Knapp Shoes, Inc. v. Sylvania Shoe Manufacturing Corp.

January 11, 1996 UNITED STATES COURT OF APPEALS
FOR THE FIRST CIRCUIT

No. 95-1220

KNAPP SHOES, INC.

Plaintiff, Appellant,

v.

SYLVANIA SHOE MANUFACTURING CORPORATION,

Defendant, Appellee.

ERRATA SHEET

The opinion of this court, issued on December 20, 1995, is
amended as follows:

On page 36, line four, replace "$233,626.47" with
"$223,626.47".

On page 36, line five, replace "$243,911.62" with
"$253,911.62".

On page 36, line five, add to the end of the paragraph the
following sentence: "In addition, the magistrate judge's order
terminating the injunction against Sylvania, as entered on May
31, 1991 and amended on June 10, 1991, is vacated; the magistrate
judge is free to reduce the amount embargoed to the net award
plus anticipated costs and interest."

UNITED STATES COURT OF APPEALS
UNITED STATES COURT OF APPEALS
FOR THE FIRST CIRCUIT
FOR THE FIRST CIRCUIT

No. 95-1220

KNAPP SHOES, INC.

Plaintiff, Appellant,

v.

SYLVANIA SHOE MANUFACTURING CORPORATION,

Defendant, Appellee.

APPEAL FROM THE UNITED STATES DISTRICT COURT

FOR THE DISTRICT OF MASSACHUSETTS

[Hon. Lawrence P. Cohen, U.S. Magistrate Judge]

Before

Cyr, Boudin and Lynch,

Circuit Judges.

Bernard J. Bonn III with whom Timothy C. Blank, Kara W. Swanson

and Dechert Price & Rhoads were on briefs for appellant.

Joseph B. Green with whom Steven L. Katz and Kotin, Crabtree &

Strong were on brief for appellee.

December 20, 1995

BOUDIN, Circuit Judge. Over the course of three years,

beginning in early 1987, Knapp Shoes, Inc. ("Knapp")

purchased nearly 300,000 pairs of shoes from Sylvania Shoe

Manufacturing Corp. ("Sylvania"). The relationship between

the two companies underwent strains during its final year,

and broke off early in 1990. Knapp filed suit in April 1990

claiming that Sylvania had manufactured defective shoes;

Sylvania counterclaimed for unpaid bills. In March 1995, the

magistrate judge awarded net damages of less than $65,000 in

favor of Sylvania. Knapp appeals. We affirm in part,

reverse in part, and remand for the entry of a new judgment

as specified in this opinion.

I. THE UNDERLYING FACTS
I. THE UNDERLYING FACTS

Knapp, a Massachusetts corporation, manufactures and

distributes work shoes. In addition to selling and

distributing shoes that it manufactures, Knapp also sells and

distributes shoes manufactured by other shoe companies under

the Knapp logo. Sylvania, a Pennsylvania corporation, was

one such supplier to Knapp.

In late 1986, Jack Esser, then Knapp's vice president

for merchandising and manufacturing, told Knapp personnel to

contact Sylvania to arrange for the manufacture of shoes

Knapp was selling to the U.S. Postal Service. Sylvania

delivered over 10,000 pairs of two styles of shoes--models

1249 and 1250--by mid-February 1987. By all accounts, there

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were few problems with these shoes, nor were there problems

with over 5,000 pairs of 1249s delivered between September

1987 and May 1988.

Thus encouraged, Sylvania and Knapp expanded their

collaboration, and by early 1988 Sylvania had made or was

making over two dozen models of shoes for Knapp. These later

models all differed in construction from the 1249s and 1250s.

While the latter in each case consisted of a leather upper

cemented to a polyurethane sole, the new models were

constructed of three parts: a rubber outsole, an ethyl vinyl

acetate (EVA) midsole, and a leather upper. Among Knapp's

various problems with Sylvania shoes, the most serious

complaint was that the leather upper and the EVA midsole

tended to fall apart.

The bulk of Knapp's purchases were in three categories.

The first, style 1251, accounted for nearly 25,000 pairs.

These shoes were athletic-style postal shoes. The second

category was the 2600 series, which accounted for over

140,000 pairs. These shoes were steel-toed shoes, intended

for use in industrial settings where OSHA regulations

required protective footwear. The final category was the

2800 and 2900 series of non-steel-toe shoes, of which perhaps

70,000 pairs were sold. A number of models that Sylvania

produced for Knapp are not implicated in this litigation.

Quality control problems with shoes in these three lines

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appeared almost immediately and continued throughout the

history of the two companies' relationship. In mid-1987,

Knapp found that the toe bumpers of style 2600 were

improperly bonded to the shoe and could be peeled off; these

shoes were returned to Sylvania for repair before being

shipped to Knapp's customers. A further problem--this time

with sole adhesion--appeared soon afterwards, affecting white

shoes in the 2600 and 2800 lines. Sylvania, on the advice of

its cement company, had in late 1987 added white pigment to

the cement for cosmetic reasons, and this seemed to affect

the bond. This difficulty led to the recall of thousands of

shoes in early 1988.

By summer 1988, the sole separation problems had spread

to black shoes. In a letter sent by John Sprague, the

individual at Knapp charged with quality control and product

development, to Colin Elliot, a vice president at Sylvania,

Sprague wrote that the problems reported with the black shoes

"scare[s] the hell out of us" and reported also that a

"[r]ash of telephone calls" had complained of sole

separations on style 1251. Following these complaints, a

number of shoes were sent to the Footwear Institute of

America for pull testing.1 These tests indicated that some

1Pull tests, standard in the industry, allow for
measurement of the strength of shoe construction. In
addition to measuring the pounds of pressure that can be
applied to a particular area of the shoe before it will fail,
the tests indicate whether the failure was caused by material

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sole adhesion problems were caused by improper manufacture.

Esser later testified that he concluded at the time that

the problems were minimal and he authorized continued

purchases from Sylvania. However, both Sprague and Esser

remained in almost daily contact with Elliot in an effort to

correct the defects. In addition, Knapp began to place a

legend on the bottom of some of its purchase orders, "ORDER

PENDING CORRECTION OF SOLE SEPARATION PROBLEM."

