Paul Arpin Van Lines, Inc. v. Universal Transp. Services, Inc., 92-1779

• Decision Date: 04 January 1993
• Docket Number: No. 92-1779,92-1779
• Parties: Fed. Carr. Cas. P 83,811, 25 Fed.R.Serv.3d 300, 38 Fed. R. Evid. Serv. 442 PAUL ARPIN VAN LINES, INC., Plaintiff, Appellee, v. UNIVERSAL TRANSPORTATION SERVICES, INC. a/k/a Universal Transportation Services Limited, et al., Defendants, Appellants. . Heard
• Court: U.S. Court of Appeals — First Circuit

Page 288

988 F.2d 288

Fed. Carr. Cas. P 83,811, 25 Fed.R.Serv.3d 300,

38 Fed. R. Evid. Serv. 442

PAUL ARPIN VAN LINES, INC., Plaintiff, Appellee, v. UNIVERSAL TRANSPORTATION SERVICES, INC. a/k/a Universal Transportation Services Limited, et al Defendants, Appellants.

No. 92-1779.

United States Court of Appeals First Circuit.

Heard Jan. 4, 1993.

Decided March 19, 1993.

Nicholas Gorham, with whom Edmund L. Alves, Jr., and Gorham and Gorham, Providence, RI, were on brief, for defendants, appellants.

Richard G. Galli, with whom Barbara Harris and Richard Galli & Associates Inc., Providence, RI, were on brief, for plaintiff, appellee.

Before TORRUELLA, Circuit Judge, BOWNES, Senior Circuit Judge, CYR, Circuit Judge.

BOWNES, Senior Circuit Judge.

On October 12, 1989, Universal Transportation Services, Inc., entered into a contract with Paul Arpin Van Lines, Inc. Arpin is primarily in the business of moving and storing household goods and furniture. Universal is in the business of soliciting customers and accounts for moving and storage companies. The contract had a term of three years, with a provision for year-to-year extensions after the three-year term had expired. On November 8, 1990, Arpin notified Universal that it was terminating the contract. After Universal refused to accede to pre-term cancellation, Arpin, on May 3, 1991, filed a declaratory judgment action in the district court of Rhode Island, seeking a judgment that: (a) the contract is "canceled, rescinded or ... null and void for illegality"; (b) that the contract is "illegal, unlawful and unenforceable."

Universal duly answered, denying that there was any legal basis for terminating the contract. Universal also brought a counterclaim on its own behalf and on behalf of McGowan Associates, Inc. The counterclaim states that Michael J. McGowan is the principal shareholder and president of Universal and McGowan Associates, Inc. The counterclaim alleged three counts: Count I sought damages of $300,000 for Arpin's attempt to cancel the contract prior to its termination date; Count II alleged violations of restrictive covenants in the contract and claimed damages of $300,000; Count III alleged interference by Arpin with a contractual relationship between another moving company, Richard J. Coriell & Co., Inc., and both Universal and McGowan Associates, Inc.; damages of $300,000 were claimed.

The case was tried, jury-waived, before the District Court of Rhode Island. The district court found that McGowan and the business entities he controlled were "brokers" and as such were required to be licensed by the Interstate Commerce Commission pursuant to 49 U.S.C. § 10921. ¹ It is undisputed that neither McGowan, Universal, nor McGowan Associates were licensed by the ICC. The court therefore held that the contract was illegal. It found that Universal was not entitled to commissions it might have earned over the remaining two-year term of the contract. The court, however, held that Universal was entitled to collect the commissions it had earned during the time the contract was in effect. It found that Universal was entitled to "$3,231.05 of restitution for unreported and unpaid commissions and $7,891.27 of restitution for reported, but unpaid, commissions." The district court also dismissed the counterclaim.

Appellants, Universal and McGowan Associates, dispute the district court's holding that they were not entitled to the commissions they would have earned over the unexpired term of the contract. They have not appealed the district court's computation of the commissions due them for business generated during the time the contract was in effect. The appellee, Arpin, has not appealed the award of commissions. The root issue on appeal, therefore, is whether appellants can recover, as damages the commissions they would have earned if the contract had remained in effect for its three-year term. We hold they cannot.

The Enforceability of the Contract

Appellants argue first that the contract should have been enforced regardless of whether McGowan ² was an unlicensed broker. We note first that the contract here was not intrinsically illegal; it was not a criminal conspiracy or one whose purpose directly violated the prohibition of a statute. The question is whether the contract is unenforceable because McGowan did not have a broker's license from the ICC, as required by 49 U.S.C. § 10921. The general rule is that an otherwise valid contract that results in the violation of a public-protection statute or regulation is unenforceable. Resolution Trust Corp. v. Home Sav. of Am., 946 F.2d 93, 96 (8th Cir.1991); Securities Industry Ass'n v. Connolly, 883 F.2d 1114, 1123 n. 7 (1st Cir.1989), cert. denied, 495 U.S. 956, 110 S.Ct. 2559, 109 L.Ed.2d 742 (1990); Shinberg v. Bruk, 875 F.2d 973 (1st Cir.1989); Smithy Braedon Co. v. Hadid, 825 F.2d 787, 790 (4th Cir.1987); 6A Arthur Lynton Corbin, Corbin on Contracts, § 1512, p. 711 (1962). See Restatement (Second) of Contracts 2d § 181 (1981).

