Harley-Davidson v. Powersports Inc. ( 2003 )

In the
United States Court of Appeals
For the Seventh Circuit
____________
No. 02-2095
HARLEY-DAVIDSON MOTOR COMPANY,
INCORPORATED,
Plaintiff-Appellant,
v.
POWERSPORTS, INCORPORATED and
POWERSPORTS OF SEMINOLE COUNTY,
INCORPORATED,
Defendants-Appellees.
____________
Appeal from the United States District Court
for the Eastern District of Wisconsin.
No. 00 C 132—J. P. Stadtmueller, Judge.
____________
ARGUED JANUARY 14, 2003—DECIDED FEBRUARY 21, 2003
____________
Before EASTERBROOK, RIPPLE and ROVNER, Circuit Judges.
RIPPLE, Circuit Judge. In this diversity action, Harley-
Davidson Motor Company, Inc. (“Harley-Davidson”) al-
leged that PowerSports Inc. and its wholly-owned subsid-
iary PowerSports of Seminole County, Inc. (collectively
“PowerSports”) had made fraudulent misrepresentations
in order to obtain Harley-Davidson’s approval of a trans-
fer of a Harley-Davidson dealership to PowerSports. Har-
ley-Davidson sought rescission of that approval. In grant-
ing summary judgment for PowerSports, the district court
2 No. 02-2095
held that, even though Harley-Davidson was seeking the
equitable remedy of rescission rather than tort damages,
its misrepresentation claim was barred under Wiscon-
sin’s economic loss doctrine. For the reasons set forth in
the following opinion, we reverse the judgment of the
district court.
I
BACKGROUND
A. Factual Background
1.
On November 8, 1999, Harley-Davidson received a
request from Scott Smith of Harley-Davidson of Seminole
County, a dealership located in Fern Park, Florida (“Fern
Park dealership”), to approve the sale of that dealership
to PowerSports of Seminole County. Florida law required
Harley-Davidson to respond to the request for approval
1
of the transfer within 60 days.
Harley-Davidson has a unique business model based
on active dealership contact with its customers. This sys-
tem is designed to enhance customer satisfaction with
ownership. In Harley-Davidson’s words, “Harley-Davidson
sells lifestyle and relationships, not just goods and ser-
vices.” R.46, Ex.78 at 4. Consequently, Harley-Davidson
1
Harley-Davidson had to either approve or object to the trans-
fer within the 60 days. A failure to respond is deemed an ap-
proval. See Fla. Stat. § 320.643(1). If Harley-Davidson had
objected, then PowerSports would have had 60 days follow-
ing that rejection to file with the Florida Department of High-
way Safety and Motor Vehicles to determine if the rejection
violated Florida law. See id.No. 02-2095 3
dealers are required to have an on-site owner-operator,
and Harley-Davidson requires that new dealer applicants
be committed to its business approach. Harley-David-
son also does not allow any of its dealerships to be pub-
licly owned.
On November 24 and December 13, 1999, Harley-
Davidson sent letters inquiring about PowerSports’ interest
in and ability to purchase and run the dealership in com-
pliance with Harley-Davidson’s dealer contract and ex-
pectations. The November 24th letter explained to Power-
Sports that it could not go public and maintain the dealer-
ship because, under the dealer contract, “no publicly-owned
corporation may, directly or indirectly, in whole or in part,
own and/or operate any Harley-Davidson dealership.”
R.39, Ex.54 at 1. The letter also inquired about Power-
Sports’ plan for “using a d/b/a that doesn’t include the
PowerSport’s name.” Id. at 3. In the December 13th letter,
Harley-Davidson specifically asked such questions as,
“Why does Power Sports want to purchase the Fern Park
dealership?”; “What are Power Sport’s plans for the Fern
Park dealership?”; “What is [PowerSports’] plan for com-
pliance with Harley-Davidson’s on-site owner operator
requirement?” R.46, Ex.32.
On December 16, 1999, representatives of Harley-David-
son and PowerSports met to discuss the proposed transfer.
PowerSports provided Harley-Davidson with an “Operat-
ing Plan” for the Fern Park dealership. See R.46, Ex.34.
The plan indicated that PowerSports would focus on
the local Seminole County, Florida, market. In the plan,
PowerSports stated that it would “distinguish the [Fern
Park] dealership by offering unparalleled attention to
our customers,” and that it would “promote motorcycling,
encourage rider education, support our local community,
and participate in local charities, as well as the Seminole
4 No. 02-2095
County Harley Owners Group.” Id. at 1. It stated under the
heading “marketing strategy” that it would “identify po-
tential customers through customers who frequent our
store, active participation in the Harley Owners Group,
and development of contacts at bike events, poker runs,
and community events,” and that it would “advertise in
bike magazines, newspapers, billboards, and through di-
rect mail.” Id. It also planned “to promote events such
as open houses, pig roasts, and customer appreciation
days.” Id. The plan explained that PowerSports would
create “friendship[s]” with its customers rather “than the
traditional ‘customer-dealer’ relationship.” Id. at 2. The
plan made no mention of any plans involving the internet
or of purchasing multiple brands over the internet either
at home or at the dealership, of turning the Fern Park
dealership into a web-interfaced facility center, or of
PowerSports going public.
Similarly, at the December 16th meeting, representa-
tives of PowerSports orally assured Harley-Davidson that
PowerSports would focus on the local market and would
distinguish itself by doing “the best in Florida,” R.46,
Ex.87 at 2, that it would operate an exclusive Harley-
Davidson dealership, and that it would not use the
PowerSports name in conjunction with the Harley-Davidson
name or logo. At the meeting, public ownership was
discussed. Harley-Davidson representatives testified that
PowerSports representatives stated at the meeting that,
although it had discussed public ownership before,
PowerSports was “[n]owhere near” going public, that it
had no present plans to take the company public, and
that, if it ever did go public, it would divest itself of the
Harley-Davidson dealership. R.39, Ex.E at 65-66; see R.46,
Exs.78, 87, 89, 103, 108. Harley-Davidson representa-
tives asked the PowerSports representatives whether Power-
Sports would be willing to sign a separate agreement
No. 02-2095 5
covering public ownership, the on-site owner-operator
requirement, limits on the number of Harley-Davidson
dealerships PowerSports would acquire, and the mainte-
nance of the Fern Park dealership as an exclusive Harley-
Davidson dealership. R.39, Ex.D at 165-69. According to
the testimony of the Harley-Davidson representatives,
the PowerSports representatives indicated they would
sign such an agreement. However, Harley-Davidson
never provided such a separate agreement for Power-
Sports to sign.
At the December 16th meeting, PowerSports also gave
Harley-Davidson a written response to the November
24th and December 13th questions. The written response
stated in part: “With respect to your concern about
PowerSports, Inc. wanting to go public, you requested
that [PowerSports and its representatives] to specifically
confirm that they acknowledge, accept, and will comply
[with] all requirements of the Harley-Davidson Dealer
Contract. It is our intent to comply with all lawful aspects
of the Harley-Davidson Motor Company Dealer contract.”
R.39, Ex.33 at 1.
In the course of discovery, PowerSports produced docu-
ments, dating from 1997 and continuing through January
3, 2000, that indicated that PowerSports had plans inconsis-
tent with its representations at the December 16th meeting.
The documents indicated that PowerSports planned to
go public and to become an internet company that con-
solidated its dealerships and sold its products almost
exclusively on the internet rather than in dealerships. For
example, on January 3, 2000, PowerSports created a list of
position points and draft slides to use for an upcoming
investor roadshow. This document, not disclosed earlier
to Harley-Davidson, indicated that PowerSports was
planning to become a pure internet business and that it
6 No. 02-2095
viewed dealerships as “a necessary evil that we bought
and integrated only because we needed the franchises
and the fulfillment capability. The only reason why we
would invest any new capital in our existing dealerships
is to expand their physical space to handle the greater
volume of internet orders we will get.” R.46, Ex.123 at 1. The
document stated that PowerSports wanted “to distance
[itself] from brick and mortar as much as possible.” Id.None of these documents were disclosed to Harley-David-
son. Moreover, in November or early December 1999,
PowerSports retained investment bankers to discuss and
plan an upcoming IPO. This development also was not
disclosed to Harley-Davidson.
