Custom Info. Tech. v. Southern Living CV-97-359-JD 10/16/98 UNITED STATES DISTRICT COURT FOR THE DISTRICT OF NEW HAMPSHIRE

Custom Information Technologies, Inc.

v. Civil No. 97-359-JD

Southern Living, Inc. d/b/a Cooking Light Magazine

O R D E R

Custom Information Technologies, Inc. ("CIT") entered an

agreement with Cooking Light Magazine, owned by Southern Living,

Inc., to provide software diskettes of recipes that Cooking Light

would distribute to subscribers of its magazine. Disappointed

with the royalties it received from Southern for its software

products, CIT brought suit alleging breach of contract and breach

of the covenant of good faith and fair dealing. Southern moves

for summary judgment on both counts, and CIT objects.

Background1

During the fall of 1993, Cooking Light Magazine managers

invited representatives from CIT to make a presentation of a

software product that CIT had suggested would complement the

1The factual summary is taken from the parties' fact statements, LR 7.2(b), and is provided for background only. magazine by offering diskettes of featured recipes. On December

15, 1993, Thomas Mamos, president of CIT, and Thomas Marshall,

General Manager of Cooking Light, signed a contract that provided

for CIT to produce recipe software, titled CookWare and CookPac,

and for Cooking Light to distribute the software to its

subscribers and to pay CIT royalties. The CookWare software

included both an initial library of 300 recipes and the program

to run updates sent in subseguent CookPac diskettes that would

correspond to the eight yearly issues of the magazine. CookPac

was available in two different editions: a Consumer Edition that

allowed downloading of fifteen recipes per magazine, and a

Professional Edition that allowed downloading of all recipes in

each magazine.

Under the terms of the agreement, decisions regarding the

marketing, promotion, and means of sale of CookWare and CookPac

were the exclusive right of Southern. At the time of signing the

agreement, Tom Marshall of Cooking Light told Tom Mamos of CIT

that Southern intended to distribute the CookWare product without

charge and to charge for the CookPac diskettes on an "on demand"

or "continuity" basis allowing customers to return diskettes

without charge. As a result, customers had no obligation to

purchase any particular number of diskettes. CIT did not object

to the giveaway or the "continuity" distribution system.

2 Southern sold CookPac diskettes in the Consumer Editions for

$6.98 each and Professional Edition diskettes for $11.98 each. A

customer began the program by ordering the CookWare diskette with

the first installment diskette of CookPac from the designated

edition. A full year of either edition consisted of eight

CookPac diskettes. Customers would receive and pay for each

diskette installment during the course of a full year unless they

earlier discontinued their participation, in which case a

discontinuing customer would not receive or pay for further

diskettes. CIT sent CookPac diskettes in shipments that

corresponded to monthly issues of Cooking Light, and Southern

sent royalties based on each shipment of diskettes.

The provisions of the agreement pertaining to CookPac

royalties are in Exhibit B of the agreement, titled "License

Fees." Clause two of Exhibit B pertains to royalties on CookPac

diskettes and provides that CIT was to receive enhanced royalties

at 50% "of the revenues received by COOKING LIGHT for sales of

Product reduced by the COOKWARE Royalty" for the first five

thousand "copies of Product" sold. Thereafter, "COOKING LIGHT

shall pay to CIT a Regular royalty of forty percent (40%) of the

revenues received by COOKING LIGHT for sales of Product reduced

by the COOKWARE Royalty." The royalties clause further provided:

3 The above specified Royalties are based on the following minimum pricing for COOKPAC Products:

1. COOKPAC Consumer Edition - Minimum Price = 39.00 2. COOKPAC Professional Edition - Minimum Price = 7 9.60

With the exception of Promotional copies of the COOKPAC Product, COOKING LIGHT shall not distribute COOKPAC Products for less than the above specified minimum prices. These minimum prices are based upon direct distribution of Products by COOKING LIGHT to Customer Accounts.

The third clause of Exhibit B, titled "Payment of Royalties

Due," provides that Cooking Light (Southern) would pay royalties

on a monthly basis upon receipt of CIT's invoice stating total

numbers of CookPac Consumer Edition and Professional Edition

products sold, the number shipped as promotional items, and the

total amount of royalties due. Part A.2. of the clause provided

the per-unit calculation for each CookPac product royalty, to be

determined by dividing the expected royalty based on sales of

diskettes for a full year by the number of magazines per year.

