Valpo Law Blog

Analysis of current legal issues and cases in the Seventh Circuit Court of Appeals

Category: Contract Law (page 1 of 2)

Even a Simple Contractual Mistake Can Lead to a Disastrous Outcome for Businesses


Elias Awaad
Juris Doctor Candidate, 2016
Valparaiso University Law

It is not uncommon for a business to rely on one manufacturer to provide them with a majority or a certain amount of one product to resell to the public. Often, these businesses and manufacturers enter into contracts with one another, but sometimes one party does not truly understand what they agreed to. As illustrated in BRC Rubber & Plastics Inc. v. Continental Carbon Company, a mistaken belief in a contract can have a potentially devastating impact on all parties involved.

BRC Rubber & Plastics Inc. entered into a contract with Continental Carbon Company for Continental to supply BRC with carbon black. Continental was unable to complete orders for BRC in April 2011 based on high demand for carbon black and refused to fill additional orders by BRC. BRC subsequently filed suit, alleging breach of contract. Continental was under the belief that as long as they shipped approximately 1.8 million pounds to BRC annually, as the contract provided, they did not have to accept and fill each and every order from BRC. BRC, on the other hand, believed that Continental had to fill every order. BRC’s belief was based on its view that the parties’ agreement was a requirements contract, where a purchaser agrees to buy all of its needs of a specified material exclusively from a particular supplier, and the supplier agrees, in turn, to fill all of the purchaser’s needs during the period of the contract. Because the parties’ agreement is governed by Indiana law, an unambiguous contract is interpreted by giving the terms their ordinary meanings while reading the contract as a whole, with the ultimate goal of determining the parties’ intent.

The District Court agreed with BRC that the companies had a requirements contract, reasoning that Continental’s refusal to confirm and ship some orders was a breach and repudiation of the agreement. BRC was awarded nearly $1 million in damages. However, the 7th Circuit Court of Appeals vacated the judgment, holding the lower court erred in ruling in favor of BRC after finding the agreement between the companies was a requirements contract.

Although the parties’ agreement did provide that BRC would purchase a specific amount of carbon black from Continental each year, according to the 7th Circuit Court of Appeals, the parties’ agreement did not qualify as a requirements contract. To constitute a requirements contract, BRC would not only have had to be obligated to buy some amount of carbon black from Continental but also be prohibited from buying carbon black from any other seller. Judge Williams, in vacating the judgment, stated, “In our view, neither condition is met, so we hold that the parties’ agreement was not a requirements contract.” This case has been remanded back to the District Court, who will need to make a decision that isn’t premised on the agreement being a requirements contract.

Based in the foundations of American law, we are free to contract with one another; however, as evidenced by BRC Rubber & Plastics Inc. v. Continental Carbon Company, the 7th Circuit reminds us that it is imperative that we fully understand any contract before agreeing to it and that we must contract within the law.

Too Close to the Sun


Zach Melloy
Juris Doctor Candidate, 2016
Valparaiso University Law

In the airline industry, it’s not uncommon for an airline that sells international tickets to arrange for another airline to handle service over part of the route. But if that bridge airline experiences a substantial delay, who is responsible for the resulting damages to the passengers?

On February 4, 2016, the Seventh Circuit Court of Appeals consolidated two appeals dealing with this exact situation in Baumeister v. Deutsche Lufthansa, AG. Both cases dealt with the liability stemming from bridge carriers, and in both cases the plaintiffs’ appeals were denied.

In the first case, German plaintiff Baumeister had purchased a ticket from Lufthansa Airlines to fly from Stuttgart, Germany to San Francisco, California. He also had a connecting flight to Munich, Germany, operated by a now-defunct regional German airline called Augsburg Airways. The Ausburg flight was cancelled, however, and Lufthansa was forced to substitute transportation for the passengers.

Baumeister finally made it to San Francisco, but 17 hours later than expected. He then sued in the United States District Court for the Northern District of Illinois, claiming that under a certain European Union regulation, Lufthansa was contractually obligated for the damages arising from the flight’s delay.

Judge Richard Posner viewed the regulation (comically citing to Wikipedia), and determined that even if Baumeister could sue to enforce a foreign regulation in the United States, he had sued the wrong company. The European Regulation placed liability on the operating carrier whose flight was delayed or cancelled, which in this case was Augsburg, not Lufthansa. As a result, Baumeister had no claim against Lufthansa, and the Seventh Circuit affirmed the lower court’s grant of summary judgment.

