United States District Court, N.D. Illinois, Eastern Division
July 8, 2004.
M. BLOCK & SONS, INC. an Illinois Corporation, Plaintiff,
INTERNATIONAL BUSINESS MACHINES CORP., a New York Corporation, Defendant.
The opinion of the court was delivered by: AMY J. ST. EVE, District Judge
MEMORANDUM OPINION AND ORDER
Plaintiff M. Block & Sons, Inc. ("Block") filed a seven-count
Amended Complaint against Defendant International Business
Machines Corporation ("IBM"). The Amended Complaint alleges
fraudulent inducement (Counts I and II), violation of the
Illinois Consumer Fraud and Deceptive Practices Act ("ICFA")
(Count III), breach of express warranties (Count IV), breach of
contract (Count V), and breach of implied warranties (Counts VI
and VII). IBM has moved to dismiss Counts I, II, III, VI, and VII
pursuant to Rule 12(b)(6). For the reasons stated herein,
Defendant's motion is granted in part and denied in part.
I. Factual Background
Block is an Illinois corporation that runs a wholesale
distribution business with a main warehouse operation in Illinois
and a secondary warehouse operation in California. (R. 8-1, Am.
Compl. ¶ 6.) IBM is a New York corporation. (Id. ¶ 2.) In the
year 2000, Block began to research the purchase or license of an
Enterprise Resource Planning ("ERP") computer system. (Id. ¶ 7.) Block focused on purchasing J.D. Edwards & Co.'s ERP
software and contacted IBM to discuss implementation of the J.D.
Edwards software. (Id. ¶¶ 7-9.) IBM represented that it was
skilled in the implementation of such software.
Block alleges that IBM made false representations of material
fact and further concealed the material facts during the
negotiations in order to induce Block to enter into a contract
(R. 8-1, Am. Compl. ¶¶ 33-48.) Namely, on or about November 17,
2000, representatives of Block and IBM met in Bedford Park,
Illinois, to discuss a proposal from IBM to implement J.D.
Edwards "OneWorld ERP Software." (Id. ¶ 9.) Block alleges that
IBM represented that it had a program "J.D. Edwards National
Practice" which focused on the implementation of J.D. Edwards
software. (Id. ¶ 9.) Block claims that at this meeting, Tracey
A. Ferguson of IBM made a misrepresentation to Block
representative Allen Drafke, Block's chief financial officer.
(Id. ¶¶ 11-14.) Specifically, Drafke asked Ferguson "whether
[IBM] ever had received any customer complaints that [IBM] had
failed to implement J.D. Edwards software successfully," and
Ferguson allegedly replied, "no." (Id. ¶ 12.) Ferguson added
that software at one installation site had required a second "go
live" before the system performed satisfactorily. (Id. ¶ 12.)
Block alleges that it justifiably relied on Ferguson's
representations. Block further alleges that in fact, IBM had at
least one failed implementation of J.D. Edwards OneWorld Software
as of November 2000. Block states that Evans Industries, Inc.
filed suit against IBM in September 2000 for breach of contract
and fraud following a failed implementation of J.D. Edwards
software. (Id. ¶ 14.)
Based on IBM's false representations, Block entered into a
contractual agreement with IBM in September and October of 2001.
(Id. ¶ 13.) Together, an "IBM Customer Agreement" and a
"Statement of Work for the implementation of JD Edwards OneWorld
ERP Software and ERP Bridge Data Collection" comprised the "IBM Contract." (Id.
¶ 13.) IBM agreed to implement the software purchased from J.D.
Edwards and provide data collection software to perform in
conjunction with the J.D. Edwards OneWorld software. IBM
represented that it was skilled in the implementation of such
software. (Id. ¶ 7.) Block alleges that if it had known of
IBM's alleged failed implementation of J.D. Edwards software, it
would not have entered the contract with IBM. (Id. ¶ 15.)
