In Their Opinion : Seventh Circuit Court of Appeals Commentary : Lawyer & Attorney Michael E. Rigney : Kelley Drye & Warren Law Firm

ALLIANCE 3PL CORP. v. NEW PRIME, INC. (August 2, 2010)

Loders Croklaan USA produces fats and oils used in the food industry. Until 2003, the company dealt directly with trucking companies to transport its product to its customers. One of the companies with whom it had such a relationship was New Prime, Inc. In 2003, Loders retained Alliance 3PL Corp., a transportation management services company, to manage its transportation needs. In turn, Alliance entered into a contract with New Prime to continue transporting Loder's products. The contract contained a back-solicitation clause which prohibited New Prime from soliciting any “traffic” from a company which it first learned about through Alliance. When Loders' contract with Alliance ended, New Prime submitted a successful bid directly to Loders. Alliance brought suit against New Prime for breach of the back-solicitation clause. A jury awarded Alliance $2.2 million in damages. Judge Bucklo (N.D. Ill.) denied New Prime's Rule 50 and 59 motions. New Prime appeals.

In their opinion, Chief Judge Easterbrook and Judges Kanne and Rovner reversed. The basic facts were not in dispute. The parties agreed that New Prime had a relationship with Loders before being retained by Alliance and that the amount of business available to New Prime increased during the Alliance era. The Court noted that the dispute arose regarding the meaning of the word "traffic" in the back-solicitation clause. The district court judge concluded that the word was ambiguous and allowed the jury to decide which meeting to apply. New Prime relied on the ordinary definition of the word in conjunction with the purpose behind the back-solicitation clause to conclude that, since it knew of the company and its general transportation needs before its contract with Alliance, it did not breach the clause. The Court found this position supported by Illinois restrictive covenant law. The Court added that a party that wants to divert from the normal definition of the term can do so with either parol or trade usage evidence -- and Alliance did neither. There is therefore no record support for Alliance's position that "traffic" should be defined as "amount of traffic" in order to hold New Prime liable.

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CW CAPITAL ASSET MANAGEMENT v. CHICAGO PROPERTIES (June 29, 2010)

Blockbuster, the movie rental company, has been hurt by increasing competition and changing business models. As a result, it has abandoned some of its stores. One of those stores was leased from Chicago Properties, a commercial landlord. Blockbuster settled the ensuing breach of lease lawsuit for $161,000, although it owed Chicago Properties future rents of $471,000. The mortgage on the property was held in trust as part of a mortgage-backed security. Bank of America is the trustee and CW Capital Asset Management is the servicer. CW Capital has been granted comprehensive power and authority with respect to the management of the trust’s assets. It brought suit under the parties' "Subordination, Non-Disturbance and Attornment Agreement" (the “Agreement”) for the $471,000. Judge Zagel (N.D. Ill) found for the defendants after a bench trial but then dismissed the suit on the grounds that CW Capital, as servicer, was not the real party in interest. CW Capital appeals.

In their opinion, Chief Judge Easterbrook and Judges Posner and Evans reversed with directions (still finding for the defendants but on the merits). The Court first addressed the real party in interest issue. It concluded, based on its review of the law and the documents, that the trust held legal title to the claim but delegated equitable ownership to CW Capital. That was enough to be a real party in interest. Alternatively, even if CW Capital is not a real party in interest, the Court noted that the case should proceed under Rule 17(a)(3) since the trustee ratified CW Capital's suit in the district court. On the merits, the court noted that the Agreement defines the rights of the parties in the event of a default. Here, notwithstanding Blockbuster's breach, Chicago Properties has not defaulted. Since it continues to meet its monthly obligations, the terms of the Agreement relied on by CW Capital have not been triggered. With respect to the claims based on the mortgage itself and the owners' guaranty, the Court concluded that the settlement with Blockbuster was not a violation. Finally, the Court upheld the district court's award of attorney's fees to Blockbuster under a "prevailing party" term of the Agreement. The Court concluded that the fact that Blockbuster did not prevail on an "unimportant" counterclaim did not change its status as a prevailing party under the Agreement. Although the defendants had prevailed in the district court (on the real party in interest dismissal), the Court reversed that dismissal with directions to enter judgment on the merits for the defendants.

