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SOUND OF MUSIC COMPANY v. MINNESOTA MINING AND MFG. COMPANY

September 27, 2005.

SOUND OF MUSIC COMPANY, an Illinois corporation, Plaintiff,
v.
MINNESOTA MINING AND MANUFACTURING COMPANY, a Delaware corporation Defendant.



The opinion of the court was delivered by: JOHN NORDBERG, Senior District Judge

MEMORANDUM OPINION AND ORDER

This parties in this case worked together for over two decades until their relationship ended in November 1997 when Minnesota Mining and Manufacturing Company ("3M") announced that it was exiting the background music business because of a "change in strategic business direction" and was therefore terminating its 1995 contract with all of its dealers based on a clause that allowed for termination in such circumstances. Sound of Music Company ("Sound of Music"), which was 3M's largest dealer of background music, was upset by this decision. It filed this lawsuit claiming that 3M was obligated under various implied and statutory duties to continue performing for a longer period of time.

Sound of Music also alleged that it had been enticed into signing the 1995 contract by promotional statements that supposedly gave the impression that 3M was committed to staying in this business until at least sometime around the year 2005. Although this enticement theory was featured prominently in the original and subsequent complaints, it was never incorporated into a specific cause of action. In discovery, Sound of Music claims to have uncovered evidence linking these promotional statements to a larger fraudulent scheme. Specifically, when 3M issued these promotional statements, it supposedly had already decided that it would be exiting the business and intentionally kept this fact secret to lure Sound of Music and other dealers into signing the 1995 contract and purchasing expensive downlink equipment. Then, after the final payments on this equipment were made in 1997, it terminated the contract and then came up with a cover-up story, which was that its business was no longer profitable.

  Before the Court is 3M's motion for summary judgment on the four counts in the current amended complaint as well as Sound of Music's motion for leave to file a second amended complaint adding a fifth count that seeks to incorporate this enticement theory into a fraud-based claim under the Illinois Consumer Fraud Act. This opinion will address both motions.

  BACKGROUND*fn1

  Founded in 1902 by five men who had a single idea for starting a company, 3M is today a highly-diversified technology corporation with 20 billion in worldwide sales, over 67,000 employees, and more than 55,000 products. 3M has succeeded over the years by constantly developing new products. Some of these products, like Post-it notes and Scotch tape, are well-known to consumers today. But not all of its products have been as successful or as long-lasting. This dispute is about one of 3M's lesser known ventures. Sometime in the 1960s, 3M decided to enter the background music business. This business involves selling pre-recorded music to businesses that play the music in their stores. 3M decided to enter this business because, at that time, music was distributed on magnetic tapes, which was an area in which it had expertise. Although 3M reserved the right to sell this music directly to end users, it primarily relied on a network of non-exclusive dealers.

  In 1973, Richard Cushing, who was then working for 3M, decided to leave the company and become one of these dealers. He founded Sound of Music and located it in Mundelein, Illinois. Much like 3M, albeit on a lesser scale, Sound of Music grew over the years from a small venture employing two people into a successful company employing 26 people and occupying five buildings. Its customers included Sears and True Value hardware stores. Cushing's two sons worked with him in this business, and he eventually hoped to hand it over to them. Unlike 3M, however, Sound of Music focused its energies primarily on one product and did not make significant efforts to diversify into other industries.

  Over the next two decades, the technology in the background music business would change several times, forcing the parties to adapt and to make choices. The first of these changes occurred in the late 1980s when the technology changed from magnetic tapes to an analog satellite signal. This change forced 3M and its dealers to restructure their distributional system. On the front end, 3M had to find a way to send out a satellite signal, which it did by entering into an agreement leasing satellite space from a North Carolina company. On the back end, 3M had to provide a way for stores to receive this signal, which it did by distributing equipment, known as downlink equipment, that allowed end users to convert the analog signal into music that could be played in their stores. The 1988 Agreement

  These technological changes led to legal changes. 3M entered into a new dealer agreement with Sound of Music and the other dealers in 1988. The 1988 agreement, though not directly at issue here, is nonetheless important in understanding the parties' concerns regarding the later 1995 agreement, which is the focal point of this lawsuit.