PowerSports maintains that these documents are immate-
rial because “the most recent information about Power-
Sports’ internet plans and desire to go public was dis-
closed to Harley in a timely manner.” R.50 at 1-5. In this
respect, PowerSports refers to the draft offering memoran-
dum that it mailed to Harley-Davidson on January 4th.
See id. We shall discuss this document further below.
On December 31, 1999, Harley-Davidson faxed a letter to
PowerSports that included a copy of Harley-Davidson’s
public ownership policy and its policy on multiple owner-
ship. In the letter, Harley-Davidson requested that Power-
Sports provide more documents and information; it spe-
cifically requested information concerning PowerSports’
upcoming private placement.
On the morning of January 3, 2000, PowerSports faxed
a letter to Harley-Davidson stating that “later today” it
would provide the requested information, including the
draft memorandum for the upcoming PowerSports pri-
vate placement offering. R.39, Ex.76. PowerSports did
not provide Harley-Davidson with the information on
January 3rd; rather, as recited below, it mailed the infor-
No. 02-2095 7
mation to Harley-Davidson on January 4th, which arrived
in Harley-Davidson’s mailroom on January 5th.
On January 3rd, Harley-Davidson representatives met
at their offices and made the decision to approve Power-
Sports’ request to purchase the dealership. On January 4th,
and concluding on the morning of January 5th, Harley-
Davidson prepared an approval letter to send to Power-
Sports. The letter recited the representations made by
PowerSports upon which Harley-Davidson was relying
in making its decision, including that PowerSports would
not use the PowerSports name in conjunction with the
Harley-Davidson name, that it would not sell new motor-
cycles manufactured or distributed by any entity other
than Harley-Davidson, and that, as advised in the Decem-
ber 16th meeting, it had no plans to go public and that, if
it did decide to become publicly owned, it first would
divest itself of ownership of the Harley-Davidson dealer-
ship. See R.46, Ex.78 at 2.
On the morning of January 4th, a PowerSports representa-
tive asked Harley-Davidson when it would deliver its de-
cision to PowerSports. Harley-Davidson replied that it
would deliver its decision by close of business on January
5th. Harley-Davidson’s letter of approval was completed
on the morning of January 5th and faxed and mailed to
PowerSports that afternoon.
Also on January 4th, PowerSports sent by overnight
delivery a letter and the draft memorandum to Harley-
Davidson and to its attorney. Although the memoran-
dum was delivered to Harley-Davidson’s mailroom on
January 5th, it was not brought to the attention of anybody
at Harley-Davidson until January 6th. Harley-Davidson’s
counsel also did not see the letter until after Harley-
Davidson had faxed its approval to PowerSports.
8 No. 02-2095
The memorandum explained that PowerSports intended
this financing to be the “last private round of capital” before
an IPO in the second quarter of the year 2000. R.46, Ex.40
at 8. It also stated that PowerSports was moving away
from “brick and mortar” dealerships in order to become
primarily an internet business, where customers could
“compare 14 different brands at once, and [be] thereby freed
from the cumbersome task of having to travel and visit
multiple dealerships.” Id. at 11. The memorandum ex-
plained that PowerSports was establishing the first inter-
net business with “nationwide and worldwide fulfillment”
capacity for power sport vehicles and that it had spent the
last “two years identifying, negotiating, acquiring and in-
tegrating eleven of the largest dealerships in Florida.” Id.
at 18. It noted that, with “two pending acquisitions,” one
of which was the Harley-Davidson Fern Park dealership,
PowerSports “[would] be the only company in the United
States capable of executing a worldwide Internet fulfill-
ment strategy for every major brand, vehicle, part, acces-
sory and finance and insurance product.” Id. The memoran-
dum stated that its website would “enable[] customers
worldwide to access a full array of powersports products
from the convenience of the customer’s home/office com-
puter without ever having to visit a dealership.” Id. at 51.
Further, the memorandum explained that PowerSports
would be transforming its dealerships into “Internet show-
rooms” so that even customers who came into a dealer-
ship would sit down at computers at the dealership and
log online to make their purchases. Id. The memorandum
notes that PowerSports would make this changeover of
“dealerships” to “Web interface” fulfillment centers on
March 31, 2000, “at its twelve (including the Harley acquisi-
tion) Florida dealerships which form the backbone of
[PowerSports’] worldwide fulfillment capability.” Id. The
memorandum noted that PowerSports needed to acquire
No. 02-2095 9
dealerships in close proximity to one another in order to
efficiently integrate them into one mega-dealership. See
id. at 53. In the appendix, the memorandum noted that
“eleven dealerships have already been integrated to oper-
ate as one ‘mega-dealer’ and, [that] the addition of the
Harley-Davidson dealership under contract, will permit
the Company to profitably fulfill each product described
in these projections.” Id. at App. 5.
Finally, the memorandum explained that PowerSports
had negotiated the purchase of
its first Harley-Davidson dealership. This dealership
shall be integrated into the Company’s network of
eleven Florida dealerships and will be turned into an
Internet fulfillment center for Harley-Davidson new
and pre-owned vehicles. . . . This acquisition will
provide ePowerSports.com with the ability to source
and fulfill over the Internet vehicles, parts and accessories
for the remaining major franchise it does not cur-
rently hold, Harley-Davidson.
Id. at App. 8 (emphasis added).
However, the memorandum did note that PowerSports,
upon acquiring a dealership, “must operate the dealer-
ship in accordance with the applicable franchise agree-
ment.” Id. at 62.
B. District Court Proceedings
On January 18, 2000, Harley-Davidson filed this action.
In its amended complaint, Harley-Davidson alleged that
PowerSports intentionally and/or negligently had made
material misrepresentations including affirmative state-
ments and omissions in order to induce Harley-Davidson
to approve the transfer of the dealership, that Harley-
10 No. 02-2095
Davidson reasonably relied on those misrepresentations
in approving the transfer, and that Harley-Davidson
was induced by the misrepresentations to approve the
transfer. See R.26 at 11. Harley-Davidson sought remedies
including (1) an order rescinding and canceling the trans-
fer or an order requiring PowerSports to sell or transfer the
dealership to an unaffiliated new dealer acceptable to
2
Harley-Davidson; (2) consequential and incidental dam-
ages suffered as result of PowerSports’ conduct; (3) puni-
tive damages; and (4) injunctive and declaratory relief.
See id. at 12-14.
PowerSports ultimately moved for summary judgment
3
on all of Harley-Davidson’s claims. It submitted that Wis-
2
Harley-Davidson originally sought an injunction prevent-
ing the transfer of the dealership to PowerSports. The district
court denied relief, finding that the harm was not irreparable
because “PowerSports could be made to divest itself of the
franchise should the need arise.” R.24 at 5.
3
PowerSports had moved earlier to dismiss on the grounds of
abstention, primary jurisdiction and failure to state a cause of
action. In responding to this initial motion, Harley-Davidson
had argued that the Florida Department of Highway Safety
and Motor Vehicles did not have any special expertise or ju-
risdiction to adjudicate common law claims. In the course of its
argument, Harley-Davidson referred to its misrepresentation
claims as common law tort claims. See R.20 at 18, 23 & 25;
Appellees’ App. at 284, 285, 286 & 287. At another point, it
referred to its claims as “common law” claims and referenced
contract authority for its rescission claim for misrepresentation.
R.20 at 21; see id. at 19, 20, 24, 25 & 28. Specifically, Harley-
Davidson noted that it could seek rescission under the Su-
preme Court of Wisconsin case First National Bank & Trust Co.
of Racine v. Notte, 293 N.W.2d 530 (Wis. 1980). See R.20 at 28. The
district court ruled in favor of Harley-Davidson on this ini-
(continued...)
