Date: 02-21-2007

Case Style: Matrix Group Limited v. Rawlings Sporting

Case Number: 05-4345

Judge: Murphy

Court: United States Court of Appeals for the Eighth Circuit on appeal from the Eastern District of Missouri, St. Louis County

Plaintiff's Attorney: Unknown

Defendant's Attorney: Unknown

Description:

After Rawlings Sporting Goods Company terminated an agreement granting an exclusive license to Matrix Group Limited to sell its sports bags, the parties sued each other for breach of contract. Matrix also asserted claims against Rawlings and K2, Inc., Rawlings' parent corporation, under a Florida statute on deceptive trade practices and a tortious interference claim against K2. The district court1 granted summary judgment to Matrix on the contract, and a jury returned verdicts in favor of Matrix against Rawlings and K2. Post trial motions were denied, except for Rawlings' motion to reduce Matrix's compensatory damage award. Rawlings and K2 appeal the judgment in favor of Matrix and the denial of post trial motions. Matrix appeals the reduction of its damage award and the dismissal of its claims under the Florida statute and for punitive damages. We affirm on all but one issue.

I.

Matrix, which is headquartered and incorporated in Florida, produces and sells bags for sporting equipment. Rawlings, a Delaware corporation, makes sporting equipment for use in baseball, softball, basketball and football. On July 31, 1996, Rawlings and Matrix executed the contract which is the subject of this litigation. Under that contract, Matrix had an exclusive license to use Rawlings' trademarks in producing, marketing, and selling equipment bags, and the license was to continue so long as certain conditions were satisfied. Matrix agreed to use its "best efforts to foster and develop the products" and to maximize sales. It further agreed to meet certain minimum average annual sales levels over a five year period. Rawlings agreed not to produce or sell bags that competed with those of Matrix or to sell bags over a certain size. A section entitled "Breach" provided that if either party "breache[d] any of the provisions" of the contract, written notice of the breach had to be given to the breaching party. The other party was entitled to terminate the contract if the breaching party did not cure the breach within thirty days after the written notice. A separate section entitled "Immediate Termination" stated that Rawlings, upon notice to Matrix, could immediately terminate the agreement if Matrix became insolvent. The contract was to be governed by the law of Delaware.

There was testimony at trial that annual sales of Rawlings bags were about $300,000 at the time Matrix took over its sporting bag business. By 1999 sales had reached $3 million per year, but in the next several years they declined and were at about $865,000 in 2003. Nevertheless, Matrix met the contract's minimum sales requirements at all times during the contract period.

In March 2003 K2 acquired Rawlings as a subsidiary, and then in September it also acquired Worth, a competitor to Matrix in the sporting equipment bag industry. K2 made plans to consolidate parts of the sales forces of Rawlings and Worth, and Louis Orloff, the president of Matrix, wrote to Rawlings that such a consolidation would violate the noncompete clause of the agreement between Matrix and Rawlings.

For some time Rawlings had been concerned with the decline in its bag sales and believed that Matrix was uninterested in growing this business and was not using its best efforts to foster and develop its products. In a meeting with Orloff in November 2003, Rawlings management expressed concern that the bag line was stagnant. Rawlings was dissatisfied with Orloff's response to these concerns, which it believed showed that Orloff considered Rawlings' bag line relatively unimportant and that he had no desire to innovate. During that same month K2's consolidation plans were carried out, and portions of the Rawlings and Worth sales forces were combined.

After the November 2003 meeting between Orloff and Rawlings management, Orloff sent a letter to Rawlings referring to the parties' disputes and outlining Matrix's positions on them. He reiterated his belief that consolidation of the Rawlings and Worth sales forces would violate the parties' contract. Rawlings felt that this letter did not satisfactorily respond to its concerns and its president, Robert Parish, discussed the Matrix letter with Monte Baier, K2's general counsel, and decided to terminate the license agreement.

On January 30, 2004, Matrix initiated its breach of contract action against Rawlings in the United States District Court for the District of Maine, alleging breach of the license agreement's noncompete duties. By letter dated February 2, 2004, Rawlings informed Matrix that it would terminate the contract effective thirty days from the date of the letter for Matrix's failure to use best efforts. The letter further stated that the contract notice provision, requiring a thirty day period for cure of breach, was inapplicable "because Rawlings has repeatedly requested that Matrix comply with the terms of the Agreement requiring Matrix to use its best efforts ... and Matrix has failed and refused to comply." On the same date as that letter, Rawlings filed its action against Matrix in federal district court in the Eastern District of Missouri for breach of Matrix's duty to use best efforts.

Matrix moved for a temporary restraining order and preliminary injunction against Rawlings in the Maine case while Rawlings sought to transfer that action to the Eastern District of Missouri. The district court denied Matrix's motion2 and transferred the Maine case to the Eastern District of Missouri where it was consolidated with the action already filed there.