  In the 1988 agreement, 3M agreed to lease this downlink equipment to dealers who would in turn sub-lease it to end users. (Ex. 3 at § I.) The price of the equipment was set forth on Schedule A that was attached to the agreement and included a one-time "entry fee" of $2,400 as well as other fees. These fees will become important later to the question of when the statute of limitations on the Illinois franchise act claim began to run.

  This agreement did not contain a specific termination date, but it did allow for termination under four possible scenarios. (Section XIV.a-d.) Subsection "c" provided that 3M could terminate "immediately" upon written notice if "3M's Satellite Business is discontinued." Subsection "d" gave either party the option to terminate "regardless of cause" upon 90 days advance written notice. Although the agreement provided that 3M would lease the downlink equipment, the parties entered into a separate lease agreement. This agreement, unlike the 1988 agreement, had a specific termination date of 60 months from its inception.

  In 1991, Sound of Music became concerned about whether the 1988 agreement gave it an exclusive right to sell in the six-county area identified in the contract as its primary selling area. Cushing asked Edwin Josephson, a partner in the Chicago law firm Chuhak & Tecson, to review the 1988 agreement and analyze this issue. Josephson informed Cushing that it was his opinion after reviewing the agreement that 3M did have an explicit right to sell directly to end users in Sound of Music's selling area. (Ex. W.) This conclusion was based on a review of the agreement as well as Schedules B and C that were attached to the it. Although Sound of Music apparently did not pursue this issue with 3M, we mention it because it shows that both Cushing and Josephson were familiar with the terms of this agreement.

  3M Terminates the 1988 Agreement

  In 1993, dealers became concerned about what would happen with the downlink equipment given that the 60-month lease agreements would expire later that year. (Ex. C.) 3M then decided (for reasons that are not clear) to shift to a system whereby dealers would purchase, rather than lease, the equipment. (Id.) To implement this change, 3M terminated the 1988 agreement in a letter dated October 14, 1993. (Ex. 6.) 3M relied on the clause allowing for termination without cause upon 90 days' notice. Although 3M terminated this agreement, it told dealers that it wanted to enter into a new contract and sent them a proposed agreement at the same time. (Id.)

  Sound of Music, as well as other dealers, were upset that 3M had terminated the 1988 agreement in what they considered to be an abrupt manner. Sound of Music again contacted Josephson and asked him to look into the matter. After researching legal grounds for challenging this termination, Josephson wrote to 3M on November 18, 1993 and asserted that 3M's unilateral termination was improper and violated "contractual obligations of good faith" and also violated, in certain states, "statutes regarding fair treatment of dealers." (Ex. V.) Josephson indicated that he was not only representing Sound of Music but also a substantial group of other dealers and that they had retained him to negotiate the terms of a new agreement. Josephson told 3M that the proposed agreement was unacceptable. Beginning in the last quarter of 1993, 3M and these dealers began negotiating the new agreement, a process that would take over a year and a half to complete during which time the parties continued working together in apparently normal fashion. It is clear that both sides thought the 1988 agreement needed to be changed in ways that would more protect their interests.

  In the proposed agreement sent out by 3M, which was nominally in the same format as the 1988 agreement, 3M had already made some significant changes. It inserted, for example, a clause stating that the dealer "is not an agent, partner, involved in a joint venture with or a franchisee of 3M. . . ." (Ex. 6; emphasis added.) Also added was a provision selecting Minnesota law as the choice of law and a binding mediation/arbitration clause. The agreement also included a buy option for the downlink equipment in addition to a lease option; later in the negotiating period, 3M deleted the lease option, which Sound of Music believes was done as part of the alleged fraudulent scheme.

