Foodmark, Inc. v. Alasko Foods, Inc.
Filing
25
Judge Douglas P. Woodlock: MEMORANDUM AND ORDER entered denying 5 Motion for Summary Judgment; granting 12 Motion for Summary Judgment. The parties shall file on or before April 8, 2013 a proposed joint schedule for the remaining issue of damages. (Woodlock, Douglas)
UNITED STATES DISTRICT COURT
DISTRICT OF MASSACHUSETTS
FOODMARK, INC.,
)
)
)
)
)
)
)
)
)
)
Plaintiff,
v.
ALASKO FROZEN FOODS, INC.,
Defendant.
CIVIL ACTION NO.
12-10837-DPW
MEMORANDUM AND ORDER
March 26, 2013
Foodmark brings this action for breach of contract under
Quebec law alleging that Alasko Frozen Foods has refused to pay
fees that it owes for terminating the parties’ Agreement.
On October 17, 2011, Alasko informed Foodmark that it would
terminate the Agreement and provided 90 days written notice.
The
Agreement provides multiple ways to end the relationship between
the parties. The parties advance conflicting interpretations of
the particular language implicated.
Foodmark filed this action in state court and Alasko removed
the action to this court on May 10, 2012.
cross-motions for summary judgment.
not yet engaged in discovery.
The parties have filed
The parties, however, have
Consequently, Foodmark’s motion
for summary judgment only seeks judgment on the issue of
liability.
I will grant the Foodmark motion for summary judgment and
deny Alasko’s cross-motion.
I.
A.
BACKGROUND
Facts
Foodmark, Inc. is a U.S. company, based in Massachusetts,
specializing in marketing and selling food products to large
retailers such as supermarkets, major convenience store chains
and club stores (for example, Sam’s Club, Costco, and BJ’s).
Alasko Frozen Foods, Inc. is a Canadian importer, marketer, and
trader of frozen fruits and vegetables, based in Quebec.
In
2006, Foodmark approached Alasko proposing a plan to bring
Alasko’s products to the American market.
The parties entered into a Sales Management Agreement on
June 20, 2007.
The Agreement provides that Foodmark will provide
private label sales management for Alasko in the United States in
exchange for a management fee and broker commission, both based
on percentages of total net sales of Alasko products in the
United States.
In late July 2009, Alasko entered into its first agreement
for distribution in the United States through Wal-Mart/Sam’s
Club.
Alasko began shipping its products to Sam’s Club in
October 2010 and first paid Foodmark approximately six months
after it began shipping products under this new agreement.
The Agreement between Foodmark and Alasko provides for a
“Non-Renewal Termination Fee” in the event Alasko decides not to
renew the contract and an alternative sale-of-business fee in the
2
event Alasko decides to terminate the contract “upon the sale of
[Alasko].”
Effective July 10, 2010, Alasko sold a controlling share
of its business to Catteron Partners, a private equity firm that
is not a party to this action.
For the next 15 months, Alasko
continued to pay management and broker fees to Foodmark under the
Agreement.
The parties met in November 2010 and again in March
2011 to discuss the operation of the Agreement under Alasko’s new
management.
Then, on October 17, 2011, Alasko notified Foodmark
by letter that it would terminate the Agreement.
The letter
stated,
Pursuant to and as required by s. 11 of the
Representation Agreement dated July 20th, 2007 between
us (“Agreement”), this letter constitutes Alasko’s
notice to you of our termination of the Agreement
effective 90 days from the date of this letter.
Since termination of the Agreement, Foodmark has demanded that
Alasko pay the termination fees, and Alasko has refused to pay
arguing that Foodmark is entitled to no fee for termination.
B.
The Agreement
The amount of any termination fee depends on the total net
sales of Alasko products in the United States leading up to the
effective date of termination as well as which “term” is in
effect when Alasko elects to end the relationship.
The three
“terms” (periods of one or more years), defined in the Agreement
correspond to termination fees based on different percentages of
3
“net invoice sales.”
(Agreement § 7-8.)
The first two terms last one year each.
The third term lasts three years.
(Id.)
At
the end of each term, the Agreement automatically renews unless
one party terminates the Agreement or notifies the other party of
its intent not to renew.
(Id. §§ 8(a), 9(a).)
After the third
term, the Agreement automatically renews for successive threeyear terms “unless either party chooses to not renew the
Agreement according to the terms of Section 10.b.”
(Id. §
10(a).)
