Summary
holding that strict, unilaterally-imposed confidentiality requirements that hampered Progressive's due diligence efforts did not deprive Progressive of a meaningful choice because it always retained the ability to walk away from the transaction
Summary of this case from Great-West Investors v. Thomas H. Lee PartnersOpinion
C.A. No. 19209
Date Submitted: June 25, 2002
Date Decided: July 9, 2002
Jeffrey L. Moyer and David A. Felice, Esquires, of RICHARDS LAYTON FINGER, Wilmington, Delaware, Attorneys for Plaintiff.
Richard L. Horwitz, Kevin R. Shannon, and Erica L. Niezgoda, Esquires, of POTTER ANDERSON CORROON, Wilmington, Delaware, Attorneys for Defendants.
OPINION
Plaintiff Progressive International Corporation ("Progressive") brought this action to rescind a license agreement it entered into with defendant E.I. DuPont de Nemours Co. ("Du Pont") to manufacture and market certain kitchen utensils using DuPont's "SilverStone" trademark (the "License Agreement" or "Agreement"). Progressive hinges its request for rescission upon several theories, including fraud, negligent and innocent misrepresentation, mutual mistake of fact, and equitable estoppel. In the precise context of this case, each of these theories requires a showing that Progressive reasonably relied upon a statement by DuPont that was not embodied in the License Agreement.
In response, DuPont has filed this motion to dismiss. It asserts, among other things, that the License Agreement contains an unambiguous integration clause, in which Progressive explicitly disclaimed any reliance on representations not contained within the four corners of the Agreement. Because Progressive's claims are based on supposed representations that are not memorialized within the text of the License Agreement itself, DuPont argues that Progressive cannot as a matter of law have justifiably relied on them.
Progressive has also sued defendant L.J. Hanna, Inc. ("Hanna"). For the sake of simplicity, I do not refer again to Hanna, which has joined DuPont's motion.
In this opinion, I conclude that DuPont's argument is a sound one. Progressive is an experienced commercial entity which had previously contracted with DuPont under an earlier licensing agreement. The License Agreement it signed with DuPont was not a contract of adhesion. Progressive had the freedom to walk away and not deal with DuPont, or to bargain for better terms, including the elimination of the integration clause.
In the License Agreement's integration clause, Progressive made two clear promises that preclude its claim for rescission as a matter of law. First, Progressive promised that DuPont had not made any representation, promise, or warranty "whatsoever, express or implied," outside the License Agreement's text concerning the subject matter of that contract to induce Progressive to enter into the Agreement. Second, Progressive promised that it was not executing that Agreement in reliance upon any statement or representation of DuPont not contained within the text of the Agreement.
License Agreement § 18.9.
Having agreed that DuPont had not made any non-contractual representations to induce Progressive to sign the Agreement and having agreed that it had not relied upon any such representations in deciding to sign the Agreement, Progressive could not reasonably base its decision to sign that Agreement on statements of DuPont that were not incorporated in the text of the Agreement. Stated differently, Progressive contractually agreed that it was not entering the License Agreement on the basis of extra-contractual representations by DuPont; as a result, it thereby acknowledged the unreasonableness of grounding its execution of the contract on statements of DuPont that were not included within the contract as binding legal promises.
To enable Progressive to proceed with its rescission claims would allow it to escape the plain language of a commercial contract it voluntarily chose to sign, and renege on a contractual promise it made to DuPont. Even assuming the facts are as Progressive has stated them to be, its unambiguous decision to foresake reliance on any representations not contained in the License Agreement renders its allegations of reasonable reliance unsustainable as a matter of law. Sophisticated parties are bound by the unambiguous language of the contracts they sign.
DuPont has also moved to dismiss Progressive's claim that the License Agreement is unconscionable. The doctrine of unconscionability is sparingly used in the law, and is inapplicable to the License Agreement. None of the terms of that Agreement are so shockingly one-sided as to warrant a finding of unconscionability. This is not surprising, because it would be highly unusual for a court to conclude that the terms of a negotiated manufacturing agreement between two commercial entities were so fundamentally unfair that a court must act as a guardian for one of the parties. Here, the terms of the Agreement make clear that Progressive was able to bargain for protections for itself. Its after-the-fact regret that it did not obtain stronger guarantees, or simply walk away and not deal with DuPont, does not buttress an unconscionability claim. That Progressive must now pay the costs of the economic risks it assumed under the Agreement is a reality of the commercial freedom it enjoys in this society, and is not grounds for equity to rewrite the Agreement after the fact to salve Progressive's wounds at DuPont's expense. For these and the additional reasons detailed later in this opinion, DuPont's motion to dismiss is granted.
