Animal Hosp. of Nashua v. Antech Diag.

2014 DNH 106

Opinion

UNITED STATES DISTRICT COURT FOR THE DISTRICT OF NEW HAMPSHIRE

Animal Hospital of Nashua, Inc.

v. Civil No. 11-cv-448-LM Opinion No. 2014 DNH 106 Antech Diagnostics and Sound-Elkin

_

VCA Cenvet, Inc. d/b/a Antech Diagnostics

v.

Animal Hospital of Nashua, Inc.; AHN Pet Hospitals, Inc.; AHN Animal Hospital Services Inc.; and Dr. Leo Bishop, individually and d/b/a The Animal Hospital of Nashua

O R D E R

This case arises from a now-defunct business relationship

involving Animal Hospital of Nashua, Inc. (“AHN”) and a supplier

of laboratory services and medical equipment, VCA Cenvet, Inc.

(“Antech”). The dispute concerns AHN’s dissatisfaction with the

quality of certain services and equipment provided to it by

Antech, and Antech’s unhappiness over AHN’s termination of the

business relationship. More specifically, the case consists of:

(1) AHN’s claims against Antech for breach of contract, breach

of the covenant of good faith and fair dealing, and unjust

enrichment (Counts I, II, and VII of the complaint); (2) AHN’s claims against Sound-Elkin (“Sound”) under the same three

theories (Counts VIII, IX, and XIII); and (3) Antech’s

counterclaims against AHN and two related corporate entities for

breach of contract (Count I of the counterclaim) and breach of

the covenant of good faith and fair dealing (Count II), plus

Antech’s counterclaim for unjust enrichment against the three

corporate entities and AHN’s president, Dr. Leo Bishop (Count

III).

Now before the court are: (1) a motion for partial summary

judgment filed by counterclaim defendants (collectively “AHN”)

in which they asks the court to rule that the damages to which

Antech might be entitled on its counterclaims are limited by

several provisions in the service agreements that governed the

parties’ business relationship; (2) Antech’s motion to strike

certain summary-judgment exhibits; (3) a motion for partial

summary judgment filed by Antech and Sound in which they argue

that they are entitled to judgment as a matter of law on AHN’s

claims that the equipment Antech provided was deficient; and (4)

AHN’s motion for partial summary judgment that Antech is not

entitled to damages in the form of lost profits. The parties

made oral arguments on all four pending motions on April 10,

2014. The court considers each motion in turn, but begins by

addressing the briefing the parties submitted in response to the

show-cause order of February 10, 2010, document no. 117.

2 Discussion

A. The Parties’ Show-Cause Briefing

In its show-cause order, the court expressed concerns

arising from the imprecision of the written documents the

parties had identified as memorializing the agreement under

which they conducted their business relationship. Without

belaboring the point, the court is now satisfied that there was,

indeed, an enforceable contract between AHN and Antech, as

described in the two service agreements in the record.

B. Document No. 89

All three counts of Antech’s counterclaim are based upon

AHN’s decision to walk away from its business relationship with

Antech approximately three years into the six-year term of the

two service agreements. While the parties agree, as a factual

matter, that AHN stopped using Antech’s laboratory services and

began to use the services of one of Antech’s competitors, AHN

contends that its actions were a permissible response to

Antech’s prior breach of the agreement, while Antech disagrees.

In any event, in document no. 89, AHN asks the court to rule

that in the event Antech prevails on any of its counterclaims,

the damages to which it is entitled are limited in a variety of

ways. Antech objects. Antech’s objection is well taken.

3 1. Summary-Judgment Standard

“Summary judgment is appropriate when there is no genuine

issue of material fact and the moving party is entitled to

judgment as a matter of law.” Ponte v. Steelcase Inc., 741 F.3d

310, 319 (1st Cir. 2014) (quoting Cortés–Rivera v. Dept. of

Corr., 626 F.3d 21, 26 (1st Cir. 2010)); see also Fed. R. Civ.

P. 56(a). When ruling on a motion for summary judgment, the

court must “view[] the entire record ‘in the light most

hospitable to the party opposing summary judgment, indulging all

reasonable inferences in that party’s favor.’” Winslow v.

Aroostook Cty., 736 F.3d 23, 29 (1st Cir. 2013) (quoting Suarez

v. Pueblo Int’l, Inc., 229 F.3d 49, 53 (1st Cir. 2000)).

“The object of summary judgment is to ‘pierce the

boilerplate of the pleadings and assay the parties’ proof in

order to determine whether trial is actually required.’” Dávila

v. Corp. de P.R. para la Diffusión Púb., 498 F.3d 9, 12 (1st

Cir. 2007) (quoting Acosta v. Ames Dep’t Stores, Inc., 386 F.3d

5, 7 (1st Cir. 2004)). “[T]he court’s task is not to weigh the

evidence and determine the truth of the matter but to determine

whether there is a genuine issue for trial.” Noonan v. Staples,

Inc., 556 F.3d 20, 25 (1st Cir. 2009) (citations and internal

quotation marks omitted).

