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Cardinal Health 301, Inc. v. Tyco Electronics Corp.

December 15, 2008

CARDINAL HEALTH 301, INC., PLAINTIFF AND APPELLANT,
v.
TYCO ELECTRONICS CORP. ET AL., DEFENDANTS AND APPELLANTS; REMEC, INC., DEFENDANT AND RESPONDENT.



APPEALS from a judgment and order of the Superior Court of San Diego County, Michael B. Orfield, Judge. Judgment affirmed in part, and reversed in part. Order affirmed. (Super. Ct. No. 040706).

The opinion of the court was delivered by: Haller, Acting P. J.

CERTIFIED FOR PUBLICATION

Plaintiff Cardinal Health 301, Inc. (Cardinal) developed the MedStation 2000, a machine used by hospitals to supply patient medication to medical personnel. Defendants Tyco Electronics Corporation (Tyco) and Thomas & Betts Corporation (T&B) manufactured certain electrical parts for the MedStation, known as spring probe connectors. After Cardinal sold numerous MedStations to hospitals, the machines did not always work properly, and testing showed the problems could be attributed to defects in the spring probe connector.

Cardinal then sued Tyco and T&B claiming the defects in the spring probe connectors required Cardinal to replace the connectors and thus caused Cardinal to suffer damages. After a six-week trial, the jury was asked to decide whether Cardinal proved three causes of action against T&B: (1) breach of contract; (2) breach of an express warranty; and (3) breach of the implied warranty of fitness for a particular purpose. The jury was also asked to decide one cause of action against Tyco: breach of the implied warranty of fitness for a particular purpose. The jury returned verdicts finding in Cardinal's favor on each of these causes of action. The jury awarded approximately $12.2 million against Tyco, consisting of $6.7 million in past damages and $5.5 million in future damages. The jury awarded $451,351.02, against T&B, consisting only of past damages.

Tyco and T&B appeal.

Tyco contends the judgment must be reversed because: (1) there was no privity between Tyco and Cardinal supporting an implied warranty cause of action and/or the court improperly instructed on the privity requirement; and (2) insufficient evidence supported the judgment on several elements of the warranty cause of action, including causation and damages. We reject these arguments, except we conclude the future damages award is unsupported, and strike that portion of the damages award from the judgment. We affirm the remaining portions of the judgment against Tyco.

As to T&B, we reverse the judgment based on two independent grounds: (1) Cardinal filed the action against T&B beyond the applicable limitations period; and (2) Cardinal failed to comply with statutory notice requirements with respect to T&B.

Cardinal filed a protective cross-appeal against Tyco and T&B. Because we affirm the Tyco judgment except for the future damages amount, it is not necessary to reach Cardinal's arguments on the cross-appeal regarding Tyco. With respect to T&B, we conclude Cardinal's arguments in the cross-appeal are without merit.

In its complaint, Cardinal also sued Remec, Inc., which had a contractual relationship with Cardinal for the assembly of the MedStation circuit boards. During trial, the court granted Remec's motion for non-suit. Cardinal appealed this ruling, but in a separate order we dismissed the appeal based on a finding the appeal was untimely. Cardinal now appeals the order awarding Remec costs. We affirm the cost award.

FACTUAL AND PROCEDURAL SUMMARY

In about 1998, Cardinal, a healthcare products company, began to develop an automated medication dispensing machine for hospital use.*fn1 Although hospitals had previously used medication dispensing machines, Cardinal wanted to develop a new type of delivery system that had removable pockets to permit the pharmacy department to fill the pockets with medication, and then deliver the secure pockets to the machine located on a patient floor. The purpose of the machine was to safeguard and protect the administration of prescription medicines, ensuring each patient was given the proper medication and providing a computerized medication inventory system.

As developed, the MedStation resembles a large cabinet, with up to eight drawers that slide open. Inside each drawer is a circuit board called a MOAB. Attached to each MOAB are the 30 removable plastic pockets, called "Cubie pockets" or "Cubies," that hold medication. Each Cubie pocket has a latch and a lid. The MedStation machines are generally located on nursing floors. The hospital pharmacy fills each Cubie pocket with a particular type of medication, and the pocket is then brought to the nursing floor and placed in the machine. A nurse can then input a command on the MedStation's keyboard, and a Cubie lid will open, allowing the nurse to access the proper medication. The Cubie has a memory chip that can be programmed at a remote site.

