Carl Wagner and Sons v. Appendagez, Inc.

Citations: 485 F. Supp. 762; 29 U.C.C. Rep. Serv. (West) 752; 6 Fed. R. Serv. 191; 1980 U.S. Dist. LEXIS 9039Docket: 76 Civ. 3619-CSH

Court: District Court, S.D. New York; January 22, 1980; Federal District Court

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Carl Wagner and Sons, Carlson-Scheff Corp., Wagner Bros. Haberdashery, Inc., and Carl's, all New York-based retailers, filed a lawsuit against Massachusetts-based Appendagez, Inc., which manufactures and sells clothing under the "Faded Glory" brand. The plaintiffs sought compensatory and punitive damages for Appendagez's failure to fulfill and ship orders, claiming this was linked to their refusal to comply with Appendagez's demand for fixed pricing, which they argued violated New York's Donnelly Act and Fair Trade Law. The case was removed to federal court based on diversity jurisdiction, where the parties waived a jury trial.

Following a bench trial, findings revealed that the plaintiffs collectively ordered $25,089 worth of merchandise in 1976, but only $5,484.50 was shipped, leaving $19,604.50 in unfulfilled orders. Specific orders filled and unfilled by store were documented, highlighting the significant shortfall in deliveries from Appendagez. The Wagner brothers first became aware of the "Faded Glory" line during a trade show in early 1976, leading them to place their initial orders.

Aaron Wagner engaged with an Appendagez representative while placing orders for their Myrtle Avenue store, initially handled by salesman Mr. Segal, with orders dated January 14, 1976. Following this, the Wagners prepared to open a new store in Cedarhurst in early April 1976, intending to feature the "Faded Glory" line. Aaron contacted Appendagez to connect with the local salesman, resulting in a visit from Alan Friedman, the Long Island salesman. Friedman agreed to write orders for all four stores under the Wagner Bros. Haberdashery account for streamlined billing.

Orders were documented on a standard printed order form from Appendagez, consisting of multiple copies for internal and customer use. The form specified shipping terms (F.O.B. Norwood), title transfer, and conditions for credits and returns, but did not state that orders required acceptance by Appendagez to be binding. After placing orders, the Wagners received confirmation copies, which sometimes indicated the salesman as Segal for earlier orders and Friedman for later ones.

Friedman informed the Wagners that they must sell the "Faded Glory" line at "keystone" pricing, meaning a 100% markup. However, noticing competitors selling the line at discounted prices, the Wagners opted to mark up prices only 80% over wholesale, promoting the line at discount rates in their advertising.

Friedman strongly objected to the plaintiffs' discounting of the "Faded Glory" line, visiting the Cedarhurst store to photograph the displays and engaging in a heated discussion with store managers Albert Wagner and Robert Ernst. Friedman claimed that other accounts had complained to Earl Nash, the northeast regional sales manager of Appendagez, about the plaintiffs' pricing practices, indicating that failure to adhere to the keystone pricing would result in Appendagez not fulfilling their orders. Despite this, Albert Wagner defended the need to discount competitively. Tensions escalated, leading to delays in the plaintiffs' shipments.

Ronald Axelrod, operator of a rival store, testified that he conformed to the keystone pricing policy and reported the plaintiffs' discounts to his Appendagez salesman, who warned that the plaintiffs would be “cut out” if they continued to underprice. By mid-May, the Wagners grew increasingly frustrated with the lack of shipments, prompting them to confront Nash at a trade show on May 20. The confrontation became heated, drawing attention from others in attendance, and ended with a lecture from national sales manager William Colber on the necessity of adhering to full markup pricing.

Following this, on May 27, 1976, the plaintiffs' counsel sent a letter to Appendagez protesting the decision to not sell merchandise to their stores due to non-compliance with fixed pricing. The Wagners had initially applied for credit in January 1976, identifying their business as a partnership, which led to a $2,000 credit line being assigned without their knowledge. A similar application was made for Wagner Bros. Haberdashery in February 1976, which also received a $2,000 credit line, yet again, the Wagners were not informed of these credit limitations.

