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Benchmark Electronics, Inc. v. Cree, Inc.

United States District Court, M.D. North Carolina

January 18, 2018

BENCHMARK ELECTRONICS, INC., and BENCHMARK ELECTRONICS de MEXICO, S. de R.L. de C.V., Plaintiff,
v.
CREE, INC., Defendant.

          MEMORANDUM OPINION AND ORDER

          Thomas D. Schroeder United States District Judge

         This is an action by Plaintiffs, Benchmark Electronics, Inc. and Benchmark Electronics de Mexico, S. de R.L. de C.V. (“Benchmark”), seeking recovery from Defendant, Cree, Inc. (“Cree”), for money allegedly owed in connection with installing Cree's lightbulbs into various products. Cree counterclaims for recovery, or offset, for component parts it contends Benchmark either damaged during the manufacturing process or has failed to return.

         Before the court are cross motions for summary judgment. Benchmark moves for summary judgment on its breach of contract claim[1] and all of Cree's counterclaims. (Doc. 24.) Cree contends that Benchmark materially breached the parties' contract and moves for partial summary judgment as to (1) its breach of contract (or, alternatively, unjust enrichment) counterclaim; (2) its breach of good faith and fair dealing counterclaim; and (3) all of Benchmark's claims. (Doc. 28.) The motions have been fully briefed (Docs. 25, 32, 34, 29, 31, and 35) and are ready for decision. For the reasons set forth below, the court grants in part and denies in part each party's motion.

         I. BACKGROUND

         The facts, viewed in the light most favorable to the non-moving parties in the cross motions for summary judgment, establish the following:

         A. The Parties' Letter of Authorization and Related Documents

          In 2012, Cree, an equipment manufacturer of light-emitting diode (“LED”) lamps and components, issued a Request for Quotes (“RFQ”) seeking estimates from contract manufacturers for the manufacture, testing, packaging, and shipping of driver boards and LED boards, two independent components within Cree's “Bengal” product line of lamp products (the “Bengal Project”). (Doc. 32-2 ¶¶ 4-5; Doc. 26-1 at 40-41.) An LED board is a printed circuit board mounted with 10 or 20 LED bulbs. (Doc. 26-1 at 41, 47; Doc. 32-2 ¶ 15.) As part of the proposed arrangement, Cree would provide the contract manufacturer with LED bulbs on consignment to construct the LED boards. (Doc. 26-1 at 17; Doc. 27-20 at 56.) Consistent with its general practice, Cree communicated a “zero cost” for the consigned LED bulbs in the bill of materials that was provided as part of the RFQ. (Doc. 26-1 at 37-38.) The RFQ did not specify any rate for loss or destruction of consigned LED bulbs during the manufacturing process. (Doc. 26-1 at 41-42.)

         On June 12, 2012, Benchmark, a contract manufacturer, responded to Cree's RFQ. (Doc. 26-1 at 45-46; Doc. 26-11.) As part of its proposal, Benchmark provided a per-unit price for LED boards. (Doc. 27-21 ¶¶ 4-6). Benchmark's pricing model for the LED boards accounted for the bill of materials provided by Cree, which listed the cost of the consigned LED bulbs as zero. (Doc. 27-21 ¶ 4.) The pricing model included a line item for “Scrap (and Other MOH), ” which factored in the cost of scrapped components as well as the cost of material overhead (“MOH”) for managing the various components. (Doc. 27-20 at 36-38; Doc. 27-21 ¶ 5.)[2] While Benchmark used a price of $0.10 to calculate the MOH in its final estimate (Doc. 27-21 ¶ 5; Doc. 27-20 at 40-41; Doc. 26-11 at 14 (noting price of $0.15 was used in original proposal)), the parties dispute whether and to what extent the cost of scrapped LED bulbs were considered in Benchmark's RFQ response. (Doc. 27-21 ¶ 6; Doc. 27-20 at 38; Doc. 29-3 ¶ 15.)[3] Cree subsequently awarded the Bengal Project to Benchmark. (Doc. 29-3 ¶ 9.)

