Baldwin Piano Inc v. Deutsche Wurlitzer ( 2004 )

In the
United States Court of Appeals
For the Seventh Circuit
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No. 04-1617
BALDWIN PIANO, INC.,
Plaintiff-Appellee,
v.
DEUTSCHE WURLITZER GMBH,
Defendant-Appellant.
____________
Appeal from the United States District Court for the
Northern District of Illinois, Eastern Division.
No. 03 C 2105—James B. Zagel, Judge.
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ARGUED NOVEMBER 8, 2004—DECIDED DECEMBER 16, 2004
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Before BAUER, EASTERBROOK, and KANNE, Circuit Judges.
EASTERBROOK, Circuit Judge. The Wurlitzer Company, a
producer of pianos, organs, jukeboxes, and other musical
equipment throughout the world, was split up in 1985.
Wurlitzer’s direct descendent, and proprietor of its organ
and piano businesses, is Baldwin Piano. One of Wurlitzer’s
former subsidiaries, Deutsche Wurlitzer GmbH, was spun
off to Nelson Group Holdings Pty Ltd., an Australian firm.
Deutsche Wurlitzer makes and sells jukeboxes and associ-
ated products bearing the Wurlitzer name. Multiple entities
2 No. 04-1617
cannot own the same trademark for one field, such as
music. See Forum Corp. v. Forum, Ltd., 903 F.2d 434, 442
(7th Cir. 1990). The mark’s ownership followed the parent
company (and thus found its way to Baldwin Piano). Deutsche
Wurlitzer received a license to use the mark in connection
with jukeboxes and related gear. In 2003 Baldwin Piano
told Deutsche Wurlitzer that the license was cancelled, ef-
fective immediately, and the same day filed this suit under
the Lanham Act, 15 U.S.C. §1114(1)(a), seeking an injunc-
tion against Deutsche Wurlitzer’s use of the Wurlitzer mark
in the United States. Baldwin Piano did not give any reason
for taking these steps. The district court granted summary
judgment to Baldwin Piano, 2004 U.S. Dist. LEXIS 114 (N.D.
Ill. Jan. 5, 2004), and issued an injunction, 2004 U.S. Dist.
LEXIS 2380 (N.D. Ill. Feb. 9, 2004), from which Deutsche
Wurlitzer has appealed.
Deutsche Wurlitzer contends that the 1985 license is
terminable only for cause. It relies on these two paragraphs:
13. Except as herein provided, and as provided in
Article 14 hereof, this Agreement shall continue in
force without limit of period but may be cancelled
by the Licensor for material breach. In the event of
Licensee’s material breach of this Agreement,
Licensor shall notify Licensee of the breach and
Licensee shall have ninety (90) days to cure the
breach or to request arbitration by a single arbi-
trator in accordance with the then current rules of
the American Arbitration Association. If (i) the
decision of the arbitrators is in favor of Licensor or
(ii) the material breach has not been cured within
the ninety (90) day period and Licensee has not re-
quested arbitration, the Agreement shall terminate
upon thirty (30) days notice by Licensor. Licensor
shall be entitled to withdraw any notice of breach
hereunder.
No. 04-1617 3
14. Licensee hereby agrees that (a) if it makes
any assignment of substantially all of its assets or
business to an unaffiliated third party without
Licensor’s consent, which consent shall not be un-
reasonably withheld if the new owner has a demon-
strated ability to meet the financial responsibilities
and quality control provisions required of Licensee
under this Agreement, or for the benefit of credi-
tors, or (b) if a trustee or receiver is appointed to
administer or conduct its business or affairs, or if it
is finally adjudged to be either a voluntary or in-
voluntary bankrupt, then the rights granted herein
shall forthwith cease and terminate upon thirty
(30) days notice by Licensor.