I. Factual Background
I have crafted the factual background from Progressive's complaint and the documents incorporated therein.
Plaintiff Progressive has been engaged in the business of marketing and distributing kitchen products (alternatively, "kitchenware") since 1973. Among many other business activities, defendant DuPont is engaged in the manufacture and licensing of certain non-stick coatings and applications for use in various consumer products. DuPont owns the trademark for SilverStone, a commercially successful mark, which has been used on nonstick cookwares since 1976.
A. The Parties Enter Preliminary Discussions for a Licensing Agreement
In recent years, DuPont sought to capitalize on the success of its SilverStone cookware line by expanding into selected product areas, including "housewares." As part of that general expansion, in mid-1999, DuPont engaged Progressive in discussions about executing a licensing agreement whereby Progressive would manufacture and market a line of kitchen utensils under the SilverStone brand.
As defined by DuPont, this term encompasses, for present purposes, kitchen electrics, kitchen tools and gadgets, cutlery, outdoor barbeque grills, and outdoor barbeque accessories and utensils. See Presentation Materials From 9/23/01 Meeting, First Am. Compl. Ex. B (hereinafter "9/23 Presentation Materials") at 9.
Progressive is no stranger to DuPont, or for that matter, the SilverStone mark. On January 1, 1998, the two entities entered into an agreement under which Progressive licensed the SilverStone and Teflon trademarks from DuPont for use in bakeware liners (the "Bakeware Agreement"). In April of 1998, DuPont altered the branding strategy for the Bakeware Agreement. Believing that the Teflon name had become generic in the minds of consumers, DuPont purportedly decided to make the SilverStone mark the primary brand under which the non-stick bakeware products would be marketed. DuPont did so, it is asserted, in order to recapture some of the brand equity it felt had eroded away from the Teflon mark.
While not explained in great detail in its pleadings, it appears that the Teflon mark refers specifically to the non-stick coating applied to the kitchen products. By contrast, the SilverStone mark appears to refer more generally to the finished non-stick kitchen products that use the nonstick coating.
At any rate, DuPont's preliminary interest in pursuing a new SilverStone agreement is evidenced by a letter to William Reibl, president of Progressive. Dated July 21, 1999, the letter notes that "we feel that Progressive could be a good fit for the SilverStone® licensing program in the areas of kitchen utensils, gadgets, and BBQ tools." Reibl was informed that DuPont intended to introduce the expanded SilverStone line in 2000.
First Am. Compl., Ex. A at 2.
B. The September 23rd Presentation
On September 23, 1999, DuPont made an exclusive confidential presentation (the "September 23rd Presentation") designed to better acquaint Progressive with the nascent SilverStone expansion, and to gauge its interest in a joint venture. The content of that Presentation in large part forms the basis of Progressive's complaint in this matter. While Progressive asserts that the Presentation contained no less than nine separate statements by DuPont it later relied upon when it entered into the License Agreement, those statements can be generally divided into two categories.
1. DuPont's Assertions Regarding the Commercial Viability of Expanding Into the Housewares Market
Several of DuPont's assertions during the September 23rd Presentation revolved around the supposed viability of growing the SilverStone line. Specifically, Progressive avers that DuPont made the following claims during the course of the Presentation:
• The housewares market dynamics were "ideal" for the expansion of the SilverStone line.
• The SilverStone brand name was under-utilized, and could easily be expanded to become an independent consumer product brand.
• SilverStone's brand equity was "strong, clear, and transferable," and the brand commanded a premium over comparable brands.
• The SilverStone brand extension into kitchen utensils was "commercially viable[,] and the idea had been well received by the trade."
• The retailing of the SilverStone line of kitchenware would provide for greater profit margins than those available with respect to non-SilverStone kitchen products.
Id. ¶ 8(a).
Id. ¶ 8(g).
Id. ¶ 8(h). At the September 23rd Presentation, DuPont bolstered this assertion by reference to an internal "price premium" study, which found, among other things, that based on an average kitchen utensil price of five dollars, "three-quarters are willing to pay at least 20% more" for a SilverStone utensil. 9/23 Presentation Materials at 29.
Progressive asserts that each of these representations was at best mistaken, and at worst, made with knowledge of its falsity. With respect to the statements concerning the commercial viability, demand, and transferability of the SilverStone mark, it avers that DuPont's representations were incorrect because they were based on consumer surveys conducted to gauge interest in a line of SilverStone electric products. Because these surveys did not measure the consumer appeal of a potential line of SilverStone housewares, Progressive argues, they were not a sound basis for gauging consumer interest in a new line of SilverStone kitchen products.