         The parties began negotiating a Contract Manufacturing Agreement (“CMA”) and exchanged draft agreements. (Doc. 32-2 ¶ 10; Doc. 26-1 at 35-36.) On June 29, 2012, Benchmark returned a redlined draft of the CMA to Cree. (Doc. 29-3 ¶ 11; Id. at 39.)[4] The draft CMA set out an initial two-year term (Doc. 29-3 at 65) and contained a Materials Consignment Agreement (“MCA”) that shifted the risk of loss to Benchmark for the consigned material in its possession (Doc. 29-3 ¶ 11; Id. at 65, 76). The relevant section of the draft MCA provides:

Contract Manufacturer shall be responsible for any loss, damage, or theft of Consigned Materials for any reason while in Contract Manufacturer's possession; provided that Contract Manufacturer shall not be responsible for actual defective or non-conforming Consigned Materials if Contract Manufacturer accounts to Cree for such Consigned Materials and follows Cree's instructions for return or disposal thereof. Contract Manufacturer shall maintain property insurance that provides adequate coverage for third-party property consigned to Contract Manufacturer and stored or used on Contract Manufacturer's premises.

(Doc. 29-3 at 76.) The draft CMA also required Benchmark to produce regular production reports, which would track Benchmark's inventory of consigned materials and report any loss of consigned materials to Cree. (29-3 at 52, 79.) However, neither the CMA nor MCA identified a designated scrap rate or attrition rate for the consigned LED bulbs. (See Doc. 35 at 9.)[5]

         Even though contract negotiations for the CMA were still ongoing, the parties continued to move forward with their business relationship. In November 2012, Cree issued its first purchase order to Benchmark and agreed to pay $0.72 per LED board. (Doc. 27-21 ¶ 6.) On December 23, 2012, the parties entered into a Letter of Authorization (“LOA”), which authorized Benchmark to purchase materials and components to manufacture the LED boards. (Doc. 8 ¶ 11; Doc. 26-4.)[6] At the time, the parties were still in the process of negotiating a CMA. (Doc. 32-2 ¶ 10; Doc. 26-4 at 4.) The LOA provided that “[t]he parties are currently in the process of discussing and negotiating a Contract Manufacturing Agreement (“CMA”) that will supersede this Letter of Authorization (“LOA”).” (Doc. 26-4 at 4.) However, the LOA also provides that “If the parties do not execute an [sic] CMA within one (1) year of the final execution of this LOA, then Benchmark has the right to invoice Customer for all Components purchased pursuant to this LOA, whether or not they are Excess and/or Obsolete Components.” (Doc. 26-4 at 4.)

         As will be seen, Cree eventually decided to discontinue its relationship with Benchmark before a CMA was ever executed. (Doc. 1 ¶ 15; Doc. 8 ¶ 15; 26-1 at 35-36.)

         B. The Parties' Course of Performance

         1. Benchmark's Manufacture of LED Boards

         Following the execution of the LOA, Benchmark began manufacturing Bengal products, including the LED boards at issue. (Doc. 1 ¶ 16; Doc. 32-2 ¶ 11.) Benchmark would purchase raw materials and components to incorporate into the Bengal products. (Doc. 26-4.) Cree also provided Benchmark with consigned materials under two different types of arrangements. (Doc. 27-20 at 55.) At the outset, Cree provided Benchmark with certain materials it had purchased in anticipation of this project. (Doc. 27-20 at 55-57.) Cree attributed a price to these products in its bill of materials. (Doc. 27-20 at 55-57; 26-1 at 16-17.) As Benchmark consumed these materials, Benchmark would issue a purchase order and Cree would invoice Benchmark for the materials. (Doc. 27-20 at 55-56; Doc. 32-2 ¶ 37.) The parties would regularly track the consumption of these materials on a monthly basis. (Doc. 27-20 at 76-77.)

         In addition, Cree provided Benchmark with LED bulbs to manufacture the LED boards under a separate consignment arrangement. (Doc. 26-1 at 17; Doc. 27-20 at 56.) Cree obtained tape from third-party manufacturers and applied individual LED bulbs to strings of reels, which it then shipped to Benchmark. (Doc. 26-1 at 92-93; Doc. 27-20 at 102.) As part of the manufacturing process, Benchmark's machinery picked individual LED bulbs from the reels and installed them into the LED boards. (Doc. 26-1 at 59-60.) Benchmark would then complete performance tests on the LED boards before packaging and shipping them to Cree. (Doc. 27-20 at 125-26.) Cree did not attribute a price to the consigned LED bulbs in the bill of materials, nor did it ever invoice Benchmark for the bulbs. (Doc. 27-20 at 56, 58-59; Doc. 32-2 ¶ 37 (noting it was not Cree's standard practice to invoice contract manufacturers for consigned LEDs.) However, Benchmark regularly accounted for the LED bulbs it received in weekly and monthly reports. (Doc. 32-2 ¶¶ 16-17; Doc. 29-3 ¶¶ 16-18; Doc. 27-20 at 120, 166-67.)

