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Tokyo Ohka Kogyo America, Inc. v. Huntsman Propylene Oxide LLC

United States District Court, D. Oregon

August 8, 2014

TOKYO OHKA KOGYO AMERICA, INC., Plaintiff,
v.
HUNTSMAN PROPYLENE OXIDE LLC, Defendant

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[Copyrighted Material Omitted]

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For Plaintiff: Bruce H. Cahn, Peter S. Hicks, BALL JANIK LLP, Portland, OR; Kimberly A. Donovan, GCA LAW PARTNERS LLP, Mountain View, CA.

For Defendant: Philip S. Van Der Weele, Stephanie E. L. McCleery, K& L GATES LLP, Portland OR; Bruce A. Blefeld, Edward W. Duffy, K& L GATES LLP, Houston, TX.

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OPINION AND ORDER

Michael H. Simon, United States District Judge.

Tokyo Ohka Kogyo America, Inc. (" TOK" ) asserts a claim for breach of contract against Huntsman Propylene Oxide LLC (" Huntsman" ). TOK purchased a chemical manufactured by Huntsman and alleges that Huntsman breached its agreement to notify TOK in a timely fashion if Huntsman changed its chemical manufacturing process. The parties agreed to litigate this case in phases and further agreed that " Phase 1" of the litigation would encompass only whether the limitation of liability clause contained in Huntsman's general terms and conditions of sale that were attached to the Credit Application that TOK executed with Huntsman applies to limit TOK's potential damages in this action. The parties cross-move for summary judgment on this Phase 1 question. For the reasons stated below, the Court finds that the limitation of liability clause is not enforceable under Uniform Commercial Code (" UCC" ) Section 2-719 and thus does not limit TOK's damages in this lawsuit. Accordingly, TOK's motion for partial summary judgment is GRANTED, and Huntsman's motion for partial summary judgment is DENIED.

STANDARDS

A party is entitled to summary judgment if the " movant shows that there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law." Fed.R.Civ.P. 56(a). The moving party has the burden of establishing the absence of a genuine dispute of material fact. Celotex Corp. v. Catrett, 477 U.S. 317, 323, 106 S.Ct. 2548, 91 L.Ed.2d 265 (1986). The court must view the evidence in the light most favorable to the non-movant and draw all reasonable inferences in the non-movant's favor. Clicks Billiards Inc. v. Sixshooters Inc., 251 F.3d 1252, 1257 (9th Cir. 2001). Although " [c]redibility determinations, the weighing of the evidence, and the drawing of legitimate inferences from the facts are jury functions, not those of a judge . . . ruling on a motion for summary judgment," the " mere existence of a scintilla of evidence in support of the plaintiff's position [is] insufficient . . . ." Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 252, 255, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986). " Where the record taken as a whole could not lead a rational trier of fact to find for the non-moving party, there is no genuine issue for trial." Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 587, 106 S.Ct. 1348, 89 L.Ed.2d 538 (1986) (citation and quotation marks omitted).

Where parties file cross-motions for summary judgment, the court " evaluate[s] each motion separately, giving the non-moving party in each instance the benefit of all reasonable inferences." A.C.L.U. of Nev. v. City of Las Vegas, 466 F.3d 784, 790-91 (9th Cir. 2006) (quotation marks and citation omitted); see also Pintos v. Pac. Creditors Ass'n, 605 F.3d 665, 674 (9th Cir. 2010) (" Cross-motions for summary judgment are evaluated separately under [the] same standard." ). In evaluating the motions, " the court must consider each party's evidence, regardless under which motion the evidence is offered." Las Vegas Sands, LLC v. Nehme, 632 F.3d 526, 532 (9th Cir. 2011). " Where the non-moving party bears the burden of proof at trial, the moving party need only prove that there is an absence of evidence to support the non-moving party's case." In re Oracle Corp. Sec. Litig., 627 F.3d 376, 387 (9th Cir. 2010). Thereafter, the non-moving party bears the burden of designating " specific facts demonstrating the existence of genuine issues for trial." Id. " This burden is not a light one." Id. The Supreme Court has directed that in such a

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situation, the non-moving party must do more than raise a " metaphysical doubt" as to the material facts at issue. Matsushita, 475 U.S. at 586.

BACKGROUND

The parties stipulated to many facts for purposes of the pending cross-motions for partial summary judgment. Additional background facts are taken from the record.