More important, Progressive claims that DuPont required it to keep the proposed venture and DuPont's branding strategy confidential from consumers, retailers, and others in the housewares industry. This shield of confidentiality, Progressive asserts, "effectively hamstrung" its efforts to engage in the type of comprehensive due diligence one would expect a company to perform before engaging in a venture of this type. That is, Progressive asserts that the stringent promise of confidentiality extracted by DuPont precluded it from properly performing its own investigation as to the commercial advisability of agreeing to a SilverStone license agreement.
2. DuPont's Assertions Regarding Its Commitment to a Strategic Plan
Progressive also asserts that it relied on several statements DuPont made during the September 23rd Presentation regarding DuPont's "solid strategic plan" for the expansion of the SilverStone line. Specifically, Progressive claims to have relied upon DuPont's assertions that (1) it was committed to building a successful SilverStone licensing program that would utilize its extensive industry contacts with manufacturers and retailers in the cookware field, and (2) the SilverStone product line would grow to include not only the kitchenware segment contemplated by Progressive, but would also include other products to be offered by additional licensees.
First Am. Compl. ¶ 8(c).
C. Progressive and DuPont Sign the License Agreement
As the parties moved closer to implementing an agreement, two other putatively false statements were alleged to have emanated from the DuPont camp. First, in October and November of 1999, DuPont told Progressive that the proposed line of SilverStone kitchenware "would not generally present any major coating problems." In addition, DuPont allegedly informed Progressive that the cost of coating the new products would be in the range of fifteen to twenty cents per unit.
Id. ¶ 12.
Acting on the basis of all these representations, as well as "other miscellaneous representations," Progressive and DuPont executed the 27-page License Agreement on December 8, 1999. Under the Agreement, Progressive was granted an exclusive five-year license to utilize the SilverStone mark in connection with the manufacture, sale, promotion, marketing, advertising, and distribution of SilverStone-branded "kitchen/cooking utensils, tools and gadgets" (hereinafter, "Kitchen Utensils" or "Utensils") in certain specified stores in the United States and Canada (the "License").
Id. ¶ 15. Progressive never explains the substance of these other representations.
License Agreement, Schedule A.
The License came at a price. Progressive was required to pay DuPont earned royalties of five percent of its net sales, as well as advance royalties totaling $150,000 over the five-year term of the Agreement. In addition, the Agreement also required Progressive to pay certain minimum guaranteed royalties at one-year intervals ("Contract Periods"). Those royalties were deemed a "fixed, absolute obligation of [Progressive] . . . notwithstanding any election by [Progressive] to terminate the LICENSE and regardless of whether sales of LICENSED PRODUCTS generate earned royalties in an amount equal to [the] Minimum Guarantee."
Id. § 3.4
By its terms, the Agreement could be automatically renewed for an additional five years if (1) Progressive remained in compliance with all terms therein, and (2) it generated earned royalties of $500,000 during Contract Period 5 ( i.e., the fifth year of the Agreement). But under Article 12, both DuPont and Progressive had the right, under certain circumstances, to terminate the Agreement. For instance, § 12.3 states that "[i]f either Party violates any of the material provisions provided in this LICENSE, the other Party shall have the right to terminate this LICENSE upon sixty (60) days written notice, provided that the breaching Party fails to cure the violation within the sixty (60) day period. . . ."
The Agreement contained an exception to the provision requiring earned royalties of $500,000 during Contract Period 5. That exception is not material to this dispute.
License Agreement § 12.3.
Most critically for present purposes, the Agreement also contained an integration clause. Section 18.9 of the License Agreement reads as follows:
Integration. This LICENSE and any attached schedules and exhibits, constitutes the entire agreement between the Parties pertaining to the subject matter contained herein and supercedes all prior and contemporaneous agreements, representations, and understandings of the Parties. Each of the Parties acknowledges that no other party, nor any agent or attorney of any other party, has made any promise, representation, or warranty whatsoever, express or implied, and not contained herein, concerning the subject matter hereof to induce the Party to execute or authorize the execution of this LICENSE, and acknowledges that the Party has not executed or authorized the execution of this instrument in reliance upon any such promise, representation, or warranty not contained herein. . . .
Id. § 18.9.
