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M. BLOCK & SONS, INC. v. INTERNATIONAL BUSINESS MACHINES

July 8, 2004.

M. BLOCK & SONS, INC. an Illinois Corporation, Plaintiff,
v.
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 ...


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