Opinion
Case No. A1-03-73, Docket Number: 27
September 30, 2003
ORDER
Summary: The Plaintiff charged the Defendant with, amongst other things, violating N.D.C.C. § 51-20.1-03 and breaching its obligation of good faith and fair dealing when terminating a Service Representation Agreement. The Defendant filed a motion to dismiss, asserting that the Plaintiff was not covered by N.D.C.C. § 51-20.1-03 and that no separate cause of action exists for the breach of good faith and fair dealing. The Court granted the Defendant's motion in part, finding N.D.C.C. § 51-20.1-03 applicable but concluding that no separate cause of action existed for breach of good faith and fair dealing.
On July 8, 2003, the Defendant filed a Motion to Dismiss Counts II and IV of the Plaintiff's Complaint. For the reasons outlined below, the Motion to Dismiss Count II is denied and the Motion to Dismiss Count IV is granted.
I. BACKGROUND
The Defendant, the Kress Corporation ("Kress"), is an Illinois corporation that designs, produces, and sells heavy equipment for use in the mining industry. The Plaintiff, Interstate Companies Inc. ("Interstate"), is a Minnesota corporation that services and repairs heavy equipment. On February 1, 1993, Kress and Interstate entered into a "Service Representation Agreement" whereby Interstate would "provide repair services and act as a forwarder of parts" to Kress's North Dakota customers. Under the terms of the "Service Representation Agreement," Interstate agreed to perform repair and maintenance work on all Kress-made Coal Hauler mining trucks sold in North Dakota. In addition, Interstate agreed to provide storage space to Kress for repair parts. In return, Kress agreed to refrain from contracting with third parties for repair/maintenance services or for storage space. Both parties agreed that their relationship would be governed and construed in accordance with the laws of the State of Illinois. Both parties also agreed that their relationship was to last for a period of 365 days, subject to automatic renewal for successive 365-day periods.
Paragraph 9.5 of the Service Representation Agreement contained the following choice of law provision:
This Agreement and the rights and obligations of the parties hereto shall be governed by and construed in accordance with the internal laws of the State of Illinois, without giving affect to the conflicts of law principles therefore, in every respect, including but not limited to validity, interpretation and performance, notwithstanding that one or more of the parties to this Agreement may now be or hereafter become domiciled in or a resident of another state or foreign company.
In addition to establishing the duties and the duration of the parties relationship, the "Service Representation Agreement" imposed several restrictive covenants on Interstate. For example, the "Service Representation Agreement" restricted Interstate's ability to service machinery manufactured by Kress's competitors for the term of the parties' agreement and for two years thereafter. It also prohibited Interstate from soliciting or engaging in any business activities which would cause it to become a Kress competitor during the term of the parties' agreement.
To terminate the relationship, the "Service Representation Agreement" required one of the parties to give the other written notice at least ninety (90) days prior to the end of the contract year. However, the "Service Representation Agreement" provided that in the event one party materially breached its obligations, the other party could terminate the relationship by giving at least thirty (30) days written notice of termination. Finally, the "Service Representation Agreement" provided that Kress could immediately terminate the relationship if Interstate breached any of its restrictive covenants.
Kress, after entering into a marketing agreement with the Caterpillar Corporation, took steps to terminate the "Service Representation Agreement" in June 2003. Kress notified Interstate in writing on June 13, 2003, of its desire to sever ties between the two companies, stating:
This letter is intended to give official notice that Kress Corporation is terminating our Service Representation Agreement with Interstate Companies Detroit Diesel, Incorporated. This business decision is strictly based on our efforts to further promote our Coal Haulers on a global basis. We appreciate the support efforts provided by Interstate Companies during this agreement and emphasize that our decision has nothing to do with past performance. We believe the agreement with Caterpillar will provide support for Kress Coal Haulers to potential customers on a worldwide basis. We would like to make the transition and support as smooth as possible to minimize any concerns our Customers may have. We have reached agreement with Tractor Equipment Company and Butler Machinery Company to support our existing Coal Haulers On June 17, 2003, Kress and Interstate representatives met to discuss the termination of their relationship and to negotiate the transfer of all Kress's repair parts in Interstate's possession to Caterpillar dealers. However, the parties were unable to amicably resolve their differences. Kress subsequently notified Interstate in a letter dated June 19, 2003, that it was exercising its right to immediately terminate the agreement based on Interstate's breach of its covenant not to compete. According to Kress, Interstate had violated the terms of the "Service Representation Agreement" by entering into a repair and maintenance relationship with Terex Mining, one of Kress's competitors.
