Revised January 29, 1999

UNITED STATES COURT OF APPEALS

For the Fifth Circuit

_____________________________________

No. 97-11114

_____________________________________

MERRITT-CAMPBELL, INC.,

Plaintiff-Counter DefendantAppellee-Cross-Appellant,

VERSUS

RxP PRODUCTS, INC.,

D efendant-Coun ter PlaintiffAppellant-Cross Appellee.

_______________________________________________

Appeals from the United States District Court

for the Northern District of Texas

_____________________________________

January 27, 1999

Before REYNALDO G. GARZA, STEWART AND PARKER, Circuit Judges.

REYNALDO G. GARZA, Circuit Judge:

I. Factual and Procedural Background

In August, 1995, Carl Merritt (“Merritt”) telephoned RxP and talked to its President, Don

Woodward (“Woodward”), about se lling a fuel additive known as “RxP Gas Kicker” as a private

label product. Woodward referred Merritt to RxP’s National Sales Manager, James Potts (“Potts”).2

On August 19, 1995, Potts met with Merritt. During the next few weeks, the parties had numerous

discussions relating to the potential private label arrangement. On September 18, 1995, MerrittCampbell, Inc. (“M-C”) was incorporated by Merritt and Harvey Campbell (“Campbell”).

On Se pt ember 28, 1995, Merritt gave Potts a proposed agreement which Potts faxed to

Woodward the following day. Woodward made changes to the proposal, signed it, and returned it

to Potts to be signed by M-C. On October 3, 1995, Merritt signed the agreement on behalf of M-C.

The agreement in its entirety states:

This agreement is made on this 28 th day of September, 1995, between

RxP Products, Inc., hereafter referred to as RxP, and MerrittCampbell, Incorporated, hereinafter referred to as Merritt-Campbell.

In cons ideration of the sum of ten dollars ($10.00), the receipt of

which is acknowledged, RxP agrees to sell to Merritt-Campbe l l the

product marketed as “RxP Gas Kicker” under the following terms:

1. RxP guarantees the following price to Merritt-Campbell for a

period of five (5) years from the date of first order.

a. RxP Gas Kicker bottled in 2.5 ounce quantities-

$1.25 per bottle (excluding labels).

b. RxP Gas Kicker in 55 gallon drum quantity-

$1,280,00 (sic) per drum.

Said pricing may be increased only in the case of documented price increases

to RxP for raw materials.

2. RxP will bottle RxP Gas Kicker in either green or black bottles, as

provided as samples, upon request for Merritt-Campbell.

3. RxP guarantees shipment within fourteen (14) days from receipt of order

from Merritt-Campbell.

4. Both RxP and Merritt-Campbell agree unconditionally to maintain

confidentiality regarding the relationship between the two companies. This

confidentiality includes, but is no t limited to, any disclosure of the source

product market by RxP and Merritt-Campbell. The scope of this

confidentiality includes, but is not limit ed to, any director, officer, employee,

or agent of both RxP and Merritt-Campbell.3 5. It is understood by RxP that it is the intent io n o f Merritt-Campbell to

market the product heretofore referred t o as “RxP Gas Kicker” under a

private label.

On November 9, 1995, Me rritt presented to Potts a purchase order for 25,000 bottl es of

product with 60-day credit terms. Potts refused the purchase order because it contained credit terms.

On April 8, 1996, RxP received a second order and a cashier’s check from M-C for a total of 8,016

bottles of RxP Gas Kicker. RxP refused the order and returned the cashier’s check to M-C uncashed.

On May 17, 1996, M-C filed suit against RxP in the United States Di stri ct Court for the

Northern District of Texas. M-C claimed that RxP breached a requirements contract entered into by

RxP and M-C in September of 1995. M-C claimed that the contract entitled it to purchase from RxP

quant ities of RxP Gas Kicker. M-C described the contract as one for the sale of goods and

acknowledged that it was governed by the Uniform Commercial Code (“UCC”). M-C sought specific

performance and in the alternative, damages in the sum of $2,020,000.

RxP counterclaimed seeking a declaration that the agreement was not an enforceable contract.

