Northeast Data v. McDonnell Douglas ( 1993 )

March 31, 1993 UNITED STATES COURT OF APPEALS
UNITED STATES COURT OF APPEALS
FOR THE FIRST CIRCUIT
No. 92-1690
NORTHEAST DATA SYSTEMS, INC.
Plaintiff, Appellant,
v.
McDONNELL DOUGLAS COMPUTER SYSTEMS COMPANY,
Defendant, Appellee.
ERRATA SHEET
Please make the following correction in the opinion in the
above case released on March 2, 1993:
Page 5, line 10: After the word "claims" at the end of the
sentence, add the following language:
See Caton v. Leach Corp., 896 F.2d 939, 943 (5th Cir.
1990) (breach of implied covenant claims are breach of
contract claims); Restatement (Second) of Contracts
176 comment e (1981).
March 2, 1993
UNITED STATES COURT OF APPEALS
FOR THE FIRST CIRCUIT
No. 92-1690
NORTHEAST DATA SYSTEMS, INC.,
Plaintiff, Appellant,
v.
McDONNELL DOUGLAS COMPUTER SYSTEMS COMPANY,
Defendant, Appellee.
APPEAL FROM THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF MASSACHUSETTS
[Hon. Robert B. Collings, U.S. Magistrate Judge]
Before
Breyer, Chief Judge,
Cyr and Boudin, Circuit Judges.
Roger S. Davis with whom Nancy Pitnof-Mahoney and Davis, Rubin &
Parker, P.A., were on brief for appellant.
Frederick W. Rose with whom Gianfranco A. Pietrafesa, and Young,
Rose, Imbriaco & Burke, P.C. were on brief for appellee.
March 2, 1993
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BREYER, Chief Judge. In February 1976, Northeast
Data, a Massachusetts firm, entered into a contract with
Microdata, a California company. In the contract, Microdata
promised Northeast, among other things, that:
1) Northeast would become the "sole distributor"
for Microdata's "Reality" line of computer
parts and related software in seven
Massachusetts counties;
2) Microdata would properly service "Reality"
products after Northeast Data sold them to
end users;
3) Microdata would supply proper spare parts;
and
4) Microdata would pay Northeast a 10%
commission on any "Reality" products that
Microdata sold directly to end users in
Northeast's territory.
The parties' relationship subsequently deteriorated. And,
in January 1983, Microdata, claiming that Northeast had
failed to meet its contractual purchasing quota, terminated
the distributorship.
Northeast then brought this diversity action
(filed in state court then removed to federal court) against
Microdata. In its original complaint Northeast essentially
said that Microdata had broken its agreement (1) by failing
to supply enough, or adequately trained, servicing
personnel; (2) by failing to supply enough, or adequate,
supply parts; (3) by failing to pay many 10% commissions
when due; (4) by marketing what were essentially "Reality"
products under different names, through other dealers; and
(5) by charging Northeast higher prices than it charged
other dealers. Northeast later amended its complaint to add
a "deceit" claim that Microdata had failed to disclose
material information during contract negotiations, namely
that Microdata was selling Reality products, and would
continue to sell them, to a company called ADP, which
(according to Northeast) was both a "Reality" end user and a
competing dealer. In Northeast's view these actions and
omissions broke both explicit and implicit terms of the
contract, amounted to "fraud," and violated various
statutes, which, with the exception of Massachusetts'
"unfair trade practices" statute, are not relevant here.
See Mass. Gen. L. ch. 93A.
The parties tried the contract and fraud issues to
a jury, with the magistrate reserving the claim of violation
of Chapter 93A. The jury found that Microdata had
wrongfully terminated the distributorship; that it had
broken explicit terms in the contract by failing to pay
commissions on "end user" sales to ADP; and that it had
broken an implicit covenant of "good faith and fair dealing"
(either by failing to pay commissions on other sales, by
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failing to supply proper parts or service, or both). It
awarded Northeast approximately $1.7 million damages. The
jury also found that Microdata had fraudulently induced
Northeast to enter the contract by failing to tell Northeast
about its ADP sales; but the jury refused to award any
damages on that claim.
The magistrate then turned to the reserved Chapter
93A claim. He noted that Northeast and Microdata had
agreed, while the case was pending, to try the contract and
"fraud" claims under California law. He reasoned that the
93A claims so closely resembled the contract and fraud
claims that the parties must have agreed "implicitly" to try
those claims under California law as well. He concluded
that, since California has no 93A-type of law, he must
dismiss Northeast's 93A claims. Northeast now appeals that
dismissal. See 28 U.S.C. 1291, 636(c)(3) (appeal from
order of a magistrate judge).