Section 10 of the Agreement governs notification of intent
not to renew and termination during the third term.
Sections 8
and 9 govern non-renewal and termination for the initial one-year
term and the second one-year term respectively.
Their provisions
regarding notification of intent not to renew and termination
parallel those of Section 10.
Specifically, the relevant parts
of Section 10 read,
b. Notification of Non-Renewal: Six(6) months
prior to the end of this term, either party has the
right to notify the other party, in writing, of its
intent to not renew this agreement.
*
*
*
*
d. Non-Renewal of Agreement by [Alasko]: If
[Alasko] elects not to renew the Agreement for any 3year term, the Agreement will terminate and [Alasko]
will pay [Foodmark] a Non-Renewal Termination Fee as
outlined in Section 10.f.
e. Sale of [Alasko]: Upon the sale of [Alasko],
[Alasko] has the right to terminate this Agreement and
4
[Foodmark] shall receive the Sale of Business Fee from
[Alasko] as noted in Section 10.f.
f. Sale of [Alasko] Fee and Non-Renewal
Termination Fee: If the Agreement terminates under
Sections 10.d. or 10.e., [Alasko] will be obligated to
pay to [Foodmark] fees based on the net invoice sales
for the last 13-week period of the term, annualized,
for accounts managed by [Foodmark]; the fee schedule is
as follows:
Sales
#$10 million
>$10 million - #$25 million
>$25 million
Percentage
10%
8%
6%
During the process of contract negotiation, Alasko inserted
another section regarding termination, which reads,
11. Termination: Nothwithstanding [sic] Sections 8
b., 9 b. and 10 b., either party shall have the right
to terminate the Agreement, upon not less than ninety
(90) days prior written notice of termination to the
other party.
Finally, but critically, the Agreement provides that it
“will be governed by the laws of the Province of Quebec.”
15).
(Id. §
Massachusetts choice of law rules permit parties to choose
the law governing their Agreement.
See, e.g., Morris v. Watsco,
Inc., 433 N.E.2d 886, 888 (Mass. 1982) (“Massachusetts law has
recognized, within reason, the right of the parties to a
transaction to select the law governing their relationship.”)
II.
STANDARD OF REVIEW
Although the parties have agreed that Quebec substantive
contract law should govern the Agreement, federal law governs the
procedural aspects of this case.
Servicios Commerciales Andinos,
5
S.A. v. General Elec. Del Caribe, Inc., 145 F.3d 463, 479-80 (1st
Cir. 1998).
Under federal law, a movant is entitled to summary
judgment when “there is no genuine dispute as to any material
fact and the movant is entitled to judgment as a matter of law.”
Fed. R. Civ. P. 56(a).
“A dispute is genuine if the evidence
about the fact is such that a reasonable jury could resolve the
point in the favor of the non-moving party,” and “[a] fact is
material if it has the potential of determining the outcome of
the litigation.”
Farmers Ins. Exch. v. RNK, Inc., 632 F.3d 777,
782 (1st Cir. 2011) (citation omitted).
I “view the facts in the light most favorable to the party
opposing summary judgment.”
10 (1st Cir. 2011).
Rivera–Colón v. Mills, 635 F.3d 9,
However, “conclusory allegations, improbable
inferences, and unsupported speculation” are insufficient to
create a genuine issue of material fact to survive summary
judgment.
Sullivan v. City of Springfield, 561 F.3d 7, 14 (1st
Cir. 2009) (quotation and citation omitted).
In dealing with
cross-motions for summary judgment, I “must view each motion,
separately, through this prism.”
Estate of Hevia v. Portrio
Corp., 602 F.3d 34, 40 (1st Cir. 2010).
III. DISCUSSION
The parties dispute both the construction of the contract
and the enforceability of the fee.
The contract construction
dispute is grounded in the applicable substantive law – the law
6
of Quebec - but the parties provide no basis for determining the
enforceability of the non-renewal fee under Quebec law, electing
instead to cite Massachusetts law, which does not apply by terms
to the substantive issue of the enforceability of the fee.
I
first address the issues of contract construction, and then turn
to the enforceability of the fee.
A.
Contract Termination
As in the United States, Quebec law dictates that the court
must apply the plain terms of the contract so long as they are
clear.