No. 02-2095 11
4
consin’s economic loss doctrine barred Harley-Davidson’s
negligent and intentional misrepresentation claims and
that, under our precedent interpreting Wisconsin’s eco-
nomic loss doctrine, Harley-Davidson “cannot maintain
any claims for fraud or misrepresentation as a matter of
law.” R.37 at 7; see R.36. Harley-Davidson responded by
asserting that it was “not seeking to recover ‘economic
losses’ from PowerSports” and was “not even claiming
compensatory damages,” but rather was merely seeking
“to rescind its consent to the dealership transfer.” R.42 at
26. However, Harley-Davidson did state in a footnote that
it “also seeks any restitution damages that might be ap-
propriate and punitive damages for PowerSports’ inten-
tional misconduct.” Id. at 8 n.1. Substantively, Harley-
Davidson noted the “long-established and well-recognized
right to rescind its fraudulently obtained consent,” stating
that “Wisconsin law clearly recognizes a claim for rescis-
sion based on misrepresentation” and citing cases, includ-
ing Marine Bank, N.A. v. Meat Counter, Inc., 826 F.2d 1577,
1580 (7th Cir. 1987), and First National Bank & Trust Co. of
Racine v. Notte, 293 N.W.2d 530, 538 (Wis. 1980). R.42
at 1, 28.
In its response, PowerSports mentioned (again in a short
footnote) the apparent inconsistency in the claim that
3
(...continued)
tial motion to dismiss, referring in its opinion to Harley-
Davidson’s misrepresentation claims as “tort” claims. R.25 at
4, 5 & 7.
4
The “economic loss doctrine is a judicially created doctrine
providing that a commercial purchaser of a product cannot
recover from a manufacturer, under the tort theories of negli-
gence or strict products liability, damages that are solely ‘eco-
nomic’ in nature.” Daanen & Janssen, Inc. v. Cedarapids, Inc.,
573 N.W.2d 842, 845-46 (Wis. 1998).
12 No. 02-2095
Harley-Davidson was “not even claiming compensatory
damages” and yet was still seeking “restitution damages”
and “punitive damages.” R.49 at 2 (internal quotation
marks omitted). PowerSports’ main contention, however,
was that the economic loss doctrine barred all fraud
and misrepresentation claims regardless of the remedy
sought—whether rescission or damages. See id. at 2-4.
The district court held that the economic loss doctrine
applied because Harley-Davidson was seeking recovery
from commercial injury. The court recognized our prior
precedent barring tort claims for negligent or strict respon-
sibility misrepresentation under Wisconsin law. The
court further noted that “[w]hether the economic loss
doctrine bars a claim for intentional misrepresentation
that alleges fraudulent inducement [of contract] is an issue
over which there has been considerable disagreement.” R.52
at 5. Nevertheless, the district court noted that we had
ruled in Home Valu, Inc. v. Pep Boys, 213 F.3d 960 (7th
Cir. 2000), that the economic loss doctrine barred inten-
tional misrepresentation claims alleging fraudulent in-
ducement under Wisconsin law. The district court held
that our holding in Home Valu was controlling and that
it was required, on the basis of this precedent, to dis-
miss Harley-Davidson’s intentional misrepresentation
claim. See R.52 at 6. The court stated that “Harley-David-
son does not cite to any case which exempts a claim from
the economic loss rule simply because the plaintiff seeks
rescission rather than damages.” Id. at 7. The court con-
cluded that “Harley-Davidson cannot avoid application
of the economic loss doctrine by seeking only rescission. The
proper inquiry in determining whether the economic
loss doctrine applies is whether the commercial injury
also causes personal injury or damage to other property.”
No. 02-2095 13
5
Id. at 6 (emphasis added). Consequently, the court deter-
mined that all of “Harley-Davidson’s misrepresenta-
tion claims are barred by the economic loss doctrine.” Id.
at 7; see also id. at 1 (stating that Harley-Davidson’s “claims
of negligent and intentional misrepresentation are barred
by Wisconsin’s economic loss doctrine”). The court granted
PowerSports’ motion for summary judgment and dis-
missed with prejudice Harley-Davidson’s entire action.
R.53.
II
DISCUSSION
A.
We review the grant of summary judgment de novo.
Summary judgment is only appropriate when, after con-
struing the facts in the light most favorable to the
nonmoving party, there is no genuine issue of material
fact and the moving party is entitled to judgment as a
matter of law. See Mateu-Anderegg v. Sch. Dist. of Whitefish
Bay, 304 F.3d 618, 623 (7th Cir. 2002). In PowerSports’ view,
there is no genuine issue of material fact and it is entitled
to judgment as a matter of law.
5
It is apparent from this passage and from PowerSports’ brief
supporting its motion for summary judgment that Power-
Sports and the district court did not concern themselves with
the punitive damages and “restitution damages” issues, but
rather believed that even if all PowerSports sought was rescis-
sion of contract, the claim was barred by the economic loss
doctrine. Consequently, the court dismissed all of the claims
based on fraud or misrepresentation, regardless of the remedy
sought, including both the claim for rescission and for pun-
itive damages.
14 No. 02-2095
B.
1.
We first address the district court’s determination that
this action for rescission of the contract is barred by Wis-
consin’s economic loss doctrine. The district court believed
that its conclusion was compelled by our decision in
Home Valu, Inc. v. Pep Boys, 213 F.3d 960 (7th Cir. 2000). We
shall begin our inquiry by addressing this view.
The district court was correct in stating that, under our
holding in Home Valu, the economic loss doctrine bars
tort damage claims for intentional misrepresentation. How-
ever, as we also noted in Home Valu, 213 F.3d at 964-65,
the Court of Appeals of Wisconsin held to the contrary in
Douglas-Hanson Co. v. BF Goodrich Co., 598 N.W.2d 262 (Wis.
Ct. App. 1999). More recently, in Digicorp, Inc. v. Ameri-
tech Corp., 650 N.W.2d 321 (Table), Nos. 01-1833, 01-2258,
2002 WL 1277220 (Wis. Ct. App. June 11, 2000) (unpub-
lished opinion), review granted by 653 N.W.2d 888 (Wis.
2002), the Court of Appeals of Wisconsin confirmed the
view it had expressed earlier in Douglas-Hansen. This issue
will soon be decided definitively by the Supreme Court
of Wisconsin.
The question remains whether the issue at stake in
Digicorp, and previously decided by the Court of Appeals
of Wisconsin and this court, ought to govern the disposi-
tion of this case. If the issue does control this litigation, as
the district court concluded, a respectful appreciation of
the task of the Supreme Court of Wisconsin would require
that we either stay our decision until that court decides
Digicorp or certify the issue in this case to that court. After
reflection, however, we have concluded that the issue
presently before the Supreme Court of Wisconsin—whether
the economic loss doctrine applies to a tort action for
No. 02-2095 15
intentional fraudulent inducement—is not implicated in
the case before us today. By contrast, today’s case pre-
sents us with the question of whether Wisconsin would
recognize an action for the rescission of a contract. In
our view, there is little question that Wisconsin would not
apply the economic loss doctrine to bar such action.
A brief review of the legal landscape prior to our deci-
sion in Home Valu will assist significantly in our placing
the problem presently before us in proper perspective.
In Badger Pharmacal, Inc. v. Colgate-Palmolive Co., 1 F.3d
621 (7th Cir. 1993), we determined that tort claims for
negligent misrepresentation and strict responsibility
misrepresentation were barred by Wisconsin’s economic
loss doctrine when “two corporations, with the benefit
of counsel, negotiate a commercial transaction at arms
length.” Id. at 627-28. After Badger, the Western District
of Wisconsin, applying Wisconsin law in Stoughton Trail-
ers, Inc. v. Henkel Corp., 965 F. Supp. 1227, 1236 (W.D. Wis.