For purposes of this appeal, we have assumed
(without deciding) that Northeast is correct when it says
that it neither explicitly nor implicitly agreed, during the
course of this litigation, that California law would govern
its 93A claims. Nonetheless, Northeast did agree, in the
contract itself, that
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This Agreement and the rights and
obligations of the parties hereto shall
be governed by and construed in
accordance with the laws of California.
In our view, Northeast's Chapter 93A claims (with one
exception) fall within this contractual choice-of-law
provision.
Northeast describes its Chapter 93A claims and,
most importantly, the alleged facts that underlie them in an
82 page document, filed with the magistrate, called
"Plaintiff's Request for Findings of Fact and Rulings of Law
on Chapter 93A Damages." Our review of the facts alleged in
that document makes clear that (as we said, with one
exception) Northeast's 93A claims amount to embroidered
"breach of contract" claims. See Caton v. Leach., 896 F.2d
939, 943 (5th Cir. 1990) (breach of implied covenant claims
are breach of contract claims); Restatement (Second) of
Contracts 176 comment e (1981). In four instances
Northeast simply says that Microdata "knowingly" or
"willfully" broke the contract by (1) failing "to provide"
proper "field service and support;" (2) failing to deliver
goods when and as promised; (3) selling goods outside the
"sole distributorship" without paying commissions; and (4)
wrongfully terminating the contract. In three other
instances Northeast says that Microdata threatened to take
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actions that the contract forbids, with a bad motive, namely
to force Northeast to give up certain contract rights, such
as its exclusive Reality distributorship. Those badly
motivated threats (as far as the document reveals) threaten
actions that Microdata might legally have taken had there
been no contract, for they consist of claims that Microdata
threatened (1) to deny Northeast the right to sell certain
"Reality" products (such as a product called "Sequel");
(2) to sell a competing product (called "CMC") in
Northeast's exclusive territory; and (3) (in unspecified
ways) to stop Northeast from meeting its contract-imposed
buying quota.
Of course, the allegations that Microdata acted
"willfully" or "knowingly" or with a bad motive add
something to the pure breach of contract claims. Indeed,
Northeast hopes they provide the element of "rascality"
needed to bring a claim of breach of contract within the
statute. Compare Pepsi-Cola Metropolitan Bottling Co., Inc.
v. Checkers, Inc., 754 F.2d 10, 18 (1st Cir. 1985) (simple
breach of contract does not violate Chapter 93A) with Wang
Laboratories, Inc. v. Business Incentives Inc., 501 N.E.2d
1163 (Mass. 1986) (bad faith contract termination states a
Chapter 93A claim) and Levings v. Forbes & Wallace, Inc.,
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396 N.E.2d 149 (Mass. 1979) (93A violations must involve
"rascality"). But, the relevant question here is whether
those additional "state of mind" or "bad motive" allegations
(together with other, less significant bits of embroidery)
take these claims outside the scope of contractual language
that says California law will govern "the rights and
obligations of the parties" in respect to the "Agreement."
We find that they do not.
The contract violations are essential elements of
the 93A claims. The "state of mind" and "bad motive"
allegations add little. Given the language of the
contract's choice-of-law provision (applying California law
to "rights and obligations" arising out of, or imposed by,
the "Agreement"), would it not seem surprising to find that
Massachusetts law, not California law, governed these
claims? In the absence of any contrary evidence, we believe
that, when parties agree that "contract related" claims will
be tried under, say, the law of California, they do not mean
that a claim of "serious" or "rascal-like" breach of
contract will be tried under the law of Massachusetts.
Moreover, the Massachusetts Supreme Judicial Court
has recognized that, under some circumstances, a Chapter 93A
claim "is essentially duplicative of a traditional contract
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claim." See Canal Electric Co. v. Westinghouse Electric
Corp., 548 N.E.2d 182, 187 (Mass. 1990). That court has
permitted plaintiffs to obtain separate Chapter 93A
attorneys' fees in such circumstances, but it has denied
plaintiffs "double recovery" on both a breach of contract
claim and a 93A claim arising from the same breach. See
Linthicum v. Archambault, 389 N.E.2d 482 (Mass. 1979).
These Massachusetts decisions support our natural reading of
the scope of the contract's choice-of-law provision, for
they acknowledge that, depending on the facts, a Chapter 93A
claim may essentially reduce to a contract claim. One
federal district court has reached the same conclusion we
reach with respect to a similar contract clause. See Scheck
v. Burger King Corp., 756 F.Supp. 543, 545-46 (S.D. Fla.
1991) (clause which says franchise agreement "shall be
governed and construed under and in accordance with the laws
of the State of Florida" applies to bar Massachusetts 93A
claims which incorporate contract claims and would not exist
without the agreement).
We have found one district court case in Illinois
that reaches a different result. Fleet Mgt. Servs., Inc. v.
Archer-Daniels-Midland Co., Inc., 627 F.Supp. 550 (C.D. Ill.
