896 F.2d 939 (5th Cir. 1990), 89-1168, Caton v. Leach Corp.

Docket Nº:89-1168.
Citation:896 F.2d 939
Party Name:Ralph W. CATON d/b/a Caton Sales Company, Plaintiff-Appellant, v. LEACH CORPORATION, Defendant-Appellee.
Case Date:March 21, 1990
Court:United States Courts of Appeals, Court of Appeals for the Fifth Circuit

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896 F.2d 939 (5th Cir. 1990)

Ralph W. CATON d/b/a Caton Sales Company, Plaintiff-Appellant,


LEACH CORPORATION, Defendant-Appellee.

No. 89-1168.

United States Court of Appeals, Fifth Circuit

March 21, 1990

Rehearing Denied April 23, 1990.

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John M. Phalen, Jr., Joseph G. Chumlea, Phalen, Chumlea & McQuality, Dallas, Tex., for plaintiff-appellant.

Susan L. Karamanian, Locke, Purnell, Rain & Harrell, Dallas, Tex., for defendant-appellee.

Appeal from the United States District Court for the Northern District of Texas.

Before GOLDBERG, POLITZ, and JONES, Circuit Judges:

EDITH H. JONES, Circuit Judge:

Ralph Caton sued Leach Corporation, which had terminated him after 22 years as an employee and a sales representative, to recover damages for breach of contract and implied contract, wrongful discharge, and amounts allegedly owed as restitution. The district court granted Leach Corporation's motion for summary judgment. We reverse in part and affirm in part.


For purposes of reviewing the grant of summary judgment, we must accept the evidence of the non-movant, and all justifiable inferences are to be drawn in his favor. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 255, 106 S.Ct. 2505, 2513, 91 L.Ed.2d 202 (1986). Leach Corporation ("Leach") manufactures electronic and mechanical products for use in the aerospace industry. Leach marketed and sold its products for many years throughout the country through local sales representatives such as Ralph Caton ("Caton").

From 1963 until June 15, 1985, Caton worked for Leach in several capacities. During his first ten years, Caton solicited sales in Texas for Leach as a company employee, including serving as district sales manager. In 1973, Caton relinquished his employee status to become an independent sales representative for Leach. Caton eventually became Leach's exclusive representative to solicit relay switch sales in Texas.

In July 1983, Leach and Caton executed a sales representative agreement which defined the parties' relationship through provisions that addressed Caton's responsibilities, sales territory, and compensation structure. The 1983 agreement recognized that Caton was to be compensated for his services on a commission basis, and its pertinent terms will be described later.

For many years, Caton actively participated in the research, design and marketing of relay switches that Leach sold to General Dynamics for the F-16 aircraft. During 1984, Caton notified Leach that General Dynamics expected a large government order of F-16 aircraft ("Multi-Year Buy"), for which General Dynamics would need relay switches. Fulfilling his sales representative responsibilities, Caton maintained and solidified Leach's position as a General Dynamics supplier.

By letter dated May 14, 1985, however, Leach notified Caton that the sales representative agreement would be terminated thirty days later. 1 The letter was hand

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delivered to Caton by Steve Whitcomb, Leach's National Sales Manager, at a hotel near Fort Worth, Texas.

By a remarkable coincidence, the termination occurred after Leach had received quotation requests from General Dynamics regarding relay switches for the Multi-Year Buy and after Caton prophesied the success of Leach's efforts on this contract. A table submitted in evidence indicates that Leach had bid to supply over $12,000,000 of relay equipment by June 15, 1985. 2 Caton contends that Leach was awarded $4.9 million in relay orders by September 6, 1985 and eventually received $8.6 million of relay business.

