Viking Yacht Co Inc v. Composites One LLC

NOT PRECEDENTIAL
UNITED STATES COURT OF APPEALS
FOR THE THIRD CIRCUIT
_____________
Nos. 09-3417, 09-3558
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VIKING YACHT CO., INC., ET AL.,
Appellants/Cross-Appellees,
v.
COMPOSITE ONE LLC, ET AL.,
Appellees/Cross-Appellants.
_____________
Appeal from the United States District Court
for the District of New Jersey
No. 1:05-cv-00538
District Judge: Honorable Joseph E. Irenas
_____________
Submitted Pursuant to Third Circuit LAR 34.1(a)
May 14, 2010
Before: BARRY and ROTH, Circuit Judges, and
DALZELL * , District Judge
(Opinion Filed: July 1, 2010)
*
Honorable Stewart Dalzell, United States District Judge for the Eastern District
of Pennsylvania, sitting by designation.
1
_____________
OPINION
_____________
DALZELL, District Judge.
Plaintiffs brought this diversity action sounding in consumer fraud and the New
Jersey Consumer Fraud Act, N.J.S.A. § 56:8-1, et seq. (“CFA”), alleging that the
cracking of defendants’ gel coat had caused them damages. After disposing of two sets
of motions for summary judgment, the District Court was able to resolve all issues except
the question of whether defendants had breached their express warranty. The case went
to trial on that one question and the jury found in favor of defendants. For the following
reasons, we will affirm.
I. FACTS AND PROCEDURAL POSTURE
Because we write solely for the parties, we discuss only those facts relevant to our
analysis.
This appeal involves the sale and subsequent cracking of gel coat used in
manufacturing yachts. Gel coat, the outer layer of a vessel, functions as a cosmetic finish
and barrier to prevent water and other materials from damaging the ship. Appellee/Cross
Appellant Cook Composites and Polymers (who, in addition to Appellees/Cross
Appellants Curran Composites, Inc., C Two LLC, Total Composites, Inc., comprise
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“CCP” or “defendants”) manufactures gel coat, which is distributed by Composites One.1
Plaintiffs-Appellants Viking Yacht Co. (“Viking”) and Post Marine Company, Inc.,
(“Post”) (collectively, “plaintiffs”) manufacture recreational motor yachts and bought the
953 Series gel coat (“953 Series”) from Composite One. In the underlying action,
plaintiffs alleged that CCP engaged in deceptive practices and breached various
warranties.
After the close of fact discovery, the parties filed motions for summary judgment.
Plaintiffs and CCP both sought summary judgment on the express warranty and New
Jersey CFA claims, among other things. On July 26, 2007, the District Court found that
CCP had made an express warranty, but that it was “vague.” Viking Yacht Co. v.
Composites One LLC, 496 F.Supp.2d 462, 470 (D.N.J. 2007). The District Court
concluded that CCP’s disclaimer was “ineffective” to the extent that it was inconsistent
with the promise of improved flexibility. Id. at 476. It also found that the record had not
been developed enough at that time to determine whether CCP had violated the CFA with
regard to its alleged misrepresentations and omissions, and denied CCP’s motion for
summary judgment with regard to plaintiffs’ “sham” warranty claim because there was no
evidence of substantial aggravating circumstances. Id. at 475-76.
CCP filed a motion for clarification seeking enforcement of the limitation of
1
Composite One is no longer a party to this action and was dismissed from the
underlying case on February 14, 2007. (Appellees’ Br. at 1.)
3
remedies and exclusion of damages, which defendants contended limited plaintiffs’
remedies to replacement of the gel coat or refund of the purchase price and excluded
other remedies, including incidental and consequential damages. The District Court
denied that motion on September 18, 2007, finding that CCP’s remedies limitations did
not apply to Viking’s claims, that CCP’s limited remedies provision failed of its essential
purpose, and that the exclusion of consequential damages was unconscionable. Viking
Yacht Co. v. Composites One LLC, No. 05-538, 2007 WL 2746713, at *6-7 (D.N.J. Sept.
18, 2007).
After the close of expert witness discovery, the District Court considered another
round of motions for summary judgment. Plaintiffs again sought summary judgment on
their breach of express warranty claim and on the remaining CFA claim. On June 2,
2009, the District Court granted CCP’s motion for summary judgment on plaintiffs’ CFA
claim because the solicitation materials were never “actually false,” and because there
was no evidence that CCP knew that the gel coat would degrade over time. Viking
Yacht Co. v. Composites One LLC, 622 F.Supp.2d 198, 205-06 (D.N.J. 2009). The Court
allowed the express warranty claim to proceed to trial.
On July 24, 2009, a jury found that CCP had not breached its express warranty and
the Court entered its amended judgment on July 29, 2009. Plaintiffs timely filed this
appeal on August 14, 2009, and CCP cross-appealed on August 28, 2009.
II. STANDARDS OF REVIEW
4
We have jurisdiction over this appeal under 18 U.S.C. § 1291. We review
summary judgment decisions de novo. Lighthouse Inst. For Evangelism, Inc. v. City of
Long Branch, 510 F.3d 253, 260 (3d Cir. 2007)(citing Gottshall v. Consol. Rail Corp., 56
F.3d 530, 533 (3d Cir. 1995)). We review a summary judgment decision under the same
standard the District Court applied and affirm the order if the record reveals there are “no
genuine issues of material fact and the movant is entitled to judgment as a matter of law.”
Id. (citing Fed. R. Civ. P. 56(c)). This also means that we must construe all facts and
inferences “in a light most favorable to...the non-moving party.” Gottshall, 56 F.3d at533 (citing Erie Telecomm. v. Erie, 853 F.2d 1084, 1093 (3d Cir. 1988)); Pollock v. Am.
Tel. & Tel. Long Lines, 794 F.2d 860, 864 (3d Cir. 1986).
