United States District Court, S.D. California
ORDER DENYING IN PART AND GRANTING IN PART SHERWIN-WILLIAMS' MOTION FOR PARTIAL SUMMARY JUDGMENT
LARRY ALAN BURNS, District Judge.
This dispute arises from a pair of supply contracts between Sherwin-Williams, a paint company, and JB Collision Services, and JJT, Inc., automotive body shops owned by John Tyczki. Sherwin-Williams has filed a motion for partial summary judgment. (Docket no. 127.)
I. Factual Background
A. JB Supply Agreement
The first communication between the parties occurred in June 2008 when a Sherwin-Williams sales representative, Jose Garcia, approached Tyczki about a potential exclusive automotive paint products supply contract. Tyczki became interested in Sherwin-Williams' new water-based paint line-AWX. Garcia allegedly represented that AWX was a tested, proven, and perfected product and, with it, a vehicle could go from "prime to shine" in 50 minutes. In September 2008, JB and Sherwin-Williams entered into a Supply Agreement (the "JB Supply Agreement").
Under the JB Supply Agreement, JB was to purchase all of its requirements for "Products" used at its body shops from Sherwin-Williams until the gross sales of its purchases of "SW Paint Products" reached $1.3 million. This was the "Term" of the agreement. "SW Paint Products" was defined in the contract as "automotive paints and coatings manufactured and sold by Sherwin-Williams under the Sherwin-Williams label.'" "Products" was defined as: "all automotive paints, coatings and related products, including, without limitation, the following: (i) primers; (ii) top coats; (iii) hardeners; (iv) abrasives, tapes, adhesives; and (v) all other associated products." In consideration of exclusivity, Sherwin-Williams gave JB a discount on certain products and a $275, 000 advanced payment. The JB Supply Agreement stipulated that upon the occurrence of an "Acceleration Event, " such as early termination, JB was required to refund a pro-rata amount of the advance payment.
B. JJT Supply Agreement
In May 2011, JJT and Sherwin-Williams entered into a similar supply agreement (the "JJT Supply Agreement"). The Term of the contract was to last until gross sales of SW Paint Products to JJT reached $250, 000. Sherwin-Williams made a $40, 000 advance payment to JJT, and the entire amount was to be refunded in the case of an Acceleration Event. Tyczki signed a personal guaranty for consideration of the advance payment to JJT.
C. Contract Performance
From September 2008 until early 2013, JB and JJT refinished about 12, 000 vehicles with Sherwin-Williams paint products. From the inception of the JB Supply Agreement until Plaintiff filed suit for breach of contract in August 2013, Defendants filed four warranty claims on vehicles painted with AWX. Since then, Defendants filed an additional 28 warranty claims.
Defendants allege quality issues arose less than a month after entering the JB Supply Agreement, when JB began experiencing color-match defects with AWX. Defendants allege further that, during a meeting in September 2008, Sherwin-Williams admitted it had made false representations about AWX's quality. After the meeting, Sherwin-Williams took AWX out of JB's shops and installed a solvent-based paint line. Because JB hadn't contracted for solvent-based products, Sherwin-Williams supplied them at no charge for the six months between September 2008 and March 2009, at which point the AWX line was reinstalled.
Starting again in July 2009, Defendants allege they had further complications with AWX, including dieback-a defect that occurs when paint loses its shine. Defendants allege they voiced their issues with the product line to Sherwin-Williams, usually to Garcia, numerous times each year from 2009 until 2013. And, while Garcia would provide "goodwill adjustments" to account for product defects, Defendants had to absorb the labor costs of repainting vehicles. In 2012, Defendants allege Tyczki met in-person with Garcia and Sherwin-Williams Vice-President David Sewell to discuss the problems. Tyczki alleges he never heard back from Sewell despite a promise that he'd "get to the bottom" of the issues.
Further, although Defendants contend they were repeatedly assured they were the "only ones" experiencing issues with the AWX line, a number of other auto body shops reportedly experienced similar issues. The cause of these issues, specifically Defendants' problem with dieback, lies at the heart of Defendants' counterclaims. Defendants allege that they encountered problems because AWX is defective. Sherwin-Williams maintains that the product isn't defective, and the issues are within the painter's control.
Defendants allege that, beginning in March 2009, in response to the issues with the AWX product line, Plaintiff provided on-site technical training to Defendants' painters and eventually certified them for use of the AWX line. Defendants allege their problems persisted and, in 2012, Sherwin-Williams proposed the adoption of a "30-60-90 Plan" which was intended to improve Defendants' body shops by optimizing the area for painting vehicles. Ultimately, the 30-60-90 Plan was never completed because, in late 2012, Tyczki stated his intention for Defendants to completely terminate their business relationship with Sherwin-Williams upon completion of the Term of the JB Supply Agreement with JB, which he contended would occur once gross sales on that account reached $1.3 million.
D. Sherwin-Williams' Allegation that Defendants Breached
On February 28, 2013, Sherwin-Williams sent JB and JJT letters stating their belief that both Defendants had breached their respective Supply Agreements by installing a competitor's paint line in their body shops. Defendants maintain they didn't actually discontinue their exclusive relationship with Sherwin-Williams until the end of March 2013, once they believed they had satisfied the Supply Agreement's gross sales requirement. At that time Defendants had purchased $1.3 million in Sherwin-Williams Products, but, according to Sherwin-Williams, only about $900, 000 worth of SW Paint Products . On April 3, 2013, Tyczki sent Sherwin-Williams a letter, enclosed with a $40, 000 check refunding the advance payment, stating that JJT was terminating its Supply Agreement as of April 8, 2013.
Sherwin-Williams also alleges Defendants breached the Supply Agreements by purchasing covered products from Keystone Automotive. Prior to entering into the Supply Agreements, Defendants were in an exclusive contractual relationship with Keystone for the supply of Spies-Hecker paint products. While Defendants claim this relationship ended in 2008, ...