GARLOCK SEALING TECHNOLOGIES v.NAK SEALING TECHNOLOGIES CORP.,

Filed 3/21/07

CERTIFIED FOR PUBLICATION

COPY

IN THE COURT OF APPEAL OF THE STATE OF CALIFORNIA

THIRD APPELLATE DISTRICT

(Sacramento)

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APPEAL from a judgment of the Superior Court of Sacramento County, Trena Burger-Plaven, J. Reversed in part and affirmed in part.

Rutan & Tucker, LLP, Ronald P. Oines and Treg A. Julander for Plaintiff and Appellant Garlock Sealing Technologies, LLC.

Solunce PLLC and Scott Payzant; Kroloff, Belcher, Smart, Perry & Christopherhson and Velma K. Lim for Defendant, Cross-Complainant and Appellant Nak Sealing Technologies Corp.

Wilke, Fleury, Hoffelt, Gould & Birney, LLP, Thomas G. Redmon and Daniel L. Baxter for Defendant, Cross-Defendant and Respondent Sunrise Trading Co.

Reliance Electrical Industrial Company doing business as Rockwell Automation Power Systems (Rockwell) sued Garlock, Inc., predecessor of Garlock Sealing Technologies, LLC. (Garlock), after industrial oil seal products Garlock sold to Rockwell caused significant oil leakage problems in the industrial gear reducers Rockwell manufactured. After Garlock settled the lawsuit with Rockwell, Garlock filed this action against its suppliers of the oil seals, NAK Sealing Technologies Corporation, formerly Mao Shun Oil Seal Industrial Company, Ltd. (Mao Shun), and Sunrise Trading Company, LLC (Sunrise Trading). Mao Shun and Sunrise Trading each filed cross-complaints against each other.

Mao Shun appeals the trial courts judgment awarding Garlock damages for Mao Shuns breach of the implied warranty of merchantability and ordering Mao Shun to indemnify Sunrise Trading for its costs of defending the Garlock action. Garlock appeals the trial courts denial of its claim for implied indemnity. We shall affirm the judgment awarding Garlock damages and ordering Mao Shun to indemnify Sunrise Trading. We shall reverse the portion of the judgment denying Garlocks claim for implied contractual indemnity.

FACTUAL AND PROCEDURAL BACKGROUND

Garlock is a company specializing in designing, manufacturing, testing and selling industrial sealing products, including oil seals. Mao Shun, located in Taiwan, is a manufacturer of oil seals and has been in the business of selling oil seals for 20 to 30 years. Sunrise Trading is a California company engaged in the importation and sale of goods including oil seals manufactured by Mao Shun. Garlock first placed a trial piece of business with Mao Shun through Sunrise Trading in the early 1980s. Thereafter, Garlock ordered radial lip-type oil seals from Mao Shun and resold them to Rockwell for use in Rockwells gear reducer boxes, which gearboxes were in turn used for conveyor belt systems in distribution warehouses.^[1]

In 1997 Rockwell was having problems with oil seals that were made from nitrile rubber, which Garlock was supplying to Rockwell for use in Rockwells gear reducer boxes.^[2] The nitrile rubber was almost melting and cracking from excessive heat in the gearboxes, resulting in a five to six percent oil leakage rate for the gear reducers. At that time, Rockwell also wanted to switch from a mineral-based lubricant to a synthetic lubricant with which the nitrile material was not compatible. Rockwell and Garlock worked together to come up with a solution which would use a step case radial lip-type oil seal made from a fluoroelastomer polymer called viton instead of the nitrile rubber. The selection of a radial lip-type oil seal made from viton was an appropriate selection for the gearbox application of Rockwell based on consideration of shaft speed, size compatibility, and heat tolerance. The operating conditions for Rockwells use of the seals were not unusual or excessive for viton seals. The operating conditions involved a typical application, which a viton polymer properly formulated should be able to handle easily.

Garlock did not normally make bonded oil seals and the proposed step case seals were both smaller in diameter and required higher volumes than Garlock normally made. In May of 1998 Garlock contacted Mao Shun through Sunrise Trading to see if Mao Shun could produce the proposed viton step case seals. Garlock had experience with Mao Shuns standard brown viton compound since perhaps as early as 1992, although the volume of brown viton seals previously purchased by Garlock was extremely small.^[3] Garlock provided Mao Shun with drawings and specifications for the new seals. The specifications, which would have been similar to the RA-37 specification used for ordering the nitrile rubber seals except for the material being viton, covered the physical materials, properties and dimensions of the seals. Garlocks manager of engineering, James Drago, did not know if Garlock specified the color of the viton to be used by Mao Shun, but he testified it was common for viton products to be colored brown to distinguish them from other rubber compounds. Drago understood Garlocks RA-37 specification asked Mao Shun to use its standard brown viton compound. Garlock did not tell Mao Shun how to compound its viton or specify any particular iron oxide as the brown pigment for the viton. Garlock did not consider it necessary to provide its own internal specification for iron oxide (for the brown viton) to Mao Shun based on its previous experience with Mao Shun and Mao Shuns reputation as a manufacturer of oil seals.