Thus, by the terms of the Agreement, both parties expressly agreed and stipulated that no party had made any representation to induce the other to execute the License Agreement, nor had either party executed the Agreement in reliance "upon any such . . . representation . . . not contained [t]herein." The final paragraph in the Agreement also states that "the Parties have read this LICENSE in its entirety, including the incorporated and attached Exhibits and Schedules, and by their execution below have agreed to all its terms and conditions."
Id.
Id. at 18.
D. In Response to Poor Sales, Progressive Raises Certain "Production Claims" With DuPont
Following the execution of the License Agreement, Progressive set about the task of designing and manufacturing its Kitchen Utensils. From the outset, however, it faced higher-than-expected costs — overruns it largely attributes to the inability of DuPont and its affiliates to transfer theft knowledge of applying non-stick coating to the Kitchen Utensils. The Utensils debuted in April of 2000. By late 2001, however, Progressive claims that production costs had grown forty to fifty percent higher than was represented by DuPont during negotiations.In August of 2000, the parties convened a conference call to discuss, among other things, three issues critical to Progressive. First, Progressive raised concerns about its higher-than-anticipated production costs. To remedy the problem, it suggested relaxing a requirement in the Agreement that DuPont-certified coaters must be used to coat the Utensils. DuPont was not amenable to that suggestion. Second, Progressive blamed the failure of the Kitchen Utensils to reach markets in time for the holiday season on a communication breakdown between DuPont's U.S. and Hong Kong offices. Finally, in supposed contravention of previous assurances, Progressive told DuPont that retailers had told it (Progressive) that the addition of the SilverStone mark added no value to the Utensils.
It was also around this time that Progressive asserts that it learned it had been provided false information "with respect to the production capability and the history and existing market for the SilverStone brand." Ans. Br. at 7.
E. DuPont Unveils a New Branding Strategy for the SilverStone Mark
Proof that an earlier DuPont representation had been false supposedly arose at a meeting between the patties in November of 2000. At that meeting, DuPont announced that it had designed a new "brand paradigm" — one that involved resurrecting the Teflon mark by combining SilverStone-branded cookware with Teflon non-stick coating. Because Progressive had allegedly entered the License Agreement in part upon the understanding that the SilverStone mark would be the brand around which a comprehensive branding strategy would be launched, it was "stunned by this revelation." In its own words, Progressive claims that "DuPont had made the decision to go with Teflon and never told Progressive until long after [it] had agreed to expend millions for the right to use the SilverStone mark."Progressive was instructed to add certain Teflon tags to its product lines, or risk being disassociated with DuPont when Teflon was reintroduced into the North American market. Progressive asserts that the reintroduction of Teflon had been contemplated by DuPont for several years and, indeed, had already been implemented in Europe.
It appears that the use of Teflon was purely a marketing issue, because the non-stick product Progressive was receiving from DuPont did not change.
Relations between the parties did not improve in the summer of 2001. In June, DuPont received its previously commissioned "SilverStone Marketing/Retail Strategy Study." According to Progressive, that study contradicted certain of DuPont's previous representations by establishing (1) that the Kitchen Utensils were too expensive for their target market, and (2) the sales volume required to support the License Agreement's royalty requirements could not be achieved in the limited channels identified by DuPont in 1999. Further, Progressive claims that the study was not disclosed to them until mid-August.
Meanwhile, sales remained stagnant, and Progressive failed to make a quarterly guaranteed minimum royalty payment as required by the License Agreement. As a result, on August 28, 2001, Progressive received from DuPont a notice of breach and demand for cure as provided by Article 12 of the Agreement. On October 25, 2001, only days before the expiration of the contractual cure period, Progressive filed an action seeking to rescind the by-then nearly two-year-old License Agreement.
II. Legal Analysis
Under Delaware Court of Chancery Rule 12(b)(6), a motion to dismiss shall be granted where it appears with "reasonable certainty" that the non-moving party "could prevail on no set of facts that can be inferred from the pleadings." In addressing a motion to dismiss for failure to state a claim, the court must assume the truthfulness of all well-pled allegations in complaint.
Solomon v. Pathe Communications Corp., 672 A.2d 35, 38 (Del. 1996).
In re USA Cafes, L.P. Litig., 600 A.2d 43, 47 (Del.Ch. 1991).
Based on the allegedly false representations detailed above, Progressive has pled five separate counts all seeking the remedy of rescission: fraud, innocent or negligent misrepresentation, mutual mistake of fact, equitable estoppel, and unconscionability. A common thread runs through all the counts, except for unconscionability, in the sense that each requires that Progressive have reasonably relied on representations by DuPont that were not incorporated into the License Agreement. That is, to succeed on its claims of fraud, innocent or negligent misrepresentation, mutual mistake, and equitable estoppel, Progressive's action or inaction must have been taken in justifiable reliance upon promises or statements by DuPont that did not find a home in the Agreement.