Throughout this period, the evidence indicates that

Sylvania and Knapp worked together to attempt to solve the

problems that were affecting the shoes. Various design

changes were suggested by Knapp, and Sylvania implemented

many of them. The suggestions included adding toe bumpers to

models that lacked them and substituting a polyurethane

midsole for the EVA midsole in certain models. In addition,

Sylvania changed cement companies in mid-1988.

In 1989, the relations between the two companies began

to deteriorate. Sylvania blames this deterioration on

Knapp's then-parlous financial state. Knapp established a

cash committee in February 1989 (of which John Esser was a

member); Richard Nedder, Knapp's president, was replaced by

Joel Murray in April. Knapp fell behind on its account with

Sylvania, prompting Sylvania president Robert Pearlstein to

failure--a tearing of the upper or of the sole--or by a bond
failure.

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send letters of complaint in the summer of 1989.

Knapp insists that defects in Sylvania shoes were

jeopardizing some of its most important accounts and it

offered evidence that failures in models 2810 and 2930 were

of particular concern. In the summer of 1989 Knapp attempted

to return 1000 pairs of 2810's that were produced with the

EVA midsole; Sylvania refused to accept the returns. At

trial, Sylvania offered evidence, credited by the magistrate

judge, that many of these 2810 and 2930 shoes were not

manufactured by Sylvania, but were instead imported by Knapp

from Taiwan. There was also evidence that sole adhesion

problems affected some models that were never produced by

Sylvania.

In an effort to work out a payment schedule, Pearlstein

met with Murray and others at Knapp twice in the summer and

fall of 1989. At the latter meeting on October 17, Knapp

sought to demonstrate that there were quality problems with

Sylvania shoes by twisting the soles and uppers apart

manually. This was done, but the ease, and the significance,

of the demonstration were disputed. At that meeting, Knapp

agreed to pay $40,000 for every $35,000 of product sent by

Sylvania, the extra $5,000 being part of Knapp's attempt to

repay earlier amounts owned to Sylvania.

Records of both companies show that shipments continued

in October and November 1989. Payments were also made by

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Knapp against its outstanding balance in January 1990. O n

December 1, 1989, Dick Sebastiao joined Knapp as executive

vice president with the understanding that he would become

president in February 1990. By the end of 1989, Sprague had

been fired and Esser, who had been on the board of directors

of the company, also had left.

A final shipment of Sylvania shoes was delivered in

February 1990, after Knapp made an advance payment. James

Crabtree, a Knapp employee, testified that when the shoes

were inspected, he was able to pull them apart with his bare

hands; he alerted Sebastiao, who called Pearlstein at

Sylvania. Pearlstein asked for a sample to inspect, and

disputed Crabtree's findings. The magistrate judge later

found Crabtree's testimony incredible and credited

Pearlstein's assertion that the shoes in the February 1990

shipment were not defective, although two Sylvania employees-

-Elliot and John Cartwright (Sylvania's manufacturing

supervisor)--admitted that they had been able manually to

separate the soles on some of the shoes.

Crabtree further testified that he then began to test

Knapp's existing inventory of Sylvania shoes and found that

it was "95% defective." Again, this testimony was not

credited by the magistrate judge. Knapp also performed

various tests on the shoes from the February shipment and on

shoes in inventory after the start of litigation; its

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evidence at trial was that these tests consistently found

problems with the bonding of the shoes. This evidence was

also not credited by the magistrate judge.

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II. PRIOR PROCEEDINGS
II. PRIOR PROCEEDINGS

On April 10, 1990, Knapp filed this diversity action

against Sylvania under Massachusetts law for breach of

contract (count 1), breach of express warranty and implied

warranties of merchantability and fitness for a particular

purpose (counts 2-4), breach of the duty of good faith and

fair dealing (count 5), fraud and negligent misrepresentation

(counts 6 and 7), and violation of Mass. Gen. L. ch. 93A

(count 8).2 Sylvania also counterclaimed, seeking $277,000

for unpaid bills, plus multiple damages and attorney's fees

under Chapter 93A.

Both parties consented to proceed before a magistrate

judge without a jury, and the magistrate judge bifurcated the

trial into a liability phase and a damages phase. Evidence

in the liability phase was completed on January 31, 1991,

after nine days of testimony. That same day, the magistrate

judge entered a four-page memorandum and order that devoted

one paragraph each to five of Knapp's eight counts, without

discussing Sylvania's counterclaims.

In this decision, the magistrate judge ruled that

Sylvania had breached its warranties only insofar as Knapp

had shown, or could show, that shoes delivered to it were

2Chapter 93A outlaws "[u]nfair methods of competition
and unfair or deceptive acts or practices in the conduct of
any trade or commerce," and permits awards of multiple
damages and attorneys' fees.

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defective. The magistrate judge also found that Knapp had

failed to prove fraud, negligent misrepresentation or--

"except to the extent that plaintiff has shown, or can show,"

a refusal by Sylvania to credit returned defective shoes--

breach of the duty of good faith and fair dealing. As for

Knapp's chapter 93A claim, the decision said that Sylvania

had not been shown to have engaged in unscrupulous conduct;

it noted, but did not decide, the question whether some

payments might still be due Knapp under chapter 93A based on

a regulation of the state's attorney general.

In May 1991, prior to the damages phase of the trial,

Knapp learned that Sylvania was going out of business and

liquidating its assets. Fearful that Sylvania would soon be

judgment-proof, Knapp obtained a temporary restraining order

precluding Sylvania from dissipating assets in the amount of

$3,775,657.22--the amount of damages that Knapp hoped to

prove in the damage phase of the trial. The magistrate judge

modified this order on June 10, 1991, converting it into a

preliminary injunction and amending it to allow Sylvania to

make limited payments to its creditors and lawyers.