We review claims of error in jury instructions for abuse of discretion, unless the
instructions misstate the applicable law, in which case review is plenary. United States v.
Jimenez, 513 F.3d 62, 74 (3d Cir. 2008). CCP claims that plaintiffs did not timely object
to one of the jury instructions they now dispute. Where a party has failed to object timely
to an instruction, we review for plain error and may reverse only if the error was
fundamental and highly prejudicial. Cooper Distrib. Co. v. Amana Refrigeration, Inc.,
180 F.3d 542, 549 (3d Cir. 1999).
III. ANALYSIS OF APPEAL
Plaintiffs present three issues on appeal. First, they claim that the District Court
applied the wrong standard when it dismissed their CFA claim on a motion for summary
5
judgment because under New Jersey law literal truth is not a defense to a CFA claim
premised on deceptive acts and unconscionable commercial practices. Second, they
assert that the District Court erred in dismissing plaintiffs’ sham warranty CFA claim on a
motion for summary judgment on the basis that there were no “substantial aggravating
factors” present that would permit recovery under the CFA. Lastly, they contend that the
District Court incorrectly instructed the jury on the law when it instructed it that, under
New Jersey’s adoption of the Uniform Commercial Code and under the CFA it could
consider a disclaimer of an express warranty for the product and limit the duration of the
express warranty to the date of delivery, after finding as a matter of law that the
disclaimer was improper.
A. Deceptive Acts and Unconscionable Commercial Practices
Plaintiffs appeal the District Court’s ruling on their claim that CCP violated the
CFA by affirmatively distributing misleading test results that implied that the warranty of
“improved flexibility” had scientific support. Viking, 622 F.Supp.2d at 205. The
District Court granted summary judgment for CCP on June 2, 2009, dismissing plaintiffs’
CFA claim related to the alleged deceptive marketing practices that CCP used to sell the
953 Series. The District Court reasoned that there was no “affirmative misrepresentation”
by CCP to support a CFA claim because the representations based on the MB-295 test
results “were never actually false.” Id. The District Court held that “the only affirmative
representation made to Plaintiffs was that the 953 Series gel coat had greater elongation
6
than the 952 Series at the time it was tested. CCP also clearly disclosed the basis for its
representation.” Id. (internal citations omitted). The District Court pointed out that the
tests had been run at room temperature. Id. at 205 n.15. The District Court also granted
CCP’s motion for summary judgment with regard to omissions, explaining that under the
CFA claims based upon omissions required proof of intent to deceive, which was absent.
Id. at 205-06.
Plaintiffs argue that literal truth is not a defense to an alleged CFA violation based
on unconscionable commercial practices and deceptive acts and that the District Court
applied the wrong standard. They claim that CCP engaged in deceptive and
unconscionable practices in violation of the CFA when it solicited gel coat sales using
misleading representations about the product’s “improved flexibility and weathering
characteristics” and distributed product test results without disclosing that the results were
not predictive of the gel coat’s performance, nor intended to be relied upon by consumers.
In New Jersey, consumer fraud may consist of either affirmative acts or acts of
omission. Ji v. Palmer, 755 A.2d 1221, 1227 (N.J. Super. Ct. App. Div. 2000). To prove
consumer fraud by omission a party must prove scienter, but “one who makes an
affirmative misrepresentation is liable even in the absence of knowledge of the falsity of
the misrepresentation, negligence, or the intent to deceive.” Ji, 755 A.2d at 1227 (citing
Gennari v. Weichert Co. Realtors, 691 A.2d 350, 365 (N.J. 1997)). Under the CFA, there
are six types of affirmative acts that are deemed unlawful: unconscionable commercial
7
practices, acts of deception, fraud, false pretenses, false promises, and affirmative
misrepresentation. N.J. Stat. Ann. § 56:8-2. “[W]hen a plaintiff’s claim is that there was
an affirmative act such as fraud or deception, it is not necessary that plaintiff show either
defendant’s knowledge or intent or that the misrepresentation was of a material fact.”
Leon v. Rite Aid Corp., 774 A.2d 674, 678 (N.J. Super. Ct. App. Div. 2001).
Whether the representation was false is relevant to whether it was a
misrepresentation. As the court held in Ji, “the [representations], while material to the
transaction, were not false in fact.” Ji, 755 A.2d at 1227. An affirmative
misrepresentation violative of the CFA is “one which is material to the transaction and
which is a statement of fact, found to be false, made to induce the buyer to make the
purchase.” Id. at 1228 (quoting Gennari v. Weichert Co. Realtors, 672 A.2d 1190 (N.J.
Super. Ct. App. Div. 1996), aff’d, 691 A.2d 350 (N.J. 1997))(emphasis added).
Plaintiffs concede that CCP’s gel coat testing, at the time that it was done,
accurately reported that the 953 Series was more flexible than the 952 Series, which is the
only representation CCP made with regard to the test. (A3912.) The District Court was
correct that the statement CCP made was not false, and therefore it could not have been
an affirmative misrepresentation.
Plaintiffs also argue, however, that CCP engaged in unconscionable business
practices and deceptive acts, but their argument hinges on the fact that CCP did not
disclose that the gel would degrade over time. Plaintiffs claim that
8
nowhere in PB-58 2 or MB-295 3 is a consumer adequately apprised of
CCP’s litigation position that the promises of ‘improved flexibility,’
‘high performance’ and ‘durab[ility]’ do not survive date of delivery
of the product and use by the consumer. Similarly, nowhere in MB-
295 is the consumer adequately apprised of CCP’s litigation position
that the elongation test results are not indicative of the future
performance of the 953 Series gel coats and were not published to be
relied upon by consumers.
