Confold Pacific v. Polaris Industries

• Citation: 433 F.3d 952
• Decision Date: 10 January 2006
• Docket Number: No. 05-1285.,05-1285.
• Parties: CONFOLD PACIFIC, INC., Plaintiff-Appellant, v. POLARIS INDUSTRIES, INC., Defendant-Appellee.
• Court: United States Courts of Appeals. United States Court of Appeals (7th Circuit)

433 F.3d 952

CONFOLD PACIFIC, INC., Plaintiff-Appellant, v. POLARIS INDUSTRIES, INC., Defendant-Appellee.

No. 05-1285.

United States Court of Appeals, Seventh Circuit.

Argued September 23, 2005.

Decided January 10, 2006.

Daniel J. Voelker (argued), Freeborn & Peters, Chicago, IL, for Plaintiff-Appellant.

James J. Long (argued), Briggs & Moran, Minneapolis, MN, for Defendant-Appellee.

Before POSNER, RIPPLE, and ROVNER, Circuit Judges.

POSNER, Circuit Judge.

The district judge granted summary judgment for the defendant, Polaris, a manufacturer of snowmobiles and other vehicles, in this diversity suit by ConFold for breach of contract and unjust enrichment. Polaris used to ship its vehicles in disposable containers, but in 1993 it began considering the possibility of using returnable containers instead. ConFold was a new company that wanted to produce such containers, and in the following two years, assisted by a management consulting and software development firm named CAPS Logistics, it conducted a "reverse logistics analysis" of Polaris's shipping needs. That is an analysis of how best to deal with goods returned by customers, for example whether to refurbish and resell them, recycle them, reuse their components, sell them as scrap, or tell the customer to discard them. Sarah Mason, "Backward Progress," Industrial Engineer, Aug. 1, 2002, p. 3; Patricia J. Daugherty, "Information Support for Reverse Logistics: The Influence of Relationship Commitment," 23 J. Bus. Logistics 85 (2002). It was conducted pursuant to an agreement, prepared by ConFold, between it and Polaris that was entitled "Mutual Non-Disclosure Agreement — Logistics Consulting Version." That agreement is the basis of ConFold's claim of breach of contract.

Two months after the agreement was signed, Polaris requested proposals for the design of a returnable container that would fit its needs. The request was sent to nine firms, including ConFold. All ConFold was told was that "your design will be one of nine considered at this point." Polaris accepted none of the proposals. But a few years later it designed a returnable container and subsequently began using containers manufactured by a firm to which it had given the design. ConFold claims that Polaris's design was based on the design that ConFold had submitted to Polaris in response to the request for proposals.

The breach of contract issue is whether the "Mutual Non-Disclosure Agreement — Logistics Consulting Version" bound Polaris not to reveal to a third party any returnable-container design that ConFold submitted to Polaris. The title of the contract suggests it did not, that the scope of the nondisclosure agreement was confined to reverse logistics analysis. The suggestion is reinforced by the timing; for when the contract was signed, the dealings between the parties related only to that analysis, which ConFold was to conduct for Polaris. The preamble to the contract states, moreover, that "ConFold has information relating to its proprietary software systems, documentation, and related consulting services which it considers to be proprietary," and the phrase "software systems, documentation, and related consulting services" refers to the reverse logistics analysis itself, for it was to that analysis that the software, documentation, and consulting services pertained. The implication is that the only proprietary information that ConFold would be revealing to Polaris would be information relating to the analysis.

This interpretation is bolstered by the statement in the contract that it is the "entire Agreement between the two parties concerning the exchange and protection of proprietary information relating to the program" (emphasis added). The only program in the contemplation of the parties was the software program to be used to produce the reverse logistics analysis, and the information that would be proprietary was the software and other materials relating to that analysis. It is one thing to determine whether a customer ought to switch to returnable containers and another to design the containers that the customer will use if he does switch. There is no hint in the contract that the design of containers was within its scope.