The second case involved an American couple (the Varsamises) who purchased roundtrip tickets from Dallas, Texas to Venice, Italy, whose connecting flight in Rome was delayed. The company that sold the tickets was American Airlines, but the operating airline for the delayed flight was a Spanish airline named Iberia. The Varsamises eventually made it back to Dallas 21 hours later than expected, and sued Iberia in the United States District Court for the Northern District of Illinois.

The Varsamises claimed that Iberia had breached their contract by allowing the flight to be delayed, and as a result they were entitled to damages from that delay. However, as Judge Posner noted, the contract was between the Varsamises and American Airlines, not Iberia. As a result, the Varsamises had no reason or standing to sue Iberia for breach of contract. The Seventh Circuit then affirmed the lower court’s decision granting summary judgment.

These two cases demonstrated the difficulty of determining liability, especially when that liability is affected by foreign and international regulations. And in an ever-increasingly globalized society, cases involving airline liability will likely only get murkier, so it’s important to stay informed when your next flight may be delayed.

Justice Is Never Free… In Regard to Attorney’s Fees


By: Jeremy M. Schmidt
J.D. Candidate, 2017
Valparaiso University School of Law

Goesel v. Boley International (H.K.) Ltd., et al., is a very unfortunate case involving a minor child that suffered a life changing injury resulting from a negligently designed and produced toy robot. This case never made it to trial because the two parties settled the day before the trial was set to start.

Goesel, who was five years old at the time of the incident, was playing with a toy robot that was designed and produced by Boley International (Boley). The toy robot shattered which lead to pieces of the robot piercing Goesel’s right eye lens. This injury resulted in irreversible damage, and caused him great pain and suffering. Goesel’s parents hired the law firm of William, Bax & Saltzman to sue Boley for the damage they caused to their son.

This case came before the Seventh Circuit on appeal because of a disagreement between Goesel’s counsel and the presiding judge on how much the attorney’s fees would be. The parties settled on the amount of $687,500 to be paid to Goesel by Boley for the injury he sustained. Personal injury cases are, traditionally, taken on by attorneys on a contingency fee basis. This means that the attorney will only get paid if the plaintiff were to win the case. If the plaintiff were to lose the case, then the attorney will not get paid for the services provided. This is exactly the type of arrangement that was agreed upon in this case. The retainer agreement stipulated that if Goesel won the case then the firm would receive one-third (1/3) of the settlement, and all litigation expenses were to be paid by Goesel from the settlement. This type of retainer is common practice for firms that take on personal injury cases.

The seventh circuit decided that Goesel’s counsel was entitled to all of the attorney’s fees under the retainer agreement, which was reasonable, and that the trial judge was wrong in the ruling. The seventh circuit awarded the attorney’s fees saying that they were reasonable. The fees ended up being about 58% of the settlement leaving Goesel with only about 42% of the settlement. Opinions will be different on whether or not this amount was fair; however, the key principle to remember is that there is an expectation (and an obligation) for an attorney to work endless hours to get the best result for their clients. Therefore, they not be compensated reasonably and fairly.


Business Judgment Rule: The New Corporate Mulligan


By: Rex Hood
Juris Doctor & M.B.A. Candidate, 2015
Valparaiso University School of Law

The Seventh Circuit recently reviewed Donnawell v. Hamburger  to establish whether a corporation could use the business judgment rule in correcting a contract. The business judgment rule is a presumption that in making a business decision, the directors of a corporation acted on an informed basis, in good faith and in the honest belief that the action taken was in the best interests of the company.

The case is a share-holders’ derivative suit against current and former members of DeVry‘s board of directors. An incentive plan adopted by the company in 2005 authorized the award of stock options to key employees, including the company’s CEO. The plan limited the awards to 150,000 shares per employee per year. Yet the company granted Daniel Hamburger, who became its CEO in 2006, options on 184,100 shares in 2010, 170,200 in 2011, and 255,425 in 2012. After discovering its mistake, Devry reduced each grant under the 2005 plan to 150,000 shares while at the same time it allocated Hamburger 87,910 additional shares available under the company’s 2003 incentive plan. As a result Hamburger received options in 2012 far above the 150,000 that were the most he could receive under the 2005 plan. All these grants were proposed by the company’s Compensation Committee to the company’s independent directors. The independent directors approved the award of the additional shares to Hamburger.

