United States District Court, Northern District of Illinois, E.D
April 7, 1983
FRANK J. SCHWARTZ AND CHICAGO POWER MANAGEMENT, INC., PLAINTIFFS AND COUNTERDEFENDANTS,
MICHIGAN POWER MANAGEMENT COMPANY, DEFENDANT AND COUNTERPLAINTIFF.
The opinion of the court was delivered by: Shadur, District Judge.
MEMORANDUM OPINION AND ORDER
Chicago Power Management, Inc. and its major principal Frank
J. Schwartz*fn1 bring this diversity action against Michigan
Power Management Company ("Michigan Power"). Schwartz's
three-count Second Amended Complaint (the "Complaint") focuses
on Michigan Power's asserted failure to obtain the approval of
Laboratories, Inc. ("UL"), a standard testing laboratory, for
the electrical power management systems Schwartz purchased
pursuant to a "Dealer Agreement" (the "Agreement") with
1. Count I claims UL approval was an
unsatisfied condition precedent to the Agreement.
2. Count II asserts Michigan Power breached the
Agreement by failing to secure UL approval and to
offer Schwartz its new products under the
Agreement's right of first refusal provision.
3. Count III charges Michigan Power induced
Schwartz to enter into the Agreement through
various misrepresentations, including its
statement that UL approval would be procured for
all its present products.*fn2
In turn, Michigan Power has filed a counterclaim, asserting
Schwartz's failure to perform his Agreement undertakings.
Schwartz has filed two summary judgment motions under
Fed.R.Civ.P. ("Rule") 56, one as to all three Complaint counts
and the other as to the counterclaim. For the reasons stated
in this memorandum opinion and order, both motions are denied.
On August 10, 1980 Michigan Power placed an ad in Chicago
newspapers, offering to sell energy management electrical
equipment. In response to the ad Schwartz called Michigan
Power for further details. Michigan Power then mailed Schwartz
some brochures describing the equipment.
Over the next several days Schwartz explored with Michigan
Power President Carson B. Ashworth ("Ashworth") the
possibility of serving as Michigan Power's dealer in the
Chicago territory. During the negotiations Schwartz asked
whether Michigan Power's energy systems had been listed by UL.
Ashworth qualified his "no" answer by saying Michigan Power
had already initiated and would continue to pursue the UL
listing process. Ashworth Dep. 10.
On August 21, 1980 Schwartz and Ashworth signed the
four-section Agreement at Michigan Power's office in Michigan
(Agreement's provisions are cited "Section ___ " in this
1. Section I appointed Schwartz as Michigan
Power's exclusive Chicago-area*fn4 dealer "for
the purpose of selling the MPM-8000 Power
Management Systems" (the "Systems").
2. Section II called for the sale of 50
3. Section III identified the various kinds of
assistance Michigan Power was to provide
4. Section IV primarily specified Schwartz's
responsibilities and rights:
(a) Section IV(1) obligated Schwartz to
"advertise, promote, and sell the . . .
MPM-8000 Power Management Systems in his
(b) Section IV(2) required Schwartz to
"[h]ire and train salesmen to sell the
manufacturers [sic] energy systems."
(c) Section IV(5)*fn5 obligated Schwartz to
order another 20 Systems
within one year after the Agreement's effective
date. If Schwartz failed to do so, Michigan
Power could appoint another dealer in the
(d) Section IV(6), the interpretation of
which is debated vigorously by the
It is expressly understood that U.L.
(Underwriters Laboratory) approval is in
process and manufacturer is responsible for any
and all modifications (at their [sic] expense)
required to obtain and maintain such approval
on all present and future power management
systems manufactured by MPM to be marketed in
the Chicago territory.
(e) Section IV(7) entitles Schwartz to sell
any of Michigan Power's "new energy savings
products" marketed in the "commercial business
marketplace." It also confers on Schwartz the
right of first refusal as to any other new
Michigan Power product.
