Opinion ID: 681008
Heading Depth: 2
Heading Rank: 1

Heading: The Settlement of the Initial Controversy

Text: 4 In January 1991, Toy Biz introduced into the United States toy market its small male child robot called My Pal 2, which was designed to talk and to perform several play functions such as throwing a small ball. Its retail price ranged from $50 to $70, and its wholesale price ranged from $35 to $37. In January 1992, In Time introduced its Rollin Robbie robot which, though less sophisticated, performed similar functions. The Rollin Robbie sold for a fraction of the price of My Pal 2, at $25 to $30 retail and approximately $13.90 wholesale. 5 In August 1992, in the face of copyright and trade-dress infringement claims from Toy Biz, In Time commenced an action in the district court seeking declaratory and injunctive relief. In October, after the court had denied cross-motions for preliminary injunctions, the parties entered into a settlement agreement (the Agreement), pursuant to which In Time agreed to cease the manufacture and sale of Rollin Robbie or any product having a substantially similar appearance and to assign to Toy Biz all rights in the creation and design of Rollin Robbie. Toy Biz agreed to purchase 17,500-17,700 Rollin Robbies from In Time at $10.35 per unit, provided they were delivered to Toy Biz no later than October 31, 1992. Toy Biz agreed to pay for these units by hand-delivered check within 24 hours of their receipt. The Agreement provided that In Time could also sell up to 20,200 Rollin Robbie units to others through November 30, 1992, retaining 57.5% of the profits and remitting the remaining 42.5% to Toy Biz. No later than December 1, 1992, In Time was required to destroy any remaining inventory. Upon the elimination of In Time's Rollin Robbie inventory in accordance with these steps, Toy Biz was to pay In Time $150,000 out of an escrow account funded by Toy Biz. 6 The Agreement required that the units In Time sold to Toy Biz be in good working condition and required that In Time repair or reimburse Toy Biz for any defective units. (Agreement p 3(c).) It further provided that 7 In Time shall use its best efforts to ensure that all units of Unsold Inventory hereinafter sold and delivered by In Time shall be of the same or higher quality as [sic ] any Rollin Robbie product sold and delivered by In Time to date. In Time covenants that the materials and components used in the manufacture of such Unsold Inventory shall be of at least the same quality as the materials and components used in Rollin Robbie product sold and delivered to date. 8 (Agreement Sec. 3(e)). 9 The Agreement also stated that it constituted the complete and total Agreement of the parties with respect to its subject matter, incorporating all representations, warranties and/or statements upon which they will rely and merging all prior discussions and negotiations between them, and that [a]ny changes or modifications to this Agreement must be in writing and signed by both parties. (Agreement Sec. 8(A).) The Agreement stated that it was to be interpreted under New York law (id. Sec. 8(B)), and that in any suit alleging breach of the Agreement the prevailing party would be entitled to reasonable attorneys' fees (id.). 10 The Agreement provided that [f]inished Rollin Robbie units were to be inspected at [In Time's] China factory before final packing and shipment to Hong Kong pursuant to statistical inspection procedure to be agreed upon by parties. (Agreement p 3(c)(1).) On October 12, 1992, shortly after signing the Agreement, the parties met in Hong Kong, along with their local agents and a representative of a toy testing company, to discuss inspection. Toy Biz president Louis Schwartz brought with him a copy of the My Pal 2 quality specifications check list, and during the 15-30 minute meeting he referred to various tests on that check list and made written notes on it with regard to differences between My Pal 2's functions and Rollin Robbie's functions. At the end of the meeting, Schwartz made copies of his marked-up list and distributed them to the meeting participants; after the meeting, he faxed another copy of the marked-up list to In Time, with a note stating, in pertinent part, [y]ou now have a copy of the Q.C. specifications we agreed to. In Time did not respond. 11 One of the written specifications for My Pal 2 required that the toy be tested by being dropped four times from a height of three feet (the drop test). This test had two purposes: (1) to determine whether the dropped toy had any broken or sharp edges (drop safety test), and (2) to determine whether it could continue to perform its play functions (drop function test). On October 22, 1992, In Time was notified that Toy Biz would not purchase Rollin Robbie units from In Time because they did not meet My Pal 2's drop function test. 12 On October 29, 1992, Toy Biz offered to buy the Rollin Robbie units; but instead of paying for them within 24 hours as provided by the Agreement, Toy Biz sought to hold 50% of the purchase price in escrow for approximately five months. On January 5, 1993, Toy Biz made a similar offer that would have allowed it to hold approximately 27% of the purchase price in escrow. In Time rejected both offers. 13