United States District Court, N.D. Illinois
January 26, 2004.
SUTTER INSURANCE CO., Plaintiff,
APPLIED SYSTEMS, INC., Defendant
The opinion of the court was delivered by: MATHEW KENNELLY, District Judge
MEMORANDUM OPINION AND ORDER
In this case, plaintiff Sutter Insurance Co., a California
corporation headquarted near San Francisco, has sued defendant Applied
Systems, Inc., an Illinois corporation headquartered in University Park,
Illinois, for breach of contract, consumer fraud under Illinois and
California statutes, and common law fraud. Applied has counterclaimed for
breach of contract. The case is set for a jury trial on February 9, 2004.
Applied has moved for summary judgment on Sutler's claims and, if summary
judgment is denied, to strike Sutler's jury demand.
Sutter sells property insurance in the West Coast region. Applied
develops and sells software for use by insurance companies and insurance
agencies. In 1999, Sutter began searching for software to replace its
existing system. Applied and other software providers sent
representatives to Sutler's California offices to promote and demonstrate
their products. Applied's presentation concerned its "Diamond System," a
comprehensive policy, claims management and billing system designed to
interact with third party software applications.
According to Sutter, Applied's representatives represented that the
Diamond System could be implemented immediately "off the shelf," would
conform the Sutler's own forms and billing procedures, and would allow
Sutter immediately to create new insurance policies and have them rated,
underwritten, issued, and billed. Sutter also contends that Applied
represented that implementation management services would be included for
a flat fee that would cover software licensing, system analysis,
specification documentation, and system development, installation, and
training, and that the program would be up and running within 180 days
after Sutter signed a contract with Applied.
Sutter contends that it relied on Applied's representations and entered
into a System Implementation and Licensing Agreement with Applied in
March 2000. The agreement included a paragraph stating that the software
would substantially conform to and perform in accordance with
specifications listed in the agreement and that all services provided by
Applied under the agreement would be performed in a good and workmanlike
manner. Agreement ¶ 6(a). The same paragraph included the
ALL REPRESENTATIONS AND WARRANTIES CLAIMED HEREIN
ARE EXPRESSLY IN LIEU OF ANY AND ALL OTHER
PREVIOUS REPRESENTATIONS OR WARRANTIES, EXPRESS OR
IMPLIED, WHICH MAY HAVE BEEN SET OUT DURING THE
NEGOTIATION OF THIS AGREEMENT. APPLIED SYSTEMS
SPECIFICALLY DISCLAIMS ANY IMPLIED
WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A
PARTICULAR USE OR PURPOSE.
Id. The following paragraph of the agreement stated:
No material statements or representations have
been made by Applied and upon which [Sutter] has
relied in entering into this Agreement that are
not contained herein.
Id. ¶ 6(b). Paragraph 1 of the agreement stated that
"[t]his Agreement . . . contains the entire
agreement between the parties, and Applied is not bound by any
representations or inducements not set forth herein." Id.
¶ 1. The final paragraph of the agreement stated that
EACH PARTY ACKNOWLEDGES THAT IT HAS READ THIS
AGREEMENT, UNDERSTANDS IT AND AGREES TO BE BOUND
BY ITS TERMS AND FURTHER AGREES THAT IT IS THE
COMPLETE AND EXCLUSIVE STATEMENT OF THE AGREEMENT
BETWEEN THE PARTIES, EXCEPT AS HEREIN CONTEMPLATED
TO ADD APPENDICES HERETO, WHICH SUPERSEDES ALL
PROPOSALS, ORAL OR WRITTEN AND ALL OTHER
COMMUNICATIONS BETWEEN APPLIED AND [SUTTER]
RELATING TO THE SUBJECT MATTER OF THIS AGREEMENT.
Id. ¶ 24.