1997), stated that the rationale under which the eco-
nomic loss doctrine barred claims for negligent and strict
responsibility misrepresentation did not apply for inten-
tional misrepresentation claims because such claims in-
volved “intentional acts taken by one party to subvert
the purposes of a contract.” Id. The Western District of
Wisconsin noted that a “party to a contract cannot ra-
tionally calculate the possibility that the other party will
deliberately misrepresent terms critical to that contract.”
Id. We implicitly overruled Stoughton Trailers in Cooper
Power Systems, Inc. v. Union Carbide Chemicals & Plastics Co.,
123 F.3d 675 (7th Cir. 1997). We noted that we had “already
predicted that Wisconsin would not allow a negligence
or strict liability misrepresentation claim” and concluded
that “[w]e perceive no basis for treating Cooper’s inten-
tional misrepresentation claim any differently.” Cooper
Power, 123 F.3d at 682.
16 No. 02-2095
Following Cooper Power, the district courts in Wisconsin
faced the question of whether there should be an excep-
tion to the Cooper Power bar on intentional misrepresenta-
tion claims when the claim alleged fraudulent induce-
ment of contract. See Budgetel Inns, Inc. v. Micros Sys. Inc., 8
F. Supp. 2d 1137, 1144-49 (E.D. Wis. 1998) (predicting
that Supreme Court of Wisconsin would recognize an
exception for fraud in the inducement claims); Rich Prods.
Corp. v. Kemutec, Inc., 66 F. Supp. 2d 937, 977-80 (E.D.
Wis. 1999) (predicting that Wisconsin would recognize “a
limited exception to the economic loss doctrine for fraud
claims, but only where the claims at issue arise indepen-
dent of the underlying contract” (internal quotation marks
6
and citations omitted)).
This issue came before a Wisconsin state appellate
court in Douglas-Hanson Co. v. BF Goodrich Co., 598 N.W.2d
262 (Wis. Ct. App. 1999). The Court of Appeals of Wisconsin
6
The courts in Budgetel Inns, Inc. v. Micros Systems Inc., 8
F. Supp. 2d 1137, 1144-49 (E.D. Wis. 1998), and Rich Products
Corp. v. Kemutec, Inc., 66 F. Supp. 2d 937, 977-80 (E.D. Wis.
1999), disagreed with each other whether or not the so-called
Huron limitation should apply even if an exception for inten-
tional misrepresentation claims alleging fraudulent induce-
ment existed under Wisconsin law. The Huron limitation,
created by a Michigan appellate court, is that an exception to
the economic loss doctrine for intentional misrepresentation
claims alleging fraudulent inducement is only available “where
the claims arise independent from the underlying contract”;
that is, “when a claim of fraudulent inducement is ‘interwoven’
with a breach of contract claim, no independent intentional
misrepresentation claim exists and the claim will be barred by
the economic loss doctrine.” Budgetel, 8 F. Supp. 2d at 1145;
see Huron Tool & Eng’g Co. v. Precision Consulting Servs., Inc.,
532 N.W.2d 541 (Mich. Ct. App. 1995).
No. 02-2095 17
upheld a judgment awarding a plaintiff $1.8 million in
compensatory damages and one million dollars in puni-
tive damages on an intentional misrepresentation claim.
The plaintiff clearly was seeking a “tort remedy.” Id. at
265. The Wisconsin appellate court concluded “that the
economic loss doctrine does not preclude a plaintiff’s
claim for intentional misrepresentation when the mis-
representation fraudulently induces a plaintiff to enter into
the contract.” Id. The court noted a rationale, very similar
to that employed in Stoughton Trailers, 965 F. Supp. at
1236, of why an intentional misrepresentation would not
be barred by the economic loss doctrine:
An intentional misrepresentation that fraudulently
induces a party to enter into a contract, however,
presents a special situation where the parties to the
contract appear to negotiate freely, but, in fact, one
party’s ability to negotiate fair terms and make an
informed decision is undermined by the other party’s
fraudulent conduct.
Douglas-Hanson, 598 N.W.2d at 268. The court additionally
reasoned that,
under Wisconsin law, a material misrepresentation
of fact may render a contract void or voidable. The
economic loss doctrine does not apply to fraudulently
induced contracts because the person fraudulently
induced to enter the contract can affirm or avoid the
contract, and in so electing, has the option of select-
ing tort or contract damages. The option is inconsis-
tent with the economic loss doctrine, however, which
requires that the contract be affirmed.
Id. at 268-69. The Supreme Court of Wisconsin granted a
petition for review in Douglas-Hanson, but was equally
divided on the question of whether the appellate court
18 No. 02-2095
was correct in holding that the economic loss doctrine
did not bar tort claims for damages for fraudulent induce-
ment of the contract by intentional misrepresentation.
See Douglas-Hanson Co. v. BF Goodrich Co., 607 N.W.2d
621, 621 (Wis. 2000). Because the Supreme Court of Wiscon-
sin was equally divided, the decision of the appellate
court was affirmed. See id.In Home Valu, we were faced with the same question
of whether a party could seek tort damages for an inten-
tional misrepresentation claim that alleges fraudulent
inducement of a contract. Noting that the Supreme Court
of Wisconsin has been divided equally on the matter,
we determined that, when faced with two equally plausi-
ble interpretations of state law, we generally choose the
narrower interpretation that restricts liability rather than
an interpretation that expands liability. See Home Valu,
213 F.3d at 965.
The issue of whether tort damages are barred by the
economic loss doctrine for intentional misrepresentation
claims alleging fraudulent inducement is once again be-
fore the Supreme Court of Wisconsin. That court has
granted a petition for review in Digicorp, Inc. v. Ameritech
Corp., 650 N.W.2d 321 (Table), Nos. 01-1833, 01-2258,
2002 WL 1277220 (Wis. Ct. App. June 11, 2000) (unpub-
lished opinion), review granted by 653 N.W.2d 888 (Wis.
2002).
In Digicorp, the Wisconsin trial court dismissed Digicorp’s
claims for negligent and strict responsibility misrepresen-
tation as barred by the economic loss doctrine, but al-
lowed the intentional misrepresentation claim to proceed
to trial. The jury awarded approximately $250,000 in com-
pensatory damages and $140,000 in punitive damages
on the intentional misrepresentation claim that alleged
that Ameritech fraudulently had induced Digicorp to enter
No. 02-2095 19
a contract. The Court of Appeals of Wisconsin upheld
the Digicorp verdict. Relying on Douglas-Hanson, it held
that “the economic loss doctrine does not preclude a
plaintiff’s claim for intentional misrepresentation when the
misrepresentation fraudulently induces the plaintiff to
enter into a contract.” Id. at *7. Reviewing the rationale
behind the economic loss doctrine, the Court of Appeals of
Wisconsin agreed with the trial court that “it would be
contrary to public policy to insulate parties from the
consequences of fraudulent conduct by applying a doc-
trine that would preclude the defrauded party from seek-
ing tort damages.” Id. at *8 (emphasis added, internal quota-
tion marks and citations omitted). The Supreme Court
of Wisconsin granted review and, on January 23, 2003,
heard oral arguments on the issue in Digicorp.
2.
Neither Home Valu, Douglas-Hanson, Digicorp, nor any
of the other cases discussed in the previous section ad-
dressed whether a party may rescind a contract based on
fraudulent inducement or a misrepresentation. No Wis-
consin court appears to have addressed squarely whether
the economic loss doctrine bars a claim for fraudulent
inducement (whether the misrepresentation is negligent,
strict responsibility or intentional) when the remedy
sought is rescission. However, the Supreme Court of
Wisconsin has repeatedly recognized a party’s right to
seek rescission under contract law where its assent was
induced by a material or fraudulent misrepresentation.
The defrauded party can elect whether to seek rescission
20 No. 02-2095
7
or affirm the contract and seek damages. We note that
we have acknowledged that Wisconsin would allow such
an action for rescission. See Marine Bank, N.A. v. Meat
8
Counter, Inc., 826 F.2d 1577, 1588 (7th Cir. 1987).
