Consolidated Data Terminals v. Aapplied Digital Data Systems, Inc.

708 F.2d 385 (9th Cir. 1983

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Nature of the Case

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Facts

D is a manufacturer of computer equipment, including cathode-ray computer terminals. P and D entered into a written distributorship agreement that made P a non-exclusive sales outlet for D terminals. In late 1977, P ordered D's newest and supposedly most advanced terminals, the Regent 100's. D's written specs stated that these rather inexpensive CRT's would operate at the relatively high speed of 19,200 baud (1920 characters per second). D also claimed that the Regents would be 'inherently reliable.' None of the Regent 100 terminals was capable of attaining the 19,200 baud performance rate. They were also plagued by design errors and production problems that caused many of them to malfunction. As many as 25% were totally inoperative upon delivery. P received a steady stream of complaints and returns from the customers. D attempted to perform its warranty obligations. D distributed 'releases' with proposed solutions for specific problems, established a repair depot where customers could ship the defective equipment for service, and on one occasion, sent a special team of engineers to customer sites to work on the malfunctioning terminals. All or most of the Regent 100's became functional within a year after the first terminal deliveries, but these terminals never operated at rates approaching 19,200 baud. The specifications were eventually lowered to 1,900 baud. P then learned that D was stealing large contracts from P and delivering product directly. P entered into a new agreement to distribute terminals made by Hazeltine, another manufacturer whose products P could not previously sell under the D distributorship agreement since D deemed Hazeltine terminals to be 'competitive' with its models. P also entered into another such agreement with Televideo, another 'competitive' concern. P sued D alleging several breaches of contract, breach of an implied covenant of good faith and fair dealing, unlawful interference with prospective business advantage, and fraud in the inducement to enter the distributorship agreement. The district court concluded that D had breached its warranties contained in the sales contracts governing the Regent 100 terminals. It ruled that the purported limitation on remedies contained in the distributorship agreement did not absolve D from either direct or consequential damages stemming from this breach. It found that D had negligently designed and sold the Regent 100 line of terminals, fraudulently representing that they were 'inherently reliable' while knowing that the Regent terminals it had already sold were experiencing operational problems. It ruled that D tortiously interfered with Ps economic relationship with Intel. From the total liability of $655,544.50 ($500,000 in punitives) imposed upon D, the court subtracted $70,054.89 to satisfy D's counterclaim. It entered judgment for Ps in the amount of $ 585,489.61. D appealed.