C. A. Acquisition Newco, LLC v. DHL Express (USA), Inc.

United States Court of Appeals
For the First Circuit
No. 12-1013
C. A. ACQUISITION NEWCO, LLC,
Plaintiff-Appellee,
v.
DHL EXPRESS (USA), INC.,
Defendant-Appellant.
APPEAL FROM THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF MASSACHUSETTS
[Hon. Michael A. Ponsor, U.S. District Judge]
Before
Boudin, Hawkins,* and Dyk,**
Circuit Judges.
Anthony C. White, with whom O. Judson Scheaf, III, Philip B.
Sineneng, and Thompson Hine LLP were on brief, for defendant-
appellant DHL Express (USA), Inc.
Jeffrey E. Poindexter, with whom Andrew Levchuk, Bulkley,
Richardson and Gelinas, LLP, Hari S. Nesathurai, and Nesathurai and
Luk LLP were on brief, for plaintiff-appellee C.A. Acquisition
Newco, LLC.
October 2, 2012
___________
* Of the Ninth Circuit, sitting by designation.
** Of the Federal Circuit, sitting by designation.
DYK, Circuit Judge. In this breach-of-contract case,
defendant DHL Express (USA), Inc. (“DHL”) appeals from a judgment
on the pleadings for plaintiff C.A. Acquisition Newco LLC
(“Newco”). The district court concluded that DHL had terminated
the contract and awarded the $50,000 per month provided for in the
contract in the event of a “termination.” See C.A. Acquisition
Newco LLC v. DHL Express (USA), Inc., 795 F. Supp. 2d 140, 146 (D.
Mass. 2011). Because we find the contract ambiguous as to whether
DHL’s actions constituted a termination under the contract, we
vacate and remand.
I.
DHL is the United States division of DHL International
GmBH, an international shipping company. Until 2008, DHL provided
express pick-up and delivery of letters and packages throughout the
United States. In 2006, with the objective of expanding its
customer base, DHL decided to install self-service kiosks
(“Shipping Spots”) at various locations where DHL customers would
be able to use touch screens to pay for domestic shipping and print
shipping labels. On August 1, 2006, DHL entered a contract with
software developer Cyphermint, Inc. (“Cyphermint”), predecessor in
interest to Newco. Under the contract, which consisted of the
Master Services Agreement (“MSA”) and the Statement of Work,
Cyphermint agreed to provide software for the kiosks. The initial
term of the contract was three years, ending July 31, 2009.
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Under the contract’s Statement of Work, Cyphermint was
obligated to supply a software package, including advertising
software, which could then be installed on an indefinite number of
kiosks provided by DHL. It appears that the software development
was to be completed before DHL began installation of the kiosks.
Cyphermint was to receive $0.35 per transaction and would share
advertising revenues with DHL flowing from advertisements displayed
at the kiosks. Once Cyphermint developed that software, its
performance was essentially complete; it merely had to monitor the
use of that software at the shipping spots. Any subsequent
“[e]nhancements, improvements, [or] modifications” to the software
would be provided separately by Cyphermint at an $80 per hour rate.
J.A. 95. The MSA also provided, in section 2.8, that “[n]othing in
this Agreement guarantees the number or placement of DHL Shipping
Spot(s)” and that the number of Shipping Spots “is solely within
the discretion of DHL.” J.A. 60. The contract does not
explicitly require DHL to deal exclusively with Cyphermint, and it
appears to contemplate that DHL will only pay the $0.35 per
transaction fee at “DHL Shipping Spot fixtures containing
Cyphermint software.” J.A. 94.
According to Newco’s amended complaint, but disputed in
DHL’s answer, 7,755 Shipping Spots were initially projected, and by
October 14, 2008, 5,415 Shipping Spots had been deployed. Id. at
30-31, 42. In August 2008, following Cyphermint’s bankruptcy,
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Newco assumed Cyphermint’s obligations, rights, and liabilities
under the contract. In late 2008 (before the contract’s
expiration), because of the weak economy, DHL decided to
discontinue all domestic shipping within the United States,
including the Shipping Spot project.
