Roboserve, Inc. v. Kato Kagaku Co., Ltd.

• Decision Date: 06 May 1996
• Docket Number: No. 95-1371,95-1371
• Parties: ROBOSERVE, INCORPORATED, a Delaware corporation, Plaintiff-Appellee, v. KATO KAGAKU COMPANY, LIMITED, a Japanese company, Defendant-Appellant.
• Court: U.S. Court of Appeals — Seventh Circuit

Page 266

78 F.3d 266

ROBOSERVE, INCORPORATED, a Delaware corporation, Plaintiff-Appellee, v. KATO KAGAKU COMPANY, LIMITED, a Japanese company, Defendant-Appellant.

No. 95-1371.

United States Court of Appeals Seventh Circuit.

Argued Sept. 7, 1995.

Decided Feb. 23, 1996.

Rehearing and Suggestion for Rehearing En Banc Denied May 6, 1996.

Appeal from the United States District Court for the Northern District of Illinois, Eastern Division, No. 92 C 5248; Brian Barnett Duff, Judge.

Eric C. Cohen, Robert B. Breisblatt, argued, A. Sidney Katz, Laurie A. Haynie, Jerold B. Schnayer, Welsh & Katz, Chicago, IL, for Plaintiff-Appellee.

Jerome H. Torshen, argued, Abigail K. Spreyer, Torshen, Spreyer & Garmisa, Chicago, IL, Michael P. Connelly, Kathleen A. Bridgman, Eugene S. Kraus, Charles P. Piacentini, Connelly & Schroeder, Chicago, IL, Nicholas J. Bua, Burke, Weaver & Prell, Chicago, IL, for Defendant-Appellant.

Before RIPPLE, MANION, and KANNE, Circuit Judges.

MANION, Circuit Judge.

On August 4, 1992, Roboserve, Inc. ("Roboserve"), sued Kato Kagaku Co., Ltd. ("Kato"), claiming breach of contract, wrongful termination, and fraud. The parties went to trial on October 18, 1993 and the jury returned a verdict in Roboserve's favor on all counts, awarding it compensatory and punitive damages totalling $9,950,000. Subsequently, Kato filed a motion for judgment as a matter of law or, in the alternative, for a new trial or a remittitur. The district court agreed with Kato on certain technical points and granted a remittitur of $127,500, but otherwise upheld the jury's verdict. On appeal Kato challenges the verdict and damages award as utterly contrary to the evidence. We affirm the jury's findings of breach of contract, wrongful termination, and fraud, but vacate the award of damages for breach of contract and fraud (including punitive damages) and remand for a new trial on those issues unless Roboserve accepts a substantial remittitur.

I. Background ¹

Roboserve, a Delaware corporation, leases and services hotel minibars. Kato, a Japanese company, owns the Hyatt Regency Chicago ("HRC"). The HRC is managed by Hyatt Corporation ("Hyatt"), a corporate entity separate from Kato. On June 23, 1986, Roboserve and Hyatt entered into a Concession Agreement ("Agreement") providing that Roboserve would install 1000 of its "Robobar" minibars in HRC rooms. The Agreement also required the HRC to use "reasonable endeavors" to place those guests most likely to use minibars in the Robobar rooms and to encourage them to make purchases from the minibars. ² The system was to be installed by the end of 1986, and the Agreement was to be effective for five years, beginning with the time 25% of the Robobars were installed.

According to Roboserve, due to delays in installation, Roboserve and Hyatt negotiated an amended Agreement on October 2, 1986. The amended version altered the Agreement's duration, making it last five years from "the date when all the Robobar units have been commissioned," meaning installed. (Emphasis added.) Kato vigorously denies the Agreement was ever amended.

Between February and April 1987, Roboserve installed 900 of the 1000 units called for in the Agreement. Hyatt officials then decided to review the success of the Robobar program before proceeding with further installations in the HRC or other Hyatt hotels. At the time Roboserve was hoping to secure a nationwide contract with Hyatt, so it was less than insistent about enforcing its contractual right to install the remaining 100 bars.

Despite Hyatt's commitment to promote Robobars, Roboserve learned in late 1987 and early 1988 that Hyatt intended to contract with ServiSystems, a Roboserve competitor, to install in HRC's east tower a number of "ServiBars," ServiSystems' minibars. (The Robobars were to remain in the west tower.) A November 11, 1988 letter to Roboserve from Hyatt vice president David Zadikoff explained this as a test "to evaluate the two Honor Bar systems that are presently being utilized in our hotels--Robobar and ServiBar." Mr. Zadikoff assured Roboserve that Hyatt's agreement with ServiSystems was for "a one-year test period only." According to Roboserve, Hyatt representatives also indicated orally that the winner of the test would become the preferred minibar provider for Hyatt hotels and would "get the Hyatt business." By the time the November 11 letter was sent, Kato had purchased the HRC and designated Hyatt as its manager. ³