According to Sutter, the software did not work "off the shelf as
represented, and the company experienced numerous and constant problems
in operating the system. It claims that it advised Applied of these
problems as they arose, but Applied failed to cure them. On May 1, 2001,
a telephone conference was held between representatives of Sutter and
Applied. Sutler's vice president Diane Kleinecke has stated in an
affidavit that during this telephone conference, she advised Applied's
representatives that Sutter was canceling the contract and did not want
to invest any more time in the Diamond System because it was not meeting
Sutler's needs. She advised that Sutter would "run off the homeowner's
insurance policies already entered into the system and after that would
cease using the system.
Sutter continued to use the Diamond System for about ten months
thereafter but asserts that it did so only to avoid substantial hardship,
as it had no other alternative short of 100% "manual" management of the
policies, which it says was not feasible. On October 29, 2001, Bill
Kleinecke, another Sutter vice president, sent Applied a letter which
Sutter characterizes as a written cancellation of the contract; the
letter stated that "[i]n follow up to our conversation, I am
writing to you to reiterate the Sutter Insurance Companies [sic]
desire for return compensation. In order to avoid further costs
associated with Applied's failure to perform, the Management of Sutter
was hoping for a voluntary return of the fees and charges collected."
Sutter Rule 56.1 Stmt., Ex. C.
Sutter contends that due to the defects in Applied's software system,
it suffered out of pocket losses as well as lost business opportunities.
Its complaint against Applied includes four claims: a claim for breach of
the written agreement premised primarily on its allegation that the
software did not meet the agreement's specifications; a claim of common
law fraud; a claim under the Illinois Consumer Fraud and Unfair Business
Practices Act; and a claim under the California Unfair Business Practices
Act. Applied has counterclaimed for amounts allegedly due under the
agreement that Sutter did not pay. As indicated earlier, Applied has
moved for summary judgment on all of Sutler's claims and, if summary
judgment is denied as to any of the claims, to strike Sutler's jury
Motion for summary judgment
In addressing a motion for summary judgment, the Court construes the
record in the light most favorable to the non-moving party; we do not
weigh the evidence but rather determine only whether there is a genuine
issue for trial. See, e.g., Payne v. Pauley, 337 F.3d 767, 770
(7th Cir 2003); Bennett v. Roberts, 295 F.3d 687, 694 (7th Cir.
1. Breach of contract claim
Applied argues, and Sutter does not dispute, that Sutler's breach of
contract claim is subject to the terms of Illinois' version of the
Uniform Commercial Code. Under the Code, a buyer of goods must pay at
the contract rate for any goods accepted. 810 ILCS 5/2-607(1). A
buyer that has accepted goods is barred from any remedy for
non-conforming goods unless it notifies the seller of the breach within a
reasonable time after it discovers or should have discovered the breach.
Id. 2-607(3)(a). Relying on a provision of the contract stating
that "[a]11 notices given under this Agreement shall be in writing,"
Agreement ¶ 21, Applied contends that Sutter never gave written
notice of its rejection of the Diamond System and thus is barred from
seeking damages for breach of contract.
Sutter contends that it advised Applied of the breach during the May 1,
2001 telephone conference and argues that the contract did not require
notices of cancellation or breach to be in writing. First, it says that
paragraph 20 of the agreement the provision on which Sutter, for
some reason, thinks Applied is relying for its "written notice only"
argument concerns only requests for mediation of disputes. That
is, in fact, what paragraph 20 concerns, but it is clear from Applied's
papers that it is relying on paragraph 21, not paragraph 20. Paragraph 21
expressly concerns "[a]ll notices given under this Agreement," not just
notices relating to paragraph 20's mediation provision. There are
numerous provisions in the agreement that refer to the giving of notice,
see Agreement ¶¶ 6(h), 8(b), 9 & 10(b), and paragraph 21
applies to all of them.
