Inacom Corp. v. Sears Roebuck and Co.

• Decision Date: 10 April 2000
• Docket Number: No. 99-3085,99-3085
• Citation: 254 F.3d 683
• Parties: (8th Cir. 2001) INACOM CORP., A DELAWARE CORPORATION, APPELLEE, v. SEARS, ROEBUCK AND COMPANY, A NEW YORK CORPORATION, APPELLANT. Submitted:
• Court: U.S. Court of Appeals — Eighth Circuit

Page 683

254 F.3d 683 (8th Cir. 2001)

INACOM CORP., A DELAWARE CORPORATION, APPELLEE, v. SEARS, ROEBUCK AND COMPANY, A NEW YORK CORPORATION, APPELLANT.

No. 99-3085

UNITED STATES COURT OF APPEALS FOR THE EIGHTH CIRCUIT

Submitted: April 10, 2000

Filed: June 13, 2001

Appeal from the United States District Court for the District of Nebraska. [Copyrighted Material Omitted] Before Bowman and Hansen, Circuit Judges, and Carman,¹ Judge.

Hansen, Circuit Judge.

Following trial, a jury found that Sears, Roebuck and Company (Sears) had committed the tort of fraudulent concealment against Inacom Corporation (Inacom) and had breached a contract with Inacom. The jury awarded Inacom over $4.1 million in damages. The district court² awarded Sears over $1 million on its counterclaim and entered judgment in favor of Inacom for the difference. Sears appeals, and we affirm.

I.

"We review the trial evidence in the light most favorable to the jury's verdict." Jarrett v. ERC Props., Inc., 211 F.3d 1078, 1080 (8th Cir. 2000). Inacom, a company based in Omaha, Nebraska, is engaged in the retailing and servicing of personal computers, software, and networking products for large corporations. In 1992, Inacom's managers decided to investigate the possibility of purchasing Sears Business Centers (SBC) from Sears. SBC was an unincorporated division of Sears that generally engaged in the same type of business as Inacom.

During 1992, Inacom and Sears participated in negotiations regarding Inacom's purchase of SBC. In the midst of the negotiation process, Sears informed Inacom that SBC had a contract with the United States Department of Defense (DOD) whereby Sears had pledged to ship a specified number of D500, D1050 and D1075 model lap-held computers to the DOD within a delineated time frame. Inacom was not familiar with government contracting, but reluctantly agreed to accept the DOD contract as part of its overall acquisition of SBC but insisted that Sears provide written warranties concerning the status of Sears's contract with the DOD.

On January 12, 1993, Sears and Inacom signed a written Business Acquisition Agreement (BAA), which ratified the sale of SBC from Sears to Inacom. The BAA contained representations from Sears that it was not in material breach or default of its contract with the DOD and that Sears enjoyed a satisfactory relationship with the government with regard to the contract. Additionally, the BAA contained a provision entitled "Limitation on Recoveries," specifying that no party to the agreement would be entitled to recover consequential, exemplary or punitive damages with respect to disputes concerning the agreement. (Appellant's App. at 133.)

Transfer of the DOD contract created a slight wrinkle in the BAA. While Sears's attorney had advised that federal regulations only permit a transfer or assignment of a government contract with prior government approval, Sears did not obtain government approval for the transfer of its DOD contract prior to the closing date of the sale. As a result, the BAA provided that Sears and Inacom would enter into a written agency agreement governing performance under the DOD contract, and Sears agreed to promptly seek DOD approval of the actual assignment of the contract to Inacom. Pursuant to the agency agreement, Inacom pledged to assume responsibility for administering the DOD contract as Sears's agent and to ensure proper performance of all of Sears's obligations under the contract. Sears promised to indemnify Inacom for "any and all claims arising under the DOD contract," except to the extent any loss resulted from Inacom's failure to timely perform Sears's obligations under the DOD contract. (Appellant's App. at 486.)

On February 19, 1993, the DOD leveled a $1.8 million liquidated damages assessment against Inacom. The government asserted that Inacom failed to ship the lap-held computers to the DOD within the time-frame specified in the contract. Inacom informed the DOD that it could not fulfill its contractual obligations because Sears had discontinued the D500 and the D1075 model computers. Inacom negotiated with the DOD and offered the government a substitute model. The DOD informed Inacom that its proposed model was an insufficient replacement for the D500 and D1075 models, but through negotiations, the DOD did reduce the liquidated damages assessment to $1.3 million. Sears did not indemnify Inacom as required under the agency agreement. In November 1993, Sears finally obtained government approval to assign the DOD contract to Inacom. Continuing exposure to liquidated damages due to Sears's discontinuation of the product and Inacom's resulting inability to fulfill the DOD contract caused Inacom to resolve the matter by agreeing to supply a replacement product, thereby suffering actual losses of over $4.1 million to satisfy the contract.