Interstate initiated the above-entitled action against Kress on June 23, 2003. Count One of Interstate's complaint alleged that Kress breached the "Service Representation Agreement" by failing to provide notice of termination within ninety (90) days of the end of the contract year. Count Two alleged that Kress's attempt to terminate the "Service Representation Agreement" was without good cause in violation of North Dakota's Heavy Construction Equipment Franchise Termination statute found at Section 51-20.1-03 of the North Dakota Century Code. Count Three alleged that the covenant not to compete contained in the "Service Representation Agreement" was void under state law. Count Four alleged that Kress violated its obligation of good faith and fair dealing in its attempt to terminate the "Service Representation Agreement". Count Five alleged that Interstate's business would be irreparably harmed if Kress repossessed its repair parts.
On July 8, 2003, Kress filed a Motion to Dismiss Counts Two and Four of Interstate's complaint, asserting that North Dakota's Heavy Construction Equipment statute does not apply to its relationship with Interstate and that no independent cause of action for a breach of good faith exists under Illinois law. Interstate filed a response to Kress's motion on August 11, 2003. Kress filed a reply brief on August 21, 2003.
II. STANDARD OF REVIEW
Summary judgment is appropriate if there is no genuine issue of material fact and the moving party is entitled to judgment as a matter of law. F.R.Civ.P. 56(c); Celotex Corp. v. Catrett, 477 U.S. 317, 322 (1986). Rule 56 of the Federal Rules of Civil Procedure "mandates the entry of summary judgment . . . against a party who fails to make a showing sufficient to establish the existence of an element essential to that party's case, and on which that party will bear the burden of proof at trial." Celotex, 477 U.S. at 322. If the moving party has supported its motion for summary judgment, the nonmoving party has an affirmative burden placed on it to go beyond the pleadings and show a genuine triable issue of fact. Commercial Union Ins. Co. v. Schmidt, 967 F.2d 270, 271 (8th Cir. 1992). However, the Court considering a motion for summary judgment must view the evidence in the light most favorable to the nonmoving party who enjoys "the benefit of all reasonable inferences to be drawn from the facts." Vacca v. Viacom Broadcasting of Missouri, Inc., et al., 875 F.2d 1337, 1339 (8th Cir. 1989) (citation omitted).
III. LEGAL ANALYSIS
A. COUNT TWO
Interstate alleges in Count Two of its complaint that the manner in which Kress attempted to terminate the "Service Representation Agreement" amounted to a violation of North Dakota's Heavy Construction Equipment Franchise Termination statute found at Section 51-20.1-03. Specifically, Interstate charges that Kress attempted to terminate the parties relationship without good cause and without providing the requisite ninety (90) days notice.
Kress has acknowledged that the choice of law provision contained in the "Service Representation Agreement" does not preclude the application of special statutory provisions, such as the Heavy Construction Equipment Franchise Termination statute. See Kress's Memorandum in Support of its Motion to Dismiss Counts II and IV, p. 10.
The termination of heavy construction equipment franchises is governed by Chapter 51-20.1 of the North Dakota Century Code. Section 51-20.1-03 of the North Dakota Century Code, which is commonly referred to as the Heavy Construction Equipment Franchise Termination statute, provides as follows:
1. Any distributor of heavy construction equipment, repair parts, or both, who enters into a written contract with any retail dealer in heavy construction equipment, repair parts, or both, in which the retail dealer agrees to maintain a stock of heavy construction equipment, repair parts, or both, may not terminate, cancel, or fail to renew the contract without good cause.
2. As used in this section, "good cause" means that the retail dealer has failed to comply with the requirements imposed upon the retail dealer by the terms of the written contract between the retail dealer and the distributor. The determination by the distributor that the distributor has good cause for termination, cancellation, or nonrenewal must be made in good faith.
3. In any civil action against a distributor for violating this section, the distributor must establish that the contract termination, cancellation, or nonrenewal was made in good faith for good cause. If the distributor fails to establish good cause for its termination, cancellation, or nonrenewal action, the distributor is liable for all special and general damages sustained by the retail dealer, including, but not limited to, the costs of the litigation and reasonable attorney's fees for prosecuting the civil action. In addition, the retail dealer, where appropriate, is entitled to injunctive relief. . . .
For purposes of the Heavy Construction Equipment statute, the term "heavy equipment" is defined as "self-propelled or pull-type construction machinery . . . primarily used in projects requiring paving, earthmoving, or bridge, road, highway, and commercial construction." N.D. Cent. Code § 51-20.1-01(2). A "distributor" is defined as "any person involved in manufacturing, wholesaling, or distributing heavy equipment or repair parts for heavy construction equipment" who enters into a written contract with a "retail dealer." N.D. Cent. Code § 51-20.1-01(1). A "retail dealer" is defined as "every person engaged in the business of selling heavy construction equipment at retail." N.D. Cent. Code § 51-20.1-01(3).
