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Benchmark Electronics, Inc., v. Cree, Inc.

United States District Court, M.D. North Carolina

June 27, 2018

BENCHMARK ELECTRONICS, INC., and BENCHMARK ELECTRONICS DE MEXICO, S. DE R.L. DE C.V., Plaintiffs,
v.
CREE, INC., Defendant.

          MEMORANDUM OPINION AND ORDER

          OSTEEN, JR., DISTRICT JUDGE

         Benchmark Electronics, Inc., and Benchmark Electronics de Mexico, S. de R.L. de C.V. (collectively, “Benchmark”) filed this action seeking recovery from Cree, Inc. (“Cree”) for money allegedly owed in connection with installing Cree's lightbulbs into various products. (Doc. 1.) Cree counterclaimed for recovery, or offset, for component parts it contends Benchmark either damaged during the manufacturing process or has failed to return. (Doc. 8.)

         The parties filed cross motions for summary judgment, and Chief Judge Thomas D. Schroeder granted in part and denied in part each of the parties' motions in a Memorandum Opinion and Order signed January 18, 2018. Benchmark Elecs., Inc. v. Cree, Inc., 1:16-cv-529, 2018 WL 472819, at *14 (M.D. N.C. Jan. 18, 2018). Summary judgment was granted in favor of Benchmark on its breach of contract claim, and Benchmark's unjust enrichment claim was dismissed. Id. at *9, *14. It was ordered that Benchmark recover from Cree “(1) $587, 229.06 in unpaid invoices plus interest; (2) $286, 371.44 for excess and obsolete components plus interest; and (3) $457, 105.38 for excess amounts paid for consigned components plus interest, with interest on these sums accruing from the date the complaint was filed, May 25, 2016.” Id. at *14. Summary judgment was also granted in favor of Benchmark on Cree's claim under North Carolina's Unfair and Deceptive Trade Practices Act and granted in part in favor of Benchmark on Cree's conversion claim. Id.

         The parties submitted pre-trial briefs and proposed findings of fact and conclusions of law. (Docs. 40-43.) On January 24, 2018, Cree's remaining counterclaims proceeded to a bench trial: breach of contract, breach of the covenant of good faith and fair dealing, unjust enrichment (in the alternative), and conversion as to a subset of the lightbulbs. Cree presented one live witness: David James Power, a senior director of engineering at Cree in the lighting division. Cree also presented one witness by deposition: Douglas Ray Stevens, then- director of operations for consumer lighting for Cree.[1] Benchmark presented one live witness: Calvin Lane Clemons, group president of Benchmark during the dispute.

         Cree seeks to recover $2, 793, 747.50, which it contends represents the cost of (1) 1, 607, 518 XT-E LED bulbs and 4, 394, 757 XB-G LED bulbs Benchmark allegedly scrapped in excess of the parties' alleged half a percent scrap allowance, and (2) 395, 022 XT-E LEDs Benchmark allegedly retained following the conclusion of the parties' relationship. (Cree's Answer & Countercls. (Doc. 8) ¶¶ 42, 50, 57-64.)[2] Cree seeks $0.5684 for each XT-E LED bulb and $0.3767 for each XB-G LED bulb. (Id. ¶¶ 55-56.)

         At the close of Cree's case-in-chief, Benchmark moved for judgment pursuant to Rule 52(c) of the Federal Rules of Civil Procedure, on the grounds that Cree had failed to show by a preponderance of the evidence that a half a percent contractual agreement existed as to scrap rate; that Cree had failed to prove its damages to a reasonable degree of certainty, specifically as to Cree's failure to quantify the amount of LED scrap “forgiven” in excess of the alleged half a percent rate; and that Cree had failed to prove its conversion claim. This court took the motion under advisement. At the close of evidence, Benchmark renewed its motion for judgment on partial findings and Cree also moved for judgment on partial findings.

         The case is now ripe for decision, and this court issues the following Findings of Fact and Conclusions of Law pursuant to Rule 52(a) of the Federal Rules of Civil Procedure. For the reasons set forth herein, this court finds that judgment should be entered in favor of Benchmark and Cree's claims should be dismissed with prejudice.

         I. FINDINGS OF FACT

         This court enters the following findings of fact based on an evaluation of all of the evidence in the record, including the credibility of witnesses, and the inferences that the court has found reasonable to be drawn therefrom.[3]

         1. Cree, Inc., is a North Carolina corporation with its principal place of business in Durham, North Carolina. Cree is an original equipment manufacturer of light-emitting diode (“LED”) lamps and components used in the manufacture of lighting products.

