Mor-Cor Packaging Products, Inc. v. Innovative Packaging Corp. , 328 F.3d 331 ( 2003 )

In the
United States Court of Appeals
For the Seventh Circuit
____________
Nos. 02-1541, 02-2156
MOR-COR PACKAGING PRODUCTS, INC.,
Plaintiff-Counterdefendant-
Appellee/Cross-Appellant,
v.
INNOVATIVE PACKAGING CORP.,
Defendant-Counterplaintiff-
Appellant/Cross-Appellee,
v.
MARTIN FIELD,
Counterdefendant-Appellee/
Cross-Appellant.
____________
Appeals from the United States District Court
for the Northern District of Illinois, Eastern Division.
No. 99 C 3855—Wayne R. Andersen, Judge.
____________
ARGUED FEBRUARY 25, 2003—DECIDED MAY 1, 2003
____________
Before POSNER, COFFEY, and WILLIAMS, Circuit Judges.
POSNER, Circuit Judge. The defendant in this diversity suit
for breach of contract, IPC, appeals from a judgment in
favor of the plaintiff, Mor-Cor, for some $300,000, rendered
2 Nos. 02-1541, 02-2156
after a bench trial. IPC had counterclaimed, charging that
not it but Mor-Cor had broken the contract but naming
Martin Field as an additional counterdefendant on the
theory that Mor-Cor is Field’s alter ego—which it is. The
counterclaim was essentially the mirror image of the
complaint, and so in ruling for the plaintiff the judge
dismissed the counterclaim.
Mor-Cor cross-appeals from the judge’s declining to
award sanctions for IPC’s refusal, which Mor-Cor contends
was unjustified, to admit a fact. We take that up later and
begin with IPC’s appeal. Wisconsin law governs, but we
have had difficulty finding pertinent Wisconsin cases.
IPC manufactures corrugated sheets used to make boxes.
It appointed Mor-Cor (that is, Martin Field, and from here
on we shall treat him rather than his company as the
contracting party) to be IPC’s exclusive agent for the sale
of its corrugated sheets to a number of small box com-
panies in the greater Chicago area listed in an attachment
to the contract. The contract imposed the usual obligations
on sales agent Field, such as that he use his best efforts to
sell IPC’s product, an obligation anyway implicit in an
exclusive dealing contract. E.g., Wood v. Duff-Gordon, 118
N.E. 214 (N.Y. 1917) (Cardozo, J.); Market Street Associates
Limited Partnership v. Frey, 941 F.3d 588, 596 (7th Cir. 1991).
The contract authorized termination “by a party if the
other party fails to perform any of its obligation[s] herein
and such failure is not remedied by the other party within
thirty (30) days of the other party’s receipt of a written
notice describing such failure.” There are other grounds
for termination in the contract that do not require giving
the defaulting party an opportunity for cure, such as Field’s
committing fraud or becoming incapacitated, but none
of them is applicable to this case.
Although the contract was for three years, it was by its
terms renewable indefinitely, and IPC argues that this made
Nos. 02-1541, 02-2156 3
it terminable at will. What is true is that if a contract does
not specify a term or any grounds for termination, a court
may interpret it to be terminable at will rather than as
subjecting each party to perpetual durance at the option of
the other. Irola & CIA, S.A. v. Kimberly-Clark Corp., No. 01-
16203, 2003 WL 1643612, at *3-5 (11th Cir. Mar. 31, 2003);
Nicholas Laboratories Ltd. v. Almay, Inc., 900 F.2d 19, 21-22 (2d
Cir. 1990) (per curiam); cf. Ferraro v. Koelsch, 368 N.W.2d 666,
671-74 (Wis. 1985). Grounds for termination were specified
in this contract; and even if they had not been, when the
duration of a contract is indefinite only by virtue of a right
of unlimited renewal a party cannot terminate the contract
without cause before the expiration of the initial term.
Armstrong Business Services, Inc. v. H & R Block, 96 S.W.3d
867, 877 (Mo. App. 2002); Preferred Physicians Mutual
Management Group, Inc. v. Preferred Physicians Mutual Risk
Retention Group, Inc., 961 S.W.2d 100 (Mo. App. 1998); A.G.
Nikas v. W.F. Hindley Beverage Distributors, Inc., 108 S.E.2d
98, 101-02 (Ga. App. 1959).
The contract went into effect in 1997. Two years later
Field became interested in acquiring a local box maker
named Jet Age Container. Jet Age was not a customer of
IPC but it was a competitor of most of IPC’s Chicago-area
customers. By the end of June 1999, Field had an agree-
ment in principle to acquire Jet Age, and while he in-
tended the acquisition to provide an income for his two
sons and intended to retain only a 1 percent interest in
the business, he had the acquiring corporation that he
created make him manager for life with complete author-
ity over all aspects of the business. The following month
he offered the position of plant manager of Jet Age to
an employee of one of IPC’s Chicago-area customers for
which Field was IPC’s exclusive sales agent.
