1308319, at *10 (M.D. Ga. 2005) (“[T]he implied covenant of good faith does not require a party to a contract to exert the maximum possible effort. Indeed, a party can in good faith exert no effort at all, if it can show that a business decision to exert no effort was reasonable under the circumstances.”). Accordingly, this Court, like the Hasbro court, holds that Defendant EDO’s failure to implement Phase III of its pre-acquisition plan does not constitute evidence creating a material question of fact with respect to the issue of whether Defendant EDO took reasonable efforts to market the Zenix product line.
In conclusion, the Court finds that Defendant EDO has presented evidence that they used reasonable efforts to market the Zenix Product. Plaintiffs unsupported allegations and hindsight complaints about EDO’s operation of the Zenix business fail to raise triable issues of fact in response to EDO’s showing. Thus, the undisputed facts establish that the question of whether Defendant EDO used reasonable efforts is appropriately resolved in Defendant EDO’s favor on summary judgment.
And also, as regards “Fraud in the Inducement Claim (Count Four)”:
Accordingly, this Court finds that Plaintiffs’ fraud in the inducement claim is time-barred, and Plaintiffs have failed to meet their burden of proving that the alleged fraud was not discovered and could not have been discovered until within two years of the commencement of the lawsuit. Therefore, the Court grants Defendant EDO’s motion for summary judgment with respect to Plaintiffs’ Count Four Fraud in the Inducement claim.
As an alternative basis for summary judgment on Plaintiffs’ fraud in the inducement claim, Defendant EDO argues that the claim should be dismissed because it is duplicative of Plaintiffs’ breach of contract claim and because Plaintiffs have adduced no evidence from which a jury could reasonably find that EDO fraudulently induced Plaintiffs to enter into the APA. Having determined that Plaintiffs’ claims are barred by the applicable statute of limitations, however, the Court finds it unnecessary to address Defendant’s alternative arguments.
For all of the foregoing reasons, the Court GRANTS Defendant EDO’s Motion for Summary Judgment (Doc. 47).
The Clerk shall remove Document 47 from the Court’s pending motions list.
The Clerk shall remove this case from the Court’s pending cases list.
IT IS SO ORDERED.
/s/ George C. Smith
GEORGE C. SMITH, JUDGE