Block further alleges that IBM misrepresented that it had an
existing software product called ERP Bridge to act as a data
collection software in connection with J.D. Edwards One World
software. (Id. ¶ 116.) Block claims that Bryan Tipton of IBM
represented to Drafke that "ERP Bridge is an excellent solution
to complement the OneWorld Advanced Warehouse Module, and the
premier J.D. Edwards references for the Advanced Warehouse Module
are using ERP Bridge as the RF solution." (Id. ¶ 16.) Block
alleges that IBM also "represented that there was a long list of
`Standard Functions' in ERP Bridge Data collection, and that
there were various `Custom Functions' in ERP Bridge Collection."
(Id. ¶ 19.) According to Block, IBM promised and "sought to
create the false belief" that ERP Bridge, later renamed "DC
Connect," was a product that already existed and contained
standard functions that would be modified in a limited manner for
Block's use. (Id. ¶ 20.) Block claims that IBM made these
representations to induce Block to enter the IBM Contract and
that IBM had "superior and unique means of knowledge" as to the
actual status of ERP Bridge as an existing product. (Id. ¶ 20.)
During the implementation of the software, Block alleges that
neither a standard ERP Bridge nor DC Connect product existed and
that the entire system "would have to be custom-programmed from
the ground up." Furthermore, IBM informed Block in late 2002 that
"all the initial work on DC Connect was useless and had to be
redone." (Id. ¶ 25.) Block alleges that numerous attempts were necessary to go "live
at Block's California operation." (R. 8-1, Am. Compl. ¶ 26.)
Block contends that the repeated problems with the system have
cost Block about $1.5 million in excess of the original amount
that IBM claimed the project would cost. (Id. ¶ 29.) Block
further alleges that the remainder of the contract cannot be
executed because the "disastrous performance for the system in
the California operation" means that Block cannot risk attempting
to install the software at the Illinois operation. (Id. ¶ 29.)
On February 24, 2004, Block filed a seven-count Amended
Complaint. In Count I, Block alleges that IBM fraudulently
induced Block to enter into the IBM Contract by making
misrepresentations as to prior failed implementations of J.D.
Edwards software. In Count II, Block claims that IBM fraudulently
induced Block to enter the contract also by concealing "the fact
that Defendant had never been involved in a failed implementation
of J.D. Edwards software."*fn1
In Count III, Block claims that it is entitled to relief under
the ICFA. Block claims that IBM violated the ICFA by stating that
it had never been involved in a failed implementation of J.D.
Edwards software, by representing that ERP Bridge and DC Connect
were existing products, and by failing to disclose that ERP
Bridge and DC Connect needed to be "virtually custom-programmed
from the ground up." (Id. ¶ 52.)
In Count IV, Block alleges that IBM materially breached express
warranties that were incorporated in the integrated IBM Contract.
In Count V, Block alleges that IBM made material breaches of
contract by not providing "functional and operative products," by
failing to "provide products that performed in accordance with
warranties," and by failing to provide products that "performed in accordance with Defendant's representations and
warranties." (Id. ¶ 65.) In Count VI, Block claims that there
was also a breach of implied warranty of merchantability. (Id.
¶¶ 67-73.) Block alleges that the disclaimers are not enforceable
because they were not sufficiently conspicuous and they do not
apply to the products that failed to perform. (Id. ¶ 69.) Block
also alleges that the circumstances of the case make enforcement
of the implied warranty disclaimers unconscionable. (Id. ¶ 69.)
In Count VII, Block alleges that IBM breached the implied
warranty of fitness for a particular purpose. Block argues that
the disclaimers and limitations on implied warranties do not
apply to the products that actually failed to perform. (Id. ¶
76.) Block alleges that the disclaimers were not sufficiently
conspicuous and that the enforcement of them would be
unconscionable under the circumstances. (Id. ¶ 77.) Block
requests that the limited damages contract clause be set aside in
reference to Counts III, IV, V, VI, and VII.
IBM has moved to dismiss Counts I, II, III, VI, and VII of
Block's Amended Compliant. IBM also moves to dismiss Block's
claims for consequential damages in Counts III, IV, V, VI, and
VII, arguing that the limitation of liability provision in the
contract precludes these damages.
II. Legal Standards
A Rule 12(b)(6) motion tests the sufficiency of the complaint,
it is not designed to resolve the case on the merits. Petri v.
