Opinion
652033/2017
10-19-2020
ANCHOR GLASS CONTAINER CORPORATION, Plaintiff, v. PABST BREWING COMPANY, LLC, Defendant.
Plaintiff was represented by Baker & McKenzie LLP, 300 East Randolph, Chicago, Illinois 60601 (312) 861-8000: Michael A. Duffy—Michael.Duffy@bakermckenzie.com, Michael C. McCutcheon—Michael.McCutcheon@bakermckenzie.com, Michael D. Lehrman—Michael.Lehrman@bakermckenzie.com Defendant was represented by Arent Fox LLP, 1301 Avenue of the Americas, New York, NY 10019 (212) 484-3900, Michael Cryan—Michael.Cryan@arentfox.com, Bryon S. Moser—Bryon.Moser@arentfox.com AND Graff Silverstein LLP, 60 Hawthorne Way, Hartsdale, NY 10530 (212) 381-6055, David Graff—dgraff@graffsilversteinllp.com, Matthew J. Silverstein—nmsilverstein@graffsilversteinllp.com
Plaintiff was represented by Baker & McKenzie LLP, 300 East Randolph, Chicago, Illinois 60601 (312) 861-8000: Michael A. Duffy—Michael.Duffy@bakermckenzie.com, Michael C. McCutcheon—Michael.McCutcheon@bakermckenzie.com, Michael D. Lehrman—Michael.Lehrman@bakermckenzie.com
Defendant was represented by Arent Fox LLP, 1301 Avenue of the Americas, New York, NY 10019 (212) 484-3900, Michael Cryan—Michael.Cryan@arentfox.com, Bryon S. Moser—Bryon.Moser@arentfox.com AND Graff Silverstein LLP, 60 Hawthorne Way, Hartsdale, NY 10530 (212) 381-6055, David Graff—dgraff@graffsilversteinllp.com, Matthew J. Silverstein—nmsilverstein@graffsilversteinllp.com
Barry R. Ostrager, J.
On October 1, 2, 5 and 7, 2020 the Court conducted a virtual bench trial of this action via Microsoft Teams. Direct testimony was submitted by sworn affidavit and all affiants were cross-examined on Microsoft Teams. The testimony of a limited number of the twenty-one trial witnesses was introduced by deposition. Plaintiff, and counterclaim defendant, Anchor Glass Container Corporation ("Anchor") is a glass supplier and manufacturer. Defendant, and counterclaim plaintiff, Pabst Brewing Company, LLC is a provider of alcoholic beverages. By this action, Anchor brings a single cause of action for breach of contract pursuant to the parties' Supply Agreement (Exhibit 1) (NYSCEF Doc. No. 534) executed in October 2015. Pabst asserts three counterclaims for (1) breach of express warranty, (2) breach of implied warranty of merchantability, and (3) breach of implied warranty of fitness for a particular purpose under Article 2 of the Uniform Commercial Code. Pabst's claims relate to the months preceding the execution of the Supply Agreement, and to the period during the existence of the Supply Agreement.
At trial, Ken Sigman (former Chief Operating Officer of Anchor), Ken Wilkes (Chief Financial Officer of Anchor), Francis Burns (damages expert), Jim Goldman (packaging expert) and Michael Mazzoni (sales organization and strategy expert) testified on behalf of Anchor. Eugene Kashper (Chairman and Chief Executive Officer of Pabst), Doug Walker (Regional Vice President of the Southeast at Pabst), Bill Williamson (Director of Regional Chain Account West at Pabst) Steve Eilerman (Senior Director, Blue Ribbon Holdings, Strategy, Production at Pabst), Neil Nersesian (former Vice President of Brewing Operations), Robert Reilly (valuation expert) and James Keener (glass manufacturing expert) testified on behalf on Pabst. Both parties played designations from videotaped depositions of Thomas Wieclaw (Vice President of Sales at Anchor), James Lee (former Sales Account Manager at Anchor), Tyler Gay (former Quality Manager at Anchor), Mathew Krawiec (former Quality Supervisor at Anchor's Henreyetta plant), Patrick Bien (former Procurement Manager at Pabst), Greg Deuhs (former Master Brewer at Pabst), Gleb Lifshits (Vice President of Buzz Works at Pabst), William Harper (former Senior Vice President of Quality at Anchor), and James Fredlake (former Chief Operating Officer of Anchor).
All joint trial exhibits have been e-filed on the Court's NYSCEF system and will be referenced herein by their joint trial exhibit number and NYSCEF Document Number.
Facts Determined at Trial
In January of 2015, Pabst initiated discussions with Anchor regarding the production of glass bottles for a new product called Not Your Father's Root Beer ("NYFRB"), an alcoholic root beer brand. Pabst first sent a purchase order to Anchor seeking to purchase bottles for NYFRB on February 20, 2015. From February 20, 2015 to October 12, 2015 Pabst purchased glass bottles from Anchor on a purchase order basis, (i.e. not pursuant to any written agreement). From March to May 2015, Anchor sold glass to Pabst for NYFRB without incident.
Pabst used contract brewer City Brewing Company ("City Brew") to brew and bottle NYFRB. City Brew initially bottled NYFRB for Pabst in its La Crosse, Wisconsin production facility but later expanded production of NYFRB to its Latrobe, Pennsylvania and Memphis, Tennessee facilities as well. City Brew was responsible for accepting bottles from Anchor, brewing and bottling NYFRB according to Pabst's specifications, and packaging it for delivery to the distributors.
Pabst's initial marketing strategy was to limit supply of NYFRB to certain markets and phase the rollout of the product. See Exhibit 6 (NYSCEF Doc. No 539). According to Pabst's February 2015 budget assumptions for the launch of NYFRB, Pabst projected sales of a total of 800,000 cases for 2015. Id. This budget also contemplated Pabst selling 1.4 million cases in 2016 and 2.2 million cases in 2017. Id.
Due to the initial success of NYFRB, which launched in certain markets in March 2015, Pabst's strategy shifted and Pabst CEO Eugene Kashper advised Anchor that Pabst wanted to accelerate production of NYFRB, thereby requiring a larger supply of glass bottles. Kashper decided that Pabst needed as many bottles as it could get to satisfy its revised demand for NYFRB. See Exhibit 3 (NYSCEF Doc. No. 536). Consequently, Pabst began negotiating a long-term supply agreement with Anchor during the Summer of 2015. Additionally, Pabst raised concerns about City Brew's capacity and sought to expand the number of City Brew plants producing NYFRB. In addition, Pabst increased its orders for the ingredients necessary to produce NYFRB. Pabst announced a national rollout of NYFRB on June 18, 2015.
The glass market was tight in the Spring, Summer and Fall of 2015. See Tr. 189:6-10. Pabst was concerned about securing enough bottles for NYFRB as well as curbing competition. See Tr. 194:8-13, Tr. 361:4-14 and Tr. 362:14-25; Exhibit 3 (NYSCEF Doc. No. 536). For its part, Anchor was concerned about securing a long-term contract if it was going to potentially devote a significant portion of its production capacity exclusively to Pabst. See Exhibit 8 (NYSCEF Doc. No. 541) and Exhibit 15 (NYSCEF Doc. No. 548).
