Court Opinion

ID: 2998679
Source: CourtListenerOpinion
Date Created: 2015-09-24 19:46:09.831537+00
Date Added: 2024-06-11T12:08:33.839876
License: Public Domain

In the
 United States Court of Appeals
               For the Seventh Circuit
                         ____________

No. 05-1285
CONFOLD PACIFIC, INC.,
                                               Plaintiff-Appellant,
                                v.

POLARIS INDUSTRIES, INC.,
                                               Defendant-Appellee.
                         ____________
            Appeal from the United States District Court
               for the Eastern District of Wisconsin.
              No. 03 C 829—Lynn Adelman, Judge.
                         ____________
   ARGUED SEPTEMBER 23, 2005—DECIDED JANUARY 10, 2006
                         ____________

  Before POSNER, RIPPLE, and ROVNER, Circuit Judges.
  POSNER, Circuit Judge. The district judge granted sum-
mary judgment for the defendant, Polaris, a manufacturer of
snowmobiles and other vehicles, in this diversity suit by
ConFold for breach of contract and unjust enrichment.
Polaris used to ship its vehicles in disposable containers, but
in 1993 it began considering the possibility of using return-
able containers instead. ConFold was a new company that
wanted to produce such containers, and in the following
two years, assisted by a management consulting and
software development firm named CAPS Logistics, it
conducted a “reverse logistics analysis” of Polaris’s ship-
2                                                 No. 05-1285

ping needs. That is an analysis of how best to deal
with goods returned by customers, for example whether
to refurbish and resell them, recycle them, reuse their
components, sell them as scrap, or tell the customer
to discard them. Sarah Mason, “Backward Progress,”
Industrial Engineer, Aug. 1, 2002, p. 3; Patricia J. Daugherty,
“Information Support for Reverse Logistics: The Influence of
Relationship Commitment,” 23 J. Bus. Logistics 85 (2002). It
was conducted pursuant to an agreement, prepared by
ConFold, between it and Polaris that was entitled “Mutual
Non-Disclosure Agreement—Logistics Consulting Version.”
That agreement is the basis of ConFold’s claim of breach of
contract.
  Two months after the agreement was signed, Polaris
requested proposals for the design of a returnable container
that would fit its needs. The request was sent to nine firms,
including ConFold. All ConFold was told was that “your
design will be one of nine considered at this point.” Polaris
accepted none of the proposals. But a few years later it
designed a returnable container and subsequently began
using containers manufactured by a firm to which it had
given the design. ConFold claims that Polaris’s design was
based on the design that ConFold had submitted to Polaris
in response to the request for proposals.
  The breach of contract issue is whether the “Mutual Non-
Disclosure Agreement—Logistics Consulting Version”
bound Polaris not to reveal to a third party any return-
able-container design that ConFold submitted to Polaris.
The title of the contract suggests it did not, that the
scope of the nondisclosure agreement was confined to
reverse logistics analysis. The suggestion is reinforced by
the timing; for when the contract was signed, the dealings
between the parties related only to that analysis, which
No. 05-1285                                                 3

ConFold was to conduct for Polaris. The preamble to the
contract states, moreover, that “ConFold has information
relating to its proprietary software systems, documentation,
and related consulting services which it considers to be
proprietary,” and the phrase “software systems, documenta-
tion, and related consulting services” refers to the reverse
logistics analysis itself, for it was to that analysis that
the software, documentation, and consulting services
pertained. The implication is that the only proprietary
information that ConFold would be revealing to
Polaris would be information relating to the analysis.
  This interpretation is bolstered by the statement in the
contract that it is the “entire Agreement between the
two parties concerning the exchange and protection of
proprietary information relating to the program” (emphasis
added). The only program in the contemplation of the
parties was the software program to be used to produce
the reverse logistics analysis, and the information that
would be proprietary was the software and other mate-
rials relating to that analysis. It is one thing to determine
whether a customer ought to switch to returnable containers
and another to design the containers that the customer will
use if he does switch. There is no hint in the contract that
the design of containers was within its scope.
   The district judge might have decided that the contract
unambiguously excluded design information, in which
event no evidence beyond the contract itself would
have had to be considered. Especially when dealing with
a substantial contract between “commercially sophisti-
cated parties . . . who know how to say what they mean and
have an incentive to draft their agreement carefully,” Bank
of America, N.A. v. Moglia, 330 F.3d 942, 946 (7th Cir. 2003),
there is great merit to the rule that the meaning of an
4                                                  No. 05-1285

