Hinc, Thomas P. v. Lime-O-Sol Company ( 2004 )

In the
United States Court of Appeals
For the Seventh Circuit
____________
No. 03-4247
THOMAS HINC,
Plaintiff-Appellant,
v.
LIME-O-SOL COMPANY,
Defendant-Appellee.
____________
Appeal from the United States District Court
for the Northern District of Illinois, Eastern Division.
No. 02 C 4302—Elaine E. Bucklo, Judge.
____________
ARGUED JUNE 8, 2004—DECIDED AUGUST 31, 2004
____________
Before EASTERBROOK, KANNE, and DIANE P. WOOD, Circuit
Judges.
KANNE, Circuit Judge. Thomas Hinc, a resident of
Illinois, sued Lime-O-Sol Company (“LOS”), an Indiana
corporation with its headquarters in Indiana, for breach of
contract. Holding that LOS’s contractual obligation to use
its “best efforts” to market the product developed by Hinc
was too vague to be enforceable, the district court granted
summary judgment in favor of LOS. Hinc appeals. We
reverse.
2 No. 03-4247
I. History
Through his experience in the paint industry and as
an employee handling claims for the Sherwin-Williams
Company, a paint manufacturer, Hinc became aware of the
recurring problems of surfactant leaching and tannin bleed-
ing, which cause brown surface stains on painted exteriors.
Often, because of this discoloration, paint manufacturers
and insurance companies were forced to repaint entire
commercial complexes at their own expense. Hinc sought to
find a cost-effective remedy by inventing a product that
would remove the stains, eliminating the need to repaint.
Hinc mixed different ingredients and tested them on stains,
eventually finding one that worked. Hinc’s product, which
he named Less Work Painted Surface Stain Remover (“Stain
Remover”), combined a certain proportion of a secret
ingredient with a shower-cleaning product manufactured by
LOS (“Shower Cleaner”).
Hinc used a hand-mixed batch of his Stain Remover to re-
move exterior stains from a building painted with Sherwin-
Williams paint, saving Sherwin-Williams approximately
$100,000. Lacking knowledge of the Shower Cleaner for-
mula but understanding the commercial potential of Stain
Remover, Hinc contacted LOS about his invention in early
1999.
Over the next several months, LOS and Hinc explored
whether Hinc’s product would be viable. During this time
frame, Hinc visited LOS’s facility in Ashley, Indiana at
least two times to discuss potential applications of Stain
Remover. LOS representatives never visited Illinois for any
reason relating to Stain Remover. The parties negotiated
over the telephone.
In August of 1999, Hinc and LOS came to an agreement.
LOS signed the contract in Indiana on August 17, 1999.
Hinc signed in Illinois the following day and mailed it back
to LOS. The contract provided that while Hinc would retain
No. 03-4247 3
ownership of the secret ingredient, he would divulge it to
LOS. LOS would produce and distribute Stain Remover while
keeping Hinc’s secret ingredient confidential. Hinc would
receive $10 per gallon sold. Without discussion between the
parties as to its meaning, the contract contained a term
obligating both parties to use their “best efforts” to market
the product “in a manner that seems appropriate.” The
contract, which was subject to annual review, contained a
provision allowing either party to cancel upon ninety-days
written notice.
After he signed the contract, Hinc supplied LOS with the
secret ingredient and secured orders for Stain Remover
with Sherwin-Williams. LOS filled these orders with its
Shower Cleaner, not the combined product containing
Hinc’s secret ingredient. LOS claims production difficulties
prohibited filling the orders with Stain Remover, and, in
order to deliver the orders on time, Hinc agreed to allow
LOS to ship Shower Cleaner instead of Stain Remover. Hinc
denies he ever agreed to this. Ultimately, LOS never
produced, marketed, or sold Stain Remover during the dur-
ation of the contract.
After one year, in early September of 2000, Hinc requested
either a new agreement that would guarantee him a mini-
mum payment of $2000 per month or the Shower Cleaner
formula so that he could seek marketing and further
production through a different manufacturer. LOS refused
to divulge its portion of the Stain Remover formula—the
formula for Shower Cleaner—or agree to the new terms.
The contract was renewed as previously signed.
On May 7, 2001, LOS sent Hinc a letter informing him
that LOS had changed management and wanted to mater-
ially alter the terms of the contract. On May 9, 2001, Hinc
sent LOS a letter outlining LOS’s failure to market or
promote Stain Remover and notifying LOS that he would
cancel the contract in ninety days, on August 9, 2001.
4 No. 03-4247
Hinc filed a breach of contract suit against LOS in the
Northern District of Illinois based on diversity jurisdiction.
The district court, applying Indiana law, granted LOS’s
motion for summary judgment and dismissed Hinc’s suit. In
its order, the court determined that the “best efforts” pro-
vision contained in the contract was vague and unenforce-
able as a matter of Indiana law.
On appeal, Hinc argues that Indiana law governs his suit,
while LOS claims that Illinois law applies. Hinc also argues
that the district court improperly granted summary judg-
ment because contracts with “best efforts” clauses are
readily enforceable under Indiana or Illinois law.
