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The Phoenix test for determining whether a letter of intent can bind the parties is in five parts. The court is to consider: (1) the language of the agreement, (2) the context of the negotiations, (3) the existence of open terms, (4) partial performance, and (5) the custom of such transactions.
Plaintiff Home Paramount is engaged in the pest control business in Maryland and Virginia. Its subsidiary York Distributors ("York") sells and distributes pest control products to pest control operators primarily in the eastern United States. Among York's clients is its parent company, Home Paramount. Defendant FMC Corporation ("FMC") manufactures and sells pest control products to distributors, including York. York was an authorized distributor of FMC pest control products for several years, beginning at least in 1993. In 1993, FMC implemented its "Alliance Points Program." Under the Program, FMC provided rebates to exterminators who purchased their products through an authorized FMC distributor such as York. As a condition for participation in the Alliance Points Program, each authorized distributor was required to provide FMC with a list of all customers who purchased FMC's products. The information included the amount and type of product purchased. In general, FMC limited access to this information. In return for the customer list, FMC paid a fee to York equal to 2% of York's yearly FMC product sales. FMC and York entered into yearly distributor agreements. As part of the distributorship agreement, York received "core distributor rebates" from FMC based on the amount of York's annual purchases.
In 1995, FMC began a policy of encouraging distributors to purchase large quantities of product late in the calendar year. Normally, sales of pest control products are slow in December and January because there is little demand for the product. In order to induce sales, FMC began to offer incentives to purchasers. These incentives included (i) awarding a higher rebate for December purchases, compared to purchases made early in the year; (ii) allowing extended payment terms, rather than the standard ninety days; and (iii) crediting December purchases to both the current year and the next year for purposes of calculating the "core distributor rebate," thus essentially giving York double credit for its purchases. In December 1996, York purchased a substantial amount of product from FMC. Eric Evans, then the Director of Specialty Products at FMC, encouraged York to make the purchase by stating that the December 1996 purchases would be recognized in both 1996 and 1997 for rebate purposes, thus giving York double credit. In mid-1997, Evans again sought to induce York to purchase more FMC products. York accepted FMC's terms. A July 31, 1997 letter from Evans to York confirms that payment for these purchases was not due until December 31, 1997. In December 1997, York again made a substantial purchase of FMC product. Evans told Craig Strobel, York's vice president, that his job at FMC was in jeopardy, and that FMC again needed to increase sales. Strobel informed Evans that York had no need for additional product at that time, and would not be able to pay for it within the normal ninety day payment schedule. Nevertheless, in December 1997, York agreed to purchase an additional $ 1.6 million in FMC product. According to York, Strobel and Evans reached an oral agreement on the terms of the December sale. There is, however, no written record of any contract, and FMC denies that any oral agreement existed. FMC dismissed Evans in late-1997 and replaced him with Jim Collins. In early 1998, Collins outlined to Strobel the terms of the proposed 1998 FMC distributorship agreement. To Strobel's distress, the 1998 proposal was substantially different from the plan allegedly promised earlier by Evans.On January 21, 1998, Collins and Strobel met to discuss the 1998 distributorship agreement. Strobel feared that the proposed agreement would place York at a financial disadvantage. The plan required York to purchase an amount equal to 20% of its 1997 purchases by March 31, 1998. The 20% was to be calculated based on a figure including the December 1997 purchases, thus substantially increasing York's required purchases for early 1998, at a time when its inventory was already large due to the December 1997 purchases. The plan also eliminated double credit for the December 1997 purchases and shortened the period under which York was required to pay in full for its December 1997 purchases. When Strobel protested that this plan departed significantly from the plan outlined by Evans in early December, Collins replied that he could not be held accountable for Mr. Evans's representations. The parties continued their negotiations through early 1998. During this time, York continued to sell FMC products and acted as an authorized distributor. In February, Collins met with Walter Tilley, president of Home Paramount. The meeting ended acrimoniously, without agreement. On February 26, Collins sent Tilley a letter, setting forth FMC's position as to York's status as an authorized FMC distributor in 1998. The letter stated that York could "continue to distribute FMC products in 1998 but has not qualified for [FMC's] 1998 Distributor Rebate program. York continued to sell FMC's products after receipt of the February 26 letter.
In May 1998, FMC shared York's customer list with representatives of Van Waters and Rogers, Inc. ("VW&R"), one of York's principal competitors. York received an anonymous letter reporting the disclosure. Upon receipt of the letter, Strobel contacted Wendell Codner, FMC's sales representative. Codner told Strobel that York remained an authorized FMC distributor, and denied that FMC had distributed York's customer list. When Strobel pressed the issue of the customer list, Codner said he would get back to Strobel. Codner did not call Strobel again. Instead, Collins wrote Strobel, stating York had not been an authorized distributor since January 1998. Home Paramount (under the name York Distributors) filed this suit against FMC in July 1998. FMC filed a counterclaim arguing breach of contract and seeking payment for the $ 1.6 million December 1997 purchases, and moved for summary judgment on all counts and on its counterclaim.
Does the February 26, 1998 letter constitute a binding distributor contract between FMC and York?
Applying the Phoenix test to the facts would produce a conclusion that the letter could be the basis for a contract between York/Home Paramount and FMC.
First prong — Unlike the letter at issue in Phoenix, Collins's letter did not contain explicit language stating that the parties were not to be bound until an final agreement was signed. Instead, Collins's letter states that "in lieu of a 1998 Distributor contract, this correspondence from an FMC point of view, defines the 1998 marketing focus on the following areas for York…."
Second prong — after York received the February 26 letter, there were no further negotiations. York continued to distribute FMC product. The parties did not again discuss York's status as an authorized FMC distributor until May, when Strobel contacted Wendell Codner of FMC to discuss the dissemination of York's customer list to VW&R. By contrast, in Phoenix, the parties continued negotiations after the signing of the letter of intent.
Third prong — Although final sentence of the letter holds open the possibility of further negotiations ("We continue to be willing to meet with you … to resolve any remaining issues"), the substance of the letter does not indicate the existence of significant open terms. Instead, Collins, on behalf of FMC, states that he is "clarifying any remaining issues regarding our path forward in 1998," and outlines FMC's "understanding" of the arrangement between York and FMC. The letter contains no significant open terms left for future negotiations.
Fourth prong — The parties proceeded to operate under the terms outlined in the February 26 letter for over two months, until May 1998. York continued to distribute FMC product. Even in May, FMC's sales representative Wendell Codner told Strobel that York remained an authorized FMC distributor. Such a representation is inconsistent with the existence of open terms in the letter, and supports a finding of partial performance.
Final prong — The defendant attached great weight to the final prong of the test, the custom of such transactions. It cites as conclusive Chief Judge Harvey's observation in Phoenix that businesses "ordinarily do not enter into multi-million dollar transactions in the absence of a comprehensive writing." Although Chief Judge Harvey is correct, the history of dealings between York and FMC cannot be characterized as ordinary. Both Chalk and Strobel testified at deposition that the parties had a history of oral agreements. Furthermore, Chalk testified it was possible for a company like York to be an authorized distributor and not participate in the rebate program.