         2. Benchmark Electronics, Inc., is a contract manufacturer and Texas corporation with its principal place of business in Angleton, Texas. Benchmark Electronics de Mexico, S. de R.L. de C.V. is a Mexico corporation and wholly-owned subsidiary of Benchmark Electronics, Inc.

         3. The “Bengal Project” is a Cree line of finished lamp products. One component of the Bengal Project is an LED board, which is a metal board that is then mounted with ten or twenty LED bulbs. The LED board plus components (that is, plus the installed LEDs) is called a printed circuit board assembly (“PCBA”).[4]

         4. On June 5, 2012, Cree e-mailed a Request for Quote (“RFQ”) to Benchmark seeking an estimate for producing PCBAs. (Cree Ex. 4.)[5] The e-mail included a line labeled, “Yield, ” followed by a bullet point “LED Board - 99.9%.” The RFQ does not specify a maximum allowable rate of scrap or rate of loss or destruction for consigned LED bulbs. (Cree Ex. 4; Clemons Test. Jan 25, 2018; Power Test. Jan 25, 2018.)[6]

         5. “Scrap” is waste generated during the manufacturing process. “Attrition” is part of scrap; that is, attrition means components that are not placed correctly or are damaged during rework or otherwise rendered unusable. (Stevens Dep. 33:23-34:21.) Cree representatives also used the term “attrition” at times in a way that did not refer to scrap at all. For example, in creating particular LED combinations, attrition referred to extra usable LEDs rather than unusable LEDs. (Cree Ex. 20; Power Test. Jan. 24, 2018.)

         6. “Yield” measures how much of something is produced from what is inputted and is a term that can be used to measure several different processes throughout the manufacturing process. The term can refer to multiple measures, for example: first-pass, second-pass, first-pass after rework. (Stevens Dep. 39:2-40:1.)

         7. “Rework” can have at least two meanings: (1) adjusting a good during various stages of the production process so that it passes through all the manufacturer's various testing states and (2) returning goods that have been shipped from the contract manufacturer to the customer back to the contract manufacturer to fix some problem. (Stevens Dep. 30:10-23.) Rework produces at least some scrap.

         8. On June 12, 2012, Benchmark responded to the RFQ for the LED board, providing a per-unit price for completed LED boards. (Cree Ex. 7.) Benchmark used an internal quote model to develop pricing for Cree that included a zero cost for the LEDs. (See Benchmark Ex. 135, Tab LEA0635 Costed BOM (spreadsheet located on thumb drive, Benchmark Ex. 214); Clemons Test. Jan. 25, 2018.) Benchmark's proposal included a line item for “Scrap (and Other MOH), ” which calculated the cost that Benchmark would charge Cree for scrapped components as well as the cost of material overhead (“MOH”).[7] Benchmark used a “[v]alue of $0.15 per Cree consigned LED . . . for MOH calculations on the LED Board.” (Cree Ex. 7 at 12, 14.) Cree had communicated to Benchmark a “high volume price” of $0.15 per LED. (Cree Ex. 6.)

         9. Cree awarded the Bengal Project to Benchmark.

         10. In August 2012, Cree reduced the value per LED from $0.15 each to $0.10 each, with an “extended” cost of zero. (See Benchmark Ex. 8; Cree Ex. 124 (describing the value as an “inventory value”).) This price factored into Benchmark's Bill of Materials (“BOM”)[8] to determine how much Benchmark would charge Cree for each completed assembly.

         11. In April 2013, Clemons e-mailed Stevens:

I need to model the target LED attrition cost for my P&L analysis. At one time, I thought each LED was $0.10, but now I am seeing freight value invoices in the $0.75-$0.83 range if I am reading correctly. Please advise what unit cost I should plug in for each LED.

(Cree Ex. 124.) Stevens replied: “LED cost should remain $0.10 each for inventory value.” (Id.) Aside from the initial $0.15 that was adjusted in August 2012, there is no evidence of a costed BOM showing an LED price in excess of $0.10. This communication between Stevens and Clemons illustrates certain diverging understandings the parties held during the course of their relationship. Stevens seemed to understand the ten cent cost of the LEDs to have been a minimal charge by Benchmark to Cree for handling of the LEDs. Benchmark seems to have understood the ten cent charge to have been Cree's cost or value of the LEDs. Nevertheless, because Benchmark never paid Cree for consigned LEDS, and Cree never sought payment or a credit toward the ten cent LED cost, Benchmark's unilateral misunderstanding does not change the agreement as understood by Cree and reflected in the parties' performance: the $0.10 was a fee Cree approved for Benchmark's handling and storage of the LEDs (an “inventory value”).

