Federal Pants vs. D-S Enterprises: Agency Dispute & Contract Breach, Study Guides, Projects, Research of Law

Download Federal Pants vs. D-S Enterprises: Agency Dispute & Contract Breach and more Study Guides, Projects, Research Law in PDF only on Docsity! LEXIS-NEXIS® Academic FEDERAL PANTS, INC., & HAROLD FOONBERG, Plaintiffs-Appellants-Cross- Appellees, v. DANIEL STOCKING, et al., Defendants-Appellees-Cross-Appellants Nos. 84-1690, 84-1745 UNITED STATES COURT OF APPEALS FOR THE SEVENTH CIRCUIT 762 F.2d 561; 1985 U.S. App. LEXIS 27419; 41 U.C.C. Rep. Serv. (Callaghan) 110 January 14, 1985, Argued May 22, 1985, Decided PRIOR HISTORY: [**1] Appeal from the United States District Court for the Eastern District of Wisconsin. 82-C- 1494-Terence T. Evans, Judge. DISPOSITION: We also affirm the court's decision to award judgment in favor of D-S Enterprises on its breach of contract claim and to order Federal Pants to pay $79,531.20 to D-S Enterprises. COUNSEL: Arthur M. Moglowsky, Bass, Goldstein, Moglowsky, Milwaukee, Wisconsin, for Plaintiffs. Michael A. Bowen, Foley & Lardner, Milwaukee, Wisconsin, for Defendants. JUDGES: Cummings, Chief Judge, Bauer and Flaum, Circuit Judges. OPINIONBY: FLAUM OPINION: [*562] FLAUM, Circuit Judge. The plaintiffs Federal Pants, Inc. and Harold Foonberg brought this diversity action against the defendants Daniel Stocking, D-S Enterprises, and others, alleging that the defendants breached an agency [*563] agreement, engaged in unauthorized competition, and misused confidential information. The defendants counterclaimed against the plaintiffs, alleging breach of contract, tortious interference with advantageous economic relations, and unlawful restraint of trade. The district court granted the defendants' motion for summary judgment in part, thereby dismissing all of the plaintiffs' [**2] claims, awarding the defendants $79,531.20 on their breach of contract claim, and dismissing the defendants' remaining two claims. For the reasons stated below, we affirm. I. The plaintiffs Federal Pants, Inc. and its sole stockholder Harold Foonberg (collectively referred to as "Federal Pants") and the defendants D-S Enterprises and its partners (collectively referred to as "D-S Enterprises") were each engaged in the diversion business when the events leading up to this lawsuit transpired. This business involves acquiring well-known, name-brand products from a manufacturer and reselling the merchandise to discount stores and other outlets that have not been designated as authorized dealers by the manufacturer. D-S Enterprises had obtained the right to buy sports shoes and other athletic apparel from the Nike Corporation. Federal Pants, however, was not an authorized Nike dealer and thus could not purchase goods directly from Nike. In May 1982, D-S Enterprises placed future delivery orders with Nike in the sum of several hundred thousand dollars or more each month for the period from June 1982 through January 1983. When D-S Enterprises found in June 1982 that it could not on [**3] its own post the security of $1 million required by Nike to guarantee the future delivery orders, it negotiated with Federal Pants to combine resources. Federal Pants was to post a $1 million letter of credit for the benefit of The Standard Chartered Bank Limited of Chicago. The Standard Chartered Bank would then post a back-to-back $1 million letter of credit for the benefit of Nike. On June 23, 1982, Jay Foonberg, the brother of and attorney for the president of Federal Pants, sent D-S Enterprises an agreement stating that Federal Pants was to guarantee up to $1 million in D-S Enterprises' purchases from Nike while D-S Enterprises would resell these purchases to Federal Pants or to persons designated by Federal Pants. On behalf of D-S Enterprises, Daniel Stocking and his wife signed the agreement and returned it to Federal Pants. For a period of two months, D-S Enterprises purchased over $1 million in Nike merchandise and resold it to Federal Pants or to another buyer designated by Federal Pants. D-S Enterprises never drew on Federal Pants' letter of credit, but rather paid Nike directly for all of its purchases. In late August or early September 1982, Nike discovered that D-S [**4] Enterprises was reselling Nike merchandise to an unauthorized wholesaler and immediately terminated the future delivery orders contract. In September, D-S Enterprises informed Federal Pants of Nike's decision to terminate the orders and proceeded to sue Nike for breach of a dealership agreement under the Wisconsin Fair Dealership Act. In November 1982, Nike began settlement negotiations with D-S Enterprises. Nike offered to make a one-time, final sale to D-S Enterprises of $8 million worth of shoes that Nike had on hand. Nike insisted that D-S Enterprises would have to secure the sale with a letter of credit or other security in the amount of the sale plus the amount that D-S Enterprises still owed to Nike. Nike refused to allow D-S Enterprises to rely on Federal Pants' $1 million letter of credit, required D-S Enterprises to post a new letter of credit before the settlement sale, and insisted that delivery on the sale begin by the end of November 1982. relationship between Federal Pants and D-S Enterprises, we note that