To make this system work, Cardinal needed a special electrical connection between the Cubie and the MOAB. The Cubie pocket was designed to be repeatedly removed from, and returned to, the MedStation, and therefore the connection between the removable Cubie pocket and the circuit board had to be capable of mating and demating thousands of times.

Because Cardinal did not have experience in designing or manufacturing electrical connectors, Cardinal contacted T&B, which had substantial expertise in this field, to discuss the possibility of T&B supplying the electrical connector attached to the MOAB. In its initial dealings with T&B, Cardinal described the MedStation's functions and characteristics and showed T&B the prototype MedStation, the Cubie pocket, and the MOAB.

T&B then presented Cardinal with a proposed design drawing for a spring probe connector (the stationary connector that would be attached to the MOAB), based on Cardinal's stated requirements. This spring probe connector contained five small pins. Each pin consisted of a barrel, a plunger (fitting within the barrel) and a spring located at the base of the plunger. T&B designed the connector so that when the Cubie pocket is pushed down into the MOAB and locked into place, the springs inside each pin depress yet still maintain physical contact (and therefore an electrical connection) with the Cubie pocket. Because each MOAB contains approximately 30 Cubie pockets and each spring probe connector has five pins, there are approximately 150 connector pins on each MOAB.

In December 1998, Cardinal and T&B entered into a purchase agreement, known as the 1998 Scheduling Agreement, for T&B to sell 1 million spring probe connectors to Cardinal. The agreed price was $1.17 for each connector. T&B agreed that the spring probe connectors would be "free of defects in material and workmanship." The Scheduling Agreement contained detailed drawings of the agreed-upon connector design, and included written product requirements. These written requirements included: (1) "mechanical life 50,000 cycles"; (2) "materials: [¶] contact: copper alloy, gold plated (30 micro inches min in contact area, 20 micro inches min in solder area) insulator: thermoplastic polyester"; (3) "mates with B121548 mobile connector"; (4) "current rating: 1 amp"; and (5) "maximum contact resistance: 100m ohms." (Capitalization omitted.) When the parties entered into the Scheduling Agreement, T&B understood that Cardinal intended to retain a manufacturer to assemble the MOABs, and T&B expressly agreed to "honor [the $1.17 price] for the . . . authorized contract manufacturer chosen . . . ." (Capitalization omitted.)

After successfully testing various prototypes, T&B began delivering the spring probe connectors to Cardinal. T&B eventually delivered 85,000 connectors directly to Cardinal.

In approximately August 1999, Cardinal selected Remec as the entity that would manufacture and assemble the MOABs, including attaching the T&B spring probe connectors to the MOABs. Cardinal then "cancelled" its agreement with T&B, and entered into a new agreement with Remec for the supply of the completed MOABs. Remec's function was to purchase all of the raw materials (including the spring probe connectors) and put the product together for Cardinal, consistent with Cardinal's specifications. Remec then entered into a separate agreement with T&B for the supply of the remaining approximately 900,000 spring probe connectors. After numerous product tests, in about May 2000, Cardinal began selling the MedStation machines to hospitals for $65,000 each.

At about the same time, in May 2000, Tyco purchased the electrical connector division of T&B. Cardinal learned of this fact when Brian Sherman, a Tyco employee formerly employed by T&B, informed Lisa Files, a Cardinal employee responsible for the Cubie product, that the acquisition had occurred and that "nothing changes until we tell you further." Files understood that she was to direct all of her inquires to Tyco personnel. Cardinal's relationship with Tyco remained the same as its relationship with T&B before the acquisition. T&B continued to exist, manufacturing and selling other electrical products.

Shortly after the acquisition, Tyco entered into an agreement with Remec for the sale of the spring probe connectors. Remec purchased the spring probe connectors directly from Tyco, and then mounted them on the MOABs, and delivered the product to Cardinal. Tyco adopted all of the specifications and design drawings that had been negotiated between Cardinal and T&B. Tyco manufactured the connectors in the same manner as had T&B, used the custom-made tools T&B had created for the manufacturing process, and charged the same price.