Pabst's internal correspondence during the period from February 2015 to November 21, 2015 and testimony adduced at the trial establishes that while Pabst initially planned a modest rollout of NYFRB, Pabst became euphoric about the extraordinarily positive early reception that its product received. Compare Exhibit 6 (NYSCEF Doc. No. 539) (February 10, 2015 email containing charts with Pabst's planned phased rollout of NYFRB) with Exhibit 7 (NYSCEF Doc. No. 540) (July 27, 2015 email chain in which Kashper writes "I think top priority is getting glass"). Thus, while Pabst was initially content to rely on purchase orders of glass from Anchor, Pabst's CEO Kashper became increasingly excited about prospects for NYFRB sales and exhorted his subordinates to not only make arrangements to order dramatically larger quantities of glass from Anchor, but to also purchase glass from other domestic and foreign suppliers. See Tr. 195:9-196:1. See Exhibit 3 (NYSCEF Doc. No. 536) (September 1, 2015 email chain, Lifshits of Pabst writes to Bill Williamson of Pabst (with copy to Eugene Kashper) "[w]e will buy as many bottles as possible locally and will sign those contracts to block out competitors." Williamson responds, "we need more bottles in January.") See also Exhibit 8 (NYSCEF Doc. No. 541) (Pabst discusses obtaining glass from additional suppliers besides Anchor, including Owens Illinois ("OI"), Ruscam and Ardagh).
Yet, as discussed further infra , by November 15, 2015 Pabst was already experiencing major problems based on their overly optimistic projections. See Exhibit 22 (NYSCEF Doc. No. 555). (Kashper: "Velocity plummeting"; "Glass stock now also becoming a problem." "Expectations for 2016 being revised drastically"; "Have already made huge purchasing commitments to City, glass suppliers, vanilla bean suppliers, etc so it could be a tough year as we are in for material shortfall fees"; "...consensus is that root beer is too sweet to drink regularly"); and Exhibit 21 (NYSCEF Doc. No. 554) (Kashper: "Let's not kid ourselves like we have been for the past 8 weeks. Writing is on the wall").
Specifically, Pabst's pre-Supply Agreement strategy was to buy up a significant quantity of glass bottles, and then manage an overstock situation if needed. See Exhibit 4 (NYSCEF Doc. No. 537) (Williamson: "Eugene, my recommendation is to secure the bottle supplies that are available and then manage the overstock situation if that arises"). See also Exhibit 5 (September 8, 2015 email forwarded to Neil Nersesian by Bill Williamson, in which Gleb Lifshits wrote, "Anchor and OI are cautious signing contracts where our obligation is only 65% of what they promise to supply us" and Bill Williamson responds "Eugene, understood. We will be methodical in the negotiations and balance risk mitigation with supply opportunities").
Pabst's internal emails establish that Kashper not only sought to ensure major supplies of glass for extremely optimistic projections of sales of NYFRB, but Kashper also sought to tie up the supplies of glass that the inevitable copycat competitors might need. See Tr.199:17-200:10 and Exhibit 3 (NYSCEF Doc. No. 536).
While on August 21, 2015 Pabst was still anticipating a massive demand for NYFRB (see Exhibit 17) (NYSCEF Doc. No. 550) (Williamson to Kashper: "[s]upply chain will build a scalable platform to handle above 65 million"), by September 15, 2015 Pabst already knew there were problems with the projections. See Exhibit 2 (NYSCEF Doc. No. 535). Moreover, on October 2, 2015 Vivek Rajbahak, Director of Business Insights at Pabst, wrote Kashper, "[l]ast week depletions came in at 225k cases vs. 275k two weeks prior." Kashper responded "Horrible. Selling 1 million cases per month and producing 3 million certainly won't work for long." See Exhibit 20 (NYSCEF Doc. No. 553).
Pabst signed the Supply Agreement on October 12, 2015 without sharing these concerns with Anchor. See Exhibit 16 (NYSCEF Doc. No. 549), Anchor's Ken Sigman writes Anchor's Bill Harper, "Pabst signed the contract this evening, great news!"
During the period prior to October 12, 2015, Pabst did not have a contract to supply glass for NYFRB with Anchor, or any other company, and Pabst understood that Anchor would not make major quantities of glass bottles available without a contract. See Tr. 553:11-9, Tr. 359:23-360:10 and Exhibit 8 (NYSCEF Doc. No. 541) (September 27, 2015 email chain in which Eugene Kashper writes "[f]or 2016 if OI is going to take another week we might have to sign with Anchor first and give them what they want next year").
During this period, Anchor made it clear that without a long-term supply contract from Pabst, Anchor would utilize its full production of glass for existing customers and other potential customers. See Exhibit 15 (October 2, 2015 email chain in which Doug Walker informs Neil Nersesian, and others, that Pabst had already tried to secure a one-year contract with Anchor without success, "[a]lready tried that angle about 4 weeks ago and they [Anchor] are not willing to sign a one year deal"). See Sigman Aff. ¶ 6:
To accommodate Pabst's volume commitments, Anchor exited business with three other existing customers, National Beverage, Lion Brewing, and Florida Brewing Company. At the same time Anchor and Pabst were negotiating a long-term supply agreement, Anchor was also in the final stages of negotiating a long-term supply agreement with the multi-national beer and liquor company, Diageo. Anchor did not have the capacity to service both Pabst and Diageo, and ultimately terminated its negotiations with Diageo in favor of Pabst.
During the summer of 2015, as the parties were in the midst of negotiating a transition from a purchase-order relationship to a long-term supply contract, City Brew experienced breakage with Anchor's glass bottles.
On June 22, 2015, City Brew told Pabst that it had been experiencing elevated levels of breakage on its filling lines when using Anchor bottles with certain June 2015 manufacture dates. This continued throughout the remainder of June and into mid-July 2015. See e.g. Exhibit 8 (NYSCEF Doc. 541). See also Dep. of Patrick Bien (NYSCEF Doc. No. 662) 166:12-167:23.
It is undisputed that contemporaneous data measuring glass breakage demonstrated that the per-shift breakage rates of all of these bottles were within one break in every ten thousand bottles filled (1/10,000). For example, between June 17 and June 23, City Brew filled over 3.2 million glass bottles with 128 total breaks, for an average breakage rate of .39 per 10,000 (or 3.9 per 100,000) bottles. No single production shift during this period had breakage rates of over 1/10,000 bottles.
The parties presented glass experts at trial to opine on, among other things, the question of which rate of breakage is acceptable in the glass industry when no contractual provision governs. For the period covered by the Supply Agreement (October 15, 2015 onward) the applicable standard was negotiated and set forth in writing. However, the applicable standard for the pre-contract period was hotly disputed and is discussed further in detail infra .
Following an investigation, Anchor determined that contaminants, known as "stones," which came from contaminated recycled glass that Anchor's Henryetta Oklahoma plant used, was the primary cause of the breakage issues in June 2015. Anchor had provided no express warranties related to this June 2015 glass.
Pabst determined to reject all bottles produced by Anchor's Henryetta plant before July of 2015. Pabst rejected the bottles and demanded that Anchor accept the return of a total of 225,000 cases. Anchor agreed to absorb $25,000 in freight and to remove the bottle inventory from Lacrosse and Latrobe that was manufactured at Henryetta prior to July 1, 2015. Pabst did not pay for these bottles.
Nevertheless, during and after the glass breakage problems in June and July, which the Court finds to be grossly exaggerated by Pabst, the parties, energized by NYFRB's early success, continued to negotiate a long-term contract. See Exhibit 12 (NYSCEF Doc. No. 545) (Sigman: "Pabst has hit a home run in the market with their Not Your Father's Root Beer. They are seeing exponential growth and have not yet covered all of their markets. They are forecasting anywhere from 5MM to 8MM gross of demand in the next year for this product, for which they will need to have multiple suppliers.").
The parties negotiated quality standard and minimum purchase requirements among other contract terms. See Tr. 203:22-25. During this period, Pabst did not have a contract with any other glass supplier for NYFRB and operated exclusively on a purchase order basis.