The case law may phrase this justifiable reliance requirement in slightly different terms, but the requirement is a common one for each of these causes of action. To allege a claim for common-law fraud, a plaintiff must plead (1) a false representation made by the defendant; (2) the defendant's knowledge or belief that the representation was false or made with reckless indifference to the truth; (3) an intent to induce the plaintiff to act or refrain from acting; (4) the plaintiff's action or inaction taken in justifiable reliance upon the representation; and (5) damage to the plaintiff. Stephenson v. Capano Dev., Inc., 462 A.2d 1069, 1074 (Del. 1983); see also W. PAGE KEETON ET AL., PROSSER AND KEETON ON THE LAW OF TORTS 728 (5th ed. 1974).
A cause of action for negligent or innocent misrepresentation is the same as that for common-law fraud, with the exception that a defendant need not know or believe her statement is false or have proceeded in reckless disregard for the truth. Stephenson, 462 A.2d at 1074; see also Zirn v. VLI Corp., 681 A.2d 1050, 1060-61 (Del. 1996).
The standards for establishing a cause of action for equitable estoppel are stringent. The doctrine is applied cautiously, and only to prevent manifest injustice. See, e.g., Two South Corp. v. City of Wilmington, 1989 WL 76291, at *7 (Del.Ch.); 28 AM. JUR. Estoppel and Waiver § 129 (2001); Singewald v. Girden, 127 A.2d 607, 617 (Del.Ch. 1956). A plaintiff raising an estoppel claim must demonstrate (1) a lack of knowledge, and the means of obtaining knowledge, of the truth of the facts in question; (2) that he relied upon the conduct of the party against whom the estoppel is claimed; and (3) that he suffered a prejudicial change of position. Moreover, the reliance upon the conduct of the party against whom the estoppel is raised must be reasonable and justified under the circumstances. Two South Corp., 1989 WL 76291, at *7 (emphasis added).
The elements required for a mutual mistake claim are framed somewhat differently. Under the Restatement (Second) formulation followed by Delaware courts, see Wilson v. Pepper, 1989 WL 268077, at *4 (Del.Ch.), overruled on other grounds, 608 A.2d 731 (Del. 1992); Shore Builders, Inc. v. Dogwood, Inc., 616 F. Supp. 1004, 1011-12 (D. Del. 1985), a party must demonstrate that (1) both parties were mistaken as to a basic assumption; (2) the mistake materially affects the agreed-upon exchange of performances; and (3) the party adversely affected did not assume the risk of the mistake. RESTATEMENT (SECOND) OF CONTRACTS § 151 (1981).
The Restatement describes three scenarios in which a party is said to assume the risk of mistake. The "most obvious" one of these, id., is the scenario we have in this case: namely, when the agreement itself provides that that party bears the risk of mistake. Id. Thus, while the analysis for a claim of mutual mistake is couched in the language of equity, the resolution of the claim requires an examination of the language of the Agreement, which in this case demonstrates that extra-contractual representations could not serve as basic assumptions of the parties to that contract.
A. Because Progressive's Reliance Was Unreasonable, Its Fraud, Misrepresentation, Mutual Mistake, and Estoppel Claims Must Be Dismissed
A failure of justifiable reliance is fatal to Progressive's fraud, misrepresentation, mutual mistake, and equitable estoppel claims. As a general matter, under the objective theory of contracts to which Delaware adheres, it is presumed that the language of a contract governs when no ambiguity exists. Under the objective theory, "`intent' does not invite a tour through [the plaintiff's] cranium, with [the plaintiff] as the guide." This presumption that parties will be bound by the language of the contracts they negotiate holds even greater force when, as here, the parties are sophisticated entities that bargained at arm's length.More specifically, Delaware courts have held that sophisticated parties may not reasonably rely upon representations that are inconsistent with a negotiated contract, when that contract contains a provision explicitly disclaiming reliance upon such outside representations. In Great Lakes Chem. Corp. v. Pharmacia Corp., for instance, this court considered whether a series of clauses in a purchase agreement between two corporations barred the buyer's fraud claims. One of those clauses stated that "[e]ach of [the sellers] expressly disclaims any and all liability that may be based on such information or errors [within due diligence information provided to the buyer] or omissions therefrom." In holding that the parties' contractually negotiated disclaimers extinguished the fraud claims, Vice Chancellor Jacobs stated:
See Great Lakes Chem. Corp. v. Pharmacia Corp., 788 A.2d 544 (Del.Ch. 2001); J.A. Moore, 688 F. Supp. 982 (in a multi-million dollar construction contract, the court found that oral representations that conflicted with clear disclaimer provisions of the written contract could not be the subject of justifiable reliance by a plaintiff claiming fraud); see also DCV Holdings, Inc. v. Conagra, Inc., 2002 WL 992164 (Del, Super.) (similar holding).