RxP also pleaded the affi rmative defenses of failure to satisfy the statute of frauds, failure of

consideration, failure to satisfy conditions precedent, repudiation by M-C, failure to provide adequate

assurance of performance, and failure by M-C to perform in a commercially reasonable manner.

Pursuant to 28 U.S.C. § 636(c), the case was assigned to a United States Magistrate. The

parties consented to the assignment and agreed that any appeals would be taken directly to this Court.

On April 21, 1997, RxP filed its motion for summary judgement raising the following issues:

(1) the contract was unenforceable per the statute of frauds for lack of a stated quantity term; and

(2) M-C was unable, as a matter of law, to prove lost profit damages because it was a new business

and it failed to register an “ER-1" with the Environmental Protection Agency.4

In opposing RxP’s motion, M-C conceded the agreement lacked a quantity term, but M-C

claimed that the agreement was a requirements contract and argued that requirements contracts are

not subject to the statute of frauds. M-C also claimed that damages for lost profits could be

recovered with respect to requirements contracts even though they may not be otherwise recoverable

for lost profits allegedly lost by a new, speculative, and enviable business. M-C did not file its own

motion for summary judgment, and the magistrate judge did not advise the parties he was considering

any relief other than that requested by RxP.

On June 30, 1997, the magistrate judge granted RxP’s motion wi th respect to dam ages

holding that M-C was not entitled to recover damages for lost profits. The judge denied RxP’s

motion with respect to the enforcability of the contract between RxP and M-C. Without a motion

before him the magistrate judge held that the contract was not one for the sale of goods. The court

characterized the agreement as an option contract and held that option contracts are not subject to

the UCC or the statute of frauds. The court also held that the agreement was potentially enforceable

as an option contract.

A jury trial was scheduled for July 21, 1997. On July 14, 1997, the parties filed their pretrial

order, which was approved and signed by the magistrate judge. The issues included: (1) whether the

agreement is an enforceable contract; (2) whether the agreement is unenforceable because it lacks a

quantity term; (3) wh et her the parties intended to form an option contract; (4) whether option

contracts for the sale of goods are subject to the UCC; (5) whether the September 1995 agreement

was intended to be the entire agreement between the parties; and (6) whether an opti on contract

lacking numerous terms, including a quantity term, is capable of specific performance.

On July 21, 1997, the magistrate judge announced that a trial would not be held and that the1 Throughout this opinion there will be specific statutory references to the Texas Business and

Comme rce Co de, which contains the applicable provisions of the Uniform Commercial Code as

adopted by the Texas legislature.

5 parties would not be allowed to present evidence concerning the contested issues.

On September 9, 1997, the judge held that the agreement entered into by the parties is an

opti on contract whereby M-C purchased from RxP, for consideration of $10.00, the right to purchase

RxP Gas Kicker for a

specified price over five years from the date of first order. The magistrate

judge also held that the opti on contract was not one for the sale of goods and was not subject to §§

2.102, 2.106(a) and 2.201 of the Texas Business and Commercial Code. 1 The magistrate judge also

held that the opti on contract represented the full and complete agreement between RxP and M-C and

could not be supplemented by evid ence o f addit ional terms. The judge awarded M-C specific

performance of the contract and attorney’s fees that amounted to $32,156.25.

On October 2, 1997, RxP filed a timely appeal to this Court. On October 10, 1997, M-C

cross appealed.

II. Standard of Review

This Circuit reviews a district court's grant of summary judgment de novo

, applying the same

st andard of review as would the district court. E llison v. Connor

, 153 F.3d 247, 251 (5th Cir.

1998). Summary judgment evidence is viewed in the light most favorable to the party opposing the

motion. E astm an Kodak v. Image Technical Services , 504 U.S. 451, 456-58 (1992). Summary

judgment is proper only when it appears that there is no genuine issue of material fact and the moving

party is entitled to judgment as a matter of law. F ED .R.C IV .P. 56(c); Ellison

, 153 F.3d at 251.

Disputes concerning material facts are genuine “if the evidence is such that a reasonable jury could

return a verdict for the nonmoving party.” D ouglas v. United Auto. Ass’n, 79 F.3d 1415, 1429 (5th6

Cir. 1996) (en banc) (quoting Anderson v. Liberty Lobby, Inc

., 477 U.S. 242, 248 (1986)). An issue

is "material" if it involves a fact that might affect the outcom e of the suit under the governing law.

