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Unihan Corp v. Max Group Corp.

December 28, 2011


The opinion of the court was delivered by: Margaret M. Morrow United States District Judge

E-FILED 12.28.11


Plaintiff Unihan Corp. ("Unihan") commenced this action on October 29, 2009, alleging breach of contract and other common law claims.*fn1 On January 5, 2010, defendant Max Group Corp. ("Max") filed an answer that pled two counterclaims for breach of contract.*fn2

The case was tried to the court from May 31 to June 4, 2011. Thereafter, the parties submitted written trial briefs.*fn3 Having considered the evidence presented, the arguments of counsel, and the parties' trial briefs, the court makes the following findings of fact and conclusions of law pursuant to Rule 52 of the Federal Rules of Civil Procedure.


A. Background Regarding the Parties and the Transactions

1. Unihan is a corporation organized under the laws of the Republic of China (Taiwan) with its principal place of business in Taipei, Republic of China (Taiwan). Max is a California corporation with its principal place of business in City of Industry, California.*fn4

2. Unihan is a manufacturer of telecommunications- related products.*fn5 Max is a wholesaler or distributor of computer and other electronic equipment.*fn6 In 2007, Max formed a Max Media unit within Max and named David Tang its president.*fn7

3. Television transmission in the United States was scheduled to migrate from analog to digital by February 2009. To encourage consumers to purchase digital-to-analog converter boxes so that they could use their analog televisions to watch digital transmissions, the United States Department of Commerce's National Telecommunications and Information Administration ("NTIA") offered a coupon program that provided consumers with a credit toward the purchase of a converter box.*fn8 Tang became aware of the coupon program in late 2007 or early 2008.*fn9 At the time, the deadline for using a NTIA coupon to purchase a converter box was February 17, 2009.*fn10

B. Pre-Agreement Representations, Negotiations, and the Issuance of Purchase Orders

4. In early 2008, Bob Hoard, a representative of Auvitek, Inc. ("Auvitek") approached Tang. Auvitek was designing a chip set to be used in converter boxes. Hoard introduced Tang to Mark Pai, an employee in Auvitek's Taiwan office, so that Tang and Pai could further discuss the concept. The two had a few discussions via telephone. Tang then flew to Taiwan in May 2008, where he met first with Pai of Auvitek and Daniel Kuo of Powerray Corp. ("Powerray"). Powerray was designing the main functionality in the converter box for which Auvitek was to provide the integrated circuit.*fn11

5. Pai and Kuo escorted Tang to Unihan's office. Tang understood that Auvitek, through Pai, was setting him up with "Unihan as a manufacturer."*fn12 At the time of the meeting in Unihan's office, Tang had not seen an actual design for a converter box. Tang met with Dr. Steve Huang and Phoebe Chien of Unihan, among others.*fn13 They discussed the potential project with Tang and estimated that the cost to manufacture converter boxes would be $5.00 per unit.*fn14

6. Following the meeting at Unihan's office, Tang went back to Auvitek's office with Pai and Kuo. There, Tang saw a sample converter box for the first time. Tang was not able to test the converter box at Auvitek's office because the channel frequencies in Taiwan are different than those in the United States.*fn15

7. After Tang returned to the United States, Powerray sent Tang a sample converter box. Tang tested the sample and, on June 14, 2008, reported problems to Kuo concerning, among other things,*fn16 that the "picture doesn't seem to be as vivid . . . especially on the red color."*fn17

8. Pai and Kuo then sent Tang a modified sample, which Tang tested again. He noticed that "half the problems went away" because "50 percent of the problem[s] with the first batch . . . were AC adapter related," and Powerray had "replaced the different AC adapters."*fn18

Although the "the other half of the problems were still there," it is unclear whether Tang reported them to Pai or Kuo.*fn19 Tang never received a third sample from Powerray or Auvitek.*fn20

9. In June and July 2008, Tang discussed with Unihan's Oscar Cheng the possibility that Max would purchase 500,000 converter boxes from Unihan, which would be known as the "Lutro" converter boxes.*fn21 No purchase orders, however, were placed.*fn22 Huang instructed everyone at Unihan to take no action to manufacture boxes until a purchase order was received from Max.*fn23

10. In July 2008, Tang traveled to China to inspect Unihan's manufacturing facility. During his visit, Tan became concerned because he did not see Unihan engaged in any part of the manufacturing process for the Lutro converter boxes. Tang was expecting "some kind of engineering team there to [be] engage[d] in the Max converter box," but "there was no activity." Tang was particularly concerned because of the "time pressure" and "limited window of opportunity" to capitalize on the government's coupon program, which "was set to expire" in February 2009.*fn24

11. After Tang's visit to China, he contacted Pai and expressed concern about the lack of manufacturing activity and the time pressure created by the coupon program. As a result, Pai flew to Los Angeles in late July 2008 for a series of meetings at Max's offices.*fn25

