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Sistemas Automotrices de Mexico v. Meritor Heavy Vehicle Systems, LLC

United States District Court, N.D. Illinois, Eastern Division

February 7, 2017

SISTEMAS AUTOMOTRICES DE MEXICO, S.A. DE C.V., Plaintiff,
v.
MERITOR HEAVY VEHICLE SYSTEMS, LLC, Defendant. MERITOR HEAVY VEHICLE SYSTEMS, LLC, Plaintiff,
v.
QUIMMCO S.A. DE C.V. and SISTEMAS AUTOMOTRICES DE MEXICO, S.A., DE C.V., Defendants.

          MEMORANDUM OPINION AND ORDER

          REBECCA R. PALLMEYER United States District Judge.

         This case involves a dispute regarding the interpretation of certain joint venture agreements. Meritor Heavy Vehicle Systems, LLC ("Meritor") is a United States-based limited liability company that supplies axles, brakes, and related Components for medium- and heavy-duty trucks, trailers, and other commercial vehicles. Quimmco S.A. de C.V. ("Quimmco") is a Mexico-based manufacturing group. In 2002, the two companies formed Sistemas Automotrices de Mexico, S.A. de C.V. ("SISAMEX"), a Mexico-based joint venture, and the parties executed a Shareholders Agreement and three Supply Agreements that would govern the relationships among Meritor, Quimmco, and SISAMEX. Pursuant to those agreements, SISAMEX manufactures certain Meritor products and supplies them to Meritor for resale to original equipment manufacturers ("OEMs") (that is, the manufacturers who assemble the vehicles), and Meritor supplies SISAMEX with certain necessary Components for manufacture of Meritor products. Although the parties had a successful working relationship for ten years, they have been at odds since 2013 regarding the meaning of certain provisions in their joint venture agreements. Specifically, Meritor denies that SISAMEX has the right to decide, unilaterally, to manufacture certain Components of the Meritor products it sells to Meritor; SISAMEX and Quimmco contend that that one of the Supply Agreements does grant SISAMEX that right. The parties also disagree about whether Meritor has an obligation to provide technical assistance to SISAMEX for the manufacturing of Meritor products.

         Since the formation of the joint venture, one significant development has been the migration to Mexico of OEMs hoping to capitalize on opportunities created by the North American Free Trade Agreement ("NAFTA"). Because the joint venture agreements provide that SISAMEX is Meritor's exclusive supplier for products sold to OEMs in Mexico, the OEMs' Mexican migration is undoubtedly a welcome development for SISAMEX. At its core, the central dispute between the parties is about how much SISAMEX stands to benefit from that migration at the expense of Meritor. If Meritor holds the right to manufacture certain components of Meritor products sold to OEMs in Mexico, it will continue to receive considerable manufacturing margins for the sale of such products. But if SISAMEX has the right to "insource" those components-that is, to manufacture them itself-the manufacturing returns on those sales would go to SISAMEX instead and would thus be shared between Quimmco and Meritor as SISAMEX's shareholders.

         SISAMEX brought suit against Meritor in July 2014 seeking a declaration that (1) SISAMEX has the exclusive right to manufacture Meritor products and their component parts, (2) SISAMEX has the right to source materials from third parties without Meritor's prior approval, and (3) Meritor has a duty to provide free technical assistance to SISAMEX for the production of Meritor products. SISAMEX's initial complaint also sought damages for breach of contract and breach of certain implied warranties. Days after SISAMEX filed its complaint, Meritor brought a parallel action against SISAMEX and Quimmco seeking declaratory relief and damages for breach of contract. In addition to addressing issues raised in SISAMEX's complaint, Meritor's complaint alleges that SISAMEX has an obligation to purchase from Meritor certain so-called "Core Components" of Meritor products.[1]

         Both SISAMEX and Meritor filed motions to dismiss the complaints against them. In January 2015, the court granted Meritor's motion to dismiss with respect to SISAMEX's claim for a declaratory judgment that SISAMEX could source materials from third-party vendors without Meritor's approval. The court concluded that the plain terms of two of the Supply Agreements made clear that Meritor's pre-approval is required. Regarding the other counts in the two complaints, however, the court determined that the relevant contractual provisions were ambiguous and could not be interpreted without the aid of extrinsic evidence. Thus the court denied the motions to dismiss with respect to those counts. Following the court's ruling on the motion to dismiss, SISAMEX amended its complaint, paring its asserted claims for relief down to three counts: two counts seeking a declaratory judgment about the parties' respective rights under the agreements and one count alleging breach of contract.