In the spring of 1994, Southern began an advertising

campaign for CookWare and reguested feedback from CIT. Tom Mamos

of CIT responded with comments including suggestions that

Southern offer customers the opportunity to prepay in a lump sum

for a year's subscription to either edition, rather than the

"record club style."

The parties' agreement provided for a one-year term with an

4 automatic extension of one year, absent termination notice by

either party. The agreement continued for two years, and the

parties began to negotiate for a third year. In a letter dated

November 6, 1995, Tom Mamos wrote to Tom Marshall saying that CIT

was losing money on the program as it was then structured because

of losses due to discontinued customers. Mamos suggested

changing the structure from "pay as you go" to a "magazine

metaphor" meaning that for a lower price customers buy and prepay

for a yearly subscription to program. The agreement was

extended by the parties during negotiations until February 1996

when it was terminated by CIT because the parties were unable to

reach agreement for future dealings.

Discussion

Summary judgment is appropriate only if the "pleadings,

depositions, answers to interrogatories, and admissions on file,

together with the affidavits, if any, show that there is no

genuine issue as to any material fact and that the moving party

is entitled to judgment as a matter of law." Fed. R. Civ. P.

56(c). Southern contends that it complied with all terms of the

contract and that its actions have not breached the covenant of

good faith and fair dealing. In response, CIT argues that the

contract reguires royalties based on different calculations

5 entitling CIT to additional royalty payments, or that the

contract's royalty terms are at least ambiguous. Alternatively,

CIT argues that if the royalty provisions were interpreted to

permit Southern to shift the financial risk of losses due to

discontinued customers to CIT, then Southern breached the

covenant of good faith and fair dealing.

A. Breach of Contract

The interpretation of a contract, including whether a

contract term is ambiguous, is ultimately a legal guestionto be

made "'based on the meaning that would be attached to [the

contract] by reasonable persons.'" Galloway v. Chicago-Soft,

Ltd.,

(N.H. 1998) (guoting Gamble v. University

of New Hampshire,

(1992)). The contract is

considered as a whole, and contract language is given its

customary or ordinary meaning. Merrimack School Dist. v.

National School Bus Serv.,

(1995). Contractterms

that permit differing reasonable interpretations are ambiguous

reguiring extrinsic evidence to determine the intent of the

parties. Galloway,

.

CIT disputes the amount of royalties paid on CookPac

products arguing that under the terms of the contract, it is due

additional royalties based on a full year of CookPac diskettes

6 for each customer whether or not customers continued the program

for all eight installments. Thus, CIT contends that it is

entitled to royalties for CookPac diskettes that were never

delivered, sold, or paid for. Alternatively, CIT argues that if

its view of the contract does not prevail, the contract is

ambiguous reguiring additional factual development of the royalty

provisions.

Southern interprets the contract to provide for royalties

only on a per unit basis for CookPac diskettes that CIT delivered

and that were sold to customers. In addition to the language of

the contract. Southern points to the parties' two-year course of

dealing under the contract during which time CIT was paid, and

accepted without objection, royalties on CookPac diskettes that

were delivered and sold, but did not claim and was not paid

royalties for the remainder of installments after a customer

discontinued the program.

The contract terms pertaining to royalties are far from a

model of clarity. The contract does not expressly address the

guestion of royalties for diskettes after a customer discontinued

the program, nor does it allocate the risk of loss for

discontinuance. While common sense supports Southern's

interpretation, the language might be stretched to cover CIT's

interpretation as well. To resolve a guestion about the parties'

7 intentions and meaning of their agreement, "the court may

properly consider their actions after the contract was executed."

Auclair v. Bancroft,

(1981); see also Spectrum

Enters., Inc. v. Helm Corp.,

(1974) . The

parties' actions must be clear and unambiguous to indicate their

mutual agreement. Guaraldi v. Trans-Lease Group,

(1992) .