II. Analysis
For federal subject-matter jurisdiction to exist in this
diversity case, we must satisfy ourselves that the amount
in controversy exceeds $75,000 as required by 28 U.S.C.
§ 1332(a). Because this was not an issue raised below, we
requested, at oral argument, that Hinc explain the basis for
his assertion that his damages at the time of filing would
exceed $75,000. Hinc pointed to LOS’s internal memo from
July of 1999, drafted prior to the contract at issue, which
contemplated selling 500 gallons of Hinc’s product for each
of the next six months. Because the contract required LOS
to pay Hinc $10 per gallon sold, Hinc claims damages of
$5000 for each month that the contract was in effect until
he voided the contract almost two years later. Therefore,
the amount in controversy appears to exceed the $75,000
threshold (24 months x $5000 = $120,000), which leads us
to conclude that there is federal subject-matter jurisdiction.
Hinc appeals the district court’s grant of LOS’s motion for
summary judgment. We review the court’s decision de novo,
viewing the facts and drawing all inferences in favor of
Hinc, the non-moving party. Zaccagnini v. Chas. Levy
Circulating Co., 338 F.3d 672, 674 (7th Cir. 2003). Sum-
No. 03-4247 5
mary judgment is appropriate only when there is no gen-
uine issue of material fact and the moving party is entitled
to judgment as a matter of law. Fed. R. Civ. P. 56(c); see
Celotex Corp. v. Catrett, 477 U.S. 317, 322-23 (1986).
A. Indiana Law Applies
Initially, we must determine whether Indiana or Illinois
law applies. The contract here does not contain a choice-of-
law provision. Federal courts sitting in diversity apply the
choice-of-law rules of the forum state to determine the ap-
plicable substantive law. Jupiter Aluminum Corp. v. Home
Ins. Co., 225 F.3d 868, 873 (7th Cir. 2000) (citing Klaxon Co.
v. Stentor Elec. Mfg. Co., 313 U.S. 487, 496 (1941)). Illinois
has adopted the “most significant contacts” test proffered by
the Restatement (Second) of Conflicts § 188 (1971) in
deciding choice-of-law disputes with respect to contractual
issues. Ruiz v. Blentech Corp., 89 F.3d 320, 323-24 (7th Cir.
1996); Wildey v. Springs, 47 F.3d 1475, 1481-83 (7th Cir.
1995). Under this test, “the contacts relevant to the choice-
of-law decision include ‘the place of contracting, negotiation,
performance, location of the subject matter of the contract,
and the domicil[e], residen[ce], place of incorporation, and
business of the parties.” Wildey, 47 F.3d at 1483 (quoting
Palmer v. Beverly Enters., 823 F.2d 1105, 1109-10 (7th Cir.
1987)). Hinc and LOS disagree on which state has the most
significant contacts, with Hinc arguing that the contract is
governed by Indiana law and LOS claiming that Illinois law
applies.
Hinc signed the contract in Illinois the day after LOS
signed in Indiana. “The place of contracting is the jurisdic-
tion wherein is accomplished the last act necessary to give
validity to the contract.” Ill. Tool Works v. Sierracin Corp.,
479 N.E.2d 1046, 1051 (Ill. App. Ct. 1985). The common law
mailbox rule provides that once an offer is made, acceptance
is effective when the offeree puts the signed contract in the
6 No. 03-4247
mail. Restatement (Second) of Contracts § 63 (1979); see
Gordon v. Tow, 498 N.E.2d 718, 723 (Ill. App. Ct. 1986).
Thus, under the mailbox rule, the place of contracting is
Illinois because the contract became effective when Hinc
mailed the contract in Illinois.
Negotiation of contractual terms took place over the tele-
phone while each party was in its home state. Prior to the
drafting of the contract, Hinc visited LOS in Indiana to
discuss possible applications of his formula; LOS represen-
tatives never entered Illinois. Therefore, the place of nego-
tiation favors Indiana.
The place of performance favors Indiana as well. The is-
sue in this suit is LOS’s alleged failure to make any effort
in carrying out its contractual obligation to market Stain
Remover. This alleged breach occurred in Indiana, where
LOS made its business decisions. Moreover, the subject
matter of the contract—production and marketing services
to be performed by LOS—is located in Indiana. With Hinc
residing in Illinois and LOS in Indiana, the domicile factor
is neutral.
While the place of contracting favors Illinois, the place of
negotiation, the place of performance, and the location of
the subject matter of the contract all favor Indiana. On
balance, we agree with the district court that Indiana law
controls this case.
B. “Best Efforts” Clause
Having found that Indiana law governs, we must now
decide whether the “best efforts” clause contained in the
parties’ contract is so ambiguous as a matter of Indiana law
that it may not be enforced. Neither the parties nor our own
No. 03-4247 7
research has found an Indiana Supreme Court or Indiana
appellate court ruling on point.1
When, as here, a federal court sitting in diversity is called
upon to decide an unsettled question of state law, our obli-
gation is to deduce, as closely as possible, how the Indiana
Supreme Court would rule. Allstate Ins. Co. v. Menards,
Inc., 285 F.3d 630, 636-37 (7th Cir. 2002). “[F]ederal courts
of appeals must review de novo the district court’s determi-
nation of the content of state law . . . .” Id. at 636 (citing
Salve Regina Coll. v. Russell, 499 U.S. 225 (1991)).
