Coburn Supply Co v. Kohler Co

United States Court of Appeals
Fifth Circuit
F I L E D
August 6, 2003
IN THE UNITED STATES COURT OF APPEALS
Charles R. Fulbruge III
FOR THE FIFTH CIRCUIT Clerk
No. 02-41317
COBURN SUPPLY COMPANY INC
Plaintiff-Appellee
v.
KOHLER CO
Defendant-Appellant
Appeal from the United States District Court
for the Eastern District of Texas
Before KING, Chief Judge, and HIGGINBOTHAM and BARKSDALE, Circuit
Judges.
KING, Chief Judge:
This case involves the alleged wrongful termination of an at-
will, non-exclusive wholesale distributor of plumbing products.
Consistent with the jury’s verdict, the district court entered
judgment in favor of the at-will distributor on its breach of
contract and negligent misrepresentation claims and denied the
defendant’s renewed motion for judgment as a matter of law. We
reverse.
I. FACTUAL AND PROCEDURAL HISTORY
A. Facts
The defendant, Kohler Co. (“Kohler”), manufactures and sells
plumbing products to contractors and end users through a nation-
wide network of non-exclusive independent distributors. The
plaintiff, Coburn Supply Company, Inc. (“Coburn”), is a wholesale
distributor of plumbing, electrical, and HVAC products, with
locations throughout Louisiana and East Texas. Coburn was a non-
exclusive, at-will distributor of Kohler’s products from 1938
through 1999.
While no single written or oral contract controlled the terms
by which the distributor relationship was governed, certain
obligations of each party were defined by written and oral
communications between the companies and through their course of
dealing over the years. For example, Coburn and Kohler met each
year to discuss account plans and goals for the coming year – which
were memorialized in an “annual agreement.”1 Further, certain
terms that governed the relationship were set forth in letters sent
by Kohler to Coburn. In most instances, these were form letters
sent to all of Kohler’s distributors. These terms set forth
general obligations that Kohler distributors were required to meet
to continue on as a Kohler distributor, such as: the requirement
that distributors purchase a minimum of $500,000 of Kohler plumbing
products annually; the requirement that distributors not sell
certain competing products; the requirement that distributors
commit a sales force properly trained in Kohler products; and the
requirement that distributors promote and advertise Kohler
products. The letters, as well as oral communications between the
1
These annual agreements were not signed by either
party.
2
parties, also set forth certain benefits Kohler distributors were
entitled to receive from Kohler, including: access to Kohler’s
Rebate Growth Program (which provided financial rewards for a
distributor’s successful sales); funds for showroom development and
advertising; consumer referrals; promotional products; training
programs for sales staff; and financial and logistical assistance
with product returns and warranty issues. It is undisputed,
however, that no contractual term required Kohler to provide
notification to Coburn, or any of its other distributors, before
terminating the distributor relationship.
On September 17, 1999, following a sixty-year distributorship
relationship, Kohler gave notice to Coburn that effective December
31, 1999, it would terminate Coburn as a distributor of Kohler
products. From this time, Coburn was thus provided with 105 days’
notice of the termination. Coburn began negotiating with American
Standard, one of Kohler’s three major competitors, within days of
this notice of termination, and Coburn was doing business with
American Standard approximately two months before the relationship
between Coburn and Kohler was terminated. Coburn and American
Standard publicly announced their new union in November 1999.
However, Coburn continued to order Kohler products on an open
account through the end of 1999 and, indeed, bought and sold Kohler
products during the first quarter of 2000.2
2
In the parties’ proposed joint pre-trial order, the
parties further stipulate that “[a]s of October 1, 2001,
Plaintiff continues to sell Defendant’s products.”
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B. Procedural History
Coburn sued, claiming Kohler breached its obligation to Coburn
to provide reasonable notice before terminating the relationship
and that Kohler made negligent misrepresentations to Coburn
regarding the stability of the distributor relationship. A five-
day trial was held. During the trial, the district court denied
Kohler’s motions for judgment as a matter of law and,
alternatively, for mistrial made after Coburn’s case in chief and,
again, before the district court presented the charge to the jury.