7
See Bank of Sun Prairie v. Esser, 456 N.W.2d 585, 588 (Wis. 1990)
(“A material misrepresentation of fact may render a contract
void or voidable.”); Merten v. Nathan, 321 N.W.2d 173, 176 n.2
(Wis. 1982) (reviewing the “elements of fraudulent misrepre-
sentation rendering a contract voidable”); First National Bank &
Trust Co. of Racine v. Notte, 293 N.W.2d 530, 537-39 (Wis. 1980)
(examining the contract cause of action at length); Malas v.
Lounsbury, 214 N.W. 332, 333 (Wis. 1927) (“Since Wheelton v.
Hardisty, 8 E. & Bl. 232, in which Lord Campbell held that
provision in a contract that it should be indefensible was ‘sub-
ject to an implied exception of personal fraud which shall vitiate
every contract,’ it has been the rule that all contracts pro-
cured by fraud were voidable with the single exception of
negotiable instruments.”); McClellan v. Scott, 1869 WL 2064 (Wis.
February Term, 1869) (holding that fraudulent representa-
tions inducing party to contract was grounds for avoiding
the contract); Eklund v. Koenig & Assocs., Inc., 451 N.W.2d 150,
153 (Wis. Ct. App. 1989) (“When a party discovers an alleged
fraud . . . , he may affirm the contract and sue for damages, or
he may disaffirm and seek restitution.”); Meas v. Young, 405
N.W.2d 697, 700-01 (Wis. Ct. App. 1987) (noting that “[a]n ac-
tion for rescission may be grounded on misrepresentation”
and reviewing elements).
8
Cf. Barnsdall Refining Corp. v. Birnamwood Oil Co., 92 F.2d 817,
819 (7th Cir. 1937) (recognizing, in case arising in Wisconsin
that a misrepresentation inducing another to contract “entitle[s]
the party deceived thereby to avoid the contract or to maintain
an action for the damages sustained,” but doing so under a
“general rule” of contract law a year before the Supreme Court
case, Erie R.R. Co. v. Tompkins, 304 U.S. 64 (1938)).
No. 02-2095 21
The Supreme Court of Wisconsin has discussed rescission
in the context of the relationship between contract and
tort misrepresentation claims in Whipp v. Iverson, 168
N.W.2d 201 (Wis. 1969), and First National Bank & Trust
Co. of Racine v. Notte, 293 N.W.2d 530 (Wis. 1980).
In Whipp, the Supreme Court of Wisconsin refused to
dismiss a complaint for failure to state a cause of action
when the complaint alleged that the defendants had
made a false representation, that the defendants knew
or should have known that the statements were false,
that the plaintiff relied on those statements, and, conse-
quently, that the plaintiff was induced into entering into
an agreement with the defendants. The plaintiff sought
rescission of the agreement and return of the down pay-
ment. The defendants had moved to dismiss the com-
plaint because the plaintiffs had failed to allege that de-
fendants had made the false representations intentionally
for the purpose of inducing the plaintiffs to sign the
agreement—a required element of fraud claims in tort.
In holding that dismissal was not proper, the Supreme
Court of Wisconsin discussed the overlap of fraud/mis-
representation in tort and contract, noting that Prosser
and Williston use the same classifications in their respec-
tive works on torts and contracts. The court concluded
that “[c]ertainly what is grounds for damages in deceit
[tort] is grounds for rescission, but rescission is not re-
stricted to deceit.” 168 N.W.2d at 204. The court went on
to explain that “[u]nder modern liberality of pleading
and the fusion of law in equity, a demurrer must be over-
ruled if the complaint states facts which entitle the plain-
tiff to any relief. . . . We think therefore a cause of action
is stated for rescission on the strict responsibility theory
if not on the ground of deceit.” Id.
In Notte, 293 N.W.2d 530, the Supreme Court of Wiscon-
sin clarified further the relationship. The court reversed
22 No. 02-2095
and remanded the case for a new trial when the trial
court had submitted the case to the jury on tort theories
of negligent and intentional misrepresentation. The court
explained:
The confusion apparent in this case originates from
the lower courts’ and the parties’ treatment of the is-
sues raised in a framework based on traditional tort
concepts of misrepresentation. Such treatment, how-
ever, is not appropriate. This is a suit to recover on
a contract. . . . We therefore, look to principles of con-
tract and suretyship law in framing the issues and
formulating a mode of analysis.
Id. at 533. The court observed that
[f]rom the defendant’s answer it is apparent that he
was attempting to avoid liability on the contract; not
assert a claim for damages based on tort principles. . . .
If [he] alleged by way of counterclaim, damages re-
sulting from misrepresentations which induced him
to enter the underlying contractual relationship, a
different question would arise. The introductory note
to the Restatement (Second) of Contracts dealing
with misrepresentation discusses the interrelation-
ship between contract and tort actions for misrepre-
sentation. It is noted that avoidance is primarily
dealt with in the contract action, while an affirmative
claim for liability may lie for misrepresentation under
the law of torts. Although the requirements for estab-
lishing misrepresentation sufficient to avoid a con-
tract and the rules for establishing tort liability parallel
each other closely, there are differences.
Id. at 533-34 (internal citations omitted). The court referred
to its earlier decision in Whipp, where it had recognized
the difference between rescission and damages actions
No. 02-2095 23
when law and equity were separate systems. See id. at
534. The court reviewed Wisconsin contract law for in-
stances when a misrepresentation makes a contract void-
able. See id. at 537-39. The court concluded: “If the
grounds for avoidance of the contract have been met,
the remedy is clear. The aggrieved party has the election
of either rescission or affirming the contract and seeking
damages. Mr. Notte in this case has sought relief
9
from his obligation under the contract.” Id. at 539.
3.
In addition to the well-established Wisconsin precedent
recognizing the existence of a contract misrepresentation
9
PowerSports submits that Harley-Davidson should be judi-
cially estopped from claiming that its cause of action sounds
in contract because Harley-Davidson characterized its claims
in earlier pleadings as “tort” claims. We cannot agree with
this characterization of the record. In its earlier pleadings, Har-
ley-Davidson maintained that its actions were grounded in
the common law and that it did not simply bring an action
within the special expertise and jurisdiction of the Florida
Department of Highway Safety and Motor Vehicles. A claim
for rescission alleging that misrepresentations induced a party
to assent to a contract is a common law action whether charac-
terized as a tort or contract claim.
Additionally, and significantly, in those same pleadings,
Harley-Davidson relied on Notte for its claim for rescission. See
R.20 at 28. As we have discussed earlier, the Supreme Court
of Wisconsin in Notte expressly stated that the cause of action
at issue was one of contract and not of tort and that the par-
ties and the lower courts erred by construing the cause as aris-
ing in tort. Thus, in seeking rescission of contract, Harley-
Davidson specifically relied on Wisconsin’s contract law of
misrepresentation.
24 No. 02-2095
action for rescission, the rationale behind Wisconsin’s
economic loss doctrine does not support a rule barring
misrepresentation claims for rescission.
In general, the “economic loss doctrine is a judicially
created doctrine providing that a commercial purchaser
of a product cannot recover from a manufacturer, under
the tort theories of negligence or strict products liabil-
ity, damages that are solely ‘economic’ in nature.” Daanen
& Janssen, Inc. v. Cedarapids, Inc., 573 N.W.2d 842, 844-45
(Wis. 1998). Economic loss generally does not include
damages “based on personal injury or damage to property”
other than to the product giving rise to the commercial
bargain. Id. at 845. The basic idea of the economic loss
doctrine is that parties to a transaction (usually the com-
mercial purchase of a product) cannot “end run around
contract law” in order to recover tort damages. Id. at 850.
The Supreme Court of Wisconsin has explained,
[a]pplication of the economic loss doctrine to tort
actions between commercial parties is generally based
on three policies . . . : (1) to maintain the fundamental
distinction between tort law and contract law; (2) to
protect commercial parties’ freedom to allocate eco-
nomic risk by contract; and (3) to encourage the party
best situated to assess the risk [of] economic loss, the
commercial purchaser, to assume, allocate, or insure
against that risk.
