KINESOFT DEVELOPMENT CORP. v. SOFTBANK HOLDINGSNo. 99 C 7428.
139 F.Supp.2d 869 (2001)
KINESOFT DEVELOPMENT CORPORATION, Plaintiff,
SOFTBANK HOLDINGS INC. and Ronald D. Fisher, Defendants.
SOFTBANK HOLDINGS INC. and Ronald D. Fisher, Defendants.
United States District Court, N.D. Illinois, Eastern Division.
February 16, 2001.
Weston W. Marsh, Amy B. Bellman, Carl E. Volz, Freeborn & Peters, Chicago, IL, for plaintiff.
Paula Enid Litt, Schopf & Weiss, Chicago, IL, David H Braff, Marc De Leeuw, Jeffrey T Scott, Sullivan and Cromwell, New York, NY, for defendants.
MEMORANDUM OPINION AND ORDER
SCHENKIER, United States Magistrate Judge.
This is the Court's second summary judgment opinion in this case, which arises out of disputes between plaintiff, Kinesoft Development Corporation ("Kinesoft"), and defendant Softbank Holdings Inc. ("Softbank"), concerning the performance of the terms of a 1995 Shareholders Agreement ("the Shareholders Agreement") and a 1997 Settlement Agreement ("the 1997 Agreement"). In its second amended complaint, Kinesoft alleges breach of the Shareholders Agreement (Count I) and the 1997 Agreement (Count II) by Softbank; breach of fiduciary duty by Softbank (Count IV) and Ronald D. Fisher, the Vice Chairman of Softbank (Count V); and tortious interference with prospective economic advantage by Softbank (Count III). The Court has jurisdiction over this matter pursuant to 28 U.S.C. § 1332, and venue is proper in this Court under 28 U.S.C. § 1391.
In its earlier opinion ("Kinesoft I"), the Court granted Kinesoft's motion for summary judgment on Softbank's counterclaim. In this opinion, the Court addresses the motion for summary judgment filed by the defendants (doc. # 47), which seeks a judgment disposing of all five counts of the second amended complaint. For the reasons that follow, defendants' motion is granted in part and denied in part.
Summary judgment is proper if the record shows that there is no genuine issue as to any material fact, and that the moving party is entitled to judgment as a matter of law. See Lexington Ins. Co. v. Rugg & Knopp, Inc.,
Thus, once Softbank moved for summary judgment, and offered evidentiary materials to support its factual allegations, Kinesoft could not merely rely on its denials in the pleadings to show that a genuine issue of material fact existed. See Shermer v. Illinois Dep't of Transp.,
After careful review of the parties' Rule 56.1 statements, the material facts are set forth below. As will be clear from the discussion, while many of these facts are undisputed, many facts material to certain of plaintiff's claims remain in genuine dispute.
A. The Shareholders Agreement.
In May 1995, in exchange for 41 percent of Kinesoft's common stock, Softbank paid $12 million to Kinesoft and its two principal shareholders: Peter Sills, Kinesoft's Chief Executive Officer ("CEO"); and Peter
On May 25, 1995, Mr. Sills and his former partner, Mark Achler, together with Kinesoft, Softbank and Softbank Corporation (Softbank's parent), entered into the Shareholders Agreement (Defs.' Facts ¶ 6).
The parties have identified five persons who served as members of the Kinesoft Board of Directors at all times relevant to this action. At those times, Mr. Fisher and Dr. T.A. Dolotta were Softbank's designated Directors to the Kinesoft Board (Pl.'s Add'l Facts ¶ 76). Messrs. Sills, Mason and Achler were Kinesoft's designated Directors (Id.). None of these five directors were elected at a formal board meeting (Id.; Defs.' Reply Facts ¶ 76); rather, all five were placed on the Board by a written, "formal unanimous consent of the Board of Directors" (Pl.'s Resp. Facts ¶ 6; Defs.' Reply Facts ¶ 76; Final Pretrial Order, § III(7)). When Kinesoft hired a new president and moved the company from Chicago, Illinois to Austin, Texas, no formal Board meeting was held to approve these acts: the communications all were through e-mails and telephone calls (Pl.'s Add'l Facts ¶ 68).
