Energy Labs, Inc. v. Edwards Eng'g, Inc.

Decision Date02 June 2015
Docket NumberNo. 14 C 7444,14 C 7444
CourtU.S. District Court — Northern District of Illinois
PartiesENERGY LABS, INC. Plaintiff, v. EDWARDS ENGINEERING, INC. and W.E. BISHOP & CO. Defendants.

Hon. Marvin E. Aspen

MEMORANDUM OPINION AND ORDER

MARVIN E. ASPEN, District Court Judge:

This action arises from an alleged breach of a manufacturing contract. Plaintiff Energy Labs, Inc. ("ELI") brings its complaint against Defendants Edwards Engineering, Inc. ("Edwards") and W.E. Bishop & Co. ("Bishop"), alleging breach of contract, quantum meruit, and promissory estoppel. Presently before us is Defendants' motion to dismiss the complaint. For the reasons discussed below, we deny Defendants' motion to dismiss in full.

BACKGROUND

ELI is a California corporation that manufactures custom air-cooling and heating systems for commercial use. (Compl. ¶¶ 1, 7.) Edwards, an Illinois corporation, contracted with the Chicago Transit Authority ("CTA") to rehabilitate the air conditioning and heating systems at the CTA's 103rd Street repair facility ("CTA Project"). (Id. ¶¶ 12, 16.) Edwards also entered into a contract with Bishop relating to the CTA Project, although Bishop's role is unclear. (Id. ¶ 30.) ELI alleges that Bishop was Edwards' alter ego and merely acted as a "pass through," "performing no work" and "providing no services" for the CTA Project. (Id. ¶ 36.)

ELI alleges that Defendants certified to the CTA that any subcontractor they utilized for the CTA Project would comply with the Buy America Act ("BAA"). (Compl. ¶ 14.) The BAA mandates that certain components used to construct transportation systems funded by the federal government be manufactured in the United States. 49 U.S.C. § 5323(j); 49 C.F.R. § 661, et seq. After certifying that it would comply with the BAA, Defendants subcontracted with ELI to manufacture and deliver thirteen custom air conditioning units for the CTA Project and sent two purchase orders to ELI for that purpose. (Compl. ¶¶ 2, 16, 25-26.) According to ELI, the purchase orders do not reference the BAA. (Resp. at 9.) After receiving the purchase orders, ELI designed the air conditioning units, submitted those designs to Defendants and the CTA for approval, and started manufacturing the units in Tijuana, Mexico. (Compl. ¶ 17.)

On March 3, 2014, Edwards' Executive Vice President of Engineering toured the facility in Mexico where ELI was manufacturing the air conditioning units. (Id. ¶ 39.) At the time, Edwards' Vice President did not mention that the BAA prevented Edwards from using air conditioning units manufactured in Mexico for the CTA Project. (Id. ¶ 40.) Following this inspection, ELI was notified that the BAA governed the CTA Project.1 (Id. ¶ 42.) ELI and Edwards then sought guidance from the Federal Transit Administration ("FTA") to determine whether the BAA precluded Defendants from using ELI's air conditioning units for the CTA Project. (Id.) The FTA found that it did, reasoning that the units were "components," rather than "subcomponents" as the parties originally argued. (Id. ¶ 43; Mot., Ex. B.) Under the BAA and its corresponding federal regulations, components must be manufactured in the United States, whereas subcomponents may be manufactured abroad. See 49 C.F.R. § 661.5(d)(2). (Compl. ¶¶ 43-44; see Mot., Ex. B at 3.) Since ELI's air conditioning units were "components,"they had to be manufactured in the United States if Defendants were to use them for the CTA Project. (Compl. ¶¶ 43-44; see Mot., Ex. B at 4.) Defendants then cancelled their purchase orders with ELI and retained a different manufacturer to produce the air conditioning units in the United States. (Compl. ¶¶ 45, 62.)

ELI filed a complaint with this court asserting breach of contract, quantum meriut, and promissory estoppel. It seeks damages totaling $952,415 for work it completed pursuant to the purchase orders from Defendants. (Id. ¶¶ 54, 64, 76, 82.) In their motion to dismiss, Defendants argue that the parties' contract cannot be enforced because it was contrary to the BAA and therefore illegal. (Mot. at 1.) Similarly, Defendants contend that ELI cannot recover in quantum meruit or promissory estoppel because a party cannot recover in equity on an illegal contract. (Id.) ELI disputes that the contract is illegal. (Resp. at 2.)

STANDARD OF REVIEW

A motion to dismiss under Federal Rule of Civil Procedure 12(b)(6) is meant to "test the sufficiency of the complaint, not to decide the merits of the case." Gibson v. City of Chi., 910 F.2d 1510, 1520 (7th Cir. 1990). In evaluating a motion to dismiss, we must accept all well-pleaded allegations in the complaint as true and draw all reasonable inferences in the plaintiff's favor. Thompson v. Ill. Dep't of Prof'l Regulation, 300 F.3d 750, 753 (7th Cir. 2002).