The plaintiff argues that the award is improper because only the company’s Plan Committee, and not the Compensation Committee, was authorized to grant stock options under the 2003 plan. But there was no Plan Committee in 2012. Likewise no harm was done by allowing the Compensation Committee to do over, in effect, the erroneous grant of stock options under the 2005 plan, by invoking the 2003 plan. The court held that drafters of contracts are not omniscient; they are not gifted with exact knowledge of what the future holds and, furthermore, literal interpretation can produce absurdities when applied to unforeseen occurrences. The nonexistence of the Plan Committee created an unforeseen hole in the 2003 incentive plan, and the company plugged the hole by substituting the Compensation Committee a substitution that might well make the shareholders better off, and would be very unlikely to make them worse off, than if there had been a Plan Committee. It makes no sense to allow a harmless error to drive a judicial decision.

This court in their ruling has avoided a company suffering from an unforeseen effect but, has this court decision created a corporate do over or “mulligan” provision? By allowing a company to use the business judgment rule in this manner you can expect we will see companies attempt to utilize this rule in other unforeseen ways in the future.

No Wonder People Do Not Like Insurance Agents


By: Jeremy M. Schmidt
J.D. Candidate, 2017
Valparaiso University School of Law

Ohio National Life Assurance Corp. v. Douglas W. Davis, et al. came before the Seventh Circuit on appeal from a summary judgement decision at the trial court. Mavash Morady (Morady), a defendant in this case, was a contracted insurance agent with Ohio National Life Assurance Corp. (Ohio National). Douglas Davis (Davis), another defendant in this case, was working with Morady to defraud Ohio National by using an investment strategy known as Stranger-Owned Life Insurance (STOLI).

Davis and Morady devised a scheme where they chose people that were older because they believed that they would be prime candidates for their scheme. It would begin by Davis approaching an individual, and then asking them to take out a life insurance policy. These people would receive a compensation from Davis for taking out a life insurance policy.

Morady, being the life insurance agent, would meet with the chosen people and have them fill out all of the forms to apply for life insurance. Morady would then fraudulently alter the documents to make these potential clients look like they are younger, and healthier, than they actually were. Ohio National would confirm that these prospective clients were actually people, but they did not check further into any of the clients to ensure the paperwork was completely accurate.

Davis and Morady then would contact the clients about a month after the life insurance went into force. The two then would have the clients sign the policy over to a irrevocable trust that was managed by a company that Morady’s husband owned. The life insurance policy then was owned by the company, and the beneficiary was also the company. The clients never paid any of the premiums because the company paid the premiums for them. The company then would sell the life insurance polices to investors. By doing this, Morady was violating her employment contract with Ohio National because the employment contract does not allow for an agent to sell policies that will be involved in a scheme where a third party will pay the premium, and will thus benefit from the death of the insured.

Once Ohio National found about the scheme Davis and Morady had been carrying out, they voided out all the policies that were involved. Ohio National then filed a complaint against Davis, Morady, Morady’s husband, and other investors. The two sides filed briefs that had a common fact pattern, which means that there was no dispute to the events and how they happened. Ohio National filed a motion for summary judgement, which the court granted in their favor. The court gave Ohio National everything they asked for with the exception for the judgment against Steven Egbert (Egbert). The court reasoned that Egbert was an innocent bystander in the scheme when he made an investment into a life insurance policy, and could not have known the policy was created through fraudulent acts.

The Seventh Circuit decided that summary judgement in favor of Ohio National was correct and the damages awarded were reasonable because Davis and Morady were found to have committed a tort of civil conspiracy.

The Not-So Merry Gentleman: A Critically Acclaimed Flop

By: Jonathan E. Joseph, MBA, CPA
Juris Doctor Candidate, 2016
Valparaiso University School of Law

Who is to blame when a motion picture receives critical acclaim yet is a commercial failure? In Merry Gentlemen, LLC v. George and Leona Productions, Inc. & Michael Keaton, Merry Gentleman, LLC blamed leading man and director Michael Keaton and George and Leona Productions, Inc. for the fact that the  2009 film The Merry Gentleman failed to show a profit and tried to use breach of contract to make the point.

