Dialight is currently engaged in litigation in the United States (Southern District of New York) against its former manufacturing partner, Sanmina Corporation (“Sanmina”) [SANM:US]. This litigation relates to a Manufacturing Services Agreement (“MSA”) entered into with Sanmina, which Dialight terminated in September 2018, effective as of January 2019. Both parties initiated formal legal proceedings against the other in December 2019. Dialight seeks damages of up to $220 million, plus interest and attorneys’ fees. By contrast, Sanmina seeks damages of $8.6 million, plus interest and attorneys’ fees.
Dialight brought its action to seek redress for the fraudulent and wilful misconduct, gross negligence, and contractual breaches of Sanmina.
Specifically, Dialight’s lawsuit now seeks redress for fraudulent inducement and contractual breaches of the MSA, signed in March 2016, in which Dialight outsourced the production of LED fixtures to Sanmina. Dialight alleges that it entered into this agreement on the basis of Sanmina’s material misstatements about its capabilities and expertise at the time, including in respect of its supposed expertise in high-mix/low-volume manufacturing; that Dialight relied upon Sanmina’s statements as its basis for entering into the agreement; and that Sanmina knew that these statements were false at the time they were made.
Dialight intends to demonstrate at trial that Sanmina misrepresented its then-existing capabilities and expertise, including with respect to its stated expertise in complex high-mix/low-volume manufacturing, resulting in significant harm and damages to Dialight, which can be measured by a severe erosion of its market capitalisation value. Dialight also intends to demonstrate that Sanmina breached the MSA by, among other ways, an ongoing failure to meet agreed production targets and consistent issues around product quality.
Dialight intends to rigorously pursue its claims at trial, which if successful, could lead to the payment by Sanmina to Dialight of up to $220m, excluding legal costs.
FAQs
Sanmina Corporation (“Sanmina”) [SANM:US] is a U.S. publicly traded contract manufacturer with headquarters in San Jose, California.
From 2016-2019 Dialight had a MSA with Sanmina to outsource supply chain, manufacturing, testing, assembly, and packaging of highly customizable LED products and components.
Dialight alleges that Sanmina induced Dialight to enter into the MSA by making material misstatements about its then-existing capabilities and expertise, including with respect to its stated expertise in complex high-mix/low-volume manufacturing, which Dialight relied upon.
Dialight further alleges that it has now become clear that these statements were false at the time they were made, and the falsities were peculiarly within Sanmina’s knowledge; and that Dialight expressly relied upon Sanmina’s statements as its basis for entering into the agreement, and Dialight has suffered significant harm as a result.
Dialight’s claims for relief include the following:
Fraudulent inducement
Dialight claims that:
• Sanmina fraudulently induced Dialight to sign the MSA and entrust its manufacturing processes to Sanmina by, among other things, falsely representing that it already possessed the necessary experience and capacity to satisfy the demands of Dialight’s high mix/low volume production model. Sanmina assured Dialight that it was already equipped to handle this complexity and was, in fact, an expert in such processes.
• Although Sanmina intended for Dialight to rely upon these statements regarding existing facts, Sanmina knew they were false at the time they were made. The false information was peculiarly within Sanmina’s control, and Dialight reasonably relied on the false representations made by Sanmina regarding its purportedly then existing expertise and capabilities.
• Sanmina’s fraudulent misrepresentations directly injured Dialight by causing it to entrust the manufacture of its products to a company that lacked the expertise to do the job. As a result, Dialight incurred substantial damages.
Breach of contract
Dialight claims that:
• Dialight performed its own obligations under the MSA. Sanmina, from shortly after performance began in March 2016 until Dialight was forced to issue a written notice terminating the agreement in September 2018, repeatedly failed to perform its obligations under the contract in a wilful manner.