unambiguous contract is a question of law rather than of
fact, e.g., Columbia Propane, L.P. v. Wisconsin Gas Co., 640
N.W.2d 819, 826 (Wis. App. 2001), rev’d on other grounds,
661 N.W.2d 776 (Wis. 2003); Insurance Co. of North America
v. DEC Int’l, Inc., 586 N.W.2d 691, 693 (Wis. App. 1998), with
the consequence “that unambiguous contractual language
must be enforced as it is written.” Town of Neenah Sanitary
Dist. No. 2 v. City of Neenah, 647 N.W.2d 913, 916 (Wis. App.
2002); see also Folkman v. Quamme, 665 N.W.2d 857, 864
(Wis. 2003). The rule enables contract disputes to be re-
solved quickly and cheaply, “protects the parties against the
vagaries of the litigation process—a major reason for
committing contracts to writing—without too great a risk of
misinterpretation,” and by thus minimizing both contractual
transaction costs and uncertainty increases the value of
contracts as means of conducting business. Bank of America,
N.A. v. Moglia, supra, 330 F.3d at 946.
   Enforcing contracts as written has particular merit
when the party that drafted the contract, which is to say
ConFold (though, as we’ll see, ConFold was largely copying
an earlier contract drafted by someone else), is arguing that
it should be relieved from the consequences of having
neglected to spell out its rights concerning the very core of
the transaction. Walters v. National Properties, LLC, 699
N.W.2d 71, 75 (Wis. 2005); Tranzact Technologies, Ltd. v.
Evergreen Partners, Ltd., 366 F.3d 542, 546 n. 2 (7th Cir. 2004);
Harris v. Union Electric Co., 787 F.2d 355, 365 n. 7 (8th Cir.
1986). For the only subject of the contract
was confidentiality. Polaris, though it knew that ConFold
manufactured returnable containers, couldn’t be expected to
peek into ConFold’s mind and discover that ConFold
thought the duty of confidentiality extended to materials,
namely container designs, that were neither mentioned
in the contract nor germane to the project for which
No. 05-1285                                                     5

Polaris had hired ConFold, which was a consulting rather
than a design project.
   It is true that a contract can be clear on its face—clear, that
is, to a reader not familiar with the commercial context—yet
still be ambiguous when that context is restored. That is the
domain of “extrinsic” or “latent” ambiguity. Dispatch
Automation, Inc. v. Richards, 280 F.3d 1116, 1121 (7th Cir.
2002); Evergreen Investments, LLC v. FCL Graphics, Inc., 334
F.3d 750, 756 (8th Cir. 2003); Mews v. Beaster, 694 N.W.2d
476, 479 (Wis. App. 2005). The parties to a sale of cotton may
have specified that the cotton be shipped on the ship
Peerless—nothing ambiguous about such a provision to the
uninformed reader—but if it turns out that there are two
ships by that name to which the contract might refer, the
contract is revealed as ambiguous and extrinsic evidence
(evidence beyond the words of the contract) is admissible to
help resolve the ambiguity. Raffles v. Wichelhaus, 2 H. & C.
906, 159 Eng. Rep. 375 (Ex. 1864).
  The district judge found the contract in this case am-
biguous, but not because of anything in the commercial
context. Rather, he thought it ambiguous on its face, requir-
ing him to consider extrinsic evidence, First Bank & Trust v.
Firstar Information Services, Corp., 276 F.3d 317, 322 (7th Cir.
2001) (Wisconsin law), because of the further statement in
the preamble that “ConFold and Polaris are desirous of
exchanging information for purposes of both companies
developing future business with each other.” The referent of
“future business” could just be the reverse logistics analysis,
which had not begun because Polaris refused to approve the
project until a confidentiality agreement was signed; it was
in response to that demand that Confold submitted the
agreement. But a more natural reading, reinforced by the
fact that the quoted language is in that agreement and the
6                                                 No. 05-1285