Field had not told IPC about his designs on Jet Age, but
the irate owner of the box company to whose employee
4 Nos. 02-1541, 02-2156
Field had offered the job of plant manager phoned the
president of IPC to complain. The owner was angry not
only about losing his employee but also about having to
compete with his supplier. Jet Age was a competitor of
his; Field as IPC’s exclusive sales agent was his supplier;
and Jet Age and Field were, for all practical purposes, one
and the same—or rather would be when and if Field’s
purchase of Jet Age was consummated.
It was consummated in September but by then Field was
no longer IPC’s agent. IPC had terminated him the previous
month, immediately upon learning from the box company
of Field’s plans to buy Jet Age, without giving him an
opportunity to cure; and this suit followed.
The contract as we said required Field to use his best
efforts to sell IPC’s corrugated sheets, and the central
question in the case is whether he could fulfill this obliga-
tion at the same time that he was managing a company that
competed with his customers. The parties treat this as a
question of fact, Potti v. Duramed Pharmaceuticals, Inc., 938
F.2d 641, 645 (6th Cir. 1991); Davidson & Jones Development
Co. v. Elmore Development Co., 921 F.2d 1343, 1350-51 (6th
Cir. 1991); cf. In re Abbott Laboratories Derivative Shareholders,
No. 01-1952, 2003 WL 1572015, at *12 (7th Cir. Mar. 28,
2003), involving as it does the application of a standard,
“best efforts,” to the particular circumstances of the case,
American Federal Group, Ltd. v. Rothenberg, 136 F.3d 897, 905-
06 (2d Cir. 1998); Polyglycoat Corp. v. C.P.C. Distributors, Inc.,
534 F. Supp. 200, 203 (S.D.N.Y. 1982), rather than as a
question that might be answerable by referring to a rule
on conflicts of interest. Ordinarily the trial judge’s answer
to a question of fact would come to us fortified by the
clearly-erroneous rule. But the district judge’s method of
deciding the case disentitles his ruling to the usual defer-
ence.
Nos. 02-1541, 02-2156 5
At the conclusion of the bench trial, he convened the
lawyers and told them that “we are here to announce or
discuss or hear, maybe, some additional argument with
respect to the decision of the Court.” What followed was
a colloquy occupying almost 75 pages of transcript in
which the lawyers and the judge exchanged their impres-
sions of the various issues. On whether Field’s proposed
acquisition of Jet Age had violated the best-efforts clause,
the judge said two things: (1) “I am not convinced that the
parties would have had a productive relationship beyond
the three-year term [of the contract]. It had already begun
to deteriorate and the plaintiff had already begun to
hedge his bets by initiating discussions to acquire a com-
pany which was going to take substantial amount of effort
on his part, even if it wouldn’t have eaten up all his efforts.
We will never know if it would have undermined his
salesmanship so much that he wouldn’t have sold anything.
But I think that your [Field’s]—your son and son-in-law
probably would have required enough oversight at the
beginning so that your sales [for IPC] wouldn’t have been
at the level that IPC demanded it. But, once again, this is
a we will never know.” (2) “[B]y terminating the agreement
immediately, IPC, I think, undermined the 30-day [cure]
period in a way that could well have been meaningful.
[Field] might not have gone through with the deal with
Jet Age or they might have tailored Jet Age’s business or
purchases by Jet Age in such a way that IPC would have
found it satisfactory. We will never know. So I think it was
improper for IPC to terminate the agreement instantly
based on the belief, reasonable though it was, that Mr.
Field was going to acquire and operate a competitor of—of
some of IPC’s customers.”
The judge asked the parties to agree on a set of findings
of fact and conclusions of law that would reflect the collo-
quy from which we have been quoting. They did so. But
6 Nos. 02-1541, 02-2156
so far as the proposed acquisition of Jet Age was concerned,
the findings of fact stated only that IPC had failed to give
Field an opportunity to cure, while the conclusions of law
stated that the court “does not conclude based upon the
evidence presented that Mr. Field’s proposed acquisition
of Jet-Age [sic] constituted a breach.” The judge adopted the
findings and conclusions.
All that is clear from this confusing mélange is that the
judge thought that IPC had violated the cure provision.
Whether or not he was correct about that, a more important
question, the answer to which we cannot dig out of the
district judge’s oral statements or terse written decision, is
whether Field’s proposed acquisition of Jet Age was a
breach of his contract with IPC, because if it was, then
Field has failed to prove substantial damages and almost
certainly was overcompensated. (IPC’s appeal does not
challenge the computation of damages as such, but this
is provided that we affirm the district judge’s ruling on
liability.) There is no evidence either that Field would have
abandoned the acquisition in order to cure such a breach,
or, as the district judge conjectured, that there were any
conditions on the acquisition that Field would have ac-
cepted that would have enabled him to acquire and man-
age Jet Age yet continue to comply with the best-efforts
clause in his contract with IPC. So far as appears, then, had
IPC given Field 30 days to cure, the consequence would
have been that when the 30 days were up the contract
with IPC would have lawfully terminated; and in that
event Field’s only damages would have been whatever
loss he sustained during the 30 days after he was termi-
nated. There were 17 months left of the initial three-year
term of the contract, and the bulk of the damages award
to Field—some $277,000—represented an estimate of his
lost profits for that period. (He did not seek damages
based on the hypothesis that he would have exercised his
Nos. 02-1541, 02-2156 7
right to renew the contract at the end of that period.) If
he was deprived of just one month’s profits by IPC’s
breach, the award for lost profits would plummet to $16,000.