This general rule, however, is almost as much honored in the breach as in the observance. The Seventh Circuit has pointed out that "the defense of illegality, being in character if not origins an equitable and remedial doctrine, is not automatic but requires ... a comparison of the pros and cons of enforcement." Northern Indiana Pub. Serv. Co. v. Carbon County Coal Co., 799 F.2d 265, 273 (7th Cir.1986). In that case the court held the contract was enforceable, id.; it also noted that the statute violated was "an anachronism--a regulatory statute on which the sun set long ago." Id. at 274. In Resolution Trust the court observed:

Some federal courts have applied this less-than-absolute rule and have refused to enforce illegal contracts only if the statute or regulation explicitly provides that contracts in violation are void, or if the interest in enforcement clearly outweighs the public policy against enforcement.

946 F.2d at 96-97 (footnote and citations omitted). The court held that the case before it was not one in which the interest in contract enforcement clearly outweighed the public policy against enforcement and held the contract "illegal and therefore unenforceable." Id.

McGowan relies on two Supreme Court cases in arguing for enforcement of the contract. In Bruce's Juices v. American Can Co., 330 U.S. 743, 67 S.Ct. 1015, 91 L.Ed. 1219 (1947), the Court held that it was no defense to a suit for collection of notes that the seller had engaged in price discriminations against the buyer violating the Robinson-Patman Act. The Act prescribed criminal penalties and entitled injured persons to treble damages, but did not specifically render the sales, for which the notes were given, illegal or the purchase price uncollectible. During the course of its opinion, the Court stated:

But when the contract sued upon is not intrinsically illegal, the Court has refused to allow property to be obtained under a contract of sale without enforcing the duty to pay for it because of violations of the Sherman Act not inhering in the particular contract in suit and has reaffirmed the "doctrine that 'where a statute creates a new offense and denounces the penalty, or gives a new right and declares the remedy, the punishment or the remedy can be only that which the statute prescribes.' " D.R. Wilder Mfg. Co. v. Corn Products Refining Co., 236 U.S. 165, 174-175 [35 S.Ct. 398, 401, 59 L.Ed. 520]; Connolly v. Union Sewer Pipe Co., 184 U.S. 540 [22 S.Ct. 431, 46 L.Ed. 679].

Id. 330 U.S. at 755, 67 S.Ct. at 1020-21. In Kelly v. Kosuga, 358 U.S. 516, 79 S.Ct. 429, 3 L.Ed.2d 475 (1959), the Court upheld the right of a seller to recover from the buyer the unpaid balance due on a lawful sale even though the sale was made pursuant to an agreement which violated § 1 of the Sherman Act. The Court noted:

As a defense to an action based on contract, the plea of illegality based on violation of the Sherman Act has not met with much favor in this Court. Id. at 518, 79 S.Ct. at 431 (footnote omitted).

We think that the precedential value of these holdings has been limited by two subsequent Supreme Court cases. In United States v. Mississippi Valley Co., 364 U.S. 520, 81 S.Ct. 294, 5 L.Ed.2d 268 (1961), the Court held that the activities of a consultant retained by the government violated a statute prohibiting one retained by the government from engaging in activities constituting a conflict of interest. It held that this alone precluded the respondent from enforcing his consulting contract with the government. Id. at 525, 81 S.Ct. at 297. The Court noted that the conflict-of-interest statute did not "specifically provide for the invalidation of contracts which are made in violation of the statutory prohibition." Nevertheless, the Court held that the consulting contract could not be enforced. It stated:

Were we to decree the enforcement of such a contract, we would be affirmatively sanctioning the type of infected bargain which the statute outlaws and we would be depriving the public of the protection which Congress has conferred.

Id. at 563, 81 S.Ct. at 316. In Kaiser Steel Corp. v. Mullins, 455 U.S. 72, 102 S.Ct. 851, 70 L.Ed.2d 833 (1982), the issue was

whether a coal producer, when it is sued on its promise to contribute to union welfare funds based on its purchases of coal from producers not under contract with the union, is entitled to plead and have adjudicated a defense that the promise is illegal under the antitrust and labor laws.

Id. at 74, 102 S.Ct. at 854-55. The Court held that the coal producer was entitled to so plead. At the start of its analysis the Court stated:

There is no statutory code of federal contract law, but our cases leave no doubt that illegal promises will not be enforced in cases controlled by the federal law.

Id. at 77, 102 S.Ct. at 856. The Court discussed Kelly v. Kosuga, supra, at length and found that Kosuga "contemplated that the defense of illegality would be...