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WABASH, INC. v. AVNET

May 26, 1981

WABASH, INC., ET AL., PLAINTIFFS AND COUNTERDEFENDANTS,
v.
AVNET, INC., DEFENDANT AND COUNTERPLAINTIFF.



The opinion of the court was delivered by: Shadur, District Judge.

MEMORANDUM OPINION AND ORDER

Plaintiffs Wabash, Inc. ("Wabash") and International Products & Manufacturing, Inc. ("IPM") sue Avnet, Inc. ("Avnet") for breach of warranty, antitrust violations, trademark infringement, contract reformation and unfair competition. Avnet has moved to dismiss Counts IV, V and VI of the Amended Complaint (the "Complaint").*fn1 For the reasons stated in this memorandum opinion and order that motion is granted as to Count IV and denied as to Counts V and VI.

Count IV

On October 8, 1976 Avnet entered into a written contract (the "Draft Agreement") to sell to Wabash substantially all the property, assets, goodwill and business of Avnet's subsidiary IPM. Its sale was pursuant to a Federal Trade Commission ("FTC") ruling (upheld by our Court of Appeals) requiring Avnet's divestiture of IPM.

Initially the parties contemplated a purchase price in the range of $30 million but intended that a portion of the price be contingent on IPM's future success or failure. For that reason the Draft Agreement provided for a guaranteed payment of $22 million plus six yearly payments, each in an amount equal to the greater of (1) $400,000 and (2) 10% of IPM's sales for the applicable fiscal year in excess of $33 million.*fn2 In no event would the aggregate of the deferred payments exceed $8 million. Both sides anticipated an approximately 10% annual rate of growth in IPM's sales, a rate that would have produced the full $8 million in deferred payments.

FTC refused to approve the Draft Agreement because it considered that linking the purchase price to IPM's sales might discourage Wabash from maximizing such sales (thus creating an incentive for anticompetitive activity). Although FTC recommended establishment of a fixed rather than a contingent price, the parties sought an alternative formula that would preserve their original intention while meeting FTC's concerns about manipulation. After investigating and rejecting a number of government indices they agreed to use the Department of Commerce's Gross National Product ("GNP"). They determined that GNP reflected general economic conditions and had in the past reflected the growth of IPM's sales. Both parties believed GNP was an accurate economic indicator, so that an increasing GNP reflected general economic growth.

On January 13, 1977 the parties entered into their ultimate agreement (the "Agreement"). Its deferred payment provision retained the $8 million maximum and the six year term, but each annual payment was revised to the greater of (1) $400,000 and (2) $5,000 for each 0.1% of the percentage increase in GNP over GNP for the year ending December 1, 1976. After FTC approved the Agreement, the IPM sale was closed February 13, 1977.

Due to "totally unpredictable and unforeseeable" economic factors ("circumstances of the inflationary-recessionary cycle"), GNP continued to rise in 1978 while sales of most U.S. companies, including IPM, began to level off or drop. In 1979 IPM had a negligible increase in sales while GNP increased over 14%. In 1980 IPM's sales fell almost 13% while GNP rose 15%. Plaintiffs estimate that if the disparity continues they will pay the entire maximum $8 million under the Agreement in about five years, while under the Draft Agreement formula rejected by the FTC they would have paid less than $5 million in deferred payments over the entire six-year term. Plaintiffs demand reformation of the Agreement "to express the true intent of the parties."

Plaintiffs predicate their request for reformation on a claimed mutual mistake of fact. On the Complaint's allegations the parties intended to draft an agreement under which the purchase price would reflect the progress of economic conditions in general. Plaintiffs contend that the subsequent failure of GNP to reflect the lack of growth in the American economy demonstrates a mutual mistake of fact in the negotiation of the Agreement.

This case does not pose the classical mutual mistake situation in which courts traditionally grant contract reformation. There parties have typically negotiated a contract in reliance on a mistaken perception as to an existing fact.*fn3

Here however the parties examined all the available data and were satisfied, at the time of the Agreement, that the GNP formula would work. As a general rule courts (and New York courts are no exception) will not reform a contract that contains a variable term simply because events do not unfold as expected. Thus in George Backer Management v. Acme Quilting Co., 46 N.Y.2d 211, 413 N.Y.S.2d 135, 385 N.E.2d 1062 (1978) the parties linked lease payments to wage rates to be established by the Realty Advisory Board. Reformation was denied even though increases in the wage rates far exceeded what plaintiff contended were the parties' expectations. As the Court put it in granting summary judgment (46 N.Y.2d at 219, 413 N.Y.S.2d at 139, 385 N.E.2d at 1066):

  Reformation is not granted for the purpose of
  alleviating a hard or oppressive bargain, but
  rather to restate the intended terms of an
  agreement when the writing that memorializes that
  ...

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