logistics analysis is the subject of the agreement and thus
“present” rather than “future” business, is that the reference
was to a possible future sale by ConFold of returnable
containers to Polaris. The parties hoped not only that the
exchange would enable successful completion of the
analysis but also that, if so, it might provide the foundation
for a fruitful relationship at the next stage, when (and if)
Polaris went into the market to buy returnable containers,
possibly from ConFold. It is not unusual for a firm to be
hired first as a consultant to advise a buyer on his needs,
and later, when those needs are formulated, to bid to supply
them; and ConFold’s initial proposal to Polaris for the
reverse logistics analysis actually quoted a price for addi-
tional services—including design.
  The quoted language is best understood, however, as
merely an explanation for why the parties were exchanging
information, and committing to its confidentiality, concern-
ing the reverse logistics analysis. They hoped to do future
business; they did not commit to. ConFold’s interpretation
lacks sensible limits. It spreads the blanket of confidentiality
over “exchanging information”—any information. This
would require that any information the parties exchanged,
including their phone numbers, be kept confidential
(forever?), and that is an implausible intention to impute to
them.
  But having rightly or wrongly decided that the con-
tract was ambiguous, the district judge turned to the
extrinsic evidence—and concluded that it clinched Polaris’s
interpretation of the contract rather than creating a triable
issue. The briefs in our court contain a confusing discussion
of how a court should treat extrinsic evidence under various
assumptions. ConFold mistakenly concedes that if that
evidence is undisputed, the judge can interpret the contract
No. 05-1285                                                    7

without recourse to a trial. Not so; for if there is tension
between that evidence and the words of the contract, or if
for any other reason the meaning of the contract remains
uncertain even after the extrinsic evidence is presented,
there must be a trial to determine the contract’s meaning. In
re Modern Dairy of Champaign, Inc., 171 F.3d 1106, 1109 (7th
Cir. 1999); Mathews v. Sears Pension Plan, 144 F.3d 461, 468
(7th Cir. 1998). The task of the trier of fact in a contract case
includes putting together bits and pieces of evidence in
order to create a convincing mosaic of meaning, rather than
just resolving outright conflicts in extrinsic evidence.
Western Industries, Inc. v. Newcor Canada Ltd., 739 F.2d 1198,
1205 (7th Cir. 1984) (Wisconsin law).
  Nevertheless the undisputed extrinsic evidence so
strongly supported Polaris that, considering that the
language of the contract was only minimally ambiguous,
a trial could have had but one outcome. For it turned out
that the confidentiality agreement had been copied from
ConFold’s confidentiality agreement with CAPS, a contract
drafted by CAPS and limited to that firm’s proprietary
software and related intellectual property; CAPS does
not design containers. Moreover, ConFold had a form
confidentiality agreement “specific for design” but did not
ask Polaris to sign it.
  So summary judgment was properly granted on the
contract claim, and we turn to the other claim, which is
for unjust enrichment. ConFold contends that by exploit-
ing its design for returnable containers Polaris wrong-
fully enriched itself to the tune of more than $25 million.
Polaris denies that the returnable containers that it is us-
ing are based on ConFold’s design, but the district judge did
not reach that issue; nor need we.
8                                                 No. 05-1285