Sutter also argues that cancellation of the agreement pursuant to
paragraph 5 does not implicate a "notice under this Agreement" that
paragraph 21 requires to be in writing. It is true that paragraph 5,
the agreement's cancellation provision, does not specifically require
"notice" of the cancellation. But that is the only reasonable reading of
the agreement's terms. When the agreement states that either party "may
cancel this Agreement, with or without cause" at various intervals,
see Agreement ¶ 5(a) & (b), an event which triggers a
refund of Sutler's down
payment, it is self-evident that a cancellation can occur only if
the canceling party notifies the other party otherwise, in the
event of a cancellation by Sutter, how would Applied become aware of its
obligation to make a refund? Because a cancellation cannot be said to
occur without notice by the canceling party, paragraph 21 requires it to
be in writing.
On the other hand, UCC section 2-607(3)(a) does not require notice
of cancellation; it simply requires notice of a breach. The
Court does not believe that this obligation, imposed not by under the
agreement but rather by the UCC, is a "notice under [the] Agreement"
that paragraph 21 requires to be in writing. Cancellation under the
agreement's terms is a unique and drastic event that carries with it
specific contractual consequences. Notice of a breach is much less
drastic; contractual breaches can be cured. The agreement nowhere
requires written notice any time a party claims that the other party has
breached, nor does it mandate that notices required under the UCC must be
in writing. For this reason, the Court rejects Applied's argument that
the May 1, 2001 telephone conference is insufficient as a matter of law
to qualify as notice of the alleged breaches of the agreement.
Even were the contract to be read to require any notice required under
the UCC to be in writing, Sutter's October 29, 2001 letter would suffice.
The letter specifically referred to Sutler's "desire for return
compensation," a desire that makes sense only in the event of a breach by
Applied. And indeed, the letter also specifically referenced Applied's
"failure to perform."
Applied also argues that Sutler's continued use of the software after
the alleged notification of breach bars its breach of contract claim.
Section 2-602 of the Illinois UCC states that if a buyer's rejection of
goods must come "seasonably" after the tender, and that after rejection,
any exercise of ownership by the buyer is "wrongful against the seller"
and entitles the
seller to seek relief under section 2-703. The Seventh Circuit has
also held that a buyer's "continued use of goods after acceptance has
purportedly been revoked is inconsistent with, and invalidates, the
supposed revocation unless such use was necessary to avoid substantial
hardship." See, e.g., L.S. Heath & Son, Inc. v. AT&T Info.
Systems, Inc., 9 F.3d 561, 568 (7th Cir. 1993). This principle
results, presumably, from section 2-606(1)(c), which provides that
"acceptance" occurs if the buyer does anything that is inconsistent with
the seller's ownership. See Computerized Radiological Servs. v.
Syntex Corp., 786 F.2d 72, 75 (2d Cir. 1986) (cited in L.S.
Heath, 9 F.3d at 568). See also, Lorenzo Banfi di Banfi Renzo
& Co. v. Davis Congress Shops, Inc., 568 F. Supp. 432, 433 (N.D.
Ill. 1983). But in this case, there is a genuine factual issue as to
whether Sutler's continued use of the goods was within the "substantial
hardship" exception; Sutter says its only other alternative would have
been 100% manual management of the already-issued policies, which it says
was impracticable given financial limitations. The Court rejects
Applied's argument that Sutler's evidence in this regard is insufficient
to create a genuine factual issue; though somewhat conclusory, Sutter has
offered specifics sufficient to avoid summary judgment.
2. Common law fraud claim
Sutler's common law fraud claim is barred as a matter of law. Sutler's
claim is premised upon the proposition that Applied made verbal
misrepresentations before the parlies signed their contract regarding the
capabilities of its software and the nature and quality of the support
that Applied would offer. This claim is barred by the agreement's
provisions in which Sutter affirmed that it had not relied upon any
representations made by Applied prior to the contract's execution.
Agreement ¶ 6(b). The Seventh Circuit has held that "a written
precludes any claim of deceit by prior representations."
