Following the Michigan Supreme Court’s landmark decision in MSSC, Inc. v. AirBoss Flexible Products Co., 511 Mich. 176 (2023), in which Warner represented the prevailing party, many businesses have been re-examining whether their supply agreements contain a quantity term sufficient to create an enforceable requirements contract. We previously reported on the ramifications of AirBoss and the potential effects of a related appeal, which is still pending, in Higuchi Int’l Corp. v. Autoliv ASP, Inc.
As we await the ruling in Higuchi, trial courts have separately begun to address one of the questions left open in AirBoss — the impact of AirBoss on a prior decision, Cadillac Rubber & Plastics, Inc. v. Tubular Metal Sys. LLC, 331 Mich. App. 416 (2020).
In Cadillac Rubber, the Michigan Court of Appeals held that a contract obligating the supplier to purchase “no less than one piece or unit of each of the Supplies and no more than one hundred percent (100%) of Buyer’s requirements” was an enforceable requirements contract. In AirBoss, the Michigan Supreme Court did not expressly resolve whether (and to what extent) Cadillac Rubber remains good law. But lower courts have started weighing in, with differing outcomes.
In one case, Ultra Manufacturing (U.S.A.), Inc. d/b/a Mitchell Plastics v. ER Wagner Manufacturing Co.,--- F.Supp.3d ----, 2024 WL 280515 (E.D. Mich. 2024), a federal court determined that Cadillac Rubber did not survive AirBoss in critical respects. There, ER Wagner had been supplying parts to Mitchell Plastics under agreements providing that “some portion or all of [Mitchell Plastics’] requirements will be obtained from [ER Wagner].” After a price dispute arose, Mitchell Plastics sought an injunction requiring ER Wagner to continue supplying automotive parts at pre-existing prices. The court declined to grant an injunction because it found that Mitchell Plastics failed to establish it was likely to succeed on the merits. The court determined that, under AirBoss, the parties’ contract was a release-by-release contract, under which ER Wagner could reject any individual release, rather than a requirements contract.
The court noted that both types of contracts start with a blanket purchase order and operate by the issuance of releases by the buyer, notifying ER Wagner of its short-term needs. The crucial difference, however, is that in a requirements contract the buyer commits to purchasing a pre-determined “set share of its total need” from the buyer, whereas no such commitment is made in a release-by-release agreement, under which a buyer is merely obligated to purchase “whatever it orders.” Ultra Manufacturing, 2024 WL 280515,at *3 (citing AirBoss, 511 Mich. at 183). Under AirBoss’ guidance, the Ultra Manufacturing court determined that the parties’ supply agreement was a release-by-release contract because the contract’s quantity term — providing that Mitchell Plastics would obtain “some portion or all requirements” from ER Wagner — did not establish a “set share of [Mitchell Plastics’] total need.” Id. at *3(citing AirBoss, 511 Mich. at 183).
In so holding, the court rejected Mitchell Plastics’ reliance on Cadillac Rubber as supporting its argument that the parties had enforceable requirements contracts. The court reasoned that, to the extent Cadillac Rubber permits the enforcement of a contract ordering anywhere between one unit and one hundred percent of the buyer’s requirements, Cadillac Rubber is incompatible with AirBoss’ holding that a requirements contract must establish a “set share” of the buyer’s total needs. Accordingly, the Ultra Manufacturing court found that Cadillac Rubber could not support forcing ER Wagner to perform at the pre-existing prices.
Then, just last week, a state trial court held that it remained bound by Cadillac Rubber, notwithstanding AirBoss and Ultra Manufacturing.
In FCA US LLC v. Kamax, Inc., Case No. 24-205863-CB (Oakland County Circuit Court, May 17, 2024), a supplier asked a state trial court to hold that Stellantis’ purchase orders, which stated that they were “for approximately 65%-100% of our requirements,” were not enforceable requirements contracts under AirBoss. The supplier argued that Cadillac Rubber did not make Stellantis’ purchase orders enforceable because, according to the supplier: (1) Cadillac Rubber irreconcilably conflicts with AirBoss and (2) AirBoss was decided by the Michigan Supreme Court more recently. The supplier also relied on Ultra Manufacturing to support its argument that FCA’s purchase orders were not enforceable requirements contracts.
This blog previously reported on the FCA US case when it was at an earlier stage (as well as two other cases involving Stellantis), noting that the court had, in an earlier decision, declined to wade into the merits of the arguments mentioned above. Now, however, the court has addressed those arguments squarely and rejected them.
In its recent decision, the FCA US court concluded that it remained bound by Cadillac Rubber because, among other reasons, Cadillac Rubber had not been expressly overruled by AirBoss. The FCA US court further noted that it was not bound to follow the decision from Ultra Manufacturing because it came from a federal court — rather than a Michigan appellate court, whose decisions bind state trial courts. The court also explained that it was “operating under a different mandate” than the court in Ultra Manufacturing because the federal court in Ultra Manufacturing court was tasked with ruling based on how the Michigan Supreme Court would likely rule in the future, while the state trial court in FCA US was required to follow current Michigan law.
These decisions highlight a critical difference in how federal and state courts operate, which could affect the outcome in some supplier disputes until a Michigan appellate court clarifies the status of Cadillac Rubber. These decisions also reaffirm the importance of reviewing supply contracts and judicial decisions in the wake of AirBoss. Contracts that may have passed muster as requirements contracts under previous law may now be interpreted as release-by-release contracts under which the parties have no continuing obligations beyond each individual release. Suppliers should carefully review the language in their contracts for the common “portion of requirements” or “range of requirements”-type of language found in Ultra Manufacturing and FCA US. This type of language may have important consequences for both buyers and sellers facing what may turn out not to be long-term contractual obligations. Further developments in this area are sure to come as courts grapple different varieties of purported requirements language.
Should suppliers have any questions about ongoing developments in supply contract law or otherwise desire counsel regarding their contracts in the wake of AirBoss, please reach out to Emily Rucker, Tim Smith or a member of Warner’s Automotive Industry Group.