Pabst signed the Supply Agreement on October 12, 2015, securing an agreement that the breakage specification would be 2/100,000, which was a lower breakage specification than Anchor typically agreed to with other customers. See Exhibit 16 (NYSCEF Doc. No. 549) and Exhibit 66 (NYSCEF Doc. No. 599). The quality standards the parties agreed to in the Supply Agreement came into effect on September 1, 2015, pursuant to the terms of the Supply Agreement. There is no evidence in this case that Anchor failed to meet the contractual specifications concerning breakage with respect to NYFRB.
In the Supply Agreement, Pabst committed to purchase a minimum of 1.89 million cases of additional bottles from Anchor between September and December 2015, 10 million cases in 2016, and 12 million cases each in 2017 and 2018 (the "Customer Annual Commitment") "[s]ubject to the termination provisions set forth in Sections 22 through 24." See Exhibit 1, (NYSCEF Doc. No. 534).
Pabst further agreed that, if it failed to meet the Customer Annual Commitment in a given year, Pabst would "pay Anchor liquidated damages equal to $2.00 per Case for the difference between the Customer Annual Commitments and the amount actually purchased by [Pabst] in such Contract Year within thirty (30) days of the end of each Contract Year." Id. at Section 2. The liquidated damages figure of $2.00 per case represents an approximate 30% discount from the $2.74 contract price for a case of glass bottles under the Supply Agreement.
Additionally, the Supply Agreement expressly disclaimed all implied warranties and contained a limitation of liability provision which stated:
In no event shall either party have any liability to the other party for lost profits damages or for consequential, incidental or punitive damages, whether arising under contract, warranty, tort, negligence, strict liability or any other theory of liability, including but not limited to lost profits, loss of use of the Glass, downtime, efficiency losses or loss of goodwill, except as set forth in Section 2 regarding liquidated damages.
See id at Section 28.
By November 2015, Pabst's optimistic projections for NYFRB plummeted. Specifically, the "velocity" of the demand for NYFRB dramatically slowed because, as Kashper acknowledged, the product was too sweet and the early excitement that existed for Pabst's alcoholic root beer had dimmed. See Exhibit 22 (NYSCEF Doc. No. 555) (November 2015 email from Kashper: "consensus is that root beer is too sweet to drink regularly") and Tr. 208:16-24. Kashper and his subordinates realized that the quantities of glass to which Pabst had committed in the Supply Agreement were excessive, and the Pabst executive team attempted to explore options to resell the glass to which it was committed to purchase to third parties. See Tr. 209: 5-12, Tr. 211:13-212:23, Tr. 370:15-25. On November 21, 2015, Kashper wrote:
See also Tr. 545:4-9 (Cross-Examination of Mazzoni) "There was a lot of anecdotal evidence that came back that said that the product was basically a little too sweet. One of the things happened, I think, by design. Early on Pabst decided not to put the caloric content on the bottle. Coney Island did the same thing. When people started to find out there was almost 300 calories in it, that was turn off."
Expectations for 2016 being revised drastically. If we felt in August that we could sell 30 million or more next year (24 million root beer) it now looks like 10-12 million (7-8 million root beer). Have already made huge purchasing commitments to City, glass suppliers, vanilla bean suppliers, etc. so it could be a tough year as we are in for material shortfall fees.
Exhibit 22 (NYSCEF Doc. No. 555)
The evidence adduced at trial established that Pabst knew it could not meet its Annual Customer Commitment for 2016 and that Pabst concealed from Anchor the deteriorating demand for NYFRB. See Tr. 211:13-212:23. On January 14, 2016 Williamson belatedly sent Anchor's Sigman a forecast for 10 million bottles for 2016 after Williamson had learned and acknowledged internally that Pabst would be unable to meet its minimum commitment for glass bottles. See Exhibit 23 (NYSCEF Doc. No. 556). Indeed, earlier that same day, Williamson had emailed a subordinate: "I need you to map out the glass forecast of our expected demand by month...March through Dec should equal 10 million cases. Make it fit and load June & July heavier to make the math work. It needs to total $10m." Exhibit 24 (NYSCEF Doc. No. 557). See also Tr. 214:22-2:15-25, Tr. 217:3-218:3, Tr. 366:15-25 and Tr. 561:10-562:6.
February 16, 2016 was the first time Pabst told Anchor it would not meet its minimum for 2016. Tr. 562:17-563:4. Pabst did not meet its minimum purchase commitments under the Supply Agreement in 2016. Pabst purchased only 2.2 million cases from Anchor, leaving Pabst 7.8 million cases of bottles short on its minimum commitment.
On March 15, 2016, Nersesian emailed Kashper "[t]he glass is a mess... [o]ur projections have us short 4.8 million cases with Anchor. If we take these bottles... we will be sitting on inventory of 10 million cases of glass (5M Anchor/5 million Ruscam)". See Exhibit 26 (NYSCEF Doc. 559). On March 27, 2016 Nersesian wrote Kashper: "[w]e are estimating currently that we will end 2016 with an excess of 5 million cases of Anchor glass. I have a meeting with their leadership next week to discuss options to reduce minimums. No great ideas exist." Nersesian then met with Anchor in early April and attempted to renegotiate the terms of the Supply Agreement.
On April 8, 2016, Ken Sigman of Anchor reported to Anchor management by email that Nersesian, Pabst's then VP of brewing operations and the person who executed the supply contract for Pabst, told Sigman "I shouldn't be sharing this, but there is discussion internally of looking to breach the contract and then litigate if we can't find a suitable agreement in a month". See Exhibit 31 (NYSCEF Doc. 564). At trial, Nersesian testified that he does not recall the conversation and has no contemporaneous notes of his own. See Tr. 565:25-566:11.
Thereafter, the parties continued exchanging contract restructuring proposals, and Pabst suggested extending the term of the Supply Agreement while simultaneously lowering its yearly purchase commitment. Ultimately, the parties were unable to reach a mutually agreeable commercial solution.
On November 7, 2016, Pabst sent a Notice of Default to Anchor "in furtherance of our recent conversations regarding the Pabst/Anchor Contract." Exhibit 35 (NYSCEF Doc. No. 568). This notice was ultimately withdrawn. Anchor refuted Pabst's allegations of breach, and Pabst continued to buy bottles from Anchor into 2017, having withdrawn its claim of material breach.
On February 21, 2017, Anchor invoiced Pabst for $15,568,404.00 for Pabst's 2016 shortfall in orders. Exhibit 37 (NYSCEF Doc. No. 570). Pabst did not pay this invoice.
Pabst then sent a termination notice of the Supply Agreement on March 3, 2017. After Pabst served its notice of termination, on March 3, 2017, Anchor sent Pabst a notice that Anchor was suspending further shipments of glass unless Pabst prepaid all orders.
On March 22, 2017, Anchor sent Pabst a "Notice of its Intent to Terminate the Supply Agreement unless [the outstanding liquidated damages] invoice 21794025 is paid in full within ten (10) days hereof." The notice further stated that "[n]otwithstanding that Anchor had the right contractually to suspend all deliveries as of March 17, 2017, Anchor has noted its willingness to ship to Pabst approximately 66 more truckloads for which payment has been received to date." Exhibit 38 (NYSCEF Doc. No. 571).
Pabst replied on March 28, 2017, stating that Anchor's letter would be deemed to be a termination of the Supply Agreement by Anchor.
On April 14, 2017, Anchor filed the Complaint in this action alleging that Pabst had breached the parties' Supply Agreement having failed to pay Anchor liquidated damages for its purchase shortfall. On June 18, 2017, Pabst filed its Answer and Counterclaims seeking, for the first time, $150 million in damages.
Pabst has three counterclaims: two for breach of implied warranties related to Anchor's June/July 2015 sales and one for breach of express warranties occurring during the life of the Supply Agreement.
