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Schawk, Inc. v. Donrusss Trading Cards

February 26, 2001

SCHAWK, INC., PLAINTIFF-APPELLANT,
v.
DONRUSS TRADING CARDS, INC., DEFENDANT-APPELLEE.



Appeal from the Circuit Court of Cook County. No. 95 L 9623 Honorable David G. Lichtenstein, Judge Presiding

The opinion of the court was delivered by: Justice Tully

This case concerns the parameters of a buyer's duty of good faith under a requirements contract.

Plaintiff, Schawk, Inc., is an Illinois corporation that provides graphic arts services and prepares artwork for printing. Defendant, Donruss Trading Cards, Inc., was a corporation that manufactured and sold sports trading cards under licenses from professional sports organizations. In 1994, plaintiff and defendant entered into a contract whereby defendant agreed to purchase from plaintiff all prepress art services it required to print its trading cards, for a period of five years, commencing January 1, 1995. In 1995, defendant purchased all prepress services from plaintiff, in conformance with the contract. In May 1996, however, after informing plaintiff of its intentions, defendant sold substantially all of its licenses and assets to Pinnacle Brands, Inc. (Pinnacle), thereby effectively ending its trading card business and its need for any prepress services. Thereafter, plaintiff brought an action for breach of contract, alleging defendant breached its duty of good faith by failing to purchase prepress services from plaintiff after May 1996, by selling its trading card business to Pinnacle without obtaining Pinnacle's agreement to assume the contract, and by failing to remain in business for the duration of the contract. Defendant filed a motion for summary judgment, arguing it was entitled to judgment because plaintiff could not demonstrate defendant acted in bad faith. In support of its motion, defendant presented sales records and the affidavit and deposition of its president, demonstrating that defendant and the sports card industry suffered severe declines in sales between 1991 and 1995, and defendant's decision to sell its assets to Pinnacle was solely for purposes of curtailing these losses. The trial court granted defendant's motion for summary judgment, finding the record devoid of any evidence that defendant acted other than in good faith under the contract. From that order, plaintiff now appeals, arguing the trial court erred in entering summary judgment because: (1) defendant had a duty to remain in business for the duration of the contract and (2) there was evidence to suggest that defendant terminated its business in bad faith. This court has jurisdiction pursuant to Illinois Supreme Court Rules 301 and 303 (155 Ill. 2d Rs. 301, 303). We affirm for the following reasons.

Background

The record in this case reveals the following facts. In 1990, defendant began purchasing prepress services from plaintiff in connection with the printing of its trading cards. In 1991, defendant's net sales totaled $134 million. In 1992, however, defendant experienced a decline in sales, its net sales dropping to $127 million. For the next two years, defendant and the entire trading card industry continued to experience declining sales; in 1993, defendant's net sales totaled $77 million; in 1994, its net sales totaled $68,400,000. In spite of these declines, defendant purchased more than $4 million in services from plaintiff in both 1993 and 1994.

In August 1994, Leaf, Inc., the company that owned defendant and that in turn was owned by the parent corporation, Huhtamaki Oy of Finland, began negotiations with plaintiff for a contract, under which plaintiff would become the exclusive provider of prepress services to defendant. On October 1, 1994, plaintiff and defendant entered into a contract which provided in part:

"1.01 For a period of five years beginning January 1, 1995, Donruss agrees to purchase from Schawk and Schawk agrees to sell to Donruss, 100 percent (100%) of Donruss' requirements for prepress services.

6.02 This Agreement shall be binding upon the parties and their successors and permitted assigns. The parties to this Agreement may not assign their respective rights and obligations hereunder to any other person or entity without the prior written consent of the other parties which shall not be unreasonably withheld."

Section 4.01 of the contract additionally set forth a payment schedule, pursuant to which plaintiff agreed to accept 10% of the payment due to it in the form of trade credits, instead of cash, if defendant purchased a minimum amount of services from plaintiff in a given year. Under the terms of this section, if defendant did not purchase a base amount of services in a given year, then plaintiff was entitled to exchange any trade credits it received from defendant that year for cash. Similarly, if defendant purchased more than the base amount of services in a given year but less than $4 million, plaintiff was entitled to exchange 50% of the trade credits it received that year for cash. The base amount of services required to trigger partial payment in trade credits in 1995 was listed as $3 million. The base amounts listed for the remaining years under the contract gradually increased, reaching $3,750,000 in 1999.

In 1995, defendant purchased all prepress services from plaintiff, in accordance with the contract, which amounted to more than $5 million in services. Defendant suffered another serious sales decline in 1995, however, as did the rest of the sports trading card industry. Defendant's net sales in 1995 totaled $47 million, representing a loss of more than $7 million to defendant. In evaluating this loss, defendant determined that its declining sales were attributable, in part, to the closure of numerous hobby stores and a stagnating collector population. Defendant also determined its profit margins were burdened by the fixed nature of prepress expenses on such considerably reduced sales quantities. Although defendant estimated that its net sales could increase in 1996 to $69,800,000, in view of its continuing losses, and the volatility of the trading card industry, it concluded it could not profitably compete in the trading card business.

At first, defendant entertained several proposals from companies seeking to engage in a joint venture in the trading card business, but it ultimately determined that getting out of the trading card business altogether was the best response to its losses. In reaching this conclusion, defendant took into account the economic strategy of its parent company, Huhtamaki Oy, which had decided to concentrate on its confectionary and food packaging businesses. As defendant's parent company, Huhtamaki Oy had the resources and borrowing power to make an investment of up to $60 million, which in theory, it could have invested in defendant's enterprise.

Defendant initially also tried to sell its entire business to Pinnacle through a stock exchange, which would have included the prepress services contract with plaintiff, but Pinnacle was only interested in acquiring defendant's licensing and trademark assets. Defendant, however, did not offer Pinnacle added consideration as inducement to assume the prepress services contract.

On May 17, 1996, defendant notified plaintiff in writing that it was entering into an agreement with Pinnacle, pursuant to which defendant would sell a substantial portion of its licensing-related assets. Defendant informed plaintiff that Pinnacle was not interested in acquiring the prepress services contract with plaintiff, and the contract therefore would not be transferred to or assumed by Pinnacle. Nevertheless, defendant assured plaintiff that to the extent it continued to have requirements for prepress services that would fall under the contract with plaintiff, it would continue to utilize plaintiff for those services.

On May 29, 1996, defendant sold most of its inventory, trademarks, and licenses to manufacture and sell sports cards to Pinnacle, for $32,500,000. Following the sale, Pinnacle continued to produce sports trading cards under defendant's name, and some of defendant's former employees went to work for Pinnacle. Defendant's sale of its assets to Pinnacle essentially eliminated its requirements for prepress services, and defendant did not purchase any more services from plaintiff after May 29, ...


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