INTERNATIONAL TOTALIZING SYSTEMS, INC. vs. PEPSICO, INC.

BROWN, J. We are asked to answer the twin essential questions: What did PepsiCo know and when did it know it? We must also decide whether in the rough and tumble world of commerce the manner and morals of the marketplace have been offended in a legally cognizable manner.

As a by-product of the now famous battle between Coke and Pepsi, the so-called "cola war," in 1978, the defendant, PepsiCo, Inc. (PepsiCo), decided to implement a new, fully electronic vending machine called the X-Vendor. In 1979, PepsiCo selected three companies to manufacture different parts of the machine: LaCrosse Cooler Co. was to manufacture the machine itself; Mars Money Systems (Mars), a division of M & M Mars, Inc., was to design and manufacture the coin mechanism; and the plaintiff, International Totalizing Systems, Inc. (ITS), was to manufacture the "controller" or electronic brain of the machine. Soon thereafter, PepsiCo entered into separate contracts with each manufacturer, including ITS.

The agreement between ITS and PepsiCo consisted of both a research and development phase and a manufacturing and production phase. When ITS proceeded to develop the controllers, a variety of problems soon emerged. PepsiCo eventually suspended the project in April, 1981, never having advanced past the research and development phase of the project. PepsiCo alleged that the failure of the controller to function properly effectively precluded the development of the X-Vendor project, while ITS alleged that PepsiCo suspended the project when it realized that manufacturers would not be willing to pay fees for the right to manufacture vending machines containing controllers and PepsiCo's franchisees were unwilling to pay additional amounts for vending machines containing controllers. The jury, in answers to special

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questions, found that ITS was not in breach of the contract by failing to produce a controller meeting the specifications of the contract and that the controller was not negligently designed.

The focus of this dispute involves the projections in 1980 of the number of controllers that would be required when the project was apparently still a successful one. Section 9(a) of the contract required PepsiCo to use its "best efforts" to provide to ITS monthly projections of what its controller requirements would be nine months in advance. ITS, in turn, was required to notify PepsiCo of its ability to meet the projected needs. If ITS did not have the capacity to manufacture the units, PepsiCo had the right to go to a second source. ITS presented evidence which showed that on numerous occasions PepsiCo's director of commercial development, Salvatore Porrazzo, and other PepsiCo officers deliberately overstated the anticipated controller requirements for 1981. By letter dated May 29, 1980, PepsiCo indicated projected requirements for a total of 19,000 controllers [Note 1] in the first four months of 1981. [Note 2] In addition, Porrazzo, who had overall responsibility for the X-Vendor project, told ITS president Peter Lillios that between 45,000 and 50,000 controllers would be required for the whole of 1981. [Note 3] PepsiCo admits that Porrazzo "thought [the projections given to ITS] were overly optimistic and maintained his personal belief in estimates that he had given ITS during 1979." [Note 4]

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Accurate projections became crucial, it is alleged, because, at approximately the same time the projections were given, in early 1980, Mars made an offer to purchase ITS. Mars initially offered to acquire ITS for a guaranteed minimum price of $2.4 million to be paid over three years. On April 21-22, 1980, Mars increased the offer to a guaranteed amount of $3.5 million to be paid over a five-year period. [Note 5] ITS, however, never accepted the offer.

At bottom of ITS's four-count complaint against PepsiCo for damages is its assertion that it rejected Mars's lucrative offer because its own calculations of the value of the company (and thus the price it was willing to accept) were inaccurately inflated by the high controller projections. Count I alleges deceit and misrepresentation. Counts II and III allege breach of contract, and Count IV alleges violations of G. L. c. 93A, Section 11. In response, PepsiCo filed an answer and counterclaim alleging breach of contract and negligence in connection with ITS's design and development of the product under the contract. [Note 6]

In August of 1986, a judge of the Superior Court allowed PepsiCo's motion for summary judgment on several of ITS's

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claims. [Note 7] At trial, ITS pursued only its claim for "lost corporate opportunity resulting from its rejection in April, 1980, of an offer by Mars to acquire its assets" -- a rejection which it said would not have occurred but for its reliance upon PepsiCo's fraud, misrepresentations, and breach of contract.