   ConFold argues that Minnesota law governs the unjust
enrichment claim, Polaris that Wisconsin law does. (The
contract claim is governed by general principles of con-
tract law, rather than anything special to the law of either
state.) Wisconsin law denies recovery for unjust enrich-
ment if all the defendant has done is use (to his profit) an
idea of the plaintiff that is not a trade secret. Gary Van
Zeeland Talent, Inc. v. Sandas, 267 N.W.2d 242, 249 (Wis.
1978); Abbott Laboratories v. Norse Chemical Corp., 147 N.W.2d
529, 541 (Wis. 1967). Minnesota law contains hints of a
contrary view. Rehabilitation Specialists, Inc. v. Koering, 404
N.W.2d 301, 302, 306-07 (Minn. App. 1987); Tate v. Scanlan
Int’l, Inc., 403 N.W.2d 666, 671-72 (Minn. App. 1987); Micro
Display Systems, Inc. v. Axtel, Inc., 699 F. Supp. 202, 205
(D. Minn. 1988) (Minnesota law). We doubt that there is
a real conflict, for reasons explained below. But in any event
the district judge was correct that Wisconsin would apply its
own law to a case such as this. The Wisconsin cases adopt a
presumption in favor of applying Wisconsin law to cases
litigated in the state, as this case was. State Farm Mutual
Automobile Ins. Co. v. Gillette, 641 N.W.2d 662, 676 (Wis.
2002); Hunker v. Royal Indemnity Co., 204 N.W.2d 897, 902-03
(Wis. 1973); Wilcox v. Wilcox, 133 N.W.2d 408, 416-17 (Wis.
1965). The presumption, the district judge rightly concluded
in granting summary judgment for Polaris on this branch of
the case as well, has not been rebutted, especially when we
consider that ConFold both is incorporated in Wisconsin
and, more important, has its principal place of business
there. Beloit Liquidating Trust v. Grade, 677 N.W.2d 298, 306-
07 (Wis. 2004).
  The parties have hurled at us a bewildering array of terms
on this branch of the case—“unjust enrichment,” of course,
but also “restitution,” “trade secret,” “misappropriation,”
“quasi-contract,” “quantum meruit,” and others. Let us try
No. 05-1285                                                  9

to make sense of them. (Proliferation of terms is a bane of
the law.) “Unjust enrichment,” and its synonym “restitu-
tion,” has two referents, a remedial and a substantive. The
remedial is to a situation in which a tort plaintiff asks not
for the damages he has sustained but instead for the profit
that the defendant obtained from the wrongful act. Hoagland
ex rel. Midwest Transit, Inc. v. Sandberg, Phoenix & von
Gontard, P.C., 385 F.3d 737, 744-45 (7th Cir. 2004). If Polaris
by copying (we are assuming) ConFold’s design saved
money, that was a gain to which ConFold is entitled—
provided the copying was a wrongful act.
  In its substantive sense, unjust enrichment or restitu-
tion refers primarily to situations in which either the
defendant has received something that of rights belongs
to the plaintiff (for example, he received it by mistake—
or he stole it), or the plaintiff had rendered a service to
the defendant in circumstances in which one would reason-
ably expect to be paid (and the defendant refused to pay)
though for a good reason there was no contract. An example
of the second case is that of the physician who renders
services to an unconscious person and later sends him a bill
that the patient refuses to pay. In re Crisan’s Estate, 107
N.W.2d 907, 910-11 (Mich. 1961); Cotnam v. Wisdom, 104
S.W. 164 (Ark. 1907). In either case, restitution of the value
of the benefit received (the mistaken payment in the first
case, the normal fee for such a medical service in the
second) enforces reasonable expectations.
  The physician case, however, also parades under the name
of “quasi-contract,” on which see, e.g., Goldstick v. ICM
Realty, 788 F.2d 456, 467 (7th Cir. 1986). For the court is
constructing a contractual relationship in order to bring
about the result for which the parties probably
would have contracted had contracting been feasible in
10                                                No. 05-1285

