‘Mandatory’ Forum Selection Clause Given Cramped Construction By IL Court (applying Ohio Law) in Hand Lotion Contract Spat

In my experience, when final contracts refer to earlier agreements between the parties, it can present fertile ground for textual conflicts.  Example: I once litigated a severance dispute where the operative employment agreement provided Delaware law (and fixed venue there, too) and incorporated two prior non-compete agreements.  One agreement contained a Nebraska forum clause while the other non-compete said New York law governed.  Much ink was spilled fleshing out the proper place to sue.

Sloan Biotechnology Laboratories, LLC v. Advanced Biomedical Inc., 2018 IL App (3d) 170020 examines the factors a court considers when deciding which of two paradoxical forum clauses apply.

The plaintiff there agreed to supply hand sanitizer product to the defendant pursuant to a 2015 Manufacturing Agreement (“2015 Agreement”). The 2015 Agreement incorporated a 2014 non-disclosure agreement (the “2014 NDA”)

The 2015 Agreement provided that Illinois law applied and identified Peoria, Illinois as the site of the contract. The incorporated 2014 NDA, in turn, contained both permissive and mandatory forum selection clauses, both of which fixed venue in Cuyahoga County, Ohio. The permissive forum clause simply stated Ohio law would govern and that it (the 2014 NDA) “may be enforced” in Ohio state court. The mandatory clause, found in the 2014 NDA’s “equitable remedies” section, provided that the scope and extent of any injunctive relief “shall be determined” by Cuyahoga County, Ohio state court. The trial court granted the Ohio defendant’s motion to dismiss the complaint and found that Ohio was the proper forum for the lawsuit. The plaintiff appealed.

Applying Ohio law, the Illinois appeals court reversed.  It first recognized the existence of both permissive and mandatory forum selection clauses. The former allows parties to submit their disputes to a designated forum but doesn’t prohibit litigation elsewhere. The latter, mandatory provision, provides the exclusive forum for litigation. Use of the word “may” denotes a permissive forum clause while “shall” signifies a mandatory one. [⁋ 26]

In Ohio, a forum selection clause brokered between two sophisticated commercial entities is prima facie valid, so long as it was bargained for freely. To set aside a commercial forum selection clause, the challenger must make a “strong showing.”

A court will reject a commercial forum selection clause where (1) it results from fraud or overreaching or (2) its enforcement is unreasonable and essentially deprive a party of its day in court.

However, a challenger’s bare allegation that it’s inconvenient to litigate in another state isn’t enough to nullify a freely bargained for forum selection clause.

Like Illinois, Ohio utilizes the four-corners rule to contract interpretation. That is, contractual terms are to be ascribed their common, ordinary meanings and a court will not go beyond the plain language (or “four corners”) of the document to divine its meaning.

Applying these principles, the Court noted that the mandatory forum clause was narrowly drafted and only applied to questions of injunctive relief for NDA violations.  And since plaintiff’s lawsuit was not premised on a violation of the 2014 NDA (it was a declaratory judgment suit), the mandatory forum selection clause didn’t apply. As a consequence, the appeals court held there was nothing preventing the plaintiff from suing in Peoria County Illinois.

Afterwords:

Sloan represents a court rigidly enforcing a forum selection clause where the contracting parties are commercially sophisticated entities and there is no fraud or defect in contract formation.

The party challenging a forum clause must make a strong showing and offer more than inconvenience as the reason to reject the clause.

This case and others like it starkly illustrate the confusion that can result when multiple contracts (with diffuse forum clauses) reference and adopt each other.

If the different agreements involved here contained some forum consistency, a lot of time and money on a satellite issue (where to file suit) likely could have been saved.

High-Tech Sports Equipment Plaintiff Alleges Viable Fraud Claim Against Electronic Sensor Supplier (Newspin v. Arrow – Part II)

In Newspin Sports, LLC v. Arrow Electronics, Inc., 2018 WL 6295272, the Seventh Circuit affirmed the dismissal of plaintiff’s negligent misrepresentation claims but upheld its fraud claims.

Under New York law (the contract had a NY choice-of-law provision), a plaintiff alleging negligent misrepresentation must establish (1) a special, privity-like relationship that imposes a duty on the defendant to impart accurate information to the plaintiff, (2) information that was factually inaccurate, and (3) plaintiff’s reasonable reliance on the information.

New York’s economic loss rule softens the negligent misrepresentation theory, however. This rule prevents a plaintiff from recovering economic losses under a tort theory. Since the plaintiff’s alleged negligence damages – money it lost from the flawed electronic components – mirrored its breach of contract damages, the negligent misrepresentation claim was barred by the economic loss rule. [*10]

Plaintiff’s fraud claims fared better.  In New York, a fraud claim will not lie for a simple breach of contract.  That is, where the only “fraud” alleged is a defendant’s broken promise or lack of sincerity in making a promise, the fraud claim merely duplicates the breach of contract one.

To allege a fraud claim separate from a breach of contract, a plaintiff must establish (1) a legal duty separate from the duty to perform under a contract, or (2) demonstrate a misrepresentation collateral or extraneous to the contract, or (3) special damages caused by the misrepresentation that are not recoverable as contract damages. [*11] [32]-[33].

