We previously previewed the issues presented in Higuchi Int’l Corp. v. Autoliv ASP, Inc., an appeal with potentially far-reaching implications for suppliers, in our March 22 and May 21 blog posts. Yesterday, the U.S. Court of Appeals for the Sixth Circuit issued its decision, offering additional clarity on the law of requirements contracts in the wake of the Michigan Supreme Court’s 2023 decision in MSSC, Inc. v. AirBoss Flexible Products Co.
As we previously wrote, the Higuchi appeal concerned (among other issues) the language required to create an enforceable requirements contract in Michigan under the Uniform Commercial Code’s statute of frauds. The case involved a request from a purchaser, Autoliv, for a preliminary injunction ordering its supplier, Higuchi, to continue supplying seat belt components at pre-existing prices. Autoliv argued that it was entitled to an injunction because, among other reasons, Autoliv was likely to succeed in establishing that the parties had entered into enforceable requirements contracts. The purchase orders at issue stated, in relevant part, that they were “blanket contract[s] ... issued to cover [the buyer’s] requirements ...”
At the trial court level, the court agreed that the contract’s reference to the buyer’s “requirements,” under the circumstances presented, was likely a sufficiently definite quantity term, and it issued the injunction. But the Sixth Circuit disagreed and held that “the parties appear not to have formed a requirements contract.” The Sixth Circuit therefore found that Autoliv was not likely to succeed on the merits, and it reversed the trial court’s issuance of an injunction.
Several aspects of the Sixth Circuit’s analysis bear emphasis.
First, the Sixth Circuit began by reading the Michigan Supreme Court’s decision in AirBoss to mean that, under Michigan law, if “a writing, such as a purchase order, refers to a buyer’s ‘requirements’ without binding the buyer to obtain any set share of those requirements from the seller, that writing does not create a requirements contract.” Instead, the court continued, “it permits the parties to form contractual obligations on a release-by-release basis[.]”
The Sixth Circuit then read Michigan case law as establishing that, to satisfy the UCC’s statute of frauds, a “written quantity term cannot be ambiguous.” Likewise, according to the Sixth Circuit, “an inferred quantity term does not satisfy the statute of frauds.” Rather, “it must be precise and explicit.”
Next, against that backdrop, the Sixth Circuit determined that, “for Autoliv to succeed on the merits, it must show that the purchase orders, on their face, clearly and precisely establish the set share of its requirements that it must purchase from Higuchi.” The court further stated that for Higuchi to succeed on the merits, “Higuchi need only show that the purchase orders are, at the very least, ambiguous regarding the share of requirements at issue.”
Turning to the contract language at issue, the Sixth Circuit found that language stating that the purchase orders were “issued to cover [the buyer’s] requirements” did “not unambiguously obligate Autoliv to purchase its requirements from Higuchi, let alone precisely state the specific share of the requirements at issue.” The Sixth Circuit added, “[The contract] does not plainly state that Autoliv will buy a specific percentage of its requirements, ‘all’ of its requirements, or any equivalent language, from Higuchi.”
Then, examining other provisions in the contract, the Sixth Circuit found that other language in the purchase orders only “muddie[d] the water” regarding Autoliv’s obligations, further weakening Autoliv’s position. Specifically, the court found that the following two features of the contract made it less likely that the parties had enforceable requirements contract: (1) language limiting Autoliv’s liability only to goods requested in releases and (2) interchangeable usage of the terms “releases” and “requirements,” making it unclear what triggered Autoliv’s purchase obligations.
Finally, the Sixth Circuit reiterated the rule that contracts must be construed against the drafter, and it noted that Autoliv unilaterally drafted the orders at issue and was free to draft them however it chose.
For all of those reasons, the Sixth Circuit held that Autoliv was unlikely to establish that the parties had entered into enforceable requirements contracts.
This decision provides further clarification under Michigan law and post-AirBoss as to which types of contract language could be interpreted as creating release-by-release contracts where the parties would have no continuing obligations beyond each individual release. And it reaffirms the importance of carefully reviewing supply contracts considering an active legal landscape.
Should suppliers have any questions about ongoing developments in supply contract law or otherwise desire counsel regarding their contracts in light of recent case law, please reach out to Michael Brady, Adam Ratliff, Tim Smith or a member of Warner’s Automotive Industry Group.