The district judge might have decided that the contract unambiguously excluded design information, in which event no evidence beyond the contract itself would have had to be considered. Especially when dealing with a substantial contract between "commercially sophisticated parties . . . who know how to say what they mean and have an incentive to draft their agreement carefully," Bank of America, N.A. v. Moglia, 330 F.3d 942, 946 (7th Cir.2003), there is great merit to the rule that the meaning of an unambiguous contract is a question of law rather than of fact, e.g., Columbia Propane, L.P. v. Wisconsin Gas Co., 250 Wis.2d 582, 640 N.W.2d 819, 826 (2001), rev'd on other grounds, 261 Wis.2d 70, 661 N.W.2d 776 (2003); Insurance Co. of North America v. DEC Int'l, Inc., 220 Wis.2d 840, 586 N.W.2d 691, 693 (1998), with the consequence "that unambiguous contractual language must be enforced as it is written." Town of Neenah Sanitary Dist. No. 2 v. City of Neenah, 256 Wis.2d 296, 647 N.W.2d 913, 916 (2002); see also Folkman v. Quamme, 264 Wis.2d 617, 665 N.W.2d 857, 864 (2003). The rule enables contract disputes to be resolved quickly and cheaply, "protects the parties against the vagaries of the litigation process — a major reason for committing contracts to writing — without too great a risk of misinterpretation," and by thus minimizing both contractual transaction costs and uncertainty increases the value of contracts as means of conducting business. Bank of America, N.A. v. Moglia, supra, 330 F.3d at 946.

Enforcing contracts as written has particular merit when the party that drafted the contract, which is to say ConFold (though, as we'll see, ConFold was largely copying an earlier contract drafted by someone else), is arguing that it should be relieved from the consequences of having neglected to spell out its rights concerning the very core of the transaction. Walters v. National Properties, LLC, 282 Wis.2d 176, 699 N.W.2d 71, 75 (2005); Tranzact Technologies, Ltd. v. Evergreen Partners, Ltd., 366 F.3d 542, 546 n. 2 (7th Cir.2004); Harris v. Union Electric Co., 787 F.2d 355, 365 n. 7 (8th Cir.1986). For the only subject of the contract was confidentiality. Polaris, though it knew that ConFold manufactured returnable containers, couldn't be expected to peek into ConFold's mind and discover that ConFold thought the duty of confidentiality extended to materials, namely container designs, that were neither mentioned in the contract nor germane to the project for which Polaris had hired ConFold, which was a consulting rather than a design project.

It is true that a contract can be clear on its face — clear, that is, to a reader not familiar with the commercial context — yet still be ambiguous when that context is restored. That is the domain of "extrinsic" or "latent" ambiguity. Dispatch Automation, Inc. v. Richards, 280 F.3d 1116, 1121 (7th Cir.2002); Evergreen Investments, LLC v. FCL Graphics, Inc., 334 F.3d 750, 756 (8th Cir.2003); Mews v. Beaster, 279 Wis.2d 507, 694 N.W.2d 476, 479 (2005). The parties to a sale of cotton may have specified that the cotton be shipped on the ship Peerless — nothing ambiguous about such a provision to the uninformed reader — but if it turns out that there are two ships by that name to which the contract might refer, the contract is revealed as ambiguous and extrinsic evidence (evidence beyond the words of the contract) is admissible to help resolve the ambiguity. Raffles v. Wichelhaus, 2 H. & C. 906, 159 Eng. Rep. 375 (Ex. 1864).

The district judge found the contract in this case ambiguous, but not because of anything in the commercial context. Rather, he thought it ambiguous on its face, requiring him to consider extrinsic evidence, First Bank & Trust v. Firstar Information Services, Corp., 276 F.3d 317, 322 (7th Cir.2001) (Wisconsin law), because of the further statement in the preamble that "ConFold and Polaris are desirous of exchanging information for purposes of both companies developing future business with each other." The referent of "future business" could just be the reverse logistics analysis, which had not begun because Polaris refused to approve the project until a confidentiality agreement was signed; it was in response to that demand that Confold submitted the agreement. But a more natural reading, reinforced by the fact that the quoted language is in that agreement and the logistics analysis is the subject of the agreement and thus "present" rather than "future" business, is that the reference was to a possible future sale by ConFold of returnable containers to Polaris. The parties hoped not only that the exchange would enable successful completion of the analysis but also that, if so, it might provide the foundation for a fruitful relationship at the next stage, when (and if) Polaris went into the market to buy returnable containers, possibly from ConFold. It is not unusual for a firm to be hired first as a consultant to advise a buyer on his needs, and later, when those needs are formulated, to bid to supply them; and ConFold's initial proposal to Polaris for the reverse logistics analysis actually quoted a price for additional services — including design.

The quoted language is best understood, however, as merely an explanation for why the parties were exchanging information, and committing to its confidentiality, concerning the reverse logistics analysis. They hoped to do future business; they did not commit to. ConFold's interpretation lacks sensible limits. It spreads the blanket of confidentiality over "exchanging information" — any information. This would require that any information the parties exchanged, including their phone numbers, be kept confidential (forever?), and that is an...