Based on the specifications and information provided by Garlock in RA-37, Mao Shun prepared the technical drawings for the seals. Mao Shun created a new mold for a step case radial lip-type oil seal based on Garlocks specifications and sent Garlock samples of the newly configured step case seal, including a slab of the brown viton compound from which the seals were to be made. Garlock maintains three testing facilities on-site: a chemical testing lab; a physical testing lab; and a functional testing lab. The functional testing lab can be used to duplicate the circumstances under which an oil seal is used in the field to check its performance. Garlock tested the Mao Shun samples for purposes of ensuring they were the proper configuration, dimension, and otherwise met specification requirements. Garlock did the normal tests designated by the American Society for Testing and Materials (ASTM) to check the basic physical properties of the rubber brown viton compound. The seals met specifications and passed the standard ASTM tests. Garlock did not do any functional testing of the samples. Although Garlock would normally do functional testing for a newly configured component with a new compound, Garlock considered these seals to be a standard design configuration not made with a new compound. The seals were not something on which Garlock felt compelled to do functional testing. Garlock had no reason to suspect Mao Shuns brown viton seals contained abrasives.

Mao Shun manufactured the new step case seals with its brown viton compound molded around a steel insert. The raw viton material used by Mao Shun for these seals was provided to Mao Shun by a Taiwanese distributor for DuPont. Mao Shun then combined the viton with several fillers, pigment, processing agents and livening agents to make the compound material for the seals according to its own formula. The pigment was a red oxidized iron powder supplied by a distributor for Bayer Corporation, a reputable supplier of pigment. Mao Shun ordered Bayers grade 225 iron oxide. In 1998 Mao Shuns purchasing specifications for the pigment did not include anything regarding particle size. Mao Shun did not test for particle size or sift the pigment. However, Bayer provided an inspection report and certification of its materials to Mao Shun, which Mao Shun verified by standard testing.

In the fall of 1998 Garlock placed orders for the Mao Shun brown viton step case oil seals with Sunrise Trading. Depending on the delivery time requirements, Mao Shun either shipped the manufactured brown viton oil seals to Sunrise Trading by sea, or air freighted them directly to Garlock. Oil seals were shipped throughout the fall, but the bulk of the seals appear to have been shipped in December 1998 and later. Garlock supplied the Mao Shun oil seals to Rockwell.

In late 1997 Rockwell started using a brown viton oil seal manufactured by Mao Shun for one model of gear reducer that was having the most significant leak rate with the nitrile oil seals. Subsequently, Rockwell incorporated the brown viton seals into other models of its gear reducers. Rockwell sold its gear reducers with the brown viton oil seals to at least seven or eight original equipment manufacturers (OEMs) who incorporated them into conveyance systems for large distribution centers operated by, for example, Anheuser-Busch, Coke, Pepsi, and Wal-Mart. Also, if a Rockwell customer had a leaking nitrile seal, Rockwell replaced those seals with a brown viton seal. Garlock was Rockwells sole supplier of brown viton seals.

Vici Bushey, Rockwells warranty administrator, began noticing a trend of claims for gear reducers with brown viton seals that were leaking oil in late 1997 or early 1998. Rockwell referred the problem to its engineers and quality control people. Eventually, Rockwell experienced almost a 30 percent leak rate for the brown viton sealed units. This was considered a catastrophic leakage rate. Rockwell lost customers. When new business was bid, some companies specified Rockwell would not be accepted as a supplier.

William Pizzichil testified it was his principal duty when hired as Rockwells gear engineering manager in November 1998 was to solve the leakage problem. He visited many customer facilities and observed considerable oil leakage on many gear reducers. The gear reducers were brought back to Rockwell facilities where engineers disassembled them for examination. The primary characteristic found was excessive damage or grooving to the rotating shaft in the gearbox. Grooving of the shaft can reduce the contact between the seal and the shaft resulting in oil leakage, possible oil carbonization, and eventual wear of the seal. If all of the oil in the gearbox is lost, the gearbox will burn up. It was a very unusual failure. Some of the failures were occurring after only 150 hours (about six days) of operation.

Toward the end of 1998 Rockwell brought the problem to the attention of Garlock. Garlock contacted Sunrise Trading in December 1998 into January 1999 regarding the problem. Sunrise Trading immediately referred the matter to Mao Shun and told Garlock to speak directly with Mao Shun.

Working with Garlock, Rockwell engineers looked at the temperature and kind of media the seals were being exposed to, the speed of the shafts, the frictional heat and adequacy of the lubrication. Eventually a test was designed where a gear reducer with a brown viton seal was run completely submerged in oil to eliminate any question of inadequate lubrication. After several days of running, there were grooves in the hardened steel shaft of the gearbox. The engineers concluded the problem was in the brown viton seal. In his 39 years of experience in the gear manufacturing industry Rockwells manager Pizzichil had never before seen this type of problem. Garlock engineers were totally surprised this could happen. An analytical study of the seal material was determined to be necessary.

