Source: http://cisgw3.law.pace.edu/cases/011217u1.html
Timestamp: 2019-04-19 14:27:33+00:00

Document:
The issue before the court was whether it should issue a preliminary injunction forbidding the seller from making sales in breach of a non-competition agreement.
A company with its place of business in the United States concluded a contract with two companies, one of which had its place of business in Greece, for the purchase of equipment to be used to manufacture plastic gardening pots. The contract provided that the parties would conclude a non-competition agreement and they subsequently did so. The sellers delivered the equipment. The buyer later ceased to make the agreed progress payments, alleging that the equipment was nonconforming and that the sellers had breached the non-competition agreement. The buyer brought suit claiming breach of the non-competition agreement, breach of contract, and breach of warranty. It asked the court to issue a preliminary injunction with respect to the breach of the non-competition agreement.
The court declined to issue a preliminary injunction. It concluded, among other matters, that the buyer was unlikely to succeed at a trial on the merits.
In a preliminary assessment, the court found that the Convention was the governing law with respect to all issues other than the non-competition agreement. The court concluded that the buyer had committed a fundamental breach by failing to make agreed progress payments. On the basis of art. 25 CISG. This entitled the sellers to avoid the contract of sale and non-competition agreement or to suspend their obligations under these agreements pursuant to arts. 64, 71-73 CISG. The court also concluded that the alleged nonconformities in the equipment did not constitute a fundamental breach by the sellers.
The court applied the Convention when rejecting several arguments made by the sellers. In response to the defense that there was no consideration for the non-competition agreement, the court ruled that the agreement was supported by consideration for the contract of sale and that the Convention (art. 29 CISG) provided that contract modifications are enforceable without regard to consideration. In response to the argument that the territory covered by the non-competition agreement was not sufficiently defined, the court applied the Convention's rules on the meaning of the parties' statements (art. 8 CISG) and course of dealing (art. 9 CISG) to interpret the agreement as sufficiently definite. In response to the sellers' argument that they were not bound by the non-competition agreement because the buyer had breached the sales transaction first by failing to duly notify the sellers of the alleged nonconformities (arts. 38, 39 CISG), the court found that notice was timely because the equipment was unique, complicated, delivered in installments and subject to training and on-going repairs.
This matter is before the Court on Plaintiff's Motion for Preliminary Injunction, which was heard on December 11, 2001. The Court now enters this written decision for the purpose of summarizing and publishing its previous findings.
Plaintiff Shuttle Packaging Systems, L.L.C. ("Plaintiff") filed this action against Defendants Jacob Tsonakis, INA S.A. ("INA") and INA Plastics Corp. ("INA Plastics") on October 24, 2001. Plaintiff's sole member is Calvin Diller, who is a citizen of Michigan. This decision refers in many parts to East Jordan Plastics, Inc. ("EJP"), which company is related to Plaintiff by its ownership and operation.
On October 24, 2001, Plaintiff filed motions for a temporary restraining order and preliminary injunction. By Order of October 25, 2001, this Court denied the Motion for Temporary Restraining Order on the ground that Plaintiff had not shown that it was likely to sustain irreparable harm before the Motion for Preliminary Injunction could be heard. The Order also set the Motion for Preliminary Injunction for hearing on December 6, 2001. Due to scheduling problems, the date was later scheduled for December 11, 2001 at 2:30 p.m. Briefing of the Motion was somewhat delayed owing to the fact that Defendant INA is a Greek corporation with its principal place of business in Athens, Greece. (See Stip. and Order of Dec. 5, 2001, allowing delayed briefing). As such, some of the legal materials mentioned below were not received until December 10, 2001, the last of them being submitted at 5:00 p.m. Nevertheless, the Court thoroughly reviewed the materials in advance of the hearing by reading them through midnight December 10, 2001.
Plaintiff's Verified Complaint alleges that on November 1, 2000, it agreed to a purchase agreement with Defendants. Plaintiff alleges that under the purchase agreement Defendants were required to supply thermoforming line equipment for the manufacture of plastic gardening pots together with the technology and assistance to use the equipment. (Plaintiff's Complaint at p. 8.) The equipment included a "double line" having an annual output capacity of 1,800,000 lbs. and a "trade gallon line" having an annual output capacity of 3,270,000 lbs. (Id. at p. 9.) The aggregate purchase price for the equipment was $1,200,000 for the double line and $1,800,000 for the trade gallon line. (Id. at 10.) The Contract also included other terms relating to payment schedules, non-competition, warranties, notices, expenses, interest, and an integration clause. (Id., Exhibit A -- purchase agreement.) The non-competition term did not include the specific terms for non-competition, but required the further execution of a non-competition agreement. (Id.) Although it was not alleged in the Complaint, the Court notes for clarification sake that, based on other exhibits filed by the parties and their briefing, the trade gallon line was intended to manufacture 2.5 liter pots and the double line was intended to manufacture 11 centimeter pots on one line and 4 inch pots on the other line.
