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O-I disclosed problems with Clorox ahead of Graham deal, finds judge

By Joe Whitworth+

18-Jul-2014
Last updated on 18-Jul-2014 at 22:40 GMT

Owens Illinois (O-I) sufficiently disclosed problems with bottles supplied to Clorox, according to a verdict in the New York Supreme Court in a suit as part of Graham Packaging’s $1.2bn acquisition of its plastic business.

Graham started an action at the end of 2006 seeking damages in excess of $30m for claims arising from three alleged breaches involving Clorox, supply of 300 ounce laundry detergent bottles for Unilever and pensions.

New York City Supreme Court Judge Saliann Scarpulla found O-I did not breach its obligations based on what it told Graham Packaging in relation to Clorox, however, it was found to have breached conditions regarding the Unilever issue.

Graham acquired O-I subsidiary Owens-Brockway Plastic Products (OBPP), which manufactured plastic bottles, in 2004 for $1.2bn.

The amount of damages has been referred to a Special Referee and will be heard at a later date.

Graham alleged claims of breach of contract, fraudulent misrepresentation, negligent misrepresentation, failure to indemnify, and breach of the implied covenant of good faith and fair dealing in connection with the acquisition.

FoodProductionDaily.com has contacted Graham Packaging and is awaiting response.

O-I told us that the parties agreed to settlement terms during a court-approved mediation held on July 1 and have executed a written Settlement Agreement resolving all claims in the litigation, of which the terms are confidential.

Clorox claim

Throughout 2002 and 2003, O-I had been experiencing quality issues with its Hidden Valley Ranch PET plastic bottles (HVR Bottles) that it supplied to Clorox for salad dressing.

The issues are believed to have occurred primarily because of O-I’s use of one-stage manufacturing as opposed to a two-stage process.

In April 2004, Clorox informed O-I that it conducted a cost analysis to determine the financial impact of the bottle problem. The results showed it had experienced losses of $725,000.

The firm decided to commit to Clorox to use the two-stage production to fix the issue instead of risk losing the business.

Graham maintained that while it was aware of the issue it was not aware of the severity or Clorox’s possible termination threat in a letter in September 2004.

Judge Scarpulla said the letter reserved Clorox’s right to exercise its termination or reimbursement option, but that it was ready to work with O-I to permanently improve the situation.

Roger Prevot, Graham’s president, testified at a deposition that he was aware of the HVR Bottles issue, and discussed the potential switch to two-stage production with Paul Young, O-I’s head of manufacturing.

Young testified that there was no direct conversation about how much the switch would cost and no agreement that Graham would pay, but was “positive” that around the time that the Clorox Letter was sent, Prevot gave him the authority to tell Clorox there would be a change to the two-step process.

According to Graham, the cost of fixing the issue, which included moving production to a different plant, was ultimately $12.4m.

In her verdict, Scarpulla said O-I sufficiently disclosed problems with bottles supplied to Clorox Co.

“Graham admittedly was aware of the HVR bottle problem well before the Clorox Letter was sent, and Owens disclosed the contents of the Clorox Letter to Graham only a few days after Owens received the letter, which happened to be on the eve of closing.”

O-I specifically notified Graham about Clorox’s concerns about the quality of the bottles, and of plans to use two-stage machines to make the bottles, said the judge.

“Because Graham was well aware of the problems with the HVR bottles, was notified of the Clorox Letter shortly after it was received, was told about plans to shift to the use of two-state machines, and declined Owens’ offer to provide it with the Clorox Letter, it cannot now sustain a claim that Owens breached its Section 2.19(e) obligations under the SPA,” said Scarpulla.

Initial agreement and Unilever verdict

Graham acquired 100% of the shares of OBPP for $1.2bn and the deal closed in October 2004 via stock purchase agreement (SPA).

In relation to the Unilever claim, Justice Scarpulla found that O-I breached the SPA because the Pricing Spreadsheet listed prices that were not updated prior to closing.

“Although Owens and Unilever did not enter into a written contract reflecting the price reduction, the evidence presented establishes that the parties agreed to the price reduction prior to the Owens / Graham closing. 

“The fact that there was a date on the pricing spreadsheet of July 26, 2004 does not change the fact that there was no “as of’ qualification in the actual representation.

“There was no “as of’ date in the SPA sufficient to relieve Owens of its responsibility to advise Graham of changes in pricing prior to closing.”   

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