(Appellants’ br. at 37-38) (emphasis added). What plaintiffs claim are unconscionable
business practices are actually claims of omissions. The test may not have been useful to
plaintiffs in that it did not help them determine what would happen to the gel coat over
time in cold temperatures, but they always knew that the test was conducted at room
temperature immediately after the gel was produced. CCP made no claims regarding the
long-term flexibility of the gel because they could not -- and certainly did not -- test for
that. The District Court is correct that there is no evidence in the record that CCP knew
that the 953 Series would degrade, and therefore plaintiffs’ CFA claim based on
omissions must fail.
In addition, with particular regard to deceptive acts, it is the capacity to mislead
that is important. Vagias v. Woodmont Properties, 894 A.2d 68, 71 (N.J. Super. Ct. App.
Div. 2006). Plaintiffs rely on Miller v. American Family Publishers, 663 A.2d 643 (N.J.
Super. Ct. Ch. Div. 1995), but the reasoning in that case is premised on deliberately
confusing representations and does not apply here.
2
The product bulletin.
3
The test results.
9
Plaintiffs claim that CCP’s solicitation materials had the capacity to mislead the
consumer into believing the elongation test results were predictive of the 953 Series’
“improved flexibility and weathering characteristics” over time. (Appellants’ Br. at 37.)
“[F]or a statement not contrary to a specific regulation to constitute a misrepresentation or
other act of deceit in violation of the Act, its qualitative content must be so materially
deceptive and its capacity to mislead so apparent that proof of intent is unnecessary.”
Chattin v. Cape May Greene, Inc., 591 A.2d 943, 947 (N.J. 1991)(Stein, J. concurring).
But CCP disclosed its testing methods and told its customers to test the product for
themselves to make sure it met their individual and specific needs. (A3151, A5527.)
Plaintiffs were aware that they could have asked CCP to conduct further tests. (A5543,
A5546.) The District Court found, correctly, that although plaintiffs’ expert hinted at the
existence of a test for flexibility over time, he “failed to identify such a test, or to specify
its parameters, cost or availability. He pointed to no literature describing such a test or
supporting its practical availability.” Viking, 622 F.Supp.2d at 206 n.18. Thus, the
statements CCP made are not so deceptive in nature that proof of intent is unnecessary.
We therefore affirm the District Court’s ruling on this issue.
B. The “Sham” Warranty Claim
The plaintiffs argued before the District Court that CCP’s use of illusory promises
with respect to the sale of the 953 Series -- specifically, with respect to limiting the
warranty of the gel’s flexibility to the time of delivery -- was an unconscionable business
10
practice. The District Court found that CCP’s warranty as to the flexibility of the gel only
through the date of delivery was “ineffective.” As a result of this ruling, the District
Court found on summary judgment that plaintiffs were merely left with a breach of
warranty claim which, without substantial aggravating circumstances, did not rise to the
level of an unconscionable business practice. Viking, 496 F.Supp.2d at 476.
Plaintiffs now claim that a sham warranty alone is an unconscionable business
practice and cite Mango v. Pierce-Coombs, 851 A.2d 62, 70 (N.J. Super. Ct. App. Div.
1994), in support of their argument. CCP responds that plaintiffs did not make this
argument before the District Court and therefore their argument is barred on appeal. We
agree that plaintiffs did not raise this issue below. In fact, plaintiffs alleged “far more
than a breach of warranty” in their sham warranty CFA claim. (A1532.) This differs
markedly from what they allege before us now -- namely, that a sham warranty does not
require an allegation of breach of warranty in addition to substantial aggravating
circumstances. Under the standard articulated in In re Insurance Brokerage Antitrust
Litigation, 579 F.3d 241, 261-62 (3d Cir. 2009), we need not consider issues raised for
the first time on appeal. We agree that there were no substantial aggravating
circumstances. Thus, we can also agree with the District Court that plaintiffs were left
with a breach of warranty claim that does not rise to the level of an unconscionable
business practice.
But even if their argument were not barred, it would not be persuasive because
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Mango applies to the specific circumstances at issue in that case, specifically, that an
inspector called upon for the purpose of inspecting a septic tank in advance of a home
sale must be able to warrant that the septic tank will still be in good working order when
the house is finally sold. Mango held that “[a] home inspection report should reveal and
report conditions which may, presently or in the reasonably foreseeable future, cause the
consumer substantial inconvenience or require costly repairs or maintenance
expense...[e]xculpation clauses are particularly disfavored with professional service
contracts.” Mango, 851 A.2d at 70 (internal citations and quotation marks omitted). A
professional service contract is not at issue here.
As noted earlier, to allege a prima facie claim of an unconscionable business
practice based in breach of warranty under New Jersey law, a plaintiff must allege
“substantial aggravating circumstances.” Given that the District Court found CCP’s
specifications warranty “ineffective,” plaintiffs cannot allege substantial aggravating
circumstances in addition to their sham warranty claim. CCP also argues that because the
jury found that there was no breach of express warranty, the sham warranty claim is
necessarily precluded by that verdict. While this may not always be so -- offering an
illusory warranty can be a claim in and of itself -- such a claim must be based on an
affirmative misrepresentation, but CCP made none. Thus, the District Court’s ruling on
this issue will be affirmed.
C. The District Court’s Jury Instructions Regarding Warranties
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Plaintiffs claim that the District Court committed reversible error in its jury
instructions in two respects. First, plaintiffs argue that when the District Court instructed
the jury that CCP “contends that the PB-58 warrants that the 953 series gel coat will have
improved flexibility characteristics over 952 series gel coat on the date of delivery”
(A7753) (emphasis added), this was contrary to applicable warranty law and inconsistent
with the Court’s interlocutory ruling that the language in the disclaimer was “ineffective”
to disclaim the express warranty of improved flexibility and weathering. This objection
was timely.