their relationship was not exclusive as Federal Pants alleged since D-S Enterprises was also booking business for another wholesaler, Western mercantile. In the third count of its counterclaim, D-S Enterprises claimed that if the court found that D-S Enterprises and Federal Pants were parties to an exclusive agency agreement, then the court should find that Federal Pants engaged in an unlawful restraint of trade in violation of the Sherman Act. 15 U.S.C. § 1 (1982). D-S Enterprises reasoned that if it had an exclusive agency relationship with Federal Pants, then Federal Pants would have been tying credit to an unreasonably overbroad refusal to deal with competitors. Since we find that D-S Enterprises and Federal Pants were not parties to an exclusive agency relationship, we affirm the district court's dismissal of D-S Enterprises' third counterclaim alleging an unlawful restraint of trade. - - - - - - - - - - - - - - - - -End Footnotes- - - - - - - - - - - - - - - - - [**11] Even if D-S Enterprises was Federal Pants' purchasing agent for Nike merchandise, however, the agency relationship came to an end when Nike terminated D-S Enterprises' dealership rights after discovering that D-S Enterprises was selling Nike goods to Federal Pants, an unauthorized dealer, in late August or early September 1982. According to the Restatement (Second), the authority of an agent terminates when he receives notice of the happening of an event or of a change in circumstances from which he should reasonably infer that the principal does not consent to the further exercise of authority or would not consent if he knew the facts. Restatement (Second) of Agency § 108(1) (1958). In addition, an agent has the duty to use reasonable efforts to give to his principal information relevant to affairs entrusted to the agent. Id. § 381; Schweiger [*566] v. Loewi and Co., 65 Wis. 2d 56, 64, 221 N.W.2d 882, 888 (1974). In the present case, D-S Enterprises notified plaintiff Foonberg of Nike's termination of D-S Enterprises as an authorized Nike dealer in September 1982. [**12] Upon receipt of the notice, Federal Pants did not instruct D-S Enterprises to sue Nike for Federal Pants' own benefit. In fact, Federal Pants did not respond in writing to this notification until November 23, 1982, when it sent a letter to D-S Enterprises. Furthermore, this November 23 letter attempted to formally wind up Federal Pants' relationship with D-S Enterprises by requesting that Federal Pants' $1 million letter of credit exonerated since D-S Enterprises no longer needed it. The letter also suggested that D-S Enterprises send a release of mortgage form to Federal Pants since Federal Pants would no longer need any security for its posting the letter of credit. The letter did not indicate that Federal Pants believed that D-S Enterprises had breached any fiduciary duties to Federal Pants, but rather concluded by thanking defendant Stocking for his "courtesy and cooperation." In sum, Federal Pants' response upon learning of Nike's termination and its November 23 letter show that any agency relationship that may have existed between Federal Pants and D-S Enterprises came to an end when Nike terminated D-S Enterprises as an authorized Nike dealer. Thus, any Nike merchandise received [**13] by D-S Enterprises pursuant to the settlement negotiations with Nike was obtained for its own rather than for Federal Pants' benefit. We accordingly affirm the district court's denial of plaintiffs' motion for summary judgment on the agency counts. B. Breach of Contract In addition to its agency causes of action, Federal Pants alleged that D-S Enterprises breached its contract to sell Nike merchandise to Federal Pants in exchange for Federal Pants furnishing a $1 million letter of credit to finance the purchases. D-S Enterprises counterclaimed with its own breach of contract claim as a result of Federal Pants' issuance of a stop payment order on a $79,531.20 check that it had issued to D-S Enterprises in payment for Nike goods already received. The district court found that D-S Enterprises had always met its obligation to provide Nike merchandise to Federal Pants and had actually rendered over $1 million in goods to Federal Pants when Nike terminated its relationship with D-S Enterprises. The court concluded that any contract between the parties was premised on the ongoing relationship of D-S Enterprises with Nike and that when that relationship ended, the contract between [**14] Federal Pants and D-S Enterprises lapsed. The court noted that even if the contract survived Nike's termination, D-S Enterprises was not obliged to forego purchasing the Nike settlement goods and reselling them to other customers in view of Federal Pants' inability to finance the purchase. The court also concluded that Federal Pants was obligated to pay for the $79.531.20 worth of goods that it had received from D-S Enterprises since D-S Enterprises never drew on Federal Pants' letter of credit or breached any contract with Federal Pants. Federal Pants argues that D-S Enterprises was under a duty to notify Federal Pants of its lawsuit against Nike and to turn over its legal rights against Nike to Federal Pants pursuant to section 2-615 of the Uniform Commercial Code ("U.C.C."). According to