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NEWMAN-GREEN, INC. v. ALFONZO-LARRAIN R.

February 27, 1985

NEWMAN-GREEN, INC., ET AL., PLAINTIFFS,
v.
ALEJANDRO ALFONZO-LARRAIN R., ET AL., DEFENDANTS.



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

MEMORANDUM OPINION AND ORDER

Newman-Green, Inc. ("NGI") has charged Newman-Green de Venezuela ("NGV") and NGV shareholders Alejandro Alfonzo-Larrain R., Irene Larrain de Caplan, Rafael Tudela, Alberto Tudela and William Bettison (collectively "Guarantors"*fn1) with violations of various agreements involving NGV's manufacture and sales in Venezuela of NGI's patented aerosol valves. Guarantors now move under Fed.R.Civ.P. ("Rule") 56 for summary judgment as to Count I of NGI's Amended Complaint. For the reasons stated in this memorandum opinion and order, their motion is denied.

Facts

NGI, an Illinois corporation, has manufactured and sold patented aerosol valves for at least 30 years (NGI President Edward H. Green, Sr. Affidavit ["Green Aff."] ¶ 1). During the early 1970's NGI developed a business relationship with Guarantors out of a mutual desire to organize a Venezuelan company to manufacture and sell Newman-Green aerosol valves in Venezuela under an exclusive license from NGI. NGV was thus born. NGI owns 25% of NGV's capital stock, and Guarantors own the rest either directly or indirectly.

Following negotiations in both Illinois and Venezuela (Pl.Mem. 4), on June 13, 1974 NGI and NGV entered into a License Agreement (Def.EX. A). Because of then-recently-enacted Venezuelan legislation, the parties recognized the License Agreement would not become enforceable unless and until it was approved by SIEX, an administrative arm of the Venezuelan government (see Pl.Ex. A). NGV and Guarantors did not want to delay commencement of operations until approval was obtained (in which respect the lack of any SIEX track record made the timetable uncertain), while NGI was unwilling to risk any sale of its machinery or any provision of know-how to NGV absent further contractual assurances (Green Aff. ¶ 4). That gap was bridged by NGV's and Guarantors' tendering of two additional letter agreements:

    1. NGV's Confidentiality Agreement (App. A)
  ensuring protection of NGI's trade secrets; and
    2. Guarantors' Guaranty Agreement (App. B)*fn2
  ensuring payment of royalties to NGI.

Both agreements were executed July 11, 1974. NGV president Alberto Tudela had drafted the Confidentiality Agreement, while it appears NGI attorney Perry Carvellas (Def.R.Mem. 9) had drafted the Guaranty Agreement.

After the Confidentiality Agreement and Guaranty Agreement were signed, NGI began performance by:

    1. selling NGV valve-assembly machinery and
  valve components; and
    2. providing technical training and assistance
  to NGV, both at NGI's Illinois plant and NGV's
  Venezuelan plant.

NGV began manufacturing and selling aerosol valves July 1, 1975. Between 1975 and 1980 NGV's sales revenue from the valves exceeded $7 million.

SIEX never approved the License Agreement. In December 1977 SIEX indicated it would do so with substantial modifications (Def.Ex. 4), but NGI found the changes unacceptable and they were never made.

Despite its large sales volume, NGV never made any royalty payments to NGI. NGV apparently created a reserve fund for that purpose (Def.Ex. 5), but largely because of the SIEX problem the parties never worked out a mutually acceptable and legal way to transfer the funds to NGI (Def.Exs. 5, 7, 8).

On January 25, 1979 NGI terminated and withdrew the still-unapproved License Agreement and also terminated its relationship with NGV. NGV continued to manufacture and sell the aerosol valves until May 1980. Because NGI never received royalty payments from NGV, NGI demanded royalty payments of approximately $350,000 from Guarantors pursuant to the Guaranty Agreement. Guarantors have refused, and NGI seeks enforcement of that obligation in Count I.

Guarantors' summary judgment theory is that Venezuelan law controls the validity of the Guaranty Agreement and renders it unenforceable.*fn3 NGI has not disputed the outcome under Venezuelan law, contending instead that Illinois law applies and renders the Guaranty Agreement enforceable.

Summary Judgment Considerations

Rule 56 requires this Court to view the underlying facts in the light most favorable to NGI. Hermes v. Hein, 742 F.2d 350, 353 (7th Cir. 1984). As movants, Guarantors have the burden of showing there is no genuine issue of material fact. Egger v. Phillips, 710 F.2d 292, 296 (7th Cir. 1983). It is an understatement to say they have failed to meet that burden.

Guarantors are entitled to summary judgment only if they establish one of two results as a matter of law:

    1. Under applicable choice-of-law rules,
  Venezuelan law controls (and negates)
  enforceability of the Guaranty Agreement.
    2. If instead Illinois law controls, it
  similarly renders the Guaranty Agreement
  unenforceable.

As this opinion will reflect, however, each of those propositions ultimately depends on the intention of the parties to the Guaranty Agreement.

Under applicable Illinois law*fn4 the question of intent (except, of course, as intent may be manifested by an unambiguous contract) is an issue of fact. Graebe v. Graebe, 95 Ill. App.3d 1144, 1150, 51 Ill. Dec. 537, 542, 420 N.E.2d 1095, 1100 (5th Dist. 1981). And on that score analysis demonstrates that precisely the opposite of what Guarantors must prove is true: Either (1) the choice of law and the type of guaranty expressed in the Guaranty Agreement both favor NGI's position as a matter of law or (2) a fortiori there are genuine issues of material fact as to both those subjects.

Parties' Choice of Law

In this diversity action Klaxon Co. v. Stentor Electric Manufacturing Co., 313 U.S. 487, 496-98, 61 S.Ct. 1020, 1021-22, 85 L.Ed. 1477 (1941) requires this Court to look to Illinois' conflict-of-laws rules. One such rule permits parties to a contract to specify the law applicable to their agreement. Hofeld v. Nationwide Life Insurance Co., 59 Ill.2d 522, 529, 322 N.E.2d 454, 458 (1975). Only when parties fail to make a valid choice of law do courts apply the traditional conflict-of-laws rules or engage in the "most significant contacts" analysis of the Restatement (Second) of Conflict of Laws ("Restatement") § 188 (1971).

Each of the three agreements involving NGI, NGV and Guarantors contains a choice-of-law provision, and each prescribes Illinois law:

    1. License Agreement ยง XXIII: "This agreement
  shall be construed under the laws of the State of
  ...

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