         12. At some point before the start of production, at least one meeting to discuss the Bengal Project was held in Guadalajara, Mexico, between senior members of the Benchmark and Cree teams. (See Stevens Dep. 61:21-62:12; Clemons Test. Jan. 25, 2018; Power Test. Jan. 24, 2018.) Both of Cree's witnesses contended a half a percent scrap rate was discussed at this meeting, and Stevens also contended that Benchmark representatives agreed it could achieve a half a percent scrap rate. (See Stevens Dep. 61:21-62:4, 63:4-22; Power Test. Jan. 24, 2018.) Benchmark's witness denies discussion of a mandatory scrap rate above which Benchmark would be responsible for reimbursing Cree. (Clemons Test. Jan. 25, 2018.) No. documentation from this meeting has been introduced.

         13. The parties and their legal teams exchanged drafts of a Contract Manufacturing Agreement (“CMA”) (also known as a Master Supply Agreement or “MSA”). Two drafts of the CMA were introduced, both sent from Benchmark to Cree: one from June 29, 2012, (Cree Ex. 183), and one from September 20, 2012, (Benchmark Ex. 52). Benchmark's September 2012 draft includes the CMA and four exhibits, including an Exhibit B Materials Consignment Agreement. (Benchmark Ex. 52.) Paragraph 20 of the draft CMA states:

Notwithstanding anything herein to the contrary, Cree shall retain all right, title and ownership to the Consigned Materials at all times. Cree will bear the risk of loss to the Consigned Materials, provided, however that Contract Manufacturer shall be responsible for and shall indemnify, defend, and hold Cree harmless from and against any loss, damage or theft of Consigned Materials due to Contract Manufacture's negligence, willful misconduct, or failure to perform its obligations.

(Id. ¶ 20.1.) Exhibit B, labeled “NOTE: need to review[, ]” allocates the risk of loss between the parties differently for materials in the contract manufacturer's possession:

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.

(Id. Ex. B ¶ 4.) Consigned materials means:

materials that are owned by Cree and consigned by Cree to Contract Manufacturer pursuant to the Materials Consignment Agreement, which materials are to only be incorporated into Products and/or packaging of such Products as part of the Contract Manufacturing Services performed by the Contract Manufacturer or otherwise used by the Contract Manufacturer in connection with the Services.

(Benchmark Ex. 52 ¶ 1.6.) The draft states that the contract manufacturer is responsible for maintaining complete and accurate records of consigned materials. (Id. Ex. B ¶ 2(e).) The drafts do not include a maximum allowable scrap rate. (See Benchmark Ex. 52; Cree Ex. 183.)

         14. In spite of the draft CMAs and some limited discussion, a CMA was never signed, (see Stevens Dep. 67:23-69:3, 187:13-188:3; Clemons Test. Jan. 25, 2018), nor was there any agreement reached between the parties with respect to the provisions of the CMA. Instead, the parties began their manufacturing venture based on their oral discussions. On September 13, 2012, only a week before Benchmark's last known draft CMA was sent to Cree, Stevens informed Benchmark that “I met with legal yesterday and reviewed the objectives & timeline. Cree [employs] an outside counsel for MSA type agreements, as such, the plan is to met [sic] with them today. After that I am sure there will be a number of sessions and red-lined documents moving back & forth between us.” (Benchmark Ex. 51.) The draft CMAs are of no significant factual relevance except as described hereafter with respect to practices or industry standards.[9] As Stevens admitted, although generally a Cree agreement will “cover the same areas, ” each agreement “will be uniquely revised in small ways depending on the contract manufacturer's desire.” (See Stevens Dep. 69:13-22.)

         15. In or about November 2012, Benchmark began manufacturing driver boards and LED boards for Cree. (See id. at 63:23-64:5; Power Test. Jan. 25, 2018.)

         16. In December 2012, Benchmark and Cree executed a Letter of Authorization (“LOA”). (Cree Ex. 182.) This written agreement “gave Benchmark authorization and Cree responsibility for materials purchased by Benchmark to support [Cree's] forecasts.” (Stevens Dep. 65:9-66:9.) The LOA stated that “[i]f the parties do not execute an [sic] CMA within one (1) year of the date of 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.” (Cree Ex. 182.) The LOA stated 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”).” (Id.) Nothing in the LOA relates to consigned LEDs, and the LOA does not provide a maximum scrap rate. (See Stevens Dep. 66:22-67:1; Power Test. Jan. 26, 2018.) The LOA is the only formal written agreement between the parties and was renewed “a couple of times.” (See Stevens Dep. 67:2-8.)