Plaintiff's Complaint is stated in three state law counts, each premised on diversity jurisdiction. Count One alleges breach of the non-competition agreement and specifically that Defendants are soliciting customers of Plaintiff in North America for the purpose of selling equipment subject to the agreement. Count Two alleges breach of the purchase agreement and more specifically both that Defendants have not provided all of the services required under the agreement and that the equipment has not performed as promised. Count Three alleges a breach of warranty as to the equipment in that the equipment was not in good working order, did not manufacture to the contract specifications and failed to meet industry standards for manufacturing. Count One is pertinent to the request for Preliminary Injunction since it includes the request that the Court temporarily and permanently enjoin violation of the non-competition agreement.
Defendants have also answered the Complaint. The Answer contests most of the factual allegations, but admits jurisdiction and venue. The Answer also contends that Defendant INA Plastics has dissolved and is no longer in business. Plaintiff, during hearing, further clarified that jurisdiction was proper in that Plaintiff had only one member, Calvin Diller, who is a citizen of Michigan.
Plaintiff's Complaint was verified by Calvin Diller, the President and CEO for Plaintiff. Nevertheless, the Complaint does not contain many specific factual allegations which are helpful to understand the factual background for this controversy. Plaintiff has, however, filed other affidavits, including the affidavits of Gary Gurizzian, Mark Lercel, Wayne DeCamp, and Alan Druskin. The affidavits include other attachments.
Wayne DeCamp was the Director of Manufacturing at EJP and is now the Director of Manufacturing for Plaintiff. (DeCamp's Affidavit at 1.) Like Lercel, DeCamp provides a catalog of the problems experienced by Plaintiff with the equipment. (Id.) This catalog, for the most part, reiterates the problems described by Lercel in his Affidavit. (See id. at pp. 3-5).
Defendants have filed the very lengthy Affidavit of Jacob Tsonakis, which includes some 185 numbered paragraphs and some 67 attachments. The attachments are mostly either documents pertinent to the case or email communications between the corporate actors involved in this case. Paragraphs 1-9 of the Affidavit give Tsonakis' general education and background and describe his development of the thermoforming technology and its use by INA to make gardening pots at more competitive prices. (Tsonakis Affidavit at pp. 1-9.) Paragraphs 10-26 of the Affidavit describe the manner in which Tsonakis has developed thermoforming manufacturing lines for the production of the pots, including descriptions of the equipment used in the lines. (Id. at pp. 10-26.) Paragraphs 27 through 33 describe the events giving rise to the approval of the purchase agreement. Those paragraphs describe those events in a similar manner to Plaintiff's representatives' descriptions. However, one important difference is that Defendant indicates that he engaged in tele-facsimile correspondence with Calvin Diller on September 28, 2000 in which he indicated that the lines might not be completed until January 15, 2001. (Id. at p. 32 and Exhibit 1.) The January date was used because much of the described equipment, which was quite large, needed to be shipped by container ship from Greece to the port of Charleston and then shipped by truck to the Plaintiff's plant in Forest City, North Carolina.
Paragraphs 116-120 contain Tsonakis' complaint that Plaintiff wrongly deducted repair costs for the machinery from contract payments due his company. Tsonakis communicated with Plaintiff on this subject and instructed Plaintiff that the deductions were wrongful in light of paragraph 11 of the purchase agreement--which allocated the buyer's "expenses" to the buyer.
Defendants have filed supplementary evidence for the purpose of establishing that performance payments were due on the 11 centimeter line. Defendants have also filed the depositions of Plaintiff's affiants for the purpose of cross-examining and testing their testimony.
An examination of the SPS performance documents (and email documents) generally shows that the 11 centimeter line had been twice successfully tested by Plaintiff such that the second performance payment of $90,000 was due under P 2(b)(ii) of the Purchase Agreement. (See Defendants' Attachments B and C.) The documents also reiterate that the standard for successful testing was not complete 8 hour shifts of production (which rarely occurred). Rather, the apparent standard was performance meeting or exceeding the performance of the trade gallon lines, which standard had been previously approved in an e-mail by Gary Gurizzian. (See Defendants' Attachments B and C.).