Id . at 248; Thomas v. LTV Corp ., 39 F.3d 611, 616 (5th Cir. 1994).

As a general rule, the interpretation of a contract is a question of law, not fact. H idden

Oaks Ltd. v. City of Austin ,138 F.3d 1036, 1048 (5th Cir. 1998). “Whether a contract exists involves

both questions of fact--such as the intent of the parties--and questions of law--such as whether, the

facts as found constitute a contract. On appeal, a trial court's findings of fact must be accepted unless

clearly erroneous or influenced by an incorrect view of the law.” Z immerman v. H.E. Butt Grocery

Co. , 932 F.2d 469, 471 (5th Cir.), cert. denied , 502 U.S. 984 (1992).

The magistrate judge held that the agreement was an opti on contract. In addition, the judge

concluded that the agreement was not a contract for the sale of goods and therefore was not subject

t o the Texas Business and Commercial Code section 2.201. Both of these legal conclusio ns are

subject to de novo review. Id.

III. Discussion

There are four issues that are presented before this Court: (1) whether the magistrate judge

was correct in holding that the agreement was an opti on contract no t for the sal e of goods and

therefore not subject to the UCC; (2) whether RxP received proper notice of the magistrate judge’s

granting sua sponte summary judgment; (3) whether attorneys’ fees were properly awarded; and (4)

whether lost profits were properly denied. We will only address the first issue because we hold that

the magistrate judge was incorrect in ruling that the Texas Business and Commercial Code does not

apply to this case.

M-C asserts that the agreement is a valid and unambiguous enforce able contract. First, it7

supports the trial court’s finding that the agreement is an enforceable option contract not governed

by the UCC. In addit io n, M-C argues that the writing is an enforceable requirements contract

governed by the UCC. Finally, M-C argues that the agreement is a valid distributorship agreement

governed by the UCC.

RxP argues that opti on contracts are governed by the UCC. In the case at bar, however, the

written agreement between M-C and RxP created an unenforceable opti on contract because it failed

to satisfy the UCC statute of frauds by failing to state a quantity term. RxP argues that a quantity

ter m is essential to form a valid option contract and therefore the writing is unenforceable. RxP

ardently argues that the lower court’s ruling, that opti on contracts are not governed by the UCC, is

erroneous and unsupported by case law.

Texas Business & Commercial Code

Chapter 2 of the UCC ap plies to all transactions in goods. T E X

. B US .& C OM

. C ODE A NN

.

§2.102. A contract for the sale of goods includes “both a present sale of goods and a contract to sell

goods at a future time.” T E X

. B US .& C OM

. C ODE A NN

. §2.106(a). Therefore, rights of parties are

not effected by whether the transaction is one for a present sale of goods or a contract relating to the

future. See Id

.

The UCC unequivocally states that a contract involving the sale of goods is not enforceable

without a quantity term. S ee T EX

. B US .& C OM

. C ODE A NN

. §2.201. Thus, the only term that must

appear in a writing to support an enforceable contract for the sale of goods is the quantity term. T E X

.

B US .& C OM

. C ODE A NN

. §2.201cmt. 1. Section 2.201(a) states:

Except as otherwise provided in this section a contract for the sale of goods for the8

price of $500 or more is not enforceable by way of action or defense unless there is

some writing sufficient to indicate that a contract for sale has been made between the

par t ies and signed by the party against whom enforcement is sought or by his

authorized agent or broker. A writing is no t insufficient because it omits or

incorrectly states a term agreed upon but the contract is not enforceable under this

paragraph beyond the quantity of goods show n in such w riting.

(Emphasis added). However, a contract which fails to satisfy the requirements of section 2.201(a)

but which is valid in other respects is enforceable pursuant to section 2.201(c):

(1) if the goods are to be specially manufactured for the buyer and are not suitable for

sale to others in the ordinary cour se o f t he seller's business and the seller, before

notice of repudiation is received and under circumstances which reasonably indicate

that the goods are for the buyer, has made eit her a substantial beginning of their

manufacture or commitments for their procurement; or

(2) if the party against whom enforcement is sought admits in his pleading, testimony

or otherwise i n court that a contract for sal e was m ade, but the contract i s not

enforceable under this provision beyond the quantity of goods admitted.