  With regard to the termination section, which is critical to this lawsuit, 3M's proposed agreement contained a termination date of December 31, 1998, which was later changed to December 31, 1999. This meant that, unlike the 1988 agreement, this agreement would expire on its own terms after approximately five years. 3M also included the same framework of early termination clauses that were in the 1988 agreement. However, apparently in response to concerns by dealers, 3M softened these clauses by eliminating the provision allowing for termination without cause and by adding a requirement that it must give 90 days' notice under the exit-the-business clause. The 1988 agreement, in contrast, allowed 3M to terminate immediately in this situation. Sound of Music and the other dealers had a number of concerns. Having just been terminated without warning under the 1988 agreement, Cushing was concerned about "how long [3M would] be in this business." (Ex. A at 45.) He also was worried that 3M was "posturing [itself] to exit rather than grow the business." (Id. at 47.) Cushing also worried that 3M might take over Sound of Music's big accounts and sell directly to end users, which was the same issue which he was concerned about in 1991. (Id. at 57.)

  In an effort to protect themselves from some of these risks, Sound of Music and the other dealers worked together to negotiate terms that would protect them. They were partly, though not entirely, successful. They were able to get some concessions from 3M because of the possibility of a "dealer revolt." (Resp. Br. at 6.) Cushing was particularly concerned about the exit-the-business clause because he knew that, if 3M only needed to give 90 days' notice, Sound of Music would be in a bind because it generally had 5-year contracts with its customers. (Ex. A. at 60.) Cushing therefore wanted this clause to require 60 months' notice, which would have effectively eliminated the effect of this clause because the contract itself only lasted 60 months. But 3M was not willing to agree to this longer time period and the parties ultimately agreed to something in the middle. 3M would have to give 12 months' advance written notice if it exited the business.*fn2

  Insofar as we can tell, Sound of Music was worried primarily about the exit-the-business clause. It is not clear whether it tried to get 3M to agree to a longer duration period beyond the five-year time period or to agree to any kind of automatic renewal provision of this contract. There is also no evidence as to whether Sound of Music made any objections to, or attempts to change, other terms such as the choice of law provision or the clause waiving franchise rights.

  Why Did Sound of Music Enter Into The 1995 Agreement?

  Although Sound of Music was able to negotiate some changes in the agreement, it still wasn't happy and felt that it was only able to get "very limited negotiation." (Cushing Dep. at 71: "we weren't happy with it. We wanted 60 months."). Despite these concerns, Sound of Music nonetheless signed the new agreement on May 5, 1995, and also contemporaneously entered into an installment contracts in which it agreed to buy approximately $600,000 worth of downlink equipment.

  At this point, an important question arises — one that will be central to the resolution of this lawsuit. Why did Sound of Music enter into this agreement if it was concerned that 3M was "posturing" to exit the business, if it knew that 3M could do so by giving only 12 months' notice, and if such an early termination of the contract would cause problems with its contracts with end users? After all, Sound of Music had just experienced an unexpected and unwanted termination of the 1988 agreement. Sound of Music's belief that 3M was posturing to exit the business shows that it had a strong suspicion at this time (which is important to remember when we discuss the fraud-based claim) that 3M would exit the business. Sound of Music asked 3M to lengthen the notice period on the exit-the-business clause, but 3M wouldn't extend it beyond 12 months. Despite all these warning signs, Sound of Music signed the agreement.

  No doubt realizing the importance of this question, Sound of Music has spent a significant portion of its lengthy response brief trying to answer it. In fact, it offers two separate explanations. The first one is a duress argument, which is that it was "forced" by 3M to sign the agreement. We'll discuss this theory further in Section I below. The second is the enticement theory mentioned in the beginning of this opinion. Sound of Music states that it was "enticed" and "assured" by both oral and written representations 3M made during the negotiation period.