The cases were realigned, and additional claims were asserted. Matrix alleged that Rawlings had wrongfully terminated the contract by failing to give it the required thirty day period in which to cure its breach. Matrix also joined K2 as a party and alleged that it and Rawlings had violated the Florida Deceptive and Unfair Trade Practices Act, Fla. Stat. §§ 501.201-.23. In addition Matrix asserted that K2, by acquiring Worth and consolidating the sales forces of Rawlings and Worth, had caused Rawlings to breach the license agreement's noncompete clause and tortiously interfered with that agreement in violation of Florida common law. Matrix sought compensatory and punitive damages, as well as equitable relief to prevent consolidation of the Rawlings and Worth sales forces and the selling or promoting of competing bags.

Rawlings and K2 subsequently moved for dismissal of Matrix's Florida statutory claim and for summary judgment on Matrix's contract and common law tort claims. In its motion Rawlings raised an additional theory justifying its termination of the contract on the ground that Matrix was insolvent and therefore in breach. To support this theory it produced a balance sheet from 2004 showing that Matrix's liabilities exceeded its assets. Matrix in turn moved for summary judgment both on its claim that Rawlings had wrongfully terminated the license agreement and on Rawlings' breach of contract claim.

In ruling on these motions, the district court concluded that Matrix's statutory claim should be dismissed for failure to state a claim. Summary judgment was granted to Rawlings on the tortious interference claim against it, but denied to K2. The district court also granted summary judgment to Matrix for wrongful termination after concluding that Rawlings' notice had violated the contract's thirty day cure provision and that there was insufficient evidence that Matrix had been insolvent.

The parties then went to trial on Matrix's claims against Rawlings for breach of the license agreement's noncompete clause and against K2 for tortious interference. As part of its compensatory damage claim, Matrix sought lost profits which it would have gained from the license absent breach. Its expert witness, Donna Beck Smith, split her calculation of lost profits into two segments: (1) the profits Matrix would have gained from the license for the first ten years after termination, and (2) the "terminal value" of the license or its residual value after those ten years. K2 and Rawlings moved for a directed verdict on the license's terminal value, claiming such damages were too speculative to be awarded, and K2 moved for judgment as a matter of law on the tortious interference claim. The motions were denied, and the cases were submitted to the jury by special verdict with instructions that if the jury found for Matrix it was to award separate damages for the ten year period after termination and for the terminal value of the license.

The jury returned a verdict in favor of Matrix and awarded damages against Rawlings in the amounts of $4,096,312 for the ten year period and $2,053,688 for terminal value. It also returned a verdict against K2 for $2,500,000. The district court entered judgment on the jury verdicts. Rawlings and K2 filed post trial motions for judgment or in the alternative for a new trial. The district court denied the motions in large part, but it did grant Rawlings' motion in respect to the terminal value award, and the judgment was amended to eliminate that portion of Matrix's award.

All parties have appealed. Rawlings argues that the district court erred in granting summary judgment to Matrix on its wrongful termination claim. K2 asserts that the jury instructions on Matrix's tortious interference claim were faulty and that it should have been granted judgment as a matter of law on that claim. Both Rawlings and K2 argue in the alternative that they are entitled to a new trial because the verdicts were against the weight of the evidence. On its cross appeal Matrix argues that its claim under the Florida statute should not have been dismissed, that the jury should have been allowed to consider whether to award punitive damages against K2, and that the district court erred in setting aside the jury's award of damages for the license's terminal value.

* * *

The contract provided for Delaware law to control, and Rawlings argues that under that law a party need not give notice of termination if there is a material breach of the contract by the other party. We have found no decision of the Delaware Supreme Court on this point of law, and Rawlings cites none. Rawlings does cite dicta in one chancery case, see A.R. Dervaes Co. v. Houdaille Indus., Inc., 1982 WL 17883 at *2 (Del. Ch. Jan. 14, 1982), and also a trial court decision interpreting a statutory notice provision, see Braxton v. Adirondack Group, Inc., 2003 WL 22938542 at *5 (Del. C.P. Aug. 11, 2003). Matrix cites a federal district court case that directly contradicts Rawlings' position, however. Harper v. Del. Valley Broad., Inc., 743 F. Supp. 1076 (D. Del. 1990), aff'd mem., 932 F.2d 959 (3d Cir. 1991). In Harper, the district court applied Delaware law to hold that one party's alleged failure to perform adequately under a consulting agreement did not excuse the other party's failure to follow a fifteen day notice and cure provision. Id. at 1084.

While the case on which Matrix relies is more apposite than those cited by Rawlings, none is conclusively determinative of Delaware law. See Comm'r v. Estate of Bosch, 387 U.S. 456, 465 (1967). What should determine the outcome here is the more fundamental principle that the unambiguous language of a contract must be given its plain meaning and full effect. Westfield Ins. Group v. J.P.'s Wharf, Ltd., 859 A.2d 74, 76 (Del. 2004). As the Delaware Court of Chancery has explained, "Where contract language speaks to a particular dispute, the Court gives those privately negotiated and agreed upon terms their full and plain meaning." Cont'l Ins. Co. v. Rutledge & Co., 750 A.2d 1219, 1228 (Del. Ch. 2000).

* * *

Outcome: For these reasons we reverse the order of the district court striking Matrix's damages for the license's terminal value but affirm the judgment in all other respects. We grant the motion by Matrix to supplement the record on appeal and remand for entry of judgment consistent with this opinion.

Plaintiff's Experts: Unavailable

Defendant's Experts: Unavailable

Comments: None