M-C maintains that although the agreement lacks a quantity term, it still does not violate the

statute of frauds because the agreement is within the exception for specifically manufactured goods

under 2.201(c)(1). Although M-C’s contention may have merit, this issue was not raised in the

magistrate court and therefore is waived. See Illinois Central Gulf R. Co. v. R.R. Land, Inc

., 988

F.2d 1397, 1407 (5th Cir. 1993).

M-C also claims that Texas Business and Commercial Code §2.201(c)(2) applies because RxP

admitted the existence of a contract through its pleadings and live testimony. RxP states that much

of the evidence that M-C relies on was not before the magistrate judge when he considered RxP’s

motion for summary judgment. In addition, RxP maintains that the evidence merely confirms that the

parties were working toward an anticipated business relationship and does not confirm the existence9

of a contract. After reviewing the record we find that RxP’s references to the agreement did not

constitute an admission under 2.201(c)(2). Therefore, this section is inapplicable to the facts of this

case. Thus, because a quantity term was not sufficently stated in the agreement we hold that the

statute of frauds is not satisfied.

Characterization of the Agreement

We will not address whether the agreement is a valid distributorship agreement because M-C

failed to a present this issue before the magistrate court. Consequently, M-C has waived that issue.

See Illinois Central Gulf R. Co. , 988 F.2d at 1407.

It is clearly established that the UCC applies to both opti on and requirements contracts. S ee

W.H. McCrory & Co., Inc. v. Contractors Equipment and Supply Co.

, 6 91 S.W.2d 717

(Tex.App.-Austin 1985, writ ref’d n.r.e)(holding that an opti on contract to purchase a forklift must

satisfy the statute of frauds); see Eastern Dental Corp. v. Isaac Masel Co., Inc ., 502 F.Supp. 1354

(E.D.Pa.1980)(applying the statute of frauds requirement of a quantity term to requireme nts

contracts). Therefore, the classification of the agreement as an option or requirements contract is

irrelevant. This is because either characterization will result in the agreement violating the statute of

frauds bec ause the agreement fails to state a quantity term. Nevertheless, this Court classifies the

agreement as an option contract.

The agreement cannot be characterized as a requirements contract. An essential element of

a requirements contract is the promise of the buyer to purchase exclusively from the seller either the

buyer's entire requirements or up to a specified amount. Mid-South Packers, Inc. v. Shoney's, Inc

. ,

761 F.2d 1117, 1120 (5th Cir. 1985). Without such a promise by the buyer, a requirements contract10

fails for lack of consideration. I d. at 1121. A requirements contract is a contract that, although it

does not establish the amount that a buyer must purchase from the seller, prohibits the buyer from

purchasing from other sellers. S ee Cardiovasc ular Services, Inc. v. West Houston Health Care

Group, Inc., 1995 WL 523615 (Tex. App.-Hous. [1 Dist.] 1995). In this case, however, the

agreement’s language fails to contain a promise of exclusivity or demonstrate in any fashion that M-C

was restricted from purchasing from other sellers.

In addition, in output and requirements contracts, the quantity of goods to be delivered under

the contract is de t ermined by t he good faith output or requirements of the parties. This does not

mean, however, that the statute of frauds' requirement of a quantity te rm is o bviated since the

inclusion of a quantity term is a mandatory requirement under the UCC. E astern Dental Corp.

, 502

F.Supp. at 1363-64. While the quantity term in requirements contracts need not be numerically

stated, there must be some writing which indicates that the quantity to be delivered under the contract

is a party's requirements or output. Id. at 1364. “The writing must specify the quantity of goods to

be sold.

. . . For a requirements contract, the quantity to be specified is "a party's requirements."

Omega Engineering, Inc. v. Eastman Kodak Co.

, 908 F.Supp. 1084, 1090 (D.Conn.1995). The

language in the agreement does not specify a quantity of M-C’s requirements or RxP’s output. Thus,

we find that the correct classification of the agreement cannot be as a requirements contract.