As to its pre-Supply Agreement claims, Pabst contends that, due to the alleged quality defects in the 225,000 cases of glass bottles that Pabst rejected in July of 2015, Pabst suffered damages to its NYFRB brand, which, in turn, purportedly led to: (i) Pabst's inability to meet distributor and consumer demand during a critical period, thereby resulting in lost sales and profits, (ii) opportunities for competitors to steal market share, and (iii) reduced expectations with respect to the future performance of the Root Beer brand. In connection with these claims, Pabst seeks consequential damages pursuant to § 2-715 of the UCC. Pabst's revised damages calculation is approximately $60 million, representing lost profits between June 19, 2015 and September 30, 2015 (the pre-Supply Agreement period) of up to $25.8 million; and (2) lost profits from October 1, 2015, to December 31, 2018 (the Supply Agreement period) of between $31.8 million and $34.7 million.
The Supply Agreement
As discussed supra , Anchor and Pabst began negotiating a long-term contract for glass bottles in June of 2015. Nersesian executed the Supply Agreement on October 12, 2015 on behalf of Pabst. Anchor's then CEO James Fredlake executed the Supply Agreement on behalf of Anchor. The Supply Agreement was intended to last through December 31, 2018. Exhibit 1 (NYSCEF Doc. No. 534) at 2.
The Supply Agreement covers various rights and obligations of the parties. The most important provision, for the purposes of this action, is Section 2, which sets forth Pabst's obligation to purchase a minimum number of glass bottles from Anchor in 2015, 2016, 2017 and 2018:
Glass Supply. Subject to the termination provisions set forth in Sections 22 through 24, Customer [Pabst] agrees to purchase, at minimum, the Customer Annual Commitment and Anchor agrees to supply, at minimum, the Anchor Annual Commitment of Customer's Glass. If Customer does not purchase the Customer Annual Commitment in any Contract Year, other than due to a termination of this Agreement pursuant to Sections 22 through 24, a breach of this Agreement by Anchor or a failure by Anchor to provide the Anchor Annual Commitment to Customer, then Customer agrees to pay Anchor liquidated damages equal to $2,00 per Case for the difference between the Customer Annual Commitments and the amount actually purchased by Customer in such Contract Year within thirty (30) days of the end of each Contract Year. The liquidated damages set forth herein shall be Anchor's sole remedy with respect to a failure by Customer to purchase the Customer Annual Commitment in any Contract Year.
The Customer Annual Commitment is defined on page 2 of the agreement:
Customer Annual Commitment, "Customer Annual Commitment" shall mean the below volumes reasonably distributed over the applicable time frame:
• September 1, 2015 to December 31, 2015 = 1,890,000 cases (45,360,000 12 oz bottles)
• January 1, 2016 to December 31, 2016 = 10,000,000 cases (240,000,000 12 oz bottles)
• January 1, 2017 to December 31, 2017 = 12,000,000 cases (288,000,000 12 oz bottles)
• January 1, 2018 to December 31, 2018 = 12,000,000 cases (288,000,000 12 oz bottles)
Anchor was also obligated to supply, at minimum, the Anchor Annual Commitment of Customer's Glass as defined on page 2 of the Agreement. Notably, Anchor was required to make even more bottles available than Pabst was required to purchase:
Anchor Annual Commitment. "Anchor Annual Commitment" shall mean the below volumes reasonably distributed over the applicable time frame:
• September 1, 2015 to December 31, 2015 = 1,890,000 cases (45,360,000 12oz bottles)
• January 1, 2016 to December 31, 2016 = 12,000,000 cases (288,000,000 12oz bottles)
• January 1, 2017 to December 31, 2017 = 15,000,000 cases (360,000,000 12oz bottles)
• January 1, 2018 to December 31, 2018 = 15,000,000 cases (360,000,000 12oz bottles)
Anchor alleges, and the Court finds, that Pabst breached Section 2 of the Supply Agreement. By the plain terms quoted above, Pabst was required to purchase 10,000,000 cases in 2016. It is undisputed that Pabst only purchased 2.2 million cases from Anchor in 2016, approximately 7.8 million cases of bottles short of its minimum commitment.
Pabst Breached the Supply Agreement in 2016
Pabst does not dispute that failing to order 10,000,000 cases in 2016 was a breach of the Supply Agreement. However, Pabst argues that this breach should be excused, and that Anchor is not entitled to recover liquidated damages on several grounds, addressed in turn below.
Pabst first argues that Anchor defrauded Pabst into entering into the Supply Agreement. As an initial matter, the Court notes that Pabst's fraud counterclaims were dismissed in the case. However, the Court advised the parties that the Court would conform the pleadings to the proof adduced at trial. Having considered the extensive pre-trial briefing, the testimony of twenty-one witnesses adduced at trial, and the documents introduced into evidence at trial, the Court finds Pabst's fraud in the inducement claim to be without merit.
Pabst's argument that it was defrauded into entering into the Supply Agreement is interconnected with Pabst's claims, discussed infra , for breach of warranty. Pabst's principal claim is that Anchor falsely assured Pabst that Anchor had identified the pre-Supply Agreement causes of the quality issues that had occurred in the months prior to executing the Supply Agreement and was addressing it. Pabst contends that this was a false representation by Anchor. The evidence adduced at trial established that Anchor did identify the cause of the problem (stones) and that the problem was resolved long before the execution of the Supply Agreement.
Further, the evidence adduced at trial showed that the Supply Agreement was the result of several months of negotiation by highly sophisticated parties with the aid of counsel. See e.g. Tr. 363:21-23. All parties were aware of the stones issue that had occurred in June 2015 during the several months of pre-Supply Agreement negotiations. Tr. 188:23 — 189:12. At trial, Sigman, who had negotiated the Agreement with Pabst, testified that he had never misled Pabst about the quality of the glass during the negotiation period. See e.g. Tr. 28:9-18 (Cross-Examination of Sigman): (Answer)
Yeah. Both of those documents are accurate. In both situations, I'm consistent. We were within specification, but no bottle is ever perfectly nominal. And this glass was toward the higher end of tolerance, but it was within spec. And so it's -- you know, I never misled the customer externally; I never misled anybody internally. It -- the reality was it was in spec and it did run on every line that we put it on, without me receiving one complaint from a customer.
The Court credits Sigman's testimony and finds it to be consistent with other evidence in this case. And, in light of the extended negotiations and sophistication of both parties, the Court further finds that there is no basis for Pabst's claim that it was defrauded into entering into the Supply Agreement. This conclusion is further buttressed by the fact that there is no evidence in the trial record that there were any quality issues with the glass bottles during the remainder of 2015 and all of 2016.
Anchor is Only Entitled to Liquidated Damages through March 31, 2017
Pabst next argues that the liquidated damages that Anchor seeks constitute an unenforceable penalty. This argument raises various legal issues, requiring different legal outcomes depending on the time period at issue. Anchor asserts that the liquidated damages provision was intended to survive for the entire term of the contact. For the reasons discussed infra , the Court finds that in the unique circumstances of this case, liquidated damages should be awarded only through the end of the month Anchor terminated the Supply Agreement.
Liquidated, or stipulated, damages are set by the parties to a contract at the time the contract is executed and are intended to represent the parties' best estimates of damages in the event of a breach. See Truck Rent-A-Ctr. v. Puritan Farms 2nd , 41 NY2d 420, 424 (1977) (liquidated damages are "an estimate, made by the parties at the time they enter into their agreement, of the extent of the injury that would be sustained as a result of breach of the agreement."). Courts routinely enforce liquidated damages provisions provided they are neither "unconscionable nor contrary to public policy." Id. To be enforceable, the liquidated damages must be proportional to the actual amount of damages sustained and the damages must not have been readily ascertainable at the time the contract was executed. Id at 425 (liquidated damages are enforceable only where "actual loss is incapable or difficult of precise estimation"). If a stipulated damages provision is grossly disproportional to the actual damages sustained, or if actual damages could have been reliably calculated at the time of execution, the liquidated damages provision can be an unenforceable penalty. A penalty is a form of punishment that goes beyond curing the actual damage caused.
