Hemlock Semiconductor Corp. v. Kyocera Corp.
18a0413n.06 (Unpublished) (2018)
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Rule of Law:
A 'take-or-pay' provision in a contract for the sale of goods may be an unenforceable penalty under Michigan law if the 'pay' option is not a genuine alternative performance but a liquidated damages clause that is unreasonable in light of anticipated harm, difficulties of proving loss, or the inconvenience of obtaining an adequate remedy. Furthermore, a declaratory judgment claim is not ripe for judicial review if the alleged injury depends on numerous contingent future events, and contract language merely acknowledging a party's plans does not create an enforceable obligation unless context clearly indicates a promise.
Facts:
- In the mid-2000s, Kyocera Corporation entered into four long-term contracts with Hemlock Semiconductor Corporation and Hemlock Semiconductor, LLC to purchase specified amounts of polysilicon at specified prices for its solar panel production.
- The contracts included 'take-or-pay' provisions, obligating Kyocera to either 'take' a specified quantity of polysilicon each year or 'pay' the full price for it.
- The contracts also contained 'acceleration' provisions, which would make Kyocera liable for all remaining sums owed if it defaulted, Hemlock served notice, and Kyocera failed to cure within 180 days, allowing Hemlock to terminate.
- Kyocera made 'non-refundable, unconditional, irrevocable advance payments' to Hemlock to support the construction and expansion of manufacturing facilities, which were to be credited back against future polysilicon purchases.
- Several years into the contracts, the Chinese government subsidized solar-panel companies, causing the market price of polysilicon to fall significantly below the price Kyocera had agreed to pay Hemlock.
- Kyocera sought to renegotiate the contract prices, leading to a temporary lowering of the polysilicon price.
- Hemlock eventually signaled its intent to insist that Kyocera honor the original, higher take-or-pay prices.
- Kyocera indicated that it would not take or pay for polysilicon at the original contract prices.
Procedural Posture:
- Hemlock Semiconductor Corporation and Hemlock Semiconductor, LLC (Plaintiffs) sued Kyocera Corporation (Defendant) in the United States District Court for the Eastern District of Michigan, seeking a declaratory judgment that Kyocera had repudiated their polysilicon supply contracts.
- Kyocera Corporation (Defendant) counterclaimed, seeking a declaratory judgment that the contracts' 'take-or-pay' and 'acceleration' provisions were unlawful penalties, and also counterclaimed for breach of contract, alleging Hemlock failed to expand its manufacturing facilities as contractually obligated.
- Hemlock (Plaintiffs) moved to dismiss all of Kyocera's (Defendant's) counterclaims.
- The district court granted Hemlock's motion, dismissing all of Kyocera's counterclaims.
- Kyocera (Defendant-Appellant) appealed the district court's dismissal of its counterclaims to the United States Court of Appeals for the Sixth Circuit.
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Issue:
1. Does a contract's 'take-or-pay' provision constitute an unlawful penalty under Michigan law if the 'pay' option, viewed at the time of contracting, does not offer a viable performance alternative but rather functions as a liquidated damages clause that fails to reasonably account for the seller's cost savings or ability to resell? 2. Is a declaratory judgment challenge to contractual 'acceleration' provisions ripe for judicial review when the conditions precedent for their invocation have not yet occurred and the alleged injury is not 'certainly impending'? 3. Did a contract clause stating 'Kyocera acknowledges that Hemlock will be expanding its manufacturing facilities' create a contractually enforceable obligation for Hemlock to undertake such expansion?