The damages phase of the trial took place over five days

in June 1991; at Sylvania's behest, an additional day of

evidence was heard on November 25, 1991. Proposed findings

of fact and conclusions of law were filed by the parties in

March 1992. Then, in March 1993, the magistrate judge issued

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an order proposing to certify certain questions to the

Massachusetts Supreme Judicial Court. Both sides opposed

certification, but on April 8, 1993, the magistrate judge

certified two questions, both relating to the possible

application of Chapter 93A to "a simple breach of warranty."

The magistrate judge prefaced the certified questions

with a ten-page statement. In it, he first repeated the

rulings on the five counts contained in the January 31, 1991,

order. Then, he determined for the first time that the

parties had agreed by express negotiations, express

understandings and express course of dealings that in the

event of defects, "Knapp's remedy, and sole remedy, would be

the replacement of [or credit for] those shoes shown to be

defective and returned--nothing more, and nothing less"

(footnote omitted; brackets in the original). The

certification also said, in a footnote, that less than three

percent of the Sylvania shoes delivered to Knapp were

defective.

On Sylvania's motion, the magistrate judge dissolved the

preliminary injunction on May 5, 1993, concluding that Knapp

now had little hope of a substantial recovery. On Knapp's

appeal, this court stayed and then vacated the order

dissolving the preliminary injunction. Knapp Shoes, Inc. v.

Sylvania Shoe Manufacturing Corp., 15 F.3d 1222 (1st Cir.

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1994). We held that Sylvania had waived the affirmative

defense of limitation of remedies by failing to raise it in a

timely fashion. Since the issue of limitation of remedies

had never been litigated by the parties, the waiver could not

be avoided by amending the pleadings to conform to the proof.

Cf. Fed. R. Civ. P. 15(b). Accordingly, we said that "the

limitation of remedies defense is out of the case and cannot

support the order vacating the injunction." Id. at 1227.

We also rejected Sylvania's alternative argument that

the termination of the injunction could be supported by the

magistrate judge's footnote finding, in the certification,

that the percentage of defects was very small. Our opinion

pointed out that the magistrate judge had not set forth

findings or analysis to support this conclusion as to the

quantity of defects, so we were "unable to make a reasoned

judgment whether, on this critical issue of defects, the

magistrate judge's finding was or was not `clearly

erroneous'" under Fed. R. Civ. P. 52(a). Id. at 1228-29.

On October 13, 1994, the Supreme Judicial Court answered

the certified questions that had been submitted by the

magistrate judge. Knapp Shoes, Inc. v. Sylvania Shoe

Manufacturing Corp., 640 N.E.2d 1101 (Mass. 1994). The Court

held that 940 Code Mass. Regs. 3.08, which provides in part

that "[i]t shall be an unfair and deceptive act or practice

to fail to perform or fulfill any promises or obligations

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arising under a warranty," was not meant "to encompass a

contract dispute between businessmen based on a breach of the

implied warranty of merchantability." Id. at 1105.

Thus informed, the magistrate judge issued his final

decision on March 1, 1995. With respect to counts 3 and 4

(breach of warranties of merchantability and fitness), he

again held that Sylvania had breached its warranties to the

extent that particular shoes were defective for whatever

reason. On count 1 (breach of contract), the magistrate

judge said again that there was no violation beyond the

breaches of warranty covered by counts 3 and 4. He also

reaffirmed that Knapp had failed to establish its claims in

count 2 (breach of express warranties), count 5 (duty of good

faith and fair dealing), count 6 (common law fraud), count 7

(common law negligent misrepresentation) and count 8 (Mass.

Gen. L. ch. 93A violation).

On Sylvania's counterclaims, the magistrate judge found

that Knapp was liable for the outstanding balance due for

shoes that Sylvania had delivered to Knapp. The magistrate

judge found that Sylvania was not entitled to recover the

contract price of additional shoes it had manufactured for

Knapp but not yet delivered; the reason was that Sylvania had

failed to make a reasonable effort to resell the shoes. He

also rejected Sylvania's own chapter 93A claim against Knapp.

Sylvania does not challenge these rulings on appeal.

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In computing damages, the magistrate judge held that

Knapp should receive credit only for defective shoes still in

its inventory--which he determined to be between 3 and 4

percent of the total--and for specified incidental damages.

He ruled that Knapp had no right to revoke acceptance of any

non-defective goods in inventory, nor to reject the final

shipment of shoes sent in February 1990, nor to recover for

lost profits. In the final tally, Knapp was awarded damages

of $160,062.74, and Sylvania was awarded damages of

$223,626.47. Finally, the preliminary injunction was

dissolved. We stayed the judgment pending disposition of

this appeal.

III. LAW OF THE CASE AND STANDARD OF REVIEW
III. LAW OF THE CASE AND STANDARD OF REVIEW

Our review of the facts found by the trial judge is

normally deferential; findings are not to be set aside unless

clearly erroneous, with "due regard . . . given to the

opportunity of the trial court to judge of the credibility of

the witnesses." Fed. R. Civ. P. 52(a); see Williams v.

Poulos, 11 F.3d 271, 278 (1st Cir. 1993). Knapp argues that

our review should be less deferential in this case, drawing

attention to paragraph 49 of the magistrate judge's findings

of fact and its accompanying footnote.

[Paragraph 49] With respect to all lines of
shoes which Knapp requested be manufactured by
Sylvania, one finding is unmistakenably [sic]
clear: By their express negotiations, by their
express understandings, by their demonstrated
conduct, and by their express course of dealings,

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Sylvania promised Knapp that, in the event that
shoes were defectively manufactured, Knapp's
remedy, and sole remedy, would be the replacement

of [or credit for] those shoes shown to be
defective and returned--nothing more, and nothing
less.

[Footnote] This finding is not made and
reported to suggest that Knapp waived its rights
under Sections 2-601, 2-608, and 2-609 of the
Uniform Commercial Code (M.G.L., ch. 106, 2-601,
2-608 and 2-609). Although it was and is clear to
this court--then and now--that that was the sole
understanding of the parties in terms of remedies
and relief, and that it was clear (then and now) to
all parties that the defense of waiver loomed
throughout, and that plaintiff could not--then or
now--establish any legal prejudice (that is,

plaintiff could not--then or now--make any showing
that the case would have been tried differently),
our Court of Appeals, in the context of an
interlocutory appeal relating to the dissolution of
an injunction, has concluded otherwise.