Although the reasons for Caton's termination are, naturally, disputed, Caton has directed us to evidence suggesting that he contributed significantly to obtaining the General Dynamics contract. Caton testified in deposition regarding a conversation on February 27, 1985, with Whitcomb following their joint visit to the General Dynamics plant in Fort Worth. Against Whitcomb's denial, Caton asserts that Whitcomb referred to the General Dynamics Multi-Year Buy, stating "when we book this, we are going to have to pay you a quarter million dollars of commissions, ..." In a letter dated March 6, 1985, Whitcomb criticized Caton for problems with Bell, but also commended Caton for developing the "obvious rapport and good relations with G.D. [General Dynamics], T.I. and Electro Space ". A later Whitcomb memo discussing possible changes in sales personnel acknowledged that Caton could potentially cost Leach $300,000 in commissions during fiscal year 1986, the time for the Multi-Year Buy. Whitcomb also conceded by deposition testimony that in early April when the termination letter was prepared, Leach was optimistic about procuring $3 to $4 million of relay orders from General Dynamics.

The district court granted summary judgment in favor of Leach on the ground that the agreement gave Leach the express right to terminate the parties' relationship upon 30 days' notice. On appeal, we must determine whether any genuine issue of material fact arises from the evidence to support any of Caton's proffered theories for relief.



Either the law of California or Texas applies to Caton's various claims. Although the parties agree that the choice of law clause contained in Caton's contract governs the choice of law analysis, our role as a federal court sitting in diversity requires application of the choice of law rules of the forum. See Day & Zimmerman, Inc. v. Challoner, 423 U.S. 3, 4, 96 S.Ct. 167, 168, 46 L.Ed.2d 3 (1975); Stuart v. Spademan, 772 F.2d 1185, 1195 (5th Cir.1985). Accordingly, we decide which law governs according to Texas law.

The parties' choice of law clause provides that: "[t]his Agreement shall be construed under the laws of the State of California." Texas choice of law principles give effect to choice of law clauses if the law chosen by the parties has a reasonable relationship with the parties and the chosen state, and the law of the chosen state is not contrary to a fundamental policy of the state. Desantis v. Wackenhut Corp., 31 Tex.S.Ct.J. 616, 618, --- S.W.2d ----, ---- (July 13, 1988) (motion for reh. pending). In Desantis, the Texas Supreme Court adopted the rule of Section 187 of the Restatement (Second) of Conflict of Laws. See id. at ---- (discussing Section 187(2)).

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Section 187(1) allows the parties to incorporate by reference the laws of a forum to determine issues that could have been resolved by explicit agreement, such as "rules relating to construction" of an agreement. See Restatement (Second) of Conflict of Laws Sec. 187(1) comment c (Supp.1988). See also Scoles & Hay, Conflict of Laws Sec. 18.3, at 637 (1984) (choice of law for construing terms of contract is not restricted). We will give effect to the parties' determination that their agreement be construed under California law. Likewise, Caton's claim for relief under the implied contractual covenant of good faith depends on the construction of the contract under California law, and California law will govern this claim.

The parties' narrow choice of law clause 3 does not address the entirety of the parties' relationship, however, and hence does not end our inquiry. Caton's other claims for relief involve the tort duty of good faith and fair dealing and a claim for restitution under quantum meruit, and, as such, do not arise out of the contract. Because the choice of law clause does not address the general rights and liabilities of the parties, we must return to Texas choice of law rules to determine which law applies. In Texas, where the parties have not agreed to the application of law to a particular issue, "the law of the state with the most significant relationship to the particular substantive issue will be applied to resolve that issue." Duncan v. Cessna Aircraft Co., 665 S.W.2d 414, 421 (Tex.1984); see also Restatement (Second) of Conflict of Laws Sec. 145(1) (1971) (most significant relationship test for tort liability). Section 145(2) provides the relevant contacts for analyzing which state has the most significant relationship to the parties and the occurrence "under the principles stated in Section 6." Restatement (Second) of Conflict of Laws Sec. 145.

Caton resides in Texas, served Leach in Texas by soliciting sales from companies in Texas, and was terminated by Leach in Texas. Leach is a Delaware corporation, which has its principal place of business in California. Caton and Leach agree that Texas law should be applied to Caton's claims that arise independently from the sales representative agreement. Finally, Texas has a significant interest in remedying civil injury to Texas citizens through tort liability and also in defining the outer limits of tort liability. Therefore, Caton's wrongful discharge claim based on breach...

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