Id. at 846. This rationale does not apply to a misrepre-
sentation claim when the remedy sought is rescission of
contract.
The Supreme Court of Wisconsin explained that the
policy of maintaining the distinction between contract
and tort is based on the recognition that contract law “is
better suited than tort law for dealing with purely economic
No. 02-2095 25
loss in the commercial arena.” Id. at 846. Contract law
should not drown in “a sea of tort.” Id. at 849 (internal
quotation marks omitted). The “heart of the distinction”
between contract and tort “drawn by the economic loss
doctrine is the concept of duty.” Id. at 846. The law of
torts imposes by law a “general duty of care to refrain
from acts unreasonably threatening physical harm.” Id. at
847. The law of contracts “rests on obligations imposed
by bargain,” that is, “the individual limited duties impli-
cated by the law of contracts arise from the terms of the
agreement between the particular parties.” Id. at 846.
However, both the laws of contract and tort recognize a
duty not to fraudulently induce a person into a bargain.
In tort, this duty arises as part of the general duty not
to harm intentionally others or otherwise unreasonably
cause harm. In the tort context, the Supreme Court of
Wisconsin has stated that “[t]he law recognizes the duty
of each to refrain from even attempted deceit of another
with whom he deals, and the right of the latter to as-
sume that he will do so.” Household Fin. Corp. v. Christian,
98 N.W.2d 390, 393 (Wis. 1959) (internal quotation marks
and citations omitted). In contract, a duty not to defraud
other contracting parties arises as part of the duty to bar-
gain in good faith and fair dealing. See In re Chayka,
176 N.W.2d 561, 564 & n.7 (Wis. 1970) (stating that “the
covenant of good faith [] accompanies every contract” and
that “[e]very contract implies good faith and fair dealing
between the parties to it”); Foseid v. State Bank of Cross
Plains, 541 N.W.2d 203, 212-13 (Ct. App. Wis. 1995) (quoting
and applying Chayka). In tort, the remedies are damages;
in contract, the defrauded party is allowed to choose
whether to affirm the contract and seek damages or to
avoid the contract by having it rescinded.
Application of the economic loss doctrine to Harley-
Davidson’s claim would not drown contract duties in “a
26 No. 02-2095
sea of tort” duties, see Daanen & Janssen, 573 N.W.2d at
849 (internal quotation marks omitted), but would drown
both contract and tort duties, allowing recovery in
neither contract nor tort where both systems recognize
that a duty has been violated. In Daanen & Janssen, the
court explained that the party could not “recover in tort
what are essentially contract damages. We see no reason
to extend tort law into an area adequately governed by
contract law.” Id. at 847. The application of the eco-
nomic loss doctrine to fraudulent inducement claims for
rescission of contract would not prevent tort law from
overreaching into contract law, but rather would restrict
contract law from protecting the duty of good faith and
fair dealing and the requirement of mutual assent, negat-
ing its well-established principles. If the economic loss
doctrine barred misrepresentation claims for contract
rescission, those claims would not be governed ade-
quately by either contract or tort.
The second rationale for the economic loss doctrine is
the need “to protect commercial parties’ freedom to al-
locate economic risk by contract.” Daanen & Janssen, 573
N.W.2d at 846. Recognizing the right to rescind a contract
entered into under the circumstances of this case hardly
impinges on the freedom of the parties to allocate risk
by agreement. It simply requires that agreements be
freely made and not be the product of either fraudulent
or material misrepresentation. The Supreme Court of
Wisconsin has recognized that “[f]reedom of contract
is premised on a bargain freely and voluntarily made
through a process of bargaining which has integrity.” Merten,
321 N.W.2d at 178 (emphasis added). The remedy of
rescission, therefore, is not incompatible with the gen-
eral policy of permitting the parties to a contractual rela-
tionship to determine allocation of risk. Indeed, afford-
ing this protection simply ensures that a party will not be
No. 02-2095 27
bound by a risk allocation that was assumed while under
a misapprehension, induced by the other party, as to
the nature of the attendant risks undertaken by the contract.
The Supreme Court of Wisconsin noted that the third
rationale, allowing the purchaser to assume, allocate,
or insure against the risk of loss, is meant to “pro-
mote[] efficiency and predictability in commercial relation-
ships” and to ensure that the defendant will not pass to
the consuming public the costs of tort damages in the
prices of its products. Daanen & Janssen, 573 N.W.2d at
849-50. These benefits are not enhanced by applying the
economic loss doctrine to bar misrepresentation claims
seeking rescission. First, barring a party’s claim for rescis-
sion of contract where its assent was induced by material
or fraudulent misrepresentations would not protect the
expectations of the contracting parties and would not
“promote[] efficiency and predictability in commercial
relationships.” Id. at 849. Parties to a contract do not ex-
pect to be defrauded; rather they expect good faith and
fair dealing, which, as mentioned before, is an implied
covenant accompanying every contract under Wisconsin
law. See Chayka, 176 N.W.2d at 564 & n.7.
Moreover, the costs of allowing the remedy of rescission,
unlike the cost of allowing tort damages, would not be
passed along to the consumer. The remedy of rescission
is meant to put the party back in the position it would
have been in. See Schnuth v. Harrison, 171 N.W.2d 370,
377 (Wis. 1969) (“The effect of a rescission of a contract is
to restore the parties to the position they would have
occupied had no contract ever been made. In other words,
when a contract is rescinded the parties are placed in
the status quo as if no contract had ever been made.”);
Head & Seemann, Inc. v. Gregg, 311 N.W.2d 667, 672 (Wis.
Ct. App. 1981) (noting that “the purpose of rescission . . .
28 No. 02-2095
is to put the defrauded party back in as good a position
as he occupied before entering the contract” (internal
quotation marks and citations omitted)), decision adopted
as the opinion of the Supreme Court of Wisconsin by 318
N.W.2d 381 (Wis. 1982).
In sum, the economic loss doctrine is intended to keep
a party from effecting an “end run around contract law”
to recover under tort law what it could not recover under
contract law and through contract remedies. Daanen &
Janssen, 573 N.W.2d at 850. Here Harley-Davidson is
not seeking to “end run around contract law,” id.; rather,
it is seeking a remedy expressly given to it through con-
tract law—rescission of contract as expounded in Notte.
Harley-Davidson’s claim for rescission does not give
it something in tort that was unavailable to it in contract.
Accordingly, we conclude that, although the question
of whether Wisconsin will apply the economic loss doc-
trine to bar intentional misrepresentation claims for dam-
ages is still an open question, we do not believe that
this unsettled question places in doubt the well-estab-
lished Wisconsin precedent that a party may bring a
contract action for rescission on the ground that the
party entered into the contractual relationship because
of fraud or material misrepresentation. In our view, the
holdings of the Supreme Court of Wisconsin in Whipp
and in Notte make it quite clear that the Supreme Court
of Wisconsin would take this approach rather than allow
the economic loss doctrine to spread its dominion to a
situation that simply does not implicate the policy con-
cerns behind that doctrine.
4.
While Harley-Davidson is entitled to rescission, the mat-
ter is complicated by its prayer for damages. In its amended
No. 02-2095 29
complaint, Harley-Davidson sought “consequential and
incidental damages” as well as punitive damages. R.26
at 13. In its response to PowerSports’ motion for sum-
mary judgment, Harley-Davidson restyled its prayer as
one for “restitution damages” and punitive damages.
R.42 at 8 n.1.
As noted above, under Wisconsin law, if a party’s assent
to a contract is induced by material or fraudulent mis-
representations, that person can either seek rescission or
damages. But Wisconsin law is quite clear that the de-
frauded party cannot seek both: “[I]f a claimant chooses
to seek rescission, he may not sue for damages.” Head &
Seemann, Inc., 311 N.W.2d at 669, decision adopted as
the opinion of the Supreme Court of Wisconsin by 318
N.W.2d 381; see also Seidling v. Unichem, Inc., 191 N.W.2d
205, 208-09 (Wis. 1971) (holding that rescission and en-
forcement of the contract were inconsistent remedies and
that court could not “scramble[]” those “[t]wo eggs”);
Eklund, 451 N.W.2d at 153 (holding that motion for rescis-
sion properly denied after verdict for damages because
“remedy [of rescission] is inconsistent with an action at
law for damages”); Meas, 405 N.W.2d at 699-700 n.3
(“We note that asking the court to rescind and affirming
the contract and suing for damages are generally con-
sidered inconsistent remedies.”).