         A substantial No. of consigned LED bulbs were lost to attrition or scrapped during the manufacturing process. (Doc. 29-3 at 126; Doc. 34-1 at 2). Due to improper specifications of the reels and malfunctions of the machinery, individual LED bulbs were not properly picked and placed onto circuit boards at times. (Doc. 26-1 at 21-22; Doc. 27-20 at 125 (describing this loss as “attrition”).) After the LED boards were manufactured, Benchmark removed and discarded LED bulbs that did not function properly during a performance test. (Doc. 27-20 at 125-26 (describing this loss as “rework”); Doc. 31-1 ¶ 5.) In addition, Benchmark would discard LED bulbs that were incorporated into LED boards that did not function properly or meet the proper specifications. (Doc. 27-20 at 126 (describing this loss as “scrap”).)

         2. Benchmark's Reporting of Scrap Rates for the Consigned LED Bulbs

         Benchmark provided Cree with weekly and monthly Inventory Reconciliation Reports (“IRRs”), which provided an accounting of Benchmark's inventory of consigned LED bulbs. (Doc. 26-1 at 131, 135; Doc. 27-20 at 77, 265.)[7] In the IRRs, Benchmark reported the No. of consigned bulbs it had received, incorporated into final products, returned to Cree, retained as inventory, and scrapped or otherwise lost during the manufacturing process. (See, e.g., Doc. 27-15 at 4; Doc. 27-18 at 12; Doc. 27-19 at 9.) Benchmark would generally calculate the attrition rate by counting the No. of bulbs that remained on the reel at the end of production, as well as the No. of bulbs that were incorporated into LED boards or otherwise discarded after the initial manufacturing process. (Doc. 27-20 at 101-02, 105-06.)[8]

         Around May of 2013, Cree requested that Benchmark transition from using XT-E LED bulbs to XB-G LED bulbs in the Bengal LED boards. (Doc. 26-1 at 105-06.) As part of this transition, Benchmark prepared a final inventory reconciliation report for the XT-E LED bulbs, which used the term “Delta” to refer to consigned bulbs that were scrapped or lost to attrition during the manufacturing process. (Doc. 27-20 at 119; Doc. 29-3 ¶ 31.)[9]Benchmark provided Cree with a presentation, which outlined the calculation of the delta value for the consigned inventory of XT-E LED bulbs in the final reconciliation report. (Doc. 26-1 at 115-16; Doc. 27-13.) In this presentation prepared in conjunction with the final report, Benchmark represented two different delta values: (1) a “Delta” value that reflected the No. of consigned LED bulbs scrapped during various stages of the manufacturing process; and (2) a separate “DELTA” value that represented the sum of this previous “Delta” value and an additional flat two percent rate of “Attrition.” (Doc. 27-13 at 4; Doc. 26-1 at 114-16.) In an internal email dated May 13, 2013, Cree summarized the “delta explanation” provided for the “Delta” value in the presentation, and Cree acknowledges that Benchmark “accurately reported the magnitude of the scrapped XT-E LEDs throughout its relationship up until that time . . . .” (Doc. 32-2 ¶¶ 36, 44.)[10] While Cree invoiced Benchmark for other consigned components at the end of the reconciliation, it did not invoice Benchmark for any consigned LED bulbs. (Doc. 26-1 at 116.)[11]

         Beginning in May of 2013, Benchmark began reporting a “delta” value for its inventory of consigned LED bulbs within its weekly and monthly IRRs. (Doc. 29-3 ¶¶ 31-35; Doc. 32-2 ¶¶ 29, 33; see Doc. 29-3 at 120 (noting revised “delta” calculations)).) The term “delta” does not have a standard meaning within the industry. (Doc. 29-3 ¶ 30; Doc. 27-20 at 30-31, 212.) Benchmark described the “delta” values as “the gross differences generally between the LEDs Cree shipped to Plaintiffs and the LEDs that were either shipped back to Cree in final products, returned to Cree in raw form, or the LEDs Plaintiffs have on hand that Cree did not want returned.” (Doc. 27-21 ¶ 10; Doc. 27-20 at 30 (describing the “delta” value as “any components that were lost during the manufacturing process, plus any parts that were replaced as a result of yield fallout at test, for example”).)

