Antitrust Law Daily Wrap Up, FRANCHISING & DISTRIBUTION—DHaw: Gaming Company May Have Expressly Warranted Legality of Games, Indemnified Distributor, (Apr 25, 2013)

By Tobias J. Gillett, J.D., LL.M.

A producer of amusement devices could not obtain partial summary judgment on a distributor’s claims that the producer had expressly warranted that the devices would not constitute illegal gambling machines under Hawaii law, and that the producer had completely indemnified a company affiliated with the distributor for costs associated with a dispute with a third party company, the federal district court in Honolulu has ruled (Prim LLC v. Pace-O-Matic, Inc., April 23, 2013, Mollway, S.).

On November 7, 2008, Prim LLC entered into an agreement to become an exclusive distributor of Pace-O-Matic, Inc.’s amusement devices in Hawaii. On October 18, 2010, Pace terminated the exclusivity portion of the agreement, alleging that Prim was in default, and Prim filed suit against Pace. Following statements from the court expressing concern that Pace’s amusement devices could be illegal gambling machines under Hawaii law, Pace sent a letter to Prim informing Prim that it was ceasing its sale of its devices in Hawaii, but that it would provide Prim with an unlimited fill for its existing games at cost.

On August 30, 2011, Prim filed a Second Amended Complaint asserting claims for breach of express warranty and indemnity, among other claims. Pace filed a motion for partial summary judgment on those two claims.

Express warranty. Prim’s breach of express warranty claim alleged that Pace warranted to Prim that its devices were legal under Hawaii law. The court noted that this claim depended on the devices being illegal, and that, as it had observed with respect to a previous implied warranty claim, if the devices were illegal, "it is not clear why this court should enforce any agreement with regard to it." However, the court observed that it had not ruled on whether the devices were illegal or on whether a contract concerning them was enforceable.

Although the court had granted summary judgment to Pace on the implied warranty claim on the ground "that Prim failed to establish that an implied warranty claim based on a contract for illegal goods is enforceable if the [devices] are illegal," the court concluded that the express warranty claim was "distinguishable because, unlike implied warranties that may exist as a matter of law, an express warranty is entirely dependent on its express terms, which may be unique." The court explained that an express warranty claim under Hawaii law has three elements: (1) "an affirmation of fact or promise regarding the product, (2) that statement became part of the basis of the bargain, and (3) the product failed to perform according to the statement."

The court found a question of fact existed regarding whether there was an express warranty and, if there was an express warranty, what it warranted. The agreement letter had made no mention of an express warranty, and the parties had extensively discussed the issue of potential illegality. Prim alleged that Pace "assured" it "that this game is skill based and there shouldn’t be a problem with this game, at all, from the Vice squad." However, the parties also joked about being "locked up" because of the devices.

Indemnification. Prim’s affiliated entity Fun Factory also alleged that it was entitled to complete indemnification by Pace with respect to a previous dispute, in which another company had sued Pace and Fun Factory, that had resulted in a settlement. In a status conference, the parties had stipulated to dismissal of that dispute and the consolidation of Fun Factory’s indemnification claim against Pace with the present action.

Pace first responded that Fun Factory lacked constitutional standing to bring the claim because it had not suffered an injury. The court observed that Pace had not established that Fun Factory had not incurred any attorneys’ fees and costs, and Fun Factory alleged that the fees and costs "were necessitated by Pace’s alleged failure to keep its promise to indemnify Fun Factory." The court rejected Pace’s argument that "when intervening events have mooted the plaintiff’s underlying claim, the plaintiff’s continuing interest in attorney’s fees does not support her continued standing to pursue the underlying claim." Here, the substance of Fun Factory’s underlying indemnification claim had not been mooted. Since the settlement of the previous dispute did not resolve Fun Factory’s indemnification claim, Fun Factory had standing, in the court’s view.

Since Fun Factory had standing, the court proceeded to address the issue of whether Pace was entitled to summary judgment on the indemnification claim. The court explained that under Hawaii law a claim for indemnity can be based on "(1) an express contract; (2) a contract implied-in-fact; or (3) equitable concepts arising from the tort theory of indemnity."

Here, Prim alleged that a Fun Factory vice president had e-mailed a Pace vice president to say that Fun Factory "look[ed] to [Pace] to deal with the situation and hold [Fun Factory] harmless," and that "[t]he publicity would not be good for anyone," among other things. The Pace vice president responded "I agree. Back to you later."

The court observed that the words "I agree" were not clearly intended "to signify agreement to indemnify Prim." The statement could have indicated agreement that "publicity would not be good for anyone," for example. Therefore, the court found that "[t]he record does not indisputably establish the existence or nonexistence of an indemnity agreement, or its terms," and thus questions of fact precluded summary judgment on the indemnity claim.

The case is Civil Action No. 10-617 SOM/KSC.

Attorneys: Dean L. Franklin (Thompson Coburn) for Prim LLC. Jason C. Hicks (Womble Carlyle Sandridge & Rice, PLLC) for Pace-O-Matic, Inc.

Companies: Prim LLC; Pace-O-Matic, Inc.

Cases: FranchisingDistribution HawaiiNews