Second, plaintiffs argue that when the District Court instructed the jury that the
disclaimer "does not in it [sic] itself limit the scope in meaning of the warranty quoted,”
this was misleading and confusing because it implicitly authorized jurors to consider the
discredited disclaimer language when determining the scope of the warranty for improved
flexibility and weathering. This objection was not timely, (A7615), and thus it must be
reviewed for plain error. Cooper, 180 F.3d at 549. We should reverse only if the trial
court committed plain error that was “fundamental and highly prejudicial, such that the
instructions failed to provide the jury with adequate guidance and our refusal to consider
the issue would result in a miscarriage of justice.” Id. (quoting Ryder v. Westinghouse
Elec. Corp., 128 F.3d 128, 136 (3d Cir. 1997))(internal quotation marks omitted). The
District Court had previously ruled that the disclaimer was ineffective and then instructed
the jury that the disclaimer does not limit the scope or meaning of the warranty. The
13
instruction is consistent with the District Court’s previous ruling. There is no evidence of
plain error in the District Court’s instruction. We therefore reject plaintiffs’ contention
challenging this particular jury instruction.
With regard to the first objection, which was timely, we exercise plenary review to
determine if the jury instruction correctly states the law and, when the instruction passes
that threshold requirement, we review a district court's wording of the instruction for an
abuse of discretion. Jimenez, 513 F.3d at 74-75. We only find that an instruction is
erroneous when we are left with a “substantial and ineradicable doubt as to whether the
jury was properly guided in its deliberations.” United States v. Traitz, 871 F.2d 368, 383
(3d Cir. 1989) (internal quotation marks omitted). If we find that the instructions “fairly
and adequately” presented the issues in the case without confusing or misleading the jury,
we should affirm. Donlin v. Philips Lighting N. Am. Corp., 581 F.3d 73, 79 (3d Cir.
2009). Harmless errors in a jury instruction that do not prejudice the complaining party
are not sufficient grounds upon which to vacate a judgment and order a new trial, Watson
v. S.E. Penn. Transp. Auth., 207 F.3d 207, 221-22 (3d Cir. 2000), but error in a jury
instruction will be harmless only if it is “highly probable” that it did not affect the verdict,
Hill v. Reederei F. Laeisz G.M.B.H., Rostock, 435 F.3d 404, 411 (3d Cir. 2006).
In its July 26, 2007 opinion, the District Court held that the language in PB-58 (the
product bulletin) for the 953 Series gel was a promise made to the buyer that the gel coat
would contain certain characteristics, including “improved flexibility and weathering
14
conditions.” Viking, 496 F.Supp.2d at 470. Within the same brochure for the product,
CCP included a disclaimer that stated that “the products...shall meet Seller’s applicable
specifications at the time of shipment.” (A8285.) The District Court found this
disclaimer “ineffective to the extent that it is inconsistent with the promise of improved
flexibility found in the PB-58.” 4 Viking, 496 F.Supp.2d at 470.
The District Court instructed the jury that it had
found that the previous [sic] quoted language in the warranty is
susceptible to different interpretations, and it is up to you, the jury, to
determine the meaning of that warranty. Plaintiffs claim that the
warranty was a promise that the 953 series gel coat will maintain
“improved flexibility and weathering characteristics” over time and
exposure to the elements. CCP denies this and contends that the PB-
58 warrants that 953 series gel coat will have improved flexibility
characteristics over [the] 952 series gel coat on the date of delivery.
(A7753.) Plaintiffs argue that the District Court’s summary of CCP’s argument in the
jury instructions -- that CCP warranted that “the 953 series gel coat will have improved
flexibility characteristics over 952 series gel coat on the date of delivery” -- allowed the
jury to accept CCP’s theory that the gel coat warranty could expire “on the date of
delivery.”
Plaintiffs contend that under the U.C.C. a warranty must provide some tangible
benefit, and that no tangible benefit was provided to them. The cases plaintiffs cite do
4
The District Court also found, however, that the express warranty was “vague”
and left it up to the jury to determine exactly what CCP meant by its express warranty.
Viking, 496 F.Supp.2d at 470.
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not support this position. In Royce Chemical Co. v. Sharples Corp., 285 F.2d 183, 186
(2d Cir. 1960), the Court of Appeals held that the express warranty that the defendant’s
machine would be suitable for “this job” applied to plaintiff’s use of the machine. That
holding is not directly applicable to this case because the product at issue here is first
mixed with other products before applied, and does not go directly to “this job”, i.e.,
directly onto the yachts. The other two cases plaintiffs cite -- Chatlos Sys., Inc. v. Nat’l
Cash Register Corp, 479 F. Supp. 738, 743 (D.N.J. 1979), and Elias v. Ungar’s Food
Prods., Inc., 252 F.R.D. 233, 250-51 (D.N.J. 2008) -- also do not stand for the proposition
that express warranties must provide some tangible benefit.
Plaintiffs argue that the ruling in Mango prohibited CCP from unreasonably
limiting “promises about the gel coat’s ‘high performance’ ‘durab[ility]’ and ‘improved
flexibility and weathering characteristics,’ to the date of delivery.” (Appellants’ Repl. at
23.) We agree with the District Court that Mango does not apply here because there was
no test to determine the longevity of the flexibility of the 953 Series. In Mango, as the
District Court noted, a test existed that could measure how long the septic tank would
last, and thus Mango is inapplicable. (A7613-A7615.)
While it is true that the District Court’s instruction could have made it sound like
the jury had an either/or choice, it did not make an incorrect statement of law and merely
summarized the parties’ arguments. Plaintiffs take it a bit far when they argue that the
District Court instructed the jury that “it could accept CCP’s alleged defense and find the
16
warranty for ‘improved flexibility and weathering’ expired on the date of delivery of the
product.” (Appellants’ Br. at 49.) That is not the instruction that the District Court gave.
The District Court merely summarized CCP’s contention that the PB-58 warrants that the
953 Series gel coat will have improved flexibility characteristics over the 952 Series gel
coat on the date of delivery.5 (A7753.)