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NATIONAL INSPECTION & REPAIRS v. GEORGE S. MAY INTERNATIONAL (April 9, 2010)

National Inspection & Repairs (“NIR”) is a trucking company located in Topeka, Kansas. When one of its employees accidentally caused its accounting systems to crash, NIR sought help from George S. May International (" May"), a business consulting firm. The parties entered into a consulting agreement. The agreement required NIR to approve any effort recommended by May. It also prohibited NIR from hiring any May employee for a year after the date of the agreement. May submitted five progress reports over the course of the three-week engagement. Each report was approved by NIR. As soon as the engagement was complete, NIR hired the May project manager as its Controller. NIR alleges that the project manager embezzled hundreds of thousands of dollars from NIR while acting as its Controller. NIR brought a breach of contract action against May. It alleged that May breached the contract by failing to "implement" its duties and for negligently hiring and supervising the project manager. The district court granted summary judgment to May. NIR appeals.

In their opinion, Chief Judge Easterbrook and Judges Kanne and Sykes affirmed. They Court first quickly addressed its appellate jurisdiction. The district court had dismissed without prejudice a claim brought by each of the parties, which made its order non-final. The Court noted its own precedent the lifts the jurisdictional bar when each party agrees at oral argument to treat the dismissals as with prejudice. Here, the parties were not explicit at oral argument. However, they were explicit in post-argument briefing. The Court concluded that that was sufficient to lift the jurisdictional bar. On the merits of the "failed to implement" allegation, the Court noted that NIR cannot prevail because it never pointed to a specific obligation or provision of the agreement that May is alleged to have failed to implement. On the merits of the negligent hiring claim, the Court concluded that it was NIR that in fact breached the contract by hiring the project manager. Finally, the Court addressed NIR's breach of implied warranty and negligence claims. NIR has a tort claim under Kansas law only if there is a violation of a duty imposed by law, as opposed to by agreement. Since Kansas law does not impose any duty on the parties to a consulting services agreement, there is no action for breach of a duty.

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ESTATE OF LUSTER v. ALLSTATE INSURANCE CO. (March 23, 2010)

Wavie Luster lived alone in her home in Merrillville, Indiana. In late 2001, she was hospitalized after a fall. Upon her release from the hospital, she immediately moved into an extended-care facility, where she remained until her death in 2006. A fire caused extensive damage to her home a few months after her death. Her personal representative submitted a claim on the estate's behalf to Allstate Insurance Company, which had provided insurance on the home for years. Allstate denied the claim on the basis that her home had been unoccupied for over four years. Notwithstanding the denial, Allstate continued to bill Luster's representative and he continued to pay the premiums for more than two years after the fire. In late 2008, Allstate attempted to cancel the policy retroactive to November of 2001 and returned the premiums for that period. The estate brought suit against Allstate for breach of the insurance contract. The district court granted summary judgment to Allstate. The estate appeals.