Garlock took samples of Mao Shuns brown viton, the brown viton oil seals, and samples of green and black viton to McCrone Associates, Inc. for scanning electron microscopy and X-ray diffraction analysis. The laboratory analysis found the only material present in any of the samples that could cause the damaged steel shafts was large iron oxide particles with smooth faces and sharp edges found in Mao Shuns brown viton sample and seals. The material was determined to be magnetite, a very hard and potentially abrasive substance. A test of magnetite by Garlock showed it scratched glass. The presence of particles of abrasive magnetite at the lip edge of the oil seal would account for the grooving of the steel shaft in the gear reducer. The presence of abrasive material resulted in defective seals. Garlocks expert, Leslie Horve, stated one of the purposes of oil seals is to prevent premature oil leakage and when a seal experiences premature leakage it has not performed its intended purpose and has failed.

Horve testified if Mao Shun had run a dispersion test on its batches of brown viton, Mao Shun may have been able to identify the problem particles in the compound. Mao Shun did not run dispersion tests on its compound in 1998 and 1999.

Garlock questioned Mao Shun as to whether the problem could be a bad batch of brown viton. When Garlock did not get information from Mao Shun that it was a bad batch, Garlock believed the only safe conclusion was that all of the brown viton seals were bad.

Mao Shun contended it followed strict quality control procedures for its processing of the brown viton. It had used the same manufacturing process and quality control procedures for its brown viton since 1997. None of its other customers had reported problems with the brown viton.^[4] An engineering expert for Mao Shun, Stephen Andrew, testified iron oxide pigment would be made from iron mixed with nitrobenzene to get magnetite, which would then be heated to form hematite for the correct brown color. In the process, some magnetite would naturally be left in the pigment.

Garlocks tests comparing Mao Shuns brown viton to materials made with Garlocks iron oxide pigment, however, showed Mao Shuns brown viton was more abrasive than Garlocks material. A chemical laboratory report found Mao Shuns iron oxide to be coarser than the iron oxide purchased from Garlocks own supplier.

While these investigations were going on, Rockwell continued to use Garlocks (Mao Shuns) brown viton seals in their gear reducers because there was no other available material for the seals at that time and Rockwell still needed to meet its customers needs. In the spring of 1999 Garlock requested Mao Shun to manufacture the step case radial lip-type oil seals using green viton Garlock supplied. Rockwell got the green viton seals from Garlock in April 1999 and proceeded to replace thousands of gear reducer units and all brown viton seals with green viton seals. The leakage rate immediately went down to one or two percent and there was no shaft grooving.

In January 2000 Vincent Tsai, the Mao Shun salesman responsible for selling to Sunrise Trading, sent an e-mail to Drago at Garlock stating that after long testing and discussion, Mao Shun confirmed that its brown viton was more abrasive to shafts than Garlocks material. According to Tsai, all of Mao Shuns engineers agreed with Garlocks testing results. Scotch Hang, an engineer with Mao Shun, denied telling Tsai he agreed with Garlocks testing results. Tsai did not discuss his e-mail with Hang or his supervisor before sending it to Garlock.

On August 31, 2001, Rockwell filed a lawsuit against Garlock in the federal district court for South Carolina seeking damages for Garlocks breach of express warranty, breach of implied warranty of merchantability, breach of implied warranty of fitness for a particular purpose, and contractual indemnification. Garlock filed a third party complaint in the action against Mao Shun, but dismissed it without prejudice when personal jurisdiction over Mao Shun could not be established in South Carolina. Garlock decided to settle the Rockwell case after document discovery, depositions and the exchange of expert reports were completed. Garlock concluded Rockwell would win its case if it went to trial, exposing Garlock to potential damages in excess of $5 million. Under the terms of the settlement agreement, Garlock paid Rockwell $2.2 million in cash, gave Rockwell $150,000 in product refunds and discounts and extended further product discounts of up to $530,000, for a total settlement value of $2.88 million.

TO BE CONTINUED AS PART II..

Publication Courtesy of California free legal resources.

Analysis and review provided by Spring Valley Property line attorney.

^[1]A gear reducer is a mechanical device that speeds up or reduces the speed of a rotating shaft, at the same time increasing or reducing the torque of a rotating shaft. Gear reducers usually contain oil because it is a necessary lubricant for the gear teeth and for the bearings. Oil seals are usually installed on the input and output shafts of the gear reducers to make sure that the oil is contained and that external contaminants do not enter the gearbox. A radial lip-type oil seal is an oil seal with a rubber lip that rides on the continually rotating hardened steel shaft to contain the oil and grease.

^[2]The nitrile oil seal problems were not at issue in this litigation.

^[3]Sometime in the second quarter of 1998 Garlock had notice that Rockwell was reporting leaks with the brown viton seals it was already using in some existing configurations. Garlock did not consider the problem chronic or widespread, probably because of the very small numbers of seals involved.

^[4]James Drago testified, however, he knew one other customer of Mao Shun, Curtis Machine, who was having problems with Mao Shuns brown viton. Darin Thibideau, Sunrise Tradings manager of sales and marketing, testified he was told by Garlock that it had received a seal from a company called Transcom with similar score markings suggesting the problem was bigger than just Rockwell.