1) SUMMARY OF THE PARTIES' ARGUMENTS
Kress maintains that the "Service Representation Agreement" is not a contract to which the Heavy Construction Equipment Franchise Termination statute applies because Interstate does not meet the definition of a "retail dealer." According to Kress, an entity must engage in the sale of heavy construction equipment to be considered a "retail dealer" as defined by statute. Acknowledging that North Dakota courts have yet to address this issue in the context of an action under the Heavy Construction Equipment Franchise Termination statute, Kress cites to a Fifth Circuit case entitled Lake Charles Diesel, Inc. v. General Motors, Corp, 328 F.3d 192 (5th Cir. 1992), for the proposition that a "retail dealer" is an entity that commits to sell equipment repair parts. In Lake Charles, the plaintiff, an automotive parts dealer, attempted to avoid the termination of its agreement with AC Delco, a nationwide supplier of automotive repair parts, by invoking the protections of Louisiana's Repurchase of Farm, Industrial, and Lawn and Garden Equipment by Wholesaler Act ("Repurchase Act"). Apparently, AC Delco had given the plaintiff 30-days notice of its decision to terminate the parties agreement. The Repurchase Act prohibited short-notice, at-will termination of dealership contracts in an effort to ensure that dealers were not left "holding a bag" of equipment or repair parts without a ready source of liquidation at a fair price. The district court determined that the Repurchase Act was applicable to the agreement at issue and that AC Delco's no-cause termination notice failed to satisfy the Repurchase Act's 90-day good cause termination provision. On appeal, the Fifth Circuit Court reversed the district court's determination and held that the Repurchase Act did not apply to the agreement at issue. It reasoned that:
The Repurchase Act literally requires that, for a dealership contract to be covered by the statute, the Dealer must commit to sell the Agent's "equipment . . . and repair parts for such equipment." . . . [The Repurchase Act is not] applicable to a contract that establishes only a freestanding dealership in repair parts.
In addition to asserting that Interstate does not satisfy the statutory definition of a "retail dealer," Kress contends that the Heavy Equipment Franchise Termination statute is inapplicable because Interstate is not required under the terms of the "Service Representation Agreement" to "maintain" a stock of repair parts, but merely to provide storage space for parts. Kress, emphasizing the fact that Interstate was not under any requirement to purchase parts, dismisses the notion that the "Service Representation Agreement" constituted a financing arrangement as contemplated by Revised Article 9 of the Uniform Commercial Code (which is codified in Chapter 41-09 of the North Dakota Century Code).
In response, Interstate contends that it is indeed a "retail dealer" as defined by statute and that Kress's reliance on Lake Charles is misplaced because (1) Interstate's relationship with Kress is fundamentally different than the relationship at issue in Lake Charles; and (2) the Repurchase Act is significantly different from the Heavy Construction Equipment Franchise Termination statute. Interstate also contends that it has "maintained" an inventory of Kress parts, adding that the Heavy Construction Equipment statute does not require Interstate to own the inventory as Kress has suggested.
Interstate also contends that it is a "retail dealer" because has been intimately involved in the sale of Coal Haulers and has played a pivotal role in Kress's ability to gain market share in North Dakota. According to Interstate, it has been engaged in every Coal Hauler sale in North Dakota by virtue of the fact that Coal Haulers:
(1) are very expensive (costing in excess of $1 million),
(2) are custom made, and
(3) require local dealers to complete their final assembly for the customer. In addition, Interstate maintains that the parties modified the "Service Representation Agreement" by oral agreement within months of its execution and that Interstate was given control over the management of the parts inventory as well as customer interactions in North Dakota.
In reply, Kress contends that Interstate's alleged efforts in promoting Kress products do not render it a "retail dealer" as defined by statute because Interstate did not have authority to close a sale. Kress also reiterates its earlier assertion that Interstate does not "maintain" an inventory of repair parts for purposes of the Heavy Construction Equipment Franchise Termination statute because Interstate does not own or otherwise have a financial stake in the inventory. With respect to the alleged oral modifications to the "Service Representation Agreement", Kress contends that the agreement cannot be modified by parol evidence and that the statute of frauds precludes the Court from considering any alterations in the parties relationship that have not been reduced to writing.