Gatlin, 997 F. Supp. 956, 963 (N.D. Ill. 1997) (citing 5A Charles
A. Wright and Arthur R. Miller, Federal Practice and Procedure §
1356, at 294 (2d ed. 1990)). When determining whether to grant a
12(b)(6) motion to dismiss, a court must accept all factual
allegations in the complaint as true. Jang v. A.M. Miller &
Assocs., 122 F.3d 480, 483 (7th Cir. 1997). A court must
also draw all reasonable inferences in the plaintiff's favor.
Id. The court should dismiss a complaint under Rule 12(b)(6)
only if "it is clear that no relief could be granted under any set of facts that could be proved consistent
with the allegations." Hishon v. King & Spalding, 467 U.S. 69,
73, 104 S.Ct. 2229, 2232, 81 L.Ed.2d 59 (1984).
III. Choice of Law
This Court will first address the applicable choice of law in
this case. A federal court sitting in diversity looks to the
forum state to determine how the state's "conflict of law
principles treat choice of law clauses in contracts." DeValk
Lincoln Mercury, Inc. v. Ford Motor Co., 811 F.2d 326, 330
(7th Cir. 1987); see also, Midwest Grain Products of
Illinois, Inc. v. Productization, Inc., 228 F.3d 784, 787
(7th Cir. 2000). Illinois courts honor a contractual choice
of law clause unless the applicable law is "dangerous,
inconvenient, immoral, or contrary to public policy." DeValk
Lincoln Mercury, Inc., 811 F.2d at 330. Illinois courts
generally give effect to contractual choice of law clauses.
Great Lakes Overseas, Inc. v. Wah Kwong Shipping Group, Ltd.,
990 F.2d 990, 994 (7th Cir. 1993).
Plaintiff does not dispute that New York law governs its
contract claims, but contends that Illinois law controls its
fraud claim. The choice of law provision in the IBM Contract
Both you [Block] and IBM consent to the application
of the laws of the State of New York to govern,
interpret, and enforce all of your and IBM's rights,
duties, and obligations arising from, or relating in
any manner to, the subject matter of this Agreement,
without regard to conflict of law principles.
(R. 12-1, Memo. in Support of Mot. to Dismiss at 4-5.)
A two part analysis applies to determine, "the breadth of a
contractual choice-of-law provision." Birnberg v. Milk St.
Residential Assoc. Ltd. P'ship., Nos. 02 C 0978, 02 C 3436, 2003
WL 151929 at * 13 (N.D. Ill. Jan. 21, 2003); see also Medline
Indus., Inc. v. Maersk Medical Ltd., 230 F. Supp.2d 857, 863
(N.D. Ill. 2002); Precision Screen Mach., Inc. v. Elexon, Inc., No. 95 C 1730, 1996 WL 495564 at *2-3 (N.D. Ill. Aug. 26,
1996). The first part of the analysis "examine[s] the language of
the contract's choice-of-law clause to determine if the parties
`intended [it] to govern all claims between them.'" Birnberg,
2003 WL 151929 at *13 (quoting Medline Indus. Inc.,
230 F. Supp.2d at 863). The second part of the analysis focuses on
whether a tort claim depends on the contract. Id. at 14. Even
if intent is not present, tort claims that are dependent on a
contract are "subject to [the] contract's choice-of-law clause
regardless of the breadth of the clause." Medline Indus. Inc.,
230 F. Supp.2d at 862. To determine if a tort claim depends on a
contract, courts examine whether: (1) "the [claim] alleges a
wrong based upon interpretation and construction of the
contract," Birnberg, 2003 WL 151929 at *14 (quoting Medline
Indus., Inc., 230 F. Supp.2d at 862); (2) "the `tort claims are
closely related to the parties' contractual relationship,"
Birnberg, 2003 WL 151929 at *14 (quoting Miyano Mach. USA,
Inc. v. Zonar, No. 92 C 2385, 1994 WL 233649 at *2 (N.D. Ill.
May 23, 1994)); and (3) "the tort claim `could exist without' the
contractual agreement which contains the choice-of-law
provision." Birnberg, 2003 WL 151929 at *14 (quoting Precision
Screen Mach. Inc., 1996 WL 495564, *2-3.
