Court Opinion

ID: 9499430
Source: CourtListenerOpinion
Date Created: 2023-08-05 17:48:16.763735+00
Date Added: 2024-06-11T17:59:30.150793
License: Public Domain

SUTTON, Circuit Judge,
concurring in part and dissenting in part.
I have some sympathy for the majority’s position on this difficult case but ultimately find myself unable to come to terms with its breach-of-contract analysis.
At issue is the following contract provision:
During the term of this Agreement each party may terminate this Agreement by giving six (6) month[s] prior written notice to the other party, provided however, such right of termination shall not be exercised without good reason.
JA 281. “[G]ood reason” is not defined by the contract. On a first reading, one *803might fairly ponder why anyone would put such an amorphous, litigation-inducing term in a contract and why, having done so, they should not suffer the fate they deserve — the uncertain judgment of a Michigan jury over whether TSS had “good reason” for terminating this contract. Like I said, I have some sympathy for the majority’s position.
But this case does not arise under American law. It arises under Japanese law, and that country’s legal customs put the phrase in context — a context that ultimately convinces me that Judge Cohn correctly rejected SKI’s breach-of-contract claim as a matter of law. As we learn from Professor John Haley, the court-appointed expert on Japanese law: to have “good reason” to terminate a contract under Japanese law is to have “commercially legitimate” reasons for terminating the contract. JA 820.
Here is how Professor Haley frames the issue and how he ultimately concludes his analysis of the question before us:
I am not aware of any Japanese case in which intermediate termination — that is, termination before the expiration of the stated term — of an exclusive distribution contract by the manufacturer/seller was either the consequence or expressly justified on the basis of acquisition by a competitor with a separate distribution network. To the extent, however, that the termination was in fact motivated by legitimate commercial concerns resulting from such acquisition, in my opinion, a Japanese court would consider the manufacturer/seller to have “good reason” for intermediate termination so long as adequate notice, as noted, was given.

Id.

As the court-appointed expert sees it, then, Japanese courts would ask two questions in resolving this dispute: Did TSS give “adequate notice” of the termination? And did it have “legitimate commercial concerns” for terminating the contract? As I see it, both questions must be answered in the affirmative on this record.
The contract itself suggests that six months represents adequate notice because that is the notice to which the parties agreed. “Express provisions of the contract matter,” as Professor Haley points out. Id. And it strains credulity to believe that SKI was not aware of the risk that the imminent purchase of TSS by Moog would lead to the termination of the contract before its five-year term; that risk is why the parties negotiated the contract in the first place. Having chosen to address that risk by negotiating and signing the five-year contract, SKI has little ground for maintaining that the notice — to which it agreed — was somehow inadequate. The risk that prompted the sudden creation of this contract, after 15 years of doing business on a casual one-year-at-a-time, nonexclusive basis, is the very risk that materialized. All of this explains why SKI cannot point to any reliance interests established between the date of the contract and its termination. As Professor Haley points out, moreover, “[ajbsent exceptional circumstances, six months notice has usually been deemed adequate.” JA 821. That this contract expressly permitted unilateral termination after six months of notice, when the contracting parties knew full well the risk of termination at the time they signed the contract, shows that respecting the six-month term is far from exceptional.
TSS also had “legitimate commercial” reasons for terminating the contract. In its termination letter, TSS explained that “[t]here has been a change in ownership of TSS and a change in management.... The TSS/SKI Exclusive Distributor Agreement ... would place in serious conflict and *804disarray the product distribution arrangements around the world of TSS and Moog and all Moog subsidiaries -” JA 389. TSS later provided other reasons for the termination: SKI’s failure to comply with its end of the bargain by failing to pay its bills on time, financial problems at TSS caused by accounting irregularities and the eventual closing of the TSS facility. Much of the parties’ dispute in our court has focused on whether fact disputes exist over TSS’s motives for terminating the contract, though no one disputes that the reason given in the letter is one of the reasons (and perhaps the only reason) that TSS canceled the agreement.
The parties’ fencing about TSS’s other reasons for terminating the agreement obscures several essential commercial realities about this dispute, realities that make TSS’s initial explanation a “commercially legitimate” one by itself. Before the merger: Moog competed with TSS in the servo-valve repair business; SKI was one of TSS’s distributors; Moog had its own international product-distribution system; and Moog thus competed with both TSS and SKI. After the merger, as the termination letters states, Moog wished to use its own pre-existing product-distribution network rather than using its former competitor’s distribution network' — which included SKI.
These undisputed facts, it seems to me, establish “commercially legitimate” grounds for ending the contract. Is it not the case that one profit-driven company may purchase another profit — driven company for the purpose of expanding profits — -even if that means that a third profit-driven company bears the risk of losing profits? I should have thought that it was an everyday occurrence in the commercial world, whether in Japan or the United States, that one competitor takes over another with the purpose of exploiting the buyer’s pre-existing commercial strengths — whether that is a distribution network, as here, or a large sales force, as in other mergers — and capturing the economic synergies of the transaction by shrinking the size (and costs) of the seller’s assets in the same area. Had the purpose of this takeover been to create an illegitimate monopoly, that would be another matter — for that would present a commercially illegitimate, and thus impermissible, ground for the termination. But SKI does not claim that the takeover (or the termination of the TSS-SKI contract) violates any antitrust laws. That leaves only the question, as framed by Professor Haley, of whether Moog had a right to buy TSS and terminate its existing distribution network for “commercially legitimate” reasons, not whether it had legitimate non-commercial reasons for doing what it did.
What makes this conclusion even more irresistible is SKI’s conduct before the takeover, which showed it to be anything but a meek participant in the (apparently) sharp-elbowed world of servo-valve repairs. As word leaked out that Moog would buy TSS, SKI went to great lengths to transform the parties’ practice of signing one-year non-exclusive distribution agreements into a hastily thrown together five-year exclusive distribution agreement. Not only does SKI take the position that this ninth-inning contract prohibits TSS from terminating the TSS-SKI contract today, but it also takes the position that TSS cannot (based on the reasons given so far) terminate it at any point during the five-year term or even at the end of the term. See Br. at 27, 29; Reply Br. at 19, 20-21. Who says that the office of a general counsel cannot be a profit center? What makes all of this particularly rich is SKI’s repeated claim that TSS and Moog did what they did to “squelch competition.” Br. at 16-18, 20-21, 24. Agreements that may not be terminated by their terms run *805a far greater risk of squelching competition than ones that may be so terminated.
Judge Cohn in the final analysis, it seems to me, got it right when he said:
At the end of the day, SKI is simply the victim of a legitimate business decision brought upon by the acquisition of TSS by one of its competitors. SKI knew at the time it entered the agreement with TSS that TSS was likely to be acquired, as well as what such acquisition might mean for SKI. Former TSS management and SKI then executed an eleventh hour agreement in hopes of protecting SKI after the acquisition. Their attempt failed as TSS had legitimate, not tortious, commercial reasons for terminating the agreement.
D. Ct. Op. at 15. In the absence of any Japanese case law to the contrary in this setting and in reliance on Professor Haley’s expert opinion, I would follow Judge Cohn’s lead in rejecting the contract claim as a matter of law and in determining as a result that the veil-piercing claim against Moog (with respect to liability on the contract claim) is of no moment.
I agree with the majority that Moog is entitled to summary judgment on SKI’s tortious interference claim. I therefore respectfully concur in part and dissent in part.