(f) Section IV(8) schedules prompt payment
for the first 50 Systems: (1) an immediate down
payment of $20,000; (2) an additional $23,000
on or before August 28, 1980; and (3) the
balance the week of September 15, 1980 — the
time contemplated for shipment of the goods.
(g) Section IV(9) called for F.O.B. delivery
from Michigan Power's factory in Anchorville,
Michigan, requiring Schwartz to reimburse
Michigan Power for its freight prepayments.
Initial relations between the parties proceeded smoothly.
Schwartz paid the last installment by September 20, 1980, when
the 50 Systems were shipped to him. Though some sets were
apparently damaged in transit, Michigan Power promptly
repaired them to Schwartz's satisfaction.*fn7
But the honeymoon ended abruptly when Michigan Power began
to experience difficulties in obtaining UL certification.
Schwartz and Michigan Power hotly contest the extent to which
the absence of UL approval hampered Schwartz's efforts to
market the Systems. Electrical codes of the various political
divisions in Schwartz's Chicago territory generally prohibit
the installation of electrical appliances (such as the System)
that lack approval by UL, any other nationally recognized
testing laboratory or the governmental unit's own electrical
department. While not mandated by any jurisdiction, UL listing
may operate in practice as an absolute marketing prerequisite.
That however is a factual issue that need not be confronted at
Michigan Power's exceedingly frustrating quest for UL
certification is chronicled at length in the Ashworth and
Martin depositions and their accompanying exhibits —
voluminous correspondence between Michigan Power and UL and
between Michigan Power and IBN, manufacturer of the System.
Only the significant developments in the ongoing saga (enough
to negate summary judgment) will be touched on here:
1. On August 6, 1980 (before running the newspaper
advertisement that attracted Schwartz's attention) Michigan
Power General Manager John R. Schoenbeck ("Schoenbeck")
telephoned a UL representative, apprising him of Michigan
Power's interest in securing UL listing of the System. In an
August 8 follow-up letter, Schoenbeck requested a UL
application form. Ashworth Dep.Ex. 1.
2. Michigan Power promptly forwarded the completed
application and a sample System, which UL received September
23 and October 24, respectively. Ashworth Dep.Ex. 7, 12.
3. In a November 26 letter to Schoenbeck, UL project
engineer Cecil L. Norman ("Norman") acknowledged the sample
had passed the heating tests. But he also indicated the System
would have to be modified in certain respects, the most
important of which entailed adapting the unit's stepdown
transformer to conform to UL's Class 2 specifications.
Ashworth Dep.Ex. 13.
4. Schoenbeck immediately wrote to IBN engineer Michael
Martin ("Martin"),*fn8 asking him to make the required
changes as soon as possible. Ashworth Dep.Ex. 14. Then
Ashworth himself gave Martin written authorization to perform
the modifications, insisting on expeditious action. Ashworth
5. By mid-December Michigan Power had completed every
required alteration but one: installation of a Class 2
transformer that was either UL-listed or capable of meeting
UL's standards. As to that remaining obstacle to UL approval,
Michigan Power found itself ensnarled in a catch-22 position,
as an exasperated Schoenbeck pointed out to Norman in a
December 18 letter (Ashworth Dep.Ex. 16, copied verbatim):
I must admit that I am in a quandry of sorts, as
I.B.N. Research & Development informs me that
there isn't a current U.L. listed Class II
transformer available anywhere! In addition, if
one were to be found, it wouldn't meet U.L.
specifications anymore. This is due to a recent
correspondence you had with the manufacturer and
told him that the specs for evaluation on Class
II transformers were going to be changed anyway.
Thus, any model sent with a transformer meeting
specification would be held up because the new
specifications have not been written.
6. Over the next two months Michigan Power and IBN searched
frantically for a UL-sanctioned Class 2 transformer, but to no
avail. In a February 24, 1981 letter Schoenbeck informed
Norman the "step down transformer recognized for Class II
specifications is unattainable for our unit requirements."