Relying on Jesperson v. Minnesota Mining & Manufacturing
Co., 183 Ill. 2d 290, 700 N.E.2d 1014 (1998), the district
court held this language insufficient to overcome the rule of
Illinois law (which the parties agree controls) that contracts
for an indefinite period may be terminated at will. (The
documents that accomplish the 1985 spinoff do not include
a choice-of-law clause, a puzzling omission in a deal that
restructures a global business; and the parties do not
contend that the Lanham Act governs the duration of trade-
mark licenses.) In response to the argument that treating
the license as ended whenever Baldwin Piano pleases would
render all of this language pointless, the district judge con-
cluded that the provisions in ¶13 for cure and arbitration
still apply if Baldwin Piano contends that there has been a
breach by Deutsche Wurlitzer; then damages and other
remedies would be at issue and would require procedures to
resolve. When the licensor is content to sever the relation
cleanly, however, these provisions are unnecessary. With
respect to ¶14, which Deutsche Wurlitzer insists limits the
circumstances that would allow termination without mate-
rial breach, the district court was silent. Both Baldwin and
the district court treat ¶14 as surplusage.
4 No. 04-1617
Interpreting contracts so that major causes fall out usu-
ally is not a sensible way to understand the parties’ trans-
action. See Mastrobuono v. Shearson Lehman Hutton, Inc.,
514 U.S. 52, 63 (1995); Emergency Medical Care, Inc. v.
Marion Memorial Hospital, 94 F.3d 1059, 1061 (7th Cir. 1996)
(Illinois law). Baldwin Piano’s view makes ¶14 pointless
and leaves one wondering what role the first sentence of
¶13 could serve. Why specify that “[e]xcept as herein pro-
vided” the license continues unless cancelled for “material
breach”, unless such a breach (or an act of default under
¶14) is indispensable to cancellation? A phrase beginning
“except” implies that the following language limits the par-
ties’ options; otherwise it is a waste of ink and paper. See
First Commodity Traders, Inc. v. Heinhold Commodities,
Inc., 766 F.2d 1007, 1012 (7th Cir. 1985); Consolidated
Laboratories, Inc. v. Shandon Scientific Co., 413 F.2d 208,
211-12 (7th Cir. 1969). More than that: the 1985 transaction
as a whole is hard to understand unless Deutsche Wurlitzer
received an enduring rather than evanescent interest in us-
ing the Wurlitzer mark on jukeboxes. The Wurlitzer
Company decided to spin off the Wurlitzer jukebox business;
to get a price reflecting this product line’s going-concern
value (as opposed to the physical value of the subsidiary’s
assets), the seller had to let the buyer use the Wurlitzer
mark.
A sale subject to a provision such as “The Wurlitzer
Company reserves the right to end your use of the trade-
mark, and thus abrogate all going-concern value of this
product line, at any time and for no reason” would not have
been commercially viable, unless Deutsche Wurlitzer’s as-
sets were being sold for scrap value only. The transaction
makes economic sense as the sale of a line of business only
if Nelson Group (the buyer, recall) enjoys protection against
opportunistic behavior by Deutsche Wurlitzer’s former par-
ent. When there is a choice among plausible interpretations,
it is best to choose a reading that makes commercial sense,
No. 04-1617 5
rather than a reading that makes the deal one-sided. “To
interpret a contract or other document, it is not enough to
have a command of the grammar, syntax, and vocabulary of
the language in which the document is written. One must
know something about the practical as well as the purely
verbal context of the language to be interpreted. In the case
of a commercial contract, one must have a general acquain-
tance with commercial practices. This doesn’t mean that
judges should have an M.B.A. or have practiced corporate
or commercial law, but merely that they be alert citizens of
a market-oriented society so that they can recognize
absurdity in a business context.” Beanstalk Group, Inc. v.
AM General Corp., 283 F.3d 856, 860 (7th Cir. 2002). See
also, e.g., Gerow v. Rohm & Haas Co., 308 F.3d 721 (7th
Cir. 2002); Metro East Center for Conditioning and Health
v. Qwest Communications International, Inc., 294 F.3d 924
(7th Cir. 2002); National Tax Institute, Inc. v. Topnotch at
Stowe Resort & Spa, 388 F.3d 15 (1st Cir. 2004).