Rissman v. Rissman, 213 F.3d 381, 384 (7th Cir. 2000).*fn1 As
the court stated in Rissman, "[a] non-reliance clause is not
identical to a truthful disclosure, but it has a similar function: it
ensures that both the transaction and any subsequent litigation proceed
on the basis of the parties' writings, which are less subject to the
vagaries of memory and the risks of fabrication." Id. Such
clauses are upheld, at least when found in a contract like this one that
is "between sophisticated commercial enterprises," and they preclude a
suit for fraud. See Vigortone AG Products, Inc. v. PM AG Products,
Inc., 316 F.3d 641, 645 (7th Cir. 2002).
Sutter does not reference any trickery or deception in the negotiation
of the agreement, and it identifies no basis to decline to enforce the
agreement's non-reliance clause. Indeed, Sutter does not respond to
Applied's argument concerning the effect of that clause other than to
contend that some of the misrepresentations it claims Applied made prior
to the contract's execution were repeated in the specifications contained
in the contract, specifically in Schedule A which the contract included
as an express warranty. See Applied Mem. at 14; Agreement ¶
6(a). But even if this is so, Sutter is limited to a breach of contract
action premised on the non-conformity of Applied's performance to the
terms of the express warranty; it may not maintain a fraud action based
on prior verbal misrepresentations upon which it expressly disclaimed
reliance, and it may not convert the breach of warranty claim into a
claim of common law fraud.
3. Statutory consumer fraud claims
Applied has moved for summary judgment on Sutter's consumer fraud
claims under the previously referenced Illinois and California statutes
on bases that are somewhat at odds with each other. Its primary argument
for summary judgment on the California claim is that the parties chose to
apply Illinois law to their relationship, and one of its arguments for
summary judgment on the Illinois claim is that the Illinois statute does
not protect non-Illinois plaintiffs. The Court's conclusion is that
Sutter can maintain a claim under the Illinois statute but not the
a. Illinois Consumer Fraud Act claim
Applied argues that the Illinois Consumer Fraud and Deceptive Business
Practices Act (ICFA) does not apply to non-Illinois consumers and thus
Sutter, a California corporation with no operations or customers in
Illinois, cannot maintain a claim under the Act. At least one District of
the Illinois Appellate Court has held that the statute does not apply to
non-Illinois consumers. See Oliveira v. Amoco Oil Co.,
311 Ill. App.3d 886, 897-99, 726 N.E.2d 51, 60-62 (2000). But that decision
was reversed by the Illinois Supreme Court on other grounds, see Oliveira
v. Amoco Oil Co., 201 Ill.2d 134, 776 N.E.2d 151 (2002), and thus
its precedential effect is not entirely clear. But see Prime Leasing,
Inc. v. Kendig, 332 Ill. App.3d 300, 313, 773 N.E.2d 84, 96 (2002)
(citing the Fourth District's decision in Oliveira despite its
reversal, though only in dictum).
Our task, of course, is to determine how the Illinois Supreme Court
would determine the issue, see, e.g., Allstate Ins. Co. v. Menard's
Inc., 285 F.3d 630, 636-37 (7th Cir. 2002), and as the Appellate
Court noted in Oliveira, the Supreme Court has not ruled on the
point. Though the
court has indicated that the Act's purpose is "to protect Illinois
consumers, borrowers, and businessmen," Oliveira, 311 Ill. App.3d
at 897, 726 N.E.2d at 60 (citing Scott v. Ass'n for Childbirth at
Home, Int'l, 88 Ill.2d 279, 288, 430 N.E.2d 1012, 1017 (1981)), it
has upheld the certification of classes including non-Illinois consumers
in two cases. See id. In one of those cases, the point was not
discussed. See Miner v. Gillette Co., 87 Ill.2d 7,
428 N.E.2d 478 (1981). In the second, however, the Supreme Court relied on
the fact that the contracts containing the purported deception were executed
in Illinois, they contained a choice of law clause opting for the
application of Illinois law, and they provided that complaints about the
defendant's performance were to be directed to its Illinois office.
