Opinion ID: 2643775
Heading Depth: 2
Heading Rank: 1

Heading: Divining State Law.

Text: The key to this puzzle is whether Washington's highest court, if squarely confronted with the question, would recognize a cause of action for breach of a contract to negotiate; that is, an action for breach of a contract that binds the parties to some course of conduct during negotiations. The most reliable guide to the interpretation of state law is the jurisprudence of the state's highest court. See, e.g., Kathios v. Gen. Motors Corp., 862 F.2d 944, 946 (1st Cir. 1988). But we think that the district court erred in deeming the absence of an on-point opinion from the -6- state's highest court dispositive. If such a lacuna exists, a federal court sitting in diversity should not simply throw up its hands but, rather, should endeavor to predict how that court would likely decide the question. See, e.g., In re Bos. Reg'l Med. Ctr., Inc., 410 F.3d 100, 108 (1st Cir. 2005). In fashioning such a prediction, the federal court should consult the types of sources that the state's highest court would be apt to consult, including analogous opinions of that court, decisions of lower courts in the state, precedents and trends in other jurisdictions, learned treatises, and considerations of sound public policy. See Andrew Robinson Int'l, Inc. v. Hartford Fire Ins. Co., 547 F.3d 48, 51-52 (1st Cir. 2008). The federal court may pay particular attention to sources cited approvingly by the state's highest court in other opinions. Id. at 52. The goal is to replicate, as well as possible, the decision that the state's highest court would be likely to reach. In this instance, we agree with the district court that the Washington Supreme Court has never recognized the enforceability of contracts to negotiate. By the same token, however, that court has not repudiated such a cause of action. The closest the court has come to either of these positions is its response to a certified question from the Ninth Circuit Court of Appeals. See Keystone Land & Dev. Co. v. Xerox Corp., 94 P.3d 945 (Wash. 2004) (en banc). There, the Washington Supreme Court -7- declared that it was unnecessary to decide whether Washington will ever enforce a contract to negotiate. Id. at 950. Although Keystone left the question open, the court provided valuable insight into how it might view the issue in the future. Its approach creates a taxonomy that comprises three different types of agreements: (i) agreements to agree, which require a further meeting of the minds and are, therefore, nonbinding; (ii) agreements with open terms, in which the parties intend to be bound to key points and to have a court or other authority supply the missing terms; and (iii) contracts to negotiate, in which the parties agree to be bound to a specific course of conduct during negotiations. Keystone, 94 P.3d at 948 (citing E. Allan Farnsworth, Precontractual Liability and Preliminary Agreements: Fair Dealing and Failed Negotiations, 87 Colum. L. Rev. 217, 253, 263 (1987)). The enforceability of this third type of agreement, the court concluded, was an open question in Washington.3 See id.; see also P.E. Sys., LLC v. CPI Corp., 289 3 Courts and scholars have used a variety of terms to describe contracts to negotiate. For example, some use the term Type II preliminary agreement, see, e.g., Brown v. Cara, 420 F.3d 148, 153 (2d Cir. 2005), others use the term binding preliminary commitment, see, e.g., Teachers Ins. & Annuity Ass'n of Am. v. Tribune Co., 670 F. Supp. 491, 498 (S.D.N.Y. 1987), and still others use the term agreement to negotiate, 1 Arthur L. Corbin, Corbin on Contracts § 2.8(b) (Joseph M. Perillo rev. ed. 1993). For simplicity's sake, we refer throughout to contracts to negotiate — the nomenclature employed in Keystone, 94 P.3d at 948. -8- P.3d 638, 644 (Wash. 2012) (en banc) (referencing relevant language from Keystone). We find it helpful that the Keystone court went on to enumerate certain bedrock principles of contract law that would apply to any analysis it might later make of contracts to negotiate. See Keystone, 94 P.3d at 948-49. For one thing, the court emphasized that agreements entered into by willing parties, which do not offend public policy, are generally enforceable. See id. at 948. For another thing, Keystone