The jury thereafter found in favor of Coburn on its breach of
contract and negligent misrepresentation claims. The jury found
that Kohler breached a “contract or obligation to Coburn in the
manner Kohler terminated its distributorship agreement with
Coburn.” The jury specifically entered the figure -0- as the sum
of money necessary to compensate Coburn fairly and reasonably for
the loss of profits it incurred following the termination of the
relationship, but nevertheless found $1,801,153 in damages
proximately caused by Kohler’s conduct, not including lost profits.
On July 3, 2002, the district court entered final judgment
consistent with this verdict and awarded aggregate damages totaling
$2,616,039.18 – including pre-judgment interest calculated at an
annual rate of 10% (totaling $419,941.72), attorneys’ fees on the
plaintiffs’ breach of contract claim (totaling $360,773.75), and
costs of court (totaling $34,170.71). On August 6, 2002, the court
denied Kohler’s renewed Rule 50 motion for judgment after trial or,
in the alternative, Rule 59 motion for new trial. Kohler appeals
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from the July 3, 2002 final judgment and from the August 6, 2002
entry of the district court’s denial of Kohler’s Rule 50 motion.
II. DISCUSSION
A. Breach of Contract
Both parties spend a good portion of their briefing debating
whether the termination was, as Coburn contends, a “surprise”
because Kohler had led Coburn to believe that it was performing
satisfactorily before “suddenly” giving Coburn notice of its intent
to terminate the relationship or, as Kohler maintains, a natural
outgrowth of differing market philosophies between the two
companies. However, all parties agree that the distributor
relationship was an at-will relationship and Coburn was a non-
exclusive distributor of Kohler’s products. Thus, Kohler’s
rationalization for its decision to terminate Coburn simply has no
bearing on the outcome of this case. Texas law has never required
a party to demonstrate cause before terminating an at-will, non-
exclusive relationship. See, e.g., Fed. Express Corp. v.
Dutschmann, 846 S.W.2d 282, 283 (Tex. 1993) (discussing the
parameters of the at-will doctrine in Texas); see also Corenswet
Inc. v. Amana Referigeration, 594 F.2d 129, 138 (5th Cir. 1979)
(“We seriously doubt [] that public policy frowns on any and all
contract clauses permitting termination without cause . . . Indeed,
when, as here, the power of unilateral termination without cause is
granted to both parties, the clause gives the distributor an easy
way to cut the knot should he be presented with an opportunity to
secure a better distributorship from another manufacturer.”); W. G.
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Pettigrew Distrib. Co. v. Borden, Inc., 976 F. Supp. 1043, 1054
(S.D. Tex. 1996) (“The longstanding rule in Texas provides for
employment at will, terminable at any time by either party, with or
without cause, absent an express agreement to the contrary.”);
Perez v. Vinnell Corp., 763 F. Supp. 199, 200 (S.D. Tex. 1991)
(stating that a party may terminate an at-will relationship in
Texas for a good reason, a bad reason, or no reason at all).
This is not to say that the manner in which Kohler terminated
the relationship cannot give rise to breach of contract damages.
Here, Coburn’s breach of contract claim is based on whether the
105-day notice given by Kohler to Coburn constitutes a breach of an
implied obligation to provide reasonable notice.
(1) Implied Term of Reasonable Notice
No contractual term expressly controls the issue of notice
here. Before analyzing whether there is sufficient evidence to
support the jury’s finding that the 105-day notice here is not
reasonable, we thus must first address whether the notice issue is
controlled by Texas common law or § 2.309(3) of the Uniform
Commercial Code (“UCC”), codified as § 2.309(c) of the Texas
Business & Commerce Code.
In Texas, distributorship agreements are generally controlled
by the UCC. See, e.g., Glenn Thurman, Inc. v. Moore Const., Inc.,
942 S.W.2d 768, 771 (Tex. App. – Tyler 1997) (“When parties enter
into a contract for the sale of goods, [the UCC] controls the
conduct of the parties. Where the U.C.C. applies, it displaces all
common law rules of law regarding breach of contract and
6
substitutes instead those rules of law and procedure set forth in
the U.C.C.”); see also Continental Casing Corp. v. Siderca Corp.,
38 S.W.3d 782, 788 (Tex. App. – Houston [14th Dist.] 2001, no pet.)
(joining “the overwhelming majority of jurisdictions . . . [in
holding] that distributorship agreements are subject to the UCC”).