Cartier v. The Queen, 2007 CarswellNat 5862, 2007 TCC 37,
¶ 29 (“Where the contract is clear, the judge’s role is to apply,
not interpret.”); Turenne v. Banque National du Canada (1983),
1983 CarswellQue 259, J.E. 83-732, ¶ 23.
The rules of
interpretation set out in the Quebec civil code are only
necessary where there is clear doubt as to the meaning of the
contract.
Cartier, 2007 TCC 37, ¶ 29
(“[T]he rules of
contractual interpretation will only be applied where some
ambiguity exists.”); Turenne, J.E. 83-732, ¶ 23.
The parties generally agree that the Agreement provides two
potential ways to end the relationship: (1) termination upon
notice and (2) termination “upon the sale of [Alasko].”
The
parties also agree that termination “upon the sale” triggers the
fee set out in Section 10.f of the Agreement.
The contract
construction dispute presents two questions: whether termination
7
pursuant to Section 11 of the Agreement constitutes a “nonrenewal” for purposes of Section 10.d and whether Alasko’s
October 17, 2011 letter terminating the Agreement constituted
termination “upon the sale.”
1. Termination Upon Notice
Proper interpretation of termination upon notice in this
case stands at the intersection of Sections 10 and 11.
Alasko
argues that Section 11 is a separate and distinct means of
terminating the Agreement that does not implicate non-renewal in
Section 10.d or the Non-Renewal Termination Fee in Section 10.f.
This position cannot withstand analysis under the plain, literal
meaning of the contract language.
Section 10.d states that Alasko “will pay . . . a NonRenewal Termination Fee as outlined in Section 10.f” if it
“elects not to renew the Agreement for any 3-year term.”
Termination pursuant to Section 11, by its plain meaning, amounts
to an “election not to renew the Agreement for any 3-year term.”
By electing to end the Agreement through termination, Alasko
necessarily elects to end the contract, and mutatis mutandis, not
to renew it.
Alasko argues that “termination” and “non-renewal” are
distinct concepts within the Agreement and that if the parties
had intended that termination under Section 11 would constitute a
election not to renew, the parties surely would have linked
8
Section 11 expressly with Sections 10.d and 10.f through explicit
cross-references.
I do not find this argument persuasive.
First, it would be quite difficult, indeed prohibitively so
from a conceptual perspective, to interpret “termination” and
“non-renewal” as entirely distinct - where “non-renewal” would
trigger a fee and “termination” would not
- in light of the fact
that the Agreement specifically refers to the fee in Section 10.f
as a “Non-Renewal Termination Fee.”
Second, and more fundamentally, in order to find these terms
to be entirely distinct such that termination would not trigger a
fee for “elect[ion] not to renew the Agreement,” one would have
to find that termination of the contract could not be an election
not to renew.
That defies common sense.
An election not to
renew, by its plain meaning, is a form of termination.
Indeed,
termination would prove entirely ineffective if the Agreement
renewed at the expiration of the term, notwithstanding the
termination.
Cross-references in the Agreement might have served
to make this fact clearer, but they are not necessary to
understand the plain, literal meaning of the language in the
Agreement.
Termination is distinct from non-renewal in that termination
changes the end date of the Agreement, while non-renewal simply
allows the Agreement to lapse at its pre-determined time without
beginning a new term.
However, termination necessarily includes
9
non-renewal because, after the effective date of termination, no
further terms begin.
This is further evidenced by the fact that Section 11
expressly states that it applies “notwithstanding” 8.b, 9.b, and
10.b.
Sections 8.b, 9.b, and 10.b set out the minimum advance
notice one party must afford the other if it plans not to renew
the agreement during the first, second, or third term,
respectively.
If termination under Section 11 did not constitute
an election not to renew, there would be no need to exempt
Section 11 from the minimum notice requirements for non-renewal
under Sections 8.b, 9.b, and 10.b.
The plain meaning of this language dictates that Section 11
is exempted from - and trumps - the contrary provisions of 8.b,
9.b, and 10.b.
On the other hand, Section 11 does not exempt
itself from the terms of 10.d or 10.f.
Thus, although the
minimum notice requirement in Section 11 trumps those of 8.b,
9.b, and 10.b, the termination provision of Section 11 is not
exempt from the impact of Sections 10.d and 10.f.
Therefore,
Section 11 does not provide a means of terminating the Agreement
that bypasses the dictates of Sections 10.d and 10.f, but rather
provides a means of terminating the Agreement that remains
subject to them.