Ashworth Dep.Ex. 21.*fn9 Unwilling to concede defeat,
however, Schoenbeck suggested the use of a UL-listed Edwards
88 series transformer ("Edwards 88 transformer"), which had
greater power capabilities. Ashworth Dep.Ex. 21.
7. Norman was unenthusiastic as to that alternative. In a
March 5 letter he indicated the use of such a transformer
would necessitate wholesale changes in the design of the
System's terminal (Ashworth Dep.Ex. 22, copied verbatim):
This is in reply to your letter of February 24,
1981. The Edwards 88 Series transformer is Listed
as a power transformer. If such a transformer is
employed, we are unable to waive the requirements
for the terminal construction and spacings. The
requirements for the terminal construction may be
found in Par. 13.11 through 13.17 of our UL873
Standard. The spacing requirements are those
found in Table 26.1 of the UL873 Standard. Also,
the unit will need to be marked to indicate that
all wiring connections must be Class 1.
We hope these comments will be of some help to
you in making the necessary corrections to your
unit in order that you may provide us with a
revised unit. We will continue to hold this
Project on an inactive status for three weeks
from the date of this letter.
8. Michigan Power apparently discarded the Edwards 88
alternative, perhaps because the required changes were
technically infeasible or because UL never gave Michigan Power
the specifications for the necessary changes. Ashworth Dep.
Throughout the summer and fall of 1981 Michigan
Power resumed its search for a suitable Class 2 transformer.
At the recommendation
of UL engineer Yertz (who temporarily replaced Norman on the
System project), Michigan Power redesigned the System so that
two UL-listed Class 2 transformers (apparently Michigan Power
had finally found a real — though smaller — live one) could
be substituted for the large transformer originally
incorporated in the unit. But that possible solution was
scuttled when Norman returned to the project. Ashworth Dep.Ex.
37 at 2.
9. Sometime in August UL further compounded Michigan Power's
problems by identifying other potential deficiencies, those
relating to System's fuses and paneling. Undaunted, Michigan
Power sought to address each successive problem perceived by
UL.*fn11 Martin Dep. 13; Fritz Dep. 10.
10. UL's December 10, 1981 letter announced its final test
results. It found the System had performed unacceptably in
several different tests, and it therefore refused to list the
product. Michigan Power was justifiably enraged by UL's
decision for at least three reasons:
(a) UL had evaluated the System under proposed
UL standards drafted only a month earlier,
despite its previously having acquiesced in
Michigan Power's efforts to conform the System to
the prevailing UL standards.
(b) Most of the tests that produced
unsatisfactory results could have been — but were
not — performed back in November 1980.
(c) Only one test was given on both occasions
— the flammability test — and that yielded
inconsistent results: System's flammability was
first found acceptable, then unacceptable.
11. Like Sisyphus, Michigan Power again pushed up the UL
hill by resubmitting a revised version of the System sometime
during the first few months of 1982. Ashworth Dep.Ex. 40.
12. No UL-Michigan Power correspondence has been furnished
this Court to illuminate what happened during the remaining
months of 1982. What scanty evidence is available suggests
Michigan Power continued to alter the System to comport with
UL's new Class 2 specifications. Ashworth Dep. 34. In addition
a February 2, 1983 letter from UL to Michigan Power — the only
recent correspondence included in the record — confirms
Michigan Power is bloody but unbowed in its UL certification
In sum the evidence (construed in the light most favorable
to Michigan Power) establishes that Michigan Power:
1. sought UL listing for the System
aggressively and in good faith;
2. performed in a timely manner every
modification requested by UL; and
3. defrayed all expenses incident to the
That forms the context in which Schwartz's summary judgment
motions must be assayed.
