In the recent appellate decision of Sonic Mfg. Tech. v. AAE Systems, California Court of Appeal 2011, the role of a Contract Manufacturing Expert Witness was pivotal in resolving a complex dispute over payment obligations and industry practices in contract manufacturing.
Background and Facts
Sonic Manufacturing Technologies, Inc. (“Sonic”) and AAE Systems, Inc. (“AAE”) entered into a series of purchase orders for the manufacture and delivery of electronic components. Sonic, as the contract manufacturer, was responsible for procuring necessary parts and assembling products according to AAE’s specifications. The dispute arose when AAE delayed payment for materials and refused to pay certain invoices, including those for price purchase variance (PPV) and materials Sonic had acquired in anticipation of fulfilling AAE’s orders. Sonic placed AAE on a shipping hold after extended delays and sought to recover costs incurred for materials and PPV, arguing that such billing was consistent with industry custom and practice.
Parties
– Plaintiff: Sonic Manufacturing Technologies, Inc., a contract manufacturer specializing in electronic assembly.
– Defendant: AAE Systems, Inc., a company purchasing electronic components from Sonic under a series of purchase orders.
Expert’s Role and Methods
The plaintiff presented testimony from a Contract Manufacturing Expert Witness to establish the standard practices in the contract manufacturing industry regarding billing for materials and PPV. The expert opined that it is customary for contract manufacturers to invoice for materials if there is a delay of more than 60 to 90 days between the issuance of a purchase order and the actual billing for those materials. In this case, Sonic experienced a seven-month delay before billing for materials and an eight-month delay before placing AAE on a credit hold. The expert further testified that Sonic’s invoices reflected only the actual costs incurred for materials and PPV, and that Sonic was willing to provide the finished product with labor billed on a net plus 30 basis, consistent with industry norms.
Court’s Reliability and Daubert Analysis
The trial court carefully considered the reliability of the expert’s testimony, focusing on whether the expert’s opinions were grounded in established industry custom and practice. The court acknowledged that the only expert testimony on the relevant billing practices supported Sonic’s position that billing for materials after significant delay was justified. However, the court scrutinized the contract terms and the nature of the PPV invoice, ultimately finding that the PPV represented a modification of the original contract’s price term rather than a separate obligation. The court rejected Sonic’s argument that the expert’s testimony should override the express contract terms, emphasizing that the contract called for net plus 30 payment and delivery in lots, which did not justify proportional payments for each delivery.
The court’s analysis reflected a rigorous application of reliability standards, ensuring that the expert’s opinions were not only consistent with industry practice but also relevant to the specific contractual obligations at issue. The court distinguished between custom and contract, holding that while expert testimony may illuminate industry norms, it cannot supplant clear contractual language.
Impact of Expert Testimony on Outcome
The expert’s testimony was instrumental in clarifying the industry’s billing practices and supporting Sonic’s claim for reimbursement of material costs. However, the court ultimately ruled that AAE did not breach the contract by failing to pay the PPV invoice within 30 days or the subsequent materials invoices, as the contract did not require separate or additional payments for PPV. The court did find that AAE breached the contract by failing to pay for the First Article, a distinct deliverable under the purchase orders.
The case demonstrates the critical role of a Contract Manufacturing Expert Witness in educating the court on industry standards, while also highlighting the limits of expert testimony when weighed against explicit contractual terms. The expert’s opinions provided essential context but did not override the contract’s express provisions, underscoring the importance of both expert analysis and careful contract drafting in manufacturing disputes.
This decision provides valuable guidance for parties in contract manufacturing litigation, illustrating how expert witness testimony can inform the court’s understanding of industry practice, but must be harmonized with the governing contract to determine liability and damages.