At the conclusion of the trial, in answer to special questions, the jury found (1) that PepsiCo knowingly made misrepresentations; (2) that ITS reasonably relied on PepsiCo's knowingly false representations and material omissions; (3) that the misrepresentations caused or substantially contributed to ITS's decision to reject the Mars offer; (4) that ITS suffered a financial loss as a result of rejecting the Mars offer; (5) that the loss was reasonably foreseeable; and (6) that PepsiCo had actual knowledge of the offer. The jury also found that PepsiCo was in breach of its contract with ITS, thereby causing the loss of a favorable opportunity which was reasonably foreseeable when the contract was entered into. The jury awarded ITS damages of $1,650,000. The jury went on to find in favor of ITS on PepsiCo's counterclaims.

PepsiCo moved for judgment notwithstanding the verdict. See Mass.R.Civ.P. 50, 365 Mass. 814 (1974). The judge allowed PepsiCo's motion in major part, ruling as matter of law that it was not reasonably foreseeable by the parties, or actually within their contemplation at the time the contract was entered into, that ITS would sustain the alleged losses as a result of PepsiCo's breach of contract. The judge concluded that "[t]here was no evidence that PepsiCo either knew that such a loss would be considered an element of ITS's damages if the former breached the contract, or that there were any circumstances from which PepsiCo should have known of such probable future contention."

The judge similarly ruled, with respect to the tort claims, that the alleged loss was not reasonably foreseeable by PepsiCo

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because the evidence was legally insufficient to warrant the jury's answer that PepsiCo was aware or should have been aware of the Mars offer before May 5, 1980, the date it expired. [Note 8] At that time, the judge issued findings of fact and conclusions of law and a memorandum of decision on ITS's G. L. c. 93A claim. The judge found that PepsiCo had violated c. 93A but ruled that PepsiCo's violations were not wilful or intentional, and he again concluded that ITS sustained no recoverable damages. This appeal and cross-appeal are from the ensuing judgment.

1. ITS's claims for breach of contract and misrepresentation and deceit.

a. Standard of review. The standard of review to be used on PepsiCo's motion for judgment notwithstanding the verdict on Counts I and II of ITS's complaint [Note 9] "is the same as that on a motion for a directed verdict." D'Annolfo v. Stoneham Hous. Authy., 375 Mass. 650, 657 (1978). In reviewing the grant of a judgment notwithstanding the verdict, we must determine whether, without weighing the credibility of the witnesses or otherwise considering the weight of the evidence, "anywhere in the evidence, from whatever source derived, any combination of circumstances could be found from which a reasonable inference could be drawn in favor of the plaintiff." Poirier v. Plymouth, 374 Mass. 206, 212 (1978). See Hall v. Horizon House Microwave, Inc., 24 Mass. App. Ct. 84, 89-90 (1987). However, "[t]he inferences must be reasonable and must be based on probabilities rather than possibilities and may not be the result of mere speculation and

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conjecture." Goffredo v. Mercedes-Benz Truck Co., 402 Mass. 97, 101 (1988).

b. Breach of contract. On Count II of the plaintiff's complaint, the jury found that PepsiCo committed a breach of its contract with ITS and that ITS's loss of the corporate opportunity to sell its assets to Mars was a reasonably foreseeable consequence of the breach. The judge, however, ruled that the loss was not foreseeable as of the date (December 26, 1978) upon which the contract was entered into.

