Suit Against TRW Shows Risks of Breaks for Clients : Van Nuys: Electro Rent says the giant firm reneged on oral agreement to buy specialized electronic equipment after leasing.
Why would any company sue one of its biggest customers?
Ask Electro Rent Corp., a Van Nuys company that rents and leases electronic test and measurement devices to companies in the aerospace, electronics and defense industries.
Electro Rent is suing TRW Inc., the diversified, Cleveland-based giant with more than $8 billion in revenue, primarily from its automotive and aerospace interests.
TRW, whose space and electronics group is located in Redondo Beach, has long been an important Electro Rent customer. Since 1980, TRW has contributed about $232 million of revenue to Electro Rent in equipment rentals, leases and sales. Last year, TRW accounted for more than 10% of Electro Rent’s $102 million in revenue. No other customer brought in more to the company.
But now Electro Rent is battling TRW in federal court. Electro Rent alleges TRW has broken its promise to buy about $2 million of leased equipment from Electro Rent when TRW’s leases on the equipment expired. In court documents, TRW denies making the promise and claims Electro Rent has violated a revenue-sharing agreement between the two companies.
As the recession lingers, the Electro Rent case raises issues that could become crucial for many suppliers. For example, when is it dangerous to grant concessions to a key customer that could only become more costly if that client goes elsewhere?
“It is not uncommon for a big customer to expect or demand special treatment, knowing their power with a supplier,” notes Al Osborne, director of UCLA’s Entrepreneurial Studies Center. Now, however, “many large companies are cutting back on the number of their suppliers to save money.”
By suing TRW, Electro Rent apparently figures it has nothing to lose, said Dagmar Halamka, a professor of business law at the University of Southern California.
“It’s pretty clear that something has gone sour. You’re not going to cut off a customer you’ve done business with for years unless you don’t see future revenue there,” Halamka said.
Electro Rent Chairman and Chief Executive Daniel Greenberg, an attorney himself, agreed that Electro Rent is not in the habit of suing its customers when problems arise. “We try to settle things before they get to that point,” he said.
Greenberg declined to comment further on the TRW suit. TRW officials also declined to comment. The suit was filed April 6 in U.S. District Court in Los Angeles.
Electro Rent, which was spun off by Telecor Inc. in 1980, is one of the larger companies in the instrument rental and leasing business and supplies equipment made by the likes of Hewlett Packard, Tektronix and IBM.
Electro Rent has about 440 employees and sales and service centers in most major cities. It is also one of the few public companies in the industry, where rivals include Leaseametric, a unit of General Electric Corp., and U.S. Instrument Rental Inc., an AT & T division.
In its third quarter ending Feb. 28, Electro Rent’s net income inched up to $2.1 million from $2 million a year earlier on a 3% dip in revenue, to $25.1 million from $26 million. The company’s nine-month results were essentially flat, with net income unchanged at $6.5 million on a 2% decline in revenue, to $75.7 million.
Electro Rent’s revenue has gradually declined in recent years because of the slowdown in aerospace and defense spending, despite a marketing shift toward workstations and personal computers.
In its lawsuit against TRW, Electro Rent alleges TRW told Electro Rent in 1984 that TRW needed certain electronic equipment that Electro Rent did not normally carry. Electro Rent said it was hesitant to buy the equipment TRW wanted to lease, fearing its specialized nature would make the equipment hard to re-lease or sell when TRW no longer needed it.
However, Electro Rent relented after TRW offered to buy the equipment from Electro Rent when the leases eventually expired, according to its suit. The agreement, which Electro Rent contends was outside its “master lease” with TRW, was never put in writing, according to the suit.
Between 1984 and 1992, Electro Rent purchased more than 190 pieces of equipment under the arrangement, the suit said. Electro Rent is seeking at least $2.3 million for the cost of the equipment, plus an unspecified amount of damages.
In court documents, TRW denied that there were any oral contracts and made the allegations about Electro Rent not fulfilling their revenue-sharing agreement. Electro Rent has said it withheld those payments because TRW owes Electro Rent money. TRW’s counter claim seeks unspecified damages.
Electro Rent has requested a jury trial. But USC’s Halamka believes the case will be settled out of court.
“There is a lot of stuff going on here on both sides,” she said. “Oral contracts are often binding. It’s only the minority of contracts that have to be in writing. But of course, you have to be able to prove what you’re alleging.
“Both sides have one incentive to settle.” Halamka said. “Because of ponderous federal court procedures, these cases normally take a great deal of time and money to litigate.”