In Coburn’s response to Kohler’s motions for summary judgment and
in its response to Kohler’s motions for judgment as a matter of law
(but not in its complaint, amended complaint or in the proposed
joint pre-trial order), Coburn argued that, consistent with this
case law, the UCC’s “gap filler” provisions should be interpreted
to imply a term of “reasonable” notice here. In contrast, Kohler
maintained that in the absence of an express contractual term
controlling notice, Texas common law should be looked to in
determining whether to imply a term of “reasonable” notice.
On June 26, 2002, the district court allowed Coburn to amend
its pleadings and file its second supplemental complaint, nunc pro
tunc as of April 5, 2002 (the day of the jury verdict), to assert
that its breach of contract claim for lack of reasonable notice of
termination is based on § 2.309(c). Kohler argues that in so
doing, the district court abused its discretion. See Prudhomme v.
Tenneco Oil Co., 955 F.2d 390, 392 (5th Cir. 1992) (holding that a
district court’s grant of a late motion to file supplemental
amended pleadings is reviewed for an abuse of discretion).
We assume for the sake of this appeal that the district court
did not abuse its discretion in granting Coburn leave to file its
second supplemental complaint. We thus look to § 2.309(c) for
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guidance on the reasonable notice issue.
As stated, Texas has adopted the UCC, which governs contracts
for the sale of goods. Texas Business & Commerce Code § 2.309(c)
provides that:
Termination of a contract by one party except on the
happening of an agreed event requires that reasonable
notification be received by the other party and an
agreement dispensing with notification is invalid if its
operation would be unconscionable.
(emphasis added). Thus, under this provision, even though the
distributor relationship between Coburn and Kohler was an at-will
relationship, Kohler was required to provide Coburn with reasonable
notice before terminating the distributor relationship.
(2) Insufficiency of the Evidence
Kohler’s challenge to the legal sufficiency of the evidence in
support of the jury’s finding that the 105-day notice is not
reasonable is reviewed under an “especially deferential” standard,
and the relevant question is whether, “consider[ing] the evidence,
drawing all reasonable inferences and resolving all credibility
determinations in the light most favorable to [Coburn] . . . no
reasonable jury could have arrived at [the conclusion that 105 days
was not reasonable notice].” Miss. Chem. Corp. v. Dresser-Rand
Co., 287 F.3d 359, 365 (5th Cir. 2002).
While no Texas case squarely addresses the issue of reasonable
notification in the sale of goods context, the cases on this issue
outside of our jurisdiction uniformly hold, even in the context of
an exclusive distributor relationship rather than – as here – a
8
non-exclusive distributor relationship, that reasonable
notification calls for such notification as will give the other
party reasonable time to seek a substitute agreement. See, e.g.,
Serpa Corp. v. McWane Inc., 199 F.3d 6, 8-9 (1st Cir. 1999)
(following Teitelbaum (discussed below) in finding that in
terminating its exclusive twenty-year distributorship relationship
with the plaintiff, thirty days was reasonable notice because the
“reasonableness of notice ‘is measured in terms of the ability of
the party affected by the termination to obtain a substitute
arrangement’”); Teitelbaum v. Hallmark Cards, Inc., 520 N.E.2d
1333, 1335 (Mass. App. 1988) (holding that Hallmark’s 60-day notice
before terminating its exclusive relationship with its distributor
was reasonable, as a matter of law, where the evidence was
undisputed that the card shop obtained another supplier (American
Greeting Card Company) before it reopened after fire damage).
This interpretation accords with the text of the comments to
§ 2.309. Comment 8 to Texas Business & Commerce Code § 2.309
provides that:
Subsection (3) recognizes that the application of
principles of good faith and sound commercial practice
normally call for such notification of the termination of
a going contract relationship as will give the other
party reasonable time to seek a substitute agreement. An
agreement dispensing with notification or limiting the
time for the seeking of a substitute agreement is, of
course, valid under this subsection unless the results of
putting it into operation would be the creation of an
unconscionable state of affairs.
TEX. BUS. & COM. CODE ANN. § 2.309, cmt. 8 (emphasis added).
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Additionally, comment 6 states that “[p]arties to a contract are
not required in giving reasonable notification to fix, at peril of
breach, a time which is in fact reasonable in the unforeseeable
judgment of a later trier of fact.” Id. § 2.309, cmt. 6.
Absent an express contractual provision governing notice of
termination, we see no reason to depart from the comments to the
controlling UCC provision and persuasive case law following these
comments. Here, it is undisputed that Kohler provided Coburn with
105 days’ notice before terminating the distributor relationship.