As of April 28, 1976, Wagner Bros. Haberdashery Inc. owed Appendagez $3,443 for goods, with only $59 being overdue for 30 days; the rest were current charges. Despite this, Appendagez placed Wagner Bros. on a "Hold for Credit/Delinquency Report" due to exceeding a $2,000 credit limit, which Wagner Bros. was unaware of. Although there was a note to contact Wagner Bros. about the credit limit, no call was made, and the Wagners confirmed they did not receive any communication.

After a confrontation on May 20, 1976, Nash advised that no further shipments be made to Wagner Bros. Appendagez ceased shipments after April 29, citing three reasons: inventory shortages, exceeding the credit limit, and alleged harassment of Nash. However, the primary reason for halting shipments was Wagner Bros.'s discounting of the "Faded Glory" line, a policy enforced by Appendagez executives.

Decision-making regarding order fulfillment was centralized at Appendagez's Norwood headquarters, with salesmen lacking authority to bind the company to fulfill orders. This internal policy was not disclosed to Wagner Bros. The findings largely favor the plaintiffs' credibility, revealing that Appendagez representatives threatened to cut shipments unless Wagner Bros. adhered to a keystone pricing policy. Nash denied such a policy existed, but the credibility of the Wagner brothers and other witnesses was upheld, leading to the conclusion that their accounts were truthful and not fabricated.

No evidence suggests that Axelrod harbors animosity toward Appendagez. The documentation related to the "Ronnie's Slax'n Shirtails" account indicates a commercial relationship, albeit not very active, between Axelrod's store and Appendagez. To challenge Axelrod's credibility, Appendagez would need to claim that the Wagners influenced him to fabricate testimony, yet Axelrod's inability to recall the name of the Appendagez salesman actually bolsters his credibility. Notably, neither Friedman nor Colber, who were allegedly involved in threatening the plaintiffs regarding price fixing, testified, with only Nash appearing for the defense. Nash's testimony lacked the capacity to contradict the plaintiffs' claims about Colber and Friedman's actions. Appendagez contends that purchase orders did not create binding contracts until accepted at their Norwood offices. Without such acceptance, no contractual obligations exist. The case is governed by New York's Uniform Commercial Code, which applies due to the order and delivery location. The statute of frauds requires a written contract for sales over $500 to be enforceable, necessitating a document signed by the party from whom enforcement is sought.

The central issue is whether purchase orders signed by Friedman are valid as writings from an "authorized agent" of Appendagez. Appendagez contends that its salesmen lacked authority to accept orders in the field, a claim supported by the company's internal policies. However, the principle of apparent authority, as defined by the Restatement of the Law of Agency, indicates that an agent can affect legal relations with third parties based on the principal's representations to those parties. In this case, Aaron Wagner expressed interest in further purchases, prompting Friedman to visit with order forms, which he completed and returned as a "confirmation copy." No limitations on Friedman’s authority were communicated to the plaintiffs, leading to the conclusion that he possessed apparent authority to bind Appendagez. The existence of internal limitations on a salesman’s authority is irrelevant if not disclosed to third parties. New York law holds that a principal cannot secretly limit an agent's authority to the detriment of third parties who act in good faith and rely on the agent's apparent authority. This principle is supported by various New York case law, including Bradford Co. v. Dunn and Cox v. Albany Brewing Co., which emphasize that undisclosed limitations on an agent's authority do not bind third parties.

A special agent with limited authority cannot bind a principal when acting outside the scope of that authority; however, if the agent is entrusted with a specific type of business, their actions can bind the principal in that context, even if they violate private instructions unknown to the third parties involved. In the Cox case, the court ruled that undisclosed instructions preventing hiring laborers for more than one day did not absolve the defendant from liability, as long as the agent acted in the capacity of an employer. Similarly, in Newman v. Lee and Morrison v. Chapman, acts of individuals with apparent authority in stock brokerage firms were binding on their employers, despite internal limitations not communicated to third parties. In Newman, the court rejected evidence of private rules that would prevent the agent from making certain contracts, stating that these rules were akin to private instructions and not binding on outsiders. In Morrison, the court affirmed that payment to an office manager constituted valid payment to the brokerage firm, as he was held out as its representative. In the current case, the plaintiffs expressed a desire to purchase goods from Appendagez and requested a salesman, leading to Friedman being sent with apparent authority to take orders. Appendagez cannot negate Friedman's binding authority by citing undisclosed limitations. The defense's claim that industry norms require acceptance of orders at the home office does not undermine the transaction, as industry practices can supplement agreement terms under U.C.C. guidelines regarding usage of trade.