Because the District Court did not misstate the law, we review the challenged jury
instruction for abuse of discretion. We must determine whether, taken as a whole, the
instruction “properly apprised the jury of the issues and the applicable law.” Dressler v.
Busch Entm't Corp., 143 F.3d 778, 780 (3d Cir. 1998)(quoting Tigg Corp. v. Dow
Corning, Corp., 962 F.2d 1119, 1123 (3d Cir. 1992)). The trial judge is permitted
considerable latitude to summarize and comment upon the evidence, provided that the
jury is neither confused nor misled. Am. Home Assur. Co. v. Sunshine Supermarket, Inc.,
753 F.2d 321, 327 (3d Cir. 1985). Here, the District Court’s jury instruction summarizing
CCP’s contention does not leave us with a substantial and ineradicable doubt as to
whether the jury was properly guided in its deliberations. Instead, it seems that the
instructions “fairly and adequately” presented the issues in the case without being
5
CCP correctly notes in its brief that plaintiffs’ appeal depends on an assumption
that the jury adopted CCP’s proffered interpretation, which is not necessarily the case.
The jury could have reached its verdict in a number of ways -- for example, it could have
concluded that the warranty referred to characteristics over some indefinite period of time
and the 953 Series conformed to that warranty, or that the 953 Series conformed to the
warranty, regardless of the exact measure of its duration. (Appellees’ Br. at 39 n.10.)
17
confusing or misleading. Viewing the jury instructions as a whole and in context, we find
that the District Court did not abuse its discretion.
IV. ANALYSIS OF CROSS-APPEAL
CCP in its cross-appeal raises three issues. First, it contends the District Court
should have stricken the testimony of plaintiffs’ chemistry expert, Dr. Caruthers, which
would have entitled CCP to judgment as a matter of law on plaintiffs’ claims in the
absence of Dr. Caruther’s testimony. Second, it argues that plaintiffs should have been
precluded from seeking damages for repair costs they voluntarily assumed. Lastly, it
claims the District Court erred in its construction and application of the limited remedy
and exclusion of consequential and incidental damages.
A. Standing to Cross-Appeal
Plaintiffs argue that CCP does not have standing to cross-appeal because it
prevailed in the District Court. Christopher v. Nestlerode, 240 F. App’x 481, 486 (3d Cir.
2007)(“When a prevailing party seeks to appeal an adverse ruling collateral to the
judgment in its favor, it may not do so if the collateral ruling was not necessary to the
judgment”)(citing Partmar Corp. v. Paramount Pictures Theatres Corp., 347 U.S. 89, 100
n.6 (1954)); Nat’l Union Fire Ins. Co. v. W. Lake Acad., 548 F.3d 8, 23 (1st Cir. 2008).
CCP concedes the first two issues, but offers them as alternative grounds upon which this
18
Court may affirm the judgment below.6
CCP argues that it should be allowed to cross-appeal the third issue because it did
not prevail on a collateral issue which was not necessary to support the decree. “[A]
prevailing party may appeal ‘for the purpose of obtaining a review of findings he deems
erroneous which are not necessary to support the decree.’” Jean Alexander Cosmetics,
Inc. v. L’Oreal USA, Inc., 458 F.3d 244, 256 (3d Cir. 2006)(quoting Elec. Fittings Corp.
v. Thomas & Betts Co., 307 U.S. 241, 242 (1939)). The Supreme Court held in Deposit
Guaranty Nat’l Bank v. Roper, 445 U.S. 326, 334-35 (1980), that, “[i]n an appropriate
case, appeal may be permitted from an adverse ruling collateral to the judgment on the
merits at the behest of the party who has prevailed on the merits, so long as that party
retains a stake in the appeal satisfying the requirements of Art. III.”
CCP claims that due to the District Court’s ruling on the motion for summary
judgment -- which invalidated CCP’s standard limited remedy and exclusion of
consequential damages provision -- it remains an aggrieved party. CCP asks us to vacate
6
On the first issue, CCP argues that plaintiffs’ chemistry expert, Dr. Caruthers,
should not have been allowed to testify because his opinion that the cracking was caused
by two changes in the formula of the 953 Series compared to the 952 Series (the addition
of adipic acid and the “removal” of the UV stabilizer) did not meet the standard of
reliability required by Federal Rule of Evidence 702. On the second issue, CCP argues
that it had no “reason to know” that, in the event of a breach, plaintiffs would incur the
voluntary repair expenses they claimed as damages, and that plaintiffs did not establish a
legal obligation to repair the yachts, or that repairs were standard commercial practice in
their industry. Naturally, plaintiffs disagree. Because CCP concedes that it does not have
standing to assert these arguments, and because we affirm the District Court with regard
to plaintiffs’ claims, it is unnecessary to delve into these two matters.
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the District Court’s September 18, 2007 Opinion and Order regarding those terms. CCP
supports its argument with Donovan v. Punxsutawney Area Sch. Bd., 336 F.3d 211,
217-18 (3d Cir. 2003), which held that
[w]hen a specific claim becomes moot after the entry of a district
court's final judgment and prior to the completion of appellate
review, [the Court of Appeals has] the power to vacate the district
court's judgment as to that claim....The Munsingwear rule is an
equitable one that is commonly used ... to prevent a judgment,
unreviewable because of mootness, from spawning any legal
consequences.
Id. (citing United States v. Munsingwear, 340 U.S. 36, 39 (1950))(internal citations and
quotation marks omitted).
CCP cites Leonard v. Nationwide Mut. Ins. Co., 499 F.3d 419 (5th Cir. 2007), in
support of its cross-appeal. In Leonard, the Fifth Circuit applied Roper to a case in which
the district court had erroneously interpreted the terms of an insurance contract. The Fifth
Circuit held that because the district court had invalidated a key provision of the
defendant’s homeowner’s policy as a matter of Mississippi law and superimposed an
entirely different causal matrix for the determination of covered damages than the policy
contemplated, Nationwide was still an aggrieved party, even though plaintiffs had
withdrawn their appeal. CCP’s case is similar to Leonard in that the District Court’s
ruling invalidated a key provision in CCP’s sales documents and exposed CCP to a
20
different quantum of damages.7 Under these circumstances, CCP should be permitted to
appeal this issue.
