Court Opinion

ID: 9475386
Source: CourtListenerOpinion
Date Created: 2023-08-05 05:25:43.333547+00
Date Added: 2024-06-11T17:44:41.249874
License: Public Domain

POSNER, Circuit Judge,
dissenting.
My brethren have decided, with no better foundation than judicial intuition about what businessmen consider reasonable, that the Uniform Commercial Code gives a supplier an absolute right to cancel an exclusive-dealing contract if the dealer is acquired, directly or indirectly, by a competitor of the supplier. I interpret the Code differently.
Nexxus makes products for the hair and sells them through distributors to hair salons and barbershops. It gave a contract to Best, cancellable on any anniversary of the contract with 120 days’ notice, to be its exclusive distributor in Texas. Two years later Best was acquired by and merged into Sally Beauty, a distributor of beauty sup*1009plies and wholly owned subsidiary of Alberto-Culver. Alberto-Culver makes “hair care” products, too, though they mostly are cheaper than Nexxus’s, and are sold to the public primarily through grocery stores and drugstores. My brethren conclude that because there is at least a loose competitive relationship between Nexxus and Alberto-Culver, Sally Beauty cannot — as a matter of law, cannot, for there has been no trial on the issue — provide its “best efforts” in the distribution of Nexxus products. Since a commitment to provide best efforts is read into every exclusive-dealing contract by section 2-306(2) of the Uniform Commercial Code, the contract has been broken and Nexxus can repudiate it. Alternatively, Nexxus had “a substantial interest in having his original promisor perform or control the acts required by the contract,” and therefore the delegation of the promisor’s (Best’s) duties to Sally Beauty was improper under section 2-210(1).
My brethren’s conclusion that these provisions of the Uniform Commercial Code entitled Nexxus to cancel the contract does not leap out from the language of the provisions or of the contract; so one would expect, but does not find, a canvass of the relevant case law. My brethren cite only one case in support of their conclusion: a district court case from Maryland, Berliner Foods Corp. v. Pillsbury Co., 633 F.Supp. 557 (D.Md.1986), which, since it treated the contract at issue there as one for personal services, id. at 559 (a characterization my brethren properly reject for the contract between Nexxus and Best), is not helpful. Berliner is the latest in a long line of cases that make the propriety of delegating the performance of a distribution contract depend on whether or not the contract calls for the distributor’s personal (unique, irreplaceable, distinctive, and therefore nondel-egable) services. See, e.g., Bancroft v. Scribner, 72 Fed. 988 (9th Cir.1896); Detroit Postage Stamp Service Co. v. Schermack, 179 Mich. 266, 146 N.W. 144 (1914); W.H. Barber Agency Co. v. Co-Op. Barrel Co., 133 Minn. 207, 158 N.W. 38 (1916); Paige v. Faure, 229 N.Y. 114, 127 N.E. 898 (1920). By rejecting that characterization here, my brethren have sawn off the only limb on which they might have sat comfortably.
A slightly better case for them (though not cited by them) is Wetherell Bros. Co. v. United States Steel Co., 200 F.2d 761, 763 (1st Cir.1952), which held that an exclusive sales agent’s duties were nondelegable. The agent, a Massachusetts corporation, had agreed to use its “best endeavors” to promote the sale of the defendant’s steel in the New England area. The corporation was liquidated and its assets sold to a Pennsylvania corporation that was not shown to be qualified to conduct business in Massachusetts, the largest state in New England. On these facts the defendant was entitled to treat the liquidation and sale as a termination of the contract. The Wetherell decision has been understood to depend on its facts. See Jennings v. Foremost Dairies, Inc., 37 Misc.2d 328, 235 N.Y.S.2d 566, 574 (1962); 4 Corbin on Contracts, 1971 Pocket Part § 865, at p. 128. The facts of the present case are critically different. So far as appears, the same people who distributed Nexxus’s products for Best (except for Best’s president) continued to do so for Sally Beauty. Best was acquired, and continues, as a going concern; the corporation was dissolved, but the business wasn’t. Whether there was a delegation of performance in any sense may be doubted. Cf Rossetti v. City of New Britain, 163 Conn. 283, 303 A.2d 714, 718-19 (1972). The general rule is that a change of corporate form — including a merger — does not in and of itself affect contractual rights and obligations. United States Shoe Corp. v. Hackett, 793 F.2d 161, 163-64 (7th Cir.1986).
The fact that Best’s president has quit cannot be decisive on the issue whether the merger resulted in a delegation of performance. The contract between Nexxus and Best was not a personal-services contract conditioned on a particular individual’s remaining with Best. Compare Jennings v. Foremost Dairies, Inc., supra, 235 N.Y.S.2d at 574. If Best had not been acquired, but its president had left anyway, as of *1010course he might have done, Nexxus could not have repudiated the contract.
No case adopts the per se rule that my brethren announce. The cases ask whether, as a matter of fact, a change in business form is likely to impair performance of the contract. Wetherell asked this. So did Arnold Productions, Inc. v. Favorite Films Corp., 298 F.2d 540, 543-44 (2d Cir.1962), and Des Moines Blue Ribbon Distributors, Inc. v. Drewrys Ltd., 256 Iowa 899, 129 N.W.2d 731, 738-39 (1964). Green v. Camlin, 229 S.C. 129, 92 S.E.2d 125, 127 (1956), has some broad language which my brethren might have cited; but since the contract in that case forbade assignment it is not an apt precedent.