In their opinion, Judges Posner, Ripple, and Wood reversed and remanded. The Court noted four relevant policy provisions: 1) the insured had an obligation to inform Allstate of any change in the use or occupancy of the premises, 2) the policy continued in effect after the death of the insured until the end of the premium period, 3) there was no coverage for a loss caused by an increase in hazard known to the insured, and 4) there was no coverage for loss caused by vandalism if the property was unoccupied for 30 consecutive days prior to the loss. With respect to notice requirement for a change in occupancy, the Court concluded that the 4+ years in which the house stood empty constituted a change in occupancy, notwithstanding the owner's desire to return. But Luster's failure to notify did not result in a automatic termination of the insurance contract. It was merely a breach, entitling Allstate to certain remedies, which may or may not have included rescission under Indiana law. In any event, Allstate took no action upon learning of the change in occupancy. It continued billing for and receiving the premiums for two years. With respect to the second provision, the Court concluded that the death clause could not revive a policy that had already lapsed -- it merely prevents a coverage lapse upon the death of the insured. It has no application here. The third provision is the provision the district court relied on in granting Allstate summary judgment. The district court ruled that leaving the house unoccupied constituted an increase in hazard as a matter of law. But the Court rejected that conclusion, stating that there is no rule that an unoccupied home for any period of time increases the hazard as a matter of law. Rather, an evidentiary hearing is required for Allstate to prevail on this ground. Finally, with respect to the fourth provision, the Court noted that there was no finding with respect to the cause of the fire. It may well have been caused by vandalism, and, if so, it certainly occurred more than 30 days before the house became unoccupied. The Court concluded that an evidentiary hearing on remand is required to resolve that issue, as well. Before it reversed and remanded, however, the Court had to deal with the estate’s argument that Allstate's waived its right to deny coverage by collecting the premiums for more than two years after learning that the house was unoccupied. The Court rejected the argument. If Allstate was entitled to deny coverage, it was entitled to do so because of the “increase in hazard” or “vandalism” exclusions, not because it had a right to cancel the coverage entirely. Collecting the premiums is not inconsistent with enforcing the exclusions in the policy.

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KIM v. CARTER'S INC. (March 15, 2010)

Su Yeun Kim and Gina Polubinski purchased children's clothing at several different Carter's stores in Illinois over a period of time. Articles of clothing in the stores had individual price tags. Frequently, however, Carter's displayed signs announcing discounts off individual prices. Kim and Polubinski each filed separate class actions, alleging that any savings were fictitious because the prices listed were artificially inflated . The complaints alleged breach of contract and a violation of the Illinois Consumer Fraud and Deceptive Business Practices Act. The district court granted Carter’s motion to dismiss the complaints. Kim and Polubinski appeal.

In their opinion, Judges Bauer, Kanne, and Tinder affirmed. With respect to the breach of contract count, the Court concluded that Carter's fulfilled its contractual obligations. It provided articles of clothing to the plaintiffs at an agreed upon price. The Court rejected plaintiffs' interpretation that the sales contract required Carter's to apply the discount to an undisclosed, fair price instead of the tag price. With respect to the statutory claim, however, the Court found that the allegations of the complaints did sufficiently allege a violation. However, the Act requires a private party to show "actual damage." Here, the plaintiffs agreed to pay a certain price for the clothing. They have not alleged that the clothing is actually worth less than what they paid or that they could have purchased it elsewhere for less. Having concluded that the plaintiffs suffered no actual pecuniary harm, the Court held that they could not state a claim under the Act.

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REGER DEVELOPMENT v. NATIONAL CITY BANK (January 20, 2010)

Reger Development is an Illinois real estate development company. In 2007, the company opened a $750,000 line of credit with National City Bank. The company signed a promissory note and provided the personal guarantee of its principal, Kevin Reger. In several places, the note makes reference to the fact that it is payable "on demand." The company made its payments in a timely manner for the first year. Nevertheless, the bank asked it to pay down $125,000 of principal. Reger did so. A month later, the bank advised Reger that it was reducing the amount of the line of credit and also wanted to restructure some of the principal and secure it with a mortgage. The bank told Reger that it was possible that they would demand payment of the entire amount if he did not agree to the modifications. Reger brought suit, alleging breach of contract and fraud. The district court dismissed the case for failure to state a claim. Reger appeals.

In their opinion, Judges Flaum, Williams, and Sykes affirmed. The Court noted that Illinois law generally implies a covenant of good faith and fair dealing in a contract. It does not apply, however, to demand notes. Reger argued that general references to due dates and default provisions in the note were inconsistent with a demand instrument. The Court noted the repeated and explicit references in the instrument to National City's right to demand payment at any time. The note is clearly and unambiguously a demand note, concluded the Court. Since it is a demand instrument, the bank's insistence on modifications did not amount to a breach. With respect to the fraud count, the Court focused on the intent element. It stated that Reger must establish that the bank intended to and did induce him. In order to meet that element, Reger asked the court to infer that the bank intentionally drafted ambiguous documents so as to mislead him. The Court had already considered the ambiguity of the document with respect to the breach of contract claim. Not only had it not found it ambiguous, it found it rather straightforward. Reger failed to allege the element of intent with the particularity necessary in a fraud count -- the dismissal of that count is affirmed.

