Wabash, Inc. v. Avnet, Inc.

Decision Date26 May 1981
Docket NumberNo. 79 C 240.,79 C 240.
Citation516 F. Supp. 995
PartiesWABASH, INC., et al., Plaintiffs and Counterdefendants, v. AVNET, INC., Defendant and Counterplaintiff.
CourtU.S. District Court — Northern District of Illinois

Stephen C. Sandels, Walter M. Jones, Margaret M. Lauf, McDermott, Will & Emery, Chicago, Ill., for plaintiffs and counter-defendants.

Michael B. Roche, Roger L. Longtin, L. Andrew Brehm, Hubachek & Kelly, Ltd., Chicago, Ill., for defendant and counter-plaintiff.

MEMORANDUM OPINION AND ORDER

SHADUR, District Judge.

Plaintiffs Wabash, Inc. ("Wabash") and International Products & Manufacturing, Inc. ("IPM") sue Avnet, Inc. ("Avnet") for breach of warranty, antitrust violations, trademark infringement, contract reformation and unfair competition. Avnet has moved to dismiss Counts IV, V and VI of the Amended Complaint (the "Complaint").1 For the reasons stated in this memorandum opinion and order that motion is granted as to Count IV and denied as to Counts V and VI.

Count IV

On October 8, 1976 Avnet entered into a written contract (the "Draft Agreement") to sell to Wabash substantially all the property, assets, goodwill and business of Avnet's subsidiary IPM. Its sale was pursuant to a Federal Trade Commission ("FTC") ruling (upheld by our Court of Appeals) requiring Avnet's divestiture of IPM.

Initially the parties contemplated a purchase price in the range of $30 million but intended that a portion of the price be contingent on IPM's future success or failure. For that reason the Draft Agreement provided for a guaranteed payment of $22 million plus six yearly payments, each in an amount equal to the greater of (1) $400,000 and (2) 10% of IPM's sales for the applicable fiscal year in excess of $33 million.2 In no event would the aggregate of the deferred payments exceed $8 million. Both sides anticipated an approximately 10% annual rate of growth in IPM's sales, a rate that would have produced the full $8 million in deferred payments.

FTC refused to approve the Draft Agreement because it considered that linking the purchase price to IPM's sales might discourage Wabash from maximizing such sales (thus creating an incentive for anticompetitive activity). Although FTC recommended establishment of a fixed rather than a contingent price, the parties sought an alternative formula that would preserve their original intention while meeting FTC's concerns about manipulation. After investigating and rejecting a number of government indices they agreed to use the Department of Commerce's Gross National Product ("GNP"). They determined that GNP reflected general economic conditions and had in the past reflected the growth of IPM's sales. Both parties believed GNP was an accurate economic indicator, so that an increasing GNP reflected general economic growth.

On January 13, 1977 the parties entered into their ultimate agreement (the "Agreement"). Its deferred payment provision retained the $8 million maximum and the six year term, but each annual payment was revised to the greater of (1) $400,000 and (2) $5,000 for each 0.1% of the percentage increase in GNP over GNP for the year ending December 1, 1976. After FTC approved the Agreement, the IPM sale was closed February 13, 1977.

Due to "totally unpredictable and unforeseeable" economic factors ("circumstances of the inflationary-recessionary cycle"), GNP continued to rise in 1978 while sales of most U.S. companies, including IPM, began to level off or drop. In 1979 IPM had a negligible increase in sales while GNP increased over 14%. In 1980 IPM's sales fell almost 13% while GNP rose 15%. Plaintiffs estimate that if the disparity continues they will pay the entire maximum $8 million under the Agreement in about five years, while under the Draft Agreement formula rejected by the FTC they would have paid less than $5 million in deferred payments over the entire six-year term. Plaintiffs demand reformation of the Agreement "to express the true intent of the parties."

In this diversity action Illinois law provides the rules of decision on all substantive issues, including the choice-of-law question as to what state's law applies to the Agreement. Agreement ¶ 17(m) provides that it is to be "governed by, construed, and interpreted" in accordance with New York law. Because Illinois law gives effect to such provisions, Reighley v. Continental Illinois National Bank & Trust Co. of Chicago, 390 Ill. 242, 249, 61 N.E.2d 29, 33 (1945), we look to the New York law of contract reformation.

