Coburn Supply Co v. Kohler Co

• Court: Court of Appeals for the Fifth Circuit
• Decided: August 6, 2003
• Docket: 02-41317
• Status: Published

Opinion

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.”

3 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

4 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.

5 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

7 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

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).

9 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).

11 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

12 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.