Were this court to allow [the buyer] to disregard the clear terms of its disclaimers and to assert its claims of fraud, the carefully negotiated and crafted Purchase Agreement between the parties would . . . not be worth the paper it is written on. To allow [the buyer] to assert, under the rubric of fraud, claims that are explicitly precluded by contract, would defeat the reasonable commercial expectations of the contracting parties and eviscerate the utility of written contractual agreements.
Id. at 556.
That reasoning applies with equal force here. Similar to the disclaimer provision in Great Lakes, the integration clause in the License Agreement provides that all parties expressly agreed and stipulated that no party had made any representation to induce the other to execute the License Agreement, nor had any party executed the Agreement in reliance "upon any such . . . representation . . . not contained herein."
License Agreement § 18.9.
Absent fraud or other unconscionable circumstances not present here, the existence of an integration clause between sophisticated parties is conclusive evidence that the parties intended the written contract to be their complete agreement. There can be little question that Progressive, an entity in business for the better part of thirty years that had previously negotiated an agreement to license DuPont intellectual property, is such a sophisticated party. Thus, having negotiated the provisions of the License Agreement, Progressive is bound by all of its clear terms — including the integration clause.
Progressive does not even attempt to argue that the integration clause was itself fraudulently induced.
J.A. Moore, 688 F. Supp. at 987 (citing FARNSWORTH ON CONTRACTS § 7.3 (1983)).
The fact that Progressive is a sophisticated business entity with a demonstrated course of dealing with DuPont is sufficient to distinguish the facts of this case from Norton v. Poplos, 443 A.2d 1 (Del. 1982). In Norton, the Delaware Supreme Court held that Delaware law prohibited the use of contract disclaimers to release claims of fraud. However, the particular disclaimer provision at issue in Norton was an unnegotiated "boilerplate" clause in a real estate contract. Later cases have held that such disclaimer provisions are enforceable when the parties to the agreement are sophisticated entities that carefully negotiated its provisions, as was the case here. See Great Lakes, 788 A.2d at 555; J.A. Moore, 688 F. Supp. at 990-91.
Nor does Progressive's assertion that its due diligence efforts were "effectively hamstrung" as a result of DuPont's policy of strict confidentiality during negotiations for the Agreement persuade me that it ought to be permitted to escape the preclusive effect of the integration clause. Progressive argues that the wall of confidentiality erected by DuPont as a condition to negotiation precluded it from engaging in all the due diligence necessary to protect an entity about to enter a large-scale licensing agreement. Having been so precluded, the argument goes, Progressive had no choice but to rely on the statements made by DuPont during the course of negotiations.
This argument is dissonant with commercial good sense. Even if DuPont insisted upon strict confidentiality, Progressive misconstrues the scope of meaningful choice still available to it when it negotiated the License Agreement. Taking as true its claim that it was precluded from doing its own marketing research regarding the viability of a SilverStone line of kitchen utensils, Progressive still had three options.
First, if Progressive felt that due diligence was truly foreclosed in a manner that posed unacceptable dangers, it could have taken the most cautious approach and walked away from any proposed deal. Second, Progressive could have taken a riskier course. Having been in the kitchen products business since 1973, Progressive could have drawn on its significant reserve of experience and expertise within that industry by exercising its own business judgment as to the commercial appeal of the SilverStone mark and the advisability of forging an agreement, the profitability of which would depend in some substantial measure on that factor. Indeed, given its long-standing expertise in the kitchenwares field, Progressive's decision to continue negotiations in the face of a confidentiality agreement can be read as an implicit admission that it had the means at its disposal to independently evaluate the merits of a proposed deal and decided to assume the risk of its own misjudgments.
But there was also a third and crucially important option available to Progressive. To the extent that Progressive believed DuPont's representations — regarding the market appeal of SilverStone or other matters — were important or even fundamental to its decision to contract, Progressive could have negotiated to have those representations reduced to writing and included in the Agreement. I do not quibble with Progressive's claim, for instance, that an assurance by DuPont that it had performed adequate market research might have been relevant to Progressive's decision whether to enter the Agreement. But if that were so, why didn't Progressive extract a warranty in the Agreement stating, for example, that DuPont had performed a reputable market study demonstrating the commercial viability of SilverStone non-stick cutlery?