         In addition to providing a “delta” value, Benchmark included a section entitled “Scrap History, ” which calculated the No. of consigned LEDs that were discarded whenever an entire LED board was scrapped. (Doc. 11 ¶ 22; Doc. 27-20 at 126; see, e.g., Doc. 32-2 at 82, 88 (8/25/14 report); Doc. 27-19 at 9 (12/29/14 report).) While the formula for calculating the “delta” value was available within the Microsoft Excel spreadsheet provided as part of the report (Doc. 26-1 at 119), Benchmark did not provide any additional explanation for the “delta” value within its weekly and monthly reports. (See, e.g., Doc. 32-2 at 82, 88 (8/25/14 report); Doc. 27-19 at 1, 9 (12/29/14 report)). The reported “delta” value fluctuated from month to month, at times even decreasing, as Benchmark accounted for different reels of consigned LED bulbs in production. (Doc. 27-20 at 136-38.)

         Once the XT-E LED bulbs were fully phased out in mid-2013, Benchmark reported a “delta” value of 1, 607, 518, which represents an overall attrition rate of approximately 3.7%. (Doc. 29-3 at 121; Doc. 32-2 at 82, 88.) Benchmark reported this “delta” value in each of its subsequent IRRs. (Doc. 29-3 at 121; see Doc. 27-19 at 9 (12/29/14 report).) Between May 2014 and January 2015, the “delta” value reported for the XB-G LED bulbs rose dramatically, increasing from 1, 013, 510 to 4, 052, 477. (Doc. 29-3 ¶¶ 35-36; Doc. 29-3 at 120.) At the conclusion of the parties' relationship, Benchmark prepared a “Delta” report in January of 2015, which reported a negative “delta” value of 4, 394, 757 XB-G LED bulbs and denoted that the “delta” value translates to a rate of -2% for “attrition and rework.” (Doc. 29-3 at 126; Doc. 34-1 at 2.)

         The parties dispute whether Benchmark provided an adequate explanation of the term “delta” as it was used in the IRRs prior to the issuance of the January 2015 report. (Doc. 8 ¶ 40; Doc. 26-1 at 115-16.) While Cree disputes that Benchmark ever provided an adequate explanation for the “delta” value prior to this time, Cree never inquired as to what “delta” represented until at least the middle of 2014. (Doc. 26-1 at 116, 120 (“I don't have personal knowledge that somebody at Cree asked Benchmark what the delta No. on this spreadsheet represented. I would've hoped somebody would've asked.”); Doc. 8 ¶ 33; Doc. 32-2 ¶ 35; Doc. 27-20 at 129 (“[N]o one had ever contacted me from Cree or internally saying, you know, we're not understanding anything about LEDs.”).)

         During the course of the parties' relationship, Cree remained actively involved in monitoring and supervising Benchmark's production of its Bengal products, particularly as it related to the LED components. Cree worked with Benchmark to develop the content and format of the weekly IRRs. (Doc. 26-1 at 90; Doc. 26-14 at 1; Doc. 26-19 at 1.) Cree representatives remained in close contact with Benchmark regarding production issues that arose during the manufacturing process. (See Doc. 29-3 ¶¶ 23-26; Doc. 27-20 at 119-20.) Cree employed a local engineer who would regularly visit Benchmark's manufacturing facility in Guadalajara, Mexico, to help address any engineering issues. (Doc. 26-1 at 93-94 (noting that Cree employed a “local Cree Mexico product engineer” who would visit the Guadalajara plant “from time to time” to “support any request that we had that required some local on-site visibility”); Doc. 27-20 at 260 (noting a Cree employees visited approximately every three months).)

         Cree communicated frequently with Benchmark regarding the production of LED boards as well as the scrap levels of the consigned LED bulbs in question. (Doc. 29-3 ¶¶ 22-24; Doc. 32-2 ¶¶ 22-24.) Cree requested that Benchmark provide weekly and monthly reports regarding its inventory of consigned LED bulbs. (Doc. 29-3 at 89.) During weekly and monthly meetings, the parties discussed measures to improve the efficiency and reduce the scrap rate of the consigned LED bulbs. (Id. ¶ 24; see Id. at 90-93, 95-104, 109-11.)

         Beginning at least in April of 2013, Cree communicated a “waste goal” of 0.5% to Benchmark for the consigned LED bulbs. (Id. at 90-93, 95-104, 109-11; Doc. 31-1 ¶¶ 4-6.) In an April 22, 2013 email, a Cree employee acknowledged that Benchmark had an attrition rate of 2% as a result of packaging issues, but stated that “[o]nce the package issue is resolved Cree's expatiation [sic] is the Attrition Rate will move below .0005% [sic] . . . .” (Doc. 29-3 at 114; Doc. 26-1 at 94-95.)[12] An April 25, 2013 email from Cree to Benchmark references Benchmark's scrap rate and attaches a Microsoft Excel spreadsheet with a column listing the “% Waste Goal” of 0.5% for consigned LED components during the initial manufacturing process. (Doc. 29-3 at 90-93.)[13] However, the parties dispute whether Cree ever communicated a maximum attrition rate for the consigned LED bulbs to Benchmark during either the RFQ process or at any other time in the parties' relationship. (Doc. 27-21 ¶ 9; Doc. 29-3 ¶ 20; Doc. 32-2 ¶ 20.)