The burden of proving the existence and scope of a trade usage falls on Appendagez, which has failed to do so in this case. The only relevant testimony came from Nash, who indicated that, based on his experience, order forms were not binding until approved by the home office. However, he also conceded that other companies explicitly stated their orders were "subject to acceptance at home office," undermining Appendagez's argument that industry-wide knowledge existed regarding this condition. 

Despite Appendagez's desire to reserve discretion in accepting orders, established contract law principles require clear communication of such reservations to be enforceable. Appendagez's internal credit limitation is legally irrelevant since it was not communicated to the plaintiffs, and salesmen accepted orders exceeding this limit. Furthermore, Appendagez's refusal to fulfill orders was linked to the plaintiffs' unwillingness to sell the "Faded Glory" line at keystone prices, a policy that contradicts New York's fair trade law, which renders any provision restricting resale prices unenforceable.

Consequently, the plaintiffs are entitled to recover damages due to Appendagez's failure to ship ordered goods. Regarding the Donnelly Act, any contract or agreement that creates or maintains a monopoly or restrains competition is deemed against public policy and void. Modeled on the federal Sherman Antitrust Act, the Donnelly Act allows for actions to recover damages from violations within four years of the cause of action accruing.

Any state entity or individual suffering damages due to a violation of this section can recover triple the actual damages, along with costs up to $10,000 and reasonable attorneys' fees. Before initiating a civil action, notice must be served to the attorney-general, with a ten-day notice required for political subdivisions or public authorities. Actions commenced prior to the act's effective date are exempt. The absence of notice to the attorney-general does not invalidate the complaint, as it is not a prerequisite for the plaintiffs' claims. In the current case, evidence indicates that Appendagez's price-fixing policy targeted the plaintiffs, influenced by complaints from other retailers. This behavior, where a supplier coerces a retailer to increase prices after receiving complaints and subsequently cuts off supply, constitutes a violation of the Donnelly Act, warranting treble damages under section 340(5). 

Additionally, Appendagez claims that without independent proof of conspiracy, admissions of conspiracy are inadmissible based on Rule 801(d)(2)(E) of the Federal Rules of Evidence. They cite various criminal cases to support this. However, the testimonies regarding statements made by individuals (Friedman, Nash, and Colber) do not require independent proof of conspiracy for admissibility, as they fall under the co-conspirator exception to hearsay. The co-conspirator's statements are admissible if made during the course and in furtherance of the conspiracy, which does necessitate some proof of the conspiracy's existence. Judge Weinstein emphasized that the "in furtherance" requirement aligns with traditional agency principles, where an agent's actions bind the principal only when within the agent's authority.

The application of the hearsay rule is clarified in relation to statements made by agents of the defendant, Appendagez, specifically Friedman, Nash, and Colber, who were acting within the scope of their employment. Under Rule 801(d)(2)(D), statements made by an agent concerning matters related to their agency are admissible as non-hearsay, regardless of the agent's authority, provided the statements were made during the existence of the principal-agent relationship. The statements from Friedman, Nash, and Colber meet these criteria, thus requiring no additional proof for their admissibility.

Additionally, Appendagez sought to exclude testimony from Axelrod due to the plaintiffs' failure to disclose him as a witness in their interrogatory responses, relying on Rule 26(e) of the Federal Rules of Civil Procedure and the precedent set in Davis v. Marathon Oil Co. In that case, the court ruled that a party could be barred from introducing undisclosed witnesses if reasonable diligence would have revealed them before trial. However, in the present case, Aaron Wagner testified that he learned of Axelrod's potential testimony only days before trial through an unexpected conversation. Although Axelrod initially hesitated to testify, he later agreed to do so. The court accepted Wagner's testimony and found no evidence suggesting that plaintiffs' counsel intentionally concealed Axelrod's existence as a witness, indicating a lack of bad faith in the disclosure process.