"Whether a provision in an agreement is an enforceable liquidation of damages or an unenforceable penalty is a question of law, giving due consideration to the nature of the contract and the circumstances." See 172 Van Duzer Realty Corp. v. Globe Alumni Student Assistance Ass'n, Inc. , 24 NY3d 528 (2014). "The burden is on the party seeking to avoid liquidated damages to show that the stated liquidated damages are, in fact a penalty." Id at 536. Where a party establishes a penalty, the proper recovery is the amount of actual damages established by the party. Id., citing JMD Holding Corp. v. Congress Fin. Corp. , 4 NY3d 373, 379 (2005) (emphasis added).
Here, the Supply Agreement sets liquidated damages in the event of Pabst's breach of the minimum Customer Annual Commitment provision. Pabst agreed to pay Anchor liquidated damages equal to $2.00 per case for the difference between the Customer Annual Commitments and the number of cases actually purchased by Pabst. $2.00 per case is approximately 30% less than the $2.74 per case Pabst was otherwise obligated to pay Anchor for the bottles. The parties clearly contemplated a long-term relationship, and the Supply Agreement makes provision for liquidated damages for September through December of 2015, all of 2016, all of 2017, and all of 2018.
The liquidated damages provision, like the rest of the Supply Agreement, was heavily negotiated by Pabst and Anchor. See e.g. Sigman Aff. ¶ 8 ("In an initial version of the contract, there was no discount applied to the contract price for glass for any shortfall by Pabst." "However, in later versions of the contract, Anchor proposed a $2.25 liquidated damages provision, which Pabst negotiated down to $2.00").
Anchor logically insisted upon a liquidated damages clause so that Anchor would be protected if Pabst did not purchase the quantities of glass Anchor was contractually obligated to produce. See Sigman Aff. ¶ 8. Anchor's CFO, Kenneth Wilkes, testified to the high-fixed costs inherent in the glass manufacturing industry. See Wilkes Aff. ¶ 7 — 8:
Glass containers are expensive to make, difficult to store and ship, and are competitively priced. The glass container manufacturing industry is a high fixed cost business, with fixed costs typically accounting to between 50% and 70% of a glassmaker's total costs. At Anchor, furnaces cost several million dollars to replace and require maintenance and repairs. These furnaces heat molten glass to over 2800 degrees Fahrenheit and have to run 24 hours a day every day, because the energy and maintenance costs of cooling, emptying, reheating, and filling a glass furnace are too sizable to cost-effectively operate otherwise, and cooling and reheating a furnace can shorten its useful life. Due to the high fixed costs required to run a glass manufacturing company like Anchor, its glass plants have to be manufacturing glass 24/7, otherwise the operations quickly become unprofitable. Production is scheduled across several furnaces and forming machines with none typically being fully dedicated to a particular customer. If production is stalled, Anchor sustains crippling losses. For example, if Anchor is left with a hole in its production schedule due to a customer's default, Anchor cannot simply shut down the entire glass furnace and fire critical technical support staff without endangering its ability to supply glassware to Anchor's remaining customers that utilize the same furnace/forming machines and fire critical technical staff. Variable costs can be reduced somewhat if a customer does not meet its commitments, but the fixed costs continue to mount and Anchor loses money because it is difficult to simply plug in substitute volume from another source given that most business is under long-term contracts.
In short, it is important to Anchor's business to have an adequate forecast from customers about their glass needs for the year in order to prevent gaps in the manufacturing cycle and consequent losses due to the high-fixed costs of running the machines. See Wilkes Aff. ¶ 11, 12:
Ordinarily, at Anchor and in the industry, glass container supply agreements last from three to five years, or longer. So, if Anchor's production process is interrupted by the failure of a customer to honor its forecasts or commitments, Anchor cannot easily fill the lost volume by reaching out to a new customer who is, in all likelihood, already bound for years to a long-term contract with one of Anchor's competitors. The loss of production volume due to a failure of one customer to meet its forecasted commitment increases the fixed "cost per piece" of all of the remaining glass containers that are produced at the same production facility which, in turn, decreases Anchor's overall profitability and can potentially eliminate it entirely. To mitigate these risks, in my experience, glass manufacturers and their customers agree to minimum purchase requirements in their supply agreements. These provisions frequently occur when market conditions are tight, a new product with high-volume potential is being released, and/or a glass manufacturer is allocating a large amount of its production capacity to a single customer. Under a minimum purchase arrangement, the customer agrees to purchase a minimum quantity of glass from the glass manufacturer at a set price. If the customer does not meet its minimum requirement then it is responsible for paying liquidated damages that are intended to cover the glass manufacturer's fixed costs, the lost opportunities to sell glass to others and capital costs to support the volume.
In order to meet its agreed-upon commitment to Pabst, Anchor undertook $5 million in capital expenditures to expand its capacity. Pabst's anticipated volume was the primary reason for approving this expenditure. See Wilkes Aff. ¶ 17. Additionally, and not insignificantly, Anchor also paid Pabst a $600,000 signing bonus under the Supply Agreement. Further, it is undisputed that Anchor exited three contracts with existing customers and forewent a relationship with a fourth, in order to accommodate Pabst's anticipated high demand for glass bottles projected from late 2015 to 2018. See Sigman Aff. ¶ 6.
The Court finds that the high-fixed costs associated with glass manufacturing, the potential losses caused by gaps in the manufacturing cycle, and the uncertainty related to Anchor's forfeited business relationships with other customers made calculating actual damages in the event Pabst failed to meet its Annual Customer Commitment difficult, as damages were not readily ascertainable at the time the Supply Agreement was executed.
As to the issue of whether $2.00 per case is proportional to the damages Anchor actually sustained, the Court notes that liquidated damages of $2.00 per case, when Pabst would normally be obligated to pay $2.74 per case ordered and received, is reasonable and proportional. See Wilkes Aff. ¶ 19:
Anchor's sales price for bottles was $2.74 per case and was expected to cover (1) fixed costs, (2) opportunity costs, and (3) lost profit. Given that Anchor expected a 26.5% profit margin, its expected costs were $2.03 per case. The only costs that Anchor 'avoided' in a shortfall scenario would be the variable production expense. That variable cost is typically 35% of total cost, or in this case $0.71 per case. Thus, a liquidated damages provision of $2.00 per case was a fair approximation ($2.74 - $0.71) of Anchor's actual damages, meant to account for Anchor's fixed costs and a portion of projected profits, but did not account for capital expenditures to support Pabst's anticipated volumes, lost revenue from customers Anchor left behind to accommodate Pabst, new customer revenue that Anchor did not pursue because of its commitment to Pabst, and the $600,000 bonus payment.
Pabst offered no persuasive testimony suggesting that the liquidated damage provision was unreasonable, and the evidence adduced at trial established that $2.00 per case was a reasonable and proportional estimate of Anchor's potential damages for shortfalls in orders from Pabst during the term of the contract.
The Liquidated Damages Provision Operates as a Penalty post-March 31, 2017
The more salient issue, under the unusual facts of this case, is whether the reasonable liquidated damages provision operates as a penalty upon Anchor's termination of the Agreement. The Court finds that it does.
In 2016, Pabst was obligated to purchase 10,000,000 cases. It is undisputed that Pabst only purchased 2,215,798 cases. Anchor invoiced Pabst for the shortfall, applying the liquidated damages provision in its February 23, 2017 invoice. See Exhibit 37 (NYSCEF Doc. No. 570). Pabst never paid the invoice. For 2016, the liquidated damages provision is enforceable, and Pabst is liable to Anchor in the amount of $15,568,404.00.