We exercise plenary review of a district court's grant of summary judgment, and
this review encompasses the District Court's legal determinations regarding contract
construction, Jumara v. State Farm Is. Co., 55 F.3d 873, 880-81 (3d Cir. 1995), the
ambiguity of contract terms, Teamsters Indus. Employees Welfare Fund v. Rolls-Royce
Motor Cars, Inc., 989 F.2d 132, 135 (3d Cir. 1993), and the enforceability of contractual
damage limitations under state law, Wartsila NSD North America, Inc. v. Hill Int'l, Inc.,
530 F.3d 269, 274 (3d Cir. 2008).
B. The Contractual Disclaimer and Limitation of Liability
7
The other side of this point -- although plaintiffs do not make it in their briefs --
is that CCP’s argument may not be ripe for adjudication. To satisfy Article III's “case or
controversy” requirement, an action must present “(1) a legal controversy that is real and
not hypothetical, (2) a legal controversy that affects an individual in a concrete manner so
as to provide the factual predicate for reasoned adjudication, and (3) a legal controversy
so as to sharpen the issues for judicial resolution.” Armstrong World Industries, Inc. by
Wolfson v. Adams, 961 F.2d 405, 410 (3d Cir. 1992)(quoting International Bhd. of
Boilermakers v. Kelly, 815 F.2d 912, 915 (3d Cir.1987)). The case or controversy
requirement must be met regardless of the type of relief sought, including declaratory
relief. Id. (citing Skelly Oil Co. v. Phillips Petroleum Co., 339 U.S. 667, 671 (1950)).
“To satisfy the ‘ripeness’ requirement, a plaintiff in a declaratory judgment action must
demonstrate (1) that the probability of future harm is real and substantial, of sufficient
immediacy and reality to warrant the issuance of a declaratory judgment, (2) that the legal
status of the parties will be changed by the declaration, and (3) that the declaratory
judgment will have utility (i.e., that it will be of some practical help to the parties).”
Algrant v. Evergreen Valley Nurseries Ltd. Partnership, 126 F.3d 178, 189 n.1 (3d Cir.
1997)(citing Travelers Ins. Co. v. Obusek, 72 F.3d 1148, 1154-55 (3d Cir. 1995)).
Roper’s exception, as amplified in Electrical Fittings and Leonard, counsels in favor of
allowing this cross-appeal to proceed.
21
In its motion for reconsideration, CCP sought enforcement of the limitation of
remedies and exclusion of damages in its disclaimer, which it claimed limited plaintiffs’
remedies to replacement of the gel coat or refund of the purchase price and excluded
other remedies, including incidental and consequential damages. Viking, 2007 WL
2746713, at *4.
The disclaimer reads in relevant part:
The Buyer’s sole and exclusive remedy against Seller shall be for the
replacement of the product or refund of the purchase price in the
event that a defective condition of the product should be found to
exist by Seller. NO OTHER REMEDY (INCLUDING, BUT NOT
LIMITED TO, INCIDENTAL OR CONSEQUENTIAL DAMAGES
FOR LOST PROFITS, LOST SALES, INJURY TO PERSON OR
PROPERTY, OR ANY OTHER INCIDENTAL OR
CONSEQUENTIAL LOSS) SHALL BE AVAILABLE TO THE
BUYER.
The sole purpose of this exclusive remedy shall be to provide Buyer
with replacement of the product or refund of the purchase price of
the product if any defect in material or workmanship is found to
exist. This exclusive remedy shall not be deemed to have failed its
essential purpose so long as Seller is willing and able to replace the
defective products or refund the purchase price.
(A8285.) The District Court found that the limitation of remedies failed of its essential
purpose and that the exclusion of consequential damages provision was unconscionable.
1. The Limitation of Remedies Fails of its Essential Purpose
Under the U.C.C., “[w]here circumstances cause an exclusive or limited remedy to
fail of its essential purpose, remedy may be had as provided in this Act.” N.J. Stat. Ann.
§ 12A:2-719. In addition, “under subsection (2), where an apparently fair and reasonable
22
clause because of circumstances fails in its purpose or operates to deprive either party of
the substantial value of the bargain, it must give way to the general remedy provisions of
this Article.” N.J. Stat. Ann. § 12A:2-719(2), cmt. 1; BOC Group, Inc. v. Chevron
Chemical Co., LLC, 819 A.2d 431, 438 (N.J. Super. Ct. App. Div. 2003). “[C]ourts
generally have concluded that so long as the buyer has the use of substantially defect-free
goods, the limited remedy should be given effect. But when the seller is either unwilling
or unable to conform the goods to the contract, the remedy does not suffice.” Chatlos
Sys., Inc. v. Nat’l Cash Register Corp., 635 F.2d 1081, 1085 (3d Cir. 1980).
The District Court held that CCP’s remedies limitation failed of its essential
purpose not only because the plaintiffs lost the substantial value of their bargain, but also
because “(1) the 953 Series’ alleged malfunction was latent; and (2) the gel coat was
combined into a larger product before use.” Viking, 2007 WL 2746713, at *6. The
District Court based its reasoning on Garden State Food Distributors, Inc. v. Sperry Rand
Corp., Sperry Univac Div., 512 F. Supp. 975, 978 (D.N.J. 1981), in which the court noted
that “[l]imited remedies under the U.C.C. have been held to fail of their essential purpose
when defects in the goods are latent and not discoverable on reasonable inspection.” Id.(citing Marr Enterprises, Inc. v. Lewis Refrigeration Co., 556 F.2d 951, 953 (9th Cir.