Because Section 11 provides for termination of
the Agreement, and Sections 10.d and 10.f provide for a fee in
the event Alasko decides not to renew the Agreement, Alasko’s
10
termination pursuant to Section 11 remains subject to the fees
imposed for ending the Agreement upon notice.
Both parties argue that the other’s interpretation of the
Section 11 90-day-notice provision renders the Section 10.b sixmonth-notice requirement impermissibly meaningless.
See Civil
Code of Quebec, S.Q. 1991, c. 64, s. 1428 (“A clause is given
meaning that gives it some effect rather than one that gives it
no effect.”).
Both parties also argue that the other’s
interpretation of Section 11 termination impermissibly renders
meaningless Section 10.c, stating that non-renewal results in
termination.
See id.
But neither interpretation actually
renders Section 10.b or 10.c meaningless, rather these sections
are without force in these circumstances.
Under either interpretation of Section 10.b, there would be
very few situations, if any, in which it would make business
sense to give six months notice for non-renewal, when it would be
equally permissible to give three months notice for termination.1
1
It is possible, however, that a situation might arise in which a
party would prefer that the Agreement expire at the defined end
date set out in Section 10.a rather than at a new date dictated
by the 90 days-notice required by Section 11. For example,
Alasko may predict a drop in sales around the renewal date, in
which case the fee would be lower if the Agreement expires then,
making termination on the defined end of the term a rational
business decision. It is also possible that a situation might
arise in which Alasko would want to give six-months notice before
the termination of the Agreement rather than 90 days. Upon
receiving notice that the Agreement will end, Foodmark logically
may diminish the energy expended on promoting Alasko products in
the U.S. market, resulting in fewer sales and lowering the amount
11
Furthermore, Section 11 does not require precisely 90-days
notice, but simply “not less than 90 days.”
Alasko could
terminate the Agreement pursuant to Section 11 with the same sixmonths notice as Section 10.b would otherwise require for nonrenewal.
This does not deprive Section 10.b of meaning, but it
does severely limit Section 10.b’s application.
As discussed
above, termination and non-renewal are overlapping but distinct
concepts.
Alasko could have decided not to renew the Agreement
and given six months notice even though the Agreement also
permitted it to terminate the agreement and give not less than 90
days notice.
A clause is not rendered meaningless simply because
it would not be a good business decision to invoke it.
A party
may enter into a valid and enforceable agreement even if it would
be inadvisable to do so from a business perspective.
See Miller
v. Lavoie, 64 W.W.R. 359, 265 (B.C.S.C. 1966) (“[T]he courts are
not empowered to relieve a man of the burden of a contract he has
made under no pressure and with his eyes open merely because his
of the termination fee. More notice might mean fewer sales,
which in turn would mean a lower termination fee: a rational
business calculation on Alasko’s part. Additionally, if the
parties understood Section 10.f to calculate the Non-Renewal
Termination fee based on the 13-week period leading up to the
date of effective termination after 90-days notice in the event
of a Section 11 termination, but based on the 13-week period
leading up to May 9, 2012 in the event of a Section 10.b election
not to renew, Alasko's decision regarding which section to invoke
would depend on its predictions of net sales over time. Based on
different predictions, either decision might make rational
business sense.
12
contract is an act of folly.”); GERALD FRIDMAN, THE LAW
OF
CONTRACT IN
CANADA 320 (5th ed. 2006) (“[A] court applying equitable powers is
not able, nor is it willing, to interfere with a concluded
contract, otherwise not exceptional, merely on the ground that
one party now finds that the original bargain he made is not to
his taste.”).
The fact that neither Alasko nor Foodmark is
likely to choose to end the Agreement under Section 10.b when
Section 11 remains a possibility does not render any clause
meaningless and does not undercut the plain meaning of the
contractual language discussed above.
The provision in Section 10.c stating, “[i]f [Foodmark]
elects not to renew the Agreement . . . the Agreement will
terminate” also still has meaning for the same reasons: Foodmark
could “elect not to renew” the Agreement and allow it to expire
at the close of a term, even though the termination provision in
Section 11 would give Foodmark more control over the timing of
termination and might, therefore, be a better business decision.
Whether or not applicable under all circumstances, Sections
10.b, 10.c and 11 still have meaning.
It is obvious that the
confusion in this case is the direct result of artless drafting.
Nevertheless, because it is still possible to make sense the
Agreement, I apply the plain meaning of the language, which
dictates that termination pursuant to Section 11 triggers the
Non-Renewal Termination Fee.