         Cree experienced several of its own production issues with its LED bulbs that caused higher attrition rates. (See Doc. 26-1 at 33-35, 61-64.) For example, in March 2014, Cree had an issue with packaging of the LED bulbs that went on for “a few months, three months.” (Doc. 26-1 at 33-34, 59-61.) Beginning in late December 2013, Cree had an issue with the “pocket sizes” on the tape containing the bulbs, which went on for several months and resulted in a rate of 35, 000 defective LED parts per million (3.5%). (Doc. 26-1 at 59-62, 64; Doc. 26-18.) And Benchmark experienced production issues in June 2014 because the LED bulbs were sticking in their packaging as a result of the heat and humidity. (Doc. 26-1 at 24-25; Doc. 29-3 ¶ 25.) As a result, Benchmark reported a scrap rate for consigned LED bulbs well in excess of 0.5% on multiple occasions. (Doc. 8 ¶ 23; Doc. 29-3 at 114 (noting attrition rate of 2% as a result of packaging issues), 110 (noting an attrition rate of 1.112%).) While Cree worked with Benchmark to address these production issues (Doc. 8 ¶¶ 23-24; Doc. 26-1 at 21-22), it never sought to recover the cost of any bulbs in excess of the alleged scrap rate during the parties' two-year business relationship (Doc. 26-1 at 16-17, 116).[14] Cree did not invoice Benchmark for consigned LED bulbs or communicate the cost it would assess for them until after Cree notified Benchmark it would be terminating its relationship. (Id. at 16-17, 27, 116; Doc. 27-21 ¶ 7.) Cree contends it was not its practice to regularly invoice contract manufacturers for consigned LEDs as opposed to other consigned inventory. (Doc. 32-2 ¶ 37.)

         3. Termination of the Parties' Relationship

         In early 2015, Cree informed Benchmark that it planned to terminate the parties' agreement and transition to another contract manufacturer. (Doc. 8 ¶ 22.) Around this time, Cree raised questions about the calculation of the “delta” value, alleging that nearly 6 million consigned LED bulbs were unaccounted for in the IRRs. (Doc. 29-1 at 82, 86-87; 26-1 at 23-24.) At the conclusion of the parties' relationship, Cree prepared a Consigned Inventory Reconciliation and End of Life Summary (“EOL Summary”), which stated it owed Benchmark certain amounts for outstanding invoices, excess and obsolete components, and excess consigned materials, totaling $1, 333, 193. (Doc. 26-5 at 1.)[15] However, Cree sought to offset these amounts, seeking to recover the cost of the “[u]naccounted LEDs” listed in Benchmark's final “delta” calculation. (Id.) Cree attributed a cost of $0.5684 for each XT-E LED bulb and $0.3767 for each XB-G LED bulb but concedes that these prices were not communicated to Benchmark during the course of the parties' relationship. (Doc. 29-3 ¶¶ 47-48; Doc. 26-1 at 27.)

         4. Benchmark's Remaining Inventory of Consigned LED Bulbs

         After Benchmark transitioned to manufacturing LED boards with XB-G LED bulbs in 2013, Benchmark retained an inventory of 395, 022 XT-E LED bulbs. (Doc. 27-21 ¶ 13.)[16] The parties dispute whether Benchmark returned the XT-E LED bulbs to Cree in March 2014. David Power, Cree's Rule 30(b)(6) witness, could not recall whether Cree requested that Benchmark return the remaining inventory of XT-E bulbs after Cree transitioned to XB-G bulbs. (Doc. 26-1 at 112.) Benchmark contends it returned the XT-E bulbs to Cree's facility located in Durham, North Carolina, and has provided shipping documents and proof of delivery. (Doc. 27-21 ¶ 13; Id. at 12-15.)[17] Cree contends that the package that arrived at Cree's Durham facility did not contain the LED bulbs in question. (Doc. 32 at 10, 18-19.)

         Following the conclusion of the parties' relationship, Benchmark retained an inventory of 199, 588 XB-G LED bulbs. (Doc. 11 ¶¶ 49-51; Doc. 27-21 ¶ 12.) In June 2015, Benchmark claims it offered to return excess and obsolete material, which it contends included the inventory of ...


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