Nevertheless, this finding and conclusion bear
heavily on the credibility of the witnesses called
by Knapp, and other issues to be determined herein.

Knapp argues that this discussion violates the law of

the case by contradicting our holding in Knapp that Sylvania

had waived any such limitation of remedies defense, that the

issue of limitation of remedies had not been litigated at

trial, and that it was now "out of the case." 15 F.3d at

1227. Knapp further insists that this error by the

magistrate judge tainted his other factual findings,

requiring us to subject these findings to heightened

scrutiny. Paragraph 49 has certainly complicated matters on

this appeal, but we conclude that Knapp has somewhat

exaggerated its import and consequences.

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The law of the case doctrine has more than one dimension

and certain complexities, but as applied to the problem

before us, the doctrine provides that when a court of appeals

makes a ruling of law, whether on appeal of a final judgment

or in an interlocutory appeal, that ruling becomes the law of

the case in any subsequent proceedings in the trial court.

Elias v. Ford Motor Co., 734 F.2d 463 (1st Cir. 1984). Such

a ruling is "[a] mandate [that] is completely controlling as

to all matters before the appellate court and disposed of by

its decree." Id. at 465.

We agree with Sylvania that the magistrate judge did not

contradict our legal ruling in Knapp that the defense of

limitation of remedies was waived and now out of the case.

He did not rest any of his own legal rulings on the

proposition that Knapp had limited its remedies by contract

to credit for returned shoes; indeed, he awarded Knapp

damages for defective shoes still in its possession (although

he found the number of such shoes to be very small). To that

extent, Knapp's law-of-the-case claim is something of a

diversion.

At the same time, on an intermediate proposition of fact

a direct conflict exists between our earlier opinion and the

most recent decision of the magistrate judge. The magistrate

judge repeats in the footnote to paragraph 49, quoted above

in text, his earlier conclusion that Knapp and Sylvania did

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agree in fact to limit Knapp's remedies; and he recognizes

that this court on the prior appeal "concluded otherwise."

Our actual conclusion was slightly narrower--we said that the

parties had not purported to litigate the issue and we could

find no evidence of such an agreement--but the fact remains

that the magistrate judge has reasserted his view that such

agreement has been proved.

All this might matter little if the magistrate judge's

disagreement with us played no role in his decision, but he

goes on to say that "this finding and conclusion bears

heavily on the credibility of the witnesses called by Knapp,

and other issues to be determined herein." No resort to law

of the case doctrine is required for us to determine that his

"finding and conclusion" that such an agreement existed

limiting remedies is clearly erroneous. The very same

defect--the lack of evidence to show such an agreement--

identified in our earlier decision remains, utterly

unaltered.

We explained in our earlier opinion why we were not

persuaded of such an agreement by the magistrate judge's

reliance on Esser's testimony that a return remedy existed--

testimony that did not even purport to address the

exclusivity of the remedy--and also why we saw no course of

dealing by the parties that could prove such a limitation.

15 F.3d at 1226-27. No new evidence was taken on remand to

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prove this limitation; no additional support for it is

mustered by the magistrate judge out of the pre-existing

record.

About the best we can do in this disturbing situation is

to defer to the usual extent as to those findings of the

magistrate judge that we are confident have not been infected

by his belief in the supposed agreement limiting remedies;

and, on all other findings, to consider them in the knowledge

that the magistrate judge has credited or discredited certain

witnesses based (at least in part) on a premise that we have

already held to be mistaken. Sorting out findings in this

way, and deciding how to treat infected findings, is

something of a task but better than an outright remand on all

issues to a new judge.

IV. THE MERITS
IV. THE MERITS

Our analysis of the merits is divided in three parts.

Knapp raises some rather half-hearted objections to the

magistrate judge's rulings that reject most of its counts; we

find that these rulings are sustainable on this record.

Knapp's next objections concern the magistrate judge's

rulings on remedies; here we find that the magistrate judge's

analysis of the remedies available to Knapp was correct on

one issue (Knapp's purported revocation of acceptance of all

shipments) but flawed on another (Knapp's rejection of the

first February 1990 shipment). Finally, we find that

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elements of the magistrate judge's determinations on damages

were clearly erroneous but that the necessary corrections can

be made on the existing record.

A. Liability

Knapp's complaint alleged eight causes of action. The

magistrate judge ruled that Knapp had failed to persuade on

all except for counts 3 and 4, breaches of implied warranties

of merchantability and fitness; these warranties were held to

be breached only with respect to those shoes that were

actually defective. Sylvania does not appeal that limited

finding of liability; Knapp appeals from the decision

rejecting its other counts, but its arguments are without

merit.

Breach of Contract. With respect to count 1, breach of

contract, Knapp objects that the magistrate judge in

rejecting this count relied upon his footnote 49 finding that

the parties had previously agreed to limit remedies. But

Knapp's own count 1 alleged only that Sylvania failed to

deliver shoes of promised quality; and it has not shown how

this claim exceeds the breach of warranty claims that the

magistrate judge allowed under counts 3 and 4. We therefore

affirm the magistrate judge's disposition of count 1.

Breach of Express Warranty. On count 2, the breach of

express warranty, Knapp argues that Sylvania warranted that

it would produce a defect-free shoe and that the high defect

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rate caused each entire shipment to be in breach of

Sylvania's express warranty. Knapp points to two letters

sent to Knapp by Sylvania in mid-1988, when sole bond

problems were affecting shoes in the 2600 line. In the

first, Elliot wrote, "We know the industrial consumer wants

this product and it is up to us to give it to him or her

without defect." In the second, Elliot wrote "As always, we

stand behind our product and fully warrant the product

against manufacturing defect."

If Knapp means to suggest that Sylvania had warranted

that each and every shoe in a given shipment would be free of

defects and that a shipment could be rejected based on any

such defect, that suggestion is not reasonable. At trial

witnesses for both parties agreed that no one in the shoe

industry expects that any shipment of shoes will be entirely

free of defects. Sylvania's quoted statements can at most be

read to mean that it was capable of producing shoes that met

industry standards as to the percentage of defects.

