KSR International Company v. Delphi Automotive Systems, LLC ( 2013 )

NOT RECOMMENDED FOR FULL-TEXT PUBLICATION
File Name: 13a0404n.06
No. 12-2063 FILED
Apr 23, 2013
UNITED STATES COURT OF APPEALS DEBORAH S. HUNT, Clerk
FOR THE SIXTH CIRCUIT
KSR INTERNATIONAL COMPANY, )
)
Plaintiff-Appellant, ) ON APPEAL FROM THE
) UNITED STATES DISTRICT
v. ) COURT FOR THE EASTERN
) DISTRICT OF MICHIGAN
DELPHI AUTOMOTIVE SYSTEM, LLC, )
)
Defendant-Appellee. ) OPINION
BEFORE: NORRIS, COOK, and McKEAGUE, Circuit Judges.
McKEAGUE, Circuit Judge. Plaintiff KSR International Company appeals the dismissal
of its complaint asserting claims against Delphi Automotive System, LLC, for breach of contract
and, alternatively, for equitable remedies. Considering the express terms of the documents
establishing the parties’ contractual agreement, the district court held that KSR’s breach of contract
claim was based on a “strained interpretation” warranting relief only if the court “impermissibly read
words into the parties’ agreement that simply are not there.” The court summarily rejected KSR’s
alternative claims for relief in equity (i.e., promissory estoppel, unjust enrichment and quantum
meruit), noting that both parties are sophisticated commercial entities whose relationship was
governed by a comprehensive express agreement. On appeal, KSR insists that its construction of
the contract is facially plausible and that the district court erred by improperly crediting Delphi’s
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construction of the contract terms instead of viewing the complaint’s allegations in the light most
favorable to KSR. We disagree and therefore affirm.
A. Standard of Review
The district court’s dismissal of plaintiff’s complaint for failure to state a claim for relief is
reviewed de novo. Frank v. Dana Corp., 646 F.3d 954, 958 (6th Cir. 2011). Under Rule 12(b)(6),
the complaint is viewed in the light most favorable to plaintiffs, the allegations in the complaint are
accepted as true, and all reasonable inferences are drawn in favor of plaintiffs. Bassett v. Nat’l
Collegiate Athletic Ass’n, 528 F.3d 426, 430 (6th Cir. 2008). However, “a legal conclusion couched
as a factual allegation” need not be accepted as true. Bell Atlantic Corp. v. Twombly, 550 U.S. 544,
555 (2007). Plaintiff’s obligation to provide the “grounds” for its claimed entitlement to relief
“requires more than labels and conclusions, and a formulaic recitation of the elements of a cause of
action will not do.” Id. The factual allegations must “raise a right to relief above the speculative
level.” Id. The complaint must state a claim that is plausible on its face, i.e., the court must be able
to draw a “reasonable inference that the defendant is liable for the misconduct alleged.” Ashcroft v.
Iqbal, 129 S. Ct. 1937, 1949 (2009). This “plausibility standard is not akin to a ‘probability
requirement,’ but it asks for more than a sheer possibility that a defendant has acted unlawfully.”
Id. (quoting Twombly, 550 U.S. at 556). “Where a complaint pleads facts that are ‘merely consistent
with’ a defendant’s liability, it ‘stops short of the line between possibility and plausibility of
“entitlement to relief.”’” Id. (quoting Twombly, 550 U.S. at 557).
Assessment of the facial sufficiency of the complaint must ordinarily be undertaken without
resort to matters outside the pleadings. Wysocki v. Int’l Bus. Mach. Corp., 607 F.3d 1102, 1104 (6th
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Cir. 2010). If a court does consider material outside the pleadings, the motion to dismiss must be
treated as a motion for summary judgment under Rule 56 and all parties must be given a reasonable
opportunity to present all material pertinent to the motion. Id. However, a court “may consider the
Complaint and any exhibits attached thereto, public records, items appearing in the record of the case
and exhibits attached to defendant’s motion to dismiss so long as they are referred to in the
Complaint and are central to the claims contained therein,” without converting the motion to one for
summary judgment. Bassett, 528 F.3d at 430.
B. Terms of Contract
According to the complaint, the parties entered into a contract on February 5, 2010, when
Delphi accepted KSR’s offer in response to Delphi’s request for quotation for the manufacture of
throttle position sensors. Tellingly, a copy of the contract is not attached to the complaint, but the
complaint refers to it as being in the possession of Delphi. The complaint alleges the parties
negotiated an agreed upon price for the parts and that Delphi contractually “agreed to pay KSR for
its pre-production services which involved engineering, development and testing (‘ED&T’).” R. 1,
Complaint at ¶ 6, Page ID # 2. For over a year, KSR provided parts to Delphi under the contract.
