Reo Distribution v. Fisher Controls Intern.

• Decision Date: 20 September 1995
• Docket Number: No. CIV. A. 90-0135-H.,CIV. A. 90-0135-H.
• Citation: 985 F.Supp. 647
• Parties: REO DISTRIBUTION SERVICES, INC., Plaintiff, v. FISHER CONTROLS INTERNATIONAL, INC., Defendant.
• Court: U.S. District Court — Western District of Virginia

Page 647

985 F.Supp. 647

REO DISTRIBUTION SERVICES, INC., Plaintiff, v. FISHER CONTROLS INTERNATIONAL, INC., Defendant.

No. CIV. A. 90-0135-H.

United States District Court, W.D. Virginia, Harrisonburg Division.

September 20, 1995.

David A. Penrod, Hoover, Penrod, Davenport & Crist, Harrisonburg, VA, Durene R. Hoyer, Christopher S. Smith, Hoyer, Hoyer and Smith, Charleston, WV, for Plaintiff.

David Z. Izakowitz, Edward R. Slaughter, Jr., Slaughter & Redinger, P.C., Charlottesville, VA, for Defendant.

MEMORANDUM OPINION

MICHAEL, District Judge.

The court referred this case to the Honorable B. Waugh Crigler, United States Magistrate Judge, pursuant to a standing order, for proposed findings of fact and a recommended disposition. The Magistrate Judge filed his Report and Recommendation on July 25, 1995, recommending that the court deny the defendant's May 19, 1995 renewed motion for summary judgment. The defendant filed Objections to the Magistrate's Report pursuant to Fed.R.Civ.P. 72(b). In considering the defendant's Objections, this court is required to undertake a de novo review of the record in this case. Orpiano v. Johnson, 687 F.2d 44, 47-8 (4th Cir.1982). After review of the record, the court adopts the recommendation of the Magistrate Judge and, accordingly, denies the defendant's renewed motion for summary judgment.

I.

In October, 1988, Reo Distribution Services (Reo) entered into an oral agreement with Fisher Controls International (Fisher) and Confederated Brokerage, Inc. to operate a warehouse and truck distribution center in Waynesboro, Virginia, for the purpose of distributing Fisher's control equipment. On November 1, 1988, two, two-year distribution contracts were signed — one between Fisher and Confederated, and the other between Confederated and Reo.¹ The agreements authorized Reo to provide distribution services for Fisher's goods along the East Coast. Reo billed Fisher through Confederated. Both agreements were signed pursuant to Iowa law.

Reo began distributing Fisher's goods in October 1988. However, in February, 1989, with a year and a half left to run on the contract, Fisher effectively terminated the contract. Reo, in response, brought this breach of contract action in federal court, jurisdiction lying under 28 U.S.C. § 1332, alleging that the breach of the two-year contract resulted in $3.75 million in damages in the form of lost profits.² Fisher, in turn, filed a motion for summary judgment, arguing that the alleged contract is void and unenforceable because Reo, at the time the contract was consummated, did not have the authorities required under the Interstate Commerce Act (ICA) to legally perform its contractual obligations. See 49 U.S.C. § 10921.

In an effort to assess Fisher's argument, this court, in October, 1994, issued an order certifying several questions to the Interstate Commerce Commission (ICC). Specifically, the ICC was asked to determine whether the ICA required Reo to have had a license, permit, or certification to perform under the contract, and if so, whether Reo's lack of such certification would bar its claim for lost profits. On April 25, 1995, the ICC issued a decision stating that the services provided by Reo required a license and a permit, both of which Reo lacked at the time the written agreement was signed.³ The ICC, however, held that the question of lost profits was an issue of contract law and, therefore, outside its jurisdiction. Accordingly, Fisher's motion for summary judgment returns to this court for final disposition.

There are two primary issues raised by Fisher's motion for summary judgment: (1) whether the contract between Reo and Fisher is void and unenforceable on the grounds that Reo did not have the proper authorities from the ICC at the time it entered into the contract; and (2) whether Reo may bring an action for lost profits.

II.

The first issue is whether the contract between Fisher and Reo is enforceable despite the fact that Reo lacked licenses and permits required by the ICA to perform under the contract. The Iowa Supreme Court has held that contracts entered into by parties that lack permits necessary to engage in the contracting activity are unenforceable only if (1) the licensing statute expressly voids such contracts, or (2) enforcing such contracts would violate public policy. See Davis, Brody, Wisniewski v. Barrett, 253 Iowa 1178, 115 N.W.2d 839 (1962).⁴

Since the ICA does not expressly void contracts made in violation of its provisions,⁵ the first condition articulated in Barrett is not met. Thus, the analysis shifts to whether the contract is unenforceable as violative of public policy.

