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Agfa-Gevaert v. A.B. Dick Co.

decided: July 18, 1989.

AGFA-GEVAERT, A.G., AND AGFA-GEVAERT, N.V., PLAINTIFFS-APPELLEES,
v.
A.B. DICK COMPANY, DEFENDANT-APPELLANT



Appeal from the United States District Court for the Northern District of Illinois, Eastern Division. No. 83 C 3213, James B. Zagel, Judge.

Posner, Easterbrook, and Ripple, Circuit Judges.

Author: Posner

POSNER, Circuit Judge

Two affiliated European firms (collectively Agfa) brought this breach of contract suit against A.B. Dick Company under the alienage component of the diversity jurisdiction (28 U.S.C. § 1332(a)(2)). The district judge directed a verdict for Agfa on the liability issues, and the jury then awarded Agfa $10.1 million -- after conversion from Deutsche marks -- in damages.

Agfa had designed a low-volume, plain (i.e., uncoated) paper copier that it called the A-1. In 1978 it signed a contract with A.B. Dick making Dick the exclusive North American distributor of the A.1, which at the time existed only in prototype form. The contract required Dick to buy a minimum of 3,750 A-1s in the first twelve months after Agfa reached a specified production level, and also provided that Dick would lose its exclusive unless it bought specified quantities of the A-1 in subsequent years.

At first Dick was extremely enthusiastic about the A-1 -- so much so that it wanted to buy 20,000 machines in 1980. Agfa refused, saying it didn't have the production capacity. Dick countered with the offer of a substantially higher price. Agfa relented, and in January 1980 the parties executed the "amendatory agreement" that is the focus of this lawsuit. Agfa agreed that it would sell Dick 16,000 machines in 1980 and that in subsequent years it "will furnish DICK its requirements for A-1 Copier Machines in accordance with DICK's orders, which AGFA-GEVAERT shall accept, but not more, without AGFA-GEVAERT's consent, than twenty thousand (20,000) machines in any one year." The agreement also provided that, after 1980, Dick's orders for any month could not be more than 15 percent higher or lower than its order for the preceding month. The amended contract was to run through August 31, 1984.

Soon after the amendatory agreement was signed, Dick encountered problems with customer acceptance of the A-1, and its sales of the machine dropped; whether this was due to quality problems, obsolescence, Dick's own marketing weaknesses, or some combination of these factors is uncertain. From as early as January 1981 Dick had begun exploring with the Japanese manufacturer Copyer the possibility of replacing the A-1 with a more up-to-date machine, and in August 1981 Dick notified Agfa that it was going to terminate the contract and gradually "order down to zero." It took delivery of A-1's for the last time the following June, having reduced its orders by 15 percent a month (the most allowed by the amendatory agreement) since the notification. In November (1982) Dick signed a contract with Copyer to distribute the latter's low-volume plain-paper copier in place of the A-1. At about the same time Agfa stopped making the A-1 -- which was obsolete -- and began distributing in its European markets the same Japanese copier that Dick had just bought.

The contract stated: "Construction of this Agreement shall be in accordance with the laws of the State of New York." The district court was required in this diversity case to honor the choice of law provision if an Illinois court would do so, and it would. See SCA Services, Inc. v. Lucky Stores, 599 F.2d 178, 180 (7th Cir. 1979). Applying New York law therefore, the district judge held that the January 1980 amendatory agreement was a requirements contract that obligated Dick to buy its entire requirements of low-volume plain-paper copiers from Agfa. The judge also held (having excluded on various grounds much testimony, and a number of exhibits, that Dick had offered to show that the A-1 was of unacceptable quality) that Dick had broken the contract by ceasing to buy the A-1, because Dick's requirements for low-volume plain-paper copiers had not fallen to zero in August 1981. The judge also dismissed Dick's counterclaim, which charged that Agfa had extracted the January 1980 agreement by fraudulently stating that it was unable to supply Dick with the 20,000 machines a year that Dick wanted. The dismissal was clearly correct. Before signing the agreement Dick learned that Agfa was both able and willing to supply that many machines provided the price was right. Therefore Dick could not have been harmed by Agfa's original statement -- which in any event obviously meant, not "can't," but, consistent with the existing contract, "won't at the current price."

With all liability issues thus disposed of, the case went to the jury only for an assessment of damages. Agfa based its damages estimation not on Dick's sales of the Japanese copier that it had substituted for the A-1 but on the sales that Agfa's expert thought Dick would have made had it promoted the A-1 effectively. The judge then converted the jury's verdict of 11,844,570DM into dollars, using the exchange rate on the date of judgment; had he used the date of breach instead, as urged by Dick, the judgment would have been for $7.4 million rather than for $10.1 million.

