KGP TELECOMMUNICATIONS, LLC, f/k/a KGP Telecommunications, Inc., Plaintiff, v. ERVIN CABLE CONSTRUCTION, LLC, Defendant.
Case No. 20-CV-0114 (PJS/ECW)
UNITED STATES DISTRICT COURT DISTRICT OF MINNESOTA
September 21, 2021
Patrick J. Schiltz
Ryan A. Olson and Daniel R. M. Haller, FELHABER LARSON, for plaintiff.
Matthew R. McBride, John C. Holper, and Quin C. Seiler, WINTHROP & WEINSTINE, PA, for defendant.
In April 2014, Google Fiber Inc. (“Google“) hired the parent company of defendant Ervin Cable Construction, LLC (“Ervin“) to construct portions of Google‘s fiber-to-the-home network (“Google projects“). Ervin then hired plaintiff KGP Telecommunications, LLC (“KGP“) to keep Ervin supplied with the products it needed to do timely work on the Google projects. After the Google projects ended, KGP had in its inventory products that it had ordered for Ervin, but that Ervin did not want (because the Google projects had ended) and that KGP could not sell to other contractors (because the products were suitable only for the Google projects). KGP told Ervin that, under the parties’ contract, Ervin was required to reimburse KGP for these leftover products. Ervin disagreed, and this lawsuit resulted.
I. BACKGROUND
Ervin is “a general contractor for telecommunications installation.” Olson Decl. Ex. A, Pinkston Dep. 121:22-23. On April 15, 2014, Ervin‘s parent company and Google signed the Master Turnkey Engineering, Procurement and Construction Contract (“Google contract“), under which Ervin agreed to do construction work on particular fiber-to-the-home projects. Id. at 56:1-22; Olson Decl. Ex. C. In order to meet its deadlines, Ervin needed a reliable and uninterrupted supply of products, so it hired KGP to provide “supply chain and integration services.” Locke Decl. ¶ 2. After months of negotiations, Ervin and KGP entered into a Master Sales Agreement (“MSA“),
Under the MSA, KGP agreed to provide a wide range of products to Ervin. This lawsuit concerns only some of those products—specifically, what the MSA refers to as “unique products.” (Those products are identified in Schedule E1 of the MSA. Id. § 1.2 & Schedule E.) Ervin wanted to ensure that it would always have an adequate supply of unique products so that its work would never have to be delayed or interrupted. See Olson Decl. Ex. D, Ervin Dep. 43:15-24. Two provisions of the MSA were designed to further that goal:
First, the MSA set out four key performance indicators (“KPIs“) and corresponding “targets,” MSA § 7.10, which were used to “track [KGP‘s] progress against the business objectives of” the MSA, id. § 1.2. One of these KPIs was the “Inventory-to-Sales Ratio,” which provided that “[d]uring the term of this Agreement, [KGP] will maintain a sixty (60)-day inventory of Unique Products based upon a rolling average of [Ervin‘s] previous two (2) months’ usage thereof.” Id. § 7.10. The Court will refer to this as the “60-day-inventory requirement.”
As noted, in order to meet the 60-day-inventory requirement, KGP needed to look backward to Ervin‘s “previous two (2) months’ usage.” MSA § 7.10. But the SOWs required KGP to look forward to Ervin‘s forecasts of future demand. Obviously, Ervin would sometimes forecast that it would need more of a particular unique product in the future than it had used in the recent past. Thus, the SOWs clearly envisioned that the
The Google projects ended in 2017, Locke Decl. ¶ 5, and Ervin stopped ordering unique products from KGP in October of that year, McBride Decl. Ex. Q at 9. As a result, KGP was left holding in its inventory unique products that Ervin did not need (because the Google projects were finished) and that KGP could not sell (because the products were unique to the Google projects). A dispute arose between Ervin and KGP over which party bore financial responsibility for the unique products left in KGP‘s inventory. That dispute is the subject of this lawsuit.
II. ANALYSIS
A. Standard of Review
Summary judgment is warranted “if the movant shows that there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law.”
B. Ervin‘s Financial Responsibility
The parties devoted a substantial portion of their briefs to arguing about the meaning of the 60-day-inventory requirement in § 7.10. Unfortunately, the parties largely talked past each other, and thus they failed to realize—until they were questioned by the Court at oral argument—that they actually agree on the meaning of § 7.10. Specifically, the parties agree on the following:
First, § 7.10 required KGP to stock a 60-day inventory of unique products. At every moment during the parties’ contractual relationship, KGP was required to have on hand at least a 60-day inventory.
Second, § 7.10 did not require KGP to stock more than a 60-day inventory. In other words, if at a particular moment (say, 4:00 pm on Wednesday, July 20, 2016) KGP had in stock exactly the number of unique items necessary to meet the 60-day-inventory requirement—and not one item more—KGP would not be in breach of the MSA at that moment.