  As for the oral representation, Cushing stated in his deposition that, despite his worries about 3M exiting the business, he entered into the agreement because some unnamed person at 3M told him "don't worry" about the contract because it was "just some legal matter that has to be done":
[W]e were concerned that — how long will they be in this business? And after our concerns, we were assured by the management of 3M that, "We are in this business to stay and we are going to be in this business a long time. And don't worry about anything. It's just some legal matter that has to be done." And when you look back at all of what has happened, this — this was the plan. They were going to exit this business, and we, again, believed in them, and the loyalty that we had with them said, "Okay. Fine. Let's continue on, and let's do business as ? usual.
(Ex. A at 45.)
  As for the written representations, Sound of Music claims that 3M made statements in promotional literature sent out to dealers and customers during this general time period (between 1993 and 1995) that gave the impression that 3M was committed to staying in the business until at least 2005. Sound of Music has submitted numerous examples of these statements, which consist of letters and marketing materials, some of which were prepared for end users such as True Value. See, e.g. Exs. 10, 14, 15, 16, 17, 19, 20. Although the wording varies slightly in each statement, only really two basic representations are at issue. First, 3M informed dealers and end users that it had recently signed a new satellite contract for space on the Galaxy IV satellite, which had "a projected orbital life to the year 2005." (Ex. 15.) No one disputes that this was a true statement. Second, usually in conjunction with this first statement, 3M sometimes also stated that this new satellite contract meant that 3M was prepared to "move forward into the twenty-first century." (Id.) The following quotation from a December 10, 1993 letter provides a good example of both types of statements:
I am pleased to announce that 3M has signed an agreement to provide satellite space on a replacement satellite with a projected orbital life to the year 2005. Further details will be forthcoming, but we are well positioned to move forward into the twenty-first century.
(Id.)*fn3

  3M Terminates The 1995 Agreement

  About two and half years after the contract was signed, on November 18, 1997, 3M informed Sound of Music and other dealers that it had been "carefully evaluating" its satellite background music business for the "past several months" and had decided that "a change in strategic business direction is necessary" and that it was therefore terminating the dealer contracts effective December 31, 1998 based on the exit-the-business clause. (Ex. 24.)

  We now are at the point in the factual summary where the parties diverge most sharply. The question is why and when did 3M decide to get out of the business. This relates to the allegation of fraud. 3M says that it first considered exiting the business only a few months before it actually did so (i.e. in the fall of 1997) and that the decision was a good faith business judgment. Sound of Music believes that 3M "concocted" a "massive deceptive or false advertising campaign" to lure dealers into signing the 1995 agreement. (Resp. at 9.) Sound of Music believes that the 3M's later explanation of its decision to exit the business, which is contained in the Will report, was merely a charade designed to make it look like the decision was being made in 1997 when it had already been made several years earlier.

  Although the parties offer sharply contrasting theories, they do not disagree about the basic underlying facts, which will be summarized here and then analyzed in more detail in Section III. To understand this issue, we need to explain how this business fit within the bigger picture at 3M.

  This business, which went by various names and was sometimes called DBS Sound Products, was undeniably a very small component of a company that had over 55,000 products. One witness said that it would have been referred to as a "project" within 3M because it was "a very small business." (Ex. G at 21.) In 1991, 3M announced that this business was being placed within a 3M's National Advertising division ("National Ad"), which consisted of products under the general label of "out-of-home advertising media" that included interstate outdoor advertising bulletins, 30-sheet posters, and shopping mall advertising. (Ex. 5.) This move was done in an effort to create product synergy because 3M believed that the background music business would "mesh well" with the other businesses in this division. (Id.)

  In this same announcement, 3M stated that Ed Shivitz was being appointed as the new product manager for the background music business. (Id.; Ex. F at 13.) In 1995, Shivitz was promoted and Arnie Roese then headed the business from late 1995 until he was transferred to Europe in the late summer of 1997.

  Sometime around the time Roese left for Europe, 3M decided to sell the National Ad division. This decision was not based on the lack of profitability, as this division was actually producing strong revenues at the time, but was instead due to the failure of the division to achieve its goal of "strong product synergy." A Century of Innovation, First Ed., at p. 200 (2002), available at http://solutions.3m.com (last visited August 15, 2005).

  Although 3M sold the National Ad division of which the background music was a part, the background music business and a related wireless intercom business were retained by 3M. (It is not known whether these businesses were retained because the buyer did not want them or because 3M did not want to sell them.) Having retained these two businesses, 3M then had to decide where in the company to put them. It temporarily put them in the Food Services division, which was headed by ...


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