In 2017, Pabst purchased 996,894 cases from Anchor. However, because the shortfall from 2016 went unpaid, the parties sought, unsuccessfully, to renegotiate the Agreement. Having failed to reach a revised agreement, Pabst ultimately issued a notice of termination of the Supply Agreement on March 3, 2017 after withdrawing an earlier notice of termination. Anchor issued its own notice of intent to terminate the Supply Agreement on March 22, 2017. The Agreement formally terminated on March 31, 2017 (ten days after the notice was sent). It is undisputed that Pabst did not purchase, and Anchor did not provide, any bottles in 2018.
The language of the Supply Agreement does not unambiguously address the applicability of the liquidated damages provision in the circumstance where the Agreement has been terminated.
Section 2 of the Supply Agreement states in part: "If Customer does not purchase the Customer Annual Commitment in any Contract Year, other than due to a termination of this Agreement pursuant to Sections 22 through 24 , a breach of this Agreement by Anchor or a failure by Anchor to provide the Anchor Annual Commitment to Customer, then Customer agrees to pay Anchor liquidated damages" (emphasis added). Pabst argues that the phrase "other than due to a termination of this Agreement pursuant to Sections 22 through 24" means that when the Agreement is terminated (as provided in Sections 22 through 24) Pabst is relieved of its obligation to pay for unpurchased bottles under the Customer Annual Commitment. Anchor interprets the Agreement to require Pabst to still pay liquidated damages for the term of the contract.
Although both parties called witnesses who had been involved in the negotiation of the Supply Agreement, no witness testified at trial as to the contractual intent of the parties with respect to this particular provision. Because the provision is ambiguous, the Court must interpret it within the context of the entire agreement. See e.g. In re Lehman Bros. Inc. , 478 B.R. 570 (S.D.NY 2012), aff'd sub nom. In re Lehman Bros. Holdings Inc. , 761 F.3d 303 (2d Cir. 2014), and aff'd sub nom. In re Lehman Bros. Holdings Inc. , 590 F. App'x 92 (2d Cir. 2015).
If the Court were to adopt Pabst's reading of the Agreement, that Pabst's termination of the Agreement ends Pabst's obligation to purchase the number of bottles that Pabst had committed to purchase, then the long-term Supply Agreement would be entirely illusory. But, if the Court were to adopt Anchor's reading of the Agreement, then Pabst would be required to pay tens of millions of dollars in damages after Anchor had terminated the Agreement.
Recognizing that the purpose of the liquidated damages provision was to compensate Anchor for the risk that Pabst might fail to meet its minimum Annual Customer Commitment, and that Anchor was devoting a significant portion of its production capacity exclusively to Pabst, the Court finds it is proportional to apply the liquidated damages provision only during the period in which Anchor was supplying glass to Pabst and therefore could not use its equipment and resources to serve other customers. This is a particularly reasonable outcome in this case because, as noted infra , by the time Anchor terminated its Supply Agreement with Pabst, the parties were both planning to separate.
To award Anchor tens of millions of dollars in damages post-March 31, 2017 and for 2018, a year in which Anchor did not use any of its production capacity to serve Pabst, would transform the liquidated damages provision into a penalty because Anchor presented no evidence that Anchor was unable to use its production capacity after March 31, 2017. Indeed, after Anchor sent a notice of termination on March 22, 2017, and for all of 2018, Anchor was free to use the capacity previously allotted to Pabst to serve any other customer.
The Court recognizes that Anchor may have had gaps in obtaining new customers immediately after March 2017, and the Supply Agreement expressly provides that Anchor had no obligation to mitigate damages. However, Anchor was on notice as early as April 2016 that Pabst was never going to fulfill the terms of the Supply Agreement. Moreover, it appears clear to the Court from the sequence of events preceding the April 2017 filing of this lawsuit, that both parties were lawyered-up well before April 2017 and that the correspondence the parties sent to each other was created in consultation with lawyers. The trial record contains no evidence that Anchor sustained actual damages after March 31, 2017. Prior to March 31, 2017, Anchor was preparing to terminate its contract with Pabst, and, presumably, made the arrangements necessary to supply other purchasers. In all events, Anchor provided no evidence of actual damages sustained following the termination of the Agreement as Anchor relied exclusively on its interpretation of an ambiguous contract.
Where a liquidated damages provision is deemed a penalty, damages are limited to actual damages sustained. See supra p. 10.
Thus, the Court finds that with respect to the period post-March 2017, the liquidated damage provision is an unenforceable penalty. As previously noted, by March 2017, both Pabst and Anchor were almost certainly "lawyered up" and the fact that Anchor sent Pabst a termination notice in March, 2017 persuades the Court that by this time Anchor had found alternate buyers for its glass or Anchor likely would not have sent the termination notice. As previously indicated, during all relevant times there was a relative scarcity of glass bottles and, while Anchor had no contractual obligation to mitigate its damages, the totality of facts suggests that it would be a penalty upon Pabst and an unwarranted windfall to Anchor to award liquidated damages for the period after March 2017.
As such, the Court finds Pabst liable to Anchor for liquidated damages during only the months in which Anchor supplied glass bottles to Pabst: $15,568,404.00 for 2016, $4,006,332 for 2017, and $0 or no damages for 2018.
The 2017 damages figured is based on a prorated reduction. Pabst was required to purchase 12,000,000 cases in 2017, or approximately 1,000,000 per month. Therefore, by late March 2017 when the Agreement was terminated, Pabst should have purchased about 3,000,000 cases. Pabst only purchased 996,894 cases. Thus, the prorated liquidated damages for the 2017 shortfall (3,000,000 — 996,894 = 2,003,166) multiplied by the $2.00 per case is $4,006,332.
Accordingly, the Court finds that Pabst is liable to Anchor for $15,568,404.00 for 2016, with interest accruing at the statutory rate of 9% per annum from the date of breach and $4,006,332 for 2017 with interest accruing at the statutory rate of 9% per annum from the date the Agreement was effectively terminated — March 31, 2017. Pabst is not liable to Anchor for any damages in 2018.
The date of breach is January 30, 2017 the day that Pabst was required to pay the shortfall invoice for 2016. Pursuant to Section 2, Pabst was obligated to pay the shortfall invoice, if any, "within thirty (30) days of the end of each Contract Year." Exhibit 1 (NYSCEF Doc. No. 534).
Pabst's Warranty Claim
As noted above, Pabst's breach of warranty claims are premised on quality issues that pre-dated the execution of the Supply Agreement — specifically the 225,000 cases that Pabst rejected as defective in July 2015. Pabst's claim is that returning the cases, without any sampling to determine whether there were non-defective bottles, caused a disastrous domino effect, leading Pabst to "go dark" during a critical period of the NYFRB rollout (July — August 2015). Specifically, Pabst claims that because those cases were returned, there was a gap in selling NYFRB that allowed competitors to enter the market and take shelf space that would have otherwise gone to NYFRB.
The Court finds that the totality of the evidence presented established that there were quality issues with Anchor's glass manufactured on a least one day in June of 2015. The Court very reluctantly concludes that Pabst was within its rights to reject the cases and that Pabst did not have an obligation to sample the cases to determine the percentage of defective bottles from the cases, even though the totality of the evidence established suggested than an extraordinarily high percentage of the bottles would be defect-free. As previously noted, the trial record established that less than 1/10,000 of Anchor's bottles were defective during this period. Surely, if Pabst desperately needed bottles, it would most certainly have taken steps to salvage the hundreds of thousands of bottles in those cases that were not defective. Indeed, the credible evidence at trial established that the defective bottles may have been produced on a single day. See Dep. of Patrick Bien (NYSCEF Doc. No. 662) 192:18-193:4.
