File No. 1:02-CV-343
August 16, 2002
In accordance with the opinion entered this date,
IT IS HEREBY ORDERED that Defendant ADC Telecommunications, Inc.'s motion to dismiss for failure to state a claim (Docket #5) is GRANTED. IT IS FURTHER ORDERED that Plaintiff Lucre Inc.'s complaint is DISMISSED.
Before this Court is Defendant ADC Telecommunications' ("ADC") motion to dismiss for failure to state a claim pursuant to FED. R. CIV. P. 12(b)(6). Plaintiff Lucre, Inc., an internet service provider ("ISP"), wanted to expand its business and to become a competitive local exchange carrier ("CLEC"). As a CLEC, Plaintiff would enjoy a competitive advantage over other ISPs. To achieve its goal of becoming a CLEC, Plaintiff had to acquire some telecommunications equipment and software. Plaintiff and Defendant signed an "Evaluation Agreement" for Defendant to provide some telecommunications equipment and software to Plaintiff for a 90-day trial period. (Pl.'s Compl. Ex. 2 [hereinafter Agreement]). Plaintiff claims that Defendant breached the Agreement (Count I), that Defendant breached the Agreement's warranties (Count II), that Defendant made fraudulent misrepresentations (Count III), and that Defendant made innocent misrepresentations. (Count IV). This Court has diversity jurisdiction as the parties are diverse and the amount in controversy exceeds $75,000. 28 U.S.C. § 1332. As explained, Defendant's motion to dismiss is GRANTED.
In its complaint, Plaintiff alleges that around February 15, 2000, ADC submitted to Lucre a proposal to help Lucre achieve its goal of becoming a CLEC. (Pl.'s Compl. Ex. 1 [hereinafter Proposal]). The Proposal, "NewNet Internet Offload Solution for Lucre," acknowledges that "it [is] financially attractive for an ISP to become a licensed CLEC." (Pl.'s Compl. Proposal at 2). ADC also notes in the proposal that its "Internet Offload Solution is available, and ready for installation today." (Pl.'s Compl. Proposal at 2). Furthermore, ADC stated that the "components are well proven in many live installations around the world." (Pl.'s Compl. Proposal at 2). In the technical requirements section of the Proposal, ADC notes that Ameritech requires CLECs to have multi-frequency or "MF" capabilities. (Pl.'s Compl. Proposal at 5). In other words, Lucre needed multi-frequency capabilities to be a CLEC. In its Proposal, ADC stated that: "During the course of Lucre's trial, NewNet will include MF [(multi-frequency)] functionality into the IOS [(Internet Offload Solution)] for Lucre's test and acceptance." (Pl.'s Compl. Proposal at 7).
Following this Proposal, Lucre agreed to accept the 90-day trial period, and the parties signed an "Evaluation Agreement" in March 2000. (Pl.'s Compl. Agreement ¶ 15). The Agreement is governed by Minnesota law. (Pl.'s Compl. Agreement ¶ 15). The primary terms are that Lucre receives a temporary license to the equipment and software at no charge and that Lucre will pay support and maintenance fees of $8,250 during the evaluation period. (Pl.'s Compl. Agreement ¶ 1). In describing the equipment and software, the Agreement notes that: "[t]he following [list of equipment and software] makes reference to our quote dated 02-15-2000 for a 2k Port IOS [(Internet Offload Solution)] System." (Pl.'s Compl. Agreement Appendix A). Lucre alleges that because the Proposal specifically noted that multi-frequency capability was included in the equipment and software, ADC was required to provide multi-frequency capability under the Agreement. An affidavit from Lucre's president indicates that the equipment and software never had multi-frequency capability. (Aff. R.S. Hale ¶ 6). Furthermore, a letter from ADC at the end of the evaluation period also supports this conclusion. (Pl.'s Compl. Ex. 3). The letter suggests that to obtain multi-frequency capability, Lucre must purchase a 2K Port IOS System plus separately purchase multi-frequency capability. (Pl.'s Compl. Ex. 3).