During these meetings, Pai represented that although he was employed by Auvitek, he would be joining Unihan immediately, where he would continue to work on Max's Lutro converter box project.*fn26 He also represented that Huang, a general manager at Unihan, had asked him to negotiate the terms and conditions of Lutro converter box purchase orders, and knew that he was doing so.*fn27 Unbeknownst to Max, Pai did not have authority to act, negotiate, or make any representations on Unihan's behalf. Pai did not join Unihan as an employee during the course of the project.*fn28
12. While Pai was in Los Angeles, Tang continued to speak with Cheng in Unihan's Taiwan office.*fn29 Follwing these discussions, on July 21, 2008, Max issued Purchase Order ("PO") No. 142034 for 400 "Maxmedia Lutro NTIA approved converter box kit[s] defined and spec by Powerray" at a $35 unit price, for a total of $14,000, and a credit or finance term of net 30 days.*fn30 Delivery was specified as "in 3 weeks (partial if necessary)."*fn31

13. Following receipt of PO No. 142034, Cheng sent Tang an email stating: "I got the PO. One question is our payment is T/T in advance not net[ ] 30 days." The email included Unihan's "internet schedule" for other anticipated Lutro converter box purchase orders. The proposed schedule was as follows: (1) sample order: 100 pieces -- August 10, 2008 delivery to customers from Taiwan; (2) engineering run order: 50 pieces -- August 25, 2008 delivery to customers from Shanghai; (3) pilot run order: 250 pieces -- September 4, 2008 delivery to customers from Shanghai; (4) mass production forecast production order: 200,000 pieces -- September 30, 2008 delivery to customers from Shanghai; and (5) rolling forecast from October: 500k per month.*fn32

14. At approximately this time, Tang became more convinced that Pai's analysis of the marketability of the converter boxes was correct. He contacted a Walmart representative to discuss Walmart's interest in the converter boxes, who expressed interest in the converter boxes. He also relied on Pai's report of a similar discussion he had had with a Best Buy representative.*fn33

15. On July 23, 2008, Max Group issued PO No. 142108 for the purchase of 100,000 converter boxes at $33.50 per unit. The purchase order stated that the units were to be delivered by September 30, 2008. It also specified that the "Lutro box should be built to be 100% NTIA compliant as an NTIA approved converter box with analog pass through feature," and that "[p]arts and components must not be altered without the consent of Maxmedia." The purchase order provided that the converter box was to "include all the necessary accessories," including a user manual. Finally, it stated that Unihan was to "provide a 15 month warranty to the Lutro box, [and a] return and repair procedure to be provided by" Unihan. PO No. 142108 did not condition purchase of the 100,000 units on fulfillment of or language in any other purchase order, did not reference any other purchase order, and did not include a cancellation provision.*fn34 Unihan accepted the terms of PO No. 142108.*fn35

C. Unihan Begins Manufacturing Process

16. Unihan immediately began purchasing component parts in sufficient quantities to manufacture 100,000 converter boxes by September 30, 2008, and rushed its suppliers to deliver components on an expedited schedule.*fn36

17. On July 29, 2008, Max issued and delivered PO Nos. 142034A and 142214 to Unihan, for 100 and 300 converter boxes respectively; these purchase orders were intended to replace PO No. 142034. The unit price for both POs was $35 and both contained similar language to PO No. 142108 regarding "100% NTIA complian[ce,]" alteration of parts and materials, and inclusion of "all the necessary accessories." Although the language, "Maxmedia Lutro NTIA approved converter box kit defined and spec by Powerray" was not included in these POs, it was Max's understanding that specifications for the converter boxes had to be provided by Powerray.*fn37

18. On August 12, 2008, Unihan manufactured one hundred converter boxes. Max's Frank Chang and Sue Tsai picked up ten of these in Taipei before August 15, 2008. Unihan shipped the remaining ninety to Max's Los Angeles office; they arrived on approximately August 20, 2008.*fn38

19. On August 19, 2008, Cheng informed Tang that Unihan was scheduled to complete the first 25,000 converter boxes from the mass production order by September 4, 2008. Cheng stated that he "need[ed] the user manual for [the] Spanish version before 22/Aug. Otherwise, [mass production] will miss the Spanish version in user manual."*fn39

20. On August 21, 2008, Tang informed Unihan that one of the one hundred converter boxes "displayed bright orange color on the OSD and the picture color is all wrong, so we think this box is bad." Thirty minutes later, Tang informed Unihan that "[a]fter [he] turned off the power and restart[ed] the box, it seemed OK again."*fn40

21. On August 26, 2008, Tang informed Unihan that another one of the one hundred converter boxes had color problems. He stated: "[T]his [is] the 2nd box that we see have a problem out of 20 boxes we tested."*fn41 That same day, Cheng responded: "The attached file is updated firmware to solve the OSC become red color problem. I [spoke] with Powerray, and, they say you have the tools before. So, I just attached the updated firmware and the firmware update manual to you. This bug will be gone after update the firmware. Please try it!"*fn42 On August 27, 2008, Unihan arranged with Pai to send an Auvitek engineer, Jiang Zhi, to identify the defects with the 100 samples.*fn43

22. On August 27, 2008, Cheng proposed a delivery schedule for the mass production order. The schedule contemplated delivery of 25,000 converter boxes on each of September 19, September 25, October 2, and October 9, 2008. Cheng asked Tang to "arrange your delivery schedule to us before 29/Aug."*fn44 In response, on August 27, 2008, Tang instructed Unihan to "[p]lease wait for our further notice of the MP [because] there are still technical problems with the box, the pr[i]cing iss[u]e, and customer problem[s]."*fn45

Notwithstanding Cheng's proposed delivery schedule, Unihan had the capacity, on August 27, 2008, to manufacture all 100,000 ...

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