On the issue of the proper specification of acceptable breakage for bottles ordered prior to the execution of the Supply Agreement, Anchor claims the appropriate standard was 1/10,000, which was a specification that Anchor's pre-Supply Agreement glass met. Pabst, relying on a document Anchor apparently inadvertently shared with Pabst, argues that the standard should be 3/100,000.
The Court accepts that the 1/10,000 standard may be insufficiently exacting, even though there are contracts that Anchor and other glass companies have which set 1/10,000 bottles as the standard. The Court further concludes that whatever Pabst's questionable motivation was for returning the 225,000 cases, it was within Pabst's right to return them without doing any sampling of the 225,000 cases. There is, however, insufficient record evidence to award Pabst any damages relating to these 225,000 cases.
City Brew invoiced Pabst for approximately $42,000 of "down time" following the return of the 225,000 cases. However, Pabst did not pay that invoice, thus and Anchor is not liable to Pabst for that invoice. See Exhibit 41 (NYSCEF Doc. No. 574) (email regarding the invoice from City Brew sent to Pabst, Tom Wieclaw of Pabst writes to Bill Harper, with copies to Anchor, "Attached is claim submitted by [C]ity to [P]abst. I told them to not pay. We will negotiate this with [C]ity directly." See also Exhibit 33 (NYSCEF Doc. No. 567) and Tr. 572:14-573:14 (Cross-Examination of Nersesian):
Q And below that, sir, the presentation your team wrote is, "multiple issues, none currently active, all resolved." Is that what your team wrote, sir?
A Yes.
Q Okay. And if you look at the next page, sir, which is Exhibit 34.08.
A Mm-Hm.
Q This apparently refers to the June 2015 quality issues, correct?
A Yes.
Q And it says, "Anchor position. They state it is their belief there was an Anchor and Pabst agreement that this was no longer an issue when the contract was signed on October 12, 2 2015." And your team writes. "No one on Pabst team can be identified to corroborate the statement to our position." Is that what your team wrote, sir?
A Yes.
Q And below that, sir, on this page describing the 2015 quality issues it says "$42,582.50 value believed to be owed to Pabst by Anchor. In actuality, Pabst has never paid City yet for this item." Is that what your team wrote in October of 2016 describing the June 2015 quality claims?
A Yes, these were the -- this was the summary of the hard costs related to charges related to City, specific to City. (emphasis added).
The Court rejects Pabst's theory of lost profits for two main reasons. First, under the law, lost profits are not available as relief if they are too speculative. Second, even if this category of damages were available, the Court finds that Pabst failed to prove actual damages at trial; specifically, the testimony at trial strongly indicated that Pabst's theory of damages is an ex post facto confection as Pabst was able to ship 850,000 cases of NYFRB during the period Pabst claims it went "dark."
A party seeking to recover lost profits for breach of warranty must establish that the alleged lost profits are (1) "capable of proof with reasonable certainty" and not "merely speculative, possible or imaginary," and (2) "directly traceable to the breach" of warranty, "not remote or the result of other intervening causes," and (3) within the contemplation of the parties at the time of contracting". See Kenford Co, Inc. v. Cnty. of Erie , 67 NY2d 257, 261-62 (1986) ; see also Billion Tower Int'l, LLC v. MDCT Corp. , No. 08 Civ. 10 4185 (LAK) (JLC), 2010 U.S. Dist. LEXIS 138874, at *28, 2010 WL 5536513 (S.D.NY Dec. 10, 2010) (applying this same standard to a case governed by UCC § 2-715 ). Failure to meet any one of these elements forecloses recovery of lost profits. Id.
Where there are a "multitude of assumptions required to establish projections of profitability," which themselves require speculation, then the lost profits damages sought are not reasonably certain and cannot be recovered. See Kenford at 599 (1st Dep't 1995) (affirming order granting defendant's motion for partial summary judgment and dismissing the claim for loss of future profits where the "multitude of assumptions underlying plaintiffs' demand for loss of future profits in the situation herein renders it impossible to satisfy the 'reasonable certainty' test"); see also RIJ Pharm. Corp. v. Ivax Pharms., Inc. , 322 F. Supp. 2d 406, 415 (S.D.NY 2004) ("[A] calculation and award of lost profits may not be based on speculation.").
Further, in July of 2015 when the cases were rejected, NYFRB was a new product with barely a three-month track record from which alleged damages from the voluntary and dubiously necessary return of the 225,000 cases of product cannot be accurately projected. New York courts have recognized that a months-long history of sales is patently insufficient to support a claim for future lost profits. See, e.g. Pop Cowboy, Inc. v. 175 W. 73rd St. Realty Corp. , 292 AD2d 300, 301 (2002) (vacating lost profit award and finding "[n]or should lost profits have been awarded based only on four months of operation").
Pabst's lost profits projections for the Pre-Supply Agreement period are predicated on highly speculative assumptions and conjecture. Calculations by Pabst's expert Robert Reilly were entirely predicated upon Pabst's representations that Pabst would have been able to obtain sufficient bottle supply and brewery capacity to fulfill orders for 5.3 million cases, which Pabst contends were cancelled solely because of its rejection of 225,000 cases of Anchor's defective glass. See Tr. 438:9-18 (Cross-Examination R. Reilly). The Court reject's Pabst representation and all of Reilly's opinions based on Pabst's representations as speculative.
Even if Pabst's lost profits were not wildly speculative, the Court finds that Pabst did not — as Pabst claims — experience a "dark period" as a result of rejecting the 225,000 cases in July 2015. Significantly, while there were issues with respect to bottles produced by Anchor during June of 2015, there is no persuasive evidence that any of these issues caused Pabst to "go dark" during the critical July/August time period. During August, Kashper was still euphoric about the success of the June, July, and August rollout of NYFRB. See Exhibit 17 (NYSCEF Doc. No. 550) (August 21, 2015 e-mail from Kashper: "500 million bottles from abroad in 2016 is the way to go!"). Pabst's contention that it "went dark" is belied by the optimism that pervaded Pabst in the months immediately preceding the execution of the Supply Agreement and by the fact that Pabst willingly entered into the Supply Agreement with Anchor in October 2015. See supra p. 3. Moreover, it is undisputed that after resolving the quality issues during June/July 2015, Pabst never informed Anchor of any damages tied to that time period. Pabst also never mentioned the issue to Anchor at any time in 2016.
Further, Anchor's industry expert Michael Mazzoni convincingly testified that NYFRB never went dark and that Pabst lost no shelf space. Mazzoni Aff. ¶ 13 (b). Mazzoni noted the shipment of 850,0000 cases during the alleged dark period and the ultimate nosedive in sales Pabst suffered when it expanded the markets to which NYFRB was shipped. Tr. 541: 3-15. By contrast, Pabst's expert Reilly offered completely speculative and facially incredible estimates of damages based on assumptions provided by Pabst.
Finally, the evidence suggests that Pabst confected alleged damages from the pre-Supply Agreement period in response to Anchor's meritorious deci-million dollar claim for liquidated damages. Indeed, the weight of the evidence established that the return of the 225,000 cases in July, 2015 arose out of a complaint by City that was of little concern to Pabst. See Exhibit 33 (NYSCEF Doc. No. 566) and Tr. 570:10-571:15 (Cross-Examination of Pabst's Nersesian):
Q And the title of the e-mail is: Subject Confidential: Anchor Glass issue in 2015. Do you see that, sir?
A I do.
Q And you say, "Doug, Greg, I know before my time there was a claim to Anchor for a glass quality issue. Do you guys have the formal request claim to Anchor? Was this ever resolved?" Is that what you wrote to your colleagues, sir?
A Yes.
