Europlast, Limited v. Oak Switch Systems, Incorporated , 10 F.3d 1266 ( 1993 )

MANION, Circuit Judge,

dissenting.

I respectfully dissent. This is the unusual case where the jury’s verdict should be reversed. The facts presented in the district court reveal only that Oak Switch engaged in reasonable business behavior, albeit to EPL’s detriment. The evidence does not support the claims for fraud, breach of contract, or tortious interference with contract.

During most of the time Oak Switch purchased parts from EPL, no one doubted it was a sound company. In fact, so impressed was Oak Switch with EPL that it began to investigate the possibility of purchasing EPL. Its initial interest in EPL was necessarily genuine; why else would Oak Switch feign interest in purchasing a supplier? The investigation did provide Oak Switch access to EPL’s financial records, which EPL volunteered in order to advance the courtship. The financial records gave an inkling that perhaps EPL was not such a sound company. As Oak Switch investigated further, it began to consider the alternative possibility of starting its own company to replace EPL as a supplier. It even consulted with EPL’s national sales manager regarding the costs of starting such a company. He generated a report for Oak Switch. In the meantime Oak Switch discovered that EPL was even questionable as a secure supplier to fill the orders that were then pending. With liabilities exceeding assets, EPL was insolvent under the Illinois Commercial Code’s definition of insolvency. Oak Switch then canceled its existing purchase orders, invoking a clause in the orders which allowed cancellation in the event of insolvency. Because Oak Switch found another supplier, it never started its own company to replace EPL. As of the date of oral argument, the national sales manager, whom Oak Switch had consulted, continued to work for EPL.

Oak Switch did not commit fraud by representing that it wanted to purchase EPL. There is no evidence that this was a misrepresentation. Oak Switch certainly did not cause EPL to relinquish some business asset based on this representation. It only gained a peek at the financial records which revealed an unfortunate truth — one that EPL evidently had not previously disclosed to Oak Switch — that EPL was in bad financial shape. This revelation came into focus gradually as Oak Switch conducted its investigation. When Oak Switch saw the real financial picture, it stopped saying that it was interested in purchasing the company. -

Also, Oak Switch did not breach its contract by canceling its purchase orders when it discovered EPL’s poor financial condition. The purchase orders explicitly allowed cancellation if EPL became “insolvent.” Oak Switch had negotiated this right in the terms of its relationship with EPL. The jury should not be given to determine the meaning of “insolvent” as it was used in the purchase orders; interpretation of contractual terms is a legal question left to the court. National Diamond Syndicate, Inc. v. United Parcel Service, Inc., 897 F.2d 253, 256 (7th Cir.1990). The term “insolvent” is “a well defined commercial term and legal term of art.” Mellon Bank, N.A. v. Aetna Business Credit, Inc., 619 F.2d 1001, 1013 (3rd Cir.1980). The Illinois Commercial Code defines “insolvent” by referring to federal bankruptcy law. Under federal bankruptcy law, insolvency occurs when debts exceed assets. 11 U.S.C. § 101(32)(A). It is not disputed that EPL’s debts exceeded its assets; it was insolvent. Therefore, Oak Switch was entitled to cancel the purchase orders.

Finally, it is unreasonable to suppose that Oak Switch possibly interfered with EPL’s contractual relationship with its national sales manager. All Oak Switch did was make inquiries about the costs of a start-up company. The national sales manager answered these inquiries. The court posits that Oak Switch caused the national sales manager — an at will employee — -to breach his duty of good faith to EPL. True, the national sales manager had a duty of good faith to EPL. But he did not breach that duty by investigating the possibility of starting a competing company. Many successful employees of a company entertain thoughts of starting a competing company. Some even investigate the possibility of doing so; some actually do defect, and go it on their own. Examples large and small dominate the business scene. In this case, all the national sales manager did was investigate the possibility of starting a competing company at the behest of a prospective partner — Oak Switch. He did not breach a duty of good faith by doing so; neither did Oak Switch interfere with his contractual relationship by encouraging him. The court’s decision on this issue is too broad, and thrusts many common business practices into the category of tortious interference with contractual relations.

EPL has presented novel theories of fraud, breach of contract and tortious interference with contractual relations. The jury, not schooled in assessing the limitations of these theories, has agreed with EPL. But the jury should never have been left to consider these technical legal questions. As a matter of law, the facts do not support the legal theories. The district court should have entered j.n.o.v. in Oak Switch’s favor. Of course, given my disagreement that Oak Switch engaged in any actionable conduct, I concur with the court’s decision to reverse the punitive damages award.