Wiseco, Inc. v. Johnson Controls, Inc.
155 F. App'x 815 (2005)
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Rule of Law:
Under UCC § 2-306(1), a buyer in a requirements contract may reduce its requirements in good faith for a legitimate business reason, even if the reduction is substantial or eliminates all requirements. The seller bears the burden of proving that the buyer's reduction in requirements was made in bad faith.
Facts:
- In 1998, Johnson Controls, Inc. (JCI) and Wiseco, Inc. entered an oral agreement for Wiseco to manufacture a metal headrest component, part 684F, for DaimlerChrysler vehicles.
- Wiseco invested in tooling and for six months produced approximately 4,000 parts per day as per the agreement.
- After six months, JCI informed Wiseco that its requirements for part 684F were decreasing substantially.
- JCI asked Wiseco to take over additional finishing work, creating a new part number (684B), but orders for this part remained significantly lower than the original volume.
- The decline in orders was due to DaimlerChrysler ceasing to use part 684 in its newer Grand Cherokee models and later discontinuing the Cherokee model line entirely.
- The newer Grand Cherokee models required a different part, part 611, which was physically different (longer, with more notches and different ends) from part 684.
- JCI sourced part 611 from a different supplier, Guelph Tool and Die, which was located closer to JCI's final assembly plant in Canada.
- JCI shifted production of the headrest stays to its Canada plant for business efficiency reasons, including reducing shipping costs and addressing production issues at its Kentucky plant.
Procedural Posture:
- Wiseco sued JCI in Kentucky state court for breach of contract.
- JCI removed the case to the U.S. District Court for the Eastern District of Kentucky.
- Wiseco voluntarily dismissed all claims except for the one related to the contract for part 684F.
- The district court granted partial summary judgment for Wiseco, holding that an oral requirements contract existed.
- Following further discovery, the district court granted summary judgment for JCI, finding that it had reduced its requirements in good faith.
- Wiseco, as the appellant, appealed the district court's grant of summary judgment to the U.S. Court of Appeals for the Sixth Circuit.
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Issue:
Does a buyer in a requirements contract breach the agreement by substantially reducing its orders when the reduction is based on legitimate business reasons, such as a change in its customer's specifications and a strategic shift in manufacturing locations for efficiency?
Opinions:
Majority - Sutton, Circuit Judge
No. A buyer in a requirements contract does not breach the agreement by substantially reducing its orders if the reduction is made in good faith for a legitimate business reason. Under UCC § 2-306, the seller assumes the risk of all good faith variations in the buyer's requirements, which can include a complete cessation of business. The good faith requirement prevents a buyer from reducing orders simply because it had second thoughts about the contract terms or wants to purchase the same goods from another supplier. However, a reduction is permissible if it stems from a valid business reason independent of the contract itself. Here, JCI presented two legitimate reasons for reducing its requirements: first, its customer, DaimlerChrysler, changed the specifications, rendering part 684 obsolete for new models; and second, JCI moved its manufacturing operations to a different plant for efficiency. Wiseco, the seller, had the burden of proving JCI acted in bad faith and failed to do so, as it could not show that the new part (611) was substantially the same as the old part (684) or rebut JCI's efficiency-based rationale.
Analysis:
This decision reinforces the dominant interpretation of UCC § 2-306, which provides buyers in requirements contracts with significant flexibility to reduce orders, even to zero, so long as the decision is made in good faith. It clarifies that a 'good faith' reduction can be based on external factors like changing customer demand or internal strategic decisions aimed at business efficiency. The case places a high evidentiary burden on the seller to prove the buyer's bad faith, making it challenging for suppliers to succeed in breach of contract claims when a buyer's needs genuinely diminish or change for legitimate commercial reasons.
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