Accepting these allegations as true, ADC argues that three clauses of the Agreement preclude any liability or damages. First, ADC argues that the Agreement contains a clause limiting ADC's liability. (Pl.'s Compl. Agreement ¶ 9a). In all capital letters, this clause states that: "ADC shall not be liable to Company under this agreement for damages of any nature arising out of the furnishing, performance[,] or use of the equipment and/or software." (Pl.'s Compl. Agreement ¶ 9a). Second, the Agreement includes a merger or integration clause. Under this clause, the parties acknowledge that:
This Agreement and the attached Appendix A sets forth the entire understanding between the parties with respect to the subject matter herein, and it merges and supersedes all prior written agreements, discussions[,] and understandings, expressed or implied, between the parties concerning such matters, and shall take precedence over any conflicting terms which may be contained in COMPANY's purchase order or ADC's order acknowledgment form.
(Pl.'s Compl. Agreement ¶ 17). Finally, the Agreement includes a disclaimer of warranty provision. Specifically, "[t]he EQUIPMENT and SOFTWARE is provided on an `AS IS' basis and without warranty. This disclaimer is in lieu of all warranties whether express implied, or statutory, including implied warranties or [sic] merchantability or fitness for particular purpose." (Pl.'s Compl. Agreement ¶ 8a (emphasis omitted)).
Under the Federal Rules of Civil Procedure, a complaint "must include only `a short and plain statement of the claim showing that the pleader is entitled to relief.'" Swierkiewicz v. Sorema N.A., 534 U.S. 506, 122 S.Ct. 992, 998 (2002) (quoting FED. R. CIV. P. 8(a)(2)). A Rule 12(b)(6) motion tests whether a complaint has satisfied this requirement. FED. R. CIV. P. 12(b)(6). In reviewing a complaint, the Court must "view the complaint in the light most favorable to the plaintiff [and] treat all well-pleaded allegations therein as true." Amini v. Oberlin Coll., 259 F.3d 493, 497 (6th Cir. 2001). Additionally, "[d]ocuments attached to a motion to dismiss are considered part of the pleadings if they are referred to in the plaintiff's complaint and are central to the plaintiff's claim." Jackson v. City of Columbus, 194 F.3d 737, 745 (6th Cir. 1999) overruled on other grounds by, Swierkiewicz v. Sorema N.A., 534 U.S. 506, 122 S.Ct. 992, 996 n. 2, 999 (2002). The Court "will dismiss the complaint only if it appears beyond doubt that the plaintiff can prove no set of facts in support of the claims that would entitle him or her to relief." Pfennig v. Household Credit Servs., Inc., 295 F.3d 522, 525-26 (6th Cir. 2002); see also Conley v. Gibson, 355 U.S. 41, 45-46 (1957) ("[A] complaint should not be dismissed for failure to state a claim unless it appears beyond doubt that the plaintiff can prove no set of facts in support of his claim which would entitle him to relief.").
A. Contract Warranty Claims
Initially, it is important to determine whether Michigan or Minnesota law applies to Lucre's breach of contract and breach of warranty claims. Although Lucre cites both Michigan and Minnesota law, ADC argues that Minnesota law governs because of the Agreement's choice of law provision. (Pl.'s Compl. Agreement ¶ 15). "The Michigan Supreme Court recognizes the validity of contractual choice of law provisions if (1) there is a "reasonable relationship" between the chosen state and the transaction, and (2) its enforcement would not offend public policy considerations." Auto. Logistics Productivity Improvement Sys., Inc. v. Burlington Motor Carriers, Inc., 986 F. Supp. 446, 448 (E.D.Mich. 1997). In this case, there is a reasonable relationship between Minnesota and the transaction. In particular, ADC is a Minnesota corporation. Additionally, Plaintiff has not indicated that application of Minnesota law would offend any public policy considerations.
Therefore, under Michigan's choice of law provisions, the Court will enforce the parties' contractual choice of law provision and will apply Minnesota law.
Although Minnesota law applies, it is not clear whether Minnesota's common law of contracts or Minnesota's Uniform Commercial Code ("UCC") Article 2, MINN. STAT. §§ 336.2-102 to 336.2-725 [hereinafter Article 2], is applicable in this case. By repeatedly citing Article 2, both parties implicitly argue that the Agreement is governed by Article 2. Hence, without analyzing whether Article 2 applies in this case and based solely on the parties' arguments, the Court will apply Article 2 to the breach of contract and breach of warranty claims.