Where possible, Indiana courts will construe contracts as
being valid, rather than void. Ind.-Am. Water Co., Inc. v.
Town of Seelyville, 698 N.E.2d 1255, 1259 (Ind. Ct. App.
1998). In applying Indiana contract law, the primary pur-
pose is to ascertain and give effect to the intentions of the
parties. Ft. Wayne Bank Bldg., Inc. v. Bank Bldg. & Equip.
Corp. of Am., 309 N.E.2d 464, 467 (Ind. Ct. App. 1974). This
requires courts to “read the agreement in a manner which
harmonize its provisions as a whole and to give effect to the
1
The district court, in finding the “best efforts” clause at issue
here so vague as to be unenforceable, relied exclusively on Wright-
Moore Corp. v. Ricoh Corp., 794 F. Supp. 844 (N.D. Ind. 1991),
aff ’d, 980 F.2d 432 (7th Cir. 1992). In that diversity case, the
district court in Indiana applied general Indiana contract-inter-
pretation principles in finding a contract clause with the caption
“Best Efforts” unenforceable for vagueness. Id. at 867. There, unlike
here, the “best efforts” clause contained a quota provision; yet, that
provision was never enforced and a quota was never assigned,
leading the court to determine that the clause was vague and in-
definite and thus, unenforceable. Id. On appeal, we declined to ad-
dress the enforceability of the “best efforts” clause, affirming on
other grounds. See Wright-Moore Corp. v. Ricoh Corp., 980 F.2d
432, 437 (7th Cir. 1992). Thus, we do not agree that Wright-Moore
supports LOS’s position that, as a matter of law, the best efforts
clause at issue here is unenforceable because of vagueness.
8 No. 03-4247
parties’ expressed intent.” Kelly v. Smith, 611 N.E.2d 118,
121 (Ind. 1993). “In most cases, the intent of the parties to
a contract is to be determined by the ‘four corners’ of the
contract[,]” Dick Corp. v. Geiger, 783 N.E.2d 368, 374 (Ind.
Ct. App.), trans. denied, 792 N.E.2d 47 (Ind. 2003), “giving
the words contained therein their plain, usual, and ordinary
meaning,” Samar, Inc. v. Hofferth, 726 N.E.2d 1286, 1290
(Ind. Ct. App. 2000). “When a court finds a contract to be
clear in its terms and the intentions of the parties apparent,
the court will require the parties to perform consistently
with the bargain they made.” First Fed. Sav. Bank of Ind.
v. Key Markets, Inc., 559 N.E.2d 600, 604 (Ind. 1990). An
ambiguous contract is construed against the drafting party.
MPACT Constr. Group, LLC v. Superior Concrete Construc-
tors, Inc., 802 N.E.2d 901, 910 (Ind. 2004).
Keeping in mind the general principles and rules of con-
struction of Indiana contract law outlined above, we now
turn to the contract in this case. The clause at issue here
states: “This is a ‘best efforts’ agreement on the part of
Lime-O-Sol and Thomas P. Hinc to market such product in
a manner that seems appropriate.” The phrase, “in a man-
ner that seems appropriate,” is obviously indefinite and
could mean different things to different people, but we do
not believe that the clause as a whole is so vague as to be
unenforceable as a matter of law. LOS, which drafted this
provision of the contract, agreed to put forth its “best efforts”
to market Stain Remover and required the same of Hinc.
“Best efforts,” as commonly understood, means, at the very
least, some effort. It certainly does not mean zero effort—
the construction LOS urges here to escape any obligation
under its contract. Cf. Olympia Hotels Corp. v. Johnson Wax
Dev. Corp., 908 F.2d 1363, 1373 (7th Cir. 1990) (noting that
the term “best efforts” is “a familiar one in contract par-
lance”); E. Allen Farnsworth, On Trying to Keep One’s
Promises: The Duty of Best Efforts in Contract Law, 46 U.
Pitt. L. Rev. 1, 8 (1984) (noting that fifty years ago it was
No. 03-4247 9
generally accepted that a duty defined only in terms of best
efforts was too indefinite to be enforced, but that such a
view is no longer widely held today). We believe that
Indiana’s highest court would take the approach that “best
efforts” provisions can be contractually enforced.2
III. Conclusion
The “best efforts” clause at issue here was not so vague as
to be unenforceable under Indiana law. We therefore
REVERSE the judgment of the district court and REMAND for
further proceedings consistent with this opinion.
A true Copy:
Teste:
________________________________
Clerk of the United States Court of
Appeals for the Seventh Circuit
2
A different question, that we do not resolve, is whether no mar-
keting effort, which LOS admits was what it exerted here, was the
“manner that seems appropriate” given the circumstances of this
case. This, however, is a disputed issue that must be addressed by
a fact finder.
USCA-02-C-0072—8-31-04