Unilever United States Inc. v. Johnson Controls Inc
Filing
38
MEMORANDUM Opinion and Order Signed by the Honorable Joan B. Gottschall on 8/2/2017. Mailed notice (jk, )
UNITED STATES DISTRICT COURT
FOR THE NORTHERN DISTRICT OF ILLINOIS
EASTERN DIVISION
UNILEVER UNITED STATES, INC.,
Plaintiff,
v.
JOHNSON CONTROLS, INC.
Defendant.
)
)
)
)
)
)
)
)
)
Case No. 16-CV-01849
Judge Joan B. Gottschall
MEMORANDUM OPINION AND ORDER
The plaintiff, Unilever United States, Inc. (“Unilever”), sued Johnson Controls, Inc.
(“JCI”) for breach of a contract to provide, among other things, security service at a commercial
facility located in Melrose Park, Illinois (“the Melrose Park facility” or “the facility”). Unilever
claims that thieves made off with electronic controls and other expensive items between August
2013 and May 29, 2015. In its original complaint, as construed by the court in its memorandum
opinion and order dated February 15, 2017 (“the February 2017 opinion”), Unilever sought “the
alleged decrease in the facility’s market value” in damages. Unilever U.S., Inc. v. Johnson
Controls, Inc., No. 16-CV-01849, 2017 WL 622209, at *4 (N.D. Ill. Feb. 15, 2017) (“Unilever
I”).
In the February 2017 opinion, the court ruled that the parties’ contract precluded recovery
of consequential or special damages. Id. at *3. Moreover, the court ruled that under New York
law, which governs this dispute, an alleged diminution in the Melrose Park facility’s market
value, allegedly caused by breaches of defendant’s contractual obligation to provide adequate
security services, is not recoverable, since a diminution in the facility’s value is not a direct and
probable consequence of JCI’s security lapses. See id. at *4–6. Indeed, nothing in the security
portion of the parties’ MSA (Master Services Agreement) or SOW (Statement of Work)
(hereinafter together “contract”) talks about preserving market value or contemplates recovery of
damages for the facility’s diminution in market value as a result of theft. Id. at *5. New York
law makes clear that the parties to a contract must have contemplated the recovery of damages
for an asset’s diminution in value when the contract was formed before such damages can be
recovered. See id.
Now, in an Amended Complaint (“FAC”, ECF No. 27), plaintiff Unilever has included
two paragraphs describing its damages. JCI again moves to dismiss the FAC for failure to state a
claim upon which relief can be granted. 1
Paragraph 49, which appears to seek recovery of the $400,000 diminution of the value of
the facility Unilever realized in its sale, appears to be precisely the damages that the court held in
the February 2017 opinion were consequential or special and not recoverable. Unilever’s
inclusion of this paragraph is baffling. If it thinks it needs to replead an allegation that the court
previously dismissed to preserve the issue, it is simply wrong. “[D]ismissed claims need not be
included in an amended complaint, because the final judgment brings up all previous rulings in
the case.” Smith v. Nat’l Health Care Servs. of Peoria, 934 F.2d 95, 98 (7th Cir. 1991) (citing
Bastian v. Petren Res. Corp., 892 F.2d 680, 682–83 (7th Cir. 1990)); accord Gavin v. AT & T
Corp., No. 01 C 2721, 2003 WL 22849128, at *4 (N.D. Ill. Dec. 1, 2003) (quotation and citations
omitted) (“the Seventh Circuit has made clear, time and again, that a litigant need not replead
dismissed claims to preserve them for appeal”). The damages described in paragraph 49 were
the subject of the court’s previous order and pursuant to the parties’ contract and New York law,
they are not recoverable. Unilever I, 2017 WL 622209, at *4–6. Paragraph 49 will therefore be
dismissed.
1
The court recited the standard governing motions to dismiss under Federal Rule of Civil Procedure 12(b)(6) in the
February 2017 opinion. See Unilever I, 2017 WL 622209, at *3.
2
The damages described in paragraph 48, however, were not the subject of the court’s
prior order. In paragraph 48, Unilever seeks to recover damages for the equipment, machines,
tools, electronics and other items damaged as a result of the security breaches allegedly caused
by JCI’s failure to perform its obligations under the parties’ contract.