Turning to the merits, ADC contends that as indicated in the Agreement's merger clause, (Pl.'s Compl. Agreement ¶ 17), the parties' entire understanding is in the Agreement and that because the Agreement's limitation of liability provision precludes any relief for damages, (Pl.'s Compl. Agreement ¶ 9a), Lucre is not entitled to any damages for its breach of contract or breach of warranty claims. At oral argument, Lucre asserted that despite the merger clause, the parties' contract is not defined solely by the Agreement. Instead, Lucre argued that the Agreement is "a contract within a contract." Even if the Agreement represents the parties' only contractual obligations, Lucre's brief claims that the limitation of liability clause is unconscionable and that accordingly, the Court should disregard it. Resolution of these issues requires interpreting the Agreement.
Minnesota applies traditional contract interpretation principles. Employers Mut. Cas. Co. v. A.C.C.T., Inc., 580 N.W.2d 490, 493 (Minn. 1998). Accordingly, the parties' intent as expressed in their contract language is controlling. Id. The contract language is given its plain meaning. Id. Under Article 2, "[a] contract for sale of goods may be made in any manner sufficient to show agreement." MINN. STAT. § 336.2-204. Here, the parties signed the Agreement, and by their signatures on the Agreement, the parties were indicating their agreement to the terms and conditions of the Agreement. In particular, the parties agreed that the "Agreement and the attached Appendix A sets forth the entire understanding between the parties with respect to the subject matter herein, and it merges and supersedes all prior written agreements." (Pl.'s Compl. Agreement ¶ 17). This language expresses the parties' intention not to create "a contract within a contract." Instead, the parties intended to include all the terms of their contract in the Agreement and not to create a contract for longer than 90-days. Furthermore, Lucre's claim that a longer term contract existed is contrary to other language in the Agreement. Specifically, the Agreement notes that Lucre "shall return the SOFTWARE and EQUIPMENT to ADC at the end of the Evaluation Period unless the parties have entered into a definitive licensing agreement for the Software that supersedes this Agreement." (Pl.'s Compl. Agreement's 10(a)). In other words, the parties considered entering into a longer term contract but did not finalized any longer term contract. Consequently, Lucre's argument that the parties' contract is not defined solely by the Agreement is without merit.
As the Agreement represents the parties sole contractual obligations, ADC claims that Lucre is not entitled to any damages for its contract claims because the Agreement's limitation of liability provision precludes any damages. Lucre does not dispute that the limitation of liability bars damages. Instead, Lucre counters that the limitation of liability clause is unconscionable and that the Court should disregard it.
Under Minnesota law, the Court determines whether a contract clause is unconscionable. Osgood v. Med., Inc., 415 N.W.2d 896, 901 (Minn.Ct.App. 1987). Minnesota courts have found a contract unconscionable when it is "such as no man in his senses and not under delusion would make on the one hand, and as no honest and fair man would accept on the other." Kauffman Stewart, Inc. v. Weinbrenner Shoe Co., Inc., 589 N.W.2d 499, 502 (Minn.App. 1999) (internal quotations omitted) (quoting Hume v. United States, 132 U.S. 406, 411 (1889)). Consistent with this definition, "` [t]he principle [of unconscionability] is one of the prevention of oppression and unfair surprise * * * and not of disturbance of allocation of risks because of superior bargaining power.'" Osgood, 415 N.W.2d at 901 (quoting comment to MINN. STAT. § 336.2-302). In determining unconscionability, consideration is given to the contract's "commercial setting, purpose and effect." MINN. STAT. § 336.2-302(b). Additionally, unconscionability is analyzed as of the time that the parties formed the contract. Taylor Inv. Corp. v. Weil, 169 F. Supp.2d 1046, 1059 (D.Minn. 2001).
Lucre argues that the Agreement was both procedurally and substantively unconscionable. Lucre has two theories of procedural unconscionability. First, Lucre claims that ADC took advantage of Lucre's lack of commercial sophistication by not explaining the terms of the Agreement to Lucre. The second theory is that alternative suppliers of equipment and software would require Lucre to agree to similar limitations on liability. Finally, Lucre contends that the limitation of liability clause is substantively unconscionable because the equipment and software had a latent defect — missing multi-frequency capability. These theories are without merit.
The first theory is not persuasive because under Minnesota's Article 2, the parties' relative bargaining power is irrelevant to unconscionability analysis. Osgood, 415 N.W.2d at 901. But cf. Martin v. Joseph Harris Co., Inc., 767 F.2d 296, 301 (6th Cir. 1985) ("We agree with the district court that relative bargaining power is an appropriate consideration in determining unconscionability under the Michigan Uniform Commercial Code.").