B. The 1997 Agreement.
On May 25, 1995, Kinesoft and Softbank entered into the "Game Porting Agreement" (Defs.' Facts ¶ 8). Under the terms of that agreement, Softbank was to provide Kinesoft with a certain number of console games to be "ported" to a PC platform; "porting" involves translating pre-existing video games from the console platform to the personal computer platform (Id. ¶¶ 7-8). Kinesoft sued Softbank for breach of the Game Porting Agreement, and Softbank admits now that it did not provide Kinesoft with the agreed upon number of games (Defs.' Facts ¶ 9). That lawsuit was resolved when Softbank and Kinesoft entered into a settlement agreement
Under the terms of the 1997 Agreement, Softbank was required to make "Initial" and "Subsequent Advances" to Kinesoft totaling $10 million, as follows: (1) $5 million on June 12, 1997, the date the 1997 Agreement was executed; (2) $2.5 million on April 1, 1998; and (3) $2.5 million on October 1, 1998 (Defs.' Facts ¶ 10). Softbank made each of the Initial and Subsequent Advances on the designated dates (Defs.' Facts ¶ 10).
The June 1997 Agreement also provides that, in certain circumstances, Softbank "shall make available" to Kinesoft up to $15 million in "Capital Advances" (Defs.' Ex. 9, at § 2.01(d)-(e)). Sections 2.01(d) and (e) of the 1997 Agreement pertain to Capital Advances. Because those provisions are central to this case we quote them in full:
(Defs.' Ex. 9, at §§ 2.01(d)-(e)) (underlining in original).
Section 5.04 of the 1997 Agreement, which is referred to in Section 2.01(e)(ii), provides the manner that notice is to be given and to whom it is to be directed:
or such other address as a party shall have designated by notice in writing to the other party given in the manner provided by this Section.
(Pl.'s Ex. A, 1997 Agreement § 5.04) (bold face and underlining in original).
The 1997 Agreement also addresses future amendments, modifications or waivers of its terms:
(Pl.'s Ex. A, 1997 Agreement § 5.01) (bold face and underlining in original). Finally, the 1997 Agreement also contains a merger and integration clause, which provides as follows:
(Id., § 5.02) (bold face and underlining in original).
C. Prior Requests for Capital Advances.
Prior to the summer of 1999, Kinesoft made three requests for Capital Advances that Softbank approved — although only two requests were actually funded (Defs.' Facts ¶¶ 20-22). We address each of those requests for Capital Advances in chronological order.
On May 20, 1997, Kinesoft initiated its first request for a Capital Advance by sending an e-mail to Mr. Fisher seeking $250,000 to pay for "extraordinary" expenses relating to hiring (Defs.' Facts ¶ 20; Defs.' Ex. 17). Although there was no proposed funding date included in the initial e-mail (Pl.'s Add'l Facts ¶ 70), Mr. Fisher did not deny the request on that basis. Instead, he noted that a Capital Advance could not be made until the 1997 Agreement was signed (Defs.' Facts ¶ 20; Defs.' Ex. 17). That agreement was signed on June 12, 1997, and by a letter dated June 24, 1997, Kinesoft confirmed the request for a Capital Advance. In the June 24, 1997 letter, Kinesoft asked that the funding be provided immediately (Defs.' Facts, Ex. 9). Thereafter, Softbank approved the request and made the Capital Advance for $250,000 (Defs.' Facts ¶ 20).
In the fall of 1997, Kinesoft initiated a second request for a Capital Advance: this one for approximately $6.5 million to fund the acquisition of two PC games being developed by third parties (Defs.' Facts ¶ 21; Defs.' Ex. 18). On behalf of Softbank, Mr. Fisher and Mr. Mason requested further financial information about these acquisitions (Defs.' Facts ¶ 21). On December 3, 1997, after receiving additional information, Mr. Fisher approved the request (Defs.' Facts ¶ 21; Defs.' Ex. 18). However, Kinesoft's Board of Directors never voted on approval of this request (Pl.'s Add'l Facts ¶ 71), and the funds were
On or about May 1, 1998, Kinesoft initiated a third request for a Capital Advance by sending an e-mail to Mr. Fisher seeking $1.32 million for "capital equipment expenditures" to be made in two installments (Defs.' Facts ¶ 22; Pl.'s Ex. 20). Again, Kinesoft's request did not include a proposed funding date; and this time, the request also did not include a description of the proposal, but it did list the equipment Kinesoft sought to purchase (Pl.'s Add'l Facts ¶ 72). Softbank sought no further details concerning the proposed acquisition. However, in an e-mail dated May 11, 1998, Kinesoft specifically requested that Softbank advance the funds within 30 days of Kinesoft's request (Defs.' Reply Facts ¶ 72; Defs.' Ex. 20). On that same date, Softbank approved the request for a Capital Advance (and the proposed 30-day funding date), and subsequently advanced the first installment of approximately $998,000 (Defs.' Facts ¶ 22). The second installment was never paid because Kinesoft withdrew the request for the balance of that Capital Advance (Id.).