It is undisputed that, if a party suing for breach of contract has sustained a loss as a result of a breach, and the loss is of such a nature that it was reasonably foreseeable by the parties and follows as a natural consequence and proximate result of the breach or was actually within their contemplation at the time the contract was entered into, the loss may be recovered in an action for damages. Leavitt v. Fiberloid Co., 196 Mass. 440, 446-448 (1907). American Mechanical Corp. v. Union Mach. Co. of Lynn, Inc., 21 Mass. App. Ct. 97, 101 (1985), and cases cited. ITS argues that the Mars offer was the type of collateral transaction which was reasonably foreseeable at the time of the contract. Evidentiary support for that contention is conspicuously lacking. [Note 10] On this record, we think it is not possible to draw fairly an inference that, at the time the parties made the agreement, it was reasonably foreseeable that, if PepsiCo caused or committed a breach of that contract, ITS might be induced to reject a lucrative acquisition offer. The damages were simply too remote to have been within the reasonable contemplation of the parties at the time the contract was executed. See Abrams v. Reynolds Metals Co., 340 Mass. 704, 709 (1960).

c. Misrepresentation and deceit. On Count I of ITS's complaint, the jury found that PepsiCo knowingly misrepresented and failed to disclose material facts to ITS and that ITS reasonably

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relied on the misrepresentations, all of which substantially contributed to ITS's decision to reject the Mars offer.

The jury's findings on causation mirror the principle that, to recover in an action for deceit, "the plaintiff must prove that the defendant [or its agent], made a false representation of a material fact with knowledge of its falsity for the purpose of inducing the plaintiff to act thereon, and that the plaintiff relied upon the representation as true and acted upon it to [its] damage.'" Danca v. Taunton Sav. Bank, 385 Mass. 1, 8 (1982)(citations omitted). See also Restatement (Second) of Torts Section 525 (1977)("One who fraudulently makes a misrepresentation of fact, opinion, intention or law for the purpose of inducing another to act or to refrain from action in reliance upon it, is subject to liability to the other in deceit for pecuniary loss caused to him by his justifiable reliance upon the misrepresentation"). PepsiCo does not argue that there was insufficient evidence for the jury to find that the inflated projections caused ITS to reject the Mars offer; [Note 11] rather, PepsiCo argues that "[r]ejection of the Mars offer was not a reasonably foreseeable consequence of PepsiCo's projections." [Note 12]

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In its answers to special questions, the jury specifically found that, "[a]t the time in April 1980 when PepsiCo gave its projected figures of controller requirements to ITS, [it was] reasonably foreseeable by PepsiCo that a probable result of a misrepresentation by PepsiCo as to those figures . . . would be ITS's loss of a favorable opportunity to sell its business to a third party." [Note 13] In granting PepsiCo's motion for

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judgment notwithstanding the verdict, the judge also focused on whether the loss of the Mars sale was "a reasonably foreseeable consequence of [the] misrepresentation by PepsiCo. . . ." Concluding that there was insufficient evidence of actual or imputed knowledge on the part of PepsiCo of the prospective sale to Mars, the judge held that the sale was not reasonably foreseeable. We agree with ITS that the judge erred in ruling that PepsiCo lacked knowledge of the Mars offer to acquire ITS, and, as this was the sole basis upon which he granted judgment notwithstanding the verdict in favor of PepsiCo on the misrepresentation count, the judgment on Count I should be reversed.

ITS points to two pieces of evidence which it claims show that PepsiCo had knowledge of the Mars offer to purchase ITS: the testimony of Donald Simon, PepsiCo's manager of marketing equipment development, and the testimony of Ray Martino, a Mars vice president. The judge ruled that there was no evidence that Simon's authority extended over any matter to which knowledge of the Mars offer was pertinent, and thus the jury could not properly have found that PepsiCo knew or should have known of the Mars offer. It is well settled that, "[w]hen an agent acquires knowledge in the scope of her [or his] employment, the principal . . . is held to have constructive knowledge of that information." DeVaux v. American Home Assur. Co., 387 Mass. 814, 818 (1983), citing Union Old Lowell Natl. Bank, 318 Mass. 313, 323-324 (1945), and Bockser v. Dorchester Mut. Fire Ins. Co., 327 Mass. 473, 477-478 (1951). In Bockser, the court stated that notice to, or knowledge of, an agent, in the course of the transaction in which he is acting for his principal, is constructive notice to, or knowledge of, the principal. 327 Mass. at 477-478. This rule does not apply unless the agent having the knowledge has within the scope of his authority the matter

