## Facts

- CDT, a California distributor, entered a written nonexclusive distributorship agreement with ADDS, a terminal manufacturer.
- The agreement required CDT to use “best efforts,” restricted CDT from selling competitive terminals, contained a 90-day cancellation clause, included a merger clause, and selected New York law.
- The distributorship terms were incorporated by reference into each sales transaction between ADDS and CDT.
- CDT purchased ADDS’s Regent 100 terminals after receiving technical and promotional materials claiming high reliability and a 19,200-baud capability.
- CDT alleged the Regent 100s were defective, often arrived inoperative, frequently malfunctioned, and did not meet the advertised speed; ADDS later reduced the stated speed specification to about 1,900 baud.
- CDT pursued a large Intel sale and alleged ADDS bypassed CDT and submitted a lower bid directly to Intel, impairing CDT’s expected deal.
- ADDS relied on warranty disclaimers and remedy limits, asserting warranties were limited to a 90-day materials-and-workmanship guarantee; CDT asserted ADDS’s performance claims created express warranties.
- CDT sued for breach of warranty, negligent manufacture/sale, fraud, and tortious interference; the district court awarded CDT $585,489.61 in compensatory and punitive damages based on negligence, fraud, and interference.
- ADDS appealed the tort liability and damages; CDT cross-appealed issues related to damages.

## Issues

1. Whether ADDS’s product performance and reliability representations created enforceable express warranties under the governing sales contracts despite disclaimer language.
2. Whether the compensatory damages awarded for breach of warranty (including consequential and lost-profit components) were supported by a legally correct theory and non-speculative proof.
3. Whether ADDS received a fair trial on CDT’s fraud and tortious interference claims, given how those issues were presented and tried.
4. Whether punitive damages could stand when dependent on disputed tort findings.

## Decision

- The Ninth Circuit affirmed that ADDS was liable to CDT for breach of contractual warranty, including express warranties arising from specific performance representations.
- The court reduced the compensatory damages to the extent the district court’s calculation relied on an erroneous and speculative lost-profits theory.
- The court held ADDS was denied a fair trial on the tort claims of fraud and tortious interference and remanded for a new trial limited to those tort issues.
- The court vacated punitive damages because they depended on the tort findings and remanded that issue contingent on the tort retrial’s outcome.

## Legal Principles

- Under UCC-based warranty rules (as applied through the contract’s choice-of-law clause), affirmations of fact and product descriptions that form part of the basis of the bargain may create express warranties.
- General warranty disclaimers and limited guarantees do not necessarily negate liability for specific express warranties found to have been made and relied upon.
- Breach-of-warranty damages must be tied to a correct legal measure and supported by evidence; consequential and lost-profit damages require non-speculative proof and causation.
- When tort theories (including fraud and interference) are introduced or reshaped in a manner that prejudices a defendant’s ability to prepare and defend, a new trial may be required to ensure procedural fairness.
- Punitive damages must rest on valid, sustained tort liability and cannot stand when the underlying tort findings are set aside for retrial.

## Conclusion

The Ninth Circuit upheld ADDS’s breach-of-warranty liability based on express performance representations but curtailed damages unsupported by a proper, non-speculative theory, and it vacated and remanded the fraud, interference, and punitive-damages determinations for a new trial limited to the tort issues due to unfairness in how those claims were tried.


Consolidated Data Terminals v. Applied Digital Data Sys., Inc., 708 F.2d 385 (9th Cir. 1983)