Of course, no such provision appears in the contract. Instead, the Agreement plainly states that no promise regarding the market demand for SilverStone had been made by DuPont to induce Progressive to sign the Agreement, and that Progressive was not relying upon any such promise in deciding to execute that Agreement. That is, by its own binding contractual representation, Progressive precluded its ability to reasonably rely on any oral statements made about consumer demand for SilverStone.
Or any other subject.
This conclusion is consonant with the decision of this court in DeBakey Corp. v. Raytheon Service Co. In that case, Raytheon argued that it had been denied the ability to perform adequate due diligence by its joint venture partner, ITS, and was thereby fraudulently induced into signing their joint venture agreement. In rejecting Raytheon's argument, this court held that
2000 WL 1273317 (Del.Ch.).
[a]bsent careful due diligence, RSC/Raytheon should have formalized RSC's representations by insisting that they be expressed and included in the JV Agreement as contractual representations and warranties. . . . Because RSC/Raytheon did not do that or conduct adequate due diligence . . . it has not established that its reliance on ITS's representations were justified. . . . If it was truly important that RSC/Raytheon be assured that [a particular representation was true], it would have been reasonable — indeed, customary — for RSC/Raytheon to insist that that assurance be expressed as representations and warranties in the JV Agreement. The absence of such contract protections suggests that RSC/Raytheon did not believe that it needed them. . . .
Id. at *27; see also In re IBP, Inc. Shareholders Litig., 789 A.2d 14, 74 (Del.Ch. 2001) ("To the extent that a contracting party chose not to negotiate for specific language regarding an issue, the most plausible inference is that the issue was simply not fundamental enough to buttress a rescission claim.").
Another of Progressive's arguments illustrates the unreasonableness of any reliance it placed on statements by DuPont that were not included in the License Agreement. As grounds for rescission, Progressive alleges that it relied upon statements by DuPont regarding the cost to apply the non-stick SilverStone coating to the Kitchen Utensils during the term of the manufacturing agreement. Now, it is, of course, perfectly sensible for a party in Progressive's position to regard a cost factor like this as important. What is not commercially sensible or reasonable is for Progressive to have believed that the cost of applying SilverStone was critical to its decision to enter the License Agreement, and to have simultaneously promised that (i) DuPont made no statement regarding those costs to induce Progressive to sign the contract, and (ii) Progressive had not relied upon any such statement in agreeing to the deal. Not only that, Progressive expressly assumed the contractual risk of paying DuPont guaranteed minimum royalties that could not be reduced, regardless of manufacturing costs, despite having allegedly relied upon an assurance that its cost of coating would only be fifteen to twenty cents per Kitchen Utensil.
License Agreement § 3.4.
Progressive's own contractual promises are impossible to square with its current argument that
[t]he cost of production figures required to coat the SilverStone-branded utensils was of vital importance because Progressive's subsistence under the License Agreement hinged upon defendants' representations concerning costs being accurate. . . . No matter how much it cost Progressive to make a seven dollar spatula, DuPont was paid a royalty fee on the seven dollars. Therefore, defendants' representations as to the costs of production and the technology required to coat the utensils was one of the most important representations upon which Progressive relied when it agreed to enter into the License Agreement with defendants.
Ans. Br. at 20 (emphasis added).
It would have been easy for the parties to have addressed Progressive's cost concerns with contractual language. For example, DuPont could have guaranteed that the per-unit cost of production would not exceed twenty cents per unit, or have given Progressive price relief from the Minimum Royalties or a right to terminate in that eventuality. But no provisions of this kind appear in the License Agreement. To the contrary, the plain terms of the Agreement allocate the risk of excessive coating costs entirely to Progressive in the early years of the Agreement.
See, e.g., License Agreement § 3.4.
When it signed the Agreement, Progressive averred that it had read all its terms and agreed to all its provisions, including the provision stating it was not relying upon any representations outside the four corners of the contract. But Progressive now asserts that it was — contrary to its promise to DuPont — relying on cost-of-production representations outside the scope of that Agreement. In essence, Progressive is saying to the court, "Believe us now when we tell you we made a false promise to DuPont then."
The law cannot sanction this type of argument. DuPont bargained for the promises made in the integration clause. Had Progressive insisted upon the elimination of that clause, DuPont might well have decided not to sign the License Agreement, precisely because it did not want to be subjected to after-the-fact rescission claims premised on oral discussions between the parties that were never formalized into contractual promises.