1977)). Other courts have used, or have at least referenced, this standard to determine
whether a remedies limitation fails of its essential purpose. See, e.g., Fiberglass
Component Production, Inc. v. Reichhold Chemicals, Inc., 983 F. Supp. 948, 960 (D.
23
Colo. 1997)(“[W]hen goods have latent defects which are not discoverable upon receipt
and reasonable inspection, a limitation of remedy to return of the purchase price fails of
its essential purpose.”); see Lutz Farms v. Asgrow Seed Co., 948 F.2d 638, 646 (10th Cir.
1991); Arias/Root Engineering v. Cincinnati Milacron Marketing Co., No. 90-55661,
1991 WL 190114, at *5 (9th Cir. Sept. 25, 1991).
Most of the cases that CCP cites to refute the District Court’s position are
distinguishable. Transport Corp. Of Am., Inc. v. International Bus. Mach. Corp., 30 F.3d
953, 959-60 (8th Cir. 1994)(holding that remedy of repair does not fail of its essential
purpose when, after a single failure, the system was fully repaired within one day); Hill v.
BASF Wyandotte Corp., 696 F.2d 287, 292 (4th Cir. 1982)(holding that the “fail of
essential purpose” exception did not apply where the repair or replacement could return
the goods to their warranted condition); Bernath v. Potato Services of Michigan, 300
F.Supp.2d 175, 182 (D. Me. 2004)(plaintiff failed to show novel circumstances not
contemplated by the parties); Taylor Inv. Corp. v. Weil, 169 F.Supp.2d 1046, 1059 (D.
Minn. 2001)(limitation did not deprive one party of a substantial value of its bargain);
Southwest Pet Prods., Inc. v. Koch Indus., Inc., 107 F.Supp.2d 1108, 1116 (D. Ariz.
2000)(holding that implicit in the terms of the contract is the presumption that the defect
can be cured by replacement or repair....If this presumption fails, either because the
product is so deficient it cannot be fixed or the warrantor fails to replace or repair the
part, the remedy has failed).
24
Plaintiffs here were deprived of the substantial value of their bargain with CCP.
After they had used the gel coat on the yachts and the gel coat cracked, the cost of the gel,
about $3,000, was dwarfed by the cost of repairing the ships -- in Post’s case it cost
$279,000 per ship to repair. For Viking it cost $822,407.59 per ship to repair. Viking,
2007 WL 2746713, at *6. In addition, the defect in the gel was latent. Upon de novo
review, the District Court’s analysis is correct and the remedies limitation failed of its
essential purpose. We need not consider the second part of the District Court’s analysis
regarding the gel having been combined into another product.
2. The Exclusion of Consequential Damages is Unconscionable
CCP argues that the District Court erroneously relied on an opinion of this Court
that applied Wisconsin law for the proposition that when an exclusion of consequential
damages leaves a buyer with small damages relative to its claimed damages, then the
exclusion is unconscionable and a buyer may recover its consequential damages under the
U.C.C. (Appellees’ Br. at 77.)
In New Jersey, to determine whether a contract clause excluding consequential and
incidental damages is valid, a court must review that clause independently from the
limitation of remedies and decide whether that limitation fails of its essential purpose.
Chatlos Sys., Inc. v. Nat’l Cash Register Corp., 635 F.2d 1081, 1086 (3d Cir. 1980).
Chatlos noted, however, that the “remedy’s failure of essential purpose, while a discrete
question, is not completely irrelevant to the issue of the conscionability of enforcing the
25
consequential damages exclusion.” Id. at 1086-87. We narrowed the question in that
case to whether it was unconscionable for the buyer to retain the risk of consequential
damages upon the failure of the essential purpose of the exclusive limitation of remedies.
Id. at 1087.
The District Court here considered the two clauses separately. Citing Chatlos, it
noted that New Jersey law separates the analysis of the two. The District Court also
considered the fact that the limitation of remedies had failed of its essential purpose and
that this was not irrelevant to its analysis of the consequential damages clause. The
District Court ultimately found that, all things considered, the exclusion of incidental and
consequential damages rendered the available damages unconscionably low. Viking,
2007 WL 2746713, at *7. The District Court did not cite Ragen Corp. v. Kearney &
Trecker Corp, 912 F.2d 619, 625 (3d Cir. 1990)(which refers to Wisconsin law) for the
proposition that the analysis of a limitation on remedies necessarily leads to the
unconscionability of the exclusion of consequential and incidental damages. Rather, the
District Court merely cited Ragen for the distinguishable concept that the U.C.C. does not
“make giant corporations fair game for either intentional sharp practices or a skewed rule
of law,” and that when the damages clause provides for unconscionably low damages, the
clause is unreasonable. Viking, 2007 WL 2746713, at *7.
CCP claims that unconscionability must be measured at the contract’s inception,
citing Kearney & Trecker Corp. v. Master Engraving Co., Inc., 527 A.2d 429, 434 n.5
26
(N.J. 1987). But this is not what Kearney holds. There, the New Jersey Supreme Court
held that “[w]hether the preclusion of consequential damages should be effective in [any]
case depends upon the circumstances involved.” Kearney, 527 A.2d at 436. In addition,
Kearney found that the U.C.C. does not require the invalidation of an exclusion of
consequential damages when limited contractual remedies fail of their essential purpose.
But “when the circumstances of the transaction, including the seller’s breach, cause the
consequential damage exclusion to be inconsistent with the intent and reasonable
commercial expectations of the parties, [then the] invalidation of the exclusionary clause
would be appropriate under the Code.” Id. at 438.
It may still be worth considering the comparison to Chatlos, however, in which the
clause was found not to be unconscionable. In Chatlos there was no great discrepancy in
the parties’ bargaining power or sophistication. That is also true here. In Chatlos the
limitation was clearly expressed, so it was not an instance of an ordinary consumer being
misled by a disclaimer hidden in a “linguistic maze.” Cf. Gladden v. Cadillac Motor Car
Division, 416 A.2d 394, 401 (1980). That is also true here. Finally, in Chatlos, the court
found that the type of damage claimed came within the realm of expectable losses.