Applying these principles, the Court noted that the plaintiff alleged the defendant made present-tense factual representations concerning its experience, skill set and that its components met plaintiff’s specifications.  Taken together, these statements – if true – sufficiently pled a legal duty separate from the parties’ contractual relationship to state a colorable fraud claim.

The Court also rejected the defendant’s argument that the plaintiff’s fraud claims were subject to the UCC’s four-year limitations period governing sales of goods contracts.  Since the plaintiff’s fraud count differed from its breach of contract claim, Illinois’s five-year statute of limitations for common law fraud governed.  See 735 ILCS 5/13-205,  As a result, plaintiff’s 2017 filing date occurred within the five-year time limit and the fraud claim was timely. [*12] [35].

Afterwords:

The economic loss rule will bar a negligent misrepresentation claim where a plaintiff’s pleaded damages simply restate its breach of contract damages;

A fraud claim can survive a pleadings motion to dismiss so long as the predicate allegations go beyond the subject matter of the contract governing the parties’ relationship.

High-Tech Sports Co.’s Warranty Claims Too Late Says Seventh Circuit (Newspin v. Arrow Electronics – Part I of II)

Newspin Sports, LLC v. Arrow Electronics, Inc., 2018 WL 6295272 (7th Cir. 2018), analyzes the goods-versus-services dichotomy under the Uniform Commercial Code (UCC) and how that difference informs the applicable statute of limitations.

The defendant supplied electronic sensor components for plaintiff’s use in its high-tech sports performance products.  Plaintiff sued when most of the parts were faulty and didn’t meet Plaintiff’s verbal and written requirements.  Plaintiff brought both contract- and tort-based claims against the Plaintiff.

The Breach of Contract Claims

The Seventh Circuit affirmed the dismissal of the contract claims on the basis they were time-barred under the UCC’s four-year limitations period for the sale of goods.

In Illinois, a breach of written contract claimant has ten years to sue measured from when its claim accrues. 735 ILCS 5/13-206.  A claim accrues when the breach occurs, regardless of the non-breaching party’s lack of knowledge of the breach.  For a contract involving the sale of “goods,” a shortened 4-year limitations period applies. 810 ILCS 5/2-102 (goods df.), 810 ILCS 5/2-725(2)(4-year limitations period).

With a mixed contract (an agreement involving the supply of goods and services), Illinois looks at the contract’s “predominant purpose” to determine whether the 10-year or the compressed 4-year limitations period governs.

To apply the predominant purpose test, the court looks at the contract terms and the proportion of goods to services provided for under the contract.  The court then decides whether the contract is mainly for goods with services being incidental or if its principally for services with goods being incidental.

Here, the Court noted the Agreement was a mixed bag: the defendant promised to provide both goods and services.  But various parts of the contract made it clear that the defendant was hired to first provide a prototype product and later, to furnish components pursuant to plaintiff’s purchase orders.  The court found that any services referenced in the agreement were purely tangential to the main thrust of the contract – defendant’s furnishing electronic sensors for plaintiff to attach to its client’s golf clubs.  Support for this finding lay in the fact that the Agreement set out specific quantity and price terms for the goods (the components) but did not so specify for the referenced assembly, manufacturing and procurement services.

Other Agreement features that led to the court ruling the Agreement was one for goods included its warranty, sales tax, “F.O.B. and title passing provisions. The court noted that the warranty only applied to the manufactured products and not to any services and the contract’s sales tax provision – making Plaintiff responsible for sales taxes –  typically applied in goods contracts, not services ones.

Additionally, the Agreement’s F.O.B. (“free on board”) and title passage terms both signaled this was a goods (not a services) deal. See 810 ILCS 5/2-106(1)(sale consists in passing title from seller to buyer for a price). [*5]

Since the plaintiff didn’t sue until more than five years elapsed from the breach date, the Court affirmed the dismissal of plaintiff’s breach of contract, breach of implied covenant of good faith and fair dealing and breach of warranty claims.

The Negligent Misrepresentation Claim

The Seventh Circuit also affirmed dismissal of plaintiff’s negligent misrepresentation claim. Under New York law (the contract had a NY choice-of-law provision), a plaintiff alleging negligent misrepresentation must establish (1) a special, privity-like relationship that imposes a duty on the defendant to impart accurate information to the plaintiff, (2) information that was in fact incorrect, and (3) plaintiff’s reasonable reliance on the information.

Like Illinois, New York applies the economic loss rule. This precludes a plaintiff from recovering economic losses under a tort theory. And since the plaintiff’s claimed negligent misrepresentation damages – money it lost based on the component defects – mirrored its breach of contract damages, the economic loss rule defeated plaintiff’s negligent misrepresentation count. [*10]

Afterwords:

The case presents a useful summary of the dispositive factors a court looks at when deciding whether a contract’s primary purpose is for goods or services.  Besides looking at an agreement’s end product (or service), certain terms like F.O.B., title-shifting and sales tax provisions are strong indicators of contracts for the sale of goods.

The case also demonstrates the continuing viability of the economic loss rule.  Where a plaintiff’s breach of contract damages are identical to its tort damages, the economic loss rule will likely foreclose a plaintiff’s tort claim.