Martin v. Heinold Commodities, Inc., 117 Ill.2d 67, 82-83,
510 N.E.2d 840, 847 (1987). At least two of these factors apply here: Applied
argues that the contract's Illinois choice-of-law provision governs their
entire relationship, not just the contract, and the contract required any
notices by Sutter to Applied to be directed to Applied's Illinois office.
Under the circumstances, particularly the parties' specific choice of
Illinois law to govern their rights and responsibilities, the Court
believes this case to be more like Martin than
Oliveira, and thus we conclude that Sutter can maintain a claim
under ICFA despite its non-resident status.
Applied also argues that Sutter cannot maintain a claim under ICFA
because it is not a "consumer" who is entitled to protection under the
Act, the transaction has no "consumer nexus," and Sutter is attempting to
recast an ordinary breach of contract action as a claim of consumer
fraud. The Court rejects these arguments for the reasons we have
previously and more fully explained in AGFA Corp. v. Wagner Printing
Co., No. 02 C 2400, 2002 WL 1559663 (N.D. Ill. July 10, 2002), in
which similar arguments were made. First, though ICFA is mainly concerned
with protecting consumers, it defines "consumer" as "any person who
purchases or contracts for the purchase of merchandise not for resale in
the ordinary course of his trade or business but for his use . . . " 815
ILCS 505/1(e), and it defines "person" as including corporations and
business entities. Id. 1(c); AGFA, 2002 WL 1559663, at
*2. A business entity that, like Sutter, is a "consumer" of the
defendant's products need not show that the transaction has a "consumer
nexus" but rather only that it suffered an injury caused by the
defendant's fraudulent or deceptive acts. Id. (citing
Skyline Int'l Development v. Citibank, FSB, 302 Ill. App.3d 79,
85, 706 N.E.2d 942, 946 (1998) and other cases). Finally, though ICFA
"`was not intended to cover all commercial transactions regardless of the
relationship between the parties,'" id. (quoting Lake County
Grading Co. of Libertyville, Inc. v. Advance Mechanical Contractors,
Inc., 275 Ill. App.3d 452, 457, 654 N.E.2d 1109, 1114 (1995)),
Sutler's allegations that Applied misrepresented the quality of its
product and services concern "exactly the type of fraudulent activity
[ICFA] is designed to address." Id. at 3 (citing, among other
cases, Kirkuff v. Wisegarver, 297 Ill. App.3d 826, 838,
697 N.E.2d 406, 415-16 (1998), and quoting it for the proposition that
"courts should liberally construe and broadly apply the Act to eradicate
all forms of deceptive and unfair business practices.").*fn2
b. California Unfair Business Practices Act claim
Applied argues that it is entitled to summary judgment on Sutter's
claim under the California Unfair Business Practices Act (CUBPA) based on
the previously referenced contractual choice of law provision, which
according to Applied means that Illinois law governs
not just the contract, but all of the parties' rights and duties.
The provision states:
The validity of this Agreement, the construction
and enforcement of its terms, and the
interpretation of the rights and duties of the
parties shall be governed by, and construed in
accordance with, the laws of the State of
Agreement ¶ 22. Sutler does not challenge Applied's argument
that the choice of law provision extends beyond the contract and
governs other types of claims as well. Rather, it argues that the choice
of law provision should not be honored because California has a
materially greater interest in applying its law to the transaction, as
the purpose of the CUBPA is to protect California consumers.
In this case, however, the Court is required to follow the choice of
law rules of the forum state, Illinois. Illinois applies contractual
choice of law provisions unless they are contrary to Illinois public
policy. See, e.g., Scentura Creations, Inc. v. Long,
325 Ill. App.3d 62, 69, 756 N.E.2d 451, 456 (2001). Having concluded that
Illinois public policy, as embodied in ICFA, permits the protection of an
out of state consumer like Sutter in the circumstances presented here, we
are hard pressed to conclude that the parties' choice of Illinois law
violates this state's public policy.