Second, Lucre cites Michigan case law for the proposition that a contract provision is substantively unconscionable when a party has no "realistic alternative to acceptance of the terms offered." Allen v. Mich. Bell Tel. Co., 18 Mich. App. 632, 637, 171 N.W.2d 689, 692 (1969) (finding that if there are no "realistic alternatives," "one who successfully exacts agreement to an unreasonable term cannot insist on the courts enforcing it on the ground that it was `freely' entered into, when it was not"). Here, Minnesota and not Michigan law controls, and Lucre's proposition is not supported by Minnesota law. In Vierkant by Johnson v. AMCO Ins. Co., 543 N.W.2d 117 (Minn.App. 1996), the Minnesota court of appeals determined whether an exclusion clause in a homeowners' insurance policy was unconscionable. The court noted that in bargaining for an insurance policy, homeowners would not choose the exclusion. Id. at 120. Regardless, the exclusion was common to the industry, and a homeowner had no alternative but to accept a policy with the exclusion. Id. Because the exclusion was prominent and clear, the Minnesota court of appeals found that it was not unconscionable. Id. Applying this reasoning, Lucre acknowledges that any party supplying Lucre with the necessary equipment and software would have included a limitation of liability provision. (Pl.'s Br. Opp'n at 10). As a result, if Lucre wanted the equipment and software, it had to agree to the limitation on liability provision. Because the limitation was clear and unambiguous, it is not unconscionable.
Finally, Lucre alleges that the limitation of liability clause is substantively unconscionable because the equipment and software had a latent defect. This argument is not persuasive. A provision is substantively unconscionable if it unfairly surprises or oppresses the other party. Osgood, 415 N.W.2d at 901. For the limitation of liability provision to be unconscionable, Lucre must argue that it was unfairly surprised by the limitation of liability provision. In this case, Lucre cannot make this argument because the limitation of liability provision was clear and unambiguous in the contract Lucre signed. (Pl.'s Compl. Agreement ¶ 9a). Additionally, Lucre incurred "virtually no cost" in obtaining the equipment and software for the 90-day trial period. (Pl.'s Br. Opp'n at 10). As the Agreement was at minimal cost to Lucre and for the purpose of allowing Lucre to examine the equipment and software, there is nothing surprising or oppressive in the limitation of liability provision. Therefore, the limitation of liability is not substantively unconscionable. Because the limitation of liability provision precludes Lucre from recovering any damages for breach of contract or breach of warranty, the motion to dismiss is granted as to Counts I and II.
B. Tort Claims
Before addressing the viability of Plaintiff's tort claims, the Court must first determine whether Michigan or Minnesota law applies to Plaintiff's tort claims. Because this Court sits in Michigan, the starting point is Michigan's choice of law rules. Ruffin-Steinback v. de Passe, 267 F.3d 457, 463 (6th Cir. 2001). In tort cases, Michigan courts
apply Michigan law unless a "rational reason" to do otherwise exists. In determining whether a rational reason to displace Michigan law exists, we undertake a two-step analysis. First, we must determine if any foreign state has an interest in having its law applied. If no state has such an interest, the presumption that Michigan law will apply cannot be overcome. If a foreign state does have an interest in having its law applied, we must then determine if Michigan's interests mandate that Michigan law be applied, despite the foreign interests.Sutherland v. Kennington Truck Serv., Ltd., 454 Mich. 274, 286, 562 N.W.2d 466, 471 (1997).
Under the first step of this analysis, the Court must consider whether a Minnesota court would apply Minnesota or Michigan law if this case had been filed in Minnesota. The Minnesota court would apply Minnesota's choice of law rules. Minnesota has "adopted the significant contacts test for choice-of-law analyses." Nodak Mut. Ins. Co. v. Am. Family Mut. Ins. Co., 604 N.W.2d 91, 94 (Minn. 2000). The significant contacts test begins by determining whether there is a true conflict between Minnesota and Michigan law. In this case, a true conflict appears to exist because while Michigan's economic loss doctrine strictly limits fraud claims, Huron Tool Eng'g Co. v. Precision Consulting Servs., Inc., 209 Mich. App. 365, 368, 532 N.W.2d 541, 543 (1995), Minnesota's economic loss doctrine does not bar "fraud or fraudulent or intentional misrepresentation" claims. MINN. STAT. § 604.10(e).