A court may grant a Rule 12(b)(6) motion to dismiss only if the complaint lacks enough facts "to state a claim [for] relief that is plausible on its face." Ashcroft v. Iqbal, 556 U.S. 662, 678, 129 S. Ct. 1937, 1949-50 (2009) (quoting Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570, 127 S. Ct. 1955, 1974 (2007)); Killingsworth v. HSBC Bank Nev., N.A., 507 F.3d 614, 618-19 (7th Cir. 2007). "A claim has facial plausibility when the plaintiff pleads factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconductalleged." Iqbal, 556 U.S. at 678, 129 S. Ct. at 1949. While a facially plausible complaint need not contain "detailed factual allegations," it must allege facts sufficient "to raise a right to relief above the speculative level." Twombly, 550 U.S. at 555, 127 S. Ct. at 1964-65. On the other hand, a claim is not plausible if the plaintiff has "ple[d] herself out of court [by including] in her complaint facts that establish an impenetrable defense to her claims." Vinson v. Vermilion Cnty., Ill., 776 F.3d 924, 929 (7th Cir. 2015); accord Tamayo v. Blagojevich, 526 F.3d 1074, 1086 (7th Cir. 2008). These requirements ensure that the defendant receives "fair notice of what the . . . claim is and the grounds upon which it rests." Twombly, 550 U.S. at 555, 127 S. Ct. at 1964.

ANALYSIS

Defendants argue that ELI's breach of contract complaint should be dismissed because ELI's allegations demonstrate that the contract is illegal and thus unenforceable, and that ELI's equitable claims must likewise be dismissed because ELI cannot recover in equity on an illegal contract. We first address Defendants' illegality of contract arguments, and deny their motion to dismiss the breach of contract claim on that basis. Next, in light of our disposition on the breach of contract claim, we deny their motion to dismiss the equitable claims as well.

I. Breach of Contract Claim

Defendants argue that ELI has pled itself out of court by alleging facts that establish their contract with ELI is illegal under the BAA. (Mot. at 1.) Principally, they contend that the BAA's strong public policy to "buy American" prevents enforcement of the contract. (Id. at 6-7.) ELI responds that the BAA does not apply to its contract with Defendants, and therefore the contract is enforceable. (Resp. at 5.)

Before we reach the merits of the parties' arguments, we first resolve their dispute over whether federal or Illinois law applies to determine the legality of the contract.

A. Choice of Law

In support of their motion, Defendants cite Illinois law governing the illegality of contracts, while ELI contends that federal law applies. (See Resp. at 4-5; Reply at 8-9.) We agree with ELI but also recognize that neither party identifies any critical differences pertinent to the issues before us.

When a party asserts that a contract is illegal under a federal statute, "federal law determines not only whether the statute was violated but also . . . the effect of the violation on the enforceability of the contract." N. Ind. Pub. Serv. Co. v. Carbon Cnty. Coal Co., 799 F.2d 265, 273 (7th Cir. 1986) (hereinafter [NIPSCO]); accord Costello v. Grundon, 625 F.3d 342, 360 (7th Cir. 2010), vacated on June 16, 2011 on other grounds explained in 651 F.3d 614 (7th Cir. 2011); see Walsh v. Schlect, 429 U.S. 401, 407-08, 97 S. Ct. 679, 684-85 (1977); Kelly v. Kosuga, 358 U.S. 516, 519, 79 S. Ct. 429, 431 (1959); Sola Elec. Co. v. Jefferson Elec. Co., 317 U.S. 173, 176, 63 S. Ct. 172, 174 (1942). Since Defendants argue that a federal statute, the BAA, makes its contract with ELI illegal, we must apply federal law to answer both whether the contract violates that statute and whether the contract is enforceable.

The parties agree that under federal or state law "in general, a contract entered in violation of a statutory or regulatory law is unenforceable." Comdisco, Inc. v. United States, 756 F.2d 569, 576 (7th Cir. 1985); see Costello, 651 F.3d at 625. Notwithstanding, the Seventh Circuit has explained that even if a contract is illegal, it is not automatically unenforceable. NIPSCO, 799 F.2d at 273. Under federal law, the illegality of contract defense involves a balancing of the "pros and cons of enforcement," taking into account the benefits of enforcement "that lie in creating stability in contract relations and preserving reasonable expectations" and the "costs in forgoing the additional deterrence of behavior forbidden by the statute." Id.; see alsoCostello, 651 F.3d at 624 (considering the "the public interest of deterring contracts in violation of the law and promoting adherence to the law"). Moreover, even if a contract is not itself illegal, "a court has the power to refuse to enforce [it] when enforcement would violate clearly articulated congressional goals and policies." Costello, 651 F.3d at 625 (quoting Stuart Park Assoc. v. Ameritech Pension Trust, 51 F.3d 1319, 1326 (7th Cir. 1995)); see United Paperworkers Int'l Union, AFL-CIO v. Misco, Inc., 484 U.S. 29, 42, 108 S. Ct. 364, 373 (1987) ("[A] court may refuse to enforce contracts that violate law or public policy.").

Keeping these broad principles in mind, we consider...

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