Moreover, the Court does not see why Applied should be able to argue on
the one hand that Sutter cannot take advantage of Illinois' consumer
fraud law because it is located in California, and on the other hand that
California law should not apply because Sutter and Applied specifically
elected to apply Illinois law to govern their rights and duties. Because
we have rejected the former argument, the Court has no particular problem
with accepting the latter argument and thus concluding that Applied is in
fact entitled to summary judgment on Sutler's CUBPA claim.
Because, however, the issue of which state's consumer protection law
should apply is a somewhat knotty one, to ensure a complete record on
appeal the Court intends to determine both claims on their merits at
trial and will enter judgment on this claim in Applied's favor on the
choice of law point only after conclusion of the trial.
Motion to strike jury demand
Applied has moved to strike Sutler's jury demand based on paragraph
22 of the agreement, which states in pertinent part that "[t]o the extent
permitted by law, trial by jury is waived for any action between the
parties." Agreement ¶ 22. A jury waiver will be enforced if
it was made knowingly and voluntarily.
Though it is unclear in this Circuit which party bears the burden on
the issue of the voluntariness of the waiver, the Court finds it
unnecessary in this case to address that issue. Either way, Sutter is
required to come forward with some evidence that calls the voluntariness
of the waiver into question, see, e.g., Reggie Packing Co. v. Lazere
Fin. Corp., 671 F. Supp. 571, 573 (N.D. Ill. 1987); Mellon Bank
v. Miglin, No. 92 C 4059, 1993 WL 281111, at *11 (N.D. Ill. Apr. 29,
1993) (Report and Recommendation by Lefkow, M.J.), and it has offered
none. Thus even if Applied bears the burden on this point, it has carried
it. The evidence reflects that both parties to the agreement are
sophisticated commercial entities; though there is no indication that the
jury waiver was specifically discussed, the parties spent a significant
period negotiating their relationship before they entered into the
agreement; the agreement itself is not lengthy or verbose (the main body
of the agreement is only nine pages long) and thus the jury waiver is
neither hidden nor buried; and although Sutter evidently chose not to
have the agreement reviewed by counsel, there is no question that it had
the opportunity to do so before it was called upon to
decide whether to sign it. Finally, Sutter cannot and does not
claim to have been taken by surprise; the first sentence of final
paragraph of the agreement, just above the parties' signatures, states
in all capital letters: "EACH PARTY ACKNOWLEDGES THAT IT HAS READ THE
AGREEMENT, UNDERSTANDS IT AND AGREES TO BE BOUND BY ITS TERMS. . . ."
Agreement ¶ 24. The argument that the waiver was hedged by
the prefatory language "to the extent permitted by law" gets Sutter
nowhere, as the law undeniably permits waiver of the right to a jury
trial (as Sutter itself concedes, see Sutter Resp. at 3).
In sum, the Court finds that even if Applied has the burden of proof on
the issue of voluntariness, it has satisfied that burden. The jury waiver
was made knowingly and voluntarily and is therefore enforced. See
generally Great America Leasing Corp. v. Cozzi Iron & Metal
Inc., 76 F. Supp.2d 875, 880 (N.D. Ill. 1999). By its terms, the
waiver applies to "any action between the parties" and thus is not
limited to the parties' respective breach of contract claims but also
includes Sutler's ICFA claim.
For the reasons stated above, defendant's motion for summary judgment
[docket # 26-1] is granted in part and denied in part. The motion is
granted as to Counts 2 (common law fraud) and 4 (California Unfair
Business Practices Act), although Count 4 will proceed to trial for the
reasons discussed earlier. The motion is otherwise denied. Applied's
motion to strike the affidavit of Diane Kleinecke [# 40-1] is denied, and
Sutler's motion to strike the affidavit of Kimberly Noffsinger [# 30-1]
is denied as moot. Defendant's motion to strike plaintiff's jury demand
[docket # 29-1] is granted. The case will proceed as a bench trial as
February 9, 2004 at 9:45 a.m.