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NCC SUNDAY INSERTS v. WORLD COLOR PRESS

March 12, 1991

NCC SUNDAY INSERTS, INC. AND MARKETING CORPORATION OF AMERICA, PLAINTIFFS,
v.
WORLD COLOR PRESS, INC., DEFENDANT.



The opinion of the court was delivered by: Goettel, District Judge:

  OPINION

This action involves a contract dispute between the plaintiffs, publishers of freestanding color coupon advertising inserts seen in Sunday newspapers throughout the country, and the defendant, a printer hired on an exclusive basis by plaintiffs for these projects. Unfortunately, due to the extremely complex nature of the contracts at issue and the relationships among the parties, not to mention the free-standing insert industry itself, this is hardly a run-of-the-mill contract dispute. Discovery having finally been completed, we are now presented with extremely voluminous summary judgment motions by each of the parties, including a counterclaim defendant, GV Investments [GFV], Inc., whose relationship to the underlying dispute will be explained shortly.*fn1

I. FACTS

Plaintiff NCC Sunday Inserts, Inc. ("NCC") was, until November 1986, in the business of publishing free-standing coupon inserts. Plaintiff Marketing Corporation of America ("MCA") indirectly owned all of NCC's stock.*fn2 Both plaintiffs are Connecticut corporations. On December 28, 1982, plaintiffs entered into a contract with defendant World Color Press, Inc. ("WCP"), an Illinois corporation maintaining a sales office in New York.*fn3 Pursuant to the contract, which by its terms initially ran until December 31, 1985, WCP was to print all of plaintiffs' insert "requirements." Additionally, the contract mandated that WCP not print any inserts for plaintiffs' competitors. The contract also provided that successors and assigns of the parties would be bound by it. The contract was extended three times, the latest extension occurring on July 30, 1986 and running until December 31, 1994. In October 1986, however, plaintiffs notified defendant that they were interested in selling their insert operations. Plaintiffs allegedly had concluded that price-wars in the insert market rendered their continuation in the business economically unfeasible. Although WCP expressed an interest in acquiring the business and negotiations actually had ensued (the parties reached the point of making offers and counteroffers), NCC's assets ultimately were sold for $14.5 million in early November 1986 to GFV Communications, Inc., now known as GV Investments [GFV], Inc. ("GFV").*fn4 The sales agreement contained specific provisions whereby GFV assumed no liability or obligation for the requirements contract and NCC agreed to be held responsible for all liabilities and obligations GFV had not assumed. On November 20, 1986, plaintiffs wrote to defendant and terminated the contract. In December of that year, WCP printed its first and final issue of inserts for GFV since GFV had its own in-house printing capacity and had no need for an outside printer.

Thereafter, plaintiffs filed the instant action. The complaint, which has since been amended four times, now contains four counts. In the first count, plaintiffs seek a declaration that they did not violate the contract by reducing their requirements to zero through the sale of NCC to GFV and the subsequent cancellation of the contract. The second, third, and fourth counts seek damages due to alleged misrepresentations and omissions by defendant relating to: (1) a hidden recovery by WCP of its share of perforating and numbering equipment, the cost of which plaintiffs allege was to have been split between plaintiffs and defendant; (2) an overcharge by WCP for its paper costs by failing to adjust its initial estimates to reflect actual costs; (3) double billing by WCP for "makereadies";*fn5 (4) double billing by WCP for "brownlines";*fn6 (5) overcharges by WCP for collating; (6) overcharges by WCP for labor costs; and (7) a failure by WCP to adjust prices to reflect alleged agreements among the parties as to WCP's permissible profits. Not only do plaintiffs allege that the foregoing acts amounted to contract breaches, but also that they were unfair trade practices as defined by the Connecticut Unfair Trade Practices Act, Conn. Gen.Stat.Ann. § 42-110a et seq., and common law frauds.

One day after this action was filed, WCP filed its own complaint against plaintiffs and GFV in the Southern District of Illinois charging breach of contract, promissory estoppel, and tortious interference with contract. That action was stayed, and ultimately voluntarily dismissed, in order to avoid duplicative litigation in light of WCP's assertion of counterclaims in the action before us that virtually mirrored those claims asserted in Illinois. WCP's Fourth Amended Counterclaim, which contains six counts, first alleges that plaintiffs violated the contract by terminating it, notwithstanding the sale of NCC to GFV. The second count seeks damages against GFV for breach of contract because of its failure to continue the contract. WCP's third count asserts a claim of promissory estoppel against plaintiffs herein, while the next count suggests that plaintiffs and GFV tortiously interfered with WCP's contract. Finally, the fifth and sixth counts contend that plaintiffs and GFV failed to pay for services rendered by WCP prior to plaintiffs' attempt to terminate the contract.

The parties now move for partial summary judgment on many of the claims and counterclaims.

II. DISCUSSION

The standards for resolving motions for summary judgment are well settled. Federal Rule of Civil Procedure 56(c) provides that summary judgment is appropriate if "there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law." Fed.R.Civ.P. 56(c). The burden is on the moving party to demonstrate the absence of a material, factual dispute. Fed.R.Civ.P. 56(e). If that burden is met, the non-moving party cannot simply contend that its complaint sets forth a valid cause of action. Id. It "must set forth specific facts showing that there is a genuine need for trial," id., and there must be more than merely "some metaphysical doubt as to [those] material facts." Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 586, 106 S.Ct. 1348, 1356, 89 L.Ed.2d 538 (1986). In determining whether this burden is met, however, the court must draw all reasonable inferences and resolve all ambiguities in favor of the non-moving party. United States v. Diebold, Inc., 369 U.S. 654, 655, 82 S.Ct. 993, 994, 8 L.Ed.2d 176 (1962) (per curiam). Against this backdrop of summary judgment jurisprudence, we turn to the instant motions.

