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Cover, as authorized by Article 2 of the New York Uniform Commercial Code, applies to contracts for the sale of goods. N.Y. U.C.C. Law §§ 2-711(1), 2-102. The threshold question in examining the legal sufficiency of a defendant's defense of cover, therefore, is whether the agreement at issue is a contract for the sale of goods and is therefore subject to the U.C.C.; if not, the defendant has no right to cover.
The manufacturer and the distributor entered into a series of agreements relating to development, manufacture, and distribution of stents. One agreement required the manufacture to establish an alternative line on which the distributor could manufacture stents if the manufacturer failed to provide the required quantities. However, the distributor established a clandestine production line and had produced stents without the manufacture's knowledge. The manufacturer sued the distributor and two of its former officers, for, inter alia, breach of contract, fraud, misappropriation of trade secrets, and violations of the Racketeer Influenced and Corrupt Organizations Act (RICO). The distributor asserted counterclaims, including breach of contract, against the manufacturer. The parties filed cross-motions for summary judgment.
Did the manufacturer breach the contract?
The court found that the manufacturer breached the contract; the doctrine of cover did not justify the clandestine line, nor was the distributor granted a license to operate such a line. However, the manufacturer failed to establish regulatory fraud. A release barred in part the distributor's counterclaims; an indemnification clause was inapplicable. The distributor was not liable for misappropriating trade secrets because the designs at issue were not secret. The RICO claims failed because there was no showing of continuity of racketeering activity. Fact issues remained as to whether the manufacturer had breached the agreements by failing to supply sufficient quantities of stents.