Inacom filed an action against Sears in federal district court in Nebraska. Inacom alleged breach of contract, fraudulent misrepresentation, and fraudulent concealment. Sears filed a counterclaim against Inacom asserting a separate breach of contract by Inacom. The jury found that Sears breached its contract with Inacom and committed the tort of fraudulent concealment but found in favor of Sears on Inacom's fraudulent misrepresentation claim and found in favor of Sears on Sears's counterclaim. The jury awarded Inacom $4,103,341 in damages, and the district court awarded Sears $1,199,862.46 on the counterclaim. The district court then entered judgment in favor of Inacom in the amount of $2,903,478.54. Sears filed a motion for judgment as a matter of law and a motion for a new trial, challenging, among other things, the district court's choice of law, the damages instructions, and the sufficiency of the evidence to support the jury's verdicts. The district court denied the motions, and Sears appeals. Inacom does not cross-appeal the determination of Sears's counterclaim against it.

II.

A. Choice of Law

The district court instructed the jury to evaluate Inacom's breach of contract claim in accordance with Illinois law and its fraudulent concealment claim in accordance with Nebraska law. Sears argues that the district court erred when it held that Nebraska law rather than Illinois law governed the fraudulent concealment claim, because the BAA specifies Illinois law as governing the contract. We review a district court's choice of law determinations de novo. See American Home Assur. Co. v. L&L Marine Serv., Inc., 153 F.3d 616, 618 (8th Cir. 1998). We also review de novo a district court's determinations of state law. See Salve Regina College v. Russell, 499 U.S. 225, 231-32 (1991).

A district court sitting in diversity must apply the conflict of law rules for the state in which it sits. See Klaxon Co. v. Stentor Elec. Mfg. Co., 313 U.S. 487, 496 (1941). In deciding choice of law questions, Nebraska follows the Restatement (Second) of Conflict of Laws. See Harper v. Silva, 399 N.W.2d 826, 828 (Neb. 1987). Sears argues that the most applicable portion of the Restatement is section 187(1), which provides that "[t]he law of the state chosen by the parties to govern their contractual rights and duties will be applied if the particular issue is one which the parties could have resolved by an explicit provision in their agreement directed to that issue." Restatement (Second) of Conflict of Laws § 187(1). Sears contends that the fraudulent concealment claim is intertwined with the contract claim and, therefore, falls within the ambit of the BAA's election of Illinois law to govern all contract claims. We respectfully disagree.

In this case, the BAA provides that the "Agreement shall be governed by and construed in accordance with the law of the State of Illinois, as applied to contracts made and to be performed solely within such state, without regard to conflict or choice of law rules, provisions or principles." (Appellant's App. at 133 (emphasis added).) While this provision adequately covers disputes concerning how to construe the BAA, the language is not broad enough to govern the choice of law for the fraudulent concealment claim, which sounds in tort. Although the claim arose out of the circumstances surrounding the formation of the contract, there is no indication in the BAA that the parties intended to elect Illinois law as the forum for every contract-related claim. The narrow contractual language that the BAA is to be governed and construed by Illinois law simply does not address the entirety of the parties' relationship. "In contrast to broad clauses, which choose a particular state's law to govern, construe and enforce all rights and duties of the parties arising from or relating in any way to the subject matter of [the applicable] contract, the instant clause denotes only that [Illinois] law will be applied to [govern and] construe the contract." Caton v. Leach Corp., 896 F.2d 939, 943 n.3 (5th Cir. 1990) (internal quotations omitted). Because the contract's choice of law provision provides no guidance as to which forum should govern the tort of fraudulent concealment, section 187(1) of the Restatement does not control the issue and we, therefore, shift our focus to other applicable provisions of the Restatement (Second) of Conflict of Laws for guidance.

Section 145 governs choice of law decisions regarding tort issues generally, stating as follows:

The rights and liabilities of the parties with respect to an issue in tort are determined by the local law of the state which, with respect to that issue, has the most significant relationship to the occurrence and the parties . . . [including] (a) the place where the injury occurred, (b) the place where the conduct causing the injury occurred, (c) the domicil[e], residence, nationality, place of incorporation and place of business of the parties, and (d) the place where the relationship, if any, between the parties is centered.

Restatement (Second) of Conflict of Laws § 145....