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Corbin on Contracts

Copyright 2007, Matthew Bender & Company, Inc., a member of the LexisNexis Group.

PART I FORMATION OF CONTRACTS

TOPIC A OFFER AND ACCEPTANCE

Supp. To CHAPTER 2 OFFERS: CREATION AND DURATION OF POWER OF ACCEPTANCE

1-2 Corbin on Contracts Supp. to § 2.5

Supp. to § 2.5 Quotation of Prices-Estimates

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(A) The following cases cite this section:

(1) MLMC, Ltd. v. Airtouch Communications, Inc., 215 F. Supp. 2d 464 (D. Del. 2002) . This case is also cited at § 2.2.

(2) Pechiney Rhenalu v. Alcoa, Inc., 224 F. Supp. 2d 773 (D. Del. 2002) . The plaintiff sought a declaratory judgment that it did not infringe the defendant's patent of high stress aluminum alloys used in the manufacture of aircraft. United States Patent Law provides that a party is not entitled to a patent if the invention was the subject of a commercial sale or offer for sale in the United States for more than one year prior to the date of the application for the U.S. patent (the ''on-sale'' bar), 35 U.S.C. § 201(b). The plaintiff argued that the defendant had made a commercial offer to sell or commercial sale of its aluminum alloy product to the Boeing corporation. The court held that whether such an offer for sale occurred is a matter of general contract law. The court quoted extensively from the Restatement (Second) of Contracts, §§ 24 and 26, to determine whether the defendant had manifested a willingness to enter into a bargain in such a way as to justify another party in understanding that its assent to that bargain is invited and will conclude the bargain. The opinion distinguishes mere price quotations, advertisements, and other preliminary negotiations from offers but, citing Corbin at § 2.5, it recognizes that a quotation containing a commitment and detailed terms in response to a specific request for an offer may be deemed to be an offer. The court then introduced the experimental use doctrine that allows an inventor to conduct testing without losing its right to obtain a patent, even where the testing occurs in the public eye. The plaintiff claimed that the defendant had activated the ''on-sale'' period by selling certain alloy samples to Boeing. The court found that such sales were experimental sales, i.e., they were not commercial sales or offers for sale since Boeing conducted destructive testing of the samples and shared the results with the defendant. While payment is one of the factors to be considered in distinguishing commercial from experimental sales, it is not conclusive. The court concluded that the plaintiff failed to prove that the defendant's sales of sample alloys to Boeing constituted a commercial offer to sell or a commercial sale. This case is also cited at § 2.2.

(B) The following cases are noteworthy:

(1) 3D Systems, Inc. v. Aarotech Laboratories, Inc., 160 F.3d 1373 (Fed. Cir. 1998) . 35 U.S.C. § 271(a) provides that patent infringement occurs when someone ''without authority makes, uses, offers to sell or sells any patented invention.'' A patentee sued its competitor for infringement, claiming that the competitor had offered to sell patented items in California. What the competitor did was to mail self-described price quotation letters to potential customers. The letters stated that they were not offers. The district court dismissed for lack of personal jurisdiction (the competitor had not made offers in California under the California law of contracts), and the patentee appealed. The Federal Circuit reversed, holding that federal, not common law, determines whether the competitor had made an offer. ''[O]ffers to sell'' was recently added to the statute to conform United States law to the April 1994 Uruguay Round's Trade-Related Aspects of Intellectual Property agreement. Its purpose, said the court, was to prevent exactly the type of activity the competitor engaged in: generating interest in a potential infringing product to the commercial detriment of the rightful patentee. Applying the Fifth Amendment due process analysis of the competitor's contacts with California, the court stated that although the price quotes state explicitly on their face that they are not offers, ''to treat them as anything other than offers to sell would be to exalt form over substance.''

(2) Bio-Tech Pharmacal, Inc. v. International Bus. Connections, LLC, 2004 Ark. App. LEXIS 392, 53 U.C.C. Rep. Serv. 2d 476 (Ark. Ct. App. 2004) . Over a period of four months, the defendant placed seventeen orders with the plaintiff for the supply of raw materials. The parties transacted most of the business by telephone. The plaintiff would locate the desired materials from one of its sources. After the telephone discussion, the defendant would issue its purchase order setting forth the terms of the transaction and the plaintiff would then order the material from one its sources and pay for it in advance. The material would be shipped to the defendant and the plaintiff would issues its invoice for that shipment. The plaintiff never confirmed the purchase orders. It merely shipped the goods and the defendant paid the invoice. Subsequently, however, the defendant sought to cancel certain orders because the defendant had not sent an e-mail or fax confirmation as stated on the purchase order (''Order/price confirmation w/ship date must be faxed/e-mailed immediately''). In the plaintiff's action for unpaid orders, the defendant sought a directed verdict that the confirmation was a required manner of acceptance under § 2-206 of the Uniform Commercial Code (UCC) and that, since the plaintiff failed to confirm the orders, no contracts resulted. The trial court held that the defendant was not entitled to a directed verdict. On appeal, the instant court recognized that, while a purchase order is generally viewed as an offer, it may be used as an acceptance or a confirmation of an existing oral contract between the parties. Section 2-206 of the UCC recognizes any reasonable manner of acceptance including the mere shipment of the goods unless the offeror unambiguously requires a particular manner of acceptance (§ 2-206(1)). Thus, even assuming the purchase order was an offer, the court held that the confirmation requirement in the purchase order did not unambiguously require only that manner of acceptance. Since the court found it reasonable to infer that the purchase order was used as a confirmation of an oral contract rather than an offer, the court further found that confirmations were unnecessary to form the contracts. The court reviewed the defendant's argument that the trial court should not have considered the parties' course of performance since U.C.C. § 2-208(2) subjects such course of performance evidence to the express terms of the agreement. The court answered this contention by referring to its earlier holding that the confirmation term of the agreement was not sufficiently clear to bar such evidence. Moreover, since the defendant accepted and paid for several orders absent any confirmation, the court found that the trial court's holding that any confirmation requirement was waived was not clearly erroneous.