Businesses are not compelled to make sensible bargains,
but courts should not demolish the economic basis of bar-
gains that would be sound if the contract were given a na-
tural reading. Baldwin Piano acknowledges this principle
but says that Nelson Group would retain some value even
if Baldwin Piano has the unilateral right to pull the rug out
from under the Wurlitzer-brand jukebox business. This is
so, Baldwin Piano contends, because the contract gives
Deutsche Wurlitzer a perpetual, non-terminable right to
use the word “Wurlitzer” in its corporate name. That is not
a valuable right, however, if Deutsche Wurlitzer cannot tell
customers who is selling the products. As if to underline
this flaw in its appellate argument, Baldwin Piano has
asked the district court to hold Deutsche Wurlitzer in con-
tempt for including its corporate name on its own web site
and advertising. After the injunction Deutsche Wurlitzer
rebranded its jukeboxes with labels such as “One More
Time”; it includes its corporate name in its promotions. See
6 No. 04-1617
. To display the
corporate name in connection with jukeboxes, Baldwin
Piano insists, is to use it as a trademark and thus to trans-
gress both the Lanham Act and the injunction—even
though the corporate name is much smaller than the prod-
uct name. See 2004 U.S. Dist. LEXIS 11145 (N.D. Ill. June
15, 2004) (granting Baldwin Piano’s motion for an order
to show cause and suggesting that the only proper use of
the corporate name would be in tiny type placed so that
consumers would be unlikely to see it or recognize who is of-
fering the jukeboxes for sale). So Baldwin Piano effectively
wants Deutsche Wurlitzer to change its corporate name as
a condition of remaining in the jukebox business. On
Baldwin Piano’s view of the 1985 transaction, all Deutsche
Wurlitzer received that it could call its own was the physi-
cal assets, and that would paint Nelson Group as a sucker.
So does Illinois law really compel an unnatural reading of
the contract, the better to strip Nelson Group of the benefit
of its bargain? Jesperson, the centerpiece of Baldwin Piano’s
position, dealt with a distribution agreement that could be
ended for a number of listed reasons. The list was open-
ended, beginning with the statement that the manufacturer
“may, upon not less than thirty (30) days notice to the
Distributor, terminate this agreement for any of the
following reasons”. The Supreme Court of Illinois posed the
question as whether, “where the parties specifically provide
that their contract may be terminated for enumerated
instances of material breach, is the contract indefinite as to
duration and terminable at will, or is it terminable only for
cause?” 183 Ill. 2d at 291-92 (emphasis in original). The
court answered that a non-exclusive list of reasons for
termination makes the term indefinite and permits termi-
nation for other reasons as well. It distinguished decisions
such as Lichnovsky v. Ziebart International Corp., 414 Mich.
228, 324 N.W.2d 732 (1982), as dealing with contracts that
had comprehensive lists of reasons for termination and
No. 04-1617 7
stated that dealers or distributors under such contracts could
not be cut off without cause. The court summed up: “where
the parties have drafted a contract that is otherwise
indefinite in duration and terminable at will, the delinea-
tion of instances of material breach in the context of a
permissive and nonexclusive termination provision will not
alone create a contract terminable for cause.” 183 Ill. 2d at
296.
The structure of the contract between The Wurlitzer
Company and Deutsche Wurlitzer is much closer to the one
discussed in Lichnovsky than it is to the one in Jespersen.
The enumeration in Articles 13 and 14 is exclusive rather
than illustrative. So if we take the language of the state’s
highest court at face value, Deutsche Wurlitzer must pre-
vail. See also Mor-Cor Packaging Products, Inc. v. Innovative
Packaging Corp., 328 F.3d 331, 333 (7th Cir. 2003). Baldwin
Piano says that we should look more closely at the contract
that led to Jespersen—language recited in the opinion of the
state’s intermediate appellate court but not mentioned by
the supreme court. Section 2.05 of that contract provided:
“Unless terminated as hereinafter provided in Article IV,
this Agreement . . . shall continue in force indefinitely”.
Jespersen v. Minnesota Mining & Manufacturing Co., 288
Ill. App. 3d 889, 893, 681 N.E.2d 67, 70 (1st Dist. 1997).