13
2. Termination “Upon the Sale”
The phrase “upon the sale” in Section 10.e of the Agreement
is arguably ambiguous.
The parties offer plausible, but mutually
exclusive, interpretations of the phrase.
Alasko suggests that
“upon the sale” means “at the time of sale, coincident with the
sale, or at the occurrence of sale,” and therefore that a
termination “upon the sale” of Alasko, if any, must have occurred
on July 10, 2010 when Alasko sold a controlling share of its
business to Catteron Partners.
By contrast, Foodmark suggests
that “upon the sale” contemplates a “termination relating to or
arising out of” the sale of Alasko, and therefore that Alasko’s
October 17, 2011 letter constituted termination “upon the sale”
because, Foodmark alleges, it was caused by Alasko’s change in
ownership and control following the sale.
Both constructions find dictionary support.
Webster’s
Dictionary provides definitions of “upon” capable of supporting
either construction.
See WEBSTER’S THIRD NEW INTERNATIONAL DICTIONARY
2517-2518 (1993) (“10a:(1) immediately following on : very soon
after . . . (2) in answer to : in satisfaction of . . . 10b: on the occasion
of : at the time of.”).
Definitions 10a(1) and 10b could support
Alasko’s construction that “upon” essentially means
“contemporaneous with.”
Definition 10a(2) can support Foodmark’s
construction that “upon” means an action taken in response or
14
answer to the sale.
The context of the Agreement does not shed
further light on the meaning of “upon the sale.”
Alasko argues that, unlike Sections 10.b and 11, Section
10.e does not require any notice and is therefore designed to be
triggered by the effective date of the sale.
When a contract
contains ambiguous language, a court may analyze the intention of
the parties according to the Québécois canons of contract
construction, Pomerlim, s.e.c. v. Societe Immobiliere du Quebec,
2010 CarswellQue 434, 2010 QCCA 127, ¶ 49; Societe de
Congeneration de St-Felicien v. Industries Piekouagame, Inc.,
2009 CarswellQue 8081, 2009 QCCA 1487, ¶ 7-8 (holding that courts
properly consider testimony as well as documentary and parole
evidence in interpreting a phrase it finds to be ambiguous.)
Interpretation of ambiguous contract language through the lens of
the parties’ intent generally presents a question of fact for the
jury.
See Smart v. Gillette Co. Long Term Disability Plan, 70
F.3d 173, 178 (1st Cir. 1995)(citing In re Newport Plaza Assocs.,
985 F.3d 640, 645 (1st Cir. 1993)).
Yet even after recourse to
the intent of the parties, “the evidence presented about the
parties’ intended meaning may be so one-sided that no reasonable
person could decide the contrary,” and the court may decide the
issue as a matter of law.
Boston Five Cents Sav. Bank v.
Secretary of Dep’t of Hous. & Urban Dev., 768 F.2d 5, 8 (1st Cir.
1985).
In this case, the parties have not yet engaged in
15
discovery such that I might conduct the kind of thorough analysis
necessary to determine of their intent in drafting this
provision,
However, because I conclude that Alasko owes Foodmark a NonRenewal Termination Fee pursuant to Section 10.d, the ultimate
determination whether the October 17, 2011 letter constituted a
termination “upon the sale” is immaterial.
B.
Unenforceable Penalty
The parties briefed whether the fee constitutes a penalty
clause under Massachusetts law only.
They have briefed neither
the choice of law issue, nor the question whether the provision
is enforceable under Quebec law.
Nevertheless, since both are
implicated, I provide the following analysis to frame the issues.
Alasko argues that if a Section 11 termination implicates
the Non-Renewal Termination Fee, the contract will renew
indefinitely and Alasko will have no way of ending the agreement
without paying the fee.
This, Alasko argues, constitutes a
penalty clause which is unenforceable under Massachusetts law.
See TAL Fin. Corp. v. CSC Consulting, Inc., 844 N.E.2d 1085
(Mass. 2006) (holding a penalty clause unenforceable).
Foodmark
counters that the Non-Renewal Termination Fee would not be a
penalty clause under Massachusetts law.
make no difference here.
However, this dispute
Even assuming, for the sake of
argument, that Section 11 would constitute a “penalty” clause
16
under Massachusetts law, it is Quebec law that governs the
contract and under Quebec law, the clause is enforceable.