The conclusion in the judge’s written decision that the
proposed acquisition of Jet Age had not been proved to
be a breach of contract on Field’s part is at war with the
language that we quoted earlier from part (1) of the
judge’s oral remarks. And it is not as if the conclusion
were well supported by the evidence. While it is true that
large suppliers of corrugated sheets, such as Stone Con-
tainer, are also integrated forward into the manufacture
of boxes from the sheets, so that they both supply and
compete with other box companies, it does not follow that
the pygmy local box companies on Field’s customer list
would be comfortable buying from a local competitor.
Stone is unlikely to jeopardize a substantial business of
selling corrugated sheets by using its integrated position to
squeeze its competitor-customers, but Mr. Field for all one
knows would use information that he obtains from his
customers to compete more effectively against them with
his newly acquired box company. If this is what the cus-
tomers believe, he will be unable to use his best efforts to
sell IPC’s product; try as he might, his customers will tend
to shun him. So at least IPC might reasonably believe
and, so believing, legitimately declare him in violation of
his best-efforts obligation. Remember that the contract is
an exclusive one, so that IPC cannot bypass Field and
appoint another agent to take up the slack while Field
builds his box company at IPC’s expense. Its exclusive
feature is amplified by Field’s right of indefinite renewal.
A further complication not helpful to Field is that the
contract provides that customers will be dropped from his
list who fail to buy at least 10 percent of their corrugated-
sheet requirements from IPC. Field cannot determine the
percentage they buy unless they are forthcoming with him.
8 Nos. 02-1541, 02-2156
They may well clam up once they realize that a competitor
is inquiring about their purchasing decisions regarding a
key input into their product. The mode of compensating
Field suggests that IPC and he did not contemplate that he
would be going into competition with his customers.
Field points us to cases that hold, sensibly enough, that
merely planning to engage in a transaction that if con-
summated would create a conflict of interest justifying
termination is not itself a breach of contract. E.g., Southwest
Forest Industries, Inc. v. Sharfstein, 482 F.2d 915, 927-28
(7th Cir. 1972); Midwest Janitorial Supply Corp. v. Greenwood,
629 N.W.2d 371, 375 (Iowa 2001); Jet Courier Service, Inc.
v. Mulei, 771 P.2d 486, 493 (Colo. 1989); see also Restate-
ment (Second) of Agency § 393 comment e (1958). A person
contemplating the lawful termination of an existing con-
tractual relationship should be permitted to make future
plans in order to smooth his transition from the exist-
ing relationship to a new one. But as the cases just cited
(and the Restatement) make clear, Field forfeited this safe
harbor by soliciting the plant manager of one of his princi-
pal’s customers, thereby harming the principal, which
confidential planning would not have done.
We are not, however, in a position to resolve definitively
the question whether the proposed acquisition of Jet Age
was incompatible with Field’s duty of using his best efforts
to sell IPC’s product. The evidence is in dispute, and the
district judge’s opinion, as we have noted, is both inter-
nally inconsistent and inconsistent with his oral findings.
Further proceedings will be necessary in the district court.
We turn last to the cross-appeal. In July 1999, the month
before firing Field, IPC sent him a letter notifying him that
he was in breach of various provisions of the contract
and announcing that he would be terminated for those
Nos. 02-1541, 02-2156 9
breaches. There was no mention of the proposed acquisition
of Jet Age; although it was in the works, IPC had not yet
learned about it. In pretrial discovery, Field asked IPC to
admit that it didn’t consider the breaches listed in the
July letter to be material breaches, that is, actual grounds
for IPC’s terminating him. IPC refused to admit this. Yet
at trial its president testified that actually he would not
have terminated Field had it not been for the later-dis-
covered proposed acquisition of Jet Age; the July letter,
he said, was intended merely as a “wake up” call to Field.
Field argues that the president’s testimony shows that
the refusal to admit that the breaches listed in the July letter
had not been material was sanctionable. Fed. R. Civ. P.
37(c)(2). It does not show that. There is a difference between
believing that your contract partner has committed a
material breach and wanting to terminate your contract
with him because of it. Many, we suspect most, material
breaches are forgiven, either in the hope that they will be
cured or because self-help (as through termination) or legal
remedies would cost the victim of the breach more than
they were worth.
Circuit Rule 36 shall apply on remand.
AFFIRMED IN PART, REVERSED IN PART,
AND REMANDED.
A true Copy:
Teste:
_____________________________
Clerk of the United States Court of
Appeals for the Seventh Circuit
USCA-02-C-0072—5-1-03