Robotic Vision Systems, Inc. v. Cybo Systems, Inc.

Citations: 17 F. Supp. 2d 151; 1998 U.S. Dist. LEXIS 14542; 1998 WL 640934Docket: 92 cv 5012

Court: District Court, E.D. New York; September 15, 1998; Federal District Court

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Robotic Vision Systems, Inc. (RVSI), a Delaware corporation specializing in adaptive robotic welding systems, entered into a contract with Cybo Systems, Inc. (Cybo), an Ohio corporation, in September 1990 for the sale of certain assets for $537,000. RVSI subsequently filed a lawsuit in October 1992 against Cybo to recover $156,000 remaining from the purchase price and other owed amounts. Cybo counterclaimed with nine allegations, including breach of contract and fraud, seeking over ten million dollars in damages for lost profits.

The contract stipulated that RVSI would sell various assets necessary for constructing a turnkey robotic welding system, detailed in Section 1.1 of the Agreement. Cybo claims RVSI misrepresented the assets included in the sale, specifically regarding the alignment and calibration equipment. RVSI contends there was a prior understanding that this equipment would not be sold, supported by the absence of such equipment in the referenced asset descriptions in Exhibit A.

The robotic welding system, which included the Weld Planner I software, had previously been installed at Caterpillar and General Dynamics plants, although there is disagreement over the functionality of those installations at the time of the Agreement. Cybo alleges that RVSI misrepresented the stability of the basic Weld Planner I software, implying that the risks were limited to enhancements, while RVSI's position is that the system required further development of this software. RVSI has filed motions for partial summary judgment to dismiss Cybo's counterclaims related to fraud, lost profits, and claims for damages exceeding the contract's purchase price.

'Standard' and 'stable' refer to products that are proven effective and readily available. RVSI denies making misrepresentations and argues that Cybo could not justifiably rely on any claims, citing Cybo's awareness of RVSI's prior issues with Weld Planner I and its own testing of the software. Cybo claims reliance on RVSI's software demonstrations and agreed to pay for software in stages based on development milestones, which RVSI contends were mutually agreed upon. However, Cybo alleges it depended on RVSI's misrepresentations regarding these milestones and additional claims about RVSI's gross margins, profits, and technical support.

In November 1990, Cybo signed an Engineering Purchase Order for $54,000 for additional engineering services, which it claims was necessary due to RVSI's failure to provide adequate support under the original Agreement. RVSI asserts the order was valid and communicated the need for additional engineering before a deadline. Cybo initially engaged two technicians who could not resolve installation issues and later hired Robert Rongo, a former RVSI engineer, to debug the software. Cybo alleges RVSI misrepresented the skill level needed for installation and the support required from Rongo, while RVSI argues Cybo was aware it needed Rongo's full-time assistance.

Despite Rongo's efforts, the system malfunctioned, leading to Caterpillar's stop work order and cancellation of purchase orders, resulting in a claimed loss of ten million dollars in future profits for Cybo due to RVSI's misconduct. Cybo contends RVSI promised over thirty sales with specific profit margins, which RVSI disputes, arguing those contracts were not foreseen in the original Agreement and that Cybo cannot prove losses linked to RVSI's breach. The final dispute involves damages, with RVSI asserting they should be limited to the purchase price in the Agreement, while Cybo argues that fraud claims are not subject to such limitations.

Summary judgment motions are appropriate when no genuine material fact issues exist, requiring the moving party to show the absence of such disputes.

The court is required to assess inferences from the facts favorably for the non-moving party in a motion for summary judgment, as established in Matsushita Elec. Indus. Co. Ltd. v. Zenith Radio Corp. However, the non-moving party cannot rely on speculation or conjecture but must present specific facts that demonstrate a genuine issue for trial, per Celotex Corp. v. Catrett. In this federal case brought in New York, the state’s choice-of-law rules apply, which favor the jurisdiction with the greatest interest in the litigation. New York employs a ‘paramount interest’ approach, and since the Agreement specifies Ohio law, which governs due to the lack of objection and the location of the alleged fraud's impact, Ohio law will apply.

Cybo's counterclaims involve three types of fraud against RVSI: fraudulent inducement into the Agreement, fraudulent misrepresentations during its performance, and misrepresentations that obstructed Cybo's discovery of RVSI's non-performance. Cybo identifies several specific misrepresentations by RVSI, including those related to the assets to be sold, software reliability, performance milestones, engineering needs, gross margins, and technical support.