Of course, to the extent that Sylvania breached its

various commitments, it may as remedial measures be liable--

under certain circumstances--to rejection of more than the

particular shoes shown to be defective and to consequential

damages that exceed the price paid for the particular

defective shoes. See IV(B) and (C), below. But so far as

Knapp's claim depends on the notion that Sylvania promised no

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defects at all, we think no such warranty was made.

Breach of Duty of Good Faith and Fair Dealing. Count 5

alleged that Sylvania breached its duty of good faith and

fair dealing.3 In his January 31, 1991, memorandum, the

magistrate judge found that Knapp had failed to carry its

burden on this claim, ruling that "the defendant acted in the

utmost good faith in an attempt to correct a problem not

reasonably foreseen by any of the parties to the

relationship." Knapp insists that Sylvania's failure to

correct its manufacturing processes, despite its assurances

to Knapp that the quality of its shoes would improve,

breached its duty.

Whether conduct violates the duty of good faith and fair

dealing is necessarily a fact-specific inquiry, see E. Allan

Farnsworth, Contracts 7.17 (2d ed. 1990), and the

magistrate judge's finding here is not clearly erroneous.

There was ample untainted record evidence that Sylvania

strove to improve the quality of the shoes it delivered; it

changed its cement suppliers and implemented various design

changes suggested by Knapp. There is no evidence that

Sylvania's failure to improve its manufacturing process was

3In Massachusetts, "[e]very contract implies good faith
and fair dealing between the parties to it." Warner Ins. Co.

v. Commissioner of Ins., 548 N.E.2d 188, 193 n.9 (Mass. 1990)

(quoting Kerrigan v. Boston, 278 N.E.2d 387, 393 (Mass.

1972). Similarly, Mass. Gen. L. ch. 106 ("UCC") 1-203
imposes an "obligation of good faith."

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motivated by bad faith rather than by a simple failure to

root out and remedy all of the problems.

Fraud and Negligent Misrepresentation. Counts 6 and 7

charged fraudulent and negligent misrepresentation, claims

that in Massachusetts require a false representation of a

material fact, knowledge of falsity or carelessness on the

part of the defendant, and reasonable reliance by the

plaintiff.4

The magistrate judge found, in his memorandum of January

31, 1991, that Knapp's misrepresentation claims failed

because Sylvania had done what it said it would do--use its

best efforts to produce shoes free of defects. On appeal,

Knapp insists that Sylvania had repeatedly and falsely

assured Knapp that it would correct any problems with the

shoes, and that Knapp reasonably relied on these

representations in continuing its purchases.

We need not decide whether such reliance would be

reasonable, but cf. IV(C) below, because we agree that no

false representation has been shown. The evidence at trial

indicated that Knapp and Sylvania remained in regular contact

regarding proposed design and manufacturing changes, and

Sylvania never misrepresented the changes it proposed to

carry out. In this context, Sylvania's conclusory statements

4VMark Software, Inc. v. EMC Corp., 642 N.E.2d 587, 593

n.8 (Mass. App. Ct. 1994); Zimmerman v. Kent, 575 N.E.2d 70,

77 (Mass. App. Ct. 1991).

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that its quality would improve--and Knapp calls our attention

to no more specific alleged misstatement--are no more than an

"expectation, estimate, opinion, or judgment." See Powell v.

Rasmussen, 243 N.E.2d 167, 168 (Mass. 1969).

Chapter 93A. On count 8--Knapp's ch. 93A claim--we

again affirm the magistrate judge. For Knapp to prevail, it

must prove that Sylvania's conduct included an "unfair or

deceptive act," a phrase that the Massachusetts courts read

as requiring a showing of "rascality;" the showing is

especially difficult where the case involves arm's-length

transactions between sophisticated business entities.

Anthony's Pier Four, Inc. v. HBC Assocs., 583 N.E.2d 806, 821

(Mass. 1991).

The crux of Knapp's argument is that Sylvania was aware

that there were problems with its manufacturing process and

failed to make the needed changes. But as the magistrate

judge held, there was no evidence at trial that Sylvania's

failure to improve the quality of its shoes was deliberate or

willful; on the contrary, it made repeated efforts on its own

and in consultation with Knapp to correct perceived problems.

Knapp's claim for multiple damages and attorney's fees was

therefore properly denied.

B. Revocation and Rejection Remedies

Even if liability is based only on counts 3 and 4, Knapp

argues on appeal that the magistrate judge nevertheless erred

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in determining the remedies available to it. It says that he

improperly denied to Knapp remedies of "revocation of

acceptance" (with respect to all prior shipments) and

"rejection" (with respect to the shipment of February 1990)

and that these errors led him into a further error, namely,

to direct his damage assessment only to those shoes actually

shown to be defective.

Revocation of Acceptance as to All Shoes. Knapp first

argues that it is entitled to revoke acceptance of all

inventory purchased from Sylvania--including non-defective

shoes--because the rate of defects was so high as to make it

impossible for Knapp to sell shoes from that inventory. The

magistrate judge rejected this remedy because he found a very

low rate of defects. Although this finding is not adequately

supported, see IV(C) below, we agree with the result because

Knapp failed to make an effective revocation of its

acceptance under UCC 2-608.

When a buyer "accepts" goods, as defined in UCC 2-606,

the buyer forfeits the right to "reject" the tender. UCC

2-607. However, a buyer may be able to "revoke acceptance"

under UCC 2-608 as follows:

(1) The buyer may revoke his acceptance of a lot
or commercial unit whose non-conformity
substantially impairs its value to him if he has
accepted it
(a) on the reasonable assumption that its non-
conformity would be cured and it has not been
seasonably cured; or
(b) without discovery of such non-conformity

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if his acceptance was reasonably induced either by
the difficulty of discovery before acceptance or by
the seller's assurances.
(2) Revocation of acceptance must occur within a
reasonable time after the buyer discovers or should
have discovered the ground for it and before any
substantial change in condition of the goods which
is not caused by their own defects. It is not
effective until the buyer notifies the seller of
it.