TOK is in the business of sourcing, qualifying, mixing, manufacturing, selling, and delivering chemicals for use in the semiconductor manufacturing process. Huntsman makes and supplies certain chemicals. In 2008, TOK was purchasing propylene glycol (" PG" ), a chemical that TOK combined with other chemicals to create a mixture that TOK then sold to its semiconductor manufacturing customer (" Customer" ). The Customer was engaged in a pilot test to determine if it wished regularly to use the chemical mixture that included PG.

TOK originally sourced PG from a supplier who purchased it from Huntsman. TOK then wished to explore purchasing PG directly from Huntsman. On or about June 5, 2008, Huntsman requested that TOK sign a Credit Application with Huntsman, and TOK did so. TOK's Vice President, Michael Lindsay, and Deputy General Manager-Operations, Chris Carlson, signed Huntsman's Credit Application on behalf of TOK. Lindsay and Carlson had authority to do so.

A one-page document entitled " Huntsman General Terms and Conditions of Sale" (" Huntsman General Terms" ) was attached to the Credit Application signed by TOK. Immediately above the line for TOK's signature, the Credit Application stated:

THE SIGNATORY BELOW HEREBY ATTESTS APPLICANT'S FINANCIAL RESPONSIBILITY, ABILITY AND AGREEMENT TO PAY ALL SUMS PROPERLY DUE AND OWING PURSUANT TO HUNTSMAN INVOICES. IN CONSIDERATION FOR HUNTSMAN'S AGREEMENT TO EVALUATE APPLICANT'S CREDITWORTHINESS, APPLICANT HEREBY ACKNOWLEDGES RECEIPT OF AND AGREES THAT ANY PURCHASE BY APPLICANT OF HUNTMAN [ sic ] PRODUCTS WILL BE MADE PURSUANT TO THE GENERAL TERMS AND CONDITIONS GOVERNING SALE ATTACHED HERETO.
THE ABOVE INFORMATION IS PROVIDED BY APPLICANT FOR THE PURPOSES OF OBTAINING CREDIT AND IS WARRANTED TO BE TRUE, CORRECT AND COMPLETE. APPLICANT HEREBY AUTHORIZES HUNTSMAN TO INVESTIGATE THE INFORMATION AND TRADE AND BANK REFERENCES LISTED ABOVE PERTAINING TO APPLICANT'S CREDIT AND FINANCIAL RESPONSIBILITY. ALL DECISIONS MADE BY HUNTSMAN WITH RESPECT TO THE EXTENSION, CONTINUATION OR DISCONTINUATION OF CREDIT TO APPLICANT SHALL BE MADE PURSUANT TO HUNTSMAN'S DISCRETION.

(capitalization in original). The attached Huntsman General Terms include a limitation of liability clause (" Limitation Clause" ), stating, in relevant part:

LIMITATION OF LIABILITY. Seller's maximum liability for any breach of this Agreement, or any other claim related to the Product, shall be limited to the purchase price of the Product or portion thereof (as such price is set forth on the first page of Seller's invoice) to

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which such breach or claim pertains. IN NO EVENT SHALL SELLER BE LIABLE FOR ANY CONSEQUENTIAL, INCIDENTAL, SPECIAL OR PUNITIVE DAMAGES, INCLUDING BUT NOT LIMITED TO ANY DAMAGES FOR LOST PROFITS OR BUSINESS OPPORTUNITIES OR DAMAGE TO REPUTATION.

(capitalization in original).

When Lindsay and Carlson signed the Credit Application, they believed that the Credit Application and its reference to general terms and conditions related to TOK's financial responsibility; they did not believe that the referenced general terms and conditions created any limitations of liability or other contractual terms governing sales that may occur at some point in the future and they did not read the Huntsman General Terms attached to the Credit Application. Carlson and Lindsay reviewed TOK's responses on the Credit Application to make sure that TOK's financial and other information as stated on the completed form was accurate, and they then signed the form. No one at Huntsman discussed with Carlson or Lindsay the Huntsman General Terms generally or the Limitation Clause specifically until after this litigation commenced.

The Credit Application was not itself a contract for the purchase or sale of PG. Although Lindsay and Carlson had the authority to sign a credit application, at the time that they signed the Credit Application, neither of them had the authority to execute a sales contract. The Huntsman General Terms were not separately signed by Lindsay or Carlson.