Opinions:
Majority - Thapar, Circuit Judge
Yes, a contract's 'take-or-pay' provision may constitute an unlawful penalty under Michigan law if the 'pay' option is not a genuine alternative performance and fails to reasonably account for the seller's cost savings or ability to resell. The court predicted that the Michigan Supreme Court would distinguish between true alternative performance options and liquidated damages provisions, subjecting the latter to a reasonableness test under Mich. Comp. Laws § 440.2718(1). The court found it plausible that Kyocera's allegation—that paying full price for nothing in return was not a viable performance option—would constitute a coercive measure rather than a true alternative. Hemlock's counterarguments (Kyocera's sophistication, desire to maintain the contract, or avoid storage costs) were deemed insufficient to dismiss the claim at the pleading stage, lacking factual support. The absence of 'make-up rights' and the fact that Kyocera, not Hemlock, initially bore construction costs for facilities further supported the contention that the 'pay' option served as a liquidated damages provision. As a liquidated damages provision, demanding full price for nothing appears unreasonable because it fails to account for Hemlock's ability to resell the polysilicon or its cost savings from not producing it. The court distinguished a prior Sixth Circuit case, Hemlock Semiconductor Operations, LLC v. SolarWorld Indus. Sachsen GmbH, due to its different procedural posture (summary judgment vs. pleading stage) and the buyer's concession of take-or-pay validity in that case. No, a declaratory judgment challenge to contractual 'acceleration' provisions is not ripe for judicial review because multiple contingencies must occur before the provisions can be invoked. For a justiciable case or controversy under Article III, the alleged injury must be 'certainly impending' and of 'sufficient immediacy and reality.' The court noted that Hemlock could not invoke the acceleration provisions until Kyocera defaulted, Hemlock served notice of default, 180 days passed for Kyocera to cure, and Hemlock elected to terminate the contract—none of which had occurred. Kyocera's situation was distinguished from MedImmune, Inc. v. Genentech, Inc., where the payment obligation was immediate. The court clarified that Kyocera's immediate injury stemmed from the take-or-pay provisions, not the acceleration provisions, and striking down the latter would not redress the obligation under the former. No, the district court correctly dismissed Kyocera's breach-of-contract counterclaim because the contract language did not create an enforceable obligation for Hemlock to expand its facilities. The clause stating '[Kyocera] acknowledges that [Hemlock] will be expanding its manufacturing facilities' was interpreted in context as serving to limit Hemlock's liability for production delays caused by expansion, rather than creating an affirmative promise to expand. The contracts were for polysilicon supply, not facility construction, and Kyocera’s 'non-refundable, unconditional, irrevocable advance payments' for facilities were explicitly credited against polysilicon purchases, confirming their purpose was for polysilicon, not as consideration for a facility-building obligation.
Dissenting - Clay, Circuit Judge
No, Hemlock has not stated a declaratory judgment claim for breach of contract regarding the take-or-pay provision because it has not plausibly alleged that specific performance (an order forcing Kyocera to pay for nothing) would be an available remedy. Judge Clay argued that the majority erred by not considering this issue, as subject-matter jurisdiction cannot be forfeited, and a plaintiff's failure to state a claim regarding remedies can create a jurisdictional defect in a declaratory judgment action. Under Michigan law and the UCC, specific performance is an exception, not the default remedy, for the sale of goods, typically reserved for unique goods or circumstances where damages are impractical. Take-or-pay provisions originated in the natural gas industry, where specific performance was appropriate due to exclusive requirements contracts and a producer's inability to 'cover' losses by selling to other buyers. In contrast, this case involves a 'run-of-the-mill' contract where neither party is a unique customer or supplier, and Hemlock could likely mitigate losses by selling polysilicon to other buyers. Therefore, Hemlock is likely not entitled to specific performance. Without the threat of specific performance, the 'pay' option lacks coercive force and acts more like a 'take-or-pay-or-breach' provision, where Kyocera would only owe damages (the value of the least onerous alternative), not be compelled to pay the full price for nothing. The ambiguity in Hemlock's complaint, asking for the 'pay' obligation to be 'unenforceable' without specifying the remedy, further highlights this deficiency.
Analysis:
This case significantly clarifies the standard for challenging 'take-or-pay' provisions in supply contracts under Michigan law, requiring a careful distinction between true alternative performance and unenforceable penalties. It emphasizes that such clauses must offer a genuine, reasonable alternative and, if functioning as liquidated damages, must fairly account for the seller's cost savings or ability to resell, allowing for greater scrutiny at the pleading stage. Additionally, the ruling reinforces the stringent Article III ripeness requirements for declaratory judgment actions, especially when numerous and uncertain future contingent events are involved, underscoring the need for a truly 'certainly impending' injury. The dissenting opinion further highlights the critical, often overlooked, role of specific performance availability in assessing the coerciveness and enforceability of 'take-or-pay' clauses, particularly when the underlying goods are not unique.