The buyer who revokes has the same rights and duties as if

the buyer had rejected the goods. UCC 2-608.

Knapp argues that this case falls squarely within

section 2-608 (1)(b). It says that the sole-bond problems

were hard to discover because they could not be detected by

visible inspection and that it reasonably relied upon

Sylvania's assurances that it had corrected the bond problem.

Knapp cites to S & R Metals, Inc. v. C. Itoh & Co.

(America), 859 F.2d 814 (9th Cir. 1988), as authority for the

view that a buyer can revoke acceptance when the prior

acceptance was made without knowledge of the defect and the

defect was "latent and difficult to discover."

The difficulty with Knapp's position is that by mid-1988

it had ample knowledge that customers were complaining about

separation, and its own experience confirmed that Sylvania

was not successfully solving the underlying problems. Knapp

itself points to pull-tests done in 1988 which, it argues,

prove that Sylvania's manufacturing process was flawed. Yet

not until spring 1990--the precise date is disputed--did

Knapp purport to revoke acceptance for all shoes delivered to

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it over the entire period.

This is not a revocation occurring within "a reasonable

time" after the buyer discovered the ground for rejection,

and the contrast between the present facts and those of S & R

Metals underscores the point. In that case, the buyer had no

reason to doubt the quality of the steel until complaints

were received; advance testing would have been expensive and

destroyed the valuable product tested; and the revocation of

acceptance was made within nine days after the defect had

been discovered and confirmed. S & R Metals, 859 F.2d at

817. Nothing in this decision, or any other cited by

Knapp,5 suggests that a buyer can accept deliveries of a

vast number of items over a period of a year and a half and

then suddenly revoke the acceptance of all of them based on

defects whose presence was known or suspected during the

entire period.

Rejection of the February 1990 Shipment. A much

narrower and stronger claim by Knapp is that it properly

rejected the single shipment of shoes received in February

1990. Section 2-601 of the UCC provides that if goods or

5In Fortin v. Ox Bow Marina, Inc., 557 N.E.2d 1157

(Mass. 1977), also cited by Knapp, the court allowed the
buyer to revoke acceptance of a boat delivered four months
earlier when the seller had provided repeated assurances that
it would cure the identified defects in the boat. The case
involved a different problem--a promise to repair a specific
item already delivered--and is governed by a different
provision (section 2-608(1)(a)).

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tender fail to "conform" to the parties' contract, the buyer

may reject the whole delivery;6 but this rejection must be

within a reasonable time, and the buyer must seasonably

notify the seller of the rejection. UCC 2-602(1). The

magistrate judge found that Knapp failed to prove that the

February shipment was nonconforming, and further found that

Knapp's rejection was untimely.

Knapp insists that the shipment was nonconforming

because all of the shoes in the shipment were defective

inasmuch as they could be pulled apart manually. Crabtree,

Knapp's key witness on this issue, so testified at trial.

The magistrate judge made clear that he did not accept

Crabtree's testimony, but this appraisal may well have been

affected by the magistrate judge's mistaken finding on

limitation of remedies: Crabtree also testified to the fact

that the procedure of return of customer defects was

established only in mid-1988 and that before that time

customer returns were discarded, a fact that the magistrate

judge found surprising in view of the "clear understanding

between the parties."

Knapp did carry out a prompt inspection of the shoes

6To permit rejection of the entire shipment for
nonconformity, Knapp had to show not just that there were
defective shoes but that the defect rate was higher than
agreed upon or, lacking specific agreement, than the standard
in the industry. See Agoos Kid. Co. v. Blumenthal Import

Corp., 184 N.E. 279, 281 (Mass. 1932).

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that arrived in the February 1990 shipment, complained

immediately to Pearlstein that the shoes were 100 percent

defective, and sent him a case for his own inspection. When

the formal "rejection" occurred is disputed--the magistrate

judge found that it did not occur until May--but Knapp's

actions were certainly consistent with its claim of

substantial defects and represented steps toward rejection.

It immediately placed the seller on notice that the defects

were pervasive and began to negotiate the seller's response.

The magistrate judge chose to credit fully the testimony

of Pearlstein, Sylvania's president, to the effect that no

shoes from the sample case sent by Knapp to Sylvania from the

February shipment separated. But quite apart from other

Knapp witnesses who supported Crabtree, other Sylvania

employees--Elliott and Cartwright--both agreed that at least

some of the shoes could be pulled apart by hand. Thus we

find it hard to accept the magistrate judge's finding that

"plaintiff has failed to establish by a preponderance of the

evidence that any of the shoes--much less the whole of the

lot--failed to conform."7

This court finds clear error only where, "on the whole

7The magistrate judge suggested that the "hand" pull
test is not standard in the industry and that evidence that
shoes could be pulled apart by hand did not necessarily prove
them defective. Common sense, buttressed by ample evidence
at trial, confirms that an industrial work shoe is defective
where it can readily be pulled apart by hand.

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of the record, we form a strong unyielding belief that a

mistake has been made." Cumpiano v. Banco Santander P.R.,

902 F.2d 148, 152 (1st Cir. 1990) (citations omitted). In

this instance, we conclude that the magistrate judge was

clearly in error in finding that the February 1990 shipment

was free of defects and conformed to industry standard. The

question whether Knapp gave prompt notice is more difficult,

but we need not resolve the issue because whether Knapp

rightfully rejected the nonconforming shipment has no

practical impact on the damages to which it is entitled.

With the magistrate judge's finding on defects set to one

side, Knapp's ordinary damages as to the February shipment

produce essentially the same amount as it would receive under

the "rejection" remedy. See IV(C) below.

C. Damages

Knapp's damage claims were based upon its allegation

that Sylvania shoes suffered from a very substantial rate of

defects. In his final damages calculation, the magistrate

judge found that the rate of defects in the inventory shoes

involved in this litigation was less than four percent.