By late 2000 or early 2001, hospitals began notifying Cardinal they were experiencing problems with the Cubies. A Cardinal engineer visited about 12 hospitals throughout the country, and observed numerous problems. Most of the problems were readily fixable, but one of the problems could not be explained-the MedStation computer would sometimes fail to detect the presence of the Cubie. When the Cubie could not be detected, the lid to the Cubie could not be opened and therefore the patient medication could not be promptly accessed. Another Cardinal employee also observed similar problems with the Cubies at other hospitals. Remec also reported its functional testing showed "some percentage" of Cubie failures. The problem was referred to as an "intermittent communication issue" because the problem would manifest randomly; sometimes the Cubie pockets would open and other times they would not.

Cardinal thereafter began to investigate possible causes for this problem, including computer software issues. After a period of testing, Cardinal ruled out other possible causes and believed the problem was caused by the spring probe connector. Shortly after making this assessment, in August 2001, Cardinal informed Tyco that the MedStation units were having intermittency problems and that Cardinal believed the problem was caused by the spring probe connectors. Tyco nonetheless continued to supply the spring probe connectors and Remec continued to install them on the MOABs, and Cardinal continued to sell the MedStations to hospitals.

Cardinal and Tyco then began efforts to find the root cause of the problem, and to identify another type of connector that would work better. The investigation continued for about 15 months until almost the end of 2002. As part of this investigation, Tyco and Cardinal conducted weekly teleconferences, exchanged hundreds of email messages, and participated in numerous face-to-face meetings. In September 2001, the Tyco product engineering manager responsible for the spring probe connectors (Robert Bendorf), sent an email noting that the connector design "does not appear to perform well in the application" and that "our customer [Cardinal] is concerned with intermittences and opens." Bendorf stated he was "looking for a high reliability contact to replace the former T&B [spring probe connector]."

At about this same time, Cardinal began requiring Remec to conduct additional tests on the MOABs and Cubies before delivering the MedStations to hospitals. These tests would sometimes detect communication failures between the Cubie pocket and the MOAB. Upon detecting a connector problem, Remec would identify the connector that had failed and would rework it and replace the connector. Cardinal also required Tyco to conduct additional testing before the connectors were sent to Remec, and Tyco never suggested these measures were unnecessary.

In 2002, Remec commissioned an outside lab, PhotoMetrics, Inc., to investigate the root cause of the electrical problem. Paul Reidel, a PhotoMetrics metallurgist, performed the analysis. Remec sent Reidel one new connector and one failed connector with one pin that was intermittently "open." Loss of electrical signal or contact is called an "open" where no current flows. After cutting the pin, Reidel found that it had "odd colorations" with "some real visible thickness" and "heavy deposits" of contaminants. Reidel also saw that there was no gold plating in the lower region of the connectors near the bottom of the barrel. These observations revealed that the internal surfaces of the barrels were corroded from the lack of gold plating and the corrosion was the cause of the intermittent electrical opens. In May 2002, PhotoMetrics prepared a report detailing its findings, and this report was forwarded to Remec and Cardinal.

Based on the report, Cardinal concluded the intermittent electrical problem was caused by insufficient gold plating on the bottom portions of the pins, making them prone to internal corrosion and electrical connection failures. Cardinal sent a copy of the PhotoMetrics report to Tyco. Tyco never indicated any disagreement with the report findings. Instead, Tyco suggested that a design change should be made because the contamination of the barrel appeared to be related to plating.

At that point, Cardinal understood that the connectors were defective because they did not effectively transmit electrical current and would continue to cause intermittent problems with Cubie openings. To deal with this problem, Cardinal decided to replace the connectors and contracted with a different company for the manufacture of a connector with a new design to use as a replacement connector. Cardinal also retained Remec to install the replacement connectors on the MOABs. However, for practical reasons and to mitigate the costs, Cardinal decided that it would not replace all of the Tyco/T&B connectors with this new connector. Instead, it decided it would replace only those spring probe connectors on MOABs that had a "failure" rate of one percent or higher. A MOAB "fails" when in response to a proper command, a Cubie pocket does not open. The failure rate was determined by software attached to MedStation units. A one percent failure rate means that for every 100 times a command was sent for the Cubie pocket lid to open, it did not open one time.