D. The Introduction of Mr. Levy Into The Relationship.
On October 27, 1998, Mr. Fisher contacted Mr. Jordan Levy about assisting Softbank in its dealings with Kinesoft. Mr. Levy was a significant shareholder of Softbank Corporation and "two or three Softbank funds." (Pl.'s Ex. K, Levy Dep., at 22, 25-26).
In his first overture to Mr. Levy, Mr. Fisher stated as follows:
(Pl.'s Ex. H: 10/27/98 Fisher e-mail to Levy). Mr. Levy indicated his willingness to help, and on October 30, 1998, Mr. Fisher asked Mr. Levy to "join the [Kinesoft] Board and represent Softbank's interests" for the purpose of helping Softbank "figure out where the company is really headed and whether there is any hope of realizing any value from it" (Pl.'s Ex. H: 10/30/98 Fisher e-mail to Levy). On November 2, 1998, Mr. Levy wrote to indicate his agreement to Mr. Fisher's request, and stated his understanding of what his role could entail: "I just want everyone to know that I am taking on the Harvey Keitel role in Pulp Fiction vs being the one who brought this baby to Softbank. I will do everything that I can to help them get successful" (Id.: 11/02/98 Levy e-mail to Fisher).
Mr. Sills testified that, during a telephone call in late 1998, Mr. Fisher first advised Mr. Sills and Mr. Spitzer that he would like to put Mr. Levy on the Kinesoft Board of Directors in place of Mr. Fisher (Pl.'s Ex. D, Sills Dep., at 435). Messrs. Sills and Spitzer spoke with Mr. Levy, and
Mr. Fisher responded that Softbank intended to "honor" its "funding obligations under the 1997 Agreement," but he harbored concerns over whether Kinesoft could achieve the goal of its Business Plan: that is, to become a "leader in the interactive entertainment industry" (Pl.'s Ex. I: 04/26/99 Fisher e-mail to Sills). In that e-mail, Mr. Fisher also reiterated his desire to have Mr. Levy serve on Kinesoft's Board:
(Id.). Mr. Sills testified that, after he received the April 26, 1999 e-mail, he "believed that Jordan Levy was on the Board of Directors by virtue of the April 26, 1999 e-mail from Ronald Fisher, and began to treat him as such" (Pl.'s Add'l Facts ¶ 78; Pl.'s Ex. O, Sills Aff. ¶ 10).
E. The Digital Anvil Proposal.
On August 6, 1999, Mr. Sills and Mr. Spitzer flew to Buffalo, New York for a planned meeting with Mr. Levy (Answer ¶ 22; Pl.'s Add'l Facts ¶ 81-82). Mr. Levy knew that Messrs. Sills and Spitzer planned to ask for a Capital Advance (Pl.'s Add'l Facts ¶ 81; Pl.'s Ex. D, Sills Dep., at 504-06; Defs.' Reply Facts ¶ 81; Pl.'s Ex. K, Levy Dep., at 204-05), although he did not know in advance of the meeting the details of the proposed use of the funds (Pl.'s Add'l Facts ¶ 81).
The parties agree that Kinesoft presented Mr. Levy with a binder of materials explaining the Digital Anvil proposal, and that Messrs. Levy, Sills and Spitzer discussed that proposal and the materials at length (Pl.'s Add'l Facts ¶ 82). However, the parties dispute whether the proposal made by Kinesoft at the August 6, 1999 meeting can be labeled a "Draw Request" under the terms of the 1997 Agreement (Defs.' Reply Facts ¶ 81). And, the parties dispute precisely what Mr. Levy said in response to Kinesoft's proposal during that meeting.
Kinesoft offers evidence (by the deposition testimony of Mr. Sills and Mr. Spitzer) that at the meeting, Mr. Levy stated as follows (Pl.'s Add'l Facts ¶ 82):
Softbank asserts that Mr. Levy merely informed Messrs. Sills and Spitzer that he did not think that Kinesoft's "potential transaction with Digital Anvil was advisable because he believed that Kinesoft ought to focus on its `core business,'" and he did not believe that the Digital Anvil deal was "a good strategy for a small company with a limited number of key executives" (Defs.' Reply ¶ 82). Softbank denies most of the statements attributed to Mr. Levy at the meeting, and specifically denies that Mr. Levy said at this meeting that Softbank had no interest in Kinesoft; instead, Softbank asserts that Mr. Levy "merely observed that Softbank's business had `shifted towards the Internet'" (Id.). Finally, Softbank concedes that Mr. Levy "suggested to Mr. Sills that, under the right circumstances, it might be sensible for Kinesoft to purchase Softbank's equity investment in Kinesoft," but denies that Mr. Levy told Mr. Sills that Kinesoft should buy out Softbank's interest for $5 million (Id.).