And third, § 7.10 did not prohibit KGP from exceeding the 60-day-inventory requirement. In other words, if at any time KGP had in stock more than the number of unique products necessary to meet the 60-day-inventory requirement, KGP would not be in breach of the MSA.
Not only did the parties fail to recognize that they largely agreed on the meaning of § 7.10, but they also failed to recognize that § 7.10 does not directly address the
[Ervin] is 100% financially responsible for any Unique Products purchased by [KGP] on [Ervin‘s] behalf (a) in the event that [Ervin‘s] underlying Master Turnkey Engineering Procurement and Construction Contract with Google Fiber Inc. (“Google“) relating to the Project is terminated by Google for any reason; (b) in the event that the Project is abandoned, terminated or otherwise cancelled by Google for any reason; (c) in the event that the Agreement between [KGP] and [Ervin] is terminated, expires or is otherwise cancelled for any reason except termination for Material Breach; or (d) upon completion of the project (the occurrence of any of the above, a “Termination“).
The parties agree that the ending of the Google projects was a “Termination” for purposes of § 7.7. Therefore, § 7.7 is crystal clear that Ervin must pay KGP “for any Unique Products purchased by [KGP] on [Ervin‘s] behalf.” What is not crystal clear—at least to the parties—is the meaning of “on Ervin‘s behalf.” Resolving the parties’ dispute requires the Court to interpret that term.
“The primary goal of contract interpretation is to determine and enforce the intent of the parties.”4 Staffing Specifix, Inc. v. TempWorks Mgmt. Servs., Inc., 913 N.W.2d 687, 692 (Minn. 2018) (citation, quotation marks, and alteration omitted). To determine
The MSA does not define “on [Ervin‘s] behalf,” so the Court looks to the “plain and ordinary meaning” of that phrase. Linn v. BCBSM, Inc., 905 N.W.2d 497, 504 (Minn. 2018) (citation and quotation marks omitted); see also Volk v. Ace Am. Ins. Co., 748 F.3d 827, 828 (8th Cir. 2014) (“Minnesota courts rely on dictionaries for the plain and ordinary meaning of an undefined term.“). Black‘s Law Dictionary defines “on behalf of” to mean “in the name of, on the part of, as the agent or representative of.” Behalf, Black‘s Law Dictionary (11th ed. 2019).5 This definition is a start, but to accurately
Pointing to § 7.10, Ervin argues that the MSA only required KGP to maintain a 60-day inventory of unique products, and thus only those items that made up that 60-day inventory were “purchased by [KGP] on [Ervin‘s] behalf.” To illustrate: Assume that a widget is a unique product listed on Schedule E of the MSA. Suppose further that, based on the rolling average of Ervin‘s prior two-months’ usage, the number of widgets that KGP was required to keep in the 60-day inventory at the time that the Google projects ended was 100. Ervin argues that if, at that time, KGP had 173 widgets in stock, only 100 of those widgets were “purchased by [KGP] on [Ervin‘s] behalf.” The other 73 widgets, in Ervin‘s view, were purchased by KGP on its own behalf.
Ervin also overlooks the fact that the MSA (through the SOWs) required KGP to work with Ervin to develop a stocking strategy based on Ervin‘s forecasts of its future demand—forecasts that could substantially exceed the rolling average of Ervin‘s prior two-months’ usage. The MSA also required KGP to order unique products in amounts
For these reasons, the Court finds that Ervin‘s interpretation—that the only unique products that are “purchased by [KGP] on [Ervin‘s] behalf” are the unique products that constitute the 60-day inventory—is refuted by the text of the MSA. As the Court has explained, the MSA (as a practical matter) requires KGP to stock unique products in excess of the 60-day inventory. If, under the Court‘s hypothetical, KGP kept only 100 widgets in stock, then as soon as Ervin placed an order for widgets, KGP would have to breach either its obligation to maintain a 60-day inventory or its duty to promptly deliver unique products to Ervin. Moreover, if KGP kept only 100 widgets in stock, it would also breach its obligation to order unique products consistently with the stocking strategy as soon as Ervin forecasted that its use of widgets would increase. These are obligations that Ervin imposed on KGP to ensure that Ervin‘s work would not be delayed or interrupted.