Coburn obtained a new primary supplier – American Standard – within
approximately six weeks of the time it received notice of
termination from Kohler and approximately two months before the
scheduled termination date of December 31, 1999. Indeed, it began
discussions with American Standard days after being given notice by
Kohler, but still continued to buy Kohler products on credit into
2000. In these circumstances, we hold that no reasonable jury
could have arrived at the conclusion that the 105 days’ notice here
is unreasonable.
As the district court clearly grounded the award of attorneys’
fees in this case to Coburn’s success on its breach of contract
claim, we further hold that the award of attorneys’ fees to Coburn
as the prevailing party on its contract claim cannot stand. See
Stine v. Marathon Oil Co., 976 F.2d 254, 264 (5th Cir. 1992)
(stating that, when tort and contract claims are tried together,
“Texas law requires the attorney’s fee be limited to a contract
award, it does not permit an award of attorney’s fees for tort
10
claims”).
B. Negligent Misrepresentation
The jury also found that Kohler made negligent
misrepresentations on which Coburn justifiably relied. Because
Texas law does not recognize a duty to avoid negligent
misrepresentations arising from an arms-length, at-will
relationship, we further reverse the district court’s judgment in
favor of Coburn on Coburn’s negligent misrepresentation claim.
To succeed on its negligent misrepresentation claim under
Texas law, Coburn is required to prove that: (1) without exercising
reasonable care or competence in communicating information to
Coburn; (2) Kohler supplied “false information” for the guidance of
Coburn; (3) in the course of its business; (4) which caused Coburn
to suffer a pecuniary loss by justifiably relying on the
information. Fed. Land Bank Ass’n v. Sloane, 825 S.W.2d 439, 442
(Tex. 1991). Here, Coburn argued that despite negotiating with a
replacement distributor outfit as early as 1997, Kohler failed to
communicate to Coburn its plans to terminate the Kohler-Coburn
distributor relationship. However, in Texas, non-disclosures
cannot be negligent unless there is a duty to disclose. Fleming v.
Tex. Coastal Bank of Pasadena, 67 S.W.3d 459, 461 (Tex. App. –
Houston [14th Dist.] 2002, pet. denied); Steptoe v. True, 38 S.W.3d
213, 219-20 (Tex. App. – Houston [14th Dist.] 2001, no pet.)
(Holding that “[i]n order to prove negligent misrepresentation,
[the plaintiff] must, as a threshold matter, prove that [the
defendant] owed her a duty).
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As a matter of law, the at-will, non-exclusive distributor
relationship between Coburn and Kohler is not the kind of
confidential or fiduciary relationship that would give Kohler a
duty to disclose to Coburn its negotiations with another
distributor or its plans to terminate the at-will, non-exclusive
distributor relationship. See Bradford v. Vento, 48 S.W.3d 749,
755 (Tex. 2001) (discussing the Restatement (Second) of Torts
§ 551's recognition of a duty of disclosure in a commercial setting
and stating that “[w]e have never adopted section 551” because in
Texas, “as a general rule, a failure to disclose information does
not constitute fraud unless there is a duty to disclose
information”); Schlumberger Tech. Corp. v. Swanson, 959 S.W.2d 171,
177 (Tex. 1997) (“[M]ere subjective trust does not, as a matter of
law, transform arm’s length dealing into a fiduciary
relationship.”).
Coburn points to a statement by Rick Reles, Kohler’s Vice
President of Sales, in support of its claim that Kohler made an
affirmative misrepresentation upon which Coburn justifiably relied.
Assuming, without deciding, that such a misrepresentation could
give rise to a duty under Texas law, we find no evidence which
supports the jury’s finding of justifiable reliance. Indeed, the
record is replete with evidence that Coburn management was fully
aware of Kohler’s plan in 1999 to review all distributors to find
out whether it was “positioned with the right horse.” See Wright’s
v. Red River Fed. Credit Union, 71 S.W.3d 916, 921 (Tex. App. -
Texarkana 2002, no pet.) (finding that where the only evidence of
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justifiable reliance is negated by the plaintiff’s own testimony,
a negligent misrepresentation claim fails).
IV. CONCLUSION
We REVERSE the judgment in favor of Coburn and RENDER judgment
that Coburn take nothing.
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