2) DISCUSSION
A "retail dealer" as defined in Section 51-20.1-01(3) of the North Dakota Century Code means every person "engaged in the business" of selling heavy construction equipment unless the context requires otherwise. See N.D. Cent. Code § 51-20.1-01. Such is the case here. A close examination of Chapter 51-20.03 reveals that the Heavy Construction Equipment Franchise Termination statute contemplates the term "retail dealers" to include those entities involved in the business of selling construction equipment, repair parts, or both. The context of the statute requires such an interpretation. To conclude otherwise would only serve to undermine the rotections of the Heavy Construction Equipment Franchise Termination statute. See N.D. Cent. Code § 1-2-01 (stating that code provisions "are to be construed liberally, with a view to effecting its objects and to promoting justice"). The statute does not require a retail dealer to stock heavy equipment; to profit from sales of heavy equipment; or to be the exclusive participant in the sales process. Rather, the statute merely requires that a dealer be "engaged in the business" of selling heavy construction equipment at retail to constitute a retail dealer. Based on the facts presented, it is clear that Interstate is "engaged in the business" of selling Kress Coal Haulers in North Dakota and, as such, should be afforded the protections of the Heavy Construction Equipment Franchise Termination statute.
Section 51-20.1-03 makes reference to "any retail dealer in heavy construction equipment, repair parts, or both. . . ." Most of the other provisions of Chapter 51-20.1 also refer to retail dealers being involved in the sale or stock of heavy construction equipment and/or repair parts and being reimbursed for such equipment and/or repair parts.
The Fifth Circuit Court's holding in Lake Charles, it is not binding upon this Court. Moreover, the holding in Lake Charles has limited relevance to the present dispute since it involves the application of a Louisiana statute. Having found that an entity "engaged in the business" of selling construction equipment or repair parts may be considered a "retail dealer" for purposes of the Heavy Construction Equipment Termination statute, the Court must then consider whether the statute requires a retail dealer to have an ownership interest in the inventory on its premises.
There is no dispute that Interstate has on its premises a sizeable stock of Kress inventory. However, under the terms of the "Service Representation Agreement", ownership of the repair parts remains vested in Kress. While Interstate is compensated for storing the repair parts, the parties have accepted that Interstate will not obtain an interest in the parts by virtue of fulfilling its obligations under the "Service Representation Agreement". Nevertheless, Interstate does have a financial stake in the parts to the extent that it receives a percentage of every Kress part sold.
The Service Representative Agreement contains the following provisions with respect to Interstate's parts handling duties:
3.1 During the term of this Agreement, Representative [Interstate] shall receive shipments of Contract Parts from Kress and shall store those Contract Parts at the Representative's Facility as bailee of Kress. Kress shall determine the quantities and types of Contract Parts that shall be stored at the Representative's Facility. . . . Representative hereby agrees and acknowledges that title to the Contract Parts shall remain vested in Kress at all times and that no interest in the Contract Parts shall be created by virtue of the fulfillment of the Representative's obligations under this Agreement. . . .
3.2 The Representative shall reserve and maintain not less than 800 contiguous square feet of space within the Representative's Facility . . . for the exclusive purpose of storing the Contract Parts and shall take all action required to segregate the Contract Parts from any inventory or other property of the Representative or any third party. The Representative shall post conspicuous signs to identify the Contract Parts as the property of Kress and take such action as is reasonably requested by Kress from time to time to ensure that the Contract Parts are maintained as the separate and identifiable property of Kress . . .
The Heavy Construction Equipment Franchise Termination statute does not explicitly require the retail dealer to have an ownership interest in the repair parts. Rather, the statute merely requires the dealer to "maintain" a stock of repair parts. As for the statutory definition of "retail dealer," it says nothing about ownership. It simply states that retail dealers are "persons engaged in the business of selling. . . ." N.D. Cent. Code § 51-20.1-01(4).
The Court expressly concludes that a "retail dealer," as defined under North Dakota's Heavy Construction Equipment Franchise Termination statute includes those engaged in the business of selling heavy construction equipment, repair parts, or both. The Court finds that the protections of the statute extend to those "retail dealers" such as Interstate who have made an investment in construction equipment or repair parts and who have a financial stake in the repair parts. It is clear that Chapter 51-20.1 does not require that the retail dealer have an ownership interest in the equipment or the repair parts. Accordingly, the Court concludes, as a matter of law, that the protections of the Heavy Construction Equipment Franchise Termination statute extend to Interstate and that the statute is applicable to this dispute.
