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Freight Train Advertising, LLC v. Chicago Rail Link, L.L.C.

United States District Court, Seventh Circuit

May 31, 2013

FREIGHT TRAIN ADVERTISING, LLC, Plaintiff,
v.
CHICAGO RAIL LINK, L.L.C., Defendant.

MEMORANDUM OPINION AND ORDER

VIRGINIA M. KENDALL, District Judge.

Freight Train Advertising, LLC ("FTA") and Chicago Rail Link, L.L.C. ("CRL") contracted to erect and display advertising space on a train car that would sit on a track on a bridge over a busy Chicago expressway. Both parties chose not to fully explore the legality of the project before expending money on it and now each seeks to blame the other for the removal of the train car sign at the direction of local officials who deemed it to be a violation of the law for safety reasons. Rather than chalking up their losses as a strategic business decision gone bad, each seeks to hold the other accountable and so they brought their case to federal court where it was tried in a one-week bench trial. Finding that neither side has proved by its case by a preponderance of the evidence, this case is dismissed.

Facts Presented

A. Concept and Negotiation of the Track Lease Agreement

Ted Johnson, a consultant in the advertising industry, conceived of the railcar advertising that ultimately led to the Track Lease Agreement, the contract between FTA and CRL that is the subject of this suit. Johnson first conceived of advertising on railcars in 2004. (Tr. at 60). In pursuing such an option, Johnson formed a company called Freight Train Media. (Tr. at 62). Johnson and his colleagues at Freight Train Media contacted both the American Association of Railroads (the "AAR") and the Federal Railroad Administration (the "FRA") about the idea and made presentations about attaching advertisements to the sides of railcars. (Tr. at 63). According to Mr. Johnson, both organizations thought that advertising on railroad cars would be permissible under federal railroad statutes, provided that the railcars were not "interchanged" -i.e., moved between railroad companies, which would violate of the AAR's regulations. (Tr. at 65-66). Johnson also thought that federal law, rather than state or local law, would govern railway advertising as it did other aspects of railroads, and nothing he learned from the railroad organizations suggested anything to the contrary. (Tr. at 66).

Johnson engaged with Florida East Coast Railroad in 2007 to test railway advertising in Florida. (Tr. at 68-70). Ads ran on Florida East Coast Railroad railcars from April through October 2007 without complaints or challenges from state or local authority, notwithstanding that Freight Train Media did not acquire any permits to run the ads from any state or local authorities. (Tr. at 69-70). The railcars in the Florida East Coast Railroad engagement were cars in motion, although the cars might be stationary for long periods of time while they were not in use. (Tr. at 115). While the trial was a success, Johnson reached two conclusions as a result of the trial: first, that the federal rule preventing advertisement on an interchanging car made valuation of ad space difficult, and second, that the dimensions of a railcar made ad construction difficult. (Tr. at 71). Mr. Johnson determined that a billboard-type advertisement mounted on a shipping container on a railcar would be more profitable and also avoid restrictions on railcar interchange that were limited to the car itself rather than the container/billboard atop the car. (Tr. at 70-71, 123-24). Johnson inquired of a board member of the AAR whether a container atop a railcar would be violative of Rule 84, and the AAR member responded that in his opinion it did not violate the AAR manual, although he made no comment about federal, state or local laws or regulations. (Tr. at 121-22). Johnson did not inquire of the FRA. (Tr. at 124). Johnson proceeded to engage Formetco, a leading designer of billboards, to design a billboard that could be mounted onto a railcar. (Tr. at 74-75).

Raymond Sipperley, co-owner of FTA, first met Johnson at an outdoor advertising trade show in fall 2008. (Tr. at 75-76). Johnson presented to Sipperley his concept of utilizing railcars for displaying advertising together with the results of his preliminary research and due diligence as to whether such advertising would be legal. (Tr. at 76). Johnson and Sipperley decided to work together to pursue other railway car advertising opportunities throughout the United States. At the time the two decided to work together, Sipperley was clear with Johnson that any billboard advertisement, while affixed to a rail car on a rail track, would be a stationary item that would not part of a moving train and would not be intended to be moved. (Tr. at 77).

In December 2009, Johnson met with Ken Koff of CRL and discussed the use of railcars on CRL rail lines for displaying advertising. (Tr. at 79-80). At that meeting, Johnson presented the results of his preliminary research and due diligence and the results of the six-month Florida test run to Koff. (Tr. at 79-81). Koff expressed that CRL was interested in the idea of utilizing railcars on CRL rail lines for displaying advertising to generate revenue for CRL. (Tr. at 79-81; 319) On March 12, 2010, Koff and Adam Hess, the director of real estate for CRL's management company OmniTrax, had a conference call with Sipperley and Johnson during which the following subjects were discussed: the use of railcars for displaying advertising; Johnson's past experience in Florida with railcar advertising and its application to stationary railcars; potential CRL property suitable for displaying advertising; and CRL's strong interest in the potential revenue generation from using railcars for displaying advertising on CRL rail lines. (Tr. at 81-85, 318-19). Mr. Johnson did not remember either Mr. Koff or Mr. Hess at any time suggesting concern about federal vs. state or local jurisdiction over the railcars. (Tr. at 90-91).