4 2. Background

The agreement that underlies the parties’ business

relationship is memorialized in two documents, each captioned

“Service Agreement.” Each service agreement required AHN to use

Antech as its exclusive provider of laboratory services for six

years starting on August 1, 2008, and also required AHN to use

and pay for $1.2 million worth of Antech’s services over those

six years. The agreements further provided that AHN was to

receive “pricing consideration” in the form of billing at a rate

of “35% off Antech’s list fee schedule.” AHN’s Mem. of Law, Ex.

A (doc. no. 89-2), at A033946; id., Ex. B (doc. no. 89-3), at

A033950.1 Hereinafter, the court uses the terms “pricing

consideration” and “laboratory-fee discount” interchangeably.

One of the two service agreements (hereinafter “Loan

Agreement”) includes terms related to a loan made by Antech to

AHN as an incentive for AHN to use Antech as its exclusive

provider of laboratory services. The Loan Agreement includes

the following relevant provisions:

3.3. Default. If . . . (ii) Animal Hospital Owner breaches the exclusivity provisions set forth in Section 1 hereof . . . then such [breach] shall constitute an event of default with respect to the Loan. At any time after the occurrence of an event of default, Antech may declare the entire amount of the Loan to be due and payable, whereupon the Loan shall

1 The pagination of the two service agreements is confusing, at best. For the sake of clarity, the court uses the Bates numbers stamped on the lower right-hand corner of each page of each of those two exhibits.

5 become forthwith due and payable without presentment, demand, protest or other notice of any kind, all of which are expressly waived . . . . The remedies available to Antech hereunder are intended to compensate Antech for the Loan and discounts provided hereunder, which Loan and discounts would not have been provided unless Animal Hospital agreed to the Minimum Average Annual Fee requirements set forth herein, the requirements set forth in Section 1 regarding exclusivity, and the payment for Laboratory Services hereunder in a timely manner.

. . . .

5. Termination. If (i) a default with respect to the loan occurs as described in Section 3.3 . . . then Antech may terminate this Agreement upon written notice to Animal Hospital Owner.

AHN’s Mem. of Law, Ex. A (doc. no. 89-2), at A033942-43

(emphasis in the original).

The other service agreement (hereinafter “Equipment

Agreement”) incudes terms related to certain x-ray equipment,

manufactured by Sound, with a retail value of approximately

$139,000, that Antech provided to AHN, also as an incentive.

The Equipment Agreement includes the following provisions:

3.1 . . . . If (i) the term of this Agreement is terminated in accordance with Section 5 . . . Antech shall cause to be removed from the premises [of AHN] the [Sound] Equipment, and Animal Hospital shall provide reasonable access to its premises in order for Antech to remove such equipment. If the Agreement is terminated in accordance with Section 5, Animal Hospital will have the option to purchase the [Sound] Equipment on the following schedule; During Year 1 100% of original price, year 2 80% of original price, year 3 60% of original price, year 4 40% of original purchase price, year 5 20% of original purchase price.

6 5. Termination. If (i) Animal Hospital breaches the exclusivity provision set forth in Section 1 hereof . . . , then Antech may terminate this Agreement upon written notice to Animal Hospital.

AHN’s Mem. of Law, Ex. B (doc. no. 89-3), at A033948-49

By letter dated August 4, 2011, Dr. Bishop notified Antech

that AHN had “entered into a new, multi-year, strategic

agreement with IDEXX Laboratories” to provide the laboratory

services it had been getting from Antech. AHN’s Mem. of Law,

Ex. C (doc. no. 89-4), at 2. By letter dated September 7, 2011,

Dr. Bishop transmitted to Antech: (1) a check in the amount of

the most recent invoice AHN had received from Antech; and (2) a

second check, for $62,500, to cover the amount of the loan it

had not yet repaid. Dr. Bishop also indicated that AHN did not

intend to purchase the Sound equipment it had been provided by

Antech, and asked Antech to make arrangements to retrieve it.

Antech has neither cashed AHN’s checks nor picked up the

equipment. Moreover, Antech appears never to have terminated

the service agreements pursuant to the termination provisions

included in each of them.

In their initial disclosures, Antech and Sound responded to

a question about computation of Antech’s damages in the

following way:

As discovery has not yet begun, any estimate of Antech’s damages is, necessarily, preliminary and

7 incomplete at this time, and is subject to revision. However, based on currently available information, Antech estimates its current damages as approximately $885,000 (exclusive of interest, costs and, where applicable, attorneys’ fees), consisting of approximately: (a) $315,000 in lost profits for the balance of the contract term; (b) $306,000 in laboratory fee discounts; (c) $139,000 worth of equipment; (d) loan balance of approximately $85,000; and (e) accounts receivable of approximately $40,000.

AHN’s Mem. of Law, Ex. D (doc. no. 89-5), at 10.

3. Discussion

AHN asks the court to rule that Antech may not recover: (1)

lost profits; (2) $306,000 in laboratory-fee discounts; and (3)

$139,000 for the equipment. It further asks the court to rule

that Antech’s remedies are limited to: (1) repayment of the loan

balance; (2) return of the Sound equipment; and (3) payment of

outstanding invoices. AHN’s primary argument is that it is

entitled to all of the relief seeks because the two service

agreements provide that Antech’s remedies are limited to

liquidated damages, which would preclude the recovery of lost

profits, laboratory-fee discounts, and money damages for the

value of the Sound equipment. AHN also makes a separate

argument with regard to the laboratory-fee discounts. Antech

disagrees, categorically. The court begins with the liquidated-

damages issue and then turns to the laboratory-fee discounts.

a. Liquidated Damages

AHN argues that the Loan Agreement and the Equipment

Agreement, taken together, include a provision that limits

8 Antech’s recovery to liquidated damages in the form of repayment

of the loan, return of the Sound equipment, and payment of

outstanding invoices. AHN is mistaken.

