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When a seller makes a written offer and a buyer responds with an acceptance letter that changes some of the terms, the Pennsylvania courts would apply the “knockout rule” to determine the terms the parties agreed to, a federal judge has predicted. In Reilly Foam Corp. v. Rubbermaid Corp., U.S. District Judge Berle M. Schiller of the Eastern District of Pennsylvania was forced to predict how the Pennsylvania Supreme Court would apply the “Battle of the Forms” provision in the Uniform Commercial Code. Schiller said he found only one decision from a Pennsylvania intermediate appellate court that addressed the issue: the 1987 decision of the Pennsylvania Superior Court in United Coal & Commodities Co. v. Hawley Fuel Coal Inc. But that decision provided “little guidance,” Schiller said, because it never directly addressed the question of what rule to apply and “contains self-contradictory comments, and does little to aid in prediction.” Turning to his own colleagues, Schiller found that none of the federal judges in Pennsylvania had ever tackled the question and made a solid prediction of Pennsylvania law, although a few seemed to be “comfortable” in applying the knockout rule, which generally calls for the terms of the contract to include only those upon which both parties agreed. The 3rd U.S. Circuit Court of Appeals is also silent on the issue, Schiller found. Oddly enough, the one court that has made a prediction of how Pennsylvania would rule was the 10th U.S. Circuit Court of Appeals with its 1984 decision in Daitom Inc. v. Pennwalt Corp. Schiller found the 10th Circuit’s reasoning persuasive, especially since it followed a strong trend in which the majority of courts around the country have adopted the knockout rule. In Reilly Foam, the company claims that Rubbermaid breached a contract in which Reilly Foam had agreed to provide sponges for Rubbermaid’s “Tidal Wave” mops by continuing to purchase sponges from one of Reilly Foam’s competitors despite promising to use Reilly for all its needs. According to the suit, Rubbermaid struck a deal with Target Stores in 1997 to sell the new mops but soon learned that its main sponge supplier, Tek Pak, could not make timely deliveries of sponges to meet Target’s needs. In March 1999, the suit says, Rubbermaid contacted Reilly Foam, which responded with a price quote. Over the course of a few weeks, Reilly Foam and Rubbermaid discussed a longer-term relationship in which Reilly Foam would supply sponges for Rubbermaid’s Tidal Wave project. But the two companies now vigorously dispute what the terms of the relationship were. According to Joseph Reilly of Reilly Foam, his company was to be the exclusive supplier of Butterfly and Roller Mop sponges with a Tidal Wave design. Rubbermaid was to purchase a minimum of 300,000 Butterfly, 300,000 Roller Mop, and 300,000 yellow ester Tidal Wave sponges each year. Rubbermaid also submitted written estimates to Reilly Foam of its requirements for Butterfly and Roller Mop sponges. Reilly Foam needed to retool its equipment and to license technology from a corporation named Foamex to produce the sponges with a “tidal wave” effect carved into their bottoms. The suit says Reilly Foam expressed concern that its profits on the contract would have to permit it to recoup its costs. Following the exchange of letters, the suit says, Rubbermaid arranged for purchasing sponges solely from Reilly Foam. But the suit alleges that Rubbermaid continued to purchase sponges from Tek Pak for use in the Tidal Wave line of mops and did not purchase 2 million sponges within the two-year window that Reilly Foam sought. Reilly Foam contends that Rubbermaid breached the contract by failing to use Reilly Foam as Rubbermaid’s exclusive supplier for the Tidal Wave Project, by making purchases from its competitors, and by failing to purchase the minimum annual quantities of sponges. In a motion for partial summary judgment, Reilly Foam’s lawyer, Spieros John Kokonos of Mount Laurel, N.J., argued that a March 26, 1999, letter from Reilly Foam was a contractual offer that Rubbermaid accepted through its March 30 correspondence. But Rubbermaid’s lawyers, David R. Fine and Jacqueline Jackson-DeGarcia of Pittsburgh’s Kirkpatrick & Lockhart, argued that Reilly Foam’s letter was merely a price quote and the terms contained within it were not part of the contract. Alternatively, they said, Rubbermaid’s March 30 letter showed that Rubbermaid did not accept all the terms contained in the March 26 letter and that certain key terms must, therefore, be excluded under the knockout rule. Schiller found that in the UCC context, courts have encountered difficulty determining whether a document that quotes a seller’s prices constitutes an offer. “Generally, price quotes are not considered an offer, but rather mere invitations to enter into negotiations or to submit offers. The buyer’s purchase order — which sets such terms as product choice, quantity, price, and terms of delivery — is usually the offer,” Schiller found. But Schiller also found that “some price quotes are sufficiently detailed to be deemed offers, which turns a subsequent document from a buyer containing a positive response into an acceptance.” Schiller found that Reilly Foam’s first letter qualified as an offer because “both parties treated the price quote as an offer and not merely a price quote.” The March 26 letter “did not merely list price,” Schiller said, but instead “refers to itself as a ‘proposal’ in its opening paragraph.” Schiller also rejected Rubbermaid’s argument that its response was not an acceptance but a rejection and counteroffer because it constituted a conditional acceptance. “To be deemed a rejection due to conditional acceptance, the offeree must do more than allude to preferred terms. It must make its acceptance expressly conditional on assent to the additional or added terms,” Schiller wrote. “In other words, it must demonstrate an unwillingness to proceed with the transaction unless its conditions are met.” Rubbermaid didn’t meet that test, Schiller said, because its March 30 letter “evinces a willingness to proceed with the transaction and therefore cannot be deemed a rejection or counteroffer.” Under the common law, Schiller said, a document qualifying as an offer could only be “accepted” by a second document expressing acceptance on terms identical to the offer. But that rule changed with the enactment of the Battle of the Forms provision of the Pennsylvania Uniform Commercial Code, which permits an expression of acceptance to operate as an acceptance even if it contains additional or different terms. The additional terms become part of the contract unless: (1) the offer expressly limits acceptance to the terms of the offer; (2) the inserted term materially alters the offer; or (3) notification of objection to the inserted terms has been given or is given within a reasonable time, Schiller found. But the fate of different terms is less clear, Schiller found. “Section 2207(b) does not directly address different terms in an acceptance, and the question remains: If the offer is accepted on different terms, should the terms of the offer control or should the acceptance be followed, or should the conflicting terms cancel each other out, to be replaced by gap fillers provided by the UCC?” Schiller wrote. The question is one that has divided courts and scholars, Schiller found. A minority of courts have held that in such a case, the terms of the offer control. But Schiller found that a vast majority of courts have adopted the knockout rule, which calls for the terms of the contract to include those upon which the parties agreed and gap fillers provided by the UCC provisions. “This approach recognizes the fundamental tenet behind Section 2207: to repudiate the ‘mirror-image’ rule of the common law. One should not be able to dictate the terms of the contract merely because one sent the offer,” Schiller wrote. “Indeed, the knockout rule recognizes that merchants are frequently willing to proceed with a transaction even though all terms have not been assented to. It would be inequitable to lend greater force to one party’s preferred terms than the other’s.” Schiller predicted that Pennsylvania, too, would adopt the knockout rule, “in light of the superior policy reasons behind the knockout rule, its fit with the text of the statute, and the vast majority of jurisdictions adopting it.”

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