B. COUNT FOUR
Interstate also alleges in Count Four of its complaint that Kress violated its obligation of good faith and fair dealing when terminating the "Service Representation Agreement". Specifically, Interstate contends that "good faith and fair dealing requires that Kress have a good faith reason for the termination of Interstate's agreement, particularly when the contract automatically renews from year to year, and the parties had engaged in this relationship over a period of ten years."
1) SUMMARY OF PARTIES ARGUMENTS
The parties expressly agreed that the "Service Representation Agreement" may be terminated upon notice. Kress contends that Interstate is attempting to rewrite the terms of the parties' relationship in its attempt to graft a good faith requirement onto the "Service Representation Agreement". Additionally, Kress contends that Interstate cannot sustain an independent tort action based upon a breach of good faith under Illinois statute and that Count Four fails to state a claim as a matter of law.
Interstate counters that North Dakota law governs this action despite the existence of the "Service Representation Agreement's" choice of law provision. First, Interstate states that the power of the parties to select the jurisdiction whose laws govern is not unlimited. Next, Interstate asserts that the choice of law provision is trumped by North Dakota law because (1) North Dakota's interest in this matter is more significant than any interest Illinois may have, and (2) the application of Illinois law in this case would run contrary to a fundamental policy of North Dakota.
2) DISCUSSION
Illinois law does not recognize a cause of action for breach of an implied duty of good faith and fair dealing arising from a contract except in the narrow context of cases involving an insurer's obligation to settle with a third party who has sued the policy-holder. See Voyles v. Sandria Mortg. Corp., 751 N.E.2d 1126, 1131 (Ill. 2001). As the Illinois Supreme Court explained in, the covenant of good faith and fair dealing is a rule of construction and not an independent source of tort liability. As the parties have agreed to the application of Illinois law, it would appear at first blush that Count Four of Interstate's complaint should fail. However, the Court is mindful of the fact a choice of laws provision is not without limits. Interstate remains adamant that North Dakota and not Illinois law controls with respect to Count Four. As Interstate filed its action in North Dakota, this Court would apply North Dakota's choice of law rules. See JRT, Inc. v. TCBY Systems, Inc., 52 F.3d 734, 739 (8th Cir. 1995) ("But even after an anti-waiver statute is held not to apply, the forum state's normal conflict of laws rules must be satisfied in order for a choice of law provision to be effective"). However, engaging in a conflicts of laws analysis would prove to be largely an academic exercise as Interstate has acknowledged that North Dakota courts have to date declined to recognize a tort action for breach of an obligation of good faith in a commercial context. See Security Nat. Bank, Edgeley v. Wald, 536 N.W.2d 924, 927 (N.D. 1995) ([I]n this case we need not decide whether [a tort for breach of breach of the obligation of good faith] exists in a commercial context . . ."); United State Bank of Woell, 434 N.W.2d 712, 715 (N.D. 1989) ("We have not ruled whether a tort action exists in this jurisdiction for breach of the obligation of good faith in a commercial context, and decline to do so today . . .").
Neither North Dakota statute nor case law explicitly foreclose the use of such clauses. To the contrary, the North Dakota Supreme Court has indicated that "parties may stipulate as to choice of laws." American Hardware Mut. Insur. Co., v. Dairyland Insur. Co., 304 N.W.2d 687, 689 n. 1 (1981); see also Plante v. Columbia Paints, 494 N.W.2d 140, 142 (N.D. 1992) (stating that "parties to a consensual transaction . . . should be able to plan their transaction as one with predictable results").
The general position taken by the Eighth Circuit Court of Appeals is that state law will void a choice of law clause "only so long as it is clear that the state legislature deliberately targeted choice of law provisions." JRT, Inc. v. TCBY Systems, Inc., 52 F.3d 734, 739 (8th Cir. 1995). Absent an anti-waiver provision, the well-accepted rule is that the chosen state's law will apply unless: 1) another state has a materially greater interest in the issue; and 2) the chosen law would violate a fundamental policy of the state with the greater interest. Id.
It should be noted that Kress does not dispute that a duty to act in good faith exists. Rather, it asserts that Interstate cannot assert a separate cause of action for an alleged breach of this duty. The Court agrees.
The Court finds it unnecessary to address the validity of the choice of law provision contained the "Service Representation Agreement" as neither Illinois nor North Dakota have recognized a separate cause of action for breach of an implied covenant of good faith and fair dealing. The Court concludes that no separate cause of action exists for the breach of good faith and fair dealing and that Count Four should be dismissed.
IV. CONCLUSION
Kress's Motion for Dismissal of Count Two is DENIED and the Motion for Dismissal of Count Four (Docket No. 7) is GRANTED.
IT IS SO ORDERED.