After his meeting with Messrs. Sills and Spitzer, Mr. Levy sent an e-mail to Mr. Fisher summarizing the Kinesoft proposal (Pl.'s Add'l Facts ¶ 83). The parties disagree as to whether Mr. Levy's August 9, 1999 e-mail forwarded to Mr. Fisher a "Draw Request" by Kinesoft for capital to fund the Digital Anvil venture (Defs.' Reply Facts ¶ 83). The August 9 e-mail states in relevant part:
The deal would be a $5MM commitment as follows:
(Pl.'s Ex. U, S 0021) (italics added).
Softbank's 1999 Annual Report reflects this shift of focus in Softbank's business strategy described in Mr. Levy's e-mail. The Report states that Softbank had received the consent of its Board to become an "Internet-centric company" (Defs.' Reply Facts ¶ 73; Pl.'s Ex. R, at 2). Soon after the release of that annual report, Softbank divested holdings in Ziff-Davis and Kingston Technologies, two non-Internet related companies (Defs.' Reply Facts ¶ 74). Softbank admits that once this shift toward the Internet took place at Softbank, Kinesoft was outside of Softbank's "core focus" (Defs.' Reply Facts ¶¶ 75, 82 (Ex. K, Levy Dep., at 188)).
F. Kinesoft's Further Communications with Softbank Concerning the Digital Anvil Proposal.
On August 31, 1999, Mr. Sills wrote to Mr. Levy regarding the Digital Anvil proposal (Pl.'s Add'l Facts ¶ 84; Defs.' Ex. 33). Mr. Sills' e-mail reflects Kinesoft's understanding that Softbank would not make a Capital Advance for that proposal, and instead requested that Softbank consider an alternative approach that would use Kinesoft rather than Softbank capital:
(Defs.' Ex. 33: 08/31/99 Sills e-mail to Levy) (emphasis added).
Mr. Levy responded to Mr. Sills by e-mail dated September 7, 1999, stating:
(Pl.'s Ex. W: 09/07/99 Levy e-mail to Sills). On September 8, 1999, Mr. Sills answered Mr. Levy's questions as follows:
(Pl.'s Ex. W: 09/08/99 Sills e-mail to Levy). After meeting with Mr. Fisher, Mr. Levy replied as follows:
(Pl.'s Ex. W: 09/08/99 Levy e-mail to Sills) (emphasis added). Although Mr. Fisher did not recall seeing Mr. Levy's September 8, 1999 e-mail to Mr. Sills (Pl.'s Add'l Facts ¶ 84; Pl.'s Ex. J, Fisher Dep., at 391-93), Mr. Fisher did not deny having a discussion with Mr. Levy regarding this matter (Pl.'s Ex. J., Fisher Dep., at 392). However, Mr. Levy's e-mail did not base Softbank's denial of a Capital Advance on the lack of a Draw Request that met all procedural requirements under the 1997 Agreement, and it did not indicate that a decision by Softbank on whether to approve Kinesoft's use of its own funds had to await a vote at a formal board meeting by Kinesoft.
(Defs.' Ex. 35: 09/10/99 Sills Letter to Levy) (emphasis added).
The parties do not dispute that Kinesoft believed that Softbank was in breach of the 1997 Agreement and that this belief is reflected in Mr. Sills September 10, 1999 letter to Messrs. Levy and Fisher (Defs.' Facts ¶ 37). However, Softbank claims that in a letter some five weeks later, dated October 19, 1999, Mr. Fisher made clear that Softbank would honor the 1997 Agreement. The text of that letter is as follows:
(Defs.' Ex. 36: 10/19/99 Fisher letter to Sills) (emphasis added). In that letter, Mr. Fisher did not base Softbank's denial of a Capital Advance on a failure by Kinesoft to comply with the procedural requirements for a Draw Request; nor did Mr. Fisher assert that it was premature for Kinesoft to conclude that Softbank would reject Kinesoft's use of its own money for the Digital Anvil project because the matter had not yet come up for a formal board vote.
Kinesoft was apparently not reassured by Mr. Fisher's letter, and on November 15, 1999, it commenced this lawsuit.