The plaintiff argued that Keaton violated his directing contract by (1) failing to prepare the first cut of the film in a timely fashion; (2) submitting a first cut that was incomplete; (3) submitting a revised cut that was not ready for the producers to watch; (4) communicating directly with officials at the Sundance Film Festival and threatening to boycott the festival, if they did not accept his director’s cut instead of the producers’ preferred cut; (5) failing to cooperate with the producers during the post-production process; and (6) failing to promote the film adequately. The plaintiff asked the Court for its full investment of $5.5 million.

Had the case gone to trial, it would have been difficult to prove the plaintiff’s claims that his actions amounted to breach of contract. Keaton did complete the film, which was subsequently accepted at the prestigious Sundance Film Festival. It received critical praise—Roger Ebert, for example, gave it 3.5 stars out of 4 and called it “original, absorbing and curiously moving.” And the film’s executive producer, Paul Duggan, admitted during his deposition that he was “unaware of any director who did more publicity than Keaton did for a movie with a comparable budget.” Instead, Keaton moved for summary judgment on the “narrow ground that the plaintiff had failed to produce sufficient evidence that his alleged breaches of the directing contract caused it damages. On appeal, the district court assumed that Keaton had breached the contract and examined the issue of damages, as well as the causation of resulting harm from the alleged breach of contract.

Under Illinois law, a “party injured by another’s breach or repudiation of a contract usually seeks recovery in the form of damages based on his ‘expectation interest,’ which involves obtaining the ‘benefit of the bargain,’ or his ‘reliance interest,’ which involves reimbursement for loss caused by reliance on a contract.” With this being said, in essence, the plaintiffs were seeking the amount of the movie’s budget in full—or in other words, a free movie. The court held in Keaton’s favor, finding that the plaintiff had failed to present a genuine issue of material fact regarding causation and resulting damages.

The plaintiff might have received part of its investment, if it had claimed that Keaton’s performance slowed production, accrued extra costs, or caused other negative financial consequences. Instead, The plaintiff asked for its entire investment as damages for breach of contract, which was impossible to justify because Keaton had not walked away from his contract. They were merely making he argument that they had relief on Keaton’s performance with the expectation interest of receiving a profitable movie.

Recovering one’s investment is a theory of reliance damages. Extra costs would also look like a theory of reliance damages in the sense that increased costs could affect any expected downstream profits (this is really complicated, because downstream profit is actually a form of consequential damage that could be thought of as reliance). As for expectation, it is possible for someone to perform his contract duties so poorly, that the expectation interest is completely frustrated. This all needs to be related to the legal standards given above about expectation and reliance damages in a more clear way, if, in fact, that was what the court’s concern.

He had made the movie and it had generated critical acclaim. If the court had sided with the plaintiff and awarded the damages it was seeking, the plaintiff would have had more than it started with; it would have been awarded a free film. More specifically, the plaintiff would have received back the money it put out in reliance on Keaton’s promise, so it would be put back in the status quo ante. Even if Keaton had breached, there was still some benefit the plaintiff received the form of a movie that was a critical success and earned some money.

On appeal, the Court found that the plaintiff “effectively wants to shift the entire cost—and risk—of producing The Merry Gentleman to Keaton for his alleged breaches, giving it a windfall and placing it in a better position than it would have been in had the contract never been signed.Reliance damages are not insurance. Courts “will not ‘knowingly put the plaintiff [receiving a reliance recovery] in a better position than he would have occupied had the contract been fully performed.’” In general, reliance damages are capped by the expectation interest and this is the  reasoning the court used.

The Court dryly noted that the plaintiff might have been able to recover some damages for specific failures by Keaton, but in this case it “shot for the moon and missed.” Keaton fulfilled his contract and made a movie.  The plaintiff was not entitled to something for nothing. Its investment – and its contract with Keaton – involved a degree of risk, and it was unreasonable for the plaintiff to expect the court to find in its favor simply because it didn’t like the final result.

Potential Strengthening of the Corporate Veil?


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By: Jeremy M. Schmidt
J.D. Candidate, 2017
Valparaiso University School of Law

During this past summer, the seventh circuit court of appeals held that the parent of a subsidiary–created solely for the purpose of purchasing assets–was not liable for breach of contract because it was not a party to the contract in Northbound Group, Inc., v. Norvax, Inc., et al. A basic rule in contract law is that you cannot be held liable for a breach of contract if you are not a party to that contract. However, this decision could potentially be used to undermine the ability of future litigants to “pierce the corporate veil.” The idea of “piercing the corporate veil” is the legal argument that a business is merely a cover for individual actions, and thus, not deserving of the protections afforded corporations.