the circumstances, which it was not. A quasi-contract
must not be confused with a “contract implied in fact,”
which is a contract “in which behavior takes the place of
articulate acceptance.” Brines v. XTRA Corp., 304 F.3d 699,
703 (7th Cir. 2002); see also Theuerkauf v. Sutton, 306 N.W.2d
651, 657-58 (Wis. 1981); Schwartz v. Federated Realty Group,
Inc., 436 N.W.2d 34, 36 (Wis. App. 1988); E. Allan
Farnsworth, Contracts § 3.10 (4th ed. 2004). A “contract
implied in fact” is thus a species of express contract,
Schwartz v. Federated Realty Group, Inc., supra, 436 N.W.2d at
36 n. 2, rather than one constructed by the court.
   Similar to quasi-contract is “quantum meruit,” which
means suing for the value of a service rendered under
circumstances in which payment was reasonably ex-
pected but the parties’ contract was unenforceable, for
example because it did not comply with the statute of
frauds. Mid-Hudson Catskill Rural Migrant Ministry, Inc. v.
Fine Host Corp., 418 F.3d 168, 175 (2d Cir. 2005). In both
the physician case (quasi-contract) and the statute of
frauds case (quantum meruit), the plaintiff is entitled to
the market value of his services rather than to the bene-
fit that he conferred on the defendant, which might be
much greater—for example if the plaintiff physician had
saved the defendant’s life. The court tries to simulate a
competitive market; and in such a market, price is based
on the cost to the seller rather than on the subjective value to
the buyer, which often is much greater. But the benefit
received by the defendant is the proper measure of relief
when he has appropriated something of value belonging
to the plaintiff. On the distinction, see Ramsey v. Ellis,
484 N.W.2d 331, 333-34 (Wis. 1992).
  These interlocked, in some cases identical, theories of
recovery have no application to this case. Firms con-
No. 05-1285                                                   11

stantly disseminate information without expectation of
payment. It would be ridiculous to think that ConFold could
simply have mailed its container design to every company
in the world that uses containers and then gone around and
sued all the companies that used the design. It is different if
the design is patented or the recipient agrees not to use it,
but then (since there is no patent claim here, although there
is indeed such an animal as a design patent—as will turn
out to be relevant to our analysis) we are back to the
contract claim that the district judge properly rejected.
  With the terms “trade secrets” and “misappropriation” we
come at last to the issue that seems to divide Wisconsin and
Minnesota but probably does not. ConFold believes mistak-
enly that a trade secret is a property right in the same sense
in which a person has a property right in his mattress. A
property right in the latter sense is a right good against the
whole world, which a trade secret is not, because it is
perfectly lawful to “steal” a firm’s trade secret by reverse
engineering. Bonito Boats, Inc. v. Thunder Craft Boats, Inc., 489
U.S. 141, 155-56 (1989); Rockwell Graphic Systems, Inc. v. DEV
Industries, Inc., 925 F.2d 174, 179 (7th Cir. 1991); American
Can Co. v. Mansukhani, 742 F.2d 314, 334 n. 24 (7th Cir. 1984)
(Wisconsin law). In contrast, a patent right is good against
the whole world. A copyright is not because independent
discovery is a defense to a copyright—or a trade se-
cret—claim; it is not a defense to a patent claim. But a
copyright is a fuller property right than a trade secret,
because copying is infringement; copying a trade secret,
which is what reverse engineering does, is not.
  A trade secret is really just a piece of information (such as
a customer list, or a method of production, or a
secret formula for a soft drink) that the holder tries to
keep secret by executing confidentiality agreements
12                                                No. 05-1285

with employees and others and by hiding the information
from outsiders by means of fences, safes, encryption,
and other means of concealment, so that the only way the
secret can be unmasked is by a breach of contract or a tort.
Wis. Stat. § 134.90(2)(c); Learning Curve Toys, Inc. v. PlayWood
Toys, Inc., 342 F.3d 714, 721-23 (7th Cir. 2003); Mangren
Research & Development Corp. v. National Chemical Co., 87 F.3d
937, 942-43 (7th Cir. 1996). ConFold admits that its designs
were not trade secrets.
  In general, if information is not a trade secret and is not
protected by patent, copyright, or some other body of law
that creates a broader intellectual property right than trade
secrecy does, anyone is free to use the information with-
out liability. ConFold argues, however, that the common
law of Minnesota imposes liability for such use if the
defendant got hold of the information improperly. The
argument is difficult to understand; if the information is not
secret and not protected by any of the laws that create
property rights in information, it is in the public domain
and freely usable without need to commit a tort or a breach
of contract to obtain it.
  The cases on which ConFold relies—the Rehabilitation
Specialists, Tate, and Micro Display Systems cases cited
earlier—stand for the distinct proposition that while section
7(a) of the Uniform Trade Secrets Act (in force in Wisconsin,
Wis. Stat. § 134.90(6)(a)) preempts most non-UTSA remedies
for misappropriation of a trade secret, the victim can sue
separately for a tort committed in the course of the misap-
propriation, such as a trespass. See also Frantz v. Johnson,
999 P.2d 351, 358 (Nev. 2000). The proposition is controver-
sial. It sounds like an end run around preemption, since
misappropriation of a trade secret normally is not actionable
without either a tort or a breach of contract, and the UTSA
No. 05-1285                                                 13