Knapp argues on appeal that the magistrate judge's defect-

rate finding was clearly erroneous, and insists that the

evidence established a defect rate of at least 40 percent for

the shoes remaining in inventory at Knapp. We think that the

magistrate judge's finding is clearly erroneous and that on

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this record the 40 percent figure is the only alternative

choice.

Knapp's allegations of substantial defect rates in the

shoes remaining in inventory were supported by detailed

testimony by Crabtree; by corroborating testimony of other

Knapp personnel; by evidence of substantial customer returns,

dissatisfaction and cancelled relationships to which the

customers testified; by testimony that the number of

defective shoes held by Knapp plus the number of prior

returns acknowledged by Sylvania was nearly twice the

magistrate's 3-to-4 percent finding; by evidence that both

Knapp and customers threw away additional defective shoes;

and, finally, by a fairly detailed sampling study that

appearedto establish a defect rate of at least 41.7 percent.8

In adopting the 3-to-4 percent defect rate figure, the

magistrate judge accepted the testimony of Esser and Sprague

(both disaffected former Knapp employees) and of Sylvania

personnel, to the effect that there was never a substantial

problem with Sylvania shoes. He disregarded Crabtree as a

liar; and he dismissed customer testimony as not necessarily

8A biostatistician analyzed the results of pull-tests
performed on randomly selected pairs of unused shoes in
inventory. Using a 20-pound figure for the pull-tests, 60
percent of the shoes failed. Given the sample size tested
and the number of shoes in inventory, the expert concluded
that "we have a 95 percent level of confidence that the
actual proportion of defective pairs in the inventory . . .
is at least 41.7 percent."

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relating to Sylvania shoes but rather to shoes manufactured

in Taiwan. He found the pull tests inconclusive, insisting

that Knapp had failed to present evidence that a pull-test

failure at under 20 pounds showed that a shoe was defective.

He refused to believe Knapp's accounting of the number of

defective shoes in inventory.

Under the Cumpiano standard, we reject as clearly

erroneous the magistrate judge's assessment of the percentage

of defects in the Sylvania shoes. We have already explained

why his related appraisal of testimony regarding quality of

the February 1990 shipment is unpersuasive, see IV(B), and

this is equally so on the broader question of the remaining

inventory. Knapp's claims of defects came not only from

Knapp but from customers disinterested in the litigation,

from the presence in inventory of defective shoes actually

returned to Knapp, and from the pull-tests conducted by

independent experts--the last of which sampled the entire

remaining Knapp inventory in the contested models.

The notion that any of these defective shoes came from

foreign sources rests on doubtful evidence; but, given the

poor quality of the February 1990 shipment admittedly from

Sylvania, it is obvious that foreign sources do not explain

away the problem. From the testimony on pull-tests, it

appears that the 20-pound figure that Knapp asked the expert

to employ was not only plausible but conservative. Knapp's

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accounting of the number of defective shoes in its inventory

was essentially uncontradicted. In sum, the evidence is

overwhelming that the defect rate was considerably higher

than the rate adopted by the magistrate judge.

Each side had its chance to present evidence and neither

side is entitled to introduce further evidence on this issue.

On the present record the stark choice is between Sylvania's

claim that defects were no greater than normal and Knapp's

evidence to the contrary. The Knapp evidence was that it had

6,045 known defective pairs in inventory, comprising shoes

returned by customers, the 1,422 pairs torn-apart from the

February 1990 shipment and other shoes pulled apart during

inspection of inventory, and--in addition--that it had in

inventory 21,010 new shoes of the models involved in this

litigation, at least 41.7 percent of which the statistical

sampling showed to be defective.

The evidence as to raw numbers in inventory was

essentially uncontradicted even though the magistrate judge

declined to accept the numbers. As for the statistical

study, the 20-pound pull-test was (as already noted) a

conservative standard based on the evidence; and the 41.7

percent figure even more so. Sylvania has chosen not to

contest its liability for defective shoes no matter how long

in inventory. "Where, as here, the record is sufficiently

developed that we can apply the law to the facts before us .

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. . that route is available to us." Lipsett v. Blanco, 975

F.2d 934, 943 (1st Cir. 1992). We take it here and find that

Knapp has proved the raw figures and defect rate just

discussed, any other conclusion on this record being clearly

erroneous.

As for the cost of the shoes, we agree with the

magistrate judge that the most accurate figure is the average

price of the shoes purchased by Knapp, rather than Knapp's

"Fifo average cost."9 Using the magistrate judge's price

figures for each model and applying that price to the larger

number of defective shoes that we have found to be present in

Knapp's inventory (14,806), we have calculated Knapp's

damages for defective shoes as $338,138.31. The

calculations, by model number, are set forth in Appendix A.

Knapp argues that regardless of the precise percentage

of defective shoes in its inventory, all of the shoes are

useless to it because the number of defects is too high to

allow Knapp to deliver the shoes to customers without fear

that they will fall apart on their feet. Knapp is

essentially attempting to invoke through the back door the

revocation of acceptance remedy that Knapp failed to invoke

9Even if we were to accept (as the magistrate judge did
not) that Knapp maintained a strict Fifo inventory procedure,
some of the new shoes in Knapp's Brockton warehouse were
returned from field warehouses; some may have been from early
shipments, and the average price figure therefore appears to
us to be the better measure.

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in a timely manner. Whatever decrease Knapp has suffered in

value of the non-defective shoes, Knapp inflicted this

decrease on itself when it accepted the deliveries and failed

to revoke that acceptance within a reasonable time.

Knapp also claimed a detailed list of incidental

damages, some of which were granted by the magistrate judge

and are not challenged by Sylvania on appeal. Knapp insists

that it is also entitled to reimbursement for a credit it

issued to Federal Express and for storage costs beyond those

granted by the magistrate judge. The magistrate judge found

that Knapp had failed to prove that it had not received

credit from Sylvania or replacements for the defective shoes

for which Federal Express demanded and received credit.

We agree that Knapp failed to prove that this credit

represented actual damages.10 As to the storage charges,

Knapp will be credited only for the amount attributable to

the actually defective shoes, as the magistrate judge held,

but that amount is increased to $4,146 to account for the

enlarged number of defective shoes determined on this appeal.

