Searching over 5,500,000 cases.


searching
Buy This Entire Record For $7.95

Download the entire decision to receive the complete text, official citation,
docket number, dissents and concurrences, and footnotes for this case.

Learn more about what you receive with purchase of this case.

Perfection Corp. v. Lochinvar Corp.

June 18, 2004

[5] PERFECTION CORPORATION, PLAINTIFF-APPELLEE,
v.
LOCHINVAR CORPORATION AND STATE INDUSTRIES, INC., DEFENDANT-APPELLANTS.
PERFECTION CORPORATION, PLAINTIFF-APPELLEE,
v.
AMERICAN WATER HEATER COMPANY, A.O. SMITH CORPORATION, RHEEM MANUFACTURING COMPANY AND BRADFORD WHITE CORPORATION, DEFENDANTS-APPELLANTS.



[6] Appeal from the Circuit Court of Cook County. Honorable Lester D. Foreman, Judge Presiding.

[7] The opinion of the court was delivered by: Presiding Justice Campbell

[8]  Defendants-counter claimants A.O. Smith Corporation, American Water Heater Company, Bradford White Corporation, Lochinvar Corporation, and Rheem Manufacturing Company (collectively "Tank Manufacturers"), appeal from entry of summary judgment in favor of plaintiff, Perfection Corporation (Perfection), on their claim alleging lost profits as a result of damage to their business reputations in connection with the purchase of an allegedly defective water heater component. On appeal, the Tank Manufacturers contend that: (1) the trial court misapprehended the controlling law in ruling that expert testimony was inadmissible; and (2) genuine issues of fact remain in dispute regarding alleged damage to business reputation claims. For the following reasons, we affirm the judgment of the trial court.

[9]  BACKGROUND

[10]   Defendants, Tank Manufacturers, manufacture water heaters. Plaintiff Perfection manufactures and sells a component part for water heaters called a "dip tube." The dip tubes assist the water heater in the process of heating the water by delivering the inflow of water to a greater depth within the water heater than would otherwise be achieved without the dip tube. To accomplish this function, the dip tube must be constructed of material that can function and not deteriorate in the environment of a water heater. Prior to 1993, Perfection, and one or more of the Tank Manufacturers, entered into agreements to purchase dip tubes for use with the water heaters they manufactured.

[11]   Perfection had been manufacturing and selling plastic dip tubes for approximately 40 years. From approximately 1975 through 1992, and from October 1996, to the time of this action, Perfection manufactured dip tubes out of a proprietary form of polypropylene called Himont, a form of plastic, that Perfection purchased in pre-compound pellets. During some of this time period, Perfection was the sole supplier of dip tubes to at least some of the Tank Manufacturers. Polypropylene dip tubes made of out of Himont were time-proven tubes and virtually all lasted for the life of the water heater. Perfection received only 10-12 returns of Himont dip tubes a year out of approximately five million manufactured annually.

[12]   In 1992, Perfection entered into negotiations with Manner Plastics Materials, Inc. for the purchase of a proprietary form of polypropylene called Prolene 6654 (Prolene). Between August 1993 and October 1996, Perfection manufactured its dip tubes out of Prolene. The Tank Manufacturers installed the Prolene dip tubes in their water heaters. During the period that Prolene dip tubes were used, the Tank Manufacturers received reports from field personnel that a certain percentage Prolene tubes were deteriorating inside water heaters during the first year and one-half of use, resulting in loss of function of the water heaters, clogging of plumbing lines, loss of water pressure, and damage to appliances.

[13]   On July 16, 1999, more than 20 consumer class action litigations were initiated against the Tank Manufacturers and Perfection asserting that Prolene tubes deteriorated prematurely inside water heaters. The Tank Manufacturers ultimately entered into a nationwide settlement with a consumer class certified by a federal court. Perfection was not party to the settlement, nor did the settlement agreement purport to release Perfection from any potential liability to the consumer class. Rather, the settlement agreement purported to assign to the Tank Manufacturers any claims that the settlement class members might have against Perfection. The Tank Manufacturers' counterclaims are premised both on their own alleged direct causes of action against Perfection as well as in their capacities as assignees of consumer claims against Perfection. On March 23, 2001, the Tank Manufacturers filed counterclaims alleging strict liability/negligence, breach of contract, breach of express and implied warranties, misrepresentation, negligence, and unjust enrichment. On May 31, 2002, the Tank Manufacturers filed consolidated counterclaims alleging all of the above, and adding allegations in counts III (Misrepresentation) & IV (Negligence) for damages to their business reputations in the aggregate of $182 million. The Tank Manufacturers alleged that as a result of the property damage claims filed by consumer claimants, the Tank Manufacturers and their water heaters were:

[14]   "disparaged, criticized, questioned, and maligned in television, print, and other media directed at the public, including but not limited to, reports on the national Good Morning America television show, in Chicago on WMAQ TV-News Channel 5, on the Appliance Doctor syndicated radio show, and in the Wall Street Journal."

