Court Opinion

ID: 9474179
Source: CourtListenerOpinion
Date Created: 2023-08-05 04:50:05.705968+00
Date Added: 2024-06-11T17:43:56.747771
License: Public Domain

*722POSNER, Circuit Judge,
dissenting in part.
The proposition that my learned brethren embrace in this case is that a dealer can defraud his supplier and yet the supplier be helpless to terminate him. If a statute or some other source of law required this result then one could but shake one’s head in wonder at the asininity of the law. But no law requires the result. It is the contract that, in my brethren’s view, requires it; in their view the supplier, though a large and vastly experienced franchisor, empowered the dealer to commit fraud yet remain a dealer in good standing.
Lippo, a franchised Mobil dealer, committed a palpable and potentially very harmful fraud against Mobil by deliberately selling another supplier’s gas under Mobil’s name. This was a willful breach of contract; jeopardized Mobil’s trademark; deprived Mobil of revenues; and could have gotten Mobil into serious legal trouble if the bootleg gasoline had been leaded gas sold as unleaded Mobil. But because the contract contains a provision allowing the dealer to cure any default within ten days, and Lippo was caught before ten days had elapsed and was forced to cover Mobil’s name on the pumps (so that the misbranding may have ceased then — though this is not certain, as we shall see), my brethren hold that Mobil’s termination of Lippo was a breach of contract. Lippo defrauded Mobil, not Mobil Lippo, but in acting to prevent a recurrence of the fraud by terminating Lippo, Mobil ends up on the losing end of a breach of contract suit. This result would be a disturbing commentary on the morality and good sense of American law if Lippo had any grounds for his suit, but he does not.
A paragraph in the contract forbids Lippo to use Mobil’s trademarks in connection with the sale of substituted products and provides in words that could not be clearer that “any violation of the provisions of this paragraph by Buyer shall give Seller the right to immediately terminate this contract.” There was a violation and Mobil terminated the contract. That would be the end of the matter except for another provision of the contract, which allows Mobil to terminate the contract if a default goes uncorrected for more than ten days; this is the provision for cure, on which my brethren base their decision. The two provisions can easily be reconciled by confining the right of cure to breaches committed in good faith. This reading would prevent Mobil from pouncing on an unimportant and inadvertent and perhaps involuntary breach — in other words, a breach made in good faith — without exposing Mobil to fraud by its dealer. My brethren do not consider this mode of reconciliation, but instead in effect throw out the first provision.
Since liability for breach of contract is strict and since the franchise contract imposes many duties on the franchisee that he might violate accidentally (for example, his workers might fail to clean the station’s restrooms one day), the provision allowing cure serves to prevent Mobil from using the pretext of an inadvertent, unimportant, and perhaps even involuntary breach by Lippo to yank his franchise. Misbranding, however, is never that kind of breach. It is not possible for a dealer to find himself accidentally selling, from Mobil’s underground storage tanks and pumps, gasoline supplied by another producer. It is especially not possible in a case such as this, where the dealer handles only one brand of gas. The only storage tanks and pumps that Lippo had were tanks and pumps supplied to him by Mobil, and there was no way that Lippo could accidentally commingle Mobil gas with any other gas. It cannot have been the parties’ intention, in writing a provision for cure into the contract, to give Lippo a license to commit a deliberate, serious, and inexcusable breach of a fundamental term of the contract; a license to defraud the licensor. As my brethren interpret the contract, every Mobil dealer who signs such a contract can misbrand until the eleventh day after he is caught, yet remain a Mobil dealer. That cannot be a correct interpretation.
*723This would be evident even without a provision in the contract expressly allowing Mobil to terminate Lippo immediately for misbranding; for “every contract imposes upon each party a duty of good faith and fair dealing in its performance and its enforcement.” Restatement (Second) of Contracts, § 205 (1981); see also Farnsworth, Contracts § 7.17, at pp. 526-27 (1982). The right of cure was conditional on Lippo’s having acted in good faith in defaulting on his contractual obligations; for it would have made no sense for Mobil to agree to let Lippo, in the name of cure, commit serious breaches of contract with impunity, provided only that he discontinue them within ten days of Mobil’s discovering them. It is to prevent such absurdities that the duty of good faith is read into every contract; and it cannot be (though my brethren imply it is) that only the franchisor has a duty of good faith, and the franchisee is free to break the contract in bad faith. The duty of good faith rests on “each party.” Restatement, supra, § 205.
