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Cloud Corporation v. Hasbro

December 26, 2002

CLOUD CORPORATION, PLAINTIFF-APPELLANT,
v.
HASBRO, INC., DEFENDANT-APPELLEE.



Appeal from the United States District Court for the Northern District of Illinois, Eastern Division. No. 97 C 3457--Rebecca R. Pallmeyer, Judge.

Before Posner, Rovner, and Williams, Circuit Judges.

The opinion of the court was delivered by: Posner, Circuit Judge

ARGUED NOVEMBER 8, 2002

"Wonder World Aquarium" is a toy that Hasbro, Inc., the well-known designer and marketer of toys, sold for a brief period in the mid-1990s. The toy comes as a package that contains (we simplify slightly) the aquarium itself, some plastic fish, and, depending on the size of the aquarium (for this varies), large or small packets of a powder that when dissolved in distilled water forms a transparent gelatinous filling for the aquarium. The gel simulates water, and the plastic fish can be inserted into it with tweezers to create the illusion of a real fish tank with living, though curiously inert, fish.

"Pretend blood," included in some of the packages, can be added for even greater verisimilitude. The consumer can choose among versions of Wonder World Aquarium that range from "My Pretty Mermaid" to "Piranha Attack"--the latter a scenario in which the pretend blood is doubtless a mandatory rather than optional ingredient.

Hasbro contracted out the manufacture of this remarkable product. Southern Clay Products Company was to sell and ship Laponite HB, a patented synthetic clay, to Cloud Corporation, which was to mix the Laponite with a preservative according to a formula supplied by Hasbro, pack the mixture in the packets that we mentioned, and ship them to affiliates of Hasbro in East Asia. The affiliates would prepare and package the final product--that is, the aquarium, the packet of gel, and the plastic fish (and "pretend blood")--and ship it back to Hasbro in the United States for distribution to retailers.

The project was in operation by the middle of 1995. Hasbro would from time to time issue purchase orders for a specified number of large and small packets to Cloud, which would in turn order the quantity of Laponite from Southern Clay Products that it needed in order to manufacture the specified number of packets. The required quantity of Laponite depended not only on the number of large and small packets ordered by Hasbro but also on the formula that Hasbro supplied to Cloud specifying the proportion of Laponite in each packet. The formula was changed frequently. The less Laponite per packet specified in the formula, the more packets could be manufactured for a given quantity of the ingredient.

Early in 1997 Hasbro discovered that its East Asian affiliates, the assemblers of the final package, had more than enough powder on hand to supply Hasbro's needs, which were diminishing, no doubt because Wonder World Aquarium was losing market appeal. Mistakenly believing that Hasbro's market was expanding rather than contracting, Cloud had manufactured a great many packets of powder in advance of receiving formal purchase orders for them from Hasbro. Hasbro refused to accept delivery of these packets or to pay for them. Contending that this refusal was a breach of contract, Cloud sued Hasbro in federal district court in Chicago, basing jurisdiction on diversity of citizenship and seeking more than $600,000 in damages based mainly on the price of the packets that it had manufactured and not delivered to Hasbro and now was stuck with--for the packets, being usable only in Wonder World Aquaria, had no resale value. After a bench trial, the district judge ruled in favor of Hasbro.

Cloud does not quarrel with the district judge's findings of fact, but only with her legal conclusions. The governing law is the Uniform Commercial Code as interpreted in Illinois.

The original understanding between Hasbro and Cloud regarding Cloud's role in the Wonder World Aquarium project either was not a contract or was not broken-probably the former, as the parties had not agreed on the price, quantity, delivery dates, or composition of the packets. These essential terms were set forth in the purchase orders that Hasbro sent Cloud, confirming discussions between employees of Cloud and Kathy Esposito, Hasbro's employee in charge of purchasing inputs for the company's foreign affiliates. Upon receipt of a purchase order, Cloud would send Hasbro an order acknowledgment and would order from Southern Clay Products the quantity of Laponite required to fill the purchase order.

In October 1995, which is to say a few months after the launch of Wonder World Aquarium, Hasbro sent a letter to all its suppliers, including Cloud, that contained a "terms and conditions" form to govern future purchase orders. One of the terms was that a supplier could not deviate from a purchase order without Hasbro's written consent. As requested, Cloud signed the form and returned it to Hasbro. Nevertheless, to make assurance doubly sure, every time Hasbro sent a purchase order to Cloud it would include an acknowledgment form for Cloud to sign that contained the same terms and conditions that were in the October letter. Cloud did not sign any of these acknowledgment forms. The order acknowledgments that it sent Hasbro in response to Hasbro's purchase orders contained on the back of each acknowledgment Cloud's own set of terms and conditions--and the provision in Hasbro's letter and forms requiring Hasbro's written consent to any modification of the purchase order was not among them. There was a space for Hasbro to sign Cloud's acknowledgment form but it never did so. Neither party complained about the other's failure to sign the tendered forms.

Hasbro placed its last purchase orders with Cloud in February and April 1996. The orders for February specified 2.3 million small packets and 3.2 million large ones. For April the numbers were 1.5 and 1.4 million. Hasbro notified Cloud of the formula that it was to use in making the packets and Cloud ordered Laponite from Southern Clay Products accordingly.

Now as it happened Southern Clay Products was having trouble delivering the Laponite in time to enable Cloud to meet its own delivery schedule. In June 1996, amidst complaints from Hasbro's East Asian affiliates that they were running out of powder, and concerned about the lag in Laponite deliveries, Hasbro notified Cloud that it was to use a new formula in manufacturing the powder, a formula that required so much less Laponite that the same quantity would enable Cloud to produce a third again as many packets. Cloud determined that by using the new formula it could produce from the quantity of Laponite that it had on hand 4.5 million small and 5 million large packets, compared to the 3.8 and 3.9 million called for by the February and April orders but not yet delivered. Cloud had delivered 700,000 of the large packets ordered in February and April; that is why it had 7.7 million packets still to deliver under those orders rather than 8.4 million, the total number of packets ordered (2.3 3.2 1.5 .4 = 8.4).

Although it had received no additional purchase orders, Cloud sent Hasbro an order acknowledgment for 4.5 million small and 5 million large packets with a delivery date similar to that for the April order, but at a lower price per packet, reflecting the smaller quantity ...


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