Antitrust Law Daily Wrap Up, FRANCHISING & DISTRIBUTION—DAriz: Sales Representative Asserted Claim for Discriminatory Pricing, Not Antitrust Price Discrimination, (Oct 29, 2012)

By Peter Reap, J.D., LLM

X-Cel Sales, LLC, one of the sales representatives through which A. O. Smith Corp (Smith) distributed its water heaters, adequately alleged a claim for discriminatory pricing against Smith by claiming that Smith systematically allowed another sales representative to sell water heaters at prices lower than X-Cel, the federal district court in Phoenix has decided (X-Cel Sales, LLC v. A. O. Smith Corp., October 24, 2012, Snow, G.). In addition, under Tennessee and Arizona law, a duty could be based on Smith’s alleged violation of its own internal pricing policies.

Smith failed to show that that no issues of material fact existed as to whether an alleged promise by the manufacturer fell within Arizona’s statute of frauds or as to whether the parties’ sales representatives agreement was fraudulently induced. Thus, Smith’s motion for summary judgment on X-Cel’s claims was denied. Finally, X-Cel made a sufficient case that summary judgment on the issue of causation should be deferred until it had an opportunity to gather more evidence, so summary judgment on that issue was denied without prejudice so that Smith could raise it again when discovery closed.

Background

X-Cel served as one of Smith’s sales representatives, attending mostly to the Arizona and Nevada regions, for 15 years. In 2012, Smith terminated X-Cel.

After its termination, X-Cel filed suit, asserting claims for breach of implied contract, promissory estoppel, fraud or intentional misrepresentation, fraudulent concealment and nondisclosure, negligence, and negligent misrepresentation. The primary allegation on which X-Cel based its claims was A. O. Smith’s alleged underpricing of water heaters in sales contracts negotiated by sales representatives other than X-Cel.

X-Cel also claimed that in 2006, it entered into an oral agreement with Smith to move into the Colorado market. X-Cel stated that it was reluctant to do so because of the significant capital it would have to invest in the expansion, but was ultimately persuaded by Smith’s James Margoni, who promised that X-Cel would “be untouchable for five years” if it acquiesced. X-Cel alleged that it entered into a five-year warehouse lease in Denver and incurred other expenses in reliance on Mr. Margoni’s oral promise.

Price Discrimination

Smith argued that X-Cel’s claims should be dismissed because, as a sales representative, it never actually bought one of Smith’s products, and thus lacked standing to bring a price discrimination claim. Smith apparently believed that X-Cel’s claims were price discrimination claims under the guise of contract and tort law, and cited only to cases deciding claims under the Clayton and Robinson–Patman Acts for its assertion that X-Cel lacked standing to sue, the court noted.

However, none of X-Cel’s claims were brought under any antitrust or price discrimination statutes, and no case law cited to by Smith holds that claims alleging discriminatory pricing could be brought only under those statutes, according to the court. Nor was there any basis for the assertion that X-Cel was required to purchase a water heater to have standing for its contract and tort claims. Therefore, Smith’s motion for summary judgment on this ground was denied.

Duty Based on Internal Policies

Smith contended that it was entitled to summary judgment on X-Cel’s claims that are based on the existence of a duty, because it owed no duty to X-Cel to follow its own internal pricing policy. This argument missed the point, the court determined. The question at issue was not whether Smith had some obligation as a matter of law to follow its own policies, instead, the question was whether Smith represented to X-Cel that it was following its own policies when in fact it was not. This was the allegation that gave rise to the causes of action for negligence, fraud, and breach of implied contractual duty.

Under Tennessee law, the duty of good faith and fair dealing is implied in every contract. Because Smith and X-Cel had a contract and because X-Cel alleged that Smith made misrepresentations of fact to it that pertained to contract performance, X-Cel stated a claim that Smith breached its contract under Tennessee law.

As for the tort claims, which were governed by Arizona law, X-Cel alleged that the parties were engaged in a relationship that was defined by certain representations made by Smith to X-Cel, upon which X-Cel relied. To the extent that such a relationship was and could be separate from contract, and Smith did not assert in its motion that it was not, the court was unable to conclude as a matter of law that such a relationship gave rise to no duty.

The Margoni Promise and the Statute of Frauds

Under Arizona law, a promissory estoppel claim involving a promise that could not be performed in a year must be in writing to be enforceable. Smith alleged that X-Cel could not recover on its theory of promissory estoppel because it was based on an oral promise made by James Margoni that X-Cel would be “untouchable for five years,” which fell within the statute of frauds. X-Cel did not contest this point, but rather argued that the statute of frauds should not be enforced against it because of the doctrine of part performance.

The doctrine of part performance took a promise out of the statute of frauds when the alleged acts were consistent only with the existence of a contract and inconsistent with other explanations such as an existing relationship between the parties. Here, X-Cel pointed to evidence that would allow a reasonable juror to find that X-Cel’s actions were consistent only with the existence of the Margoni promise, thus taking the promise out of the statute of frauds, the court ruled. For example, X-Cel cited to evidence in the record that it incurred the expense of setting up operations in Colorado, including the costly lease of a warehouse in Denver, to serve the Colorado market in exchange for Margoni’s promise. Based on this evidence, a juror could find that X-Cel’s part performance of entering the Colorado market took the Margoni promise out of the statute of frauds.

Fraudulent Inducement

Smith contends that all of X-Cel’s claims were barred by a release clause in the parties’ 2010 Sales Representatives Agreement that purports to release both parties from claims for damages, among other causes of action. The evidence produced by X-Cel was enough to allow a jury to find by circumstantial evidence that Smith made a material false statement to X-Cel while knowing that the statement was false and intending for X-Cel to believe it and to renew its relationship with Smith, by way of the 2010 agreement, in reliance on it, the court held.

The evidence that Smith terminated X-Cel shortly after executing the 2010 agreement and admitting its wrongdoing was sufficient for a jury to infer that Smith had an ulterior motive. Because X-Cel had evidence that it worked with Smith for fifteen years and thus had no reason to doubt its assurances, a jury could find that X-Cel’s reliance on Smith’s statements was reasonable. Finally, X-Cel produced evidence that it would not have entered into the 2010 agreement if Smith had not made such statements.

X-Cel therefore demonstrated that there was a material issue of fact regarding whether its commitment to the 2010 SRA was fraudulently induced. Because this material issue of fact existed, the Court could not find that the 2010 agreement barred all of X-Cel’s claims against Smith.

The case is No. CV-11-01082-PHX-GMS.

Christopher Anthony Caserta (DiCarlo Caserta McKeighan & Phelps PLC) for X-Cel Sales LLC. Irina S Tanurcov (Snell & Wilmer LLP) for A. O. Smith Corp.

Cases: FranchisingDistribution ArizonaNews