It is no answer that Mobil can sue Lippo for breach of contract. If a breach of contract is committed by conduct that is also tortious, the breach is not excused just because the victim has a right to bring a tort suit. The purpose of making a breach of contract a ground for termination by the other party is that termination — self-help— is normally a much cheaper remedy than having to bring a lawsuit, meanwhile being locked into an unwanted contractual relationship, here with someone who is not much better than a thief. The right to sue would be an especially inadequate substitute for the right to terminate in this case. Not only are Mobil’s expenses of suit likely to exceed the amount of damages that can actually be collected from the owner of a gas station, but the amount of provable damages is likely to be small relative to the actual injury to Mobil. The injury is not the loss of some revenues; that is minor. The injury is the impairment of Mobil’s trademarks, and cannot readily be quantified. The fact that it cannot readily be quantified does not make it trivial; and even if what Lippo did to Mobil was a
trivial harm, still we must consider the implications if every Mobil dealer may deliberately misuse Mobil’s trademarks, to his profit, without losing his franchise. The cumulative effects could be very serious, and can be prevented under the view my brethren take only if Mobil brings suit against every dealer emboldened by the majority opinion to engage in misbranding. It is (putting the matter with great restraint) unlikely that this is the only remedy that the parties meant to allow to Mobil.
The provision of the contract that entitles Mobil “to immediately terminate” the contract for misbranding makes this even clearer as well as creating an embarrassing question for my brethren: what does that provision mean if all breaches of contract are curable? Since the provision for cure itself allows the contract to be terminated if the default is not corrected in ten days, -and since my brethren hold that misbranding is curable, it seems that the provision for immediate termination, though obviously of vital importance to the owner of a valuable trademark, has been read right out of the contract. My brethren think that the provision means only that Mobil can terminate the contract for misbranding after ten days without further notice. This would be little enough at best; actually it is nothing at all. It is true that the provision for cure requires notice before termination after the period for cure has expired, while the provision for immediate termination does not mention notice. But the distinction is unreal. You can hardly terminate a contract, before it expires, without telling the other party what you are doing to him. What would it mean for Mobil to say to Lippo, “Oh, by the way, we terminated you last year for misbranding— only we didn’t bother to tell you at the time”? In any event, as we shall see, it would violate the Petroleum Marketing Practices Act for Mobil to attempt to cancel a franchise without notice. And the difference between the two contract provisions cannot be the difference between oral and written notice, because the contract requires that all notices be in writing. Mobil *724cannot terminate the contract on any ground without written notice. The majority opinion indeed reads the immediate-termination provision out of the contract.
My brethren believe most improbably that despite the parties’ efforts to make the contract terminable immediately if Lippo sold other suppliers’ gasoline as Mobil gasoline, Lippo could do just that for as long as he could get away with it and when he was caught he could keep on selling that gasoline as Mobil gasoline for another ten days and Mobil’s only remedy would be to bring a lawsuit (doubtless of little value) against Lippo. As Lippo would remain a Mobil dealer, he might decide to repeat the fraud. This, however, would probably be too much for my brethren, and they would (or at least might) then read into the contract a provision allowing Mobil to tack together successive frauds and call it one fraud not cured within ten days. They thus seem willing to interpret the contract loosely if that is necessary to avert totally absurd results — willing, indeed, to make the contract quite vague by requiring that a distinction be made between a series of individual breaches and a single “continuing” breach. But they are not willing to interpret the contract reasonably — as they could easily do by confining the provision for cure to breaches made in good faith — to avert merely absurd results.
Although the contract does not use the word “cure,” we can learn something from the meaning of the term in contract law, on which see Farnsworth, supra, § 8.17. For example, if in a contract to sell goods the buyer rejects the seller’s tender because of some defect in the goods, but the time within which the seller was to perform (that is, was to make a perfect tender of the goods) has not yet expired, the seller will be allowed to make a conforming tender within that time. See UCC § 2-508(1). This is cure in a quite literal sense; for, provided that the seller makes a conforming tender within the contractual time limits, he has averted the harm that his earlier breach threatened to do. But if it is too late to undo the harm, the attempt at cure will not excuse the breach; you cannot cure a disease after the patient has died from it. “Cure is not always possible, as in the case of a singer who does not show up on the night of the opera.” Farnsworth, supra, at p. 613 n. 1. Lippo could no more cure his breach in selling misbranded gasoline simply by ceasing to sell it than the singer could cure her default by showing up the next night. Of course the parties to a contract can agree to a broader power of cure than the common law would give them in the absence of an express provision and they may have done that here, but the right of cure that Lippo asserts goes too far beyond the conventional boundaries to be plausibly imputed to the parties.