For a fraud claim under Ohio law, the elements required include a material misrepresentation, knowledge of falsity, intent to mislead, justifiable reliance, and resulting injury. Cybo contends that RVSI misrepresented the assets included in the sale, asserting reliance on Section 1.1 of the Agreement, which states all 'non-cash assets' would be sold, but claims that RVSI's intention to retain certain equipment was acknowledged by Cybo’s executives during their depositions.

Knowledge of corporate officers is imputed to the corporation itself in Ohio, as established in *Arcanum National Bank v. Hessler*. Cybo, represented by McHugh, contends that Wanner and McHugh's lack of knowledge regarding the final terms of an Agreement, negotiated solely by CEO Ron Reeve, renders their awareness irrelevant. Reeve asserts that he believed all business assets would be sold to Cybo. However, RVSI challenges Reeve's credibility, arguing that his affidavit contradicts prior deposition statements and should therefore be disregarded, citing *Mack v. United States*. Reeve's various statements indicate confusion about which assets were included in the sale, including claims about certain equipment being sold yet retained by RVSI.

RVSI's argument for summary judgment rests on the assertion that Cybo was aware from the Agreement that not all assets were included in the sale. Although Cybo's chances of succeeding on its fraud claim regarding asset sales appear weak, any reasonable doubt about factual issues will favor Cybo, leading to the denial of summary judgment.

Additionally, Cybo alleges that RVSI misrepresented the reliability of the Weld Planner I software, claiming it was stable and fully tested, particularly in discussions with Thomas Smith and Ronald Reeve. RVSI counters that Cybo cannot claim reliance on these representations since it visited the Caterpillar plant, was aware of issues at General Dynamics, and conducted its own tests on the software. Cybo, however, maintains that its reliance was justified based on Caterpillar's satisfaction with the product.

Cybo acknowledges awareness of a dispute between General Dynamics and RVSI but claims ignorance regarding its performance-related nature, relying on Reeve's affidavit. Conversely, Wanner’s affidavit indicates he was informed of software-related issues between RVSI and General Dynamics. Wanner, citing Caterpillar’s satisfaction with the software and the differences in software sold to Cybo, opted not to contact General Dynamics. Cybo also admits RVSI demonstrated its product but alleges inadequate testing prior to marketing it as a 'standard' and 'stable' product. Despite these claims, Cybo fails to establish justifiable reliance on RVSI's representations, as reliance is a factual question involving the parties' relationship. The presence of a dispute, along with Cybo's own testing and visit to Caterpillar, undermines Cybo's argument for reliance. Consequently, Cybo's claims are dismissed as a matter of law.

Regarding the milestones, Cybo asserts reliance on RVSI's misrepresentations about their adequacy, while RVSI contends that the final milestones were the result of negotiations. Testimonies from Smith and Wanner indicate Cybo's involvement and belief in the sufficiency of the milestones, failing to create a factual issue for justifiable reliance. Cybo also claims RVSI misled them about milestone completion, but acknowledges conducting its own checks, negating any claim of justifiable reliance. Thus, Cybo's milestone claims are also dismissed.

Lastly, Cybo argues RVSI misrepresented the need for additional engineering for the installation of Weld Planner I by asserting it was a standard product. This assertion is supported by affidavits from Reeve and Smith, who believed no further engineering would be necessary.

Cybo alleges that the engineering services provided under the Engineering Purchase Order should have been governed by the broader Agreement. RVSI counters that it notified Cybo about the need for additional engineering before the November 15, 1991 deadline and that Cybo could have exited the deal if it believed the Engineering Purchase Order was inconsistent with the Agreement. RVSI also notes that McHugh recognized that Wanner and Smith assured him the Engineering Purchase Order aligned with the Agreement. Despite any factual disputes raised by Cybo regarding RVSI's claims, Cybo's failure to withdraw from the deal undermines any assertion of justifiable reliance, leading to the conclusion that Cybo's claim lacks legal merit.

Cybo further claims fraudulent inducement by RVSI regarding the sufficiency of two robot technicians for system installation. It argues that these technicians were inadequately skilled to assess software effectiveness or milestone completion. RVSI contends that Cybo cannot claim reliance on any misrepresentation since it personally interviewed the technicians before signing the Agreement. Cybo clarifies that the issue lies not in the technicians' qualifications but in RVSI's assertion that their skills would be adequate. Cybo supports its position with Reeve's affidavit, which states he was assured of the technicians' abilities. Additionally, Cybo argues it relied on RVSI's claim that hiring Rongo on a full-time basis would not be necessary, although RVSI asserts Cybo was aware Rongo's assistance would be required. Cybo maintains that RVSI misrepresented the level of assistance needed from Rongo, again supported by Reeve's affidavit.