An examination of Plaintiff's affiants' testimonies show them to be generally consistent with the affidavits, but also contain many admissions helpful to the Defendants. Wayne DeCamp admitted that the high degree of manual labor associated with Plaintiff's operation of the lines made training difficult. (DeCamp Dep. at 99-100.) He also admitted that the line operated inefficiently due to employee breaks (id. at 101-106) and that the four inch line had not been set up and run by Plaintiff (which was required because of Defendants' expectation of the additional performance payment) and that the necessary part to set up the line (the extruder) had been warehoused (id. at 162). DeCamp also confirmed his authoring the e-mail attributed to him by Tsonakis, relating to the adequacy of the line training.
Gary Gurizzian's deposition is also somewhat helpful to Defendants' position. He admitted that he had not complained about late delivery or about the failure to include accessory equipment with the lines. (Gurizzian Dep. at 71-74, 22-23.) Gurizzian's credibility on other points is also undermined by his deposition testimony. For instance, his explanation of his spreadsheet analysis concerning the operation of the lines shows it to be mistaken in significant parts. This spreadsheet analysis appears to bill Defendants for the ordinary operation of the machinery, including repair costs, and accessories which were not included within the Purchase Agreement.
Parties to this matter were provided an opportunity to present additional evidence and testimony at hearing. However, no witnesses were called at hearing. In fact, the only additional evidence consisted of four exhibits, two by Plaintiff and two by Defendants. Two of these exhibits, Plaintiff's Exhibit 1 and Defendant's Exhibit 1, were admitted only as demonstrative exhibits -- to summarize the testimony of witnesses. The remaining two exhibits were documents pertinent to the case. Plaintiff's Exhibit 2 contains equipment purchase terms and related correspondence between the parties near the time of the purchase agreement. Defendant's Exhibit 2 is an e-mail sent to Baucom's Nurseries by Jacob Tsonakis on March 20, 2001, which tends to prove that he had assigned this former customer to Plaintiff. The Court believes that these documents, when read in context, support the Court's factual conclusions concerning this case.
In reviewing a preliminary injunction motion under Federal Rule of Civil Procedure 65, this Court is required to consider four factors: (1) Plaintiff's likelihood of success on the merits; (2) the irreparable harm that could result to Plaintiff if the injunction is not issued; (3) the possibility of substantial harm to others caused by the requested injunction; and (4) the impact on the public interest. Basicomputer Corp. v. Scott, 973 F.2d 507, 511 (6th Cir. 1992); Performance Unlimited v. Questar Publishers, Inc., 52 F.3d 1373 (6th Cir. 1995). This evaluation allows the factors to be balanced and focuses on all four factors -- rather than any particular factor. In re De Lorean Motor Co., 755 F.2d 1223, 1228-30 (6th Cir. 1985).
The first factor, likelihood of success, in this case relates to the likelihood of success of the merits of its claim for injunctive relief to enjoin the violation of the non-competition agreement and, more specifically, to enjoin competition in places in North America wherein Plaintiff is active in selling greenhouse pots. Jacob Tsonakis has not denied that his companies are competing in North America and his e-mail of August 2001 indicated his intent to compete in North America because of Plaintiff's non-payment. Thus, the Court regards that the substance of this dispute is not over whether Defendants are competing, but whether they are bound by the terms of non-competition agreement to not compete in North America.
To begin this discussion, the Court must make an initial and preliminary assessment of the likely source of law to be applied to this controversy. The Court's preliminary assessment is that this controversy is governed by the United Nations Convention on Contracts for the International Sale of Goods ("CISG"), 19 I.L.M. 671 (May 1980), with one exception. The exception is the legal question of the enforcement of the non-competition agreement, which is governed by Michigan law under the parties' forum selection clause. This assessment is based on the several pertinent facts. The United States and Greece are signatories to the Convention. (See Defendants' Brief, Exhibit B.) The goods sold in this case are commercial goods of the type subject to the Convention. While the purchase agreement does not specify the application of any body of law as to the purchase, the non-competition agreement specifies the application of Michigan law, but only as to the enforcement of the non-competition agreement. Also, given the law cited by the parties, they are in apparent agreement as to this choice of law.
With this backdrop, the Court must access whether Defendants now have a legal right to compete for this business in North America. Defendants make several arguments in opposition to the Motion. One argument made by Defendants is that the non-competition agreement is ineffective because of lack of consideration for the agreement. This argument fails. First of all, the non-competition agreement was made part and parcel with the purchase agreement and assumed that the consideration for the non-competition agreement was the consideration for the purchase agreement. Second, under the Convention, a contract for the sale of goods may be modified without consideration for the modification. See CISG, Art. 29; Michael Van Alstine, 37 Va. J. Int. Law 1 & n.47 (Fall 1996) (reaching this conclusion based on the U.N. Secretariat's Commentary on the Draft Convention, U.N. Doc. A/Conf. 97/5 (1979)).