On November 16, 2004, Cardinal filed an action against Tyco, T&B and Remec to recover its costs for replacing the spring probe connectors on the MOABs. As amended, the complaint alleged breach of contract, breach of implied covenant of good faith and fair dealing, and breach of express and implied warranties. Before trial, the court granted Tyco's summary adjudication motion on Cardinal's contract claims, finding the undisputed evidence established there was no oral or written contract between Tyco and Cardinal for the sale of the connectors (because Cardinal had contracted directly with Remec, which contracted with Tyco). But the court denied Tyco's summary adjudication motion on Cardinal's express and implied warranty claims, finding the existence of disputed factual issues.

During trial, the court granted Remec's non-suit motion as to all causes of action, essentially concluding Cardinal did not present evidence that Remec provided any form of warranty as to the quality of the spring probe connectors. The trial court also granted Tyco's motion for non-suit on Cardinal's express warranty cause of action, stating there was "no evidence [of] there being any basis of the bargain, negotiation, express warranties between Tyco and Cardinal such as to create any grounds for a cause of action for express warranty." The court later dismissed Cardinal's implied warranty of merchantability claims, finding no evidence to support the claims.

Thus, after these rulings, one cause of action remained against Tyco: breach of the implied warranty of fitness for a particular purpose. Three causes of action remained against T&B: breach of contract, breach of express warranty, and breach of the implied warranty of fitness for a particular purpose. On the express warranty cause of action, Cardinal claimed T&B had made three express warranties in the 1998 Scheduling Agreement: (1) the connectors would be "free of defects in material and workmanship"; (2) "[t]he contact would be copper alloy, gold plated"; and (3) "[t]he mechanical life would be 50,000 cycles." On the implied warranty claims, Cardinal asserted that the spring probe connectors were not suitable for the MedStations because they did not provide a reliable electrical connection.

At the lengthy trial, Cardinal presented numerous witnesses and documentary evidence in an attempt to establish the spring probe connectors were defective, and that this defect caused many of the MedStations to fail to operate properly. Defendants presented opposing evidence, asserting numerous factual arguments, including that Cardinal was responsible for the design of the connectors and Cardinal's failure to produce any of its customers as witnesses to establish the defective condition of the machines showed that Cardinal's true purpose in replacing the spring probe connectors was to upgrade the machines, rather than to repair a defect.

By the time of trial, Cardinal had replaced the spring probe connectors on 29,112 MOABs, at a total cost of $7,919,895. With respect to these replacement costs, Cardinal requested the jury to award it refurbishment costs ($4,955,100) plus service costs ($2,209,202), totaling $7,164,302.*fn2 Cardinal argued each defendant should be responsible for this amount in proportion to the amount of spring probe connectors that it had supplied for the MedStations. Thus, because Tyco had sold 93.7 percent of the connectors, Cardinal asserted that Tyco should be held responsible for 93.7 percent of this cost, or about $6,712,951. Because T&B had sold 6.3 percent of the spring probe connectors, Cardinal claimed that T&B was responsible for 6.3 percent of the replacement costs, or about $451,351.

Cardinal also asked the jury to award it compensation for its future costs with respect to MOABs that had not yet been returned. With respect to this figure, Cardinal presented evidence that approximately 21,646 MOABs with Tyco/T&B spring probe connectors remained in use by hospitals and presented evidence of the average refurbishment and service costs for each MOAB. According to Cardinal's accounting expert, if all of the spring probe connectors on the remaining MedStations were replaced, the present value of the recoverable cost would be $5,916,526 ($3,791,547 for refurbishment plus $2,124,979 in service costs).

In special verdicts, the jury found in favor of Cardinal on each of its causes of action against T&B and Tyco. With respect to damages, the jury awarded Cardinal all of its claimed past damages for replacing the spring probe connectors ($7,164,302). The jury's damage awards indicate it agreed with Cardinal's arguments that Tyco was responsible for 93.7 percent of this amount (or $6,712,950.98), and T&B was responsible for 6.3 percent of this amount (or $451,351.02).

With respect to future damages, the jury awarded Cardinal $5,543,784.87 against Tyco, which is approximately 93.7 percent of the replacement and service costs of the spring probe connectors on all of the MOABs with spring probe connectors that remain with the hospitals. The jury did not award Cardinal any future damages against T&B.