Citing Justice Cardozo’s opinion in Kerr Steamship Co. v. Radio Corp. of America, 157
N.E. 140 (N.Y. 1927), JCI argues that repair or replacement costs for equipment damaged by
theft are also consequential damages and not recoverable under the contract. In Kerr, the
plaintiff delivered to the defendant a telegram consisting of twenty-nine words in cipher (code)
to be transmitted to Manila in the Philippine Islands. Id. at 140. Its purpose was to provide
instructions for the loading of a ship. Id. For various complex reasons, the telegram was not
delivered, and because the telegram was not delivered, the cargo was not loaded and the freight
was lost. Id. at 141. Importantly, for the court however, the telegram delivered to defendant was
in cipher, and its subject was therefore not apparent. Id. The court held that while it might be
inferable that the telegram related to business of some sort, beyond that it meant nothing, and
defendant could not have foreseen the effect of its non-delivery. For this reason, following the
rule of Hadley v. Baxendale, (1854) 156 Eng. Rep. 145; 9 Ex. 341, defendant’s liability was
limited either to nominal damages or the cost of carriage if tolls had been prepaid. A telegram in
cipher failed to give defendant adequate notice of the risk of failing to perform its contractual
obligation. See Kerr, 157 N.E. at 141.
Kerr is grounded on the difference between general and special damages. The difference,
Justice Cardozo emphasized, “is not absolute, but relative.” Id. In other words, the specific
contract at issue determines the classification of the damages that are recoverable. “[D]amage
which is general in relation to a contract of one kind may be classified as special in relation to
3
another.” Id. In American List Corp. v. U.S. News and World Report, Inc., 549 N.E.2d 1161,
1164 (N.Y. 1989), the New York Court of Appeals essentially agreed, noting that “[t]he
distinction between general and special contract damages is well defined but its application to
specific contracts and controversies is usually more elusive.” The court defined general and
special damages in terms of their relative probabilities of flowing from the breach, general
damages being “those which are the natural and probable consequence of the breach” and special
damages being extraordinary damages which do not flow “so directly” from the breach. Id.
(citation omitted); accord Biotronik, A.G. v. Conor Medsystems Ireland, Ltd., 11 N.E.3d 676,
679–81 (N.Y. 2014).
This contract-specific approach to assessing the probability that particular damages will
result from a breach can be seen in action in Biotronik, supra. Plaintiff, a medical device
distributor, and defendant, the developer and manufacturer of CoStar, a coronary stent, entered
into an agreement designating plaintiff as the exclusive distributor of CoStar throughout much of
the world. Biotronik, 11 N.E.3d at 677. The price plaintiff paid defendant reflected the actual
sales, and sales price, of the CoStar stents, involving a percentage of direct sales and a different
percentage of indirect sales. Id. at 678. The contract operated only if plaintiff sold stents and the
payment received by defendant bore a direct relationship to the market price plaintiff could
obtain. Id. The agreement guaranteed to defendant a set number of sales per month, but
defendant could cap the number of orders it filled even if plaintiff was ready and able to sell
more. Id. Based on FDA trials, defendant terminated an FDA application for CoStar and
notified plaintiff that it was recalling CoStar and removing it from the worldwide market. Id. at
679.
4
Plaintiff sued defendant for breach of contract, seeking lost profits, which are frequently
characterized as consequential damages. Id. The agreement, governed by New York law,
explicitly excluded recovery for consequential damages. Id. The New York Supreme Court held
that lost profits in this case were consequential damages, and the Appellate Division affirmed.
Id.
The Court of Appeals, however, reversed, holding that “damages must be evaluated
within the context of the agreement” and that under this exclusive distribution agreement, lost
profits should be characterized as general, not consequential, damages. Id. The issue, the court
said, is whether the nature of the agreement is such that the damages in question—here, lost
profits—flow directly from the breach or might reasonably be assumed to have been
contemplated by the parties at the time the contract was made. Id. at 680. In these cases, lost
profits should be viewed as general and not consequential damages. Id. Where a contract, such
as that in the case at bar, is closer to a joint venture than to an ordinary buyer-seller contract, and
where the agreement reflects the building of a business and the creation of a demand for the
plaintiff’s product, sale profits are not the result of some sort of collateral engagement but are a
measure of the value of the contract to the plaintiff. In such a case, lost profits are general, not
consequential, damages.
While “foreseeability” is a term used interchangeably (and confusingly) with respect to
both general and consequential damages, including by Justice Cardozo in Kerr, the degree of
foreseeability is in modern cases often used to distinguish between the two types of damages.
