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United States District Court, Northern District of Illinois, E.D

January 26, 1981


The opinion of the court was delivered by: Shadur, District Judge.


DP Service, Inc. ("DP") brings this action based on the breach of an alleged distributorship agreement entered into with defendants AM International, Inc. and Jacquard Systems (collectively "AM"). DP's two-count complaint charges breach of contract and tortious interference with prospective economic advantage. AM has moved for dismissal of both counts. For the reasons stated in this memorandum opinion and order, AM's motion is denied as to Count I and granted as to Count II.

Choice of Law

In this diversity case the Illinois substantive law to which this Court looks includes its choice-of-law rules. Klaxon Co. v. Stentor Electric Mfg. Co., 313 U.S. 487, 61 S.Ct. 1020, 85 L.Ed. 1477 (1941). Those rules are not the same for the two theories, breach of contract and tort, sought to be invoked by DP's Complaint.

1. Count I: Alleged Breach of Contract

Count I of the Complaint alleges the existence and AM's subsequent breach of a written agreement dated July 1, 1978 establishing DP as a non-exclusive distributor of AM's products in Illinois. AM argues that the alleged agreement is unenforceable because no written agreement was ever signed by AM or any of its agents and because any claimed oral agreement would run afoul of the Statute of Frauds.

Illinois has not yet adopted the "most significant contacts" approach for contract choice-of-law questions, as it has in other areas of substantive law. Nor is there a sufficiently strong indication of so doing in recent Illinois Supreme Court decisions to justify this Court in not following the existing law in this respect.

Accordingly this Court is required to follow the law as set down in such cases as Cook Associates, Inc. v. Colonial Broach & Machine Co., 14 Ill. App.3d 965, 304 N.E.2d 27, 31-32 (1st Dist. 1973): If a contract is to be performed in more than one state, the law of the place of execution applies as to questions of validity, construction and scope as well as performance. Here the alleged Distributorship Agreement*fn1 calls for DP as distributor to perform its activities in Illinois, while it contemplates that AM as manufacturer will manufacture and ship its products to DP "F.O.B. at the Manufacturer's factory" (¶ 4.2) in California. Thus the answer under the Illinois conflicts rule is to look to the place of execution.

On that score the alleged agreement has two provisions:

(1) It states on the cover page, "This Agreement shall first become effective upon the Manufacturer's acceptance of the Distributor's initial order. . . ." — which would be a California act.

(2) Paragraph 15.7 provides, "This Agreement may be executed in counterparts, and whenever signed shall be deemed delivered and executed at Santa Monica, California." Therefore Illinois choice-of-law rules lead to California, the same law that is specified by Paragraph 15.6 of the Distributorship Agreement:

  This Agreement shall be interpreted and governed
  exclusively by California law.

2. Count II: Alleged Tort Liability

DP's second Count sounds in tort. In that area of substantive law Illinois has adopted the "most significant contacts" choice of law rule, Ingersoll v. Klein, 46 Ill.2d 42, 262 N.E.2d 593 (1970). Ingersoll requires consideration of four factors:

(a) place of injury;

(b) place where the conduct occurred;

    (c) place of incorporation and place of business of
  the parties; and

    (d) place where the parties' relationship is

In this case the alleged injury occurred in Illinois. AM's claimed conduct, interfering with DP's business, had its effect and may have been carried out in Illinois, but doubtless would have been conceived in AM's corporate headquarters in California. DP is incorporated and does business in Illinois, while AM is incorporated in Delaware but operates in California. Finally, the relationship of the parties stems from a contract negotiated in both Illinois and California and, as already discussed, calling for performance in both states.

Thus one of the four factors points to Illinois, another involves either a divided or primarily California situs, and the other two are evenly balanced between Illinois and California. Under the most significant relationship test, the place of injury is given presumptive importance only to be supplanted when another state has a more significant relationship. In re Air Crash Disaster, 644 F.2d 594 (7th Cir. 1981). Because California's contacts are at best of equal significance with, and indeed appear to be less significant than, those of the place of alleged injury, Illinois law is controlling.