Reo cites Ets-Hokin and Galvan, Inc. v. Maas Transport, Inc., 380 F.2d 258 (8th Cir.1967), cert. denied, 389 U.S. 977, 88 S.Ct. 481, 19 L.Ed.2d 471 (1967), for the proposition that the contract is enforceable despite the fact that Reo did not have the requisite authorities when it signed the contract with Fisher. In Ets-Hokin, the Eighth Circuit refused to void a contract involving the interstate shipment of a product by a shipper who failed to file a tariff with the ICC as required under the ICA. The shipper eventually filed a tariff but the tariff did not become effective until two months after the shipper began executing the contract. Ets-Hokin, 380 F.2d at 260 n. 3. The court held the contract enforceable, stating in pertinent part that:

A contract in violation of a statutory provision is generally void or illegal only if the legislative body enacting the statute evidences an intention that such contracts be considered void or illegal. Otherwise, even though the parties to a contract may be subject to a statutory penalty as the result of performing a contract, the contract itself remains in full force and effect. In the instant case, Maas was in violation of the Motor Carrier provisions of the Interstate Commerce Act when it transported cable under its contract with Ets-Hokin and was subject to penalties for such violations. The cable transportation contract itself, however, would be void, illegal or unenforceable only if Congress, in passing the Motor Carrier provisions of the Interstate Commerce Act, intended that contracts resulting in violations of that portion of the Act be illegal and void. A review of the statutory provisions involved herein reveals no congressional intention to make contracts in violation thereof void or illegal. The contract between Ets-Hokin and Maas was valid and enforceable.

380 F.2d at 260-261 (internal citations and footnotes omitted). Reo maintains that Ets-Hokin is directly on point and is, therefore, highly persuasive authority. The court agrees. The holding in Ets-Hokin that a contract is enforceable despite underlying violations of the ICA clearly suggests that enforcement of the contract at issue here would not violate public policy. Like the contract at issue in Ets-Hokin, the underlying purpose of this contract is not in any way illegal. Moreover, there are already sufficient regulatory mechanisms in place to ensure compliance with the ICA's licensing provisions. Thus, voiding the contract here would be a remedy vastly disproportionate to its deterrent effect.

Fisher protests that the Ets-Hokin court did not apply Iowa law and is, therefore, irrelevant to the issue of whether enforcing the contract would violate the public policy of Iowa. Rather, Ets-Hokin rested primarily on federal law. However, Fisher is asking the wrong question. The issue is not so much whether enforcing the contract would violate Iowa public policy, but whether doing so would violate U.S. public policy since the contract at issue is premised upon a violation of a federal statute. In other words, if federal interests are not compromised by the court's enforcing this contract, it is difficult to see how Iowa's interests are so compromised. Ets-Hokin stands for the proposition that federal interests are not compromised when courts enforce contracts that are premised upon violations of the ICA — Congress simply did not express a desire to void such contracts. Thus, it is difficult to maintain that enforcing such contracts would violate the public policy of Iowa.⁶ Indeed, voiding the contract could raise federalism concerns to the extent federal law mandates the enforcement of such contracts.⁷

Fisher also attempts factually to distinguish Ets-Hokin. It argues that Ets-Hokin involved an action to recover actual damages rather than lost profits. This argument, however, does not suggest that the contract is unenforceable. It simply seeks to set parameters for that enforcement by limiting recovery to actual damages. In addition, Fisher argues that the parties in Ets-Hokin believed that the contract involved intrastate transportation of goods and that the shipper had an appropriate license for such activity. This is not an adequate grounds for distinguishing Ets-Hokin since Reo, like the shipper in Ets-Hokin, was acting in good faith.

Finally, Fisher argues that Ets-Hokin is undermined by the U.S. Supreme Court decision in Maislin Industries, U.S., Inc. v. Primary Steel, Inc., 497 U.S. 116, 110 S.Ct. 2759, 111 L.Ed.2d 94 (1990). The Court in Maislin invalidated an ICC policy that relieved shippers of the obligation of paying the "filed rate"⁸ when the shipper and carrier have privately negotiated a lower rate because the policy contradicted the express provisions of the ICA. Fisher wisely concedes that the case is "not relevant to a determination of whether the contract is enforceable," Defendant's Support Memorandum at 27 n. 5, since it did not involve a defense of illegality. Rather, Fisher argues that Maislin mandates strict adherence to the requirements of the ICA.

Maislin, however, is narrowly focussed on the rate requirements of the ICA. The opinion suggests that the provisions governing rates are of particular significance because they serve as a prophylactic against antitrust violations. The Court stated that...