Opinion ID: 172000
Heading Depth: 2
Heading Rank: 1

Heading: The Parties' Relationships

Text: The second trial lasted 16 days. To put our analysis in context, we summarize here the essential evidence at that trial. Additional evidence will be addressed in our discussion of specific issues. Mr. Haynes's relationship with Trane began in 1958 when he took a sales position at Trane's Boston franchise. Over the course of the next decade he took on increasing responsibility and in 1967 his efforts were rewarded with an offer to run Trane's Denver franchise. The franchise agreement was for an indeterminate length, and provided that it could be terminated by either party upon 30 days notice to the other. Aplts. App. Vol. XII at 5388. Mr. Haynes formed HaynesTSA soon after he received the franchise. Initially HaynesTSA was a service wing of Mr. Haynes's operations. Its role expanded in 1990, however, when it entered into an agreement with Trane to distribute Trane's unitary HVAC products, smaller units for residential and light-commercial applications. Although the initial agreement was for a term of five and one-half months, it was renewed on a yearly basis the following five years in substantially the same form. Either party could terminate the agreement at will upon proper notice. Central to this case is a flexible pricing program that Trane developed through a series of policy statements or Sales Plan[s] provided to its distributors. The program helped Trane distributors compete for business. Thus, although the program was not set forth in HaynesTSA's contract with Trane, HaynesTSA had good reason to participate. The program worked as follows: If a distributor risked being underbid by its competition, it could request a lowered price quote from Trane. If the request was granted, the distributor could then sell the product at a reduced price and claim back (that is, seek from Trane) a portion of the reduction. Id. Vol. XIII at 5984. As a precaution against error or fraud, distributors were required to accompany claimbacks with the invoice number for the sale and retain a copy of the invoice for two years, thereby enabling Trane to determine whether a distributor ultimately sold the unit for the stated price. If a discrepancy was discovered before Trane credited a claimback, Trane adjusted the claimback; but even after a claimback was credited, Trane reserved the right to recover the amount of credit improperly claimed. Id. Vol. XIII at 5988. Although Mr. Haynes was president of HaynesTSA, he had little experience in the unitary-products market and therefore hired Willard Forward to manage that company's distributorship venture. Forward and his subordinates gamed the claimback program in a number of ways. Denice Louder, a billing administrator at HaynesTSA, testified that at Forward's behest she routinely submitted claimbacks that stated a price quote below the actual price at which HaynesTSA sold the item. She also testified that HaynesTSA submitted some claimbacks for nonexistent projects and others for units that had been secretly sold to Trane salesmen (claimbacks were available only for units sold to final customers). All told, Louder testified that nearly every one of the claimbacks that she submitted to Trane contained something that wasn't completely right. Id. Vol. XI at 4983. Periodically, Trane would request random invoices from HaynesTSA to determine whether the amount HaynesTSA billed a customer matched the price stated in a claimback. When there was a mismatch, Louder would recreate or alter the customer invoice so that it comported with the claimback documents previously submitted to Trane. But HaynesTSA was not able to conceal the fraud completely. HaynesTSA's unusually high claimback rate (that is, the percentage of units for which it sought a claimback) led Trane to conduct an on-site audit of its books in 1995. Trane's auditor would ultimately visit HaynesTSA's offices on three occasionsMarch 6, April 3-5, and April 17-18and discover significant discrepancies between HaynesTSA's claimback submissions and its customer invoices. During the weeks between the announcement of the audit in mid- or late-February and the arrival of Trane's auditor on March 6, HaynesTSA employees engaged in a concerted, though ultimately unsuccessful, effort to replace customer invoices with fraudulent invoices that matched the representations supporting the claimbacks. This effort came to the attention of Mr. Haynes when two employees, Denice Louder and Vicki Graves, told him that invoices were being retyped to give to Trane's auditors and that employees were, in effect, covering our tracks. Id. Vol. VI at 2479. Mr. Haynes asked HaynesTSA's chief financial officer, Steven Moss, to investigate the matter. Moss reported back to Mr. Haynes that invoices were indeed being recreated for the claimback audit. Mr. Haynes, however, did not inform Trane of the coverup, despite several opportunities to do so. He said nothing to Trane's auditor on March 6. On March 17 a former HaynesTSA employee informed Trane that HaynesTSA was generating false claimback documentation. Trane officials flew to Denver and confronted Mr. Haynes with that accusation on March 21. During the meeting Mr. Haynes adamantly denied that HaynesTSA kept two sets of books, Id. Vol. V at 2265, again neglecting to mention that fake invoices had been typed for the audit. During the continuation of the audit in April, the extent of HaynesTSA's abuse of the claimback program became apparent. Extrapolating from the limited sample of claimbacks reviewed, the auditor estimated that HaynesTSA had collected $852,000 in undeserved claimbacks. Trane also confirmed that HaynesTSA had attempted to conceal discrepancies by altering and recreating invoices. When Trane confronted Mr. Haynes with its findings, he asked for the auditor's report so that he could investigate its accuracy; he did not confess his awareness of the coverup effort. On June 6 Trane terminated HaynesTSA's distributorship agreement. Shortly thereafter it gave Mr. Haynes notice that it would terminate his franchise in 30 days (the length of notice required by the franchise agreement). When it terminated the franchise agreement, Trane suspected that Mr. Haynes was aware of the claimback abuses. That suspicion would be confirmed during the second trial when Mr. Haynes testified that he had been aware before the March 6 audit that HaynesTSA employees were recreating invoices to give to Trane's auditors.