         17. Cree provided LED bulbs to Benchmark under a consignment arrangement. (See id. at 57:25-58:3.) As the parties used the term, consignment simply meant that title to the LEDs never passed from Cree to Benchmark.[10] Under the arrangement, Cree supplied LEDs “at zero cost to Benchmark.” (See id. at 58:4-59:3.) Cree produced the LEDs and transferred them to Benchmark's Mexico facility at Cree's cost, which meant the LEDs were “free on board with Cree bearing all the costs.” (See Id. at 59:4-14.) Cree preferred this arrangement because (1) Cree did not want to share with a third party its cost to make LEDS, information Cree considered proprietary, and (2) consignment removed the burden on Benchmark of having to manage a cash flow to get the LEDs, which Cree hoped would optimize the price Cree paid for the finished product. (Power Test. Jan. 24, 2018.) Stevens testified that “once we established that we were going to provide consigned materials at no cost, [Clemons] felt free to give a much more aggressive quote to Cree because he . . . wasn't going to have a financial carrying cost for buying LEDs.” (Stevens Dep. 61:15-19.)

         18. In April 2013, a Cree product engineer requested Benchmark to provide a weekly Fault Rate Analysis (“FRA”) report and LED Scrap report. (Cree Ex. 185; Power Test. Jan. 24, 2018.) This request included two Microsoft Excel attachments: a document titled FRA report Benchmark and a document titled LED Scrap Benchmarck [sic]. The e-mail states that “[f]or any yield below 99.5%, we would need a 1st level paretos and a corrective action to be listed on the action log . . . .” (Cree Ex. 185.)

         19. An FRA looks for deviations from an expected yield target and works to identify ways to put the yield back on track. (Power Test. Jan. 24, 2018.) The report's “Yields” tab included three sections with conditional formatting that turned the cells a certain color based on the percentage in the cell. (Cree Ex. 185, CREE00146891 (spreadsheet located on thumb drive, Cree Ex. 212).) In weeks 18 through 21, a cell value of more than 0.98 resulted in green; a cell value greater than or equal to 0.9 resulted in yellow; a cell value less than 0.9 resulted in red; and a cell value of 0 resulted in black. In weeks 22 through 42, a cell value greater than or equal to 0.995 resulted in green; a cell value greater than or equal to 0.9 resulted in yellow, and a cell value less than 0.9999 resulted in red.

         20. The LED Scrap report or “stoplight report” also used conditional formatting and calculated a total scrap percentage on a weekly basis. (Cree Ex. 185, CREE00146892 (spreadsheet located on thumb drive, Cree Ex. 212).) Red indicated a significant departure from an expected target. (Power Test. Jan. 24, 2018.) Yellow indicated that the percentage was close to achieving the target. (Id.) Green indicated success in achieving the target. (Id.) A cell value less than or equal to 0.005 resulted in green; a cell value greater than 0.005 resulted in yellow, and a cell value greater than or equal to 0.015 resulted in red. (Cree Ex. 185, CREE00146892 (spreadsheet located on thumb drive, Cree Ex. 212).) On the second tab of the stoplight report, several column labels described various types of LED scrap that was generated through the manufacturing process. For example, Column C described scrap generated from the surface mount assembly process, which was the technique used to place LEDs on the LED board. (Power Test. Jan. 24, 2018.) Column I includes a “% Waste Goal” of 0.500% for each week. (Cree Ex. 185, CREE00146892 (spreadsheet located on thumb drive, Cree Ex. 212).)

         21. It is unclear how often the FRA report and LED Scrap report were created and shared between the parties, [11] but this reporting makes sense in light of the manufacturing process Benchmark undertook for Cree. LED bulbs are small, roughly the size of a pencil eraser, and delivered on a tape, which is wound on a spool. The LED bulbs are situated on the tape in a single line roughly two inches apart. As part of Benchmark's manufacturing process, some form of picker removed a bulb or bulbs from the tape and placed them in a predetermined pattern on an LED board. A number of variables affected the amount of scrap bulbs generated in this process. These variables include the adhesiveness of the bulb to the tape, which could result in the bulb failing to be properly picked, or failure of the picker to successfully pick and place the bulb, and it appears from the evidence that both Cree and Benchmark were aware of the potential for the generation of scrap during the manufacturing process. (See, e.g., Cree Ex. 153; Benchmark Exs. 17, 18, 122.)

