United States District Court, Northern District of Illinois, E.D
May 26, 1981
WABASH, INC., ET AL., PLAINTIFFS AND COUNTERDEFENDANTS,
AVNET, INC., DEFENDANT AND COUNTERPLAINTIFF.
The opinion of the court was delivered by: Shadur, District Judge.
MEMORANDUM OPINION AND ORDER
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").*fn1 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.
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.*fn2 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
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,
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
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
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
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
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
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 Backer. There the tenant
sought to reform the lease because the rent increases under the
formula substantially exceeded what the parties had expected.
Thus in Backer as under plaintiffs' allegations here, the index
agreed upon by the parties did not work as the contracting
parties had anticipated when they executed their contract.
Rejection of reformation in Backer requires a like rejection of
reformation of the Agreement as drafted, under Count IV as
Plaintiffs might possibly have framed the Complaint's
allegations in a way that would conform to the requirement of
a mutual mistake of existing fact and thus survive a motion to
dismiss.*fn6 They are however represented by responsible and
skillful counsel, and their pleadings will be taken as framed.
Count IV is dismissed.
Counts V and VI
Counts V and VI concern the alleged misappropriation of
confidential information by Avnet. Joseph Brusseau
("Brusseau"), an IPM employee before IPM was purchased by
Wabash, was promoted to IPM President after the purchase and
held that position until terminated December 5, 1977. Wabash
asserts that after the claims set forth in Counts I, II and
III of the Complaint were presented to Avnet, but before this
action was filed, Avnet induced Brusseau to disclose
confidential information as to the nature of Wabash's claim
and the possibility of litigation. Count V seeks compensatory
damages for the harm caused by the allegedly unlawful
inducement and misappropriation of the confidential
information (it also prays for injunctive relief against
further solicitation of confidential information), and Count
VI seeks punitive damages because Avnet's alleged misdeeds
were willful and wanton.
Counts V and VI are tort claims, and under Illinois
choice-of-law principles this Court must apply the law of the
state with the most significant relationship to the tort.
Ingersoll v. Klein, 46 Ill.2d 42, 262 N.E.2d 593 (1970). Both
plaintiff corporations have their principal places of business
in Illinois, while defendant corporation has its in New York.
Brusseau is an Illinois resident who worked for plaintiffs in
this state. Brusseau's alleged misappropriation of the
information thus occurred in Illinois. Given the Illinois
center of gravity of the claimed tortious activity, its
substantive law must be looked to.
Avnet urges that this Court read Brusseau's employment and
termination contracts closely and find that the information
referred to in Counts V and VI was not of the type prohibited
from disclosure by those contracts. That may well be true, but
the Complaint charges inducement of a breach of Brusseau's
fiduciary duties as well as a breach of contract. Even absent a
breach of the contract of employment or the contract of
termination, Brusseau owed a duty of loyalty to IPM. ABC Trans
National Transport, Inc. v. Aeronautics Forwarders, Inc.,
62 Ill. App.3d 671, 20 Ill.Dec. 160, 379 N.E.2d 1228 (1st Dist.
1978). Avnet cannot therefore obtain dismissal of the two
Counts on a narrow reading limited to the contract provisions.
One essential element of the cause of action asserted by
Avnet in Counts V and VI is of course damage to Avnet.
Mitchell v. Weiger, 87 Ill. App.3d 302, 42 Ill.Dec. 543, 545,
409 N.E.2d 38, 40 (1st Dist. 1980). Plaintiffs allege three
injuries resulting from Avnet's actions:
(1) the costs of the entire litigation with
(2) the salary paid to Brusseau during the
period of the wrongdoing; and
(3) "other substantial losses."
Though a motion directed to the pleadings is not the
appropriate occasion to deal definitively with the issue of
damages, a few comments may be constructive in shaping the
future course of the litigation. As for their first claimed
injury, plaintiffs have failed to allege any reason that
Avnet's misappropriation of the confidential information was
either responsible for, or in any way expanded, this
litigation. In fact, they have failed to allege any harm at
all resulting from such misappropriation.
Plaintiffs have, however, stated a potentially valid claim
for recovery of Brusseau's salary. If Brusseau breached his
duty of loyalty to IPM he would not be entitled to
compensation during the period of the breach. Whitney v. Fred
D. Jones Co., 174 Ill. App. 116 (1st Dist. 1912). Avnet, by
inducing the breach and conspiring with Brusseau, could be
liable for recovery of that compensation.
In any event, questions of liability are for the future. For
now it is sufficient to sustain Counts V and VI against
Count IV of the Complaint is dismissed under Fed.R.Civ.P.
12(b)(6) for failure to state a claim upon which relief can be
granted. Avnet's like motion as to Counts V and VI is denied,
and Avnet is ordered to
answer those Counts on or before June 8, 1981.