To rule upon AHN’s liquidated-damages argument, the court

must construe the two service agreements, both of which provide

that they are to be construed under California law. See AHN’s

Mem. of Law, Ex. A (doc. no. 89-2), at 3, Ex. B (doc. no. 89-3),

at 3. Under California law, “contract interpretation is a legal

question for the court.” Legendary Investors Grp. No. 1, LLC v.

Niemann, 169 Cal. Rptr. 3d 787, 793 (Cal. Ct. App. 2014) (citing

Morrow v. L.A. Unified Sch. Dist., 57 Cal. Rptr. 3d 885, 901

(Cal. Ct. App. 2007)).

The basic goal of contract interpretation is to give effect to the parties’ mutual intent at the time of contracting. When a contract is reduced to writing, the parties’ intention is determined from the writing alone, if possible. The words of a contract are to be understood in their ordinary and popular sense. [California] Civil Code section 1638 states [that] the language of a contract is to govern its interpretation, if the language is clear and explicit, and does not involve an absurdity.

Lueras v. BAC Home Loans Servicing, LP, 163 Cal. Rptr. 3d 804,

822-23 (Cal. Ct. App. 2013) (citations, internal quotation

marks, and brackets omitted).

One fundamental problem with AHN’s argument is its

conflation of two different kinds of contractual provisions,

i.e., liquidated-damages provisions and those that limit the

liability of the defendant or the remedies available to a

9 successful plaintiff. While AHN devotes considerable attention

to liquidated damages, the real issue here is whether the

agreement between AHN and Antech limits AHN’s liability or the

remedies available to Antech. It does not.

In its memorandum of law, AHN cites H.S. Perlin Co. v.

Morse Signal Devices of San Diego, 209 Cal. App. 3d 1289 (Cal.

Ct. App. 1989), as a case in which a plaintiff’s recovery was

limited by a liquidated-damages provision. In H.S. Perlin, the

court of appeals affirmed the trial court’s enforcement of a

contractual provision that resulted in an award of $250 in

liquidated damages to a shop owner on a negligence claim against

its burglar-alarm service, after a burglary resulted in losses

of $959,000. See id. at 1291-92. The opinion in H.S. Perlin

quotes extensively from the agreement between the shop owner and

the alarm service, and based upon the language of the agreement,

it is clear that the court’s decision was not based upon the

agreement’s reference to liquidated damages but, rather, its

express limitation of the alarm service’s liability to

liquidated damages. See id. at 1292; see also Guthrie v. Am.

Prot. Indus., 206 Cal. Rptr. 834, 835 (Cal. Ct. App. 1984)

(enforcing similar contractual provision); Better Food Mkts. v.

Am. Dist. Tel. Co., 253 P.2d 10 (Cal. 1953) (same). Here,

however, there is no language anywhere in either the Loan

Agreement or the Equipment Agreement that is remotely similar to

10 the language in the agreements in H.S. Perlin, Guthrie, and

Better Food Markets. That is, neither of them says anything

about limiting AHN’s liability for a breach, and neither

purports to limit the remedies available to Antech. Thus, there

is nothing in either service agreement, or in both of them read

together, that would preclude Antech from being awarded damages

in addition to repayment of the loan it made AHN, recovery of

the equipment it provided AHN, and payment of any outstanding

invoices.

The court’s interpretation, in turn, is consistent with the

language of the contract as a whole. See Cal. Civ. Code § 1641

(“The whole of a contract is to be taken together, so as to give

effect to every part, if reasonably practicable, each clause

helping to interpret the other.”). For example, with respect to

the remedy of declaring the loan Antech made to AHN due and

payable in the event of a default, Section 3.3 of the Loan

Agreement makes that remedy permissive. See AHN’s Mem. of Law,

Ex. A (doc. no. 89-2), at 3. Moreover, that same section

explains that the remedies available under it “are intended to

compensate Antech for the Loan and discounts provided

hereunder.” Id. What is missing from section 3.3, however, is

any indication that the remedies available thereunder were

intended to compensate Antech for other losses, such as lost

11 profits on sales it did not make to AHN over the last three

years of the term of the agreement.

In sum, there is nothing in the contractual descriptions of

the remedies that AHN calls liquidated damages that would

preclude an award of the full range of damages Antech seeks from

AHN in this case.

b. Laboratory-Fee Discount

In addition to relying upon its liquidated-damages

argument, AHN advances a second basis for a ruling that Antech

is not entitled to recover the value of the pricing

consideration described in Annex 1 to each of the two

agreements. Specifically, AHN argues that: (1) nothing in

either agreement indicates that the pricing consideration was

intended as an incentive for AHN to enter into its Agreements

with Antech; (2) even if pricing consideration was intended as

an incentive, Section 3.3 of the Loan Agreement provides that

calling the loan was the single remedy intended by the parties

as compensation for the loan and associated discounts, in the

event of a breach by AHN; and (3) Antech cannot recover the

laboratory-fee discount because such a recovery, combined with

lost profits going forward from the alleged breach, would put

Antech in a better position than it would have occupied if AHN

had performed its obligations under the contract. The court

agrees with AHN’s third argument.