• Sanmina repeatedly and wantonly ignored Dialight’s concerns. In doing so, Sanmina interfered with Dialight’s ability to manage its customer relationships and Sanmina regularly failed to meet even the unreasonably protracted lead times its systems committed them to. In some instances, delivery dates were pushed back (or “decommitted”) in excess of 10 times.
• Sanmina acted in bad faith by, among many other things, declining to bring its processes and protocols up to reasonable standards, running up Dialight’s bill for sub-component inventory rendered unusable solely by Sanmina’s ineffective production process, and otherwise acting with galling indifference to Dialight’s needs.
• Sanmina failed to deliver products free from workmanship defects (as evidenced, for example, by the epidemic defect of improperly crimped lanyards), and falsely claimed it had complied with Dialight’s specifications when Dialight’s own testing renders this claim demonstrably false.
• Despite assuming manufacturing responsibility for Dialight, and despite knowing that Dialight was depending on Sanmina to fill its customers’ orders, Sanmina took no effective steps to improve its performance or to mitigate the consequences of its deficient performance. Instead, Sanmina oscillated between ignoring and denying the problem and failed to cure the harm caused to Dialight when notified of potential rectifications by Dialight’s expert engineers.
• Sanmina knew that Dialight products are used and installed in high-risk industrial facilities and other hazardous environments, that Dialight products are, in substantial part, used for the safety and wellbeing of workers and members of the public who come into contact with such facilities and environments, and that the products it was manufacturing for Dialight would be deployed in such environments.
o Sanmina further knew that industrial LED products such as Dialight’s have the capacity to cause considerable harm to people, property, and the economic operations of industrial end-users if such products were to malfunction.
o Sanmina’s reckless indifference toward the safety of those who rely on Dialight’s products, as demonstrated through the epidemic defect in safety lanyards and through various other instances of defective or inoperable product as described above, is apparent.
• Sanmina plainly lacked all concern for Dialight’s rights under the MSA.
Sanmina has brought a claim against Dialight, also filed in December 2019, seeking redress for excess and obsolete (“E&O”) liabilities and accounts receivable. Sanmina alleges that under the terms of the MSA, Dialight owes Sanmina for unpaid invoices and unconsumed materials.
Dialight is confident of defending its position in relation to the disputed elements of these claims.
This is asymmetric litigation in which the financial risk to Sanmina from an adverse judgment is materially greater than the risk for Dialight. If Dialight’s claims are successful at trial, the range of outcomes could include the payment by Sanmina to Dialight of between $0 and c. $220m USD (excluding legal costs and judicial interest). If Sanmina’s claim is successful at trial the range of outcomes could include the payment by Dialight to Sanmina of between $0m and $8.6m USD (excluding legal costs and judicial interest).
Dialight initiated formal legal proceedings on 20 December 2019.
The parties completed a process of filing motions and briefs challenging certain evidence and witnesses on 28th April 2024.
The trial is scheduled for 15 July – 26 July 2024.
After both parties issued formal legal proceedings in December 2019 and a period of unsuccessful mediation, Sanmina lodged a motion for summary judgment to dismiss elements of Dialight’s claims.
The Court denied Sanmina’s motion for summary judgment seeking to dismiss Dialight’s fraudulent inducement claim and seeking judgment in Samina’s favour on its accounts receivable claim. The Court granted Sanmina’s motion on summary judgment to dismiss Dialight’s separate wilful misconduct claim on the basis that no duty was owed independent of the contract.
In March 2023, Sanmina subsequently filed a motion of reconsideration seeking the reversal of the judge’s denial of summary adjudication of Sanmina’s $5.3m accounts receivable claim. The court denied this motion.
Both Sanmina’s accounts receivable and E&O claims and Dialight’s fraudulent inducement and breach of contract claims are now set to proceed to trial.
The sheer weight of the evidence to demonstrate Sanmina’s misconduct makes Dialight confident of pursuing this claim to a successful conclusion at trial. This evidence includes Sanmina’s own contemporaneous emails produced in discovery, hidden from Dialight at the time.