While the opinion is useful in recognizing the chameleonic nature of purchase orders depending upon how they are actually used in a given transaction, the analysis is somewhat untidy. The court's description of the transaction process indicates that the plaintiff (seller) did not order the goods from his source of supply until after receiving the defendant-buyer's purchase order. The opinion also implies that the material was shipped from the plaintiff's supplier directly to the defendant. The plaintiff, therefore, appears to operate as a broker. This description belies a prior oral agreement confirmed by the purchase order. It also belies the purchase order used as an acceptance of any offer by the seller. It suggests that the telephone discussions were mere preliminary negotiations that the parties understood would not ripen into a contract until the seller received the buyer's purchase order (offer) and the seller accepted that offer. While the quoted confirmation requirement in the purchase order was not a model of clarity in terms of requiring an exclusive manner of acceptance, the court too easily dismisses the defendant's argument, notwithstanding the term ''must'' in that provision, which the court ignores. The course of performance issue would have benefited from the clarification that course of performance evidence may be used as the strongest evidence of the meaning of the express terms (interpretation) or as a waiver or modification of express terms under § 2-208(3). The court's suggestion that the confirmation provision was not sufficiently clear to exclude conflicting course of performance evidence is misleading. While the confirmation provision may not have been sufficiently ''unambiguous'' to require a confirmation as the exclusive manner of acceptance, it nonetheless appears as an express term conflicting with the course of performance evidence. A more pronounced distinction between course of performance as interpretation which may not conflict with express terms and course of performance as evidence of waiver or modification that necessarily conflicts with express terms would have been beneficial. On balance, the result appears correct, particularly in light of a buyer who appears to be reneging on his obligations. The criticism goes essentially to missed opportunities for a more refined analysis of these fundamental contract formation and related sections of the Uniform Commercial Code as applied to a not uncommon transaction pattern.

Supplement to Notes in Main Volume

6. U.S.- Marjam Supply Co. v. BCT Walls & Ceilings, Inc., 2003 U.S. Dist. LEXIS 11088 (E.D. Pa. June 26, 2003) , reconsideration denied, 2003 U.S. Dist. LEXIS 14737 (E.D. Pa. Aug. 20, 2003) . The defendant contractor requested a price quotation on 3-inch flange studs to be used in its construction of a building. The plaintiff's quotation did not promise to deliver 3-inch studs. The delivered studs measured 15/8 inches and were used in the construction. Their use, however, did not meet the architect's design. The plaintiff sued to recover the price of the delivered studs and the defendant counterclaimed for the cost of replacing the studs with studs that met the design specifications. The court held that the defendant's request for a price quotation was not an offer, but the price quotation which did not promise 3-inch studs was an offer which the defendant accepted by using the 15/8-inch studs.

Enidine, Inc. v. Dayton-Phoenix Group, Inc., 2003 U.S. Dist. LEXIS 18493 (W.D.N.Y. Sept. 30, 2003) . Where the parties engaged in preliminary negotiations resulting in a ''final quotation'' from the vendor of actuators, the court held that the quotation was an offer. The buyer's purchase order response to the offer constituted an acceptance. The buyer's faxed response omitted the purchase order terms that appeared on the reverse side of the original. The court found a contract on the seller's terms (including the boilerplate terms on the quotation's reverse side) and the buyer's acceptance (excluding the boilerplate terms on its reverse side). While quotations are often viewed as preliminary to offers, the court relied on the factors set forth in Rich Products Corp. v. Kemutec, Inc., 66 F. Supp. 2d 937, 955-58 (E.D. Wis. 1999) , aff'd, 241 F.3d 915 (7th Cir. 2001) , in determining whether the price quotation was an offer: the extent of prior inquiry, the completeness of the terms in the quotation, and the number of persons to whom the quote was sent. These factors are often mentioned in determining whether a statement constitutes an offer. As the main text indicates, however, the critical factor is whether the statement includes a commitment to sell the product to the buyer. Quotations, like advertisements, may contain detailed terms, may be sent to a particular party, and may have also been preceded by prior inquiries. These factors, alone, however, may only indicate what the vendor has for sale, including the prices of its products. Without more, it will not constitute an offer absent a commitment or promise by the vendor to sell the product to the buyer. Only such a commitment will provide the buyer with a reasonable understanding that its assent will form a contract. This factor is too often forgotten in pursuit of the fundamental issue of whether a statement creates a power of acceptance in the party to whom it is addressed.