My brethren find this a simple case — as simple (it seems) as if a lawyer had undertaken to represent the party opposing his client. But notions of conflict of interest are not the same in law and in business, and judges can go astray by assuming that the legal-services industry is the pattern for the entire economy. The lawyerization of America has not reached that point. Sally Beauty, though a wholly owned subsidiary of Alberto-Culver, distributes “hair care” supplies made by many different companies, which so far as appears compete with Alberto-Culver as vigorously as Nexxus does. Steel companies both make fabricated steel and sell raw steel to competing fabricators. General Motors sells cars manufactured by a competitor, Isuzu. What in law would be considered a fatal conflict of interest is in business a commonplace and legitimate practice. The lawyer is a fiduciary of his client; Best was not a fiduciary of Nexxus.
Selling your competitor’s products, or supplying inputs to your competitor, sometimes creates problems under antitrust or regulatory law — but only when the supplier or distributor has monopoly or market power and uses it to restrict a competitor’s access to an essential input or to the market for the competitor’s output, as in Otter Tail Power Co. v. United States, 410 U.S. 366, 93 S.Ct. 1022, 35 L.Ed.2d 359 (1973), or FTC v. Brown Shoe Co., 384 U.S. 316, 86 S.Ct. 1501, 16 L.Ed.2d 587 (1966), or United Air Lines, Inc. v. CAB, 766 F.2d 1107, 1114-15 (7th Cir.1985). See also Olympia Equipment Leasing Co. v. Western Union Telegraph Co., 797 F.2d 370, 376-79 (7th Cir.1986). There is no suggestion that Alberto-Culver has a monopoly of “hair care” products or Sally Beauty a monopoly of distributing such products, or that Alberto-Culver would ever have ordered Sally Beauty to stop carrying Nexxus products. Far from complaining about being squeezed out of the market by the acquisition, Nexxus is complaining in effect about Sally Beauty’s refusal to boycott it!
How likely is it that the acquisition of Best could hurt Nexxus? Not very. Suppose Alberto-Culver had ordered Sally Beauty to go slow in pushing Nexxus products, in the hope that sales of Alberto-Cul-ver “hair care” products would rise. Even if they did, since the market is competitive Alberto-Culver would not reap monopoly profits. Moreover, what guarantee has Alberto-Culver that consumers would be diverted from Nexxus to it, rather than to products closer in price and quality to Nexxus products? In any event, any trivial gain in profits to Alberto-Culver would be offset by the loss of goodwill to Sally Beauty; and a cost to Sally Beauty is a cost to Alberto-Culver, its parent. Remember that Sally Beauty carries beauty supplies made by other competitors of Alberto-Culver; Best alone carries “hair care” products manufactured by Revlon, Clairol, Bristol-Myers, and L’Oreal, as well as Alberto-Culver. Will these powerful competitors continue to distribute their products through Sally Beauty if Sally Beauty displays favoritism for Alberto-Culver products? Would not such a display be a commercial disaster for Sally Beauty, and hence for its parent, Alberto-Culver? Is it really credible that Alberto-Culver would sacrifice Sally Beauty in a vain effort to monopolize the “hair care” market, in violation of section 2 of the Sherman Act? Is not the ratio of the profits that Alberto-Culver obtains from Sally Beauty to the profits it obtains from the manufacture of *1011“hair care” products at least a relevant consideration?
Another relevant consideration is that the contract between Nexxus and Best was for a short term. Could Alberto-Culver destroy Nexxus by failing to push its products with maximum vigor in Texas for a year? In the unlikely event that it could and did, it would be liable in damages to Nexxus for breach of the implied best-efforts term of the distribution contract. Finally, it is obvious that Sally Beauty does not have a bottleneck position in the distribution of “hair care” products, such that by refusing to promote Nexxus products vigorously it could stifle the distribution of those products in Texas; for Nexxus has found alternative distribution that it prefers — otherwise it wouldn’t have repudiated the contract with Best when Best was acquired by Sally Beauty.
Not all businessmen are consistent and successful profit maximizers, so the probability that Alberto-Culver would instruct Sally Beauty to cease to push Nexxus products vigorously in Texas cannot be reckoned at zero. On this record, however, it is slight. And there is no principle of law that if something happens that trivially reduces the probability that a dealer will use his best efforts, the supplier can cancel the contract. Suppose there had been no merger, but the only child of Best’s president had gone to work for Alberto-Culver as a chemist. Could Nexxus have canceled the contract, fearing that Best (perhaps unconsciously) would favor Alberto-Culver products over Nexxus products? That would be an absurd ground for cancellation, and so is Nexxus’s actual ground. At most, so far as the record shows, Nexxus may have had grounds for “insecurity” regarding the performance by Sally Beauty of its obligation to use its best efforts to promote Nexxus products, but if so its remedy was not to cancel the contract but to demand assurances of due performance. See UCC § 2-609; Official Comment 5 to § 2-306. No such demand was made. An anticipatory repudiation by conduct requires conduct that makes the repudiating party unable to perform. Farnsworth, Contracts 636 (1982). The merger did not do this. At least there is no evidence it did. The judgment should be reversed and the case remanded for a trial on whether the merger so altered the conditions of performance that Nexxus is entitled to declare the contract broken.