Another argument made by Defendant is that the non-competition agreement is unenforceable because the document failed to specify the jurisdictions in which seller was required not to compete. This argument is not apt in the context of the Convention and the facts of this case. Although the meaning of the non-competition agreement was confused because the parties never attached the schedule describing the extent of the restrictions, the parties' subsequent conduct and discussions revealed an intent to apply this restriction to the United States' market. (See Tsonakis Affidavit P 54, stating that Tsonakis turned over United States' customer list in consequence of the agreement.) Furthermore, given the wording of the Convention, federal courts have determined that international sales agreements under the Convention are not subject to the parol evidence rule and are to be interpreted based on the "subjective intent" of the parties based on their prior and subsequent statements and conduct. CISG, Articles 8 and 9; MCC-Marble Ceramic Center, Inc. v. Ceramica Nuova d' Agostino, S.p.A., 144 F.3d 1384, 1387-1391 (11th Cir. 1998). In this case, the statements and conduct of the parties reveal an intent to require Defendants not to compete as to the United States' market. As such, the failure to specify the precise jurisdiction does not render the agreement invalid.
Defendants also make the related argument that the agreement is invalid because the extent of the non-competition clause was too broad. Under Michigan law, a non-competition clause relating to the sale of a business is generally enforceable provided that it is reasonable in scope, considering the duration, product and geography of the restriction. See Woodward v. Cadillac Overall Supply Co., 396 Mich. 379, 240 N.W.2d 710, 714 (Mich. 1976) (J. Williams, dissenting) (describing general, common law rules); Vogue Cleaners & Dryers, Inc. v. Berkowitz, 292 Mich. 575, 291 N.W. 12 (1940). The party challenging the non-competition clause bears the burden of establishing its unreasonableness. Alders v. AFA Corp. of Florida, 353 F. Supp. 654, 657 (D. Fla. 1973), aff'd, 490 F.2d 990 (5th Cir. 1976). In this case, Defendants have scarcely argued this point and have made no real showing that the case law and facts of this case requires a conclusion that the non-competition clause is unreasonably broad. The scope of the clause is five years. The territory of the clause, as interpreted, is the United States. The clause relates to the sale of a unique product -- a plastics manufacturing line for specialized horticultural products. The clause is typical of agreements of this type, which by their nature intend the sale of the goodwill of the business in addition to the manufacturing machinery. The person to be enjoined -- INA -- is also a foreign corporation with a lesser interest in competing in the United States than a corporation chartered in the United States. Under somewhat similar facts, the Fifth Circuit in the Alders case affirmed a five-year restriction on competition in the United States, Canada and Mexico. Under these circumstances, this defense is unlikely to prevail.
Defendants have also made equitable arguments based upon laches and unclean hands. These arguments, which are not supported by case authority cited, are not persuasive. There has been no extensive delay in the filing of this suit and the Plaintiff's alleged misconduct, principally non-payment, is not such as to warrant the label of "unclean hands." For instance, in Cleveland Newspaper Guild v. Plain Dealer Pub. Co., 839 F.2d 1147, 1155 (6th Cir. 1988), the Sixth Circuit Court of Appeals rejected both defenses and described the "unclean hands" defense as limited to instances of "bad faith." In the Court's judgment, these defenses simply do not apply on the facts of this case.
Defendants' final argument relating to likelihood of success is that the Plaintiff committed the first material breach of the contract and, as such, Defendants are no longer bound by the terms of the non-competition agreement. Defendants also make a related argument that because Plaintiff delayed in complaining about the performance of the equipment, it is not entitled to suspend payment of money owed under the purchase agreement.
This related argument concerns Articles 38 and 39 of the Convention, which require the buyer to "examine the goods ... within as short a period as is practicable in the circumstances" and which further state the buyer "loses the right to rely on a lack of conformity of the goods if he does not give notice to the seller specifying the nature of the lack of conformity within a reasonable time. ..." Article 39 also provides a two-year time period as the outer limit of time for a buyer to notify the seller of a lack of conformity (unless the goods are subject to a longer contractual period of guarantee).