The language of the choice of law clause in the IBM Contract
shows that the parties intended for New York law to apply to not
only contractual claims, but also other claims related to the
contract. The clause states that the laws of New York will govern
any "rights, duties, and obligations arising from, or relating in
any manner to, the subject matter of this Agreement." This
provision indicates that the parties intended New York law to
apply broadly to matters related to or arising out of the
contractual obligations. The term "arising out of" in forum
selection clauses includes all disputes which "arguably depend on
the construction of an agreement." Omron Healthcare, Inc. v.
Maclaren Exports Ltd., 28 F.3d 600, 603 (7th Cir. 1994). The choice of law clause will thus be interpreted to apply
broadly to disputes between the parties related to the IBM
Applying the second part of the two-part test from Birnberg,
Plaintiff's claims of fraudulent misrepresentation, fraudulent
concealment, and violation of the ICFA all allege a wrong based
on construction, or formation, of the contract. The claims also
are closely related to the contractual relationship. Further,
Plaintiff does not claim that New York law is, "dangerous,
inconvenient, immoral, or contrary to public policy."
Accordingly, New York law applies to the claims of fraudulent
misrepresentation, fraudulent concealment, and the alleged
violations of the ICFA. DeValk Lincoln Mercury, Inc., 811 F.2d
IV. Counts I and II: Fraudulent Inducement
A. Statement of Opinion
In order to state a claim for fraudulent inducement under New
York law, a plaintiff must allege that "(1) the defendant made a
material false representation, (2) the defendant intended to
defraud the plaintiff thereby, (3) the plaintiff reasonably
relied upon the representation, and (4) the plaintiff suffered
damages as a result of such reliance." Banque Arabe et
Internationale D'Investissement v. Maryland Nat'l Bank,
57 F.3d 146, 153 (2nd Cir. 1995). See also Unicredito Italiano Spa
v. JP Morgan Chase Bank, 288 F. Supp.2d 485, 497 (S.D.N.Y.
2003). IBM has moved to dismiss Counts I and II on the basis that
Block did not properly allege all elements of fraudulent
inducement under New York law.
IBM claims that the alleged misrepresentation of material fact
is merely sales "`puffing' or a statement of opinion." IBM argues
that Block's alleged reliance on the statement is therefore not
reasonable. IBM states that New York courts dismiss fraud claims,
"where the claims are based on subjective opinion statements or
sales `puffery' regarding `success.'" (R. 12-1, Memo. in Support of Mot. to Dismiss at 12.) IBM relies on
several securities fraud cases where the courts considered
phrases such as the "acquisition and integration has been a
success" to be merely puffing or opinion statements. According to
New York law, a claim for fraud is not actionable if the alleged
misrepresentation is merely a statement of opinion or "puffery."
Cohen v. Koenig, 25 F.3d 1168, 1172 (2nd Cir. 1994); see
also Zanani v. Savad, 630 N.Y.S.2d 89, 90 (N.Y.A.D. 1995) (For
fraud to be actionable, the false representation allegedly relied
on, "must relate to a past or existing fact, or something
equivalent thereto, as distinguished from a mere estimate or
expression of opinion."). Plaintiff has alleged a
misrepresentation in connection with a material fact whether or
not IBM failed in implementing a certain type of software. Thus,
Plaintiff's complaint contains allegations of more than mere
puffery. Based on the allegations in the complaint, IBM's attempt
to characterize the alleged misrepresentations as opinion or
B. Scrivenors Error
IBM also contends that the Court should dismiss Count Two based
on the "scrivener's error" in the complaint. (R. 12-2, Memo. in
Support of Mot. to Dismiss at 13.) Plaintiff admits that it made
an "obvious clerical error" when it alleged that "in concealing
the fact that Defendant had never been involved in a failed
implementation," rather than "in concealing the fact that
Defendant had been involved in a failed implementation." The
Court dismisses Count Two based on this error without prejudice,
and grants Plaintiff leave to amend the error.