Q Okay. And below that you say, "I need to make sure that we have the complete history when dealing with this contract issue." Correct?
A Yes.
Q Okay. And above that, sir, Mr. Walker responds to your query; is that right?
A Yes.
Q And Mr. Walker, he doesn't say, boy, that that 2015 quality issue was worth tens of millions of dollars. That cost us $30 million of lost sales. What Mr. Walker says to you is, "let me look through my files." Isn't that what he says, sir?
A Yes.
Q Okay. He says then, "I believe the claim was sent to City from Anchor -- to Anchor, and this was during all of the issues we had with Anchor on the bottles that kept breaking. I believe the claim was for downtime on the line and I know there were several points of communication that went back and forth but I will have to look." Is that what Mr. Walker wrote to you, sir?
A Yes.
By March 2016, Pabst was attempting to renegotiate the terms of the Supply Agreement and by April 8, 2016 Sigman of Anchor reported to his colleagues by email that Nersesian had told him "there is discussion internally of looking to breach the contract and then litigate if we can't find a suitable agreement in a month." See Exhibit 31 (NYSCEF Doc. 564). On cross-examination Nersesian failed to rebut Sigman's trial testimony affirming the accuracy of his contemporaneous email, and the Court expressly finds based on the credibility of the witnesses at trial that Nersesian made the statement attributed to him in the April 8 memo and that Pabst conformed its later conduct to the strategy attributed to Pabst by Nersesian in Sigman's memo. Cf Nersesian Aff. ¶ 28. The Court similarly credits Sigman's testimony with respect to this critical issue. Sigman Aff. ¶ 15.
In sum, Pabst failed to purchase the bottles it had committed to purchase in 2016 in the Supply Agreement, failed to pay the liquidated damages for the shortfall in the bottle orders to which Pabst had committed in 2016, and when Anchor initiated this litigation in April of 2017, Pabst advanced its breach of warranty claims in an attempt to reduce the substantial liability Pabst was confronting.
Pabst has advanced the claim, which this Court rejects in its entirety, that the return of 225,000 cases of allegedly defective bottles in June/July 2015 caused $60+ million dollars in brand value diminution. The claim, preposterous on its face, ignores the fact that Pabst shipped 850,000 cases of NYFRB during this period. In short, there is insufficient evidence to conclude that defective Anchor bottles caused Pabst any damages, as Anchor's marketing expert Michael Mazzoni compellingly testified in his direct testimony and under cross-examination. Tr. 541:3-15. The reality is that by late 2016 Pabst was clearly attempting to a lay a foundation for the meritless counterclaims it advanced at trial.
Not Your Mom's Iced Tea Wire-Edge Defect
In the early part of 2017, Pabst was about to launch another new product, Not Your Mom's Iced Tea ("Iced Tea"). On January 23 and 24, 2017, during a production run of Iced Tea bottles supplied by Anchor's Henryetta Facility, City Brew's Latrobe Facility experienced excessive bottle bursts on the filler. In response, City Brew immediately placed a hold on all bottles within a certain production range that City's Latrobe Facility believed was related to the bottle containing inclusions. After learning that the defective cases of Iced Tea had already been shipped to Pabst's distributors, Pabst issued a voluntary recall of all the affected Iced Tea.
Pabst established that the defective bottles contained what is known as a "wire edge" defect. See Deposition Designations of William Harper 21:23-23:1, 27:17-28:12, 77:15-78:7; Affidavit of Jim Goldman (NYSCEF No. 649) ¶ 21; id. Ex. A at 41-42; Tr. 90:3-92:21 ("Q: This is out of specification under the contract, this wire edge defect, isn't it? [Sigman:] Oh, yeah, yes."), 121:5-122:7, 127:5-128:1; accord Affidavit of Steven Eilerman (NYSCEF. No. 642), ¶¶ 16-20. The evidence at trial further established that Anchor mistakenly reshipped the same defective glass bottles at a later date, and then recalled them. Tr. 93:15- 23.
Pabst argues that a "wire edge" defect is a "critical defect" under the Supply Agreement and thus a per se breach of the Supply Agreement. Tr. 314:12-315:5. The Court disagrees.
Under the Supply Agreement, Anchor has the right to cure any defects upon notification. See Exhibit 1 (NYSCEF Doc. No. 534) at Section 22:
In the event that one party breaches any material obligation under this Agreement, other than Customer's failure to pay any outstanding invoice when due, the other party shall give the breaching party written notice of the breach ("Cure Notice"). If the breaching party fails to cure the breach within thirty (30) days of receipt of the Cure Notice, the other party shall have the right to terminate this Agreement effective thirty (30) days after written notice of termination ("Termination Notice"). The other party's right to terminate this Agreement shall automatically expire if the breaching party has cured the breach prior to the breaching party's receipt of the Termination Notice.
The evidence adduced at trial showed that when Anchor was notified of the wire edge defect, it undertook corrective measures, immediately performed a complete audit and determined that the defect had impacted glass manufactured during a limited time on October 3, 2016. Exhibit 88 (NYSCEF Doc. No. 621). Anchor immediately ceased shipping all of its inventory produced on October 3, 2016 and made plans to retrieve any affected bottles from distribution. Id.
Anchor's right to cure under the Supply Agreement was triggered by Pabst's cure notice on January 31, 2017. It is undisputed that Anchor acted to cure this defect, the impacted bottles were recalled, and no defective glass ever reached a consumer. See Sigman Aff. at ¶ 28; Rebuttal Aff. of J. Goldman at ¶ 21; and Exhibit 88 (NYSCEF Doc. No. 621). Critically, as Wilkes testified, even after this incident, Pabst continued to order, and Anchor continued to supply, glass under the Supply Agreement. Tr. 159:24-160:5 ("Q. Okay. After Pabst and Anchor discovered the wire edge defect in February 2017, did Anchor continue to supply glass to Pabst pursuant to the Supply Agreement? A. Yes. Q. Okay. Did Pabst continue to order glass from Anchor pursuant to the Supply Agreement? A. Yes.").
Because Anchor exercised its right to cure the defect, Pabst failed to establish that Anchor breached the Supply Agreement and cannot use the wire edge defect to avoid Pabst's obligations under the contract. Nevertheless, Pabst should be compensated for its actual damages sustained due to the wire edge defect, which Reilly opined, and Anchor stipulates, are $389,702. See Reilly Aff. at ¶ 23.
See NYSCEF Doc. No. 660 "[t]hat amount can and should be deducted from the liquidated damages owed to Anchor.
In conclusion, while the Court rejects Pabst's other claims, the Court finds that Pabst should be compensated for its actual damages for the Not Your Mom's Iced Tea wire edge defect period for $389,702.00.
Accordingly, it is hereby,
ORDERED that defendant Pabst Brewing Company LLC is liable to plaintiff Anchor Container Corporation for $15,568,404.00 with prejudgment interest accruing at the statutory rate on 9% per annum from January 30, 2017; and it is further
ORDERED that defendant Pabst Brewing Company LLC is liable to plaintiff Anchor Container Corporation for $4,006,332.00 with prejudgment interest accruing at the statutory rate of 9% per annum from March 31, 2017; and it is further
ORDERED that plaintiff Anchor Container Corporation is liable to defendant Pabst Brewing Company LLC for $389,702.00 with prejudgment interest accruing at the statutory rate of 9% per annum from June 19, 2015 .; and it is further
The date the defective bottles for Not Your Mom's Iced Tea were produced at the Henryetta plant.
ORDERED that the Clerk is directed to enter judgment in favor of the respective parties in the amounts set forth herein, with interest as calculated by the Clerk of the Court, upon counsel's filing of a Proposed Judgment directed to the County Clerk; and it is further
ORDERED that all claims not expressly granted in this decision are denied.