         After months of discovery, SISAMEX has moved for partial summary judgment [228] ([191] in Case No. 14 C 5319) on all counts in its amended complaint and in Meritor's complaint. SISAMEX argues that the extrinsic evidence conclusively demonstrates that it has the exclusive right to manufacture Meritor products sold to OEMs in Mexico and that although it may not purchase Core Components of Meritor products from third parties, SISAMEX may elect to manufacture such components itself rather than purchase them from Meritor. Meritor disagrees, but for a different reason than the one it advanced at the motion-to-dismiss stage. Meritor argued previously that although SISAMEX had the contractual right to manufacture Meritor products, it lacked the right to manufacture Components of Meritor products without Meritor's approval. Meritor also argued that Meritor's approval was required to allow SISAMEX to manufacture Core Components of Meritor products instead of purchasing them from Meritor. Now, Meritor appears to concede that the parties' supply agreements permit SISAMEX to manufacture Components of Meritor products, including Core Components, but Meritor insists that SISAMEX can only do so with the approval of a supermajority of SISAMEX's Board of Directors, half of whom are appointed by Meritor. That is, Meritor contends that it has the power, through its appointed Directors, to veto SISAMEX's choice to manufacture components of Meritor's products.

         For the reasons discussed below, SISAMEX's motion is granted in part and denied in part. The court agrees with SISAMEX that the extrinsic evidence in the record supports its interpretation of the agreements and concludes that Meritor has not offered evidence that creates a genuine issue of material fact regarding its newly-advanced argument. The court also concludes that Meritor's argument regarding its obligation to provide technical assistance to SISAMEX is a different argument from the one it made at the motion-to-dismiss stage, and this new argument is also not supported by sufficient evidence to create a genuine issue of material fact. Finally, the court concludes that, given the court's interpretations of the parties' agreements and the undisputed facts, Meritor is in breach of the parties' agreements by refusing to purchase certain Meritor products from SISAMEX. Because there are genuine issues of material fact concerning matters relating to third-party vendors, however, the court cannot determine at this stage that Meritor has breached the parties' agreements with regard to those matters.

         BACKGROUND

         I. Pre-Agreement History

         The parties had a business relationship well before negotiation of the agreements at issue here, and both sides have presented evidence about the history of that relationship, which sheds some light on the meaning of the joint venture agreements. Before forming SISAMEX, Meritor and Quimmco were parties to another Mexico-based joint venture named Dirona, S.A. ("Dirona"). (Quimmco and SISAMEX's Rule 56.1 Stmt. of Undisputed Facts (hereinafter "SMX 56.1 Stmt.") [231] ¶ 3.) Quimmco held a 60% stake in Dirona, while Meritor's predecessor in interest, Rockwell, held a 40% minority share. (Meritor's Resp. to SISAMEX's and Quimmco's Rule 56.1 Stmt. of Undisputed Facts (hereinafter "Meritor 56.1 Resp.") [249] ¶ 3a.) A "Technical Licenses and Non-Compete" agreement between Dirona and Rockwell provided that Rockwell would grant Dirona access to its intellectual property to allow Dirona to manufacture Rockwell products for Mexico-based OEMs. (Id. ¶ 3b.) Despite attempts to renew the agreement, it expired in 1998. (Id. ¶ 3c.) Though the joint venture persisted and the parties maintained a peaceful coexistence for some time, Meritor entered a more aggressive phase of its relationship with Dirona in 2000 and was competing globally with the joint venture by June of that year. (Id. ¶¶ 3c-3d, 6d.) In October 2002, Quimmco and Meritor executed the Shareholders Agreement, which restructured Dirona into SISAMEX, a joint venture in which Meritor held a 50%-minus-one-share ownership stake and Quimmco held the remaining 50% plus one share. (SMX 56.1 Stmt. ¶ 18.)