The crux of this dispute is whether DHL “terminated” the
contract when it totally eliminated all Shipping Spots. The MSA
incorporated various provisions concerning early termination of the
contract. Section 10.2 stated that termination for cause could
occur after a material breach. The contract is reasonably clear
that no termination compensation would be payable in the event of
a DHL termination flowing from a material breach by Cyphermint, but
that termination compensation would be payable if Cyphermint
terminated the contract as the result of a material breach by DHL.
There is no contention that either party materially breached the
agreement (except insofar as Cyphermint contends that DHL
improperly failed to pay termination compensation), or that DHL
terminated the agreement for cause.
Cyphermint points out that the agreement provided for
termination fees in the event that the agreement was terminated by
DHL without material breach by Cyphermint. The Statement of Work
provided that “[s]hould DHL terminate this agreement for any reason
other than a material breach by Cyphermint before its termination
date DHL agrees to compensate [Cyphermint] in the amount of $50,000
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per month for each month remaining in the initial term.” J.A. 95.
Section 10.5 also stated that “[t]here shall be no termination fees
for any termination by either party, irrespective of the reason for
such termination, except for a ‘Material Breach’ or as provided
pursuant to the ‘Statement of Work’ [set forth above].” J.A. 69.
Finally, section 10.3 stated that “[i]n addition to the other
termination rights set forth in this Section 10, [Cyphermint] may
terminate [its] Services in the event that DHL elects to cease
supporting the DHL Shipping Spot Project.” J.A. 69.
There is no dispute that the termination fees are payable
here if DHL did “terminate” the agreement. The question is whether
DHL’s actions amounted to a termination. On November 12, 2008,
after learning of DHL’s decision, Newco’s counsel requested
confirmation “that DHL intends to terminate the agreement” on
November 21. C.A. Acquisition Newco, 795 F. Supp. 2d at 143. DHL
responded on November 16 simply that “shipping will cease on
November 21.” Id.On December 8, Newco requested early termination fees of
$413,333.33 ($50,000 per month until July 31, 2009). After DHL
refused to pay, Newco sued for breach of contract and other claims.
The case was removed from the Superior Court of the Commonwealth of
Massachusetts to federal court. The federal district court granted
Newco’s motion for judgment on the pleadings on its breach-of-
contract claim, concluding that DHL “fail[ed] to explain how
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reducing the [number of] shipping spots to zero is in any way
different from terminating the Contract.” Id. at 146. The parties
stipulated to dismissal of Newco’s other claims and to the amount
of damages, and the district court entered final judgment for Newco
of $413,333.33 plus interest. DHL timely appealed from this
judgment, and we have jurisdiction pursuant to 28 U.S.C. §§ 1291and 1294(1).
II.
We review the grant of a judgment on the pleadings under
Fed. R. Civ. P. 12(c) de novo, “view[ing] the facts contained in
the pleadings in the light most favorable to the nonmovant and
draw[ing] all reasonable inferences therefrom.” Perez-Acevedo v.
Rivero-Cubano, 520 F.3d 26, 29 (1st Cir. 2008) (quoting R.G. Fin.
Corp. v. Vergara–Nunez, 446 F.3d 178, 182 (1st Cir. 2006))
(internal quotation marks omitted). “Contract interpretation, when
based on contractual language without resort to extrinsic evidence,
is a ‘question of law’ that is reviewed de novo.” OfficeMax, Inc.
v. Levesque, 658 F.3d 94, 97 (1st Cir. 2011) (citing Principal Mut.
Life Ins. Co. v. Racal-Datacom, Inc., 233 F.3d 1, 3 (1st Cir.
2000)). The contract states that it “shall be governed by and
construed in accordance with the laws of the State of Florida,”
DHL’s principal place of business. J.A. 197. “Under Florida law,
courts must give effect to the plain language of contracts when
that language is clear and unambiguous. Whether a contract
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provision is ambiguous is a question for the court.” Arriaga v.