A. Plaintiffs' Motion for Partial Summary Judgment

Plaintiffs move for judgment dismissing counts one, three, and four of WCP's Fourth Amended Counterclaim, which allege a breach of contract, promissory estoppel, and tortious interference with contract, respectively. With respect to the breach of contract counterclaim, plaintiffs' argument is straightforward. They contend that since the contract was a requirements contract requiring WCP to print only their insert requirements, see 12/28/82 Contract ¶ I, they had the right to terminate the contract prior to the date specified in the contract if in "good faith" they had no further requirements. Consequently, plaintiffs argue that they acted in good faith by terminating the contract because they faced impending financial disaster if they had remained in the insert business. In turn, defendant first argues that Illinois law, which the parties agree governs this issue pursuant to the express terms of the contract, see 12/28/82 Contract ¶ XVIII [sic, XXVIII], does not follow the good faith standard employed by the majority of jurisdictions, but rather, implies a duty upon a requirements buyer to remain in business until the expiration of the contract. In addition, WCP argues that the parties' course of dealing, as well as the contract itself, created an obligation for plaintiffs to remain in business. Finally, defendant argues that even if the good faith doctrine applies, such that plaintiffs could have eliminated their requirements absent bad faith motivations, this burden has not been satisfied because plaintiff was not facing dire financial straits, but instead, was simply attempting to avoid the terms of what it perceived as an unfavorable contract.

The general rule with respect to requirements contracts is that "`the seller assumes the risk of all good faith variations in the buyer's requirements even to the extent of a determination to liquidate or discontinue the business.'" Empire Gas Corp. v. American Bakeries Co., 840 F.2d 1333, 1337-38 (7th Cir. 1988) (quoting HML Corp. v. General Foods Corp., 365 F.2d 77, 81 (3d Cir. 1966)).*fn7 In this respect, a buyer's ability to reduce its requirements differs significantly from its ability to increase its requirements where "unreasonably disproportionate" demands to those estimated or previously required are not permissible. Id. at 1337. In resolving the question of good faith, there is no established standard, see id. at 1339 ("the term [has no] settled meaning in law generally; it is a chameleon"), but it is clear that one need not adduce evidence sufficient to implicate a contract's force majeure clause or to establish the affirmative defenses of impossibility, impracticability, or frustration of purpose. Id. at 1340. The proper inquiry requires an analysis of the buyer's subjective motives to determine if it had a legitimate business reason for eliminating its requirements, as opposed to a desire to avoid its contract. Id. at 1339 (decision must be "independent of the terms of the contract or any other aspect of [the buyer's] relationship with [the seller]"); see also Agfa-Gevaert, A.G. v. A.B. Dick Co., 879 F.2d 1518, 1522-23 (7th Cir. 1989) ("a requirements contract is not just an option to buy").

We now look to what plaintiffs contend were their good faith reasons for selling NCC's assets to GFV. Upon NCC's entry into the insert market in 1983, there were three other publishers in the business, including GFV. These four competitors remained in the business until 1986. In 1986, however, plaintiffs allege that significant price-wars began in the industry and that lowering prices was the only way to remain competitive. Of course, lowering prices without lowering costs leads, at a minimum, to reduced profits and there is the potential for economic ruin if one is operating at a sufficiently low profit margin. Plaintiffs determined that they had little ability to lower their costs because they depended upon outside printers to do their work, while integrated firms, like GFV and the other two competitors in the business, did their printing in-house and, therefore, had a greater ability to control their costs.*fn8 Plaintiffs allege that had they remained in the business, they would have lost between 14 and 48 million dollars for the eighteen months following January 1, 1987. See Plaintiffs' Memorandum of Law in Support at 12-13. Therefore, plaintiffs decided that selling NCC was the safest means of avoiding catastrophic losses.

As previously noted, WCP's response to the foregoing is that notwithstanding the pronouncements of the Seventh Circuit on Illinois law, see Empire Gas Corp., 840 F.2d at 1338 ("[w]e conclude that the Illinois courts would allow a buyer to reduce his requirements to zero if he was acting in good faith"), Illinois actually has adopted a different standard. WCP contends that the Illinois courts impose upon a requirements buyer an obligation to remain in business throughout the term of the contract. See In re United Cigar Stores of Am., 72 F.2d 673, 675 (2d Cir.) (dicta) (citing Chalmers & Williams v. Walter Bledsoe & Co., 218 Ill. App. 363 (1920), as authority for impliedly obligating a requirements buyer to have requirements throughout the term of the contract), cert. denied, 293 U.S. 617, 55 S.Ct. 210, 79 L.Ed. 706 (1934)). At this stage, it is unclear, but extremely doubtful, that Illinois law at present is any different than the general rule throughout the country such that a requirements buyer would have to remain in business until the contract expires, absent evidence of impossibility, impracticability, or frustration of purpose. The cases WCP cites in support of this proposition, see ...


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