         The two sides present different accounts of the parties' motivations for restructuring Dirona. It is undisputed that in 2000, Meritor planned to terminate the supply of certain Components it had been selling to Dirona, to raise prices on certain Components it did provide to Dirona, and to launch more aggressive sales efforts to "go-after" some of Dirona's customers. (Id. ¶ 3; Internal Meritor Letter from B.A. Arnold, 5/3/00, Ex. 8 to SISAMEX's Mot. for Partial Summ. J. [232-8], at-93.)[2] It is also undisputed that Quimmco entered into negotiations with Daimler Chrysler Aktiengesellschaft ("Daimler"), one of Meritor's largest OEM customers, and executed a Memorandum of Understanding in April 10, 2000 concerning the establishment of a joint venture between Quimmco and Daimler. (SMX 56.1 Stmt. ¶¶ 4-5.) As part of the agreement between Quimmco and Daimler, Quimmco would seek to acquire Meritor's minority share in Dirona. (Id. ¶ 5.) According to SISAMEX, Meritor also determined to prevent Quimmco from forming a partnership with Daimler. (See, e.g., Internal Meritor Letter from B.A. Arnold, 6/9/00, SMX Ex. 13 [232-13], at -28 ("Blocking the [Daimler] outcome is very important and worth a significant amount.").) SISAMEX contends that, in order to deter Quimmco from entering into such a partnership, Meritor offered to restructure Dirona to provide the restructured entity with exclusive rights to manufacture Meritor products for OEMs located in Mexico. (SMX 56.1 Stmt. ¶ 8.)

         Meritor denies that its motivation in restructuring Dirona was to block the Quimmco-Daimler partnership or that it offered exclusive manufacturing rights to the restructured entity. Meritor insists that SISAMEX overstates the extent to which Meritor was concerned about a potential Quimmco-Daimler partnership because Meritor had the ability to block the sale of Dirona to Quimmco and Daimler by refusing to sell its shares. (Id. ¶ 6d.; Internal Meritor Letter from B.A. Arnold, 6/9/00, SMX Ex. 11 [232-11], at -61 ("[A]s a shareholder, [Meritor] would prevent any agreement of any sort in this regard . . . . Meritor would not sell its shares.").) Meritor contends it was motivated to restructure Dirona in order to enhance Meritor's control over the joint venture. (Meritor's Local Rule 56.1(b)(3)(C) Stmt. of Add'l Facts (hereinafter "Meritor 56.1 Stmt. Add'l Facts) [249], ¶ 1.)

         Regardless of the parties' reasons for doing so, representatives from Quimmco and Meritor met to discuss the terms of agreements to restructure Dirona into the joint venture that would become SISAMEX (referred to at the negotiation stage as "NewCo"). Through the course of the parties' negotiations, Brad Arnold acted as lead negotiator for Meritor, and Jesus Barrera acted as lead negotiator for Quimmco. (SMX 56.1 Stmt. ¶ 13.) According to Meritor employee Thomas Gosnell, the other Meritor employees responsible for negotiating the Dirona restructuring were Larry Burgin and Larry Dowers. (Decl. of Thomas Gosnell, Meritor Ex. 8 [250-8], ¶ 1.) Both Meritor and SISAMEX cite to pre-agreement notes of the negotiators, communications between the negotiators themselves, internal communications between the negotiators and the parties they represented, as well as a Memorandum of Understanding ("MOU") Quimmco and Meritor executed in September 2000. Predictably, the parties highlight different aspects of those documents. SISAMEX points to those materials to emphasize that it negotiated for the exclusive right to manufacture Meritor products sold to OEMs in Mexico. To support this assertion, for example, SISAMEX notes that section 2(c) of the MOU provides that "NewCo [SISAMEX] would be the exclusive manufacturer of and shipping point for Meritor Products and Dirona Products sold by Meritor to OEM's plants located in Mexico" and also states that Meritor would receive a "5% margin . . . to reflect administrative, sales, marketing, and engineering expenses incurred by Meritor."[3] (Mem. of Understanding, 9/5/00 (hereinafter "September 2000 MOU"), SMX Ex. 16 [232-17], § 2(c).) As another example, SISAMEX cites to a business plan outline, forwarded by Arnold, reflecting that the joint venture's operations would include manufacturing-and developing the capacity for manufacturing-"core component[s]" of Meritor products. (Business Plan Outline, 11/7/00, SMX Ex. 20 [232-21], at -29.)