Florida Pac. Farms, L.L.C., 305 F.3d 1228, 1246 (11th Cir. 2002)
(citation omitted).
On appeal each side argues that its construction of the
contract is mandated by the contract’s plain language –- Cyphermint
that DHL’s actions clearly amounted to a termination, and DHL that
its actions were clearly not a termination. We conclude that both
sides are mistaken.
DHL invokes two contractual provisions to support its
argument that ending the Shipping Spot Project is not a termination
of the contract. First, it argues that MSA section 2.8, which
states that the “number . . . of DHL Shipping Spot(s)” is not
guaranteed and “is solely within the discretion of DHL,” J.A. 60,
gives it the right to reduce the number of shipping spots to zero,
and that such action cannot be a termination. Second, DHL argues
that MSA section 10.3, which states that “[i]n addition to [its]
other termination rights . . . [Cyphermint] may terminate [its]
Services in the event that DHL elects to cease supporting the DHL
Shipping Spot Project,” would make no sense if the contract were
automatically terminated by DHL’s cessation of the Shipping Spot
Project.
The district court concluded, and Newco argues on appeal,
that these two provisions did not create ambiguity. While MSA
section 2.8 grants DHL discretion over the number of Shipping
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Spots, the district court concluded that “it does not . . . permit
[DHL] to stop performing altogether for any reason or no reason.”
C.A. Acquisition Newco, 795 F. Supp. 2d at 144. The court also
concluded that MSA section 10.3 “merely identifies one possible
remedy available to [Cyphermint] upon notification that [DHL]
intends to terminate the agreement,” and that the reference to
“other termination rights” triggered by DHL’s cessation of the
project supports Newco’s view. Id. at 145.
We agree that the contract might reasonably be
interpreted as the district court and Newco suggest, as requiring
DHL to pay the $50,000 per month termination fee if it ceases all
shipping so that Cyphermint (now Newco) is not receiving any $0.35
per transaction payments. As the district court noted, the
cessation of shipping (which ends the Shipping Spot Project) seems
to fall within the ordinary meaning of “terminate.” See Mac’s
Shell Serv., Inc. v. Shell Oil Prods. Co., 130 S. Ct. 1251, 1257
(2010) (“The word ‘terminate’ ordinarily means ‘put an end to.’”
(quoting Webster’s New International Dictionary 2605 (2d ed.
1957))). However, we think DHL’s interpretation might also be
reasonable based on the language of the contract: termination of
the Shipping Spot Project is not necessarily equivalent to
termination of the agreement, particularly in light of MSA section
2.8, giving DHL “sole[] . . . discretion” over the number of
Shipping Spots. The parties might have intended the termination
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fees to apply if DHL elected to continue the project with a
different software supplier but not if economic conditions led to
a cancellation of the Shipping Spot project entirely. We thus
conclude that the contract is ambiguous as to whether DHL’s actions
constituted a termination.
“When a contract is ambiguous, Florida law provides rules
of construction to infer the meaning.” Arriaga, 305 F.3d at 1246-
47. For example, “courts may receive evidence extrinsic to the
contract for the purpose of determining the intent of the parties
at the time of the contract” and may also consider factors such as
the “circumstances surrounding the parties at the time the contract
was made,” “custom and usage” of ambiguous terms, and “certain
public policy concerns.” Id. at 1247 (citations and internal
quotation marks omitted). It is also well established that a
contract should be interpreted to be reasonable. See Excelsior
Ins. Co. v. Pomona Park Bar & Package Store, 369 So. 2d 938, 941
(Fla. 1979) (“A reasonable interpretation of a contract is
preferred to an unreasonable one.”) (citing James v. Gulf Life Ins.
Co., 66 So. 2d 62 (Fla. 1953)). In the commercial context, courts
should avoid interpreting contracts to be “commercially
unreasonable.” See John Hancock Life Ins. Co. v. Abbott Labs., 478
F.3d 1, 8 (1st Cir. 2006); see also XCO Int’l Inc. v. Pac.