According to Baldwin Piano, this is functionally the same as
the first sentence of Article 13 of the Deutsche Wurlitzer
license, so Jespersen compels us to hold that the license is
terminable at will. Not at all. Section 2.05 of the contract in
Jespersen is best read as a procedural rule, ensuring that
the distributor receives the notice provided in Article IV.
That’s why the Supreme Court of Illinois did not mention
the language, which does not help us understand whether
there were substantive limits on the reasons for termina-
tion. Article 13 of the Deutsche Wurlitzer license, by
contrast, does establish substantive restrictions.
8 No. 04-1617
Quite apart from linguistic differences in the termination
provisions, and reinforcing the conclusion we have expressed,
are fundamental economic differences between the transac-
tions. Jespersen reflects a belief that most businesses don’t
want to be locked into a perpetual relation. “ ‘Forever’ is a
long time and few commercial concerns remain viable for
even a decade. Advances in technology, changes in con-
sumer taste and competition mean that once-profitable
businesses perish regularly. Today’s fashion will tomorrow
or the next day inevitability fall the way of the buggy whip,
the eight-track tape and the leisure suit. Men and women
of commerce know this intuitively and achieve the flexibil-
ity needed to respond to market demands by entering into
agreements terminable at-will.” 183 Ill. 2d at 295. The
presumption of terminability allows separation in the bus-
iness world, unless the parties clearly provide otherwise. It
is the business equivalent of no-fault divorce, with the
possibility of covenant marriage if the parties make the
necessary declarations.
Like other clear-statement rules, the one expressed in
Jespersen depends on context. Allowing the businesses to
part ways is especially important in distribution contracts
and other forms of partial vertical integration, where the
firms must coordinate their conduct over an extended per-
iod to deliver a product. Terminability means that, if the
firms’ goals or methods diverge, either side may get out. It
also means that both sides have a credible threat to walk
away, and this threat may induce the other side to compro-
mise. Because these long-term relations produce continuing
profits for both sides, both have something to lose by taking
the exit option without trying to work out differences first.
See Alan Schwartz, Relational Contracts in the Courts, 21 J.
Legal Studies 271 (1992); Charles J. Goetz & Robert E.
Scott, Principles of Relational Contracts, 67 Va. L. Rev.
1089 (1981); Benjamin Klein, Robert G. Crawford & Armen
E. Alchian, Vertical Integration, Appropriable Rents & the
No. 04-1617 9
Competitive Contracting Process, 21 J.L. & Econ. 297 (1978).
A combination of the need for flexibility in relational con-
tracts and the fact that both sides have an ongoing interest
in accommodating the other makes a presumption of
terminability sensible.
This trademark license differs from a distribution con-
tract. These parties are not locked together in a form of
partial integration by contract—as, for example, when a
distribution partner serves as a substitute for vertical inte-
gration into warehousing and sales. The 1985 contract was
designed to partition the Wurlitzer music empire, giving
Deutsche Wurlitzer a line of business that would henceforth
operate independently of its former parent. Baldwin Piano
and Deutsche Wurlitzer do not need to coordinate their
activities in order to produce or deliver a product; all they
need do is manage their businesses so as not to injure the
other (as, for example, by diluting the trademark’s value by
attaching it to inferior goods). There is no need to facilitate
renegotiation. Nor were the stakes reciprocal, as in distribu-
tion contracts. Baldwin Piano yanked Deutsche Wurlitzer’s
license with no loss to itself, and with a potential for gain if
it then went into the jukebox business or licensed another
firm to use the trademark.
Thus both linguistic and economic contexts favor treating
the 1985 license as perpetual, subject to the provisos in
Articles 13 and 14. Illinois law does not upset the parties’
transaction. The injunction is vacated, and the case is
remanded with instructions to enter judgment in favor of
Deutsche Wurlitzer.
10 No. 04-1617
A true Copy:
Teste:
________________________________
Clerk of the United States Court of
Appeals for the Seventh Circuit
USCA-02-C-0072—12-16-04