Norvax and Northbound Group (Northbound) both operate in the insurance lead industry. Northbound and Norvax came to a deal that Norvax would buy out Northbound’s assets through Leadbot LLC. Leadbot is the Norvax subsidiary t created for the sole purpose of purchasing Northbound’s assets.

Northbound argued that Norvax was a party to the contract and that if they were not parties to the contract then Northbound should be allowed to pierce the corporate veil because of evidence showing Leadbot was only a shell corporation. The evidence supporting this theory came from a deposition with the CEO of Norvax, Clint Jones, and affidavits containing financial information.

First, Clint Jones stated in a deposition that Leadbot LLC was a brand under the Norvax umbrella. This shows that Norvax did in fact own Leadbot. Second, the affidavits provided that Norvax, not Leadbot, paid the purchase price to acquire Northbound’s assets and that Norvax paid all Leadbot the salaries. Northbound claimed that this information alone proved that Leadbot is run directly by Norvax, and that Northbound should be allowed to pierce the corporate veil to sue Norvax directly.

The seventh circuit did not agree with Northbound on the breach of contract claim nor would they allow Northbound to pierce the corporate veil. The seventh circuit acknowledges that piercing the corporate veil has no place in breach of contract cases. However, they said that they will let the state courts determine the finality of that issue. The seventh circuit concluded that Northbound has no claim against Norvax because contracting parties have the ability to dictate the terms of the contract, and if they do not agree to the terms, the party can reject the offer.

Did the seventh circuit inadvertently weaken the theory of piercing the corporate veil in deciding Northbound v. Norvax? Have they given corporations a new strategy to help them avoid risky contracts? Did they set a precedent that will negatively affect other areas of law? Only time–-and more litigation—can accurately answer these questions.

A Proper Proffer, After All


By: Jonathan Joseph,  MBA, CPA
J.D. Candidate, 2016
Valparaiso University School of Law

Larry Pust was convicted of four counts of wire fraud after a jury trial in March 2013. On appeal, Pust’s attorney argued that Pust’s conviction should be overturned, on two grounds: First, that the evidence presented by prosecutors was insufficient to establish that he acted with intend to defraud the victims, and second, that the district court’s decision to admit evidence under Federal Rule of Evidence 801(d) (2) (E) was improper.

His conviction, which was upheld by the Seventh Circuit U.S. Court of Appeals, demonstrates the court’s familiarity with fraudulent practices in Ponzi schemes and the defense attorney’s missed opportunities to oppose evidentiary proffers during trial.

In 1919, a Boston clerk named Charles Ponzi devised an investment scheme in which new investors paid interest to earlier backers. The scheme collapsed then Ponzi was unable to recruit enough new capital to pay promised returns on investments. Over the years, other Ponzi schemes have made headlines, most recently an effort by financier Bernard Madoff (2008) that is considered the largest financial fraud in United States history. In Pust’s scheme, he and co-conspirator Robert Anderson, recruited investors for several phony investment schemes, among them Rosand Industries, a low-income housing project in Chicago. Pust and Anderson promised their investors that their monies would be held in an attorney’s escrow account that was “absolutely secure” and guaranteeing returns “as high as 20%.” No real estate was ever purchased, and Anderson and Pust were indicted for wire fraud in violation of 18 U. S. C. §1343. Anderson pled guilty, but Pust went to trial.

With regard to the defense failing to prove that Pust intend to defraud investors, the court noted that in none of the 7500+ emails between Anderson and Pust was there any mention of real estate transactions, permits, or any of the logistics that would have been involved in a project of that score. Furthermore, the emails included statements that proved Pust knew that monies were not being held in an escrow account as he had promised investors and that they needed additional monies to get “caught up” on certain investors’ interest payments through the infusion of new capital. In an email to an investor, Pust stated that the cost of inner-city real estate in Chicago had increased, which is why the investor would only be receiving 10 percent interest on his investment rather than the 20 percent he had been promised. These emails, combined with witness statement and other evidence presented by the government, proved that Pust had lied to investors in his effort to defraud them.