In May of 2010, Sipperley and Johnson met with Hess in Chicago to review two potential sites on CRL rail lines suitable for displaying advertising. (Tr. at 87-88). They agreed that CRL's bridge property crossing the Dan Ryan Expressway, known as the "Root Street Wye, " had potential for displaying advertising on rail cars. (Tr. at 88, 320). As soon as the site was decided upon, all parties focuses on the fact that this new form of advertising was likely to bring legal challenges. (Tr. at 320-21). Johnson testified that the form of the agreement was critical; if the agreement were a billboard agreement it might fall under state and local laws and regulations, but an agreement premised on the use of a railcar would fall under federal jurisdiction. (Tr. at 93-94). Hess agreed that the form of the agreement was important and a track lease agreement a good choice, and also agreed that building a separate spur track for the signage car would give the Mobile Signage Unit (the "MSU") a better argument for federal preemption (Tr. at 91, 322-23).

On May 18, 2010, Johnson sent a written summary of his research regarding the legality of utilizing railcars for displaying advertising to Hess. (Tr. at 94-95; Joint Exhibit 1). Johnson thought that a challenge from Cook County or Chicago was possible and thought it important that all parties be aware of the research. (Tr. at 96). Hess advised Johnson by email dated May 27, 2010 that CRL would obtain an attorney to look into the best defense for CRL regarding the municipal codes and the federal railroad regulations. (Tr. at 96-97; FTA Ex. 10). According to Johnson, subsequent conversations between him and Hess gave Johnson the impression that Hess' attorneys had gotten comfortable with Johnson's research and agreed that federal rather than local regulations would govern the stationary railcar advertisement. (Tr. at 97).

On May 25, 2010, Sipperley sent a written proposal to Hess to lease CRL's property for displaying advertising. (FTA Ex. 9). Mr. Brad Berkley, a part owner of FTA, then also known as Radiant Outdoor, was integrally involved in the negations with Hess about the written proposal. (Tr. at 173). The proposal referenced length of the lease, guaranteed minimum rent, the revenue share of advertising revenue between FTA and CRL, and the fact that the MSU would need to be moved periodically for CRL to conduct rail business. (Tr. at 491-20; FTA Ex. 9). The written proposal contains no reference to FTA maintaining the right to defend against suits. (FTA Ex. 9). But according to Berkley, the right to "fight and defend" against legal challenges to any kind of alternative advertising is the "single most important thing" to the advertising company, because alternative advertising is generally subject to challenge at multiple levels of government. (Tr. at 173-74). Sipperley also testified that it was critical, a "cornerstone" to the agreement, that FTA have the ability to defend legal challenges and that discussions about the ability to defend were frequent between himself and Hess. (Tr. at 386-87; 397-98). Berkley and Sipperley discussed rights to defend and corresponding indemnification of CRL's costs to defend on multiple occasions with Hess. (Tr. at 174, 386-87). Berkley testified that FTA would not have entered into the Track Lease Agreement without explicitly preserving FTA's right to defend against suits. (Tr. at 176).

In June 2010, CRL prepared the first draft of the Track Lease Agreement, which was largely, but not entirely, the standard template at CRL for a track lease agreement (Tr. at 138, 324-25). Hess sent the first draft to Sipperley and Johnson by email on June 16, 2010. (Tr. at 138; FTA Ex. 12). While CRL's initial draft was largely the standard form for track leases, the initial draft contained deal-specific drafting in Section 4.3 stating that lessee (FTA) would be responsible for obtaining all applicable permits for the maintenance and operation of the track without expense to lessor (CRL), and that lessee FTA would comply with all laws, ordinances, and directives of any federal, state or municipal government, "including, without limitation, regulations and laws found in Chapter 17-12 of the City of Chicago Municipal Code and in the Illinois Highway Advertising Control Act of 1971, collectively, laws, and other lessor requirements relating to the use of the track." (Tr. at 138-19, 325; FTA Ex. 12.) The initial draft also contained language in Section 1.3 allowing for termination of the agreement without cause upon five days written notice in the event that the use of the track violated the "Laws" defined in Section 4.3. (Tr. at 178).