There is even some doubt whether Lippo’s breach could be, if not cured (it could not be cured, in the sense of averted, as I have said), at least corrected — stopped— within ten days. I shall illustrate with Lippo’s misbranding of regular Mobil. When Lippo put 3,000 gallons of bootleg gasoline into his “empty” regular-Mobil tank, there were still 800 gallons of Mobil in the tank. The pumps do not pump out the last 800 gallons in the tank; an “empty” tank contains this amount at the bottom. After the unauthorized purchase there were 3,800 gallons of gasoline in the tank, presumably well mixed, of which approximately 75 percent was not Mobil gasoline. When Lippo was caught out in his fraud he covered the Mobil name on the pumps and continued pumping until the tank was again “empty,” that is, until there were only 800 gallons left. Of these, 75 percent (600 gallons) would not have been Mobil gasoline. Mobil then delivered 2,200 gallons of regular Mobil to refill the tank, making a total of 3,000 gallons in the tank, of which 600 were not Mobil gasoline. Thus, after Lippo’s default was “cured,” 20 percent of the gas in the tank was still not Mobil gas, and Lippo continued pumping this gas under the Mobil name. If this was not misbranding, which it probably was, it was adulteration — which is forbidden along with misbranding in the paragraph that gives Mobil a right of immediate termi*725nation for certain violations. The adulteration was not cured within ten days; it may never be cured, though it will decay exponentially, and eventually become insignificant, as Lippo continues buying Mobil gasoline to replenish the tank as it empties.
A semanticist or grammarian might admire the ingenuity with which the majority opinion draws refined verbal distinctions, notably that between “default” and “violation,” which is the lever by which the provision for immediate termination for misbranding is eased out of the contract. The provision refers to “violation,” and in my brethren’s analysis a “default” — the word used in the provision for cure — becomes a “violation” when the period for cure has elapsed without correction. The violation is a moth, and the default is the caterpillar; and without the caterpillar, there can be no moth. My brethren do not consider the possibility that “default” was used in the provision for cure because it connotes a lesser breach than “violation.” This distinction is supported by the dictionary, which uses words like “lack” and “neglect” as synonyms for “default” and words like “transgression” and “infringement” as synonyms for “violation.” But linguistic subtlety is in any event out of place in interpreting this contract. It is not a contract between lexicographers; it was not drawn to provide hermeneutical exercises for judges. “It is the parties’ linguistic reference that is relevant, not the judges’.” Mellon Bank, N.A. v. Aetna Business Credit, Inc., 619 F.2d 1001, 1011 n. 12 (3d Cir.1980).
What we ought to ask, and use common sense and a sense of commercial reality in answering, is whether the parties would have agreed to make the ten-day cure provision applicable to misbranding if the issue had come up during the contract negotiations. It seems to me pretty obvious that Mobil would never have agreed to such an application and that for Lippo to have pressed for it would just have convinced Mobil of Lippo’s unreliability and have made the negotiations collapse. Imagine Lippo saying to Mobil: “I would like to be able to sell another supplier’s gas under your name for up to ten days after you catch me at it, as that will enable me among other things to enjoy the use of your premises at a much lower rent during that period.” If Lippo had bought no Mobil gas for ten days his rent for the period would have been only about half of what he would otherwise have owed, assuming he bought the same volume of some other supplier’s gas.
The only point I can find in favor of my brethren’s position, besides the commonplace judicial sympathy, here undoubtedly misplaced, for the little man up against the vast multinational corporation (I shall come back to this point), is that the provision that allows immediate termination for misbranding also allows immediate termination for the lesser violation of failing to get Mobil’s approval in advance for advertising, “including color schemes.” This is not so trivial a violation as my brethren suppose, because color is part of Mobil’s trademark; but as is not true of misbranding, the restrictions on advertising could be violated inadvertently, and for an inadvertent breach immediate termination might as I suggested earlier be a disproportionate sanction, and therefore one that the parties, had they considered the point, would not have wanted to impose. If Mobil had terminated Lippo for such a breach we would therefore have a difficult case and it might be possible to stretch the cure provision to cover it. But this would be limiting rather than nullifying the provision that allows immediate termination for some violations of the contract; and to say that because the provision for cure might reach a good-faith violation involving Mobil’s trademarks it must therefore reach misbranding done in bad faith is a non sequitur.