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WISCONSIN ALUMNI RESEARCH FOUNDATION v. XENON PHARMACEUTICALS, INC. (January 5, 2010)
 

Scientists at the University of Wisconsin discovered that suppressing a certain enzyme in the body reduced cholesterol levels. They disclosed their discovery to the Wisconsin Alumni Research Foundation, which manages patents for the University. They assigned all their rights to the Foundation. Xenon Pharmaceuticals was very interested in the same effort. Xenon and the University entered into a series of agreements under which Xenon sponsored various research projects; Xenon and the Foundation entered into an agreement giving Xenon exclusive licensing rights in return for a percentage of fees received; and Xenon entered into a series of agreements directly with the individual researchers to undertake various projects. Xenon and the Foundation filed for and received a joint patent. The relationship soured. Xenon did some related work with a third party and with an individual University scientist with whom it had a consulting agreement. When it filed a patent application covering the results of that work, the Foundation objected. It also licensed the technology covered by both the joint patent and the related patent to Novartis. The Foundation demanded its contractual percentage -- Xenon refused. The Foundation brought suit, claiming that both the Novartis license and the related patent violated the party's agreement. Xenon counterclaimed. In a series of rulings, the court held that Xenon breached the agreement by granting the sublicense to Novartis and that Xenon owed licensing fees to the Foundation. The court refused the Foundation's request for a declaration that the work on the related patent belonged to it and concluded that the Foundation's argument that it had a right to terminate the contract was not developed sufficiently in its briefs. At trial on damages, the jury awarded $1 million, which was reduced on remittitur to $300,000. The parties cross-appealed.

In their opinion, Chief Judge Easterbrook and Judges Bauer and Sykes affirmed in part, reversed in part and remanded. The Court first addressed Xenon's transfer to Novartis. The Court agreed with Xenon that each joint patent holder, under federal law, is allowed to use the patented technology without regard to the rights of the other. However, that right is subject to modification by agreement of the parties. Here, the Foundation conditioned Xenon's right to license the technology on its payment of a fee. Interpreting the terms of their agreement, the Court concluded that Xenon owed the contractual fee upon its receipt of its fee and its failure to remit it was a breach of the agreement. The Court then rejected Xenon's argument that the Foundation presented insufficient evidence to support its damages claim. With respect to the Foundation's right to terminate the agreement, the Court concluded that the lower court was in error when it held that the right to terminate was contingent upon a judicial finding of a breach. The agreement specifically gives the Foundation the right to terminate the agreement upon a breach by Xenon and a failure to remedy the breach within 90 days after written notice. The Foundation considered Xenon's conduct a breach and gave appropriate notice. Even though it filed suit prior to the expiration of the 90 days, it's right to terminate after a failure to cure remains. It need not await a judicial determination. The Court concluded that the Foundation properly terminated the agreement. Finally, the Court addressed the Foundation's claim for a declaration of its ownership of the related technology. The Court concluded that the contractual terms were clear and that the scientist's work, although partially sponsored by Xenon, was owned by the Foundation.  

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STROITELSTVO BULGARIA LIMITED v. BULGARIAN-AMERICAN ENTERPRISE FUND (December 14, 2009)

Stroitelstvo Bulgaria Limited ("Limited") is a Bulgarian construction company. In 2005, it borrowed almost €2 million from the Bulgarian-American Credit Bank ("Bank") for a construction project. After a few months, the Bank claimed that Limited breached the loan agreement. It terminated its payments under the borrowing and asserted a right to recover almost €1 million, although less than €400,000 had been disbursed. According to Limited, the allegations of a breach were simply a pretext to put pressure on Limited to pay more for its borrowing. When the bank got a judgment in Bulgaria for almost €1 million and froze Limited’s assets, Limited agreed to compromise the claim for less than the judgment but more than they owed. They then sued Bank and its U.S. parent in U.S. court, alleging violations of RICO and the Bulgarian Obligations and Contracts Act as well as contract and tort claims. The court granted a motion to dismiss on forum non conveniens grounds. Limited appeals.