However, as noted by the court in Head & Seemann,
311 N.W.2d 667, the definition of “damages” forbidden to
a party electing rescission requires more precise elabora-
tion; restitution damages are not barred. “Rescission is
always coupled with restitution” because “rescission
and restorative damages [are] entirely consistent with
each other and therefore not subject to election.” Id. at 667,
672; see also Schnuth v. Harrison, 171 N.W.2d 370, 377-78
(Wis. 1969) (allowing party electing rescission to recover
30 No. 02-2095
monetary award “needed to place him in the same posi-
tion he was in before the contract”). Thus, Harley-David-
son, if it prevails, may recover restitution damages “to
restore [it] to the position [it] would have occupied had
no contract ever been made.” Schnuth, 171 N.W.2d at 377.
Harley-Davidson, however, even if it prevails, will not
be able to recover punitive damages. “Wisconsin does
not allow punitive damages to be awarded in the ab-
sence of an award of actual damages. Nor are punitive
damages available as a remedy for breach of contract
actions.” Weiss v. United Fire & Cas. Co., 541 N.W.2d 753,
763 (Wis. 1995) (internal quotation marks and citations
omitted); Autumn Grove Joint Venture v. Rachlin, 405
N.W.2d 759, 762-63 (Wis. Ct. App. 1987). In Weiss, the
Supreme Court of Wisconsin recognized that even when
both tort and contract theories of recovery were available,
punitive damages were not allowed unless actual dam-
ages had been awarded under the tort theory of recovery.
See Weiss, 541 N.W.2d at 763-64. Here, as explained
above, if Harley-Davidson seeks rescission, its claim for
damages under a tort theory is not available as an incon-
sistent remedy. Thus Harley-Davidson cannot recover
punitive damages below.
C.
Having established that Wisconsin has recognized a
contract claim for rescission based on fraudulent induce-
ment or misrepresentation and having demonstrated the
lack of a relationship between that doctrine and the eco-
nomic loss doctrine, we must determine whether, on
this record, Harley-Davidson can withstand a motion for
summary judgment.
As we have noted, in Notte, the Supreme Court of Wis-
consin reviewed the elements for a contract claim for
No. 02-2095 31
rescission based on fraudulent inducement or misrepre-
sentation. The court explained that, under contract law,
even innocent representations in some circumstances
may entitle a party to rescission. The court adopted the
Restatement’s approach to determining when a contract
will be deemed voidable and subject to rescission by one
of the parties, namely: “When [1] a party’s manifestation
of assent is induced [2] by either a fraudulent or a ma-
terial misrepresentation by the other party, the contract
is voidable by the recipient [3] if he is justified in relying
on the misrepresentation.” Notte, 293 N.W.2d at 538 (in-
ternal quotation marks and citations omitted). The court
explained that “[a] misrepresentation is an assertion that
does not accord with facts as they exist.” Id. The court
noted that a “misrepresentation is material if it is likely
to induce a reasonable person to manifest his assent, or
if the maker knows that it is likely that the recipient
will be induced to manifest his assent by the misrepresen-
tation.” Id. In a footnote, the court stated that “[i]f there
is fraud [in the sense that the defendant intended to de-
ceive the plaintiff], there is no requirement that the mis-
representation be material.” Id. at 538 n.7. The court
then quoted the Restatement to define “fraud”:
A misrepresentation is fraudulent if the maker intends
thereby to induce a party to manifest his assent and
the maker
(a) knows or believes that his assertion is not in
accord with existing facts, or
(b) does not have the confidence in the truth of his
assertion that he states or implies, or
(c) knows that he does not have the basis for his
assertion that he states or implies.
32 No. 02-2095
Id. (internal quotation marks and citations omitted). As
to the element of justifiable reliance, the court did not
agree that Notte’s reliance was not justified merely be-
cause he was allegedly negligent in failing to discover
the facts behind the misrepresentations made. The court
explained that “[t]he recipient’s fault in failing to dis-
cover the facts before entering the contract does not
make his reliance unjustified unless his fault amounts to
a failure to act in good faith or to conform his conduct
to reasonable standards of fair dealing.” Id. at 539.
PowerSports contends that summary judgment should
be granted on multiple grounds. We shall discuss each.
1.
PowerSports contends that summary judgment should
be granted because it timely disclosed its business plans
by mailing Harley-Davidson the draft memorandum be-
fore Harley-Davidson sent its approval. PowerSports sub-
mits that the facts concerning timeliness are undisputed.
It notes that it is undisputed that the draft memorandum
was delivered to Harley-Davidson six hours before Harley-
Davidson sent its approval.
However, the facts that PowerSports characterizes as
“undisputed” facts give rise to disputed inferences. At
summary judgment, we must review the underlying facts
in the light most favorable to the nonmoving party. The
phrase “in the light most favorable to the nonmoving
party,” as we have previously explained, “simply means
that summary judgment is not appropriate if the court
must make ‘a choice of inferences.’ ” Smith v. Severn, 129
F.3d 419, 426 (7th Cir. 1997) (quoting United States v.
Diebold, Inc., 369 U.S. 654, 655 (1962)). That is, “[t]he choice
between reasonable inferences from facts” is a function of
No. 02-2095 33
a fact-finder, and when multiple reasonable inferences
exist on a genuine issue of material fact, summary judg-
ment will not be appropriate. Id.It is undisputed that (1) Harley-Davidson informed
PowerSports that it would give its answer on January 5th;
(2) Harley-Davidson repeatedly had requested in the
prior two months documents concerning, and informa-
tion about, PowerSports’ business plans, particularly
about their plans for the Fern Park dealership and any
possible plans to go public; (3) PowerSports mailed the
draft memorandum overnight delivery on January 4th,
knowing that it would arrive the day that Harley-David-
son was delivering its decision; and (4) the draft memo-
randum remained in Harley-Davidson’s mailroom until
January 6th and thus was not seen until after Harley-
Davidson had granted approval.
From these facts, a fact-finder would be entitled to
determine that PowerSports timely disclosed the memo-
randum. However, drawing all inferences in the light
most favorable to the nonmoving party, as we must, a fact
finder also could infer reasonably that PowerSports inten-
tionally or negligently delivered the memorandum in
such a way and at such a time that the relevant individ-
uals at Harley-Davidson would become aware of its con-
tents only after they already had given PowerSports ap-
proval. Harley-Davidson technically would have received
the memorandum in its mailroom at the same time or
slightly before the approval was given. In short, the
facts support an inference of actionable conduct, if the
trier of fact wishes to make certain permissible infer-
ences from the established adjudicative facts. There are
no established facts that make such an inference unrea-
sonable or demonstrate that PowerSports made any at-
tempts to ensure that the relevant individuals at Harley-
34 No. 02-2095
Davidson actually had received and had time to evaluate
the contents of the memorandum before Harley-David-
son gave its approval. Because there are conflicting infer-
ences concerning whether or not PowerSports timely
disclosed its business plans, summary judgment is not
appropriate.
2.
PowerSports next submits that Harley-Davidson cannot
rely on oral misrepresentations because it later received
written statements that “qualified” the oral representa-
tions or at least put Harley-Davidson on notice of a need
for independent investigation. Appellees’ Br. at 32. Spe-
cifically, PowerSports contends that its statement that
it intended to comply with “all lawful aspects” of the
dealer contract should have alerted Harley-Davidson to
the alleged misrepresentations. Id. at 34. However, the
Supreme Court of Wisconsin in Notte recognized that, in
a claim for rescission under contract law, the plaintiff’s
reliance would not be “unjustified unless [its] fault
amounts to a failure to act in good faith or to conform [its]
conduct to reasonable standards of fair dealing.” Notte, 293
N.W.2d at 539. PowerSports’ evidence does not allow for
such an inference.