         Meritor emphasizes different portions of the parties' pre-agreement negotiations and documents. It points to evidence that Meritor wanted equal control over the management of the joint venture, including control and veto rights over the joint venture's "key activities, " such as its annual operating plan and capital expenditures. Evidence that Meritor sought such control, and that Quimmco agreed to grant it, includes reports, emails, and presentations from Arnold to Meritor management regarding the negotiations. (See, e.g., Internal Meritor Letter from B.A. Arnold, 4/27/00, Meritor Ex. 4 [250-4], at -60 (relaying conversation about reformulating Dirona as a "50/50 arrangement"); Internal Meritor Letter from B.A. Arnold, 5/3/00, SMX Ex. 8 [232-8], at -94 (same); Email from Bradley Arnold, 8/21/01, Meritor Ex. 16 [250-16], at -05 (listing imperatives in the negotiations, including "that these documents allow veto rights for certain critical matters such as annual operating p[l]ans, capital expenditures and the like").) Meritor also highlights references to the parties' intention to restructure Dirona to become a "Tier 2" supplier to Meritor. (See, e.g., Arnold Report, 8/11/01, SMX Ex. 35 [232-36] (indicating Quimmco agreed that Dirona would become a joint venture "with a new Tier 2 mission").) A Tier 2 supplier, Meritor explains (and SISAMEX does not dispute), is "a manufacturing entity that enters an agreement with a Tier 1 supplier to make whatever Components or products the Tier 1 requests." (Meritor Stmt. Add'l Facts ¶ 12.)

         II. The Agreements

         Quimmco and Meritor officially executed a Shareholders Agreement for the restructuring of Dirona on October 25, 2002. (Shareholders Agreement, SMX Ex. 1 [232-1], at -14.) Under that agreement, Dirona was restructured into SISAMEX, and the scope of its business would be as follows:

(i) to manufacture for, and sell exclusively to, [Meritor], Meritor Products, Dirona Products and Sudisa [SISAMEX's subsidiary[4] Products for sale to OEM Customers in Mexico;
(ii) to manufacture for, and sell exclusively to [Meritor] and its Affiliates, Core Components and Non-Core Components[5] for use by them worldwide;
(iii) to manufacture and sell Company [that is, SISAMEX] Products to any customer worldwide.

(Id. at "Where as" Clause(g)(6).) The Shareholders Agreement also provides that SISAMEX's business must be conducted according to a Business Plan developed by SISAMEX's Director General and approved by the company's board of directors. (Id. § 2.3(a).) The initial Business Plan would cover SISAMEX's first five years of operations and would thereafter by upDated: least once a year by the Director General and presented to the Board of Directors for approval. (Id.) Under the Shareholders Agreement, Quimmco nominates the Director General, subject to Meritor's approval, which Meritor may not unreasonably withhold, and the Director General serves for a two-year term, subject to renewal for additional one-year terms. (Id. ¶ 3.5.3(b).) In addition to the initial Business Plan, the Shareholders Agreement calls for the execution of three Supply Agreements (Supply Agreements A, B, and C) between SISAMEX and Meritor. (Id. § 7.3(k)-m).) The parties executed the initial Business Plan and the three Supply Agreements on January 14, 2003. (Business Plan 2003-2007, SMX Ex. 68 [233-18], at -08; Supply Agreement A, SMX Ex. 36 [232-37], at -30; Supply Agreement B, SMX Ex. 55 [233-5], at -93; Supply Agreement C, SMX Ex. 56 [233-6], at -79.) In ruling on the parties' motions to dismiss, this court has already discussed extensively the provisions of the three supply agreements. See, e.g., Sistemas Automotrices de Mexico, S.A. de C.V., v. Meritor Heavy Vehicle Sys., LLC, No. 14 C 5289, 2015 WL 390790 (hereinafter "MTD Opinion"), at *3-4 (N.D. Ill. Jan. 28, 2015). At this point, the court need only summarize and highlight certain key provisions of the Business Plan and the Supply Agreements.