1986). That district court reasoned that any violation of
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Chapter 93A is a "tort" and therefore no alleged Chapter 93A
violation could fall within the scope of a contractual
choice-of-law provision that talks about "contracts." Id.
at 561-62. This reasoning, however, seems to exalt pleading
form over fact-related substance. Such reasoning would
undermine the parties' choice of law agreement by permitting
one of them, through artful pleading, to bring what is
little more than a breach of contract claim, under law that
both parties have agreed would not apply.
The Illinois case relied upon a Massachusetts
district court case, Computer Systems Engineering, Inc. v.
Qantel Corp., 571 F.Supp. 1365 (D.Mass. 1983), a case very
different from the present one. Qantel concerned a 93A
claim that was not, in essence, a breach of contract claim,
for the plaintiff there did not claim that the defendant
broke a contract, but rather that the defendant fraudulently
induced the plaintiff to form the contract in the first
place. See id. at 1367 (Chapter 93A claim partially based
on fraudulent inducement); see also id. at 1370 (because
tort-like claims predominate over contract-like claims in
compound 93A claim, 93A claim is outside parties'
agreement); cf. Popkin v. National Benefit Life Insurance
Co., 711 F.Supp. 1194, 1201-02 (S.D.N.Y. 1989) (Chapter 93A
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tort claim alleging fraudulent misrepresentations to third
party with whom plaintiff had a different contract falls
outside choice-of-law clause in agency agreement between
plaintiff and defendant). Insofar as Qantel contains dicta,
Qantel, 571 F.Supp. at 1371, that might be read to mean that
every Chapter 93A claim must be viewed as a tort claim, no
matter how clearly it resembles a claim of breach of
contract, those dicta do not express our view of
Massachusetts law.
We conclude that the parties, in their choice-of-
law provision, meant that California law would govern both
ordinary and "rascal-like" breach of contract claims. We
believe that the "rascal-like" claims before us fit within
that provision. In the absence of a conflict with public
policy, Massachusetts honors choice-of-law provisions in
contracts, Morris v. Watsco, Inc., 433 N.E.2d 886, 888
(Mass. 1982), and, in this diversity case, so must we.
Borden v. Paul Revere Life Ins. Co., 935 F.2d 370, 375 (1st
Cir. 1991). There is no conflict with Massachusetts public
policy here. The "dispute is essentially a private one,"
which, unlike, say, an antitrust dispute, has no third-party
effects. Cf. Canal Electric, 548 N.E.2d at 187-88
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(corporations may waive protection of 93A by contractual
limitation of liability clause).
We turn now to the one further 93A claim that we
called an "exception." That special claim rests upon
allegations of fraud, not breach of contract. Northeast
says that Microdata, when negotiating the contract, failed
to disclose that it was currently selling Reality systems to
ADP, a firm that does business in Northeast's
distributorship area, and that it intended to continue
selling to ADP even after the contract was in effect.
Northeast says that this course of conduct amounts to a
"fraud" that falls within the scope of Chapter 93A.
Because this claim concerns the validity of the formation of
the contract, it cannot be categorized as one involving the
rights or obligations arising under the contract. Hence,
the claim falls outside the contract's choice-of-law
provision. See Qantel, 571 F.Supp. at 1372. Nonetheless,
Microdata, in its brief, refers us to the docket sheet,
which notes that Northeast agreed, in a settlement, to
stipulate that "none of" Microdata's "actions w[ith]
r[eference] t[o] ADP can form the basis of liability." A
district court memorandum confirms that, as part of the
consent judgment, Northeast "agreed that if the Court of
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Appeals should reverse the judgment dismissing plaintiff's
Chapter 93A claim (Count X of the Second Amended Complaint),
plaintiff will not press as part of that claim any of the
defendant's actions with respect to ADP." The appeal, with
respect to this remaining ADP claim, therefore is moot. See
Pontarelli v. Stone, 978 F.2d 773, 775 (1st Cir. 1992)
(settlement of merits of underlying claims moots appeal).
Finally, we note that Northeast, in its 82 page
document, at one point alleges in a single sentence that
Microdata violated Chapter 93A by "filing and prosecuting
frivolous and meritless counterclaims and affirmative
defenses, without any attempt to introduce any evidence to
support same at the trial of this action." Because
Northeast does not separately press this claim on appeal, we
suspect that it has been abandoned. But, if it has not, we
simply point out that a claim of "abuse of process" with
nothing more does not state a violation of Chapter 93A. See
Quaker State Oil Refining v. Garrity Oil Co., 884 F.2d 1510,
1514 (1st Cir. 1989) and cases cited therein (filing legal
claim which proves baseless not in itself an unfair trade
practice, except where claim brought with ulterior motive).
For these reasons, the magistrate's order
dismissing the Chapter 93A claims is
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Affirmed.
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