12 13 In support of its argument that it is entitled to recover

the laboratory-fee discounts it gave AHN, Antech says that “AHN

has cited no law – and Antech is aware of none – that would

allow AHN to keep the consideration it received from Antech

while failing to render the consideration it agreed to provide

in exchange.” Antech & Sound’s Mem. of Law (doc. no. 95-1) 15.

But, if Antech recovers the profits it lost as a result of AHN’s

breach, that will fully compensate Antech for the consideration

AHN failed to provide. Allowing Antech to recover both its lost

profits and the laboratory-fee discount would overcompensate

Antech, allowing it to recover the full consideration that AHN

promised it, plus part of the consideration it gave AHN in

exchange for AHN’s promise to use Antech’s laboratory services

for six years. In other words, it would not be fair to make AHN

give up the discount without also relieving it of the obligation

it assumed in exchange for the discount, i.e., its agreement to

use Antech’s services, exclusively, for six years. Without that

agreement, however, Antech would have no basis for a breach-of-

contract claim against AHN. To sum up, Antech has cited no law,

and the court is aware of none, that would allow it to both: (1)

recover the consideration it gave AHN; and (2) recover for AHN’s

breach of the promise it gave in exchange for that

consideration.

14 c. Value of the Equipment

The court has rejected the only argument advanced by AHN

that would preclude Antech from recovering the cash value of the

equipment it provided to AHN. Even so, the court offers the

following observation for the guidance of the parties as this

case moves forward. If this case goes to trial, and the jury

finds that AHN is liable to Antech for breach of contract, then

the jury may need to determine the value of the Sound equipment.2

When it does so, it will have before it a variety of evidence,

including: (1) the list price of that equipment; (2) the lesser

amount that Antech actually paid Sound for the equipment;3 and

(3) the “depreciation” schedule in the Equipment Agreement,

which gave AHN, under certain circumstances, the right to

purchase the equipment for a percentage of its “original” price

that diminished over time. The point is that the jury is likely

to have before it a substantial amount of evidence from which it

could reasonably determine that, at the time of breach, the

equipment in AHN’s possession was worth considerably less than

2 As noted, the court has already ruled that nothing in the two service agreements requires Antech to take back the equipment rather than being compensated for it, in cash, and the court is aware of no legal basis that would allow a breaching party to choose the remedy available to the party who was the victim of the breach. 3 Annex 2 to the Equipment Agreement includes documentation suggesting that Sound gave Antech two separate discounts, thus lowering the cost of the equipment from $138,770 to $95,000. See AHN’s Mem. of Law, Ex. B. (doc. no. 89-3), at S00001.

15 the $139,000 Antech claims in damages resulting from AHN’s

possession of the equipment.

4. Summary

AHN’s motion for summary judgment on the limitation of

damages, document no. 89, is granted in part, but only to the

extent that Antech is barred from recovering both the pricing

consideration it gave AHN on the services it purchased before it

stopped doing business with Antech and the profits it lost

afterward. Otherwise, the motion is denied.

C. Document No. 96

In document no. 96, Antech asks the court to strike three

exhibits attached to document no. 89, the summary-judgment

motion the court disposed of in the previous section. Antech

argues that because the three exhibits are inadmissible, they

should be stricken from the summary-judgment record, but offers

no legal authority for the relief it seeks. Because the court

did not rely upon the disputed evidence in ruling on document

no. 89, Antech’s motion to strike, document no. 96, is denied as

moot.

D. Document No. 118

In document no. 118, AHN takes another shot at limiting the

kinds of damages to which Antech might be entitled if it

prevails on its counterclaims. Specifically, it asks the court

16 to rule that Antech is not entitled to recover lost profits.

Antech objects. Again, Antech’s objection is well taken.

AHN’s basic argument is this: (1) Antech’s lost profits

equal the amount AHN would have paid for services from Antech,

less the costs Antech would have incurred to provide those

services; (2) Antech’s costs are made up of both variable costs

and fixed costs; and (3) Antech’s expert opinion on lost profits

takes into account only fixed costs. As a result, AHN argues,

Antech’s expert opinion is invalid as a matter of law, which

entitles it to an order precluding Antech from recovering lost

profits. Antech raises a number of objections. To make a long

story short, nothing in AHN’s briefing and nothing said at oral

argument has persuaded the court that, as a matter of law, the

jury would be incapable of determining Antech’s lost profits.

Accordingly, AHN’s motion for summary judgment on this issue,

document no. 118, is denied.

E. Document No. 98

In document no. 98, Antech and Sound seek judgment as a

matter of law on AHN’s claims against them to the extent those

claims are based upon any alleged deficiencies in the equipment

that Antech provided to AHN. AHN objects. For the reasons that

follow, the court agrees with Antech and Sound.