The result is achieved by using the magistrate judge's own

10It is apparently undisputed that Knapp gave credit to
its customer Federal Express to resolve complaints about
defective shoes. Nevertheless, the evidence left it
uncertain whether some of the shoes reflected in this figure
had already been returned by Knapp to Sylvania or were among
shoes in Knapp's inventory, damages for which are already
reflected in the calculations in Appendix A. The burden was
on Knapp to show actual damages without double counting, and
it failed to do so.

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formula set forth in his March 1, 1995, decision.

Knapp further claims that it is entitled to lost profits

from the shoes in inventory it could not sell. To recover

lost profits, the plaintiff must show by a preponderance of

the evidence that the actionable breach caused the loss and

that the loss was foreseeable and calculable with reasonable

certainty. Matsushita Electric Corp. v. Sonus Corp., 284

N.E.2d 880, 890 (Mass. 1972). For the pre-February 1990

shipments, Knapp's claim is hopeless. Knapp did not show

that it had an urgent need for any of that inventory, nor

justify its failure to obtain alternative sources given its

knowledge of persisting problems. See UCC 2-715(2)(a)

(consequential damages include only those losses "which could

not reasonably be prevented by cover or otherwise").

With respect to the February 1990 shipment, the issue is

closer, because Knapp established at trial that it had an

urgent need for that inventory; the quality of that shipment

was even lower than earlier shipments; and Sebastiao

testified that Knapp lost orders because it could not deliver

these shoes. On the other hand, Knapp was on notice that

Sylvania shoes suffered from a high rate of defects, so its

failure to switch to other, more reliable suppliers at an

earlier date is hard to justify. Knapp knew or should have

known that it might well get defective shoes in the February

shipment, and it chose to take that risk. We affirm the

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magistrate judge's finding that lost profits are not

appropriately awarded.

Knapp also presses on appeal its broader claim for

consequential damages. It presented at trial expert

testimony that because of the defective shoes Knapp lost

future profits of $2,895,326 that it would have enjoyed on

other sales to customers who left Knapp out of

dissatisfaction with its product. Its evidence certainly

showed that its relationships with important customers were

irretrievably damaged. But it is equally clear that Knapp

could have minimized the damage through reasonable diligence

by increasing its inspections and, to the extent needed,

finding alternative suppliers.

Although Sylvania was at fault for supplying defective

goods and must reimburse Knapp for those goods proved to be

defective, Knapp cannot recover for any larger harm done to

its own reputation and customer relations. The general

principle is well settled that a party cannot recover for

harms that its own reasonable precautions would have avoided.

Columbia Novelty Co. v. Leslie Dawn, Inc., 6 U.C.C. Rep.

Serv. (Callaghan) 679, 679 (N.Y. App. Term 1969); UCC 2-

715(2)(a). To permit such a recovery on this record would

simply reward Knapp for its own lack of attention, poor

quality control, and bad judgment. In addition, the

magistrate judge's order terminating the injunction against

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Sylvania, as entered on May 31, 1991 and amended on June 10,

1991, is vacated; the magistrate judge is free to reduce the

amount embargoed to the net award plus anticipated costs and

interest.

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CONCLUSION

In summary, Knapp is entitled to damages as follows:

Cost of Defective Inventory: $338,138.31
Storage Costs: $4.146.00
Unpaid Credits: $92,472.97
Credit to Miami Hilton: $9,250.00
Refund to Marriott: $3,194.54
Price concessions to Federal Express: $11,096.25
Replacement shoes supplied to Hilton: $6,401.20
Increased inspection costs: $4,167.30
Freight charges: $6,877.60
Travel expenses: $1,793.92

Total $477,538.09

The first two entries are adjusted to reflect the

corrections explained in the opinion; the others are as

determined by the magistrate judge in rulings that Sylvania

has not appealed. The award against Knapp in favor of

Sylvania for unpaid bills, in the amount of $223,626.47, has

also not been challenged on appeal and so stands as

previously entered.

On remand, the judgment should be modified to award

$477,538.09 to Knapp and $223,626.47 to Sylvania, so that the

net award is now in Knapp's favor in the amount of

$253,911.62. It is so ordered.

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Appendix A

Style Defects New x41.7% Total Ave Cost Cost
1244 150 199 83 233 18.20 4,240.60
1245 63 189 79 142 23.75 3,372.50
1251 493 509 212 705 21.65 15,263.25
1257 111 402 168 279 26.25 7,323.75
2600 914 765 319 1,233 24.25 29,900.25
2601 47 60 25 72 25.75 1,854.00
2605 578 2,034 848 1,426 26.75 38,145.50
2660 485 1,926 803 1,288 23.25 29,946.00
2665 654 955 398 1,052 22.00 23,144.00
2670 464 599 250 714 27.90 19,920.60
2675 566 404 168 734 27.90 20,478.60
2810 514 2,438 1,017 1,531 21.91 33,544.21
2814 53 1,474 615 668 18.75 12,525.00
2815 51 1,311 547 598 22.10 13,215.80
2816 26 87 36 62 22.10 1,370.20
2840 125 548 229 354 27.40 9,699.60
2845 136 1,538 641 777 27.30 21,212.10
2916 39 264 110 149 18.75 2,793.75
2930 339 3,968 1,655 1,994 17.25 34,396.50
2935 211 1,302 543 754 19.90 15,004.60
2950 1 38 16 17 18.75 318.75
2955 25 0 25 25 18.75 468.75

Total 6,045 21,010 8,761 14,806 338,138.31

The first column refers to the Knapp shoe style number; the
second column sets out the number of customer returns plus
shoes pulled apart by Knapp personnel in Knapp's inventory;
the third column sets out the number of new shoes in
inventory; the fourth column gives the number of defective
shoes among the new shoes, based on the statistical survey;
the fifth column gives the total number of defective shoes in
Knapp's inventory; the sixth column gives the average price
for each style; the last column gives the price paid by Knapp
for defective shoes still in inventory.

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