[15]   The Tank Manufacturers alleged that the negative publicity surrounding the property damage claims "has damaged and will continue to damage the Tank Manufacturers' goodwill and present and future profitability."

[16]   In support, the Tank Manufacturers submitted expert opinion evidence given by Dr. Silas H. Lee III, and Dr. Darrell L. Williams. Dr. Lee, an expert specializing in public opinion and marketing research, conducted a generic consumer survey or poll, examining how consumers feel about purchasing a product that was defective, and what impact purchasing a defective product would have on the reputation of a company." Based on his survey results, Dr. Lee opined that "consumers are less likely to buy a product if it is manufactured by a company that produced something defective in the past," and concluded that purchasing a defective product has a negative impact on reputation. Dr. Lee did not do a study specifically relating to water heaters.

[17]   Dr. Williams, a professor and economist, employed a technique called the "event study methodology" to analyze whether Tank Manufacturer A.O. Smith, a publicly traded company, suffered damage to its reputation as a result of public comments relating to the dip tube litigation and, if so, to quantify the magnitude of any such damages. Dr. Williams described the event study methodology as a "commonly and widely accepted method used by economists to estimate the change in the market value of a company as reflected in the change in the market value of the company's equity." Dr. Williams explained that the event study methodology is "based on the widely accepted principle that publicly available information relevant to the valuation of a company is rapidly incorporated into stock prices such that the market value of a company's equity responds quickly to information that is relevant to the company's market value."

[18]   An "event" is an informational disclosure, such as an appearance in a newspaper, television or radio. Dr. Williams established an "event window," i.e., the period of time over which that disclosure is deemed to have an "effect." Dr. Williams described the methodology as using "statistical techniques in order to isolate stock price effects resulting from relevant information disclosures, in this case those related to defective dip tubes, as opposed to general market-wide stock price movements or random variance in stock prices." In other words, Dr. Williams calculated the "loss" based on the "event." Dr. Williams explained that a premise of the event study methodology is that the market value of a firm, the sum of the value of all of its assets, broadly defined, is equal to the market value of its equity plus the market value of its debt.

[19]   Dr. Williams analyzed the measure of changes in the price of A.O. Smith's publicly traded stock during three separate three-day periods and determined that a decline in the stock price was solely the result of two newspaper reports in the Kansas city Star and a local Detroit radio broadcast about the dip tube claims and class action litigation against the Tank Manufacturers (the "events"). For each event, Dr. Williams calculated the total change in the closing stock price of A.O. Smith for the three-day period from what he deemed public dissemination of these local media reports. He then translated the net change in stock price of A.O. Smith into a change in the aggregate "market value" of the company's stock by multiplying the per share price change by the number of shares outstanding.

[20]   In rendering his opinion, Dr. Williams produced his calculations of the change in A.O. Smith's stock value for the three separate three-day periods selected between March 1999 and April 2000. Dr. Williams totaled these amounts and concluded that, on these nine days, A.O. Smith's stock value had decreased by over $115 million. Deducting all non-reputational damage claims that A..O. Smith asserted in the counterclaim, i.e., its alleged direct costs, Dr. Williams reduced his aggregate stock value decrease to $80 million and identified this result as A.O. Smith's "reputational" or "brand" damage. None of the other Tank Manufacturers are publicly traded and there is no published source of their stock prices. Dr. Williams therefore extrapolated the A.O. Smith stock price study to the other four corporate counter-claimant Tank Manufacturers, and assumed a "reputational" impact proportionately equal to that calculated for A.O. ...


Buy This Entire Record For $7.95

Download the entire decision to receive the complete text, official citation,
docket number, dissents and concurrences, and footnotes for this case.

Learn more about what you receive with purchase of this case.