         The initial Business Plan outlines SISAMEX's objectives, structure, and business strategy, and discusses the products in its portfolio, projected market volumes, competing firms, operations, financial statements, the company's capital plan, and a time schedule for the company's restructuring. (See generally Business Plan 2003-2007.) In describing SISAMEX's primary function, the plan says that SISAMEX's business scope will "be primarily the manufacturing of axles, brakes, related Components and assemblies for medium and heavy-duty commercial vehicles." (Id. at -10.) SISAMEX will, the plan continues, "produce all [Meritor's] products supplied to OEM plants located in Mexico, as well as manufacturing Components for [Meritor's] global axle and brake business." (Id.)

         The Supply Agreements elaborate on the scope of the relationship between SISAMEX and Meritor. Supply Agreement A concerns Meritor Products that Meritor sells to OEMs in Mexico; the agreement provides that SISAMEX will supply Meritor with all such Products that Meritor requires. (Supply Agreement A § 2.1.) The agreement establishes an exclusive purchasing arrangement: SISAMEX may not sell Meritor Products to anyone else but must provide Meritor with all the Products it requires for resale to Mexican OEMs, and Meritor must purchase all of the Products it sells to Mexican OEMs from SISAMEX and not from anyone else. (Id. §§ 2.1-2.2.) Supply Agreement B concerns Products Meritor sells worldwide; the agreement provides that SISAMEX will supply Meritor with certain Components of those Products, based on Meritor's orders. (Supply Agreement B § 2.2(a).) Specifically, Meritor agreed to purchase, and SISAMEX agreed to supply, "a percentage of [Meritor's] requirements for Core Components for original equipment use in products for OEM Customers in the United States and Canada" as provided in a schedule attached to the agreement." (Id. § 2.2(b).) Whereas Supply Agreements A and B require SISAMEX to supply Products and Components to Meritor, Supply Agreement C concerns Components that SISAMEX must purchase from Meritor. Specifically, the agreement requires SISAMEX to purchase from Meritor the "Core Components" it requires to fulfill its obligations under Supply Agreements A and B, although SISAMEX is only required to purchase from Meritor the Core Components that SISAMEX "does not manufacture itself." (Supply Agreement C § 2.2(a).) In addition, Supply Agreement C provides the following exceptions from SISAMEX's purchasing obligation:

(a) Core Components for which [Meritor] is unable or unwilling to supply to [SISAMEX] to meet the delivery, quality or other terms and conditions of this Agreement or [Meritor's] customers.
(b) Core Components which [SISAMEX] and [Meritor] have agreed to be an exception to the purchase commitments of this Agreement.
(c) Core Components during a Force Majeure Event . . . .

(Id. § 2.4.) Under any of those three circumstances, SISAMEX "shall be entitled to manufacture such Components itself and/or to source such Components from [other suppliers.]" (Id.)

         III. History of Performance

         For several years, the parties had a good working relationship. As SISAMEX built up its manufacturing capacity, Meritor acknowledged that it needed to commit to transferring its manufacturing business for the Mexican OEM market to SISAMEX. (See SMX Stmt. ¶ 39; Meritor 56.1 Resp. ¶ 39a.) Because SISAMEX would "get to make [the Meritor] products as soon as [SISAMEX] c[ould] tool and integrate, " Larry Burgin arranged for Meritor to provide SISAMEX with technical specifications for all of Meritor's products and Components that Meritor sold to OEMs in Mexico. (Email from Larry Burgin, 11/18/2002, SMX Ex. 81 [233-31], at -65.) Initially, SISAMEX purchased from Meritor, under Supply Agreement C, the Core Components required to assemble Meritor's "160 axle, " which it sold to Meritor pursuant to Supply Agreement A. (SMX 56.1 Stmt ¶ 42; Meritor 56.1 Resp. ¶ 42b.) Eventually, however, SISAMEX developed the capacity to "insource" (that is, manufacture itself) the Core Components of the 160 axle. (Id.) And by 2004, SISAMEX had ...


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