C. Non-Reliance and Integration Clause
IBM claims that Block's fraud allegations also fail because the
contract contains a "non-reliance" clause. The clause in question
states that the written contracts "are the complete agreement
regarding these transactions, and replace any oral or written
communications between us." (R. 24-1, Mot. to Dismiss, Ex. A, Customer Agreement at 1;
Ex. B, SOW at 10, 47, 73.) IBM claims that this means Block's
alleged reliance on statements by IBM that it had never had a
failed implementation cannot be reasonable." (R 12-1, Mot. to
Dismiss at 14.) Under New York law, however, if a party can
establish that he was induced to enter a contract by fraud, the
party may escape liability under the contract, "even when the
contract contains an omnibus statement that the written
instrument embodies the whole agreement, or that no
representations have been made." Manufacturers Hanover Trust Co.
v. Yanakas, 7 F.3d 310, 315 (2nd Cir. 1993) (quotation
The New York Court of Appeals has held that while normally "a
general merger clause is ineffective to exclude parol evidence to
show fraud in inducing the contract," if the complaint includes a
cause of action for fraud, "the parol evidence rule is not a bar
to showing the fraud either in the inducement or in the
execution." Danann Realty Corp. v. Harris, 157 N.E.2d 597,
598-599 (N.Y. 1959). In Danann, the court dismissed plaintiff's
fraudulent inducement claim based on misrepresentations about the
operation expenses and profits of a building where plaintiff
signed a contract stating that defendant had not "made and does
not make any representations" about expenses or operation and
that plaintiff was not "relying upon any statement or
representation, not embodied in this contract, made by the
other." Id. at 597-599. If the plaintiff has "in the plainest
language announced and stipulated that it is not relying on any
representations as to the very matter as to which it now claims
it was defrauded," then the specific disclaimer "destroys the
allegations in plaintiff's complaint that the agreement was
executed in reliance upon these contrary oral representations."
Id. at 598-599.
Courts applying New York law have consistently followed the
Danann holding with little modification. See Hobart v.
Schuler, 55 N.Y.2d 1023, 1024 (N.Y. 1982) (Stock purchase agreement, "which states that all representations, warranties,
understandings and agreements between the parties are set forth
in the agreement" is a "general merger clause" and is not
sufficient to "bar parol evidence of a fraudulent
misrepresentation); Midway Home Entm't, Inc. v. Atwood Richards,
Inc., No. 98 C 2128, 1998 WL 774123 at *4 (N.D. Ill. Oct. 29,
In Sotheby's Fin. Serv. Inc. v. Baran, No. 00 Civ. 7897 BSJ,
2003 WL 21756126 at *5 (S.D.N.Y. July 29, 2003), the court noted
that contracts must contain "explicit disclaimers of the specific
representations that form the basis of the claim for fraudulent
inducement in order to be considered sufficiently particular to
bar that defense." The clause in the contract between IBM and
Block resembles a general integration clause and not a specific
non-reliance clause. While the clause does state that the
contract replaces "any oral or written communications between
us," it does not specifically disclaim the alleged
representations made in inducement of the contract. The contract
is silent on whether or not there have been any customer
complaints of prior failed implementations of J.D. Edwards
software. The court in Hobart emphasized that the fraudulent
representation at issue was "not specifically contradicted by any
of the detailed representations or warranties contained in the
agreement" and thus was not barred by the general merger clause
of the agreement. Hobart, 55 N.Y.2d at 1023. The clause in the
IBM contract is a general integration clause and thus does not
bar parol evidence of a fraudulent misrepresentation. Since
Block's fraud was correctly pleaded, the motion to dismiss Counts
I and II is denied.
V. Count III, Illinois Consumer Fraud and Deceptive Practices
IBM alleges that the Court should dismiss Block's ICFA claim
because the choice-of-law clause in the contract selects New York
law to govern the contract and related controversies. The Court
agrees. Because New York law controls for the reasons set forth
above, Plaintiff cannot bring an Illinois statutory claim against
Defendant. While public policy concerns can override choice of law clauses, Block has not identified any
concerns sufficient to override the contract terms. See
Continental Ill. Nat'l Bank and Trust Co. of Chicago v. Premier
Sys., Inc., No. 88 C 7703, 1989 WL 24122 at *6 (N.D. Ill. Mar.
14, 1989). The motion to dismiss Count III is granted.
