Benchmark Elecs., Inc. v. Cree, Inc., 1:16-cv-529

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

1:16-cv-529

UNITED STATES DISTRICT COURT FOR THE MIDDLE DISTRICT OF NORTH CAROLINA

January 18, 2018

MEMORANDUM OPINION AND ORDER

THOMAS D. SCHROEDER, 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 claim¹ and all of Cree's counterclaims. (Doc. 24.) Cree contends that Benchmark materially breached the parties' contract and movesfor 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 thatprovides 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 at4.) 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 Benchmarkconsumed 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 number of consigned LED bulbs were lost toattrition 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 number of consigned bulbs it had received, incorporated into final products, returned to Cree, retained as inventory, and scrapped orotherwise 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...