Plaintiffs predicate their request for reformation on a claimed mutual mistake of fact. On the Complaint's allegations the parties intended to draft an agreement under which the purchase price would reflect the progress of economic conditions in general. Plaintiffs contend that the subsequent failure of GNP to reflect the lack of growth in the American economy demonstrates a mutual mistake of fact in the negotiation of the Agreement.

This case does not pose the classical mutual mistake situation in which courts traditionally grant contract reformation. There parties have typically negotiated a contract in reliance on a mistaken perception as to an existing fact.3

Here however the parties examined all the available data and were satisfied, at the time of the Agreement, that the GNP formula would work. As a general rule courts (and New York courts are no exception) will not reform a contract that contains a variable term simply because events do not unfold as expected. Thus in George Backer Management v. Acme Quilting Co., 46 N.Y.2d 211, 413 N.Y.S.2d 135, 385 N.E.2d 1062 (1978) the parties linked lease payments to wage rates to be established by the Realty Advisory Board. Reformation was denied even though increases in the wage rates far exceeded what plaintiff contended were the parties' expectations. As the Court put it in granting summary judgment (46 N.Y.2d at 219, 413 N.Y.S.2d at 139, 385 N.E.2d at 1066):

Reformation is not granted for the purpose of alleviating a hard or oppressive bargain, but rather to restate the intended terms of an agreement when the writing that memorializes that agreement is at variance with the intent of both parties.

Accord, applying New York law, Leasco Corp. v. Taussig, 473 F.2d 777, 781-82 (2d Cir. 1972).

New York case law tracks conventional contract doctrine: Parties that enter into clear and unambiguous contracts (certainly the case here) are bound to the terms of those contracts because the law presumes that intent conforms to language. Nichols v. Nichols, 306 N.Y. 490, 119 N.E.2d 351, 353 (1954). Essentially this is the contract counterpart of the reasonable man in tort law: One party will not be heard to assert that it understood the contract language to have a meaning other than its normal one, for that would defeat the reasonable expectations of the other party. In that sense we do not really look at "mutual intent" to define contractual responsibilities, but rather at what a person using the clear contract language will conclusively be deemed to have intended. Only where the intent of both parties would be defeated by literal application of such clear language will relief by way of reformation be granted — hence the concept of "mutual mistake of fact."

Plaintiffs themselves recognize the limited play to be accorded the doctrine of reformation on such grounds (Pl. Mem. 6, emphasis added):

Stated succinctly, when the parties to a contract enter into a contract under a mutual mistake as to a material existing fact, the courts can and will reform the contract to make it conform to the true intent of the parties.4

What they fail to acknowledge however is the impact of that limitation on the allegations of their own Count IV:

12. Upon examining the Commerce Department's Gross National Product Index ("GNP"), the parties determined that GNP, in fact, reflected general economic conditions and had, in fact, reflected the growth of IPM's sales in the past. As such, if GNP continued to increase, IPM's sales would increase accordingly as they had done so in the past. Both Wabash and Avnet carefully examined the past performance of the GNP index before agreeing to its use. Both parties believed that GNP was an accurate economic indicator and that a growing GNP reflected general economic growth.
* * * * * *
14. The assumption that the GNP index was an accurate economic index was basic to the contract. The parties arrived at an agreeable purchase price dependent upon this assumption. Following amendment, the Agreement was approved by the Federal Trade Commission and on February 11, 1977, Wabash and Avnet closed on the sale of IPM.

Nowhere do plaintiffs assert that what the parties mutually "determined" (the first sentence of Paragraph 12) or "believed" (the fourth sentence of Paragraph 12) or their mutual "assumption" (the first sentence of Paragraph 14) was mistaken at the time of contracting. Indeed Paragraph 15 of Count IV characterizes the future operation of GNP ("future" in the sense that the phenomenon of its failing to parallel the sales trend admittedly began over one and one-half years after the Agreement was executed) as "totally unpredictable and unforeseeable." That completely negates the notion of a mistake as to a material "existing" fact. So the concept that the Complaint's well-pleaded allegations are accepted as true defeats rather than establishes plaintiffs' claim.

This Court will rewrite neither the Agreement nor plaintiffs' Complaint. On plaintiffs' own allegations the situation is no different from that in Bac...

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