Scientific Co., 369 F.3d 998, 1005 (7th Cir. 2004) (“Contract
interpretations that produce commercially unreasonable results are
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disfavored . . . because they are implausible to impute to the
parties.”).
The pleadings do not establish the facts necessary to
resolve the ambiguity. It follows that judgment on the pleadings
(which requires that there be no relevant factual dispute) was
inappropriate. At this stage of the proceedings it is not possible
to anticipate precisely what extrinsic evidence might resolve the
ambiguity, but there are several possibilities.
For example, evidence related to the purpose of the early
termination fee provision is likely relevant in determining whether
DHL’s actions constitute a termination. In the amended complaint,
Newco alleged that the parties were originally considering a fee
structure under which Cyphermint would have received over
$6,000,000 in development and licensing fees, and that the early
termination fee was inserted after the parties switched to the
transaction-based payment structure, with the understanding that it
would allow Cyphermint to recover its initial investment if DHL
terminated the contract early. DHL disputes this version of the
negotiating history. Evidence as to the negotiating history of the
contract may well be helpful in resolving the ambiguity. Needless
to say, although each party’s uncommunicated subjective
understanding of the agreement during negotiations is generally
irrelevant, statements of subjective intent are relevant when
contrary to the party’s own interests. See Gendzier v. Bielecki,
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97 So. 2d 604, 609 (Fla. 1957) (“[E]vidence of the unilateral
secret intent of a party to a written instrument is in and of
itself immaterial to the actual creation of a contract.”)
(citations omitted); 5 Corbin on Contracts § 24.10 (Matthew Bender
& Co. 2012) (“A party will not be permitted to build up an argument
by means of self-serving statements. Such statements should be
admissible against that party, however, as admissions against that
party's interest.”). The district court should also consider any
relevant industry practices.
Extrinsic evidence would also be useful in determining
whether the parties’ differing interpretations are commercially
reasonable. On this issue it will be necessary to determine what
consideration supported DHL’s initial promise if DHL in fact had
unbridled discretion to have zero Shipping Spots. DHL’s theory –-
that it had no obligation to install any kiosks –- might render the
contract commercially unreasonable absent some meaningful promise
in return.1
Under Newco’s interpretation, the only consideration
provided by DHL (in the case of a DHL decision to never create any
Shipping Spots) is the termination fee, which would be triggered if
1
While the parties appear to agree that the contract is not
illusory, they have not clearly identified the consideration given
by DHL to Cyphermint that renders the contract not illusory at the
time of execution. “It is a fundamental principle that a contract
is to be construed as meaningful and not illusory.” Cofman v.
Acton Corp., 958 F.2d 494, 497 (1st Cir. 1992).
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DHL elected to have zero Shipping Spots from the beginning of the
contract. But there are also other constructions that might be
given to the contract to render it commercially reasonable at the
time of contracting. For example, while DHL does not appear to
explicitly agree in the contract not to use software provided by
others (and the $0.35 per transaction payments apparently only
apply to kiosks using Cyphermint software), if the contract were
construed to require DHL to deal exclusively with Cyphermint and to
use best efforts to advance the project, that promise could serve
as consideration. See U.C.C. § 2-306(2) (“A lawful agreement . . .
for exclusive dealing . . . imposes unless otherwise agreed an
obligation by the seller to use best efforts to supply the goods
and by the buyer to use best efforts to promote their sale.”); Fla.
Stat. § 672.306(2) (adopting U.C.C. rule); 2 Corbin on Contracts
§ 6.5. But the question exists whether such promises would be
sufficient to render it commercially reasonable.
We do not intend the above to be an exhaustive list of
the evidence or factors that might be pertinent in resolving the
ambiguity in the contract language; rather, we simply note them to
confirm that the language of the contract itself –- while pertinent
to resolving the ambiguity –- is not the only source of relevant
evidence.
Vacated and Remanded. Costs to appellant.
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