already exempts (in section 7(b)(1)) claims of breach of
contract from being preempted. Robert Unikel, “Bridging
the ‘Trade Secret’ Gap: Protecting ‘Confidential Information’
Not Rising to the Level of Trade Secrets,” 29 Loy. U. Chi. L.J.
841, 887-88 (1998). At all events, with the contract issue
resolved in Polaris’s favor, no contention that it obtained
ConFold’s designs by tortious means, and no trade secrets,
ConFold can get no traction from the Minnesota cases.
  There is, however, another version of “misappropriation,”
unrelated to trade secrets, which ironically has a footing in
Wisconsin law, see Mercury Record Productions, Inc. v.
Economic Consultants, Inc., 218 N.W.2d 705, 709-11 (Wis.
1974); see generally McKevitt v. Pallasch, 339 F.3d 530, 533-35
(7th Cir. 2003), but has never been mentioned in a Minne-
sota case (and remember that ConFold is contending that
Minnesota law governs its misappropriation claim),
on which ConFold might have tried to rely, though with
dim prospects of success.
   International News Service v. Associated Press, 248 U.S. 215
(1918), a decision no longer authoritative because it was
based on the federal courts’ subsequently abandoned
authority to formulate common law principles in suits
arising under state law though litigated in federal court, has
inspired the common law of a number of states, including,
it seems, Wisconsin. The Associated Press and the Interna-
tional News Service competed in gathering news to be
published in newspapers. Barred during much of World
War I by British and French censors from sending war
dispatches to the United States, INS would paraphrase AP’s
war dispatches that had been published in east coast
newspapers, and it was able to publish its paraphrases in
west coast newspapers at the same hour because of the
difference in time zones and in east coast newspapers only
a few hours later. There was no copyright infringement,
14                                                   No. 05-1285

because INS was copying the facts reported in AP’s dis-
patches rather than the dispatches themselves and anyway
AP had not bothered to copyright its dispatches. And of
course there was no trade secrecy. Nevertheless the Court
held that AP was entitled to enjoin INS’s copying as a form
of unfair competition.
  In an effort to keep this concept of unfair competition or
misappropriation—this bequest by the Supreme Court
to a number of states—within reasonable limits, the
Second Circuit, in an influential opinion interpreting
New York law, stated the elements of the tort as follows: “(i)
the plaintiff generates or collects information at some cost or
expense; (ii) the value of the information is highly time-
sensitive; (iii) the defendant’s use of the information
constitutes free-riding on the plaintiff’s costly efforts to
generate or collect it; (iv) the defendant’s use of the informa-
tion is in direct competition with a product or service
offered by the plaintiff; (v) the ability of other parties to free-
ride on the efforts of the plaintiff would so reduce
the incentive to produce the product or service that its
existence or quality could be substantially threatened.”
National Basketball Association v. Motorola, Inc., 105 F.3d 841,
852 (2d Cir. 1997) (citations omitted). ConFold has made
no effort to establish these elements. Its misappropria-
tion claim comes down to a claim of infringement of a
design that it did not patent. Such a claim is preempted
by patent law, as held by the Supreme Court in the Bonito
case cited earlier. See also Sears, Roebuck & Co. v. Stiffel Co.,
376 U.S. 225, 231-32 (1964); Compco Corp. v. Day-Brite
Lighting, Inc., 376 U.S. 234, 239 (1964). The broader, INS-type
claim probably is not preempted, see Bonito Boats, Inc. v.
Thunder Craft Boats, Inc., supra, 489 U.S. at 154, but, as we
have just noted, its elements have not been proved.
                                                      AFFIRMED.
No. 05-1285                                            15

A true Copy:
       Teste:

                      _____________________________
                       Clerk of the United States Court of
                         Appeals for the Seventh Circuit

                USCA-02-C-0072—1-10-06