After Huntsman approved TOK's creditworthiness, the parties engaged in discussions regarding TOK's potential purchase of PG from Huntsman. TOK informed Huntsman that the PG that TOK was purchasing would be mixed with other chemicals and that the final mixture would be sold to the Customer for use in making semiconductors. TOK also informed Huntsman that any potential purchase of PG from Huntsman would depend on Huntsman and the PG meeting TOK and the Customer's approval process, which included reaching an agreement on product and process specifications and inspection and approval of the Huntsman plant. In approximately August 2008, TOK made its first purchase of a sample lot of PG from Huntsman. Between August 2008 and July 2010, TOK purchased four additional sample lots to test the efficacy of the PG in the chemical mixture.

Every time that TOK purchased PG from Huntsman, TOK sent a purchase order that stated that all purchases were subject to TOK's terms and conditions. Each time that Huntsman shipped PG to TOK, Huntsman included a sales invoice that specified the quantities and prices for the PG being shipped and attached the Huntsman General Terms. These two sets of documents contain different terms, but for purposes of the pending motions, Huntsman does not contend that the Huntsman General Terms attached to the invoices sent to TOK are binding or enforceable.

Because of the precise and demanding nature of the Customer's manufacturing needs and processes, the Customer insisted on the right to approve all suppliers, vendors, chemicals, and components involved in its supply chain. TOK and Huntsman engaged in lengthy negotiations regarding the specifications of the PG, and TOK worked with the Customer to get Huntsman approved as a vendor. In May or June 2010, TOK inspected and audited Huntsman's manufacturing facility. In August 2010, TOK and Huntsman agreed to an initial written procurement specification for the manufacture and sale of PG

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from Huntsman to TOK. This procurement specification included a " Process Change Notification" clause that required Huntsman to notify TOK twelve months in advance of implementing any change in the manufacturing process.[1]

On or about September 23, 2011, TOK and Huntsman agreed to the written Procurement Specification for E-Grade Propylene Glycol (the " 2011 Procurement Specification" ). The 2011 Procurement Specification contains a " Process Change Notification" clause stating:

When there is a process change in the production of the product, the supplier shall send notification. This notification will be given twelve months in advance of implementation. Shorter advance notice will require negotiated approval between the supplier and TOK AMERICA. Process changes include changes in raw material suppliers, the manufacturing process, and other significant changes affecting the quality of the product.

The 2011 Procurement Specification also contains a " Non-conforming Materials" clause that states that if an abnormality is discovered in the quality of the PG during its use, TOK and Huntsman shall consult together to determine appropriate actions and that product shipped to TOK that is out of specification will be returned to Huntsman and replaced. This clause was later modified by an addendum stating:

After reviewing TOK America's Procurement Specification for Propylene Glycol, it is noted that these specifications are more stringent than we [Huntsman] can meet. Huntsman is willing to accept the return of non-conforming material for credit. However, the credit will be limited to the amount that Huntsman can recover by selling the product to another customer.

The 2011 Procurement Specification was not in itself a contract for the purchase or sale of PG.

TOK tested every shipment of PG upon arrival from Huntsman in order to identify any PG that did not meet the agreed-upon specifications before TOK mixed it with other chemicals. Additionally, the chemical mixture was tested to ensure that it was within the specifications demanded by the Customer, and the Customer engaged in additional quality control and sampling throughout its semiconductor manufacturing process.

On or about October 9, 2012, the Customer reported to TOK that semiconductor wafers were demonstrating defects well above acceptable levels. The Customer, TOK, and Huntsman then worked together to identify the specific issue and concluded that the PG was the problem. It was then discovered by TOK that an undisclosed processing change made by Huntsman modifying temperature and pressure conditions caused an unidentifiable chemical change during the manufacture of the PG. Accordingly, although the PG met the technical specifications set forth in the 2011 Procurement Specification and was able to pass TOK's own tests, the PG used in the mixture sent by TOK to the Customer caused defects to appear in the Customer's semiconductor manufacturing process. For purposes of the pending cross-motions only, Huntsman concedes that it changed its manufacturing process and failed to comply with the Process Change

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Notification clause in the 2011 Procurement Specification.

As soon as the problem was identified to TOK, it stopped mixing the Huntsman-supplied PG with other chemicals and stopped ordering PG from Huntsman. By that time, however, TOK already had made a significant amount of the chemical mixture containing the defective PG and had additional, unmixed PG still in its possession. The unmixed PG was sold, and the proceeds are in Huntsman's counsel's trust account. The mixed chemicals, however, required hazardous waste disposal. TOK spent significant sums transporting the defective PG and defective chemical mixture to and from various locations, purchasing chemicals that were mixed with the defective PG ...


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