This related argument fails. The wording of the Convention reveals an intent that buyers examine goods promptly and give notice of defects to sellers promptly. However, it is also clear from the statute that on occasion it will not be practicable to require notification in a matter of a few weeks. For this reason, the outer limit of two years is set for the purpose of barring late notices. In this case, there was ample reason for a delayed notification. The machinery was complicated, unique, delivered in installments and subject to training and on-going repairs. The Plaintiff's employees lacked the expertise to inspect the goods and needed to rely on Defendants' engineers even to use the equipment. It is also wrong to say, in light of this record, that notification did not occur until July 6, 2001. Long before the July 6 correspondence, there was a steady stream of correspondence between the parties relating to the functioning of the equipment which may have constituted sufficient notice of the complaints. The international cases cited by Defendants are not apposite to this discussion because they concern the inspection of simple goods and not complicated machinery like that involved in this case.
Nevertheless, the Court does accept Defendants' contention that the Plaintiff's non-payment of progress payments on the machinery did constitute a "fundamental breach of contract." Article 25 of the Convention defines a "fundamental breach of contract" as one "which results in such detriment to the other party as substantially to deprive him of what he is entitled to expect under the contract. �" See Delchi Carrier v. Rotorex Corp., 71 F.3d 1024, 1028 (2nd Cir. 1995) (discussing definition). This is a significant definition in that Article 64 provides the seller a right to declare the contract avoided due to a "fundamental breach of contract." The Convention affords the buyer a right to avoid the contract under Article 49 for a fundamental breach. It likewise affords both buyer and seller the right to suspend or avoid an installment contract due to fundamental breach under Articles 71-73. Article 64 is also specifically worded to give the implication that non-payment of the purchase price is the most significant form of a fundamental breach by a buyer, since, as to a serious non-payment, no additional notifications are required for avoidance of the contract.
In this case, the buyer has had some legitimate complaints concerning the machinery throughout the delivery and training process. However, on the whole, the Court concludes that the evidence submitted best supports the proposition that these complaints did not constitute either a fundamental or even a substantial breach of the contract by the seller. This is particularly true since the context for this dispute -- namely, the machinery has been successfully operated with Defendants' assistance and Plaintiff is a cash-strapped business raising performance questions only after formal inquiries have been made as to non-payment -- tends to show that complaints about performance were opportunistic and not genuine in character. On the other hand, the Court determines that it is likely that non-payment of the large sums due for the performance payments was a fundamental breach of contract and that it excused Defendants' performance of non-competition obligations under the purchase agreement and non-competition agreement. As such, the Court concludes that Plaintiff is unlikely to succeed on the merits.
Plaintiff has cited cases for the proposition that loss of goodwill and loss of business opportunities are the kinds of losses which are irreparable because they cannot later be sufficiently quantified for damage purposes. See, e.g., Basicomputer v. Scott, 973 F.2d 507, 511-12 (6th Cir. 1992). While the Court agrees with that legal proposition, it finds it inapplicable here. Because the Plaintiff had, most likely, committed a fundamental breach of the contract by nonpayment, it has also most likely surrendered its right to seek enforcement of the non-competition agreement. As such, on the present record, the Court does not find that Plaintiff is likely to suffer irreparable harm because of Plaintiff's own fundamental non-performance of its duties under the contract.
This factor focuses on the harm to Defendants caused by a possible wrongful injunction. The Court believes that this factor sorts out like the other factors above. Namely, since the Plaintiff has, most likely, wrongfully failed to pay amounts due under the contract, the Defendants should not be expected to honor obligations for which they have not been paid. As such, the Court determines that this factor disfavors granting relief.
Of course, the public, in the abstract, cares very little concerning which group of manufacturers should manufacture pots in the United States during the course of this lawsuit. However, the public does have an interest in seeing that these pots, which are produced at a more cost-efficient basis than other agricultural pots, are readily available in the market. Thus, the public's interest is best supported by a resolution which would cause both the parties to manufacture pots in the market pending the resolution of this suit. This is particularly true since the Plaintiff's manufacturing abilities have proven suspect such that the market might be jeopardized by licensing the market solely to Plaintiff--a producer who operates its manufacturing on a shoestring budget. Although, as Plaintiff points out, this resolution might threaten its long-term viability, it seems apparent that there are ample threats to Plaintiff's long-term viability even absent denial of this preliminary injunction motion.
Accordingly, an Order shall issue denying the Motion for Preliminary Injunction.
Order. In accordance with the Opinion of this date and the Court's previous findings upon hearing of this matter on December 11, 2001; IT IS HEREBY ORDERED that Plaintiff's Motion for Preliminary Injunction (Dkt. No. 4)is DENIED.

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