On the second point, the court examined how the government had introduced evidence in Pust’s original trial. In pre-trial proceedings, prosecutors made a Santiago proffer to admit statements made by Anderson against Pust under FRE 801(d)(2)(E). This type of proffer is a “road map” of the government’s case – it ties co-conspirators together, presents a specific, detailed outline of the witnesses and evidence that connect back to the defendant. The government also presented evidence in the form of over 7500 emails between Anderson and Pust and the testimonies of several investors Pust recruited for the Rosand Industries project.

Pust’s attorney did not object to these admissions either during pre-trial proceedings or during the trial itself. In its decision, the Court cited specific instances where Pust’s attorney stated specifically that he had “no objection” to the proffers and determined that Pust had waived his rights to challenge the admission of these statements, citing United States v. Natale: “When a defendant intentionally relinquished or abandons a known right, the issue has been waived and cannot be reviewed on appeal, not even for plain error.” Therefore, the appellate court upheld Pust’s conviction on this point.

There are two lessons to be learned from Pust’s case, conviction, and failed appeal. First, the time to object to a proffer is when it is made. Pust’s attorney had numerous opportunities to object to any or all of the government’s proffer, but repeatedly failed to do so. The introduction of the defense attorney’s decision not to object to proffered evidence during pre-trial and trial proceedings made any subsequent appeal on the grounds of improper admission of evidence invalid. Second, the overwhelming amount of evidence contained in the email traffic between Anderson and Pust created a clear case of intent after prosecutors connected the dots between the co-conspirators and their victims. The importance of these emails cannot be overstated and illustrated the ways that our digital technology can still provide an old-fashioned “paper trail.”

Rental Gone Bad?

By: Haley Holmberg
Valparaiso University Law School
J.D. Candidate, 2017

Rental_Gone_BadThere are many reasons individuals may choose to rent instead of buy a living space. Renting often comes with a reduced financial risk, is financially more attainable, and there is often no worries of maintenance on the rental unit. There is typically a written rental agreement or contract that specifies the terms of the rental which are managed under contract law. But what happens when no written rental agreement exists? The 7th Circuit Court of Appeals set out to solve this very problem in Huren v. Tavares.

In October 2010, Nasreen Quadri bought an apartment in the West Ridge area of Chicago. Shortly after, a disturbance occurred and was investigated by police. Nasreen then decided to visit the apartment with her real estate agent and a locksmith. When Dzevad Hurem was discovered in the unit the police were called. Hurem claimed he had paid rent to Quadri’s husband, Moshim, and had obtained the keys to the apartment. Moshim denied this occurring. Hurem was unable to provide a receipt, lease, or any other paperwork referring to his residence in the unit. He refused to leave the residence. Two days later, Quadri again found Hurem in the apartment unit and called the police. Failing to have any paperwork allowing him to be there, the police arrested Hurem. Hurem then sued the arresting officers, the City of Chicago, and the Quadris for wrongful eviction and various civil rights violations. The Quadris and the City were dismissed as defendants, and the district court granted partial summary judgement in favor of all but one of the remaining officers. Hurem then dropped the case against the last officer; nonetheless, the officer later appealed.

The 7th Circuit affirmed the district court’s opinion. The Court held that Hurem’s arrest was not unlawful as they had probable cause that criminal trespass was occurring, as this was the second time police were called. At the time of the arrest the police received two conflicting stories on what was occurring. The Court found officers may rely on information from a witness they find to be credible when making an arrest, regardless if the suspect says otherwise. Further, it is possible to imagine a landlord-tenant relationship which is completely paper-free; however, the lack of existing documentation stating he was renting the apartment from the Quadri’s only helped the probable cause at the time of the arrest.

This particular case shows the importance of necessary documentation. The best bet when renting a new apartment is to ensure that a written lease has been established. Further, make sure you read the entire lease so you are aware of everything to which you are agreeing. Obtaining a copy of the lease is also important; this way if you need to look back on something you agreed to it is readily available. It will also come in handy if any court proceedings take place or if the original lease held by the landlord is lost.

Seventh Circuit Doesn’t Take Whirlpool to the Cleaners


Co-written by: Samuel Henderson and Andrew Kitchel
Valparaiso University Law School
J.D. Candidates, 2016

On October 16, the Seventh Circuit ended a nine-year battle between Whirlpool and a former supplier in a case that combined aspects of contract and patent law. The court ruled that the companies had a license agreement rather than a requirements contract, which meant the supplier couldn’t get benefit of the bargain damages. Judge Frank Easterbrook wrote for the three-judge panel.