In their opinion, Judges Manion, Sykes and Tinder affirmed. In order to dismiss on forum non conveniens grounds, a court must find that there is an alternate forum that is both available and adequate. The principal issue on the appeal was whether the available Bulgarian forum was “adequate.” An adequate forum is one that provides some fair avenue for redress – not necessarily as complete or comprehensive as the U.S. forum. The Court noted that there was expert testimony regarding corruption in the Bulgarian court system. However, particularly given Bulgaria’s entry into the European Union with its requirement of a stable legal system, the Court concluded that the anecdotal evidence of corruption did not establish inadequacy. The Court also conceded that Limited would not have available the same claims in Bulgaria – particularly would have no RICO claim. It was undisputed that a breach of contract claim would lie against the Bank, and that was the heart of the complaint. The Court concluded that was enough potential for redress to meet the adequacy standard. Finally, the Court concluded that the higher filing fee in Bulgaria did not rule out the dismissal. Having concluded that the Bulgarian forum was available and adequate, the Court addressed the balancing factors. The Court found no abuse of discretion. In fact, it found the private and public interests strongly favored Bulgaria.

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RAO v. BP PRODUCTS NORTH AMERICA (December 9, 2009)

Salik Rao operated as a BP gasoline service station dealer in the Chicago area. For 10 years beginning in the early 1990s, Rao gave over $100,000 worth of cash and gifts to a BP sales manager. In return, the sales manager performed many favors for Rao, to his great benefit. In 2003, Rao reported this improper activity to BP. However, he characterized it as extortion on the part of the sales manager. BP begin an investigation which ultimately led to the termination of the sales manager in November of 2003. BP continued its investigation, seeking to confirm the extortion. Although Rao promised to cooperate, he never met with BP after November of 2003 and affirmatively withdrew his pledge of cooperation in June of 2004. BP notified Rao in October 2004 that it was terminating its franchise relationship with him because of his improper activity. Rao brought suit under the Petroleum Marketing Practices Act ("PMPA"), as well as RICO, fraud, breach of contract and extortion. The court dismissed the counts based on RICO, fraud and breach of contract and granted summary judgment on the PMPA claim. Rao appeals.

In their opinion, Judges Bauer, Flaum and Williams affirmed. The principal issue on appeal was whether BP's notice of termination was sufficient under the PMPA. The PMPA, which protects service station franchisees, allows early termination of franchise agreements in certain circumstances, which Rao does not contest here. The PMPA requires the franchisor to give a notice of such early termination within 120 days of when it "first acquired actual or constructive knowledge" of the reason for the termination. Here, it is uncontested that BP knew of the improper conduct well over 120 days before providing termination notice. The Court focused, however, on what BP knew when and what BP did. From the fall of 2003 through the middle of 2004, Rao continued to insist that he was a victim of the sales manager's extortion. The sales manager, at the same time, insisted that the gifts were given voluntarily in exchange for his favors. The Court concluded that the statute did not require BP to give notice while it was still investigating the allegations. It was not until Rao ceased his cooperation that the clock started. BP's notification was sent within 120 days of that date and was therefore proper. The Court affirmed the rest of the lower court's judgment as well.

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LUCERO V. NETTLE CREEK SCHOOL CORPORATION (May 29, 2009)

Sharon Lucero, a female Hispanic, was hired by the Nettle Creek School Corporation in 2001 to teach English at the Hagerstown Junior - Senior High School (the "School"). The School served students in grades 7 through 12 in the same building. Lucero was informed, at the time of her hire, that she could be assigned to teach English at any of the grade levels. For her first two years, Lucero taught 7th and 8th grade English, respectively. For the third year, the School assented to her request to teach 12th grade English. The year progressed quite differently than her prior years of service. The principal criticized her performance, the students complained of her teaching style, and the parents complained of her grading policies, to name just a few of her problems. In addition, two specific incidents late in the year stood out. In one, a student showed a photograph in class of a partially naked classmate. In another, a group of students left several Playboy magazines in her classroom. The students involved in these two incidents were all suspended. After the school year, the School hired a new English teacher, a white male. The school assigned the new teacher to 12th grade English and reassigned Lucero to 7th grade English. Lucero sued the School, challenging her reassignment under theories of retaliation, discrimination, hostile work environment and breach of contract. The district court granted summary judgment to the School. Lucero appeals.