section 2-615(1), a seller will not be considered to have breached his duty under a sales contract due to delay in delivery or nondelivery in whole or in part if "performance as agreed has been made impracticable by the occurrence of a contingency the nonoccurrence of which was a basic assumption on which [**15] the contract was made." Wis. Stat. § 402.615(1) (1983-1984). This section also provides that the seller must notify the buyer seasonably that there will be a delay or nondelivery. Id. § 402.615(3). Comment five to this section states that when there is a failure of production by an agreed source of supply, the seller must act in good faith in making good his claim of excuse by turning over to the buyer his rights against the defaulting [*567] source of supply to the extent of the buyer's contract. Id. § 402.615 comment 5. Following the seller's notification to the buyer concerning a material or indefinite delay or an allocation, the buyer may by written notification to the seller terminate and discharge any unexecuted portion of the contract or else modify the contract by agreeing to take his available quota in substitution. Id. § 402.616(1). If the buyer fails to modify the contract within a reasonable time not exceeding thirty days following receipt of the seller's notification, the contract will lapse with respect to any deliveries affected. Id. § 402.616(2). According [**16] to the comment, this section is designed to establish simple and workable machinery for providing certainty when a supervening contingency excuses the delay or discharges the contract. Id. § 402.616 comment. In the present case, D-S Enterprises complied with the relevant provisions of the Uniform Commercial Code and thus did not breach its sales contract with Federal Pants. Nike's termination of D-S Enterprises as an authorized dealer constituted a contingency the nonoccurrence of which was a basic assumption on which the contract between D-S Enterprises failure to deliver the Nike merchandise to Federal Pants following Nike's termination did not amount to a breach of D-S Enterprises' duty to deliver goods to Federal Pants pursuant to their sales contract because the occurrence of this contingency made D-S Enterprises' performance impracticable. Following Nike's termination, D-S Enterprises notified Federal Pants of the nondelivery. Federal Pants never instructed D-S Enterprises to sue Nike on its behalf. Furthermore, Federal Pants failed to modify its contract with D-S Enterprises within thirty days of receiving D-S Enterprises' notification and remained silent for two months [**17] until its November 23 letter to D-S Enterprises. Federal Pants' failure to respond to D-S Enterprises thus resulted in the lapsing of its contract with D-S Enterprises under section 2-616(2) of the U.C.C. This termination of the contract between D-S Enterprises and Federal Pants was essentially acknowledged by Federal Pants in its November 23 letter to D-S Enterprises when it requested the return of its letter of credit. Cf. Eastern Air Lines, Inc. v. McDonnell Douglas Corp., 532 F.2d 957, 989 n. 91 (5th Cir. 1976) (buyer's failure to pursue options under U.C.C. § 2-616 would not preclude him from maintaining a breach of contract action because both the buyer and seller continued to perform the contract as though it remained in force following the occurrence of the contingency). In sum, D-S Enterprises was excused from performing its obligations to Federal Pants under the terms of their sales contract as a result of Nike's unexpected termination. Federal Pants' silence following D-S Enterprises' notice of Nike's termination resulted in the contract being discharged. Since we find that D-S Enterprises neither breached its contract with Federal Pants nor improperly [**18] used Federal Pants' $1 million letter of credit, Federal Pants must pay D-S Enterprises for the $79,531.20 worth of Nike goods that it received. Thus, we affirm the district court's grant of summary judgment on D-S Enterprises' counterclaim and the court's denial of Federal Pants' motion on its breach of contract claim. C. Misuse of Confidential Information, Unauthorized Competition, and Tortious Interference with Advantageous Economic Relations In its final cause of action, Federal Pants claimed that D-S Enterprises misused confidential information in selling the Nike settlement goods to Federal Pants' principal customers and engaged in unauthorized competition in using Federal Pants' own $1 million letter of credit to enable D-S Enterprises to purchase goods for and sell directly to Federal Pants' customers. According to the Restatement (Second) of Agency, an agent is subject to a duty not to compete with his principal concerning the subject matter of his agency. Restatement (Second) of Agency § 393 (1958); McGeoch [*568] Building Co. v. Dick and Reuteman Co., 253 Wis. 166, [**19] l73, 33 N.W.2d 252, 255 (1948). This duty not to compete, however, ceases upon the termination of the agency relationship. Restatement (Second) of Agency § 393 comment e, § 396(a); Stark and Co. v. Roets, 253 Wis. 166, 33 N.W.2d 252 (1948). Although prohibited from using trade secrets or other confidential information given to him only for the principal's use, an agent is permitted to