1. Choice of Law
Massachusetts law will enforce obligations of the parties
arising under foreign laws “if not contrary to [Massachusetts]
public policy or to abstract justice or pure morals, or
calculated to injure the state or its citizens,” assuming
jurisdiction is proper.
Higgins v. Central N.E. & W.R. Co., 29
N.E. 534, 535-36 (Mass. 1892).
This does not mean that
Massachusetts law controls wherever it is in conflict with Quebec
law; that would fundamentally defeat the purpose of applying
Quebec law.
Rather, the dispositive question is whether there is
some substantial public policy reason that Massachusetts
interpretation of penalty clauses should, as a rule, control over
those of a foreign jurisdictions.
See Bragel v. General Steel
Corp., 21 Mass.L.Rptr 408, 2006 WL 2623931, at *4 (Mass. Super
Ct. Aug. 2, 2006) (“‘[I]n the absence of any substantial
Massachusetts public policy reason to the contrary,’
Massachusetts’ view of the enforceability of the arbitration
clause is not controlling, and this Court should turn to the law
of Colorado to determine whether the arbitration provision is
unconscionable.”) (quoting Jacobson v. Mailboxes Etc. U.S.A,
Inc., 646 N.E.2d 741, 744 (Mass. 1995))).
Although Massachusetts
has determined that penalty clauses should not be enforceable in
17
the application of its own laws, see Kelly v. Marx, 694 N.E.2d
869, 871 n.6 (Mass. App. Ct. 1998) (“A term fixing unreasonably
large liquidated damages is unenforceable on grounds of public
policy as a penalty.” (quoting Restatement (Second) of Contracts
§ 356)), I do not find any substantial Massachusetts public
policy reason that its law must control the interpretation or
enforceability of the Non-Renewal Termination Fee.
This is not a situation in which Massachusetts has an
interest in protecting those who do business in the state from
the impact of divergent foreign law.
In fact, it is the
Massachusetts party, Foodmark, pressing for application of Quebec
law.
There is nothing unfair in this situation about applying
Quebec law to Alasko, a citizen of Quebec that specifically
agreed to application of Quebec law in its Agreement with
Foodmark.
This is also not a case implicating Massachusetts’s
interests as a state.
See N.E. Data Sys., Inc. v. McDonnell
Douglas Comp. Sys., Co., 986 F.2d 607, 610-11 (1st Cir. 1993)
(“There is no conflict with Massachusetts public policy here.
The dispute is essentially a private one, which . . . has no
third-party effects.” (internal quotations omitted)).
Application of Quebec contract law would not impose any
substantial or inappropriate burden on the state or call for this
court to overstep its jurisdiction or powers.
Nor is Quebec law
such an extreme departure from the laws of Massachusetts as to
18
justify a refusal to apply the parties’ stated choice of
governing law.
Massachusetts will not enforce penalty clauses,
but will enforce liquidated damages clauses so long as they are
not so extreme as to constitute a penalty.
See NPS, LLC v.
Minihane, 886 N.E. 2d 670 (Mass. 2008) (upholding a liquidated
damages clause as not “grossly disproportionate” and therefore
not a penalty).
The law of Quebec comes to a result similar to that of the
law of Massachusetts through a different route.
Under the law of
Quebec, courts enforce penalty clauses, but also have the power
to reduce the penalty if the penalty is abusive or in cases of
partial performance.
See Civil Code of Quebec, S.Q. 1991, c. 64,
s. 1623 (“A creditor who avails himself of a penal clause is
entitled to the amount of the stipulated penalty without having
to prove the injury he has suffered.
However, the amount of the
stipulated penalty may be reduced if the creditor has benefited
[sic] from partial performance of the obligation or if the clause
is abusive.”).
Finally, Alasko argued - for the first time at oral argument
- that my decision in NPS LLC v. Ambac Assurance Corp., requires
the application of Massachusetts law to questions of
unenforceability because “contractual choice of law provision[s]
[are] not binding” on claims “about the validity of a contract’s
formation.”
706 F. Supp. 2d 162, 168 (D. Mass. 2010) (citing
19
N.E. Data Sys., Inc. v. McDonnell Douglas Comp. Sys. Co., 986
F.2d 607, 611 (1st Cir. 1993)).
misplaced.
Alasko’s reliance on NPS is
In both NPS, and in N.E. Data Sys., plaintiffs
claimed fraud in the inducement of the contract, and the courts
considered whether the parties had ever entered into a valid
agreement to begin with.