CIT does not dispute that it acted in conformity with

Southern's interpretation of the royalty provisions without

objection while their agreement was in force. Indeed, Tom

Mamos's deposition testimony establishes that CIT did not protest

the royalties it received or demand that Southern pay royalties

on the balance of discontinued programs. CIT argues, however,

that its silence on the issue does not indicate its intent to

agree to royalties on only continuing programs. Instead, CIT

alleges that it assumed that Southern's malfunctioning computer

program was responsible for lost royalties.2

The record presented for summary judgment does not support

CIT's position. If CIT's silence during the two-year life of the

contract, while it received royalties based on only diskettes

2Although CIT cites deposition testimony that confirms the existence of a computer program malfunction, CIT includes no citation to the record to support its assertion that it believed the computer glitch was responsible for low royalties. sent and sold, was not enough to indicate CIT's understanding of

the parties' agreement, then Tom Mamos's efforts to negotiate a

new contract confirm the reason for CIT's silence. In his letter

of November 6, 1995, to "Tom and Judy" at Cooking Light, Mamos

wrote:

As I mentioned to Judy on the phone, we are losing money on the program as it is currently structured. The existing program has some inherent flaws that inhibit program growth and minimize profitability. For example . . .

1. The customer needs to make a decision to continue or not each time they receive a CookPac. Result - 20% of the customers do not renew each issue. . . . 2. Also, our numbers indicate that a customer stays in the program, on average, for five issues. At CIT, we break even at four. This is only if we have 100% renewal. This, as I demonstrated above, is not happening. . . .

The changes suggested below could help us improve the program on all of these major concerns. I believe that these changes to the structure, marketing and distribution of the program will ensure a profitable product for both Cooking Light and CIT. . . .

(emphasis added). Mamos recommended that the program be changed

from a "pay as you go" system to a "magazine metaphor" meaning

that customers would buy yearly subscriptions, prepaid, for

CookPac products guaranteeing CIT royalties on full year

programs. The letter, therefore, unambiguously explains that CIT

was not achieving sufficient royalties because the structure of

the program limited revenue to CIT when customers discontinued their participation, not because of a computer program

malfunction at Cooking Light, as CIT now argues.

CIT's silence, in this case, demonstrates its understanding

of the contract. Had CIT believed it was entitled to more, under

the contract, it would have said so. "'There is no surer way to

find out what the parties meant, than to see what they have done.

Self-interest stimulates the mind to activity, and sharpens its

perspicacity. Parties in such cases often claim more, but rarely

less, then they are entitled to.'" Bogosian v. Fine,

(1955). Based on the circumstances shown by the record,

CIT did not protest Southern's royalty payments because the

payments were in accord with CIT's understanding of the parties'

agreement.

To avoid summary judgment, CIT must "come forward with

specific, provable facts which establish that there is a triable

issue." Aponte Matos v. Toledo Davila,

(1st

Cir. 1998) (guotation omitted). A factual dispute is "genuine"

and reguires trial only if there is "sufficient evidence to

permit a reasonable trier of fact to resolve the issue in favor

of the non-moving party."

CIT has not shown a triable issue

pertaining to the contract's meaning. The parties' two-year

course of dealings under the contract unambiguously demonstrates

that Southern intended to pay and CIT intended to receive

10 royalties on only the CookPac diskettes that were delivered to

Southern and sold to continuing customers. Since that is what

happened, no breach occurred. Accordingly, as no factual issue

remains to be resolved with respect to CIT's breach of contract

claim. Southern is entitled to summary judgment.

B. Breach of the Covenant of Good Faith and Fair Dealing

CIT contends, in the alternative to its breach of contract

claim, that Southern breached its implied duty of good faith and

fair dealing by adopting a marketing plan that did not guaranty a

minimum return to CIT. Specifically, CIT says that Southern's

plan to give away CookWare diskettes and not to package CookPac

diskettes in annual subscriptions permitted customers to leave

the program before the cost of the CookWare product was recouped

and impermissibly shifted financial risk to CIT.

"The implied covenant of good faith and fair dealing is an

example of a common law application of public policy to contract

law." Harper v. Healthsource New Hampshire, Inc.,

(1996). Under New Hampshire law, several different doctrines

of the implied good faith duty serve different functions. Great

Lakes Aircraft Co., 135 N.H. at 293. Most pertinent to the

circumstances in this case, and the version of the doctrine CIT

relies upon, is reflected in the following guotation:

11 under an agreement that appears by word or silence to invest one party with a degree of discretion in performance sufficient to deprive another party of a substantial proportion of the agreement's value, the parties' intent to be bound by an enforceable contract raises an implied obligation of good faith to observe reasonable limits in exercising that discretion, consistent with the parties' purpose or purposes in contracting.