In July 2011, Delphi communicated its intention to terminate the contract effective March 31, 2012.
Acknowledging Delphi’s right to terminate the contract “for convenience,” KSR invoked its
entitlement under the contract to recover unpaid costs of ED&T “services” furnished to Delphi prior
to termination. Delphi refused, contending such recovery was not within KSR’s exclusive remedy
under the contract. When KSR commenced this action, Delphi moved to dismiss. The district court
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granted the motion, agreeing with Delphi that the contract could not be reasonably construed as
permitting the claimed recovery.
The parties acknowledge that the “Requirements Contract” for KSR’s sale of throttle position
sensors to Delphi incorporates by reference Delphi’s 11-page “General Terms and Conditions.”
Both of these documents—referred to in, albeit not attached to, the complaint—were attached to
Delphi’s motion to dismiss. R. 5, Motion to Dismiss, Ex. A and B, Page ID # 37-51. They are
central to KSR’s claims and are properly considered part of the pleadings evaluated under Delphi’s
motion to dismiss without converting it into a motion for summary judgment. Among the General
Terms and Conditions is Article 11, defining KSR’s remedies in the event of “termination for
convenience” by Delphi. Id. at Page ID # 44-45.1 Focusing on its right to recover for “services”
1
Article 11, in its entirety, provides as follows:
11. Termination for Convenience
In addition to any other rights of Buyer to terminate this Contract, Buyer may
immediately terminate all or any part of the Contract, at any time and for any reason,
by notifying Seller in writing. Upon such termination, Buyer may, at its option,
purchase from Seller any or all raw materials, work-in-process and finished goods
inventory related to the goods under this Contract which are useable and in a
merchantable condition. The purchase price for such finished goods, raw materials
and work-in-process, and Seller’s sole and exclusive recovery from Buyer (without
regard to the legal theory which is the basis for any claim by Seller) on account of
such termination, will be (a) the contract price for all goods or services that have
been completed in accordance with this Contract as of termination date and
delivered and accepted by Buyer and not previously paid for, plus (b) the actual costs
of work-in-process and raw materials incurred by Seller in furnishing the goods or
services under this Contract to the extent such costs are reasonable in amount and are
properly allocable or apportionable under generally accepted accounting principles
to the terminated portion of this Contract less (c) the reasonable value or cost
(whichever is higher) of any goods or materials used or sold by Seller with Buyer’s
written consent. In no event will Buyer be required to pay for finished goods, work-
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completed as of termination and accepted by Delphi but not previously paid for, KSR contends its
pre-production engineering, design and testing efforts represented “services” that resulted in costs
not fully paid for by Delphi prior to termination.
The district court rejected this argument, finding that Delphi agreed only to purchase throttle
position sensors during a five-year period at a contract price of $4.0222 per part. The court observed
that neither the purchase order nor the General Terms and Conditions included an agreement by
Delphi to pay the total amount of KSR’s ED&T expenses.
KSR maintains that the negotiations which culminated in the amended price of $4.0222
included a “Cost Breakdown Worksheet” showing that KSR’s ED&T cost per unit was $.08.2 R. 13,
KSR’s Opposition to Motion to Dismiss, Ex. A and B, Page ID # 159, 163. By virtue of Delphi’s
acceptance of KSR’s quote based on the cost breakdown worksheet and continued performance at
the amended price, KSR contends the contents of the worksheet became part of the parties’ contract.
in-process or raw materials which Seller fabricates or procures in amounts that
exceed those Buyer authorizes in delivery releases nor will Buyer be required to pay
for any goods or materials that are in Seller’s standard stock or that are readily
marketable. Payments made under this Article will not exceed the aggregate price
for finished goods that would be produced by Seller under delivery or release
schedules outstanding at the date of termination. Within sixty (60) days after the
effective date of termination, Seller will submit a comprehensive termination claim
to Buyer, with sufficient supporting data to permit an audit by Buyer, and will
thereafter promptly furnish any supplemental and supporting information Buyer
requests.
Id. at Page ID # 44-45 (emphasis added).
2
This amount was assertedly arrived at by amortizing KSR’s total ED&T costs in developing
the throttle position sensor for Delphi ($507,208) over the anticipated full term (five years) and total
volume (approximately 6,340,100 parts) of the contract.
