Bacou Dalloz Usa, Inc. v. Continental Polymers, Inc.

Facts

Howard Leight was the sole stockholder and President of Howard S. Leight & Associates, Inc. (HLI). Howard Leight was the sole stockholder and President of Howard S. Leight & Associates, Inc. (HLI). HLI manufactured hearing protection products. Bacou (P), an HLI customer, sought to purchase HLI. Leight declined to sell the company. P's co-chairman Walter Stepan and in-house counsel Philip Barr called Leight and HLI's CEO John Dean and requested they come to Rhode Island. Leight and Dean agreed to the trip in part because P was one of HLI's biggest customers. During dinner, Leight informed P he would not sell because the December 1997 offer was $10 million too low. To bridge the $10 million gap, Stepan proposed a $1 million consulting contract for Leight, as well as royalty payments, which would cut the gap in half. They also discussed how P would purchase all its requirements for polyurethane prepolymer, the main raw material for HLI's foam earplugs, from Howard Leight Enterprises for five years. Howard Leight Enterprises, now Continental, was a newly formed corporation owned by top HLI executives, including Leight and Dean. It was created to manufacture polyurethane prepolymer. This contract would bridge the remaining $5 million price gap. The parties agreed to this arrangement and had a champagne toast. On January 12th, Stepan and Barr presented to Leight and Dean a letter drafted by Barr and P's outside counsel. The fourth paragraph provides:...a new company named Howard Leight Enterprises, Inc. (HLE) now D, which will manufacture polyurethane prepolymer, the raw material used in the production of foam ear plugs by HLI and currently purchased from Hampshire Chemicals. This will confirm that P will enter into a supply agreement with HLE pursuant to which P agrees to purchase its requirements for polyurethane prepolymer from HLE for a period of five years provided that the quality and price of such raw material are equivalent to that which is then used by HLI and available from third-party suppliers. Stepan, Barr, and Leight signed the letter. Following the sale, D purchased a property in Mexico on which it built a manufacturing plant and machinery needed to manufacture prepolymer. In January 1999, D informed P it had completed construction and was prepared to begin shipment to P. P and D commenced negotiations for a supply agreement in February 1999. The price of prepolymer remained relatively stable, around $2 per pound both at the time of the January 12th letter and up until February 1999. In October 1998, P requested a price reduction on prepolymer from its then-current supplier, Dow. Dow agreed to reduce its prepolymer price to $1.56 per pound. Dow did not offer this price to other customers. P demanded the $1.56  price from D. The parties also had difficulty agreeing on the quality term. The volume of prepolymer that P would purchase also became a disputed issue between the parties. P wanted to purchase a small percentage of prepolymer from a second source to maintain a backup supplier. D insisted on one hundred percent of its requirements. P submitted to D an initial purchase order for 10,000 pounds of prepolymer at $2 per pound. A portion of this lot would be used for testing and upon qualification, the balance would be used in production. D did not ship the prepolymer to P. More negotiations ensued.  Barr sent another purchase order to D for 10,000 pounds at $2 per pound. The order mentioned that the parties were still working out a confidentiality agreement, but that they would not share confidential information until that was completed. D declined to ship.  P offered D one last supply agreement but D refused. P sued D seeking a declaratory judgment that P had no obligations under the January 12th letter. D claimed that P (1) breached the January 12th agreement; (2) breached its duty of good faith and fair dealing under the January 12th agreement; and (3) falsely misrepresented its intention to enter into a supply agreement with D to induce Leight to sell HLI at a reduced price. The court ruled the January 12th letter was an unenforceable 'agreement to agree.' The district court entered judgment in P's favor finding that P negotiated in good faith and that D's Dean thwarted negotiations. D appealed.

Issues

Rule of Law

Holding and Decision

Legal Analysis

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