VI. Block's Claims for Consequential and Incidental Damages
IBM next moves to dismiss the claims for consequential and
incidental damages in Counts III-VII. Specifically, IBM alleges
that the limitation-of-liability provision in the contract with
Block prohibits recovery of both consequential and incidental
Under New York law, consequential damages may be excluded in a
contract, "unless the limitation or exclusion is unconscionable."
N.Y.U.C.C. § 2-719(3) (McKinney 1993); see McNally Wellman Co.
v. N.Y. State Elec. & Gas Co., 63 F.3d 1188, 1198 (2nd Cir.
1995). Unconscionability can be shown by "an absence of
meaningful choice" that results in "contract terms which are
unreasonably favorable to the other party." State v. Avco Fin.
Serv. Inc., 50 N.Y.2d 383, 429 (N.Y. 1980). Unconscionability is
a question of law, which requires "an inquiry into any inequities
of bargaining power when the parties drafted the contract," and a
showing that the contract was both procedurally and substantively
unconscionable when made. That is, a plaintiff must show an
absence of meaningful choice together with contract terms which
are unreasonably favorable to the defendant. Id. at 1198
(quotations omitted); see also Williams v. Walker-Thomas
Furniture Co., 350 F.2d 445, 449 (D.C. Cir. 1965). While it is a
question of law whether the contract is unconscionable, it is a
question of fact whether or not the circumstances and the
"process by which the contract was formed" show a lack of
meaningful choice. Siemens Credit Corp. v. Marvik Colour, Inc.,
859 F. Supp. 686, 695 (S.D.N.Y. 1994). Determination of
procedural unconscionability requires an examination of matters
including "whether deceptive or high-pressured tactics were employed" in
the transaction. Gillman v. Chase Mannhattan Bank, 73 N.Y.2d 1,
11 (N.Y. 1988). In viewing the complaint in the light most
favorable to Block, the Court cannot conclude at this stage that
the IBM Contract prohibits Block from recovering consequential
damages. Accordingly, the motion to dismiss claims for
consequential damages under Counts IV, V, VI, and VII is denied.
The motion to dismiss claims for consequential and incidental
damages under Count III is granted as Illinois statutory law does
While the terms of U.C.C. § 2-719(3) only address limitations
on consequential damages, "courts uniformly apply its
unconscionability standard to limitations on incidental damages
as well." McNally Wellman Co., 63 F.3d at 1198; see also,
Shuldman v. DaimlerChrysler Corp., 768 N.Y.S.2d 214, 216 (N.Y.
App. Div. 2003) (Plaintiff's claims for incidental damages were
dismissed because "under state law, the test is whether the
limitation is unconscionable (see U.C.C. 2-719(3))," and the
court found, "the limitation on incidental damages in Daimler's
warranty is not unconscionable"). Accordingly, for the same
reasons discussed above, IBM's motion to dismiss Block's claims
for incidental damages is denied.
VII. Implied Warranty Claims (Counts IV, VI and VII)
IBM seeks to dismiss Block's claims in Counts IV, VI, and VII
based on implied warranties of merchantability and fitness for a
particular purpose. IBM argues that the Customer Agreement, as
well as the SOW and PCAs, expressly disclaim such warranties. IBM
further seeks to strike Block's claims for express warranties for
the ERP Bridge software. A. The ERP Bridge Software Claim for Breach of Warranty
IBM argues that the "as is" language in PCA 6*fn2 and the
SOW agreement*fn3 defeats Block's claims for express
warranties on the ERP Bridge software. IBM contends that this
software did not include any warranties "express or implied."
Block argues in response that the "as is" and "no warranty"
disclaimers were not conspicuous, and that "as-is" disclaimers
are ineffective if they conflict with an express warranty such as
the description of the products that was incorporated into the
IBM Contract. An "as is" disclaimer must be conspicuous in order
to be effective. Koenig Iron Works, Inc. v. Sterling Factories,
Inc., No. 89 CIV 4257 (THK), 1999 WL 178785 at *5 (S.D.N.Y. Mar.
30, 1990). The "as is" disclaimer here is not capitalized,
boldfaced, in a larger type than the surrounding type, or
highlighted in the SOW or PCA. The Court cannot conclude that
these disclaimers are conspicuous as a matter of law. The motion
to dismiss or strike Count IV is denied.