On June 25, 2010, Ray Sipperley sent his comments on the initial draft to Adam Hess, which included the following business points: that the lease be non-cancelable, and that a provision be added that if it was alleged that the agreement violates laws, FTA must have the right to defend FTA's position against legal and indemnify CRL. (FTA Ex. 13; Tr. at 395-96). Berkley testified that during negotiations with Hess, he and Sipperley made quite clear to Hess that the right to defend a challenge was necessary and therefore the five day termination period needed to be altered. (Tr. at 178). Berkley and Sipperley both testified that the right to defend necessarily required the MSU to be in place while the challenge was defended, (Tr. at 178, 386, 395), but the contemporaneously sent email containing critical deal points references only the right to defend/obligation to indemnify, not the location of the MSU during such challenges. (FTA Ex. 13). Hess responded that FTA should propose language to alter Section 1.3 and that he agreed with the defense/indemnification in concept and would confirm it with his lawyers.

By the final version of the Track Lease Agreement, the termination notice period of Section 1.3 had been extended to 60 days. (Tr. at 184; Joint Ex. 2). The obligation of FTA in Section 4.3 to obtain permission and permits with respect to the MSU had been removed, but the obligation of FTA to comply with all laws and regulations had otherwise remained as originally drafted. (FTA Ex. 12, Joint Ex. 2). With respect to defense and indemnification, by the final version of the Track Lease Agreement the parties had added a Paragraph 8 in which FTA agreed that it assumed all risk, liability and obligations with respect to complying the "Laws" and agreed to indemnify CRL for all costs of alleged or actual violation of those Laws. (Joint Ex. 2).

B. The Track Lease Agreement

On August 27, 2010, FTA and CRL executed the Track Lease Agreement. (Joint Ex. 2). Under the Track Lease Agreement, CRL would be compensated for leasing the Track to FTA by a monthly rental payment as well as 30% of the net profits obtained by FTA for renting the MSU for advertisements. (Joint Ex. 2 at §§ 3.1, 3.2).

Several sections of the Track Lease Agreement are highly relevant to the ensuing dispute. Specifically, Section 4.3 of the Track Lease Agreement provides that FTA

shall strictly comply with any and all law, by-law, order, ordinance, ruling, regulation, certificate, approval, consent or directive of any applicable federal, state or municipal government, government department, agency or regulatory authority or any court of competent jurisdiction, including, without limitation, those pertaining to environmental matters, advertising and signage, and including, without limitation, regulations and laws found in Chapter 17-12 of the City of Chicago Municipal Code and the Illinois Highway Advertising Control Act of 1971 (collectively, "Laws") and other Lessor requirements related to the use of the Track.

(Joint Ex. 2 at § 4.3). Additionally, Section 8 of the Track Lease Agreement, titled "Government Regulations, " discussed legal defense and indemnification and states:

[FTA] assumes all risk and liability for any costs, obligations or duties with regard to complying with any Laws related to [FTA]'s use of the Track and nearby property. In addition, [FTA] shall defend, indemnify, release and hold harmless [CRL] from any and all costs, obligations, liabilities, duties, fines, penalties, judgment and/or attorneys' fees that [CRL] may incur as a result of addressing or defendant any alleged or actual violation of any Laws related to [FTA]'s use of the Track and associated property. This obligation set forth in this section will survive termination of this Agreement.

(Joint Ex. 2 at § 8). The Track Lease Agreement does not mention, in Section 4.3, Section 8 or anywhere else, that the MSU must stay out on the Track during the pendency of any legal challenges. (Tr. at 425-26).

With respect to CRL's rights to move the MSU, Section 12 of the Track Lease Agreement, titled "Operations Discontinuance, " states:

[CRL] may discontinue operation over the Track and remove it and all connections to it in the event [FTA] fails to materially keep or perform any obligation or stipulation stated in or resulting under this Agreement or if [CRL] is required or authorized by Laws to discontinue operation of the Track or to change its tracks in such a manner as to render it impracticable, in the judgment of [CRL], to continue to operate the Track.

(Joint Ex. 2 at § 12), while Section 16.1, titled "Operations, " states:

[CRL] agrees to operate said Track for the purpose of serving [FTA], subject to any lawful charges that may be made by [CRL] for such services, with the understanding, however, that [CRL] shall not be obligated to operate the Track if it shall be prevented from doing so by acts of God, public authority, riots, labor disputes or any cause beyond its control, or, if in the opinion of [CRL], it becomes unsafe to operate over said Track.

Several provisions provide notice periods prior to termination. Section 1.2 of the Track Lease Agreement permits either party to terminate the agreement upon giving the other party not less than 60 days written notice "if [FTA's] use of the "Track" violates the "Laws, " as defined in Section 4.3 of the Agreement". (Joint Ex. 2 at § 1.2). Section 18.1 and 18.2 provide CRL and FTA, respectively, the right to terminate the Track Lease Agreement on 30 days' ...


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