In their opinion, Judges Bauer, Flaum and Evans affirmed. The Court addressed each of Lucero’s legal theories in turn. With respect to her retaliation claim, the Court noted that she was required to establish that she suffered a materially adverse employment action. The Court addressed the reassignment in light of the Supreme Court's decision in Burlington Northern. Burlington Northern tells us that a court should apply an objective standard for assessing whether the reassignment might have dissuaded a reasonable person from making a charge of discrimination. Here, Lucero was reassigned to teach the same subject in the same building under the same conditions. The Court concluded that her reassignment was not a materially adverse action. The Court similarly found that Lucero failed to demonstrate a materially adverse employment action with respect to her discrimination claim, albeit under a different test. Since her compensation and work conditions were unchanged, Lucero attempted to establish that her reassignment was an adverse employment action by asserting that it would negatively impact her career prospects. The Court found that she failed to submit adequate evidence of a negative career impact and upheld the lower court on the discrimination claim. Next, the Court concluded that Lucero's allegations of hostile work environment failed as a matter of law. Although depicting inappropriate behavior, the Court concluded that they were isolated incidents, were not related to her gender or national origin, and did not support employer liability. Finally, the Court summarily rejected Lucero's breach of contract claims.

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AA SALES v. CONI-SEAL (December 9, 2008)

Gerald Saltzman, owner and sole employee of AA Sales, and Coni-Seal started working together in the early 1980s. Coni-Seal manufactured automotive parts. Saltzman was a sales representative. Early successes led to a written agreement in 1987. The contract provided AA Sales with a 6% commission on sales to approved accounts and with 5 years of post-termination commissions on accounts previously sold by AA Sales. AA and Coni-Seal later agreed to negotiate commissions on an account-by-account basis. In 1994, Coni-Seal approved AA to solicit AutoZone, a large retailer of automotive parts. Shortly thereafter, their relationship began to sour. In 1995, Coni-Seal reassigned several accounts away from AA. In return for releasing the accounts, AA agreed to a monthly fee and a 2% commission on sales to the accounts it released. Coni-Seal authorized a second sales representative for AutoZone in 2003. Coni-Seal began selling to AutoZone in 2004. It paid no commissions to AA on these sales. AA filed suit for breach of contract and violation of the Illinois Sales Representative Act (“ISRA”). The district court granted summary judgment to Coni-Seal. AA appeals.

In their opinion, Judges Cudahy, Flaum and Rovner affirmed in part and reversed in part. The Court agreed with the district court that AA was not responsible for the AutoZone sales but disagreed that that ended the inquiry. The issue for the Court was whether the parties’ contract entitled it to commissions. The Court determined that the contract required Coni-Seal to pay a commission: a) during the life of the contract on all sales to approved accounts, whether AA was responsible for the sale or not, and b) after termination of the contract, only on sales to accounts for which AA was responsible for sales during the life of the contract. The Court proceeded to address the issue of whether Coni-Seal’s sales to AutoZone were “sales to approved accounts.” The parties’ versions of the development of the AutoZone account differed considerably. The Court reversed and remanded for trial.

With respect to AA’s claims on the 1995 oral contract, the Court held that it was not a new contract, but a modification of the termination provisions of the 1987 contract. Since it did not include a term of years to apply to the new post-termination commissions, the Court applied the five year term from the 1987 contract. Since Coni-Seal had already paid the commissions for over ten years, the Court affirmed the district court’s judgment on the 1995 contract.

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