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Graphic Sales Inc. v. Sperry Univac Division

decided: July 21, 1987.


Appeal from the United States District Court for the Northern District of Illinois, Eastern Division, No. 81 C 3185, Marvin E. Aspen, Judge.

Author: Ripple

Before POSNER, RIPPLE, Circuit Judges, and CAMPBELL, Senior District Judge.*fn*

RIPPLE, Circuit Judge. In this diversity action, Graphic Sales, Inc. (Graphic) sought recission of lease agreements and damages against the Sperry Univac Division of the Sperry Corporation (Sperry). Graphic alleged fraud in the inducement, common law fraud and violation of the Illinois Consumer Fraud and Deceptive Business Practices Act in connection with lease agreements involving computer equipment. Sperry filed a counterclaim for amounts due under the lease agreements. Following a bench trial, the district court entered judgment for Sperry in the amount of $112,549.02 along with the costs of the action. For the reasons set forth below, we affirm the judgment of the district court.



Graphic is an Illinois corporation that uses computerized phototypesetting equipment to provide graphic arts services for its customers. Sperry, a Delaware corporation, provides, by sale or lease, computer systems and support to its customers. On February 1, 1980, after having contacted numerous computer vendors during the previous year, George E. Price, Graphic's President, contacted Robert W. Johnson, a Sperry sales representative, to inquire about replacing its basic IV computer system. Mr. Price decided that, for Graphic to remain competitive in the phototypesetting business, it needed a new computer that could be linked directly to its typesetting equipment and that could provide word processing capabilities. Mr. Price was an experienced operator of computers prior to meeting with Mr. Johnson.

During the February 1 meeting, Mr. Johnson toured Graphic's facilities to observe Graphic's typesetting operation and equipment. Mr. Johnson received an overview of Graphic's computer requirements and then left a copy of the current Sperry annual report and several brochures. At their next meeting on February 4, 1980, Mr. Johnson gave Mr. Price several brochures describing Sperry equipment that he believed would perform the functions that Graphic needed. The documents included descriptions of the 90/25 and the 90/30 data processing systems as well as a description of a newspaper composition program, "Newscomp," used for production of composed material in the printing and publishing industry. Mr. Price later gave Mr. Johnson a list of hardware specifications required to allow the computer equipment to interface with Graphic's typesetting equipment. AT their next meeting, Mr. Price and Mr. Johnson discussed the price of a 90/25 computer system.

On February 12, 1980, Mr. Johnson provided Mr. Price with the names of manufacturers that made black boxes that would enable the 90/25 computer system to interface with the typesetting equipment. Mr. Price also received a copy of the proposed contracts for leasing the 90/25 system, terminals and program products for which there was a license charge. Before executing the contracts, Mr. Price submitted them to Graphic's attorney for his review and approval. On February 14, 1980, Mr. Price signed leases on behalf of Graphic for the 90/25 computer system and for application software programs, such as BEM monitor, EDT and BASIC, each with a separate monthly license charge for its use.

On February 26, 1980, Graphic leased a 90/30 computer system instead of the 90/25 system. Mr. Price decided to lease the 90/30 computer system rather than the 90/25 computer system because the 90/30 system contained an increased amount of disc memory, communication lines and disc drives. The 90/25 system could be converted into a 90/30 system with the installation of additional hardware. Both systems utilize the OS/3 operating system. The computer equipment arrived at Graphic in May 1980.

On June 20, 1980, Mr. Price wrote a complaint letter to Mr. Vennard, a Chicago branch manager for Sperry. The letter reviewed the meeting between Mr. Price and Mr. Johnson and discussed the problems Graphic had experienced with Sperry's performance. The letter specifically stated that several pieces of hardware were not functioning and that Graphic could not pay for any additional pieces of hardware or software to enable the 90/30 system to operate according to the contract specifications. Because he received no response to his first letter, Mr. Price sent a second letter on July 2 to Mr. Johnson. In this letter, Mr. Price stressed that Graphic could not afford additional equipment and attached a list of problems with Sperry's performance that remained unresolved.

On August 19, 1980, Mr. Price directed an employee to accept for Graphic a written acknowledgment hat the equipment installed by Sperry was ready for use. Defendant's Ex. 29. However in October, Graphic alleged non-performance of the contracts and consequently stopped paying rent to Sperry for the use of the leased equipment. On December 15, 1980, Mr. Price signed a "detailed implementation plan" enumerating the tasks that both Graphic and Sperry needed to accomplish in order for the computer system to function according to specifications. Several of these tasks were not scheduled to be completed until the end of January 1981 or mid-February 1981; however in January 1981, Graphic ordered Sperry off its premises. Graphic returned the computer equipment to Sperry on May 28, 1981.

The dispute in this case centers on misrepresentations Sperry allegedly made to Graphic regarding the availability of application software. Both parties agree that the lease of computer equipment involved a "bundled" product, but they disagree as to the meaning of the term "bundling." Graphic contends that Sperry's brochures indicated that application programs, such as Newscomp, were included with the 90/25 system hardware and the OS/3 operating system at no additional charge and were thus part of the bundled product.*fn1 Graphic specifically maintains that the unavailability of both the Newscomp application software and its replacement, Graphic Text Management System, "GTMS," caused it to sustain damages because, without those programs, it did not have the capacity to meet its customers' needs. Sperry claims that, in accordance with the custom and usage in the computer industry, the only software included in the bundle is the operating system and that application software is leased separately.


The District Court ...

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