DISCUSSION T&B APPEAL

I. Statute of Limitations

T&B contends the court erred in denying its motions for non-suit and directed verdict based on its argument that the lawsuit was barred by the four-year limitations period of California Uniform Commercial Code section 2725.*fn3 This argument is meritorious.

A. Breach of Express Warranty Claim

1. Overview

California has adopted the Uniform Commercial Code (UCC) statute of limitations rule for breach of warranty causes of action. (§ 2725.) Section 2725 provides in relevant part: "(1) An action for breach of any contract for sale must be commenced within four years after the cause of action has accrued. . . . [¶] (2) A cause of action accrues when the breach occurs, regardless of the aggrieved party's lack of knowledge of the breach. A breach of warranty occurs when tender of delivery is made, except that where a warranty explicitly extends to future performance of the goods and discovery of the breach must await the time of such performance the cause of action accrues when the breach is or should have been discovered."

In 1967, the Legislature adopted the UCC statute, rejecting its earlier view that the statute of limitations is "purely a local problem." (Cal. Code com., 23A Pt. 2 West's Ann. Cal. U. Com. Code (2002 ed.) foll. § 2725, p. 154.) The Legislature sought to promote "uniformity" and to " 'eliminate jurisdictional variations and provide needed relief for concerns doing business on a nationwide scale.' " (Ibid.) The four-year rule was selected by the UCC drafters "as the most appropriate to modern business practice," recognizing "[t]his is within the normal commercial record keeping practice." (U. Com. Code. com., 23A Pt. 2 West's Ann. Cal. U. Com. (2002 ed.) foll. § 2725, p. 155.)

Thus, under section 2725, the general limitations rule for a breach of warranty cause of action is four years from the date the goods are delivered (regardless of the date the buyer discovers the breach), unless the "warranty explicitly extends to future performance of the goods and discovery of the breach must await the time of such performance . . . ." (§ 2725, subd. (2).) If the exception applies, the accrual date is the time the breach "is or should have been discovered." (Ibid.)

In this case, T&B sold its entire electronic connector business to Tyco in May 2000. At that time, Tyco took over T&B's obligations for supplying the spring probe connectors. The last time the T&B spring probe connectors were delivered to Cardinal was in July or August 2000. However, Cardinal did not file the action against T&B until more than four years later, in November 2004.

At trial, T&B moved for a non-suit and directed verdict on the basis that Cardinal's warranty claims were untimely as a matter of law under section 2725, subdivision (2).

Cardinal opposed these motions, arguing that T&B's statement in the 1998 Scheduling Agreement that the spring probe connector would have a "mechanical life" of 50,000 cycles was a warranty extending to "future performance" and thus the discovery rule applied. The trial court agreed, and denied T&B's motions. As explained below, this ruling was erroneous. The 50,000-cycle warranty does not "explicitly extend to future performance" as that phrase has been defined in California and the majority of other jurisdictions interpreting the UCC limitations period. These courts have held the "future performance" exception applies only when the future warranty refers to a specific future time period. The 50,000-cycle warranty does not satisfy this standard.

2. "Future Performance" Exception

The scope of the "future performance" exception has been the subject of numerous, and sometimes conflicting, decisions throughout the country. (See Annot., What Constitutes Warranty Explicitly Extending to "Future Performance" for Purposes of UCC § 2-725(2) (2000) 81 A.L.R.5th 483, 529-550; see also 1 White & Summers, Uniform Commercial Code (4th ed. 1995) § 11-9, pp. 607-611.) But the majority view is that the exception must be narrowly construed, and that it applies only when the seller has expressly agreed to warrant its product for a specific and defined period of time. (See Western Recreational Vehicles, Inc. v. Swift Adhesives, Inc. (9th Cir. 1994) 23 F.3d 1547, 1550; Economy Housing Co. v. Continental Forest Products, Inc. (8th Cir. 1986) 805 F.2d 319, 321; Standard Alliance Indus. v. Black Clawson Co. (6th Cir. 1978) 587 F.2d 813, 820-821; Coady v. Marvin Lumber & Cedar Co. (2001) 167 F.Supp.2d 166, 170; Binkley Co. v. Teledyne Mid-America ...


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