confirmed that Washington follows the objective manifestation test for contracts, under which parties form a contract by manifesting their mutual assent to be bound. Id. at 949. The obligations of the parties must be sufficiently definite to allow courts to fix liability, and the exchange of promises must be supported by consideration. Id. Even though the Washington Supreme Court has not spoken definitively to the issue, the state's intermediate appellate court has recently enforced a contract to negotiate. See Columbia Park Golf Course, Inc. v. City of Kennewick, 248 P.3d 1067, 1076 (Wash. Ct. App. 2011). But the strength of this precedent is suspect because the appellant there apparently did not dispute the enforceability of such contracts but, instead, merely appealed the damages award. See id. at 1074. Consequently, we give this precedent little weight. -9- The case law elsewhere is a mixed bag. Withal, two things seem clear. First, many more jurisdictions have recognized the enforceability of contracts to negotiate than have repudiated that doctrine. Compare, e.g., Brown v. Cara, 420 F.3d 148, 156-59 (2d Cir. 2005) (construing New York law), Venture Assocs. Corp. v. Zenith Data Sys. Corp., 96 F.3d 275, 277-78 (7th Cir. 1996) (construing Illinois law), Newharbor Partners, Inc. v. F.D. Rich Co., 961 F.2d 294, 298-99 (1st Cir. 1992) (construing Rhode Island law), Channel Home Ctrs. v. Grossman, 795 F.2d 291, 299 (3d Cir. 1986) (construing Pennsylvania law), Copeland v. Baskin Robbins U.S.A., 117 Cal. Rptr. 2d 875, 879-85 (Cal. Ct. App. 2002), SIGA Techs., Inc. v. PharmAthene, Inc., 67 A.3d 330, 343-47 (Del. 2013), and Logan v. D.W. Sivers Co., 169 P.3d 1255, 1258-60 (Or. 2007) (en banc), with, e.g., Knight v. Sharif, 875 F.2d 516, 525 (5th Cir. 1989) (construing Mississippi law) and MidAmerican Distribution, Inc. v. Clarification Tech., Inc., 807 F. Supp. 2d 646, 668 (E.D. Ky. 2011) (construing Kentucky law). Second, the trend line appears to be moving steadily in favor of recognizing a cause of action for breach of a contract to negotiate. See, e.g., Keystone Land & Dev. Co. v. Xerox Corp., 353 F.3d 1093, 1097 (9th Cir. 2003) (discussing the modern trend and collecting numerous case, treatise, and law review citations); Burbach Broad. Co. of Del. v. Elkins Radio Corp., 278 F.3d 401, 408-09 (4th Cir. 2002) (citing modern trend in contract law and recognizing doctrine under West -10- Virginia law); 1 E. Allan Farnsworth, Farnsworth on Contracts § 3.26b (3d ed. 2004) (describing doctrine as having gained a substantial following); Alan Schwartz & Robert E. Scott, Precontractual Liability and Preliminary Agreements, 120 Harv. L. Rev. 661, 675 (2007) (describing recognition of contracts to negotiate as the new default rule). There is, moreover, abundant support for the enforcement of contracts to negotiate in other sources that the Washington Supreme Court would be apt to find persuasive. From first principles, a contract is merely an exchange of promises that the law will enforce. See Restatement (Second) of Contracts § 1 (1981). A contract is formed when the parties objectively manifest their intention to be bound and consideration exists. See id. at § 17; see also Keystone, 94 P.3d at 949. The baseline rule (absent some affront to public policy) is for courts to honor parties' expressed intentions in structuring their contractual affairs. See Hodge v. Evans Fin. Corp., 707 F.2d 1566, 1568 (D.C. Cir. 1983) (A basic principle of contract law is the concept of freedom of contract — the right of the contracting parties to structure their transactions in accordance with their wishes.); see also Keystone, 94 P.3d at 948 (citing Farnsworth, Precontractual Liability, supra, at 267). A contract to negotiate, in which the parties' promises normally embody the duty to negotiate in good faith, presents no -11- obvious exception to this baseline rule. See Newharbor, 961 F.2d at 298-99. The manifested intention of the parties is the lodestar. See Channel Home, 795 F.2d at 299; Teachers Ins. & Annuity Ass'n v. Tribune Co., 670 F. Supp. 491, 499 (S.D.N.Y. 1987); see also 1 Arthur L. Corbin, Corbin on Contracts § 2.9 (Joseph M. Perillo rev. ed. 1993). Scholarly works and case law describe compelling reasons both as to why parties may desire to exchange