Thus, where damages are “utterly foreseeable, indeed certain” they are considered direct
(general) but where they are “reasonably foreseeable,” they are consequential. In re Rust-Oleum
Restore Mktg., Sales Prices & Prods. Liab. Litig., 155 F. Supp. 3d 772, 792 (N.D. Ill. 2016)
5
(quoting Rexnord Corp. v. DeWolff Boberg & Assocs., Inc., 286 F.3d 1001, 1004 (7th Cir. 2002));
see also Rexnord Corp., 286 F.3d at 1004 (collecting cases) (“Contract law distinguishes between
direct and consequential damages, the difference lying in the degree to which the damages are a
foreseeable (that is, a highly probable) consequence of a breach.”)
The argument JCI advances, then, is in essence that the loss of equipment from a theft is
not a sufficiently foreseeable consequence of breaching its contract with Unilever to provide
security services to make the equipment’s replacement value recoverable as general damages.
See Gary Knapp, Annotation, 83 A.L.R.4th 1150 §§ 6–7(b) (1991 & Supp.) Neither Unilever nor
JCI cites New York case law addressing how to draw the line between general special damages
in contracts for security services: If a contract for a security guard is breached, how foreseeable
is the loss of movable stolen equipment (as contrasted from the diminution in the market value of
the real property from which it was taken)?
Although the cases are far from clear on what kind of damages they are referring to, there
is authority that strongly suggests that the breach of a contract to provide security-guard services
allows recovery of losses caused by theft, not recovery merely of the value of the security
services performed properly. In Generale Bank v. Bell Sec., Inc., a bank obtained a temporary
restraining order preventing a third party, a trading company, from removing property from a
warehouse. 741 N.Y.S.2d 198, 199 (N.Y. App. Div. 2002). The same day it obtained the order,
the bank hired a security company to post guards to watch the warehouse and make sure none of
the inventory was taken. See id. (describing fax sent by bank’s counsel to security company
directing guards to show anyone trying to access the warehouse a copy of the order).
Nevertheless, over three quarters of the inventory was gone when the bank later obtained access
to the warehouse. Id. at 199–200. The bank sued the security company for breach of contract,
6
and the trial court dismissed the complaint. Id. at 200. The New York Court of Appeals
reversed, stating:
It is abundantly clear that defendant provided security services to
plaintiff, that property was removed from the premises secured by
defendant and that plaintiff was damaged by the loss of its
collateral. Under these facts, having actually undertaken
performance, defendant would be prima facie liable to plaintiff for
breach of contract even in the absence of a writing. The
intervention of third parties is immaterial because such a breach of
security is the immediate consequence of the lapse in security with
which defendant is charged.
Id. (emphasis added) (citing McKinnon v. Bell Sec., 700 N.Y.S.2d 469 (N.Y. App. Div. 2000)).
Sandvik, Inc. v. Statewide Security Systems, Division of Statewide Guard Services, Inc.,
469 A.2d 955 (N.J. Super. Ct. App. Div. 1983) runs in much the same vein. The plaintiff, a
manufacturer of tungsten carbide inserts, contracted with defendant, a licensed private detective
agency, to provide security guard services. Id. at 956. On the occasion in question, defendant’s
employee, who was guarding the plant, was bribed to leave his post. Id. During his absence,
4205 kilograms of tungsten carbide powder were stolen, worth $118,000. Id. The trial court
awarded damages of $1,994.33, being one-twelfth of the parties’ annual contract price, reasoning
that the defendant had not been fully informed of the value of the tungsten carbide powder and
that the parties, therefore, could not have reasonably intended that defendant’s liability for breach
of contract should extend to the value of the stolen inventory. Id. The appellate court reversed.
While it did not speak in terms of general versus consequential damages, it applied the principle
that “[t]he only purpose of the contract was to avoid the precise loss suffered,” and that the
evidence indicated that the contract price was to some extent based on the contract’s purpose to
avoid inventory loss.” Id. at 958. While defendant may not have known of the value of the
tungsten carbide powder, it knew that the plant contained moveable property and that avoiding
internal theft and inventory loss was what the plaintiff was paying for. Id. Under these
7
circumstances, the appellate court ruled, “we find unavoidable the conclusion that the inventory
loss of $118,000 was a reasonably foreseeable, natural and proximate consequence of
defendant’s breach.” 2 Id.
In the case at bar, one of the purposes for which the parties contracted was for the
provision of security services at the Melrose Park facility. The contract specifically requires JCI
to provide security services including “suitably trained and qualified security guards for the
security coverage of the building . . . [to] ensure the protection of personnel, customers, visitors,
property, buildings and land . . . .” (MSA 27, ECF No. 27 Ex. 1.) Thus, securing the premises
and the property contained therein appears to have been an explicit objective of the contract, as it
was in Generale Bank and Sandvik.