Lastly, Cybo contends that RVSI fraudulently induced it into the Agreement by misrepresenting gross margins from orders and profits from after-sale services and spare parts. Cybo cites affidavits from Reeve and Smith, who claim reliance on RVSI's sales estimates. RVSI produced a pre-Agreement internal memorandum containing the same figures presented to Cybo, but Cybo argues that RVSI has not substantiated the accuracy of this information. Robert Rongo, a former RVSI employee, asserts in his affidavit that the memorandum's figures are incorrect, highlighting that many costs attributed to after-sale services were actually related to initial system corrections necessary for operational functionality at General Dynamics.

Rongo's affidavit raises a factual issue regarding the accuracy of a memorandum, but Cybo does not establish that RVSI knowingly provided false information. The memorandum's existence alone is insufficient to prove RVSI's knowledge of any misrepresentations. Even if RVSI had made knowing misrepresentations, Cybo did not justifiably rely on them. Smith claims reliance on RVSI's profit estimates for cash flow projections, but McHugh, Cybo's president, testified that he prepared his own projections independently of RVSI’s estimates and did not rely on them. McHugh confirmed that his projections were based solely on what Caterpillar would pay, without considering potential income from other customers or spare parts.

Cybo's claims of justifiable reliance are undermined by McHugh's deposition, leading to the conclusion that these claims fail as a matter of law. Regarding technical support, Cybo alleges RVSI misled it about retaining qualified personnel, resulting in Cybo needing to hire Rongo. RVSI counters that Cybo has not cited specific instances of inadequate support. Cybo argues that the failure of the project indicates RVSI's lack of expertise, but this does not substantiate a fraud claim regarding pre-contract awareness of performance issues. 

Finally, for lost profits claims in Ohio, three criteria must be met: profits must be contemplated by the parties at contract formation, loss must likely result from breach, and profits must be demonstrated with reasonable certainty. Establishing these criteria is essential for recovering lost profits, as emphasized in relevant case law.

Cybo seeks over ten million dollars in damages for lost profits from contracts that it claims it could have secured if the Weld Planner I software had functioned properly. Cybo asserts that representations made by RVSI during an August 29, 1990 meeting indicated that certain anticipated contracts were considered by both parties when they entered into the Agreement. This assertion is supported by Reeve's affidavit and his meeting notes that mention specific contracts and profit details. For instance, RVSI's Bob King suggested that purchasing the technology would lead to a $475,000 contract with GM Diesel, yielding a profit of $232,750.

RVSI seeks to dismiss all lost profit claims except those related to its alleged failure to deliver calibration equipment and future profits from the Caterpillar job. The court finds that Cybo's claims for lost profits do not establish a factual issue regarding whether the prospective business opportunities were within the parties' contemplation at the time of the Agreement. The Agreement's purchase price of $537,000, allocated entirely to the robotic welding system without consideration for goodwill or third-party sales, suggests that future profits of ten million dollars were not anticipated.

Additionally, Cybo fails to demonstrate that lost profits were a probable result of RVSI's breach. Unlike the plaintiff in Combs, who showed a breach led to a lost contract, Cybo's evidence lacks specificity. It acknowledges that some proposed contracts were never awarded and does not know the status of others. Cybo also lacks third-party corroboration that it would have received contracts had the software worked. While Cybo contends that it is unreasonable to require proof that RVSI's conduct was the sole cause of its losses, it ultimately fails to provide any evidence indicating that it would likely have secured the contracts if the system had functioned. Without a clear link between RVSI's actions and the alleged lost profits, Cybo's claims are dismissed as a matter of law.

In Ostano Commerzanstalt v. Telewide Systems, Inc., the court ruled that the plaintiff failed to prove that business losses stemmed from the defendant's inability to deliver films under New York law. Regarding Cybo's breach of contract claim against RVSI, Section 9.4 of their Agreement limits RVSI's liability to the purchase price owed by Cybo, which is supported by Ohio law that allows for damage limitation clauses in breach cases. Cybo has not claimed any royalty payments to RVSI, thus RVSI is not liable under the royalty provision. However, the limitation does not apply to Cybo's fraud claims. Consequently, RVSI's motion for summary judgment is denied concerning the fraudulent inducement claims, which involve misrepresentations about the assets and the adequacy of robot technicians. Conversely, RVSI's motion is granted for all other claims, leading to their dismissal. Cybo cannot claim damages for lost profits, and its breach of contract damages are restricted to the purchase price stated in the Agreement.