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Further, Delphi’s acceptance of the worksheet is said to evidence its agreement to pay KSR’s total
ED&T expenses. At the time of Delphi’s termination, KSR alleges that $344,633 of its total pre-
production ED&T costs had not yet been recouped through Delphi’s payments for parts delivered
through March 31, 2012. R. 1, Complaint ¶ 24, Page ID # 5-6.
Delphi denies that the worksheet ever became part of the parties’ contract. The district court
assumed that KSR’s quote and worksheet were part of the contract, but found them unavailing.
C. District Court Ruling
Assuming the documents relied upon by KSR comprised the parties’ contract, the district
court concluded KSR had failed to state a valid breach of contract claim for recovery of pre-
production ED&T costs. The court held the documents simply do not contain a promise by Delphi,
express or implied, to pay for all of KSR’s ED&T costs :
These documents do not present Plaintiff’s ED&T costs as a separate charge and they
certainly do not contain Defendant’s promise to pay for all the ED&T costs over the
duration of the Purchase Order. In sum, a plain reading of the contract reveals that
Defendant never agreed to pay for the entire amount of Plaintiff’s ED&T costs
related to the TPS project. To conclude that the contract requires Defendant to
separately pay for Plaintiff’s ED&T costs would impermissibly read words into the
parties’ agreement that simply are not there.
R. 17, Opinion at 6, Page ID # 245. The court also rejected KSR’s characterization of its ED&T
costs as “services” under Article 11 of the General Terms and Conditions:
The Court rejects this interpretation because Defendant need only pay for “services
that have been completed in accordance with the contract.” Defendant did not
contract with Plaintiff to perform ED&T “services” — it agreed only to purchase
TPS parts at $4.0222 per piece for five years. Accordingly, Plaintiff’s ED&T costs
were not “services” completed in accordance with the parties’ contract.
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Id. at 7, Page ID # 246. The district court thus held that KSR’s breach of contract claim was
defeated by the very terms of the contract sued upon.
As to KSR’s alternative claims for relief in equity—based on theories of promissory estoppel,
unjust enrichment and quantum meruit—the court held that Delphi got what it bargained for under
the contract. The court rejected the claim that Delphi inequitably received the benefit of KSR’s
ED&T efforts without paying for them in full: “Defendant paid for and received goods from
Plaintiff; it did not order or receive ‘services’ from Plaintiff.” Id. at 8. Page ID # 247.
D. Claim Plausible on its Face?
KSR does not dispute the district court’s finding that the contractual documents do not
contain an express agreement by Delphi to pay the full amount of KSR’s ED&T costs. KSR argues
that its right under Article 11of the General Terms and Conditions to recover “the contract price for
all goods or services that have been completed in accordance with this Contract as of termination
date and delivered and accepted by Buyer and not previously paid for” is broad enough to support
a plausible claim for recovery of the costs of its ED&T “services.” We find no error in the district
court’s rejection of this argument.
Despite KSR’s artful characterization of its ED&T costs as “services,” to bring them within
the ambit of its exclusive remedy under the contract, it is evident on the face of the contract
documents that this was a contract for the sale of goods, not services. The contract did not obligate
KSR to furnish or deliver any services to Delphi. The contract documents contain no promise by
Delphi to pay a contract price for ED&T or any other “services.” The contract was solely for the
sale of goods, throttle position sensors, at the contract price of $4.0222 per part. KSR does not deny
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that it has recovered, as provided in Article 11, the contract price for all goods completed in
accordance with the contract as of the termination date.
KSR attempts to recover more than this amount by shoe-horning an item of damages not
specifically permitted under the exclusive remedy, ED&T costs, into a term appearing in Article 11
of the General Terms and Conditions, “services,” that simply has no application to this specific
contract for the sale of goods. The argument is creative, but we are not obliged, even under the
liberal pleading standards of Rule 12(b)(6), to accept as true a mere label or conclusion couched as
a factual allegation, Twombly, 550 U.S. at 555—especially where the very contractual documents
on which the claim is based protest so loudly against the fit of the label. Considering the documents
which KSR contends defined the parties’ agreement, this was not a contract for services.