The situation differs from the case of Davis, where witnesses were longstanding acquaintances of the plaintiff and could have been disclosed well in advance of trial. Axelrod's involvement was unexpected, and plaintiffs could not have anticipated him as a witness. Appendagez was able to formulate a response to Axelrod's testimony, which focused on a single issue. Before trial, plaintiffs' counsel shared Axelrod's statement with the defendant's counsel, who then utilized certain files to challenge Axelrod's credibility during the trial. Although plaintiffs' counsel arguably should have revealed Axelrod's identity sooner, the failure to do so was not intentional, and the plaintiffs were not entirely unprepared. Consequently, the testimony will not be struck. Plaintiffs are entitled to recover triple the actual damages sustained, as detailed in the findings.

The unfilled order amounts for each plaintiff are as follows: Carl Wagner and Sons: $2,573.50; Carlson-Scheff Corp.: $4,993.50; Wagner Bros. Haberdashery, Inc.: $9,862.50; Carl's: $2,175.00. The "Faded Glory" line had strong sales potential, and it is inferred that the goods would have been sold at retail if delivered. The Wagners testified they charged keystone prices (twice the wholesale cost) at three stores, and 80% of cost at Cedarhurst. However, this contradicts their amended interrogatories, where Carlson-Scheff Corp. claimed damages below wholesale cost with an 80% markup. Albert Wagner verified this on July 27, 1978, and the Wagners admitted to amending their initial claims due to a misunderstanding regarding the keystone markup definition. Given the circumstances and the lack of documentation for the claimed mark-ups, the plaintiffs are bound by their amended answers. Therefore, damages for the Cedarhurst and Hempstead stores will be calculated at an 80% markup, while damages for the Myrtle Avenue and Fifth Avenue stores will use a 100% markup. The final damages are: Carl Wagner and Sons: $2,573.50; Carlson-Scheff Corp.: $3,994.80; Wagner Bros. Haberdashery, Inc.: $7,890.00.

Plaintiff Carl seeks damages of $2,175.00, based on U.C.C. § 2-713, which allows recovery for the difference between the market price at the time of breach and the contract price due to non-delivery by the seller. Plaintiffs are entitled to pre-judgment interest at the legal rate of 6% per year under N.Y.C.P.L.R. § 5004, which is mandatory in breach of contract cases according to § 5001(a). Interest accrues from the earliest ascertainable date of the cause of action, with January 1, 1977, identified as an outside date for interest calculations.

Plaintiffs also claim punitive damages for breach of contract, but such damages typically require a showing of a "malicious" breach, as established in New York case law. Although there are antitrust implications in Appendagez's conduct that could potentially support punitive damages, prior cases suggest that punitive damages are not warranted in the absence of a public right being involved. 

The Donnelly Act allows for treble damages for antitrust violations, which are viewed as sufficient deterrents. Plaintiffs argue for both punitive and treble damages; however, precedent indicates that these types of damages cannot be awarded simultaneously for claims arising from the same facts, as noted in the cited case of Arnott v. American Oil Co. Moreover, no case supports a dual recovery of punitive damages for a contract claim alongside treble damages for an antitrust violation.

The Donnelly Act also allows for costs and reasonable attorney's fees, but since no evidence was presented regarding attorney's fees, no award can be granted. The Clerk can tax costs in favor of the plaintiffs, not exceeding $10,000.

Plaintiffs may seek to amend the judgment for attorneys' fees under Rule 59(e) of the Federal Rules of Civil Procedure. The Court confirms its jurisdiction over the case and establishes that the purchase orders at the center of the dispute are valid contracts, with the defendant failing to demonstrate any contrary trade practices. The defendant's non-shipment of goods constitutes breaches of these contracts, entitling plaintiffs to compensatory damages. Additionally, this failure violates the Donnelly Act, allowing for treble damages, while punitive damages are not permitted. The Court orders judgment against the defendant as follows: Carl Wagner and Sons to receive $2,573.50 (plus interest), Carlson-Scheff Corp. $3,994.80 (plus interest), Wagner Bros. Haberdashery, Inc. $7,890.00 (plus interest), and Carl's $2,175.00 (plus interest), with each amount to be tripled. Plaintiffs are also entitled to recover costs, to be determined by the Clerk. The findings are based on the defendant's admissions and pre-trial acceptance of certain figures, despite minor discrepancies in trial testimony. A letter from plaintiffs' counsel is noted as admissible to counter claims of fabrication. The Court acknowledges the professionalism of both parties' legal representation.