Centronics Corp. v. Genicom Corp.,

(1989).

The implied good faith obligation operates to control a

party's exercise of discretion in performance of a contract. As

Tom Mamos explained in his deposition testimony, Tom Marshall

told him before the contract was signed and, therefore, before

performance under the contract became an issue that Southern

intended to give away the CookWare diskettes and to offer CookPac

diskettes in a continuity program. At that point, CIT was free

to decline the deal or to continue negotiations to achieve more

favorable terms. Instead, Mamos enthusiastically agreed with

Marshall's plans, as he related in his deposition testimony

guoting his own reaction when Marshall told him about the plan:

"'Great, if you guys decide to give it away, then that's fine.

We'll - ' [sic] I used the phrase - 'you'll sell millions of

them,' meaning, if you give something away, that way obviously

you're going to make - you'll do better."

When Southern implemented its marketing plans, as Marshall

had disclosed to Mamos, it was merely performing as the parties

12 had agreed. "[T]he good faith reguirement is not a fail-safe

device barring a defendant from the fruits of every plaintiff's

bad bargain, or empowering courts to rewrite an agreement even

when a defendant's discretion is consistent with the agreement's

legally contractual character." Centronics,

.

CIT agreed to proceed with Southern's program as described before

either party signed the contract. The cause of CIT's loss of

expected royalties was that the program failed to perform as

planned and customers choose to discontinue their participation

in greater numbers than anticipated, not Southern's exercise of

discretion in implementing the program.3 See

CIT nevertheless asserts that the contract guaranteed that

it would receive minimum royalties and that Southern's

discretionary marketing choice, allowing customers to discontinue

and giving CookWare free of charge, frustrated CIT's reasonable

expectations for royalties. CIT's argument seems to merely

revisit its breach of contract claim. While the contract

established minimum pricing for each edition of CookPac products

3As Southern points out, both Southern and CIT stood to profit from success of the marketing plan. To the extent customers chose to discontinue the program. Southern as well as CIT lost money. Thus, Southern was not benefitting from a bad plaintiff's bargain, but instead was also a victim of a marketing plan, or a product, that did not work as well as either party had expected.

13 as a base for calculating CIT's royalties, it did not set minimum

royalties. Nor did CIT ever demand its "expected" minimum

royalties from Southern during the life of the contract.

In addition, CIT's explanation that Southern's program

frustrated its expectations is contrary to the terms stated in

the contract. CIT says that CookWare did not cost Southern

anything because the $10.00 royalty paid to CIT for each CookWare

diskette for the first 10,000 units was offset against royalties

for CookPac diskette sales. Thus, CIT argues. Southern bore no

production costs for CookWare and transferred the risk to CIT of

failing to recoup its costs through sales of CookPac. By giving

away CookWare, CIT argues. Southern reduced customers' incentive

to continue with the CookPac program.

It is not clear why a free product would reduce customers'

interest in buying subseguent CookPac products, and Mamos at

least initially believed the "loss leader" approach would result

in millions of sales. Even assuming that CIT's description of

events were true, however, the applicable contract provisions do

not appear to support CIT's version of the payment scheme. As to

promotional copies of CookWare distributed by Cooking Light free

of charge, the contract did not reguire Southern to pay the

$10.00 royalty, but instead Southern was to pay CIT's

manufacturing and shipping costs and those costs were not to be

14 set off against royalties on CookPac products. While that may

not have been the parties' actual conduct, CIT has not claimed

that Southern breached its contract obligations with respect to

CookWare royalties or payments, and the circumstances do not

support a claim for breach of good faith obligations.

In summary, CIT has not demonstrated a triable factual

guestion pertaining to Southern's implied good faith obligation.

Southern is entitled to summary judgment on this claim.

Conclusion

For the foregoing reasons. Southern's motion for summary

judgment (document no. 8) is granted. The clerk of court is

directed to enter judgment accordingly and to close the case.

SO ORDERED.

Joseph A. DiClerico, Jr. District Judge

October 16, 1998

cc: Frank P. Spinella Jr., Esguire William L. Chapman, Esguire

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