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with respect to which that knowledge is important. Stetson Press v. Bunsen Oil Burner Corp., 285 Mass. 291, 293 (1934). See also Wurm v. Allen Cadillac Co., 301 Mass. 413, 416 (1938). While this is a close case, the jury, drawing all reasonable inferences for the plaintiff from the evidence before it, could have found that Simon learned of the Mars offer while acting in the course of his PepsiCo duties on the X-Vendor project and thus learned of the offer within the scope of his employment while acting on a matter in which the knowledge was important. [Note 14] See Fahey v. Rockwell Graphic Sys., Inc., 20 Mass. 642, 654 (1985) (the scope of an employee's employment is not restrictively construed). This is particularly true given the fact that Mars itself was also working on the project (i.e., producing the coin mechanism) at the time the information was communicated to Simon. The two parts of the machine, one produced by Mars, the other by ITS, were required to work together once incorporated into the machine, and an acquisition of ITS by Mars would have had a discernible impact on ITS's production capabilities and financial strength. Both of those matters were of concern to PepsiCo. Over-all, an acquisition of ITS by Mars would undoubtedly have had a substantial impact on the X-Vendor project. This created an issue that was properly for the jury. See DeVaux v. American Home Assur. Co., 387 Mass. at 819.

We conclude that there was sufficient evidence in this case for the jury to find that in making the inflated projection it was foreseeable that ITS would lose the opportunity to sell its business to Mars. [Note 15] PepsiCo knew that Mars was negotiating

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with ITS to acquire ITS's assets [Note 16] and should have foreseen that its projections might affect the value of ITS or its attitude towards the sale. Certainly, it would be reasonable for ITS to take into consideration the number of controllers it would be manufacturing in the next year in deciding whether to accept an acquisition offer, and whether it did so was a question of fact. [Note 17] That other factors may have contributed to the decision to reject the Mars offer is not material as long as the inaccurate controller projections were an operating factor. Saunders v. Goodman, 8 Mass. App. Ct. at 616.

2. ITS's claim under G. L. c. 93A. On ITS's claim for damages under G. L. c. 93A (Count IV) the judge made his own findings of fact and conclusions of law and issued a separate memorandum of decision. He found that "PepsiCo has been guilty of an unfair and deceptive act toward ITS, within the purview of G. L. c. 93A, Section 11." However, the judge also incorporated, from his decision on the previous claims, his reasoning on the causation issue, that, "[a]bsent actual (or imputed) knowledge of a prospective sale of ITS corporate assets to Mars, . . . [the loss] was not reasonably foreseeable," and he went on to conclude "that ITS has suffered no legally recoverable damages under Count IV." He did, however, award ITS attorney's fees in the amount of $375,000, plus interest. For various reasons, both ITS and PepsiCo have appealed these rulings on Count IV.

Given the posture of this case, which included both common law actions and a statutory claim, the judge had the option of "letting the jury find the facts for both claims, reserving to himself all aspects of the 93A claim, or asking for a non-binding advisory" as to the latter. Acushnet Fed. Credit Union v. Roderick, 26 Mass. App. Ct. 604, 606 (1988), and cases cited. Here, the judge stated that "[b]efore

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trial I advised the parties that I would determine the issues presented by Count IV; that I recognized that I was not bound by the jury's answers to any G. L. c. 93A questions, but that I would accord such answers respectful attention and deference." The judge, therefore, was not bound by the jury's findings that pertained to the c. 93A claim, and he was entitled to make his own findings and rulings.

In this case, however, in his memorandum and decision on the 93A claim, the judge stated that, if he was "in error in . . . ruling that . . . as a matter of law the loss of the Mars sale was not an element of damages for which PepsiCo was responsible under the circumstances, then I . . . adopt the jury's finding as to the amount of damages suffered by ITS as a result of that loss." A similar statement was appended to the judge's findings on the misrepresentation count. We read these statements as revealing the judge's intention that, should an appellate court disagree with his conclusions as to the foreseeability of the harm, his decision would be to echo the jury's findings as to damages in both the misrepresentation and c. 93A claims. [Note 18] Having decided that the judge was mistaken in concluding that "the loss of the Mars sale was not an element of damages for which PepsiCo was responsible under the circumstances," it follows that damages should have been awarded as to the c. 93A claim. [Note 19] The judge's

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award of attorneys' fees can therefore stand. [Note 20] Interest on the portion of the award representing attorneys' fees should, however, be calculated from the time judgment was entered on the c. 93A claim (June 8, 1988), not from the time the complaint was filed. Patry v. Liberty Mobilehome Sales, Inc., 394 Mass. 270, 272 (1985).