We hold that the agreement is properly characterized as an opti on contrac t. An opti on

contract has two components: 1) the underlying contract which is not binding until accepted; and

2) the covenant to hold open to the optionee the opportuni ty to accept. C asa El Sol-Acapulco, S.A.

v. Fontenot

, 919 S.W.2d 709, 717 n.9 (Tex. App.-Houston. [14 Dist.] 1996, writ dism’d by agr.).

“The purpose of a purchase opti on is to give the optionee the right to purchase, at his election, within2 The following are illustrations of option contracts:

1. A promises B under seal or in return for $100 paid or promised by B that A will sell B 100 shares

of stock in a specified corporation for $5,000 at any time within thirty days that B selects. There is

an option contract under which B has an option; and

2. A offers to sell B Blackacre for $5,000 at any time within thirty days. Subsequently A promises

under seal or in return for $100 paid or promised by B that the offer will not be revoked. There is an

option contract under which B has an option. R ESTATEMENT (S ECOND ) C ONTRACTS §25 (1979).

11 an agreed period, at a named price, which presumably was considered satisfactory by the optionor

in case the option should be exercised at any time during the opti on term.” 2 Maxw ell v. Lake , 674

S.W.2d 795, 798 (Tex. App.-Dallas, 1984). To be binding, an option contract must: (1) be signed

by the offeror; (2) recite a purported consideration for making the offer; and (3) propose an exchange

on fair terms within a reasonable time. R ESTATEMENT (S ECOND ) C ONTRACTS §87 (1979). We find

that the agreement should be classified as an opti on contract because it was (1) was signed by RxP,

the offeror; (2) the agreement states a consideration of the sum of ten dollars for making the offer;

and (3) M-C had the opti on to purchase RxP Gas Kicker for five years from the date of the first order

at the price of

$1.25 per 2.5 ounce bottles and $1,280 per drum. We find these terms to be fair and

within a reasonable time. Therefore, we conclude that the correct classification of the agreement is

an option contract.

Although we a gree with the magistrate judge in his conclusion that the agreement was

properly characterized as an opti on contract, we find that there is no authori ty to support the

proposition that the UCC does not apply to opti on contracts. The magistrate judge incorrectly cites

Sinclair Refining Co. v. Allbritton , 147 Tex. 468, 218 S.W.2d 185 (Tex. 1949), in support of his

holding. As RxP notes, the UCC became effective in Texas as of June 30, 1966, but S inclair was

decided almos t eight een y ears before that date. S inclair involved a dispute between a lessee and12

lessor over a purchase option clause in an oil and gas lease and is not applicable to our case.

Furthermore, Texas courts apply the UCC when dealing with opti on contracts. The Austin

C o urt o f Appeals held that an option to purchase a forklift was unenforceable because it failed to

satisfy the statute of frauds

. W.H. McCrory & Co., Inc., 691 S.W.2d at 721. The option, which was

connected to an equipment lease, was characterized as a contract for the sale of goods. Id. at 720.

The court held that the contract did not comply with Texas Business and Commercial Code § 2.201.

Id. at 719-720. In addition, Texas courts have also held that option contracts involving the sale of

securities must satisfy the statute of frauds. Kenney v. Porter, 604 S.W.2d 297, 302-04

(Tex.Civ.App.-Corpus Christi, 1980 writ ref’d n.r.e).

Moreover, other jurisdictions hold that option contracts are subject to the statute of frauds.

Option contracts for the sale of land or personal property must satisfy the statute of frauds. See In

re Air Vermont, Inc

., 44 B.R. 446, 450 (Bankr.D.Vt. 1984). Also, UCC § 2-201 has been held

applicable to an alleged option contract involving the sale of an airplane. M cCollum Aviation, Inc.

v. CIM Associates, Inc ., 446 F.Supp. 511, 513 (S.D.Fla.1978).

IV. Conclusion

Although this Court woul d classify the agreement between RxP and M-C as an option

contract, the agreement fai ls t o sufficently state a quantity term and therefore does not satisfy the

statute of frauds. Thus, there is no valid and enforceable contract bet ween M-C and RxP.

Accordingly, this Court concludes that the magistrate judge’s decision is in correct and i s hereby

REVERSED and RENDERED.13