Roboserve won the one-year test and soon thereafter began protracted negotiations with Hyatt about replacing the ServiBars in the HRC with Robobars. However, the evidence suggests (and the jury ultimately believed) that the one-year test was a pretext. Unbeknownst to Roboserve, by the time Hyatt announced the test it had already signed a contract with ServiSystems to provide ServiBars for the HRC "for a term commencing on May 15, 1988 and expiring on May 14, 1995." During the negotiations, Hyatt's official position was that Roboserve was the preferred provider of minibars, which Roboserve claims caused it to fully anticipate getting the broader Hyatt business and thus to forego any attempt to force the installation of the remaining 100 bars at the HRC.

The negotiations dragged on for about three years. Finally, on February 26, 1992, Hyatt confessed that it had "complications of another contractual arrangement" and would be unable to replace the ServiBars with Robobars. On December 14, 1992, Hyatt informed Roboserve that, as of March 1, 1993, it was terminating the Agreement.

Roboserve sued Kato alleging that Kato, through its agent Hyatt, (1) breached the Agreement by not allowing the installation of all 1000 bars and by failing to properly promote the Robobars, (2) wrongfully terminated the contract before its five-year term had begun, and (3) defrauded Roboserve of further Hyatt business. (At oral argument counsel for Roboserve stated that because Hyatt was Kato's agent, they "did not have to" sue Hyatt.) Roboserve claimed that as a result it suffered $1 million in damages from the breach of contract and another $1 million on account of the fraud (the wrongful termination count merely asked for specific performance). The prayer for relief then requested $4 million in actual and consequential damages and $2 million in punitive damages. The jury did not stop there, however. Not only did it find for Roboserve on each count, it also awarded nearly $10 million in damages: $2.1 million for the breach of contract, $850,000 for the wrongful termination (reduced by the court to $722,500), and $7 million for fraud ($1 million in compensatory and $6 million in punitive damages).

II. Analysis

On appeal, Kato challenges both the finding of liability and the amount of the damages award for each claim. Regarding the fraud claim, Kato contends that the district court improperly permitted the jury to hear evidence suggesting that Hyatt fraudulently promised Roboserve business opportunities beyond the HRC. According to Kato, this caused the jury to believe that Kato was responsible for actions of Hyatt which were well beyond the scope of the Kato-Hyatt agency relationship. Kato challenges the award of $1 million in damages for fraud on the ground that the jury improperly based its calculations on the value of Hyatt's unfulfilled promises of business beyond the HRC, which Kato never had the means to deliver. Kato also denies the evidence suggests conduct sufficiently gross or outrageous to justify the award of any punitive damages, let alone $6 million.

As for the contract claim, Kato argues that the Agreement's "reasonable endeavors" clause was too vague to be enforceable and that the district court improperly excluded evidence that Roboserve waived its rights to install all 1000 Robobars. With respect to the $2.1 million award for contract damages, Kato contends that the jury improperly compensated Roboserve for lost profits to which it was never entitled.

Finally, Kato challenges the verdict on the wrongful termination claim by arguing that the Agreement was never amended and that, at any rate, it was never truly terminated. Kato challenges the damages award (like that for breach of contract) on the ground that it was based on calculations of lost profits to which Roboserve was never entitled.

A. Fraud

1. Scope of Kato's liability for Hyatt's acts.

Initially, we consider Kato's contention that the district court improperly allowed the jury to consider as evidence of fraud certain promises Hyatt allegedly made to Roboserve concerning business at other Hyatt hotels. Such promises, Kato argues, were well beyond the scope of the Kato-Hyatt agency relationship, which was limited to the management of the HRC. ⁴ As a result, the jury heard evidence that Roboserve lost a large volume of business Kato was never in a position to deliver and awarded damages accordingly. Roboserve counters that Kato's HRC directly benefitted from Hyatt's ability to extract concessions favorable to Kato through alluring allusions to other Hyatt business opportunities.

Kato is correct that it cannot be held liable for Hyatt's statements to Roboserve concerning deals at other Hyatt hotels. The scope of Hyatt's agency relationship with Kato simply did not extend beyond the management of the HRC. Moreover, as a sophisticated player in the hotel industry, Roboserve knew (or should have known) that Kato could not deliver business at hotels it did not own. The evidence indicates that Roboserve courted Hyatt not merely as Kato's agent for the HRC but as a separate corporate entity, as the gatekeeper for business at Hyatt hotels nationwide. Therefore, to the extent it was wrongfully deprived of the broader Hyatt business, Roboserve's gripe is with Hyatt, not Kato. The district court came to this conclusion in ruling on Kato's post-trial motion, holding that "Roboserve cannot place at Kato's feet liability for fraud that extended beyond its domain, certainly...