Summary Judgment on the Complaint
In his almost impenetrable memoranda Schwartz advances five
grounds for summary judgment, all of which supposedly
establish Michigan Power's unconditional promise of UL
listing.*fn13 Each of the first three contentions predicates
that obligation on Section IV(6), characterizing it
alternatively as a condition precedent, contractual duty and
express warranty. Schwartz's
last two arguments invoke implied warranty theories of
merchantability and fitness for the particular purpose.*fn14
All five assertions are wholly unconvincing for summary
judgment purposes, regardless of whether Michigan or Illinois
law supplies the rule for decision.*fn15
All three contract theories of recovery rest on a reading of
Section IV(6) that, though possible, is scarcely compelled by
its language. Whatever canons of contract interpretation are
employed, that provision simply cannot be contorted into an
unqualified guaranty of UL certification. It is at least
ambiguous in that respect.*fn16 And if Schwartz drafted
Section IV(6) (as Ashworth testified), any arguable ambiguity
would have to be resolved against Schwartz.*fn17
Under the circumstances, it is surely a permissible reading
of Section IV(6) that it merely (1) affirms Michigan Power's
representation that the UL listing process had been initiated
and (2) obligates Michigan Power to perform any modification
needed to secure UL approval. When viewed in the light most
favorable to Michigan Power, the record plainly confirms both
the validity of Michigan Power's representation and its good
faith and timely efforts to conform the System to UL
specifications. So much, then, for Schwartz's breach of
As for Schwartz's implied warranty theories, both rest on a
bizarre proposition: Because the System cannot be marketed in
the Chicagoland area (the supposed "ordinary purpose" for
which Schwartz purchased the product) without UL
certification, Michigan Power impliedly warranted the System
would pass UL inspection. That argument is marred by numerous
1. Neither species of implied warranty directly
guarantees extrinsic conditions (such as UL
approval) conducive to the marketability of the
goods. Both warranty concepts extend only to the
goods' intrinsic quality, ensuring their fitness
for either their "ordinary purposes" (UCC §
2-314(2)) or the buyer's "particular purpose" (UCC
§ 2-315). In either case the term "purpose" refers
to the product's end use. Concededly Schwartz
intended his purchased Systems to be used for their
ordinary purpose — energy management. And Schwartz
has never demonstrated (or even alleged) that any
of his 50 Systems was deficient in those
2. Even were Schwartz's resale objective
treated as the relevant "purpose," there is a
disputed fact issue as to the System's fitness
for that purpose — whether Michigan Power's
inability to obtain UL listing substantially
impaired the System's marketability in the Chicago
3. Schwartz and Michigan Power themselves
negated any implied warranty that the Systems
sold to Schwartz (in their unmodified state) were
of sufficient quality to receive UL
certification. Section IV(6) expressly recognized
the possibility of modifying the System to secure
4. Arguably Section IV(6)'s disclaimer might
not vitiate any implied warranty as to the
System's adaptability to UL specifications. But
at least one factual issue would defeat summary
judgment on that implied warranty theory: whether
Schwartz "assumed the risk" of the System's basic
incompatibility with UL requirements.
See, e.g., Ruggeri v. Minnesota Mining &
Manufacturing Co., 63 Ill. App.3d 525, 530, 20
Ill.Dec. 467, 470, 380 N.E.2d 445, 448 (5th Dist.
1978) (recognizing assumption of risk defense to
implied warranty claim).
Schwartz's melange of arguments is without merit.*fn19
summary judgment motion on the Complaint counts must be
Motion for Summary Judgment on Counterclaim
As will be recalled, Michigan Power's counterclaim
challenges Schwartz's refusal to discharge various of his
Agreement duties — most notably, to order additional System
units. Schwartz now contends Michigan Power's failure to obtain
UL listing operated as a contractual breach that relieved him
of his own contractual responsibilities. In the summary
judgment context that argument must be given short shrift, for
it relies on the same arguments found unsuccessful on
Schwartz's other summary judgment motion.
At the very least, genuine issues of material fact abound to
defeat Schwartz's motions for summary judgment. Both motions