Count I: Alleged Breach of Contract — The Substantive Law

California's Statute of Frauds, Cal.Civ.Code § 1624, provides*fn2:

  The following contracts are invalid, unless the same,
  or some note or memorandum thereof, is in writing and
  subscribed by the party to be charged or by his

  1. An agreement that by its terms is not to be
     performed within a year of the making
     thereof . . .

Because the Distributorship Agreement specifies a 24-month term, renewable for two additional periods of 12 months each, it was not valid unless there was a writing sufficient to take it out of the Statute of Frauds.

As a general rule the "in writing" requirement may be satisfied by a contract comprising two or more writings, only one of which need be signed by the party to be charged. Corbin, Contracts § 512. California follows that general rule. Walsh v. Standart, 174 Cal. 807, 164 P. 795 (1917); Searles v. Gonzalez, 191 Cal. 426, 216 P. 1003 (1923).*fn3

DP acknowledges that the original Distributorship Agreement is unsigned by AM but argues that later documents, signed by AM, constitute a sufficient writing in conjunction with the original.*fn4 Complaint Exhibit E is a letter from AM to plaintiff, signed by AM's Vice President-Sales Donald Novak, referring to "your current Distributor Contract" (quite plainly a reference to AM's printed form of Distributorship Agreement, Exhibit A, which DP had signed). Exhibit F, a letter from AM's President Edgar Bolton to DP, states that AM "fully intends to honor the agreement we have with your organization." In light of those exhibits it is somewhat remarkable that AM's memorandum in response to this Court's request to brief California law lays heavy stress on Straus v. DeYoung, 155 F. Supp. 215, 219 (S.D.Cal. 1957). Straus distinguished the California Supreme Court decision in Searles in terms that appear to make the latter case and not Straus controlling here (the following quotation repeats the Straus language quoted in AM's memorandum, including its added emphasis):

  A memorandum signed by the party to be charged which
  forms no part of the contract, but which recognizes
  the existence of a contract, is a sufficient
  memorandum, and parol evidence is admissible to
  establish the same. Searles v. Gonzalez, 191 Cal. 426,
  216 P. 1003 (1923).

  . . . In [the Searles case] the party to be charged
  had not signed any document which formed an integral
  part of the contract, but had signed another document
  in which he expressly declared and recognized the
  existence of a contract. In the instant case, the
  three letters signed by DeYoung do not mention or
  refer to the oral agreement embodied in exhibits 1 to
  4 inclusive. None of said letters incorporates the
  oral agreement therein by any internal reference.
  None contains any language which indicates or from
  which might be inferred an intention on the part of
  the Defendants to authenticate or confirm the oral

On a motion to dismiss for failure to state a claim upon which relief can be granted, this Court must not only accept as true all well-pleaded allegations in the Complaint but must also construe those allegations in favor of the party opposing the motion. Scheuer v. Rhodes, 416 U.S. 232, 236, 94 S.Ct. 1683, 1686, 40 L.Ed.2d 90 (1974). From that perspective, the Court cannot rule as a matter of law that the Exhibits attached to DP's complaint do not constitute writings sufficient to avoid the Statute of Frauds.*fn5

AM next argues that if a valid agreement does exist between the parties, all of the relief requested by DP involves consequential damages. Because Paragraph 15.6 of the Distributorship Agreement contains a waiver of consequential damages, DP is precluded from recovering them under the contract. DP does not contest the validity of that provision but rather argues that it is not requesting consequential damages.

Neither party, however, addresses the more difficult question whether the injuries alleged in the Complaint should be classified as consequential, as opposed to direct, damages. For that reason the Court will deal with the issue only in threshold and non-definitive terms.

25 C.J.S. Damages § 2 states the concept this way:

  Consequential damages are such as are not produced
  without the concurrence of some other event
  attributable to some origin or cause; such damage,
  loss, or injury as does not flow directly and
  immediately from the act of the party, but only from
  the consequence or results of such act.