In his decision on G. L. c. 93A, the judge also made clear that in no event were "double or treble damages . . . justified on the facts of this case" given the absence of "wilful or intentional conduct within the purview of G. L. c. 93A." Based on the entire record, we see no reason to disturb this aspect of the judgment. Cf. Bachman v. Parkin, 19 Mass. App. Ct. 908, 910 (1984). Contrast Computer Sys. Engr., Inc. v. Qantel Corp., 571 F. Supp. 1365, 1373-1378 (D. Mass. 1983), affd., 740 F.2d 59 (1st Cir. 1984). We note that this conclusion may have been based in part on the absence of any evidence that PepsiCo acted with the intention of killing the Mars sale. Further, ITS's claim could not have been termed "clearly valid," such that multiple damages should have been awarded as punishment for forcing ITS to litigate.

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See Heller v. Silverbranch Constr. Corp., 376 Mass. 621, 627-628 (1978); International Fid. Ins. Co. v. Wilson, 387 Mass. 841, 857 (1983).

3. PepsiCo's motion for a new trial. Finally, PepsiCo argues that the trial judge improperly denied its motion for a new trial. See Mass.R.Civ.P. 59, 365 Mass. 827 (1974). PepsiCo points to, as against the weight of the evidence, the jury's conclusions that ITS did not commit a material breach of the contract by failing to produce a 1980 version of the controller conforming to the original specifications or a 1981 version conforming to the amended specifications. [Note 21]

Whether to grant a motion for new trial typically lies within the sound discretion of the trial judge, and a new trial should not be ordered unless the failure to do so appears inconsistent with substantial justice and affects the substantial rights of the parties. Galvin v. Welsh Mfg. Co., 382 Mass. 340, 343 (1981). See Mass.R.Civ.P. 61, 365 Mass. 829 (1974). In deciding whether there has been an abuse of discretion, we look to see if there are signs of "arbitrary determination, capricious disposition, or whimsical thinking." Davis v. Boston Elev. Ry., 235 Mass. 482, 496 (1920). Egan v. Holderman, 26 Mass. App. Ct. 942, 944 (1988). See also Adams v. United States Steel Corp., 24 Mass. App. Ct. 102, 103-104 (1987). When a claim that a verdict is against the weight of the evidence is asserted (as PepsiCo asserts as to its counterclaims), the trial judge should determine whether the verdict, in his judgment, "is so greatly against the weight of the evidence as to induce in his mind the strong belief that it was not due to a careful consideration of the evidence, but that it was the product of bias, misapprehension or prejudice." Scannell v. Boston Elev. Ry., 208 Mass. 513, 514 (1911). This determination is also addressed to the sound discretion of the trial judge. Solimene v. B. Grauel & Co., KG, 399 Mass. 790, 802 (1987). Robertson v. Gaston Snow & Ely Bartlett, 404 Mass. 515, 520-521 (1989). Considering the evidence presented to the jury relative to PepsiCo's counterclaims, [Note 22]

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we are unable to discern any basis in fact or law for disturbing the judge's refusal to overturn the jury's verdicts. Nor can we conclude, in light of the previous discussion as to the issues raised by Counts I, II, and IV of ITS's complaint, that the trial judge abused his discretion in denying PepsiCo's motion for a new trial as to those counts as well.

The portion of the judgment relating to Counts I and IV is vacated. As to Count I, judgment is to enter reinstating the jury verdict. As to Count IV, judgment is to enter for the plaintiffs. As to all counts, judgment shall enter for the plaintiffs in the amount of $1,650,000. The judge's award of attorneys' fees is affirmed, except interest thereon is to be calculated only from June 8, 1988. The judgment is otherwise affirmed.

So ordered.