3.
We turn next to the issue of whether PowerSports’ failure
to disclose its plans violated its contractual obligation to
No. 02-2095 35
10
proceed in good faith and fair dealing. “Wisconsin ap-
plies the position taken in the Restatement (Second) of
Contracts in determining whether a misrepresentation
10
PowerSports, relying on tort misrepresentation law, see
Ollerman v. O’Rourke Co., 288 N.W.2d 95 (Wis. 1980), submits
that, as to its omissions, it owed Harley-Davidson no duty to
disclose the business plans contained in the draft memoran-
dum. In Ollerman, the Supreme Court of Wisconsin explained
that, in tort misrepresentation claims, a party to a business
transaction only has a duty to disclose under certain circum-
stances. One of those circumstances is that a party to a business
transaction has a duty to disclose “facts basic to the transac-
tion.” Id. at 104-05 n.18. PowerSports argues that the draft
memorandum and its internet, dealership and public owner-
ship plans disclosed in the draft memorandum are not “basic
facts.” Harley-Davidson contends that they are.
Facts are basic to the transaction if (1) the person “knows
that the other is about to enter into” the transaction under a
mistaken view about those facts and (2) a special relationship
or other “objective circumstances” creates a reasonable ex-
pectation of disclosure of those facts. Id. It would be reasonable
to infer that PowerSports knew that Harley-Davidson had a
mistaken view of the facts; moreover, Harley-Davidson’s re-
quests for information on these specific issues might constitute
objective circumstances creating a reasonable expectation of
disclosure. As the Court of Appeals of Wisconsin has explained,
the key to determining whether a duty of disclosure exists
is “whether the mistaken party would reasonably expect dis-
closure.” Hennig v. Ahearn, 601 N.W.2d 14, 22 (Wis. Ct. App.
1999). A jury could certainly infer from the above facts that
Harley-Davidson would reasonably expect disclosure of
PowerSports’ plans. Thus, even if this were a tort misrepresen-
tation claim, summary judgment could not be granted because
it is at least reasonably inferable that PowerSports’ omissions
were of basic facts and thus PowerSports had a duty to dis-
close to Harley-Davidson.
36 No. 02-2095
theory of defense voids a contract.” Marine Bank, 826 F.2d
at 1580 (citing Notte, 293 N.W.2d at 538). According to the
Restatement:
A person’s non-disclosure of a fact known to him is
equivalent to an assertion that the fact does not exist
in the following cases only:
(a) where he knows that disclosure of the fact is
necessary to prevent some previous assertion from
being a misrepresentation or from being fraudulent
or material.
(b) where he knows that disclosure of the fact
would correct a mistake of the other party as to a basic
assumption on which that party is making the con-
tract and if non-disclosure of the fact amounts to a
failure to act in good faith and in accordance with
reasonable standards of fair dealing.
(c) where he knows that disclosure of the fact would
correct a mistake of the other party as to the contents
or effect of a writing, evidencing or embodying an
agreement in whole or in part.
(d) where the other person is entitled to know the
fact because of a relation of trust and confidence be-
tween them.
Restatement (Second) of Contracts § 161. It is inferrable
that PowerSports’ non-disclosure would be the equivalent
of an affirmative misstatement under contract law.
Moreover, there is a genuine issue of material fact as
to whether PowerSports made affirmative material misrep-
resentations (rather than mere omissions). Under contract
law, when seeking rescission based on misrepresentation,
all that is required is that “a party’s manifestation of assent
is induced by either a fraudulent or a material misrepre-
No. 02-2095 37
sentation by the other party.” Notte, 293 N.W.2d at 538.
In order to be material, a misrepresentation merely has to
be likely to induce a reasonable person to manifest his
assent, or the maker has to know “that it is likely that
the recipient will be induced to manifest his assent by
the misrepresentation.” Id. Harley-Davidson explained its
expectations for how dealers should run Harley-Davidson
dealerships and repeatedly asked for information con-
cerning PowerSports’ plans for the Fern Park dealership
and for going public. From these facts, it could be inferred
that PowerSports knew that its representations that it
would operate a community-oriented, exclusive Harley-
Davidson dealership, owned by a company that was not
going public, would induce Harley-Davidson to ap-
prove the transfer and thus were material misrepresenta-
tions. See id.
4.
Finally, PowerSports argues that there were no mis-
representations because the statements and omissions
concern future performance and promises and thus are
not statements concerning present facts. Again, looking
to the Restatement, a “misrepresentation” is defined as
“an assertion that is not in accord with the facts.” Restate-
ment (Second) of Contracts § 159. The comment explains:
An assertion must relate to something that is a fact
at the time the assertion is made in order to be a mis-
representation. Such facts include past events as well
as present circumstances but do not include future
events. . . . However, a promise or a prediction of fu-
ture events may by implication involve an assertion
that facts exist from which the promised or predicted
consequences will follow, which may be a misrepre-
sentation as to those facts.
38 No. 02-2095
Id. cmt. c. Furthermore, in discussing reliance, the Restate-
ment provides:
A statement as to the intention of either the maker or
a third person is an assertion of a fact, his state of
mind, just as a statement of his opinion is such an
assertion. It is therefore a misrepresentation if that
state of mind is not as asserted. However, the truth of
a statement as to a person’s intention depends on
his intention at the time that the statement is made
and is not affected if he subsequently, for any reason,
changes his mind. In order for reliance on an asser-
tion of intention to be justified, the recipient’s expecta-
tion that the maker’s intention will be carried out
must be reasonable.
Restatement (Second) of Contracts § 171, cmt. a. Never-
theless, the Restatement comment further explains that
a contract would not be voidable if a court concluded,
after considering all of the circumstances, that “the buyer’s
misrepresentation is not contrary to reasonable standards
of dealing.” Id.
In this case, there is at least a material question of fact
as to whether PowerSports had a present intent of not go-
ing public and of focusing on the local Seminole County
market. PowerSports expressed in written and oral com-
munications its intent not to go public and its local-market
plans. From the documents produced in discovery, it
is inferable that PowerSports did not actually intend to
use the Fern Park dealership as it represented to Harley-
Davidson or to refrain from going public or divesting
itself of the Harley-Davidson dealership if it did go public.
The Restatement also states that if a “promise is made
with the intention of not performing it, this implied asser-
tion is false and is a misrepresentation. The promise itself
No. 02-2095 39
need not be made in words but may be inferred from
conduct or even supplied by law. Nor does it need to be
a legally enforceable promise.” Id. at cmt. b. Again, as
testified to by Harley-Davidson’s representatives, and
construing the facts in the light most favorable to Harley-
Davidson, PowerSports’ alleged promise that it would
not go public or would divest itself of the dealership if
it did was incompatible with the statements found in
the draft memorandum. Thus it is at least inferable that
PowerSports made that promise “with the intention of not
performing it.” Id.
Accordingly, we must conclude that PowerSports is
not entitled to summary judgment on this record.
Conclusion
Harley-Davidson has stated a viable cause of action
for contractual rescission. There is no indication that the
Supreme Court of Wisconsin would consider the eco-
nomic loss doctrine applicable to such a rescission action.
Moreover, PowerSports is not entitled to summary judg-
ment on this record. Many of the adjudicative facts of
the case are undisputed. Nevertheless, the reasonable
inferences arising from those facts are disputed and
create genuine issues of material fact. Accordingly, the
judgment of the district court is reversed, and the case
is remanded for proceedings consistent with this opin-
ion. Harley-Davidson may recover its costs in this court.
REVERSED and REMANDED
40 No. 02-2095
A true Copy:
Teste:
_____________________________
Clerk of the United States Court of
Appeals for the Seventh Circuit
USCA-02-C-0072—2-21-03