This Court has been unable to locate a California case defining "consequential" damages, but several California courts have defined the term "special" (as opposed to general) damages, a term closely related to consequential damages. Monarch Brewing Co. v. George J. Meyer Manufacturing Co., 130 F.2d 582, 585 (9th Cir. 1942). "Special" damages were defined in Myers v. Stephens, 233 Cal.App.2d 104, 43 Cal.Rptr. 420, 433 (1965), as:

  damages which do not arise from the wrongful act
  itself, but depend on the circumstances peculiar to
  the infliction of each respective injury.

For purposes of AM's motion it is enough to determine that at least some of DP's damages might not be classified as consequential damages. Its complaint alleges:

(a) disruption of DP's day to day business;

(b) prevention of DP's pursuing its sales programs;

    (c) prevention of DP's entering into agreements
  with potential customers;

(d) loss of profits; and

    (e) DP's incurring of expenses in developing
  territory, marketing AM's product, training DP's
  employees and paying attorneys to preserve its rights
  under the contract.

Unquestionably the Distributorship Agreement contemplated DP's selling of AM's machines for a profit. Alleged damages in the form of loss of profits and the disruption of day to day business, for example, could be viewed as flowing directly and immediately from the breach of the claimed contract; see Myers v. Stephens (loss of profits held to be general damages).

This Court cannot hold at this time that all of DP's requested damages are consequential. It remains for future determination which if any of DP's claims are barred by the contract limitation.

Count II: Alleged Tort Liability — The Substantive Law

Both parties have treated the allegations of DP's Count II as asserting a claim for tortious interference with prospective economic advantage. That tort requires a showing of:

    (a) a reasonable expectation of entering into a
  valid business relationship;

(b) defendant's knowledge of that expectation; and

    (c) intentional interference by defendant
  preventing plaintiff from realizing that expectation.

See Tom Olesker's Exciting World of Fashion, Inc. v. Dun & Bradstreet, Inc., 16 Ill. App.3d 709,
306 N.E.2d 549 (1st Dist. 1973), aff'd in part, rev'd in part, 61 Ill.2d 129, 334 N.E.2d 160 (1975).

DP alleges that AM wanted to terminate its distributorships in order to eliminate competition and take over the direct sales of its own products; that in furtherance of that desire, AM tried to coerce DP into signing a new and less favorable sales agency agreement; that after DP refused, AM denied the validity of the Distributorship Agreement and threatened its termination, all with the same coercive purpose; and that AM finally breached the contract wilfully and maliciously. When those allegations are distilled to their essence, it appears that the only allegedly tortious act was the breach of a contract between the parties.

But the tort of intentional interference with prospective economic advantage requires some action toward a third party that disrupts an economic relationship of a defendant. As stated in Parkway Bank & Trust Co. v. City of Darien, 43 Ill. App.3d 400, 2 Ill.Dec. 234, 357 N.E.2d 211 (2d Dist. 1976) (emphasis added):

  Although the plaintiffs state in cursory language
  that the defendants `intentionally

  interfered with plaintiffs' business affairs . . .'
  none of the particular acts alleged that the
  defendants purposely caused a third person not to
  enter into or continue with prospective contractual

One contracting party does not have a cause of action against the other for conspiring to breach their contract or for wrongfully interfering with its own contract. Blivas & Page, Inc. v. Klein, 5 Ill. App.3d 280, 286, 282 N.E.2d 210, 214 (2d Dist. 1972).

DP has not alleged any act of AM directed toward a third party. Even were DP able to prove that AM's motive in breaching the contract was to sell directly to DP's customers, under the Illinois cases that would not constitute the tort of intentional interference with prospective economic opportunity.


AM's motion under Fed.R.Civ.P. 12(b)(6) for failure to state a claim upon which relief can be granted is denied as to Count I and granted as to Count II. AM is ordered to answer Count I on or before February 6, 1981.

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