such binding promises and as to why courts may deem it socially beneficial to enforce them. Modern transactions often involve significant up-front investments in deal structuring and due diligence, and parties may wish to protect those investments in some measure. See Schwartz & Scott, Precontractual Liability, supra at 665-67. Without any such protection, a rapacious counter-party may attempt to take advantage of the other party's sunk investment by trying to retool the deal at the last minute. See Venture Assocs., 96 F.3d at 278. To forestall such gamesmanship, parties may wish to build in safeguards that will operate early in the bargaining process. This can be accomplished by binding themselves sufficiently such that they feel comfortable investing resources into the deal, but without inextricably committing themselves to a transaction that is still inchoate. Contracts to negotiate can satisfy this need. -12- To be sure, there are some considerations that may counsel against adopting a rule that contracts to negotiate are enforceable. Three such considerations are worthy of mention. First, courts are understandably hesitant to enforce agreements whose terms are too indefinite to allow easy and objective identification of a breach. See Restatement (Second) of Contracts § 33 (1981); see also Keystone, 94 P.3d at 949. With respect to contracts to negotiate, it can be argued that courts will struggle both to define negotiating in good faith and to identify a party's failure to do so. See 1 Corbin on Contracts, supra, § 2.8. But in the main, courts have found this obstacle surmountable. See, e.g., Teachers, 670 F. Supp. at 506; Logan, 169 P.3d at 1259-60; see also A/S Apothekernes Laboratorium for Specialpraeparater v. I.M.C. Chem. Grp., Inc., 873 F.2d 155, 158-60 (7th Cir. 1989) (finding no breach of obligation to negotiate in good faith). Moreover, courts routinely make judgments as to parties' good faith (or the lack of it) in analogous contexts. See, e.g., O'Tool v. Genmar Holdings, Inc., 387 F.3d 1188, 1197-1203 (10th Cir. 2004) (discussing implied duty of good faith and fair dealing under Delaware law); Mathis v. Exxon Corp., 302 F.3d 448, 453-59 (5th Cir. 2002) (discussing Uniform Commercial Code duty to act in good faith when fixing open price terms); Peckham v. Cont'l Cas. Ins. Co., 895 F.2d 830, 834-35 (1st Cir. 1990) (discussing -13- insurer's duty to negotiate settlements in good faith). And with specific reference to contracts to negotiate, Professor Farnsworth has suggested that bad faith in negotiations can be separated into seven subsets: refusal to negotiate, improper tactics, unreasonable proposals, nondisclosure, negotiation with others, reneging, and breaking off negotiations. 1 Farnsworth on Contracts, supra, § 3.26c; see also Farnsworth, Precontractual Liability, supra, at 269-85. This refinement makes the definitional task easier. Second, courts and scholars have quibbled about the appropriate measure of damages when a contract to negotiate has been breached. In the opinion of some, damages should be limited to the sums spent in reliance on the broken promise. See, e.g., Copeland, 117 Cal. Rptr. 2d at 885; Logan, 169 P.3d at 1263. In the opinion of others, expectancy damages may be available. See, e.g., Venture Assocs., 96 F.3d at 278-79; Columbia Park, 248 P.3d at 1076-78. This uncertainty, however, does not speak to the viability of a cause of action for breach of a contract to negotiate. It speaks only to the nature of the proper remedy. Third, some judges have worried about the manifest need for courts charged with enforcing contracts to negotiate to tread carefully lest they trap[] parties in surprise contractual obligations that they never intended. Teachers, 670 F. Supp. at 497. But this concern was noted and discounted in Keystone, where -14- the Washington Supreme Court concluded that the state's fundamental requirements for contract formation were sufficient to address it. Keystone, 94 P.3d at 949. In this case, all roads lead to Rome. After surveying the relevant legal landscape in Washington and beyond and weighing the pertinent policy considerations, we conclude that the Washington Supreme Court will in all probability recognize the enforceability of contracts to negotiate when it squarely confronts that issue.