Because there is a true conflict, Minnesota courts would consider the following choice-influencing factors: "(1) Predictability of results; (2) Maintenance of interstate and international order; (3) Simplification of the judicial task; (4) Advancement of the forum's governmental interest; and (5) Application of the better rule of law." Nodak Mut. Ins. Co., 604 N.W.2d at 94. The Minnesota Supreme Court has explained that the first factor, predictability of results, is designed "to avoid forum shopping" and "to preserve the parties" justified contractual expectations. Id. In this case, the parties bargained for the application of Minnesota law to their contact. On the other hand, they did not bargain for Minnesota or Michigan law to control their tort causes of action. While the underlying contract is governed by Minnesota law, the factor does not appear to support either Minnesota or Michigan law. Similarly, the second factor, maintenance of interstate and international order, does not favor either state. Because both states have addressed the applicability of the economic loss doctrine to tort law claims, they have both demonstrated an interest in this issue. Id. at 95.
The third factor "is primarily concerned with the clarity of the conflicting laws." Id. Here, the conflicting laws seem clear. Advancement of the forum's governmental interest, the fourth factor, in this case favors Michigan law. Plaintiff, a Michigan company, is alleging that Defendant made fraudulent misrepresentations in Michigan. This fact strongly suggests that Michigan has a greater interest in seeing its law applied. AGA Gas, Inc. v. Wohlert Corp., No. 5:98-CV-155, 2000 WL 1478466, at *2 (W.D.Mich. 2000) (Miles, J.). Finally, the fifth factor, the better rule of law, has not been emphasized by the Minnesota Supreme Court. Id. at 96.
Balancing these five factors, a Minnesota court would most likely apply Michigan law. Because Minnesota does not have an interest in having its law applied, the presumption that Michigan law applies is not overcome. Sutherland, 454 Mich. at 286, 562 N.W.2d at 471. Consequently, the Court will apply Michigan law without addressing the second step of Michigan's choice of law analysis.
Under Michigan law, "[t]he economic loss doctrine provides that `[w]here a purchaser's expectations in a sale are frustrated because the product he bought is not working properly, his remedy is said to be in contract alone, for he has suffered only "economic" losses.'" Huron Tool Eng'g Co., 209 Mich. App. at 368, 532 N.W.2d at 543 (1995) (quoting Kennedy v. Columbia Lumber Mfg. Co., 299 S.C. 335, 345, 384 S.E.2d 730 (1989)). The Michigan Court of Appeals has recognized an exception to the economic loss doctrine. Id. at 372-73, 532 N.W.2d at 545. The exception provides that a plaintiff may recover for a claim of fraud in the inducement. Id. In distinguishing between fraud claims and fraudulent inducement claims, the Michigan Court of Appeals emphasized that fraudulent inducement involves some impairment of a party's ability "to negotiate fair terms and make an informed decision." Id. at 373, 532 N.W.2d at 545. Contra Budgetel Inns, Inc. v. Micro Sys., Inc., 34 F. Supp.2d 720, 722-25 (E.D.Wis. 1999) (Adelman, J.) (predicting that Wisconsin courts will not follow Huron Tool's narrow exception to the economic loss doctrine but noting that other district judges disagree with this prediction).
Here, Lucre claims that it was tricked into contracting with ADC. Specifically, Lucre contends that in the Proposal, ADC made false representations and that Lucre relied on these false representations in contracting with ADC. Because the representations in the Proposal concern the subject of the Agreement, Lucre's argument is not persuasive. As this Court has previously noted, a fraudulent inducement claim is without merit when the "operative allegations in the claims would not arise without the existence of the putative contracts." Merch. Publ'g Co. v. Maruka Mach. Corp. of Am., 800 F. Supp. 1490, 1493 (W.D.Mich. 1992) (Bell, J.); see also AGA Gas, Inc. v. Wohlert Corp., No. 5:98-CV-155, 2000 WL 1478466, at *4 (W.D.Mich. 2000) (Miles, J.) (acknowledging fraudulent inducement exception to economic loss doctrine and finding that fraud and misrepresentation claims were barred by Michigan's economic loss doctrine). Consequently, Lucre's tort claims are barred by the economic loss doctrine.
To summarize, Lucre is not entitled to relief on its breach of contract or breach of warranty claims because the Agreement's limitation of liability provision precludes Lucre from recovering any damages. Similarly, Lucre may not recover on its tort claims because recovery is precluded by Michigan's economic loss doctrine. Consequently, ADC's motion to dismiss for failure to state a claim is GRANTED. Accordingly, an order consistent with this opinion will be entered.