“Some disruption of normal business routines, expenditure of employee time, and
impairment of efficiency cannot be considered highly unusual or unforeseeable in a faulty
computer installation.” Chatlos, 635 F.2d at 1087. Similarly here, the parties should have
considered the possibility that a defective gel might mean having to replace the gel coat
27
once it had already been applied to the vessels. The only real difference is the raw dollar
value of the damages, which go beyond “some disruption of normal business routines”
since the boat companies had to replace the gel coat on all of the vessels. In addition, in
Kearney the Supreme Court of New Jersey found that “[a]s between commercial
parties...the allocation of risks in accordance with their agreement better serves the public
interest than an allocation achieved as a matter of policy without reference to that
agreement.” Kearney, 527 A.2d at 437 (quoting Spring Motors Distribs., Inc. v. Ford
Motor Co., 489 A.2d 660, 671 (N.J. 1985)). CCP points out that Viking’s and Post’s own
sales materials also contain nearly identical exclusions of consequential damages.
(A5826, A5828.)
Though a close question where, as here, sophisticated businesses are involved, the
damages clause would in this case render the damages unconscionably low -- in Post’s
case by a factor of 93 and in Viking’s by a factor of 274. We therefore do not disturb the
District Court’s calculus on this admittedly difficult point.
3. No Contractual Preclusion of Consequential Damages
CCP claims that the District Court made two errors in ruling that the limitation of
remedies and exclusion of consequential damages did not apply to breaches of the
flexibility warranty: (1) it disregarded the agreed textual interpretation of the parties, and
(2) it interpreted the provision in isolation and without reference to the documents as a
whole. (Appellees’ Br. at 70.)
28
CCP claims that the District Court should not have sua sponte disregarded the
parties' agreed textual interpretation of the remedies. CCP cites Teamsters Indus.
Employees Welfare Fund v. Rolls-Royce Motor Cars, Inc., 989 F.2d 132, 135 (3d Cir.
1993), in support of its point. But Rolls-Royce Motor Cars stands for the proposition that
in order for a court "to decide whether a contract is ambiguous, [it] do[es] not simply
determine whether, from [its] point of view, the language is clear. Rather, [it] hear[s] the
proffer of the parties and determine[s] if there are objective indicia that, from the
linguistic reference point of the parties, the terms of the contract are susceptible of
different meanings." Id. (internal citations and quotation marks omitted). But the District
Court did not find that the limitation was ambiguous. Instead, it determined that even if it
did interpret the provision in such a way that the limitation would apply to breaches of all
the warranties -- and not just to breach of the specifications warranty -- the "limited
remedies deprive Plaintiffs of the substantial benefit of their bargains." Viking, 2007 WL
2746713, at *6.
We agree that the disclaimer is not ambiguous and that it dictates that remedies
will only be offered in the event that the gel is found to be defective, i.e., when the gel
does not meet Seller’s specifications. CCP claims that the District Court interpreted the
exclusion of consequential damages provision in isolation and without considering the
document as a whole, but they cite no cases in support of their point, ultimately arguing
that at the very least the provision was ambiguous. We have already agreed with the
29
District Court that the provision was not ambiguous. Under Kennedy v. Westinghouse
Elec. Corp., 108 A.2d 409, 413 (N.J. 1954), “[t]he design of the parties to a written
contract is to be collected from the instrument as an entirety.” The District Court quoted
this language after writing, “[i]n interpreting the Disclaimer, the Court must read the
limitation of remedies in the context of the section in which it is contained.” Viking,
2007 WL 2746713, at *5. The Court cited to Kennedy thereafter, and these two
statements therefore can be read together. The instrument as an entirety can be
considered while also construing the limitation of remedies in the context of the section in
which it is contained.
The District Court then proceeded to consider the disclaimer as a whole and found
that it only applied to the specifications warranty because the disclaimer begins, “[t]he
products sold hereunder shall meet Seller’s applicable specifications at the time of
shipment. Seller’s specifications may be subject to change at any time without notice to
buyer.” Viking, 2007 WL 2746713, at *5. The District Court acknowledged that CCP
disclaimed all other warranties “if any defect in material or workmanship is found to
exist” and provided that the exclusive remedy in the event of a defect is replacement or
refund. Id. The District Court found that the disclaimer only applies when the gel does
not meet CCP’s specifications. The District Court noted that it was uncontested that the
gel coat met CCP’s specifications. Id. at *6. Thus, absent a breach of the specifications
warranty, the incidental and consequential damages available in the event of a defect (but
30
where the gel still met the Seller’s specifications) had not been disclaimed.
The disclaimer also states, however, “[n]o other remedy (including, but not limited
to, incidental or consequential damages for lost profits, lost sales, injury to person or
property, or any other incidental or consequential loss) shall be available to the buyer.”
(A8285.) CCP argues that this applies to all warranties, not just the specifications
warranty.
CCP also contends that well-established usage of trade in the gel coat industry --
where manufacturers limit purchasers’ remedies to replacement of gel coat or refund of
the purchase price and similarly exclude consequential and incidental damages -- counsels
in favor of allowing exclusion of consequential and incidental damages. CCP reports that
all other major domestic gel coat manufacturers limit remedies to replacement or refund.
Based on the evidence CCP presented, it does appear that this is indeed a common
disclaimer in the industry. (A5733-34, A5736.) But those disclaimers may also be
disclaiming only the specifications warranties, which is not an issue before us. And CCP
cites no cases in support of this point. Thus, the District Court’s rulings on the motion for
summary judgment should be affirmed on this issue.
V. CONCLUSION
As neither party has a meritorious legal issue on appeal, we affirm the District
Court’s orders.
31