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Engineered Abrasives, Inc. v. American Machine Products & Service, Inc.

United States Court of Appeals, Seventh Circuit

February 13, 2018

Engineered Abrasives, Inc., Plaintiff-Appellant,
American Machine Products & Service, Inc., et al., Defendants-Appellees.

          Argued September 20, 2017

         Appeal from the United States District Court for the Northern District of Illinois, Eastern Division. No. 13-CV-7342 - Sara L. Ellis, Judge.

          Before Manion and Kanne, Circuit Judges, and Miller, District Judge.[*]

          Miller, District Judge.

         The principals of American Machine Products are a father and son who left employment at Engineered Abrasives, Inc., to start a competing business in 2011. Bad blood seems to have marked the companies' relationship ever since, to the apparent benefit of the lawyers who have represented them over years of bitter litigation. This case involves two lawsuits from that history.

         In March 2015, Engineered Abrasives won a default judgment against American Machine and its principals for $714, 814.04 and injunctive relief for stealing trade secrets and infringing trademarks. Five months later, Engineered Abrasives sued American Machine and its principals again. This time, with the help of the magistrate judge, the parties reached a settlement. American Machine's insurer would pay $75, 000 to Engineered Abrasives, and a permanent injunction would be entered against slander by American Machine or its principals with a $250, 000 liquidated damages clause accompanying the injunction.

         Paragraph 8 of the settlement agreement contains a release provision:

a. [Engineered Abrasives], on behalf of itself, its parents, subsidiaries, affiliates, officers, directors, employees, agents, successors and assigns, hereby releases [American Machine], their subsidiaries, affiliates, officers, directors, employees, agents, attorneys, shareholders, successors and assigns, of and from any and all rights, claims, debts, demands, acts, agreements, liabilities, obligations, damages, costs, attorneys' fees, expenses, actions, and/or causes of action of every nature, character and description, whether known or unknown, suspected or unsuspected, which it ever had, now has, or may hereafter claim to have by reason of any matter, cause or circumstances whatsoever arising or occurring prior to and including the date of the Agreement, including but not limited to the claims and defenses set forth in the Action.

         A similar release addressed American Machine's claims against Engineered Abrasives. The agreement's Recital A defined "the Action" as Engineered Abrasive's August 2015 suit (the latter of the two suits involved in today's case).

         American Machine returned to the district court in the earlier case under Federal Rule of Civil Procedure 60(b), reporting that the settlement covered the March 2015 trademark judgment as well as the new case; Engineered Abrasives contended that it had only settled the new case. The written settlement didn't mention a global settlement.

         Engineered Abrasives said it hadn't intended to release the earlier default judgment, and pointed to extrinsic evidence to support its position: Engineered Abrasives' presettlement demand letter didn't mention the earlier judgment; the parties didn't discuss the earlier judgment during the settlement conference; the working draft of the settlement agreement didn't contain anything about satisfaction of the earlier judgment; the parties didn't discuss, on the record, satisfying the judgment; the settlement agreement was for a sum just a tenth of the amount of the earlier judgment; and Engineered Abrasives' attorney objected at the first suggestion that the settlement agreement might encompass the earlier judgment.

         We can't vouch for the accuracy of those factual assertions because the district court didn't consider them. Applying Illinois law, the district court found the settlement agreement unambiguous and released both the default judgment in the March 2015 case and the judgment in the more recent case. A court deciding whether the parties intended to include other claims in a release can't consider extrinsic evidence unless the contract is ambiguous. See Farm Credit Bank of St. Louis v. Whit-lock, 581 N.E.2d 664, 667 (111. 1991). Engineered Abrasives appeals the district court's ruling, arguing that the settlement agreement is ambiguous and the district court should have considered its extrinsic evidence. Whether a contract is ambiguous is a question of law, so we review without deferring to the district court's opinion. See Prestwick Capital Mgmt. v. Peregrine Fin. Group, 727 F.3d 646, 655 (7th Cir. 2013) (quoting EraGen Biosci., Inc. v. Nucleic Acids Licensing LLC, 540 F.3d 694, 698 (7th Cir. 2008)) ("If [a] contract is ambiguous, a more deferential standard of review is applied to the interpretation of the terms and factual findings.").

         American Machine argues that Engineered Abrasives has waived any argument that the settlement agreement is ambiguous because it claimed in the district court that the agreement was unambiguous, though Engineered Abrasives said it was unambiguously supportive of Engineered Abrasives. What isn't argued in the district court generally can't be argued on appeal either. Roberts v. Reliance Standard Life Ins. Co., 130 F.3d 1231, 1238 (7th Cir. 1997). Although Engineered Abrasives argued ambiguity in the district court as a secondary argument, its argument isn't waived.

         Illinois law provides the rule of decision in this diversity case. A court's job in construing a negotiated release under Illinois law is to determine what the parties intended. Miller v. Lawrence,61 N.E.3d 990, 997 (111. Ct. App. 2016) ("A release will not be construed to include claims that were not within the contemplation of the parties."); Ainsworth Corp. v. Cenco Inc., 437 N.E.2d 817, 822 (111. Ct. App. 1982) ("Illinois courts have uniformly held that the scope and extent of a release is controlled by the intent of the parties signing it."). Courts look to the language of the settlement ...

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