Our story begins in windswept Decatur, Illinois, “Pride of the Prairie,” where for many years the Grigoleit Company made knobs for Whirlpool’s household appliances.

In the 1980s, Grigoleit obtained two patents on a “knob with decorative end cap and method of manufacturing it” and a “knob with decorative end cap.”

Despite their unassuming names, these inventions were not trivial. As the district court said,

“Gri[go]leit’s patented technology was . . . addressed at getting away from glued assemblies for decorative caps of appliance knobs. . . . The technology and method obviated the need for gluing the cap to the knob and permitted efficiencies in assembly.”

All was fine and dandy until 1991, Whirlpool decided it was going to switch from Grigoleit to Phillip Plastics. Whirlpool preferred Phillips because its plastic knobs coincided with Whirlpool’s patent technology.

In 1993, the two companies entered into an agreement in which Whirlpool agreed to use Grigoleit’s knobs for its estate and roper lines of automatic laundry machines. In return for using the Grigoleit’s Knobs, Whirlpool was not obligated to pay Grigoleit royalties so long as it also gave Grigoleit serious consideration for other product lines for which Grigoleit could sufficiently provide knobs.

Here is the agreement’s exact contractual language, with emphasis added to make the key connecting phrases stand out:

“Whirlpool shall not be obligated to pay Grigoleit any monies as royalties for the right, license, and privilege granted herein so long as Whirlpool continues to purchase from Grigoleit Whirlpool’s requirement for present styling of knobs for the “Estate” and “Roper” brand lines of automatic clothes washers and dryers and so long as, in the opinion of an arbitrator established in accordance with the procedures of a recognized and independent arbitration service, Whirlpool continues to give serious consideration to Grigoleit by working with and purchasing from Grigoleit various appliance components, when in regards to such components it is reasonable to believe Grigoleit can provide more than parity in technology, quality, service, delivery and price in comparison to other qualified suppliers in the Whirlpool supplier base at such time.”

The agreement and the patents expired in 2003, but the battle was just beginning.

Whirlpool had complied with that first “so long as,” using only Grigoleit knobs for its Estate and Roper lines. But as the arbitrator later found, it did not comply with the second one: it failed to consider Grigoleit even for products where its knobs could have been very competitive.

Perhaps wisely, the arbitrator ducked the issue of damages, finding Whirlpool liable only for “payment of money royalties or damages as the courts may determine.”

In 2005, Grigoleit sued in the Central District of Illinois, arguing that the companies had a contract, and therefore it was entitled to the profits it would have made if Whirlpool had used Grigoleit knobs for other product lines as promised. Whirlpool argued that the conditional language meant only that if Whirlpool didn’t comply, it would have to pay royalties on Grigoleit’s patents.

Five years later, the district court ruled in Whirlpool’s favor. Four years after that, the court defined a rough formula for royalties. The parties quickly stipulated that the amount of the royalties by that formula would be $140,000.

Grigoleit then appealed to the Seventh Circuit, arguing again that the agreement was a requirements contract and that it should get its lost profits from Whirlpool’s breach.

Judge Easterbrook was unpersuaded.

Against Grigoleit’s argument that the agreement would lack consideration from Whirlpool under the district court’s reading, Judge Easterbrook noted that Whirlpool agreeing to pay royalties without Grigoleit having to show that its patents were both valid and infringed was already a “substantial promise by Whirlpool.”

Grigoleit also argued it should have been paid lost profits due to the oral negotiations the parties undertook by deciding not to set a per piece royalty, in effect, allowing only contract damages to be in play. Judge Easterbrook disarmed this argument by citing to the integration clause of the agreement, which disclaimed any understandings between the parties that did not appear in the contract.

With this, the two-decade grudge match finally drew to a close.

You may not spend a lot of time thinking about them, but let it never be said that appliance knobs are a simple business. Here is just one of the many drawings from the second Grigoleit patent:


That has almost as many different parts as the disputed sentence in the contract!

The Grigoleit Company stopped producing knobs (or anything else) in 2009. Its only visible activity in recent years involves this lawsuit and another one against Whirlpool in Michigan that ended in 2013.

That raises an interesting terminological question. If a company that does nothing besides file patent suits is a “patent troll,” what is the proper term for a company that used to make things but now exists only to pursue patent-related litigation based on the things it used to make?

A patent half-troll? A patent zombie?

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