See NPS LLC, 706 F. Supp. 2d at 169
(“NPS alleges that Ambac cannot enforce the 2006 Agreement
because it induced NPS to enter into the Agreement through
fraudulent and/or negligent misrepresentations . . . .”); N.E.
Data Sys., 986 F.2d at 611 (“Th[e] special claim rests upon
allegations of fraud. . . . Because this claim concerns the
validity of the formation of the contract . . . the claim falls
outside the contract’s choice-of-law provision.” (emphasis in
original)).
It would be odd to apply a contractual choice-of-law
clause when determining whether any part of the contract is valid
in the first instance.
case.
The same concern is not present in this
Neither party to this action alleges fraud in the
inducement, and neither has denied the validity of contract
formation.
There is, therefore, no reason to ignore the choice-
of-law clause the parties validly agreed upon, and I apply Quebec
law to determine the enforceability of the fee.
2. Enforcement of the Fee
Alasko has not made out an adequate showing that the NonRenewal Termination Fee is unenforceable under the laws of
20
Quebec.2
Nor could it.
Quebec law.
Penalty clauses are enforceable under
Therefore, the Non-Renewal Termination Fee is
enforceable even if it disincentivizes termination in certain
circumstances.
Alasko has not undertaken to show that the fee
constitutes a penalty under Quebec law.
Nor, if it had, could it
make a case that this court should reduce the amount of the fee.
The fee is neither abusive nor does it need to be reduced for
partial performance.
The fee is based on a percentage of Alasko’s sales and is
therefore not abusive because it is reasonably proportionate to
Foodmark’s loss.
See Alta Ltée v. Corp. Des Maîtres Mécaniciens
en Tuyanuterie, 1995 CarswellQue 202, 27 C.L.R.2d 243, ¶ 38; see
also Civil Code of Quebec, S.Q. 1991, c. 64, s. 1437 (defining
2
While I apply Quebec substantive law regarding “penalty
provisions,” I also note that even if Massachusetts law were to
apply, I would not find the Non-Renewal Termination Fee
constitutes an unenforceable penalty. Alasko argues that the fee
makes it far more expensive for Alasko to terminate than to
continue renewal, and makes termination more profitable for
Foodmark than continued performance, thus depriving Alasko of a
“real option.” See Blay v. ZipCar, Inc., 716 F. Supp. 2d 115,
119 (D. Mass. 2010) (quoting 14 Williston on Contracts § 42:10
(4th ed. 2010)). However, it is by no means clear that a
termination fee no greater than 10% would always render perpetual
renewals the cheaper option. More fundamentally, the fee is not
excessive. It requires payment of no more than 10% of the
annualized revenue calculated by the previous 13 weeks. Thus
Alasko would never owe more than 10% of the approximate value of
a year’s worth of sales, approximating just over one month of
expected income. This is hardly excessive, particularly
considering that Alasko has the right to cut off the agreement on
90-days notice - potentially depriving Foodmark of nine months
expected income if Alasko gives notice at the beginning of a
year.
21
abusive as “so departing from the fundamental obligations arising
from the rules normally governing the contract that it changes
the nature of the contract.”).
Alasko has partly performed on the contract, paying Foodmark
its contractually entitled percentage of sales from the first
sales under the Agreement in July 2009 though termination of the
Agreement on January 15, 2012.
But neither party has produced
any evidence or argument to justify reducing the amount of the
Non-Renewal Termination Fee based on Alasko’s partial
performance.
Nor is any reduction appropriate.
Alasko terminated the
agreement effective January 15, 2012, and the term was set to
expire on May 9, 2012, leaving nearly four months of the contact
unperformed.
As discussed above, the Non-Renewal Termination Fee
amounts to no more than 10% of annualized net invoice sales - the
equivalent of no more than one and one half months of projected
sales.
The full fee is therefore not duplicative of any partial
performance.
IV.
CONCLUSION
For the foregoing reasons, I DENY Defendant’s motion for
summary judgment (Dkt. 5) and GRANT Plaintiff’s cross-motion
(Dkt. 12) with respect to liability.
The parties shall file on
or before April 18, 2013 a proposed joint schedule for a
resolution of the remaining issue of damages and its predicate,
22
the proper meaning of the phrase “the last 13-week period of the
term” in Section 10.f.
/s/ Douglas P. Woodlock
DOUGLAS P. WOODLOCK
UNITED STATES DISTRICT JUDGE
23
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?