17 1. Background

The Equipment Agreement provides, in pertinent part, that

“[a]s an incentive to enter into this Agreement, Antech will

provide to Animal Hospital Owner the Sound Technologies

equipment described [in] Annex 2 attached hereto, and subject to

the terms and conditions set forth in Section 3.” Antech &

Sound’s Mem. of Law, Ex. B (doc. no. 98-3), at A033947 (emphasis

in the original). Section 3, in turn, provides as follows:

Sound Technologies Equipment. As additional consideration for Animal Hospital’s agreement to use an Antech lab as its primary laboratory services provider, Antech shall provide to Animal Hospital for its use the Sound Technologies equipment identified in Annex 2 attached hereto (the “STI Equipment”); provided, however, that during the Term, Antech shall purchase from Sound Technologies, Inc., Silver Sound Assurance coverage under standard terms and conditions applicable to maintenance and warranty coverage for such STI Equipment. Antech shall retain title to the STI Equipment at all times during the Term.

Id. at A033948 (emphasis in the original). The requirement that

Antech purchase warranty coverage is a handwritten amendment to

the printed Equipment Agreement, which originally required AHN

to purchase the warranty.4 That amendment, in turn, was

negotiated by AHN. See Antech & Sound’s Reply, Ex. A, Bishop

4 Antech’s obligation to pay for the warranty is also reflected in Sound’s Order Summary, which includes as a “special instruction,” the following notation: “ANTECH is responsible for financial obligation of equipment costs and Silver Sound Assurance coverage for months 13-60.” Antech & Sound’s Mem. of Law, Ex. B (doc. no. 98-3), at A033960.

18 Dep. (doc. no. 113-1) 84:9-13, 122:7-123:15, June 27, 2013.5

While section 3 of the Equipment Agreement was amended to shift

the responsibility for paying for the warranty to Antech, it was

not amended to require the warranty Antech purchased to exceed

“standard terms and conditions.”

Annex 2 to the Equipment Agreement provides, in pertinent

part:

The laboratory services agreement will include [a] DR system installed in each [of] your hospitals in exchange for your commitment to utilize [the] ANTECH Diagnostics Reference Library. . . . You would own the systems free and clear after 5 years.

Antech & Sound’s Mem. of Law , Ex. B (doc. no. 98-3), at

A033951. Without going into undue technical detail, the STI

Equipment provided by Antech consisted of: (1) an x-ray machine

(with a list price of $79,000); (2) an associated workstation

(with a list price of $8,070); (3) two additional free-standing

workstations (each with a list price of $4,500; and (4) a server

(with a list price of $19,850). The specifications for the

workstations indicated that each of them came loaded with the

Windows XP operating system and a license to run certain STI

5 In support of the proposition that “AHN did not negotiate the terms of . . . either of the Services Agreements,” AHN’s Mem. of Law (doc. no. 103-1) 5, AHN cites deposition testimony from AHN employee Donna Cole in which she agreed that she was “the lead negotiator” for AHN in its dealings with Antech, id., Ex. C, Cole Dep. (doc. no. 103-7) 88:2, Mar. 28, 2013, and that, with regard to various terms in the service agreements, “Antech was offering and we were counter-offering,” id. at 89:8-10.

19 software known as VetPACS. More specifically, the order summary

from Sound indicates that it provided AHN with: (1) a “VetPACS

DICOM Digital Enterprise License,” id. at A033954, (with a list

price of $10,000); and (2) a “VetPACS OrthoPlan Software

License,” id., (with a list price of $5,000).

The warranty mentioned in Section 3 of the Equipment

Agreement was memorialized in a Warranty Agreement. See Antech

& Sound’s Mem. of Law, Ex. B. (doc. no. 98-3), at S00005-S00011.

The warranty had an initial term of one year, which was included

with the purchase of the equipment. See id. at S00005. The

Warranty Agreement also provided for the purchase of two-year

renewal terms, at a cost of $2,500 per year. See id. Antech

purchased a two-year renewal term at the same time it purchased

the equipment. See id.

With regard to the scope of its coverage, Section 11 of the

Warranty Agreement provides, in pertinent part:

STI warrants that the Covered Products and each Work Station will (1) be free from defects in material, workmanship, and title, and (2) conform to our published product specifications in effect on the date of order of the products[.] . . . STI may, in its sole discretion, repair and/or replace such stations during the warranty period. . . . This warranty is renewable . . .; provided, however, that with respect to each Work Station, the maximum term of the warranty is ONE (1) YEAR, and such warranty is not and may not be included in any Renewal Term.

Antech & Sound’s Mem. of Law, Ex. B (doc. no. 98-3), at S00008.

While Section 11 excludes workstations from any renewal term,

20 the executive summary of the Warranty Agreement provides an

exception to the exclusion, and allows for renewal of the

warranty on the workstation associated with the x-ray machine.

See id. at S00005.

Section 8 of the Warranty Agreement, in turn, describes

several elements of the STI Equipment that were not warranted:

No guarantee or commitment as to the type of products, functionality, enhancements, additions, usability or uptime with respect to the Software is implied or expressed by STI.

a. So long as Customer remains in good standing under the Sound Assurance program . . . patches, fixes and minor enhancements to VetPACS software will be provided to Customer free of charge.

c. Nothing in this Agreement shall obligate STI to develop, create, test, release, support or provide for use, or sell any new software, software patches, or software functionality (“Software Enhancements”). Customer has no implied nor specific right, to receive or demand any Software Enhancements.