On the central question raised by the appeal we find ourselves in respectful disagreement with the district judge's holding that the January 1980 amendment to the distributor agreement unambiguously obligated Dick to take its requirements for low-volume plain-paper copiers from Agfa. The natural reading of the agreement is to the contrary. The amendment requires Agfa to furnish Dick with the latter's "requirements for A-1 Copier Machines." A-1 is not a generic term for low-volume plain-paper copiers, nor even the type of well-known brand name that frequently (to the great distress of the trademark owner) is mistaken for the generic name, such as "Kleenex" or "Xerox." A-1 is the name of a particular brand and model of low-volume plain-paper copiers. At first glance the amendment obligates Agfa to sell Dick as many A-1 copying machines as Dick requires, starting with 16,000 in 1980 and rising to a maximum of 20,000 in subsequent years, and obligates Dick only to pay a specified price for the machines it buys. But let us not ignore the 15 percent cap on monthly purchase changes, which in combination with Dick's obligation to buy 16,000 machines in 1980 assured Agfa substantial sales regardless, and the history of the parties' dealings over the A-1. Dick wanted more machines than Agfa could comfortably supply, and to get them agreed to pay a high price. Agfa would not agree to supply all of Dick's requirements even at the high price, but only 16,000 machines in the first year and 20,000 in each of the subsequent years of the contract. So read, the agreement is perfectly intelligible and not a requirements contract, which obligates the buyer to buy all his requirements from the seller. Looked at from the seller's side, a requirements contract guarantees him a market for his good; in exchange he must offer the buyer a price break. The January 1980 amendatory agreement looks like the opposite of a requirements contract, despite the presence of the word "requirements"; for it merely assures the buyer, Dick, a greater supply, and in exchange Dick agrees to pay a premium. It does not seem to obligate Dick to take more than it wants.

We hesitate to conclude, however, that the judge should have directed a verdict for Dick. To explain this conclusion requires us to consider two ways of looking at the question of the respective role of judge and jury in a case involving the interpretation of a contract, a procedural way and a substantive way. The black-letter procedural rule is that the meaning of a written contract is a question of law and is therefore to be decided by the judge rather than by the jury. Like a number of other questions involving the division of responsibilities between judge and jury, see, e.g., Abernathy v. Superior Hardwoods, Inc., 704 F.2d 963, 970-71 (7th Cir. 1983), it is a question of federal law even in a case where the substantive issues are governed by state law. See Cooper Laboratories, Inc. v. International Surplus Lines Ins. Co., 802 F.2d 667, 671 (3d Cir. 1986); Meyers v. Selznick Co., 373 F.2d 218, 222 n. 1 (2d Cir. 1966) (Friendly, J.). The old rule has, however, largely given way to a new one, that the question of meaning is for the jury unless it can be answered in only one way. See, e.g., id. at 223; LaSalle National Bank v. Service Merchandise Co., 827 F.2d 74, 78 (7th Cir. 1987); Restatement (Second) of Contracts, § 212 (1981).

The black-letter substantive rule, sometimes called the "four corners" rule, see FDIC v. W.R. Grace & Co., 877 F.2d 614, slip op. at 9-12 (7th Cir. 1989), is that if a written contract is clear "on its face" -- that is, clear to someone who can read English but does not know the background of the contract -- evidence may not be introduced to vary that apparent meaning. The practical effect is to confine the power to decide in such cases to the judge, for the issue of interpretation can be answered only one way. As explained in Grace, the four-corners rule has now pretty much yielded to a rule that "extrinsic" evidence may be introduced not only if the written contract is ambiguous on its face, but also to show that it is ambiguous. This evolution of substantive law parallels that on the procedural side, the upshot being that the jury decides the meaning of the contract in all cases in which that meaning has for any reason been fairly drawn into doubt.

The wisdom of the trend may be questioned; modern commercial disputes often are complex, and few jurors are drawn from the ranks of the commercially sophisticated. More to the point, New York has resisted the trend, retaining the four-corners rule. See, e.g., Schmidt v. Magnetic Head Corp., 97 A.D.2d 151, 468 N.Y.S.2d 649 (1983); Bank Itec N.V. v. J. Henry Schroder Bank & Trust Co., 612 F. Supp. 134, 138-39 (S.D.N.Y. 1985) (applying New York law). And that is a substantive rule which binds the federal courts in this diversity case. However, the January 1980 amendatory agreement is sufficiently ambiguous on its face to make its meaning a question for the jury under the New York rule. For the use of the word "requirements" may have been intended to sort the contract into the requirements-contract bin, and the term "A-1 Copier Machines" may have been a maladroit shorthand for "low-volume plain-paper copier machines."

So the case must be remanded for a new trial on liability. All the other issues presented by Dick's appeal will be moot if the jury finds that the January 1980 agreement was not a requirements contract and hence was not broken when Dick stopped buying the A-1. But as the jury may not find this, we shall go on and resolve the other issues (besides the one we ...


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