G. Kinesoft's Economic Performance.
It is undisputed that Kinesoft has generated no profits from January 1, 1997 through the present (Defs.' Facts ¶ 19). Kinesoft has not released any PC game for consumer sale during that time and does not plan to release any game until sometime in 2001 (Defs.' Facts ¶ 18). Since January 1997, Kinesoft's business has been
Moreover, the discovery record is clear that if and when Kinesoft releases PC games for consumer sale, there is no guarantee that those games will be profitable. Kinesoft acknowledges that the interactive entertainment industry is a "hit driven" business where the greatest profits are generated by only a few of the games released, and the revenues are earned by only a few game producers (Defs.' Facts ¶ 41; Defs.' Ex. 41, at S 0316 (Sills Report); Defs.' Ex. 42, at Schedules 4 and 9 (Bruehl Expert Report); Defs.' Ex. 44, at 224-25 (Willis Dep.)).
Mr. L. Gregory Ballard, one of Kinesoft's experts, states that "no company has yet discovered the `magic formula' to absolutely guarantee that their titles are successful" (Defs.' Facts ¶ 41). Mr. Ballard acknowledged that "many [game] titles are not successful" even for companies that have figured out a "formula" for creating successful titles (Defs.' Facts ¶ 42), and that it is difficult to predict whether a company will release a "hit" video game unless that company has a past performance of success (Defs.' Facts ¶ 45).
Mr. Anton Bruehl, another Kinesoft expert, has provided sales projections for the PC and console software and hardware market generally, and from those general projections has extrapolated general sales projections for the Playstation 2 and PC games markets (Defs.' Facts ¶ 46). However, in his deposition, Mr. Bruehl testified that "it might be difficult to forecast success or failure ... [b]ecause of the changing nature of the industry, the fickle nature of consumers, and a lot of elements that could happen to any company. Nothing can be predicted with a great deal of certainty" (Pl.'s Ex. DD, Bruehl Dep., at 432). Mr. Bruehl states that average sales for a game could be analyzed for a company with prior success and many years of experience in the field, but testified he had not done such an analysis of Kinesoft (Defs.' Facts ¶ 46; Pl.'s Resp. Facts ¶ 42; Pl.'s Ex. DD, Bruehl Dep., at 437-38). According to Mr. Bruehl, unless a company has a record of releasing only "hit game titles, it would be unreasonable to predict that every game a company plans to release would be a commercial success" (Defs.' Facts ¶ 52).
Finally, Mr. Chris Roberts, the Chief Executive Officer of Digital Anvil, testified regarding the industry and launch of the Playstation 2 platform. Mr. Roberts testified that only the top ten or twenty games (of the thousands produced and released each year) generate all of the industry's profits (Defs.' Ex. 25, Roberts Dep., at 93). Mr. Roberts indicated that some products, like Playstation 2, are more likely to succeed than other new products based on various factors, like the experience of those working on the game and the amount of capital available to develop it; but Mr. Roberts did not state that the Playstation 2 and any games to be used on that system were a "sure bet" (Pl.'s Ex. S, Roberts Dep., at 104-05). Mr. Roberts said he could "hazard a guess" as to the potential success of the Playstation 2 market; and that he had "a pretty strong gut feel that Playstation 2 is going to be a very lucrative business" (Defs.' Facts ¶ 44; Defs.'s Ex. 25, Roberts Dep., at 53). Mr. Ballard, however, said it was not possible to generalize whether a particular game title for Playstation 2 would be successful "without knowing more about that title" (Defs.' Facts ¶ 44). Consistent with this opinion, Mr. Roberts testified that no one could project how a new game would sell in the market, and that such projections were speculation and conjecture (Defs.'
The report of Kinesoft's expert Stephen I. Willis opines that "Kinesoft's actions lead to a reasonable expectation of success" (Defs.' Ex. 12, at 17). Mr. Willis makes several future lost profits projections, which total nearly $80 million before reduction to present value (Final Pretrial Order, § VII). First, Mr. Willis projects that Kinesoft will lose $3.67 million in future profits from two PC games on which Kinesoft is working but is months away from fully developing or releasing (Defs.' Ex. 12, at 17). Second, Mr. Willis projects that Kinesoft will lose some $7 million in future profits from the sale of three PC games that Kinesoft has considered but has never started to develop (Id.). Third, Mr. Willis projects that Kinesoft will lose an additional $18.39 million in future profits from the sale of three unspecified Playstation 2 games that Kinesoft has never identified or started to develop. Finally, Mr. Willis projects that Kinesoft will lose another $50.36 million attributable to "economic harm from [the] continuing effect on Kinesoft's lower earnings" (Id.).
Mr. Willis admits that his lost profits projections are not based on actual lost profits but instead are based on lost profits that Kinesoft might have earned in the future. Although Mr. Willis admits that "relatively few titles ... are commercially and financially successful," his future lost profits claim assumes that, on average, Kinesoft's titles would succeed commