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ZENITH ELECTRONICS CORP. v. WH-TV BROADCASTING CORP.

March 25, 2003

ZENITH ELECTRONICS CORPORATION, PLAINTIFF/COUNTER-DEFENDANT,
v.
WH-TV BROADCASTING CORPORATION, DEFENDANT/COUNTER-PLAINTIFF.



The opinion of the court was delivered by: George W. Lindberg, Senior United States District Judge

MEMORANDUM OPINION AND ORDER

Plaintiff Zenith Electronics Corporation ("Zenith") brought this diversity action against defendant WH-TV Broadcasting Corporation ("WH-TV"), alleging a state law claim of breach of contract (Count I), and seeking a declaratory judgment as to the terms and conditions of the contract between WH-TV and Zenith (Count II). WH-TV counterclaimed, alleging fraud in the inducement (Count I) and breach of contract (Count II). Before the court is Zenith's motion for summary judgment as to Count I of WH-TV's Third Amended Counterclaim, and WH-TV's claim for lost profits damages. Also before the court is WH-TV's motion for summary judgment with respect to liability on Count II of its Third Amended Counterclaim, and as to Count II of Zenith's First Amended Complaint. For the reasons stated below, Zenith's motion is granted as to Count I of WH-TV's Third Amended Counterclaim, and denied as to WH-TV's claim for lost profits. WH-TV's motion for summary judgment is denied. However, pursuant to Federal Rule of Civil Procedure 56(d), the court specifies that certain facts relating to WH-TV's breach of contract claim and Zenith's declaratory judgment count are not in controversy and that partial summary adjudication short of judgment is appropriate relating to those facts.

I. Factual Background *fn1

WH-TV has broadcast wireless cable television service in Puerto Rico since 1987. By 1998, WH-TV had over 7,000 subscribers in the greater-San Juan area. In 1998, WH-TV decided to convert its analog system to a digital system, which would allow it to offer more channels to its customers. WH-TV believed it could increase its market share by being the first to offer digital programming to the market.

A digital wireless cable system has three components. First, "head-end" equipment receives signals from satellites, fiber optic cable, and conventionally-broadcast television stations, encrypts the information, converts it to a different frequency, and transmits it to a microwave tower for transmission into subscribers' homes. Second, a conditional access system encrypts the digital signal to prevent unauthorized access. Third, a set-top box ("STB"), which is connected to the customer's television, allows the television to receive and decode various channels. The STB also allows subscribers to access features such as electronic program guides, secondary audio programming, and closed captioning.

In 1998, WH-TV considered purchasing the STBs for its digital service from various companies, including Zenith. On August 28, 1998, WH-TV sent Zenith a request for a proposal for STBs. The request specified that the "digital format will be DVB." The term "DVB" refers to the digital video broadcasting standards or specifications established by the Digital Video Broadcasting Project, a European trade association. According to WH-TV, when the head-end and STBs are configured to meet DVB standards, the system may use STBs made by different manufacturers; although Zenith disagrees that STBs could operate together in such a system without some modifications, it concedes that DVB standards are used for the purpose of minimizing such modifications. WH-TV states that it sought DVB-compliant equipment to allow it to use more than one source for the STBs, and thus obtain STBs on a competitive basis.

In September 1998, Zenith responded to WH-TV's request with a proposal for selling STBs to WH-TV. The proposal represented that its STBs were fully capable of meeting WH-TV's requirements. In addition, it represented that the STBs' conditional access subsystem, decoding and descrambling module, and service information table management were DVB compliant. Finally, the proposal guaranteed that the STBs would function as described in the proposal, and included a one-year warranty with a guaranty of a mean time between failures of 100,000 hours (the equivalent of more than ten years).

According to WH-TV, during the time it was negotiating the purchase of STBs from Zenith, and before it ordered any STBs, Zenith also promised to provide an electronic program guide with enhanced features, including a seven-day look-ahead feature. Zenith denies ever promising to deliver a seven-day look-ahead feature, and denies making a commitment to deliver an enhanced electronic program guide until after WH-TV had ordered STBs from Zenith.

Between May 3, 1999 and December 23, 1999, WH-TV sent Zenith four purchase orders for STBs. In response to these purchase orders, Zenith delivered to WH-TV a total of 8,404 STBs between either May or June 1999 and July 10, 2000, in fifteen shipments. WH-TV paid more than $2.6 million for the STBs.

According to WH-TV, the STBs did not work properly from the outset, and lacked certain functions, such as an enhanced electronic program guide with a seven-day look-ahead feature. Zenith made efforts to fix some of the problems. From the time of the first deliveries of the STBs, through August 2000, Zenith delivered eight operating system upgrades, which WH-TV contends were an attempt to redress the STBs' problems. Zenith never provided an enhanced electronic program guide with a seven-day look-ahead feature. Meanwhile, on July 30, 1999, DirecTV, a large digital broadcasting service provider, entered the market in Puerto Rico.

In December 1999, WH-TV began contacting other STB suppliers and testing other vendors' STBs, with the intention of obtaining STBs from a supplier other than Zenith. One of these suppliers advised WH-TV in late December 1999 that Zenith's STD were not DVB compliant. As a result, according to WH-TV, it was unable to purchase STBs from other vendors for operation in WH-TV's system alongside the Zenith STBs that were already deployed in subscribers' homes. According to WH-TV, because of defects in Zenith's STBs and WH-TV's inability to obtain and use working STBs from another vendor, it suspended or slowed its efforts to convert its existing subscriber base to digital service, and delayed or cancelled its sales and marketing efforts to attract new subscribers.

Zenith and WH-TV discussed making a transition to DVB compliance. In a July 14, 2000 letter, the president of Zenith's division responsible for making the STBs wrote to a senior vice president at Nagra, the company that supplied the conditional access system for the STBs, that "[i]t is acknowledged that it is in the best interests of the business to upgrade the current software to a fully compliant DVB version, for existing and future boxes."

In August 2000, Zenith sold the assets of its STB division to General Instrument. After the sale, General Insturment's parent company, Motorola, prepared a Preliminary DVB Migration Plan for the Zenith STBs. That plan, like a February 2001 migration plan prepared by Nagra, recommended a "multicasting" solution that would allow the Zenith STBs to be used with STBs made by other vendors. Under the plan, the head-end would broadcast two signals simultaneously: one which could be read by the Zenith STBs, and the other which could be read by other vendors' STBs.

The modifications made under the multicast plan were completed in December 2001, allowing WH-TV to use STD from other vendors. According to WH-TV, however, to date the STD still are not fully DVB compliant. WH-TV maintains that its window of opportunity to entice new subscribers to its digital service had closed by the time its system was modified to allow it to use other vendors' STBs.

II. Analysis

Summary judgment shall be granted "if the pleadings, depositions, answers to interrogatories, and admissions on file, together with [any] affidavits, show that there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law." Fed.R.Civ.P. 56(c). The court must draw all reasonable inferences in favor of the nonmoving party. Reeves v. Sanderson Plumbing Prods., Inc., 530 U.S. 133, 150 (2000). The moving party bears the initial burden of demonstrating that no material issue exists for trial. Celotex Corp. v. Catrett, 477 U.S. 317, 323 (1986). Once the moving party has properly supported its motion, the nonmoving party must offer specific facts demonstrating that a material dispute exists, and must present more than a scintilla of evidence to support its position. Anderson v. Liberty Lobby. Inc., 477 U.S. 242, 251-52 (1986).

A. WH-TV's Breach of Contract Counterclaim

WH-TV seeks summary judgment as to liability only, on its counterclaim that Zenith breached its contract with WH-TV. According to WH-TV, Zenith breached its contract by providing STD that were not DVB compliant, that were not stable and did not function as promised, and that did not contain an enhanced programming guide with a seven-day look-ahead capability. Zenith does not dispute that it had a contract with WH-TV to supply STD, or that WH-TV paid for the STBs. Rather, Zenith contends that its STBs were DVB compliant, that they were not defective, and ...


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