Finally, my brethren’s interpretation of the contract is inconsistent with the Second Circuit’s decision in Wisser Co. v. Mobil Oil Corp., 730 F.2d 54 (2d Cir.1984), another case where Mobil terminated a misbranding dealer without giving him an opportunity to cure his breach. It is true that there are differences between the two contracts and *726that it was even clearer in Wisser than it is in this case that Mobil had no intention of putting itself in the dealer’s power to defraud it. The fact that Mobil is the franchisor in both cases is some additional evidence against supposing that it put itself in Lippo’s power, having declined to put itself in Wisser’s power. But I am particularly-interested in the part of Wisser in which the court rejected Wisser’s argument that the Petroleum Marketing Practices Act, 15 U.S.C. §§ 2801 et seq., required Mobil to give him an opportunity to cure his violation of the franchise. Of course it is possible in theory that the Act would give a franchisee fewer rights than the franchise contract; it just is completely unrealistic. The Act (so far as Wisser or the present case is concerned) was passed to give gasoline dealers rights they could not get by contract. See S.Rep. No. 731, 95th Cong., 2d Sess. 17-18 (1978), U.S.Code Cong. & Admin.News 1978, p. 873.
The Act forbids an oil company to terminate a dealer without 90 days’ notice unless such notice “would not be reasonable” in the circumstances, 15 U.S.C. § 2804(b)(1), in which event notice must be given as early as “is reasonably practicable,” 15 U.S.C. § 2804(b)(1)(A). The Second Circuit thought that in the case of misbranding no advance notice — and hence no opportunity for cure — was required. An opportunity to cure, the court pointed out, need not be given when the default “undermines the [franchise] relationship and ... does not call for a second chance”; “the proposition that a franchisee always has the right to cure a default is obviously wrong.” 730 F.2d at 59. To like effect see JFC Investors Ltd. v. Gulf Products Division, 608 F.Supp. 1136, 1141-42 (W.D.N.C.1985); Amoco Oil Co. v. D.Z. Enterprises Inc., 607 F.Supp. 595, 600-01 (E.D.N.Y.1985); In re Joyner, 46 B.R. 130, 134-35 (M.D.Ga. Bkrtcy.1985); cf. H.R.H. Service Station, Inc. v. Exxon Co., U.S.A., 591 F.Supp. 25, 26 (S.D.N.Y.1983); AAMCO Industries, Inc. v. DeWolf 312 Minn. 95, 102-03, 250 N.W.2d 835, 839-40 (1977).' These observations are even more pertinent to interpreting a contract designed to protect the interests of both parties than a statutory provision designed to protect only the franchisee.
Let us not lose sight of the basic issue. It is not whether “Lippo is a bad actor who, under all the circumstances presented here, deserves to lose his business,” although as a matter of fact he is, and does. It is true that what I call fraud “may have been only a small businessman’s (misguided) effort to stay in operation” — if anyone believed Lippo’s testimony, but no one does (see note 2 of majority opinion). It was fraud, and we have no power to say to Mobil, it was a little fraud, and you must forgive it. Such an approach would make it impossible for a businessman to know in. advance when he could terminate a contract because of misconduct by the other party to the contract. And lest my position seem hardhearted I hasten to add that twisting a contract to help the little man who is dishonest hurts the little man who is honest; a decision that makes it harder for Mobil to terminate dishonest dealers will, by increasing the risks that Mobil bears when it decides to sell gasoline through a dealer, make it more costly for Mobil to sell gasoline through dealers in general, in just the same way that making it hard for creditors to collect debts from defaulting debtors raises interest rates to all debtors. It is no answer that Mobil should go back to the drawing board and come up with an airtight contract. It is not easy to draft a contract that an unsympathetic court, a court that thinks a defrauding dealer should have another chance (or damages in lieu thereof), can’t find a loophole in.
But the basic issue as I say is different. It is whether a rational franchisor would, and whether this rational franchisor did, empower his dealers to defraud him by attaching his trademark to another supplier’s product. Unless as I devoutly hope the decision can somehow be limited to gasoline shortages (see note 4 in majority opinion), in which event it will merely be a sport, the surprising answer that my brethren have given to this question will send shock waves through industries that sell *727their products through franchised dealers, will confirm the widespread view in the business community (among other communities) that contemporary American law is unintelligible and unjust, and, not least, will set back the cause of purposive and realistic contract interpretation.