In light of this authority and the contract’s language, the court cannot accept JCI’s
argument that it never agreed to assume the risk of loss for break-ins and thefts caused by
inadequate security at the pleading stage. Obviously, given the contract’s exclusion of
consequential damages, the question of foreseeability when the parties contracted may be a
factual issue appropriate for summary judgment or jury determination. But given the wording of
the contract regarding the parties’ explicit agreement for security services, Unilever states a
plausible claim that repair and replacement damages are recoverable as general damages. See
Atkins v. City of Chi., 631 F.3d 823, 832 (7th Cir. 2011) (emphasizing that complaint need not
establish validity of plaintiff’s claim to a degree implied by the phrase “preponderance of the
evidence”). In this case, as in many others, “the precise demarcation between direct and
2
Despite JCI’s quotation of “consequential damages” language from the Sandvik court’s description of the Sandvik
plaintiff’s description of its argument, the Sandvik court does not distinguish between general and consequential
damages, and the court’s own language is very close to that generally used in describing general damages.
Regardless, Sandvik was not decided under New York law, and, while interesting to consider, is not precedential
authority in this case. General Bank, discussed and quoted in the text infra, applied New York law, and the court
there used language very close to that New York courts use when they speak of general damages.
8
consequential damages is a question of fact.” Am. Elec. Power Co., Inc. v. Westinghouse Elec.
Corp., 418 F. Supp. 435, 459 (S.D.N.Y. 1976) (noting that “the commercial context in which a
contract is made is of substantial importance in determining whether particular items of damages
will fall into one category or the other” (citing Applied Data Processing, Inc. v. Burroughs Corp.,
394 F. Supp. 504, 509 (D. Conn. 1975)); cf. Generale Bank, 741 N.Y.S.2d at 200 (holding that
the extent of security services to be provided and whether the thefts from warehouse resulted
from the breach were fact questions). The court cannot determine on the present, undeveloped
record what the parties intended or what risks they explicitly discussed. At the pleading stage,
reasonable inferences from the facts alleged must be drawn in Unilever’s favor. See, e.g., KatzCrank v. Haskett, 843 F.3d 641, 646 (7th Cir. 2016) (citing Iqbal, 556 U.S. at 662, 663). Taken
together, the contract’s language and the FAC’s allegations demonstrate that these and other
factual issues may well bear on the question of whether the damages Unilever seeks in paragraph
48 are recoverable, and that is enough to survive a motion to dismiss. See Brooks v. Ross, 578
F.3d 574, 581 (7th Cir. 2009) (federal pleading standards “‘call[] for enough facts to raise a
reasonable expectation that discovery will reveal evidence’ supporting the plaintiff’s allegations”
(quoting Bell Atl. Corp. v. Twombly, 550 U.S. 544, 556 (2007))).
Finally, JCI suggests that Unilever’s allegation in paragraph 25 of the FAC of what
repairing or replacing the damaged equipment would have cost dooms its request for damages
because it does not plead that it actually repaired or replaced anything. The court has been
unable to find any indication in New York law that a party must effectuate repairs or replacement
to be entitled to damages, and JCI directs the court to no authority supporting its position.
Rather, it appears that the measure of damages is what it would cost to repair or replace the
damaged goods, not whether or not plaintiff actually invested in repair or replacement. See, e.g.,
9
Olympic Realty, LLC v. Open Road of Staten Island, LLC, 36 N.Y.S.3d 484, 486–87 (N.Y. App.
Div. 2016) (holding that defendants’ damage to plaintiff’s property, based on what restoring the
property to its proper state of repair would have cost, was recoverable as damages even if
subsequent tenant demolishes the allegedly damaged fixtures).
***
For the reasons stated, Unilever’s FAC pleads a plausible claim for the general damages it
seeks in paragraph 48. Accordingly, JCI’s Motion to Dismiss First Amended Complaint (ECF
No. 30) is granted in part and denied in part. Paragraph 49 of the FAC is dismissed; paragraph
48 is not. A status conference is set for August 9, 2017 at 9:30 a.m.
Date: August 2, 2017
/s/
Joan B. Gottschall
United States District Judge
10
Disclaimer: Justia Dockets & Filings provides public litigation records from the federal appellate and district courts. These filings and docket sheets should not be considered findings of fact or liability, nor do they necessarily reflect the view of Justia.
Why Is My Information Online?