If Progressive is allowed to proceed with its fraudulent inducement claims, it will be released from its own breach of the License Agreement, a result that is unreasonable and that creates a troubling precedent for commercial parties forging future contracts. By contrast, if Progressive is expected to live up to its own words, the reasonable expectations of the parties to the License Agreement are enforced and the importance of contractual text is reinforced — results in keeping with the public policy of this state.
See, e.g., MHM/LLC, Inc. v. Horizon Mental Health Mgmt., Inc., 1996 WL 592719, at *2 (Del.Ch.) ("[F]undamental rules of construction require strict adherence to the language of the contract when its provisions are clear."); see also City Inv. Co. Liquidating Trust v. Continental Cas. Co., 624 A.2d 1191, 1198 (Del. 1993); FARNSWORTH ON CONTRACTS § 3.6.
Progressive makes a final argument that highlights the infirmity of its claims. It contends that it could only have bargained away its right to rely on extra-contractual representations if the contract was written so that Progressive was only disclaiming reliance upon those representations or subjects specifically identified in the contract. That is, for a disclaimer like the one contained in the integration clause to be of binding effect, it must be accompanied by a compendium listing every representation and issue that the parties were not relying upon as a basis for contracting with each other. Otherwise, Progressive says it could not know what representations or subjects it was not relying upon in executing the Agreement.
If adopted as law, Progressive's argument would impede commerce. It is not efficient for negotiators to identify all the material issues that are not part of the foundation of their relationship, and to list them in a contractual schedule. Indeed, that exercise would be wasteful and silly, as the integration clause in the License Agreement shows. By simple and unambiguous means, the parties to that Agreement identified all the representations and statements that could not have induced the execution of the Agreement: all representations and statements not included in the text of the Agreement itself. This method of identification does not become unclear simply because it is terse. And it is efficient, because it forces the parties to focus on the language of the contract and include therein any representations that form the foundation for their mutual agreement.
B. The Mere Presence of Unequal Bargaining Power Is Insufficient to Support a Claim for Unconscionability
Progressive has also sought to set aside the License Agreement on grounds of unconscionability. But, at most, Progressive has merely suggested that it might have wielded less bargaining power than DuPont, in the sense that its desire to deal with DuPont was greater than DuPont's desire to deal with it. This sort of unequal bargaining power does not support an unconscionability claim.
A mere disparity in the bargaining power of parties to a contract will not support a finding of unconscionability. Rather, to support such a finding, a court must find that the party with superior bargaining power used it to take unfair advantage of its weaker counterpart. For a contract clause to be unconscionable, its terms must be "so one-sided as to be oppressive." Put another way, "[u]nconscionability has generally been recognized to include an absence of meaningful choice on the part of one of the parties together with contract terms which are unreasonably favorable to the other party." Courts have been reluctant to apply the doctrine, recognizing among other things that the parties' "bargaining power will rarely be equal." Further, courts are particularly reluctant to apply the doctrine in favor of sophisticated corporations.
Tulowitzki v. Atlantic Richfield Co., 396 A.2d 956, 960 (Del. 1970).
Id. ("The traditional test is this: a contract is unconscionable if it is `such as no man in his senses and not under delusion would make on the one hand, and as no honest or fair man would accept, on the other.'") (internal citations omitted); see also Graham v. State Farm Mut. Auto Ins. Co., 565 A.2d 908 (Del. 1989).
FARNSWORTH ON CONTRACTS § 4.28 (2d ed. 2000). The former portion of that formulation, regarding an absence of meaningful choice, has been deemed "procedural" unconscionability, while the latter, involving "unreasonably favorable" terms, has been deemed "substantive" unconscionability. Id.
Id.
Id.
The application of the doctrine of unconscionability is clearly inappropriate here. Nothing prevented Progressive from refusing to contract with DuPont if it did not have the leverage to forge an agreement on terms it believed were favorable. At any point, Progressive could have taken its ball and gone home. Likewise, it has failed to identify shockingly unfair terms that warrant having the court intervene on its behalf to relieve it of economic risks it voluntarily assumed. The absence of such outrageous terms is not surprising, given that Progressive is a business entity with thirty years of experience in the housewares industry, which made a voluntary decision to enter into an Agreement to license kitchen utensils.
III. Conclusion
For the reasons herein cited, DuPont's motion for summary judgment is granted as to all counts. The parties shall submit a conforming order within seven days.