Therefore, the Court interprets “any Unique Products purchased by [KGP] on [Ervin‘s] behalf” to mean “those Unique Products that KGP reasonably had to purchase
Given its interpretation of the MSA, the Court obviously cannot grant Ervin‘s summary-judgment motion, which asks the Court to hold that Ervin is liable to KGP for no more than $6,764.50—which, according to Ervin, is the value of the unique products that composed the 60-day inventory as of October 2017. McBride Decl. Exs. O at 28–29, U. But the Court also cannot grant KGP‘s motion for summary judgment. In its briefing, KGP asks the Court to hold that Ervin is liable to KGP in the amount of $2,720,914.44—which, according to KGP, is the value of all of the unique products that remained in its inventory at the time that the Google projects ended and that KGP was
C. Interest
Because Ervin withheld payment on all of the leftover unique products—including even the $6,764.50 in unique products for which Ervin has admitted responsibility—the parties agree9 that Ervin is obligated to pay interest under § 5.2 and § 5.3 of the MSA. But the parties dispute whether that interest is simple or compound.
Section 5.2 of the MSA provides that “[a]ll items . . . that are not paid when due, are subject [to] interest on those charges equal to the lesser of 1 ½% per month or the maximum rate allowed by law.” KGP points to the phrase “1 ½% per month“—emphasizing the words “per month“—and argues that this phrase reflects an agreement to pay compound interest. The Court is not persuaded.
KGP cites a range of cases in support of its position, but none of those cases apply Minnesota law or consider contractual language that is identical to the language of § 5.2, and all of those cases devote only passing attention to the compound-interest issue. For example, in Exxon Corp. v. Crosby-Mississippi Resources, Ltd., the Fifth Circuit held that a contractual provision stating that “the unpaid balance shall bear interest monthly at the rate of twelve percent” required compound interest. 40 F.3d 1474, 1488 (5th Cir. 1995). The Fifth Circuit appeared to rely on Texon Energy Corp. v. Dow Chemical Co., 733 S.W.2d 328 (Tex. Ct. App. 1987), which determined that a comparable interest provision required compound interest because the phrase “unpaid balance“—when read together with the word “monthly“—included interest on interest. Exxon, 40 F.3d at
As best as the Court can tell, what was critical to all of these decisions was the use of the phrase “unpaid balance” or “past due balance“—which, when read in conjunction with a “per month” or “monthly” interest provision, arguably requires that interest be assessed on both unpaid principal and unpaid interest. But § 5.2 of the MSA does not refer to an “unpaid” or “past due” balance; instead, it assesses interest on “those charges,” which refers to “[a]ll items not subject of a bona fide dispute that are not paid when due“—which, in turn, refers to “a charge on the invoice.” MSA § 5.3. While “unpaid balance” and “past due balance” can reasonably be read to include unpaid interest, “those charges” cannot. Rather, “those charges” refers to charges for items sold to Ervin by KGP. Therefore, even if the Court agreed with the reasoning of
That leaves Peerless Network, Inc. v. MCI Communications Services, Inc., in which a contract imposed a “late payment penalty” that was calculated by multiplying “the portion of the payment not received by the due date” by “a late factor” of 1.5% “per month.” No. 14 C 7417, 2018 WL 3608559, at *4 (N.D. Ill. July 27, 2018), rev‘d in part, vacated in part, 917 F.3d 538 (7th Cir. 2019). The court concluded that compound interest was appropriate because interest was charged at “1.5% per month.” Id. Peerless supports KGP‘s argument, since it focuses its analysis on the “per month” language of the interest clause.
Although the Court has not found a Minnesota case exactly on point, Minnesota courts seem to require some degree of specificity in a contractual interest clause to overcome the statutory presumption against compound interest. See In re Est. of Lowe, Nos. C6-93-2335, C4-93-2379, 1994 WL 323362, at *3 (Minn. Ct. App. June 5, 1994) (affirming that “[i]nterest shall be computed annually at the rate of nine (9) per cent per annum” did not call for compounding after looking to extrinsic evidence); Pointe Sanibel Dev. Corp. v. Sundial Beach & Tennis, Inc., No. CO-93-595, 1993 WL 500529
This requirement of specificity makes sense. If, as Peerless found, contractual language as simple as “per month” were sufficient to trigger compound interest, then
For these reasons, the Court finds that § 5.2 is not sufficiently specific to overcome the presumption under
ORDER
Based on the foregoing, and on all of the files, records, and proceedings herein, IT IS HEREBY ORDERED THAT plaintiff‘s motion for summary judgment [ECF No. 58]
Dated: September 21, 2021
s/Patrick J. Schiltz
Patrick J. Schiltz
United States District Judge
Notes
Although the Court has not considered extrinsic evidence in interpreting the MSA because the contract is unambiguous, the Court notes that a prior version of the MSA provided that Ervin would be “100% financially responsible for any Unique Products purchased by [KGP] on [Ervin‘s] behalf that is not in excess of 60 days inventory . . . .” McBride Decl. Ex. I § 7.7 (emphasis added). That language would clearly have placed upon KGP the financial responsibility for items that were not part of the 60-day inventory. But for reasons that are unclear, Ervin decided to remove this language. Id. Ex. J § 7.7.