KSR insists that “services” is ambiguous and may plausibly be construed broadly enough to
encompass the costs of its pre-production ED&T efforts. KSR urges us to accept as true its
numerous allegations that Delphi promised to pay for all pre-production ED&T services. Viewed
in the abstract, “services” could be ambiguous. However, KSR’s breach of contract claim asks us
to enforce the term as it appears in a specific contractual agreement, evidenced by contractual
documents that are part of the record and properly considered part of the pleadings. Those
documents show that Delphi promised to pay for goods, not services. The documents do not, on
their face, support the allegations that Delphi promised to pay for the costs of KSR’s ED&T efforts,
except insofar as ED&T costs were a cost component of the agreed price per part. The contractual
documents not only fail to support KSR’s allegations but, inasmuch as the contract expressly
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provides that it is integrated, see R. 5-3 General Terms and Conditions, Art. 29, Page ID # 51,
positively defeat KSR’s breach of contract claim.
The viability of KSR’s breach of contract claim is thus distinguishable from that presented
in Mediacom Southeast LLC v. BellSouth Telecomm., Inc., 672 F.3d 396, 399-400 (6th Cir. 2012).
In Mediacom, we reversed a Rule 12(b)(6) dismissal where the district court engaged in
impermissible fact finding on the meaning of “service” or “services,” contrary to the plaintiff’s well-
pleaded facts, based on improper consideration of a document not attached to the complaint and not
central to the claim. Here, in contrast, KSR’s allegations of an agreement by Delphi to pay for
ED&T services are directly refuted by the terms of the very contractual agreement its breach of
contract claim is based on.
The district court’s dismissal of the claim based on a “plain reading” of the contract Delphi
is alleged to have breached has not been shown to be improper. Rather, it is entirely consistent with
the dictates of Michigan law. See Rory v. Continental Ins. Co., 703 N.W.2d 23, 42 (Mich. 2005)
(holding that unambiguous contract must be enforced according to its plain language and that judicial
revision of contract to enforce obligations in accordance with party’s unilateral expectations is
neither reasonable nor just); New Freedom Mortg. Corp. v. Globe Mortg. Corp., 761 N.W.2d 832,
840 (Mich. App. 2008) (recognizing that goal of contract interpretation is to ascertain and enforce
parties’ intent based on plain language of contract). On de novo review, we concur in the district
court’s determination that the complaint fails to set forth a breach of contract claim that is plausible
on its face.
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E. Equitable Relief
KSR’s complaint also sets forth three claims for equitable relief, based on promissory
estoppel, unjust enrichment and quantum meruit. KSR asserts these claims in the alternative, in the
event its breach of contract claim fails. Yet, because each of these theories of relief is premised on
KSR’s asserted entitlement to full recovery of pre-production ED&T costs, a matter within the scope
of the parties’ express contractual relationship but not addressed in their integrated contract, the
district court held that equity would not come to KSR’s aid to enforce a duty it had refrained from
bargaining for. In this holding, too, we find no error.
Under Michigan law, the elements of a claim for promissory estoppel are (1) a promise, (2)
that the defendant should reasonably have expected to induce definite and substantial action or
forbearance by the plaintiff, and (3) that did in fact induce such action or forbearance in
circumstances such that the promise must be enforced if injustice is to be avoided. Metropolitan
Alloys Corp. v. Considar Metal Mktg., Inc., 615 F. Supp. 2d 589, 598 (E.D. Mich. 2009). Where
Delphi’s asserted promise—i.e., to pay for all of KSR’s pre-production ED&T costs—is a matter
within the scope, and clearly at odds with, the terms of the parties’ integrated express contract,
KSR’s alleged reliance on the promise cannot be deemed reasonable such that enforcement of the
promise is necessary to avoid injustice. See Novak v. Nationwide Mut. Ins. Co., 599 N.W.2d 546,
552 (Mich. App. 1999) (affirming dismissal of promissory estoppel claim based on alleged oral
promise contradicted by integrated contract).
KSR’s unjust enrichment and quantum meruit theories fare no better. Michigan law
recognizes that under the theory of quantum meruit, a contract may be implied at law to prevent
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unjust enrichment when one party inequitably receives and retains a benefit from another. Morris
Pumps v. Centerline Piping, Inc., 729 N.W.2d 898, 903 (Mich. App. 2006). However, a contract
will not be implied if there is an express contract between the same parties on the same subject
matter. Id. It follows that because KSR’s claims for relief in equity stem directly from a relationship
with Delphi covered by a written and integrated contract, and are premised on a claimed entitlement
to recovery not provided for in the contract and outside the scope of the contract’s exclusive remedy
provision, the law will not imply a contract to rescue KSR from its failure to obtain Delphi’s
contractual agreement to pay for all ED&T costs. The unjust enrichment and quantum meruit claims
were also properly dismissed.
F. Conclusion
Finding no error in the district court’s order dismissing KSR’s complaint in its entirety, we
AFFIRM.
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