         22. Cree was actively involved in working with Benchmark to address manufacturing issues that arose over the course of the relationship with respect to the LEDs. However, there was also some uncertainty as to who was at fault for generating scrap.[12] At certain times during the course of the relationship, Cree sent Benchmark non-conforming goods that caused Benchmark's reported scrap rate to be higher than half a percent. For example, in some instances, Cree may have been responsible as a result of changes to the packaging material used to hold the LEDs to the tape. (See, e.g., Benchmark Exs. 17-18 (noting that 3.5% of LEDs were not being picked and placed correctly in early 2013); Power Test. Jan. 25, 2018.) In some instances, Benchmark was responsible as a result of problems with picking and placement due to, for example, issues stemming from the temperature and humidity of Benchmark's manufacturing facility. (See, e.g., Cree Ex. 153; Power Test. Jan. 24, 2018.) Because the Bengal Project was a new product introduction, this court finds that Cree had certain goals with respect to scrap generation, but neither Cree nor Benchmark had sufficient experience with this particular project to know what may be reasonable, nor, in reality what factors may have caused the generation of scrap or which company might be responsible for that scrap. Manufacturing issues arose throughout the relationship that affected scrap rates to varying degrees. (See, e.g., Benchmark Exs. 17-18; Benchmark Ex. 44 (introduction of a new LED height in September 2013); Benchmark Ex. 48 (discussing out-of-specification material during a July 2014 LED transition period); Benchmark Ex. 122 (discussing attrition due to various issues in early 2013); Cree Ex. 153; Power Test. Jan. 25, 2018.) Additionally, an LED transition in 2013 was “messier than expected” and required optimization with new tooling and software which increased scrap and rework for a period. (See Benchmark Ex. 34; Clemons Test. Jan. 25, 2018.)

         23. It remains unclear how much scrap was due to Cree sending non-conforming goods and how much scrap was due to Benchmark's manufacturing processes. (See Stevens Dep. 261:24-262:9.) What is clear, and this court so finds, is that although there were times when Benchmark's scrap rate exceeded a half a percent, the subject was never raised as a breach of contract issue. Instead, the discussions were directed toward an effort to identify and resolve the issue.[13]

         24. In May 2013, Benchmark provided Cree with an XT-E LED reconciliation. (Cree Ex. 39.) The XT-E LEDs were being reconciled because: one, Cree's finance department had tasked the team to start undertaking a monthly reconciliation of consigned materials, and two, the Bengal project was transitioning away from using XT-E LEDs. (See Stevens Dep. 107:7-108:7.)[14] Benchmark's presentation to Cree included a table titled “Delta Brake [sic] down.” (Cree Ex. 39.) This presentation, which was presented by Benchmark to Cree in a meeting, is the first appearance in the record of Benchmark using the term “delta” in its reporting to Cree. The delta breakdown included several line items relating to the XT-E program accounting for 1, 742, 087 XT-E LED bulbs that were sent to Benchmark and that, for various reasons relating to start-up and production issues, were not returned to Cree on a finished LED board. (See id.; Stevens Dep. 109:6-111:16; Clemons Test. Jan. 25, 2018.) Another table in the presentation shows the 1, 742, 087 delta number plus two other rows:

DELTA
6.01%
2, 468, 827
Attrition
2.00%
726, 740
Delta
4.00%
1, 742, 087

(Cree Ex. 39.) A 2% flat attrition figure was added, 726, 740, for a final total “DELTA” of 2, 468, 827.

         26. Cree representatives understood the issues in the delta breakdown to be closed items, that is, to be resolved as of the date of the email. (Stevens Dep. 111:17-23; Power Test. Jan. 24, 2018.) Benchmark's representative thought Cree understood and accepted the 1.7 million scrap XT-Es. (Clemons Test. Jan. 25, 2018.)

         27. Around the May 2013 timeframe, the Bengal Project transitioned from XT-E LEDs to XB-E and XB-G LEDs.[15]

         28. Starting in June 2013, Benchmark began providing Cree weekly LED inventory reconciliation reports. (See, e.g., Cree Ex. 209.) The first report, sent June 7, 2013, and internally dated 06-03-13, includes a delta of 1, 591, 671. The delta formula in the report is: total receipts of XT-E LEDs, minus on-hand, minus LEDs in WIP, [16] minus shipments. (See Cree Ex. 209 (spreadsheet located on thumb drive, Cree Ex. 212); Stevens Dep. 119:8-15.)

         29. The term delta does not have a standard meaning in contract manufacturing. (See Stevens Dep. 108:22-24; Power Test. Jan. 24, 2018.)

         30. Stevens testified that he was told this delta number

represents the amount of LEDs that could not be accurately identified for this report. They could be -- by Benchmark's definition to me, they could be received, but in a loading -- in a receiving location, but not dedicated to a warehouse yet, so thus not able to identify part number.
Or they could be inventory that had been pulled from the warehouse and was being staged for work, so they were WIP on a production floor. Or it could be completed work orders, inventory that was remaining that needed to be ...

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