Antech & Sound’s Mem. of Law, Ex. B (doc. no. 98-3), at S00007.

The Warranty Agreement also includes the following

provision regarding limitation of liability:

IN NO EVENT, WHETHER AS A RESULT OF BREACH OF CONTRACT, WARRANTY, TORT, STRICT LIABILITY, STATUTE OR OTHERWISE, SHALL EITHER PARTY BE LIABLE TO THE OTHER FOR ANY SPECIAL, INDIRECT, INCIDENTAL OR CONSEQUENTIAL, PUNITIVE OR EXEMPLARY DAMAGES RELATED TO THIS AGREEMENT (INCLUDING, BUT NOT LIMITED TO, DAMAGES FOR LOST BUSINESS PROFITS, LOSS OF DATA, INTERRUPTION IN USE OF EQUIPMENT OR UNAVAILABILITY OF

21 DATA), INCLUDING CLAIMS OF ANY THIRD PARTY. STI’S ENTIRE LIABILITY AND CUSTOMER’S EXCLUSIVE REMEDY SHALL BE FOR STI TO REPERFORM SERVICES WITHIN A REASONABLE TIME FRAME; PROVIDED, THAT IN THE EVENT STI IS UNABLE TO CORRECT ANY BREACH OR DEFAULT OF THIS AGREEMENT, STI MAY ELECT TO REFUND TO CUSTOMER AN AMOUNT EQUAL TO THE ANNUAL FEE FOR A RENEWAL TERM (REGARDLESS OF WHETHER SUCH BREACH OR DEFAULT OCCURS DURING THE INTIAL TERM OR DURING A RENEWAL TERM) IN FULL SATISFACTION OF STI’S OBLIGATIONS UNDER THIS AGREEMENT. SUCH REPERFORMANCE OR REFUND SHALL CONSTITUTE STI’S ENTIRE LIABILITY AND CUSTOMER’S EXCLUSIVE REMEDY WITH RESPECT FOR SUCH DEFAULT OR BREACH.

Id. at S00008-09.

AHN received and began using the STI Equipment in the late

summer of 2008. It used the equipment, without incident, until

February of 2011. At that point, AHN’s information technology

consultant began upgrading AHN’s computer system to run the

Windows 7 operating system. Among other things, the consultant

attempted to run VetPACS on a computer on which Windows 7 had

been installed, but was unable to do so. Then, Sound confirmed

that: (1) VetPACS ran on Windows XP, the operating system that

Sound installed on the three workstations that Antech provided

to AHN, but did not run on Windows 7; and (2) it had replaced

VetPACS with a new product, called “eSeries,” and stopped

developing VetPACS.

2. Discussion

All three of AHN’s claims against Antech and all three of

its claims against Sound are based, in part, on some version of

an allegation that the defendant “provid[ed] an X-Ray System

22 that became obsolete,” Am. Compl. (doc. no. 17) ¶ 103, and was

“non-responsive[] in dealing with . . . the obsolete X-Ray

System,” id. AHN defends against Antech’s three counterclaims

on similar grounds. The obsolescence to which AHN refers is the

incompatibility of Sound’s VetPACS software with the Windows 7

operating system to which AHN upgraded. Here is the crux of

AHN’s position:

At the time AHN entered into the Equipment Service Agreement, it used workstations that ran on versions of Microsoft Windows older than Windows 7. Given the history of Microsoft’s releases of Windows software, there was no question that new versions of Microsoft Windows would be released during the six-year term of the Agreement. Therefore, it was reasonable for AHN, Antech, and [Sound] to expect that Vet-PACS should function with future versions of Windows, including Windows 7 and any other versions of Windows that AHN would install in its workstations.

Antech & Sound’s Mem. of Law (doc. no. 98-1) 7 (quoting AHN’s

Supp. Answers to Antech’s First Set of Interrogs. (Answer No.

24) 19 (emphasis added by Antech & Sound). In other words, AHN

appears to argue that for the STI Equipment to have been free

from defects, it was necessary for VetPACS to have anticipated

and accommodated the next six years’ worth of Microsoft’s

development of the Windows operating system. To borrow a phrase

from Judge Siggins of the California Court of Appeals, “[t]o

state [AHN’s] premise is to refute [its] logic.” Samaniego v.

Empire Today LLC, 140 Cal. Rptr. 3d 492, 500 (Cal. Ct. App.

2012).

23 Defendants argue that all of AHN’s claims and defenses

based upon the alleged obsolescence of the STI Equipment fail as

a matter of law because: (1) Antech’s only obligation under the

Equipment Agreement was to purchase the equipment described

therein from Sound and deliver it to AHN, which it did; (2) in

the Warranty Agreement, Sound expressly disclaimed any

obligation to undertake any additional development of VetPACS;

(3) the Warranty Agreement precludes AHN from recovering

damages; and (4) AHN breached the Warranty Agreement by trying

to combine VetPACS and Windows 7. AHN contends that: (1) Antech

had an obligation to deliver equipment that would function for

the six-year term of the Equipment Agreement; (2) the Warranty

Agreement is unenforceable because it is both procedurally and

substantively unconscionable and because it fails of its

essential purpose; (3) even if the Warranty Agreement is

enforceable, it does not preclude the claims asserted against

Sound in this case; (4) it, i.e., AHN, did not breach the

Warranty Agreement; and (5) resolution of the issues raised in

defendants’ motion requires expert testimony to assist the trier

of fact in understanding various terms used in the Warranty

Agreement. In the discussion that follows, the court considers

each defendant separately.

24 a. Antech

Antech’s obligations to AHN were spelled out in the Loan

Agreement and the Equipment Agreement. In the Equipment

Agreement, Antech promised to provide AHN with certain pieces of

hardware and software. It is undisputed that Antech provided

exactly the hardware and software specified in the Equipment

Agreement. In an attempt to establish that Antech provided the

equipment it promised to provide yet breached its agreement with

AHN, AHN invokes the implied warranty of merchantability. AHN’s

reliance upon that warranty is unavailing.

Presuming, for the sake of argument, that it is even proper

to consider an argument based upon a legal theory inserted into

the case at this late date, the implied warranty of

merchantability is inapplicable to the facts of this case

because: (1) Antech was not a merchant; (2) it did not sell any

goods to AHN; and (3) at the time of sale, the goods were

merchantable.

In an order on which AHN relies, Judge Fogel explained that

“[t]here exists in every contract for the sale of goods by a

merchant a warranty that the goods shall be merchantable.” Kent

v. Hewlett-Packard Co., No. 09-5341 JF (PVT), 2010 WL 2681767,

at *4 (N.D. Cal. July 6, 2010) (quoting Atkinson v. Elk Corp. of

Tex., 48 Cal. Rptr. 3d 247, 257 (Cal. Ct. App. 2006)). The

“merchant” to which Judge Fogel refers is “a merchant with

25 respect to goods of that kind,” Cal. Com. Code § 2314(1). Under

California’s enactment of the Uniform Commercial Code (“UCC”),

Antech does not appear to be a merchant of x-ray equipment. See

Cal. Com. Code § 2104(1). Beyond that, the Equipment Agreement

was not a “contract for the sale of goods,” given that “[a]

‘sale’ consists in the passing of title from the seller to the

buyer for a price,” Cal. Com. Code § 2106(1), and the Equipment

Agreement provided that “Antech [would] retain title to the STI

Equipment at all times during the Term [of the agreement],”

Antech & Sound’s Mem. of Law, Ex. B (doc. no. 98-3), at A033948.

Moreover, merchantability is measured at the time of

delivery. See Mexia v. Rinker Boat Co., 95 Cal. Rptr. 3d 285,

290 (Cal. Ct. App. 2009). Here, it is undisputed that the STI

Equipment, including VetPACS, functioned as AHN believed it was

supposed to function for the first two and one half years that

AHN used it. See Bishop Dep. 214:14-18. Necessarily, then, the

STI Equipment, including VetPACS, was merchantable at the time

of its delivery. To be sure, the California legislature also

enacted the Song-Beverly Act, which includes provisions more

favorable to consumers than those of the California version of

the UCC, see Mexia, 95 Cal. Rptr. 3d at 290, but even under the

pro-consumer Song-Beverly Act, the implied warranty of

merchantability has a duration of “no[] more than one year

following the sale of new consumer goods,” Cal. Com. Code. §

26 1791.1(c). And, again, by AHN’s own admission, VetPACS worked

just fine for more than two years after AHN took delivery of the

STI Equipment.

Turning from the law to the facts of this case, the court

offers the following observations. AHN argues that the implied

warranty of merchantability required Antech to provide it with

equipment that included software that would be compatible with

the next six years’ worth of Windows operating systems. But,

AHN also says that it, Antech, and Sound all knew that Windows

XP was very likely to be replaced during the term of the

Equipment Agreement. See Antech & Sound’s Mem. of Law (doc. no.

98-1) 7. Thus, while AHN concedes that it recognized the threat

of obsolescence, and had an “astute negotiator” working on the

Equipment Agreement, see Bishop Dep. 84:10, it agreed to accept

workstations that ran Windows XP and agreed to accept “warranty

coverage under standard terms and conditions,” Antech & Sound’s

Mem. of Law, Ex. B (doc. no. 98-3), at A033948. Given AHN’s

admitted knowledge of the potentially limited shelf-life of

Windows XP, and its admitted and demonstrated ability to

negotiate the terms of the Equipment Agreement, it hardly seems

right to hold Antech liable for the consequences of a situation

that AHN itself anticipated and against which it could have

attempted to protect itself.

27 To conclude, because the California version of the UCC does

not apply to Antech’s provision of equipment to AHN, and because

VetPACS was merchantable for more than two years after AHN

acquired it, AHN’s reliance upon the implied warranty of

merchantability does it no good. Accordingly, as to any claim

or defense asserted by AHN that relies upon the implied warranty

of merchantability, Antech is entitled to judgment as a matter

of law.

b. Sound

In Count VIII of its amended complaint, AHN claims that

Sound breached the Warranty Agreement by “providing an X-Ray

System that became obsolete and [by] its non-responsiveness in

dealing with the obsolete X-Ray System.”6 Am. Compl. ¶ 142.

While AHN identifies the conduct on which its claim is based, it

does not identify the specific contractual obligation that Sound

supposedly failed to fulfill, nor does it explain how Sound’s

conduct constituted a breach of the Warranty Agreement. Closer

scrutiny is required.

6 Sound does not defend against AHN’s breach-of-contract claim on grounds that AHN was not a party to the Warranty Agreement, and the court assumes that AHN has standing, as a third-party beneficiary, to sue Sound for breaching it. See B Spinks v. Equity Resid. Briarwood Apts., 90 Cal. Rptr. 3d 453, 468 (Cal. Ct. App. 2009) (“California law permits third party beneficiaries to enforce the terms of a contract made for their benefit.”) (quoting Principal Mut. Life Ins. Co. v. Vars, Pave, McCord & Freedman, 77 Cal. Rptr. 2d 479, 489 (Cal. Ct. App. 1998)); see also Cal. Civ. Code § 1559 (“A contract, made expressly for the benefit of a third person, may be enforced by him at any time before the parties thereto rescind it.”).

28 In the Equipment Agreement, Sound obligated itself to

provide covered products and workstations that were “free from

defects in material, workmanship, and title,” and that

“conform[ed] to [its] published product specifications.” Antech

& Sound’s Mem. of Law, Ex. B (doc. no. 98-3), at S00008. Here,

AHN says nothing about defects in title or a failure to conform

to specifications, so its claim must be that some product or

workstation it received from Sound had either a defect in

materials or a defect in workmanship.

AHN alleges a defect in the VetPACS software that was

installed on the workstation associated with the x-ray machine,

which is the only workstation that was still under warranty in

February of 2011. That defect is the inability of VetPACS to

run on Windows 7. The problem is that such a defect does not

appear to be a defect in either materials or workmanship.

Rather, as Judge Wigenton points out,

[a] defect in the programming of . . . software is not akin to a defect in materials or substandard workmanship . . . . See Brothers v. Hewlett Packard Co., [No. C-06-02254 RMW,] 2007 WL 485979, at *4 (N. D. Cal. Feb. 12, 2007) (“Unlike defects in materials or workmanship, a design defect is manufactured in accordance with the product’s intended specifica- tions.”) (applying California law) (Emphasis added); see also Cooper [v. Samsung Elecs. Am., Inc.], 374 F. App’x [250, 253 (3d Cir. 2010)] (concluding that breach of express warranty claim failed because plaintiff’s allegation that “the design deviated from Samsung’s advertisements and packaging” was not a “manufacturing defect” that would be covered by this warranty).

29 Hughes v. Panasonic Consumer Elecs. Co., Civ. Acton No. 10-846

(SDW), 2011 WL 2976839, at *19 (D.N.J. July 21, 2011).

If indeed the defect on which AHN bases its claim is a

design defect rather than a manufacturing defect, then Sound

would be entitled to judgment as a matter of law that it did not

breach the Warranty Agreement by providing AHN with equipment

and/or a workstation that included software that was not

compatible with Windows 7. In the face of this issue, the court

could simply assume, as defendants appear to, that Count VIII is

based upon a defect in materials or workmanship and then wade

into the complicated warranty-based defenses on which Sound

relies. Or, the court could request further briefing, pursuant

to Rule 56(f)(2) of the Federal Rules of Civil Procedure, on the

question of whether, in the first instance, the defects alleged

by AHN could possibly support a claim for breach of the warranty

against defects in materials and workmanship expressed in

Section 11 of the Warranty Agreement. In the interest of

judicial economy, i.e., the avoidance of issues requiring the

application of unfamiliar law and issues that that may not need

to be decided, the court choses the second course of action.

Accordingly, AHN is ordered to show cause why Sound should

not be granted Summary Judgment on Counts VIII and IX of AHN’s

amended complaint. Similarly, given the undisputed fact that

Antech rather than AHN bore the cost of the warranty, and AHN’s

30 allegation in its amended complaint that it paid for the

warranty coverage, AHN is directed to show cause why Sound

should not be granted summary judgment on the claim for unjust

enrichment stated in Count XIII.

Conclusion

For the reasons described above: (1) AHN’s first motion for

partial summary judgment on the issue of damages, document no.

89 is granted, but only to the extent that Antech is barred from

recovering both the pricing consideration it gave AHN on the

services it purchased before it stopped doing business with

Antech and the profits it lost afterward; (2) Antech’s motion to

strike, document no. 96, is denied as moot; (3) AHN’s second

motion for partial summary judgment on the issue of damages,

document no. 118, is denied; and (4) defendants’ motion for

partial summary judgment, document no. 98, is granted as to

Antech, while the court’s decision as to Sound is deferred,

pending receipt of the show-cause briefing the court has

requested. With regard to timing, AHN has ten days from the

date of this order to respond, and Sound has ten days to respond

to AHN’s briefing.

SO ORDERED.

__________________________ Landya McCafferty United States District Judge May 15, 2014

31 cc: Phillip A. Baker, Esq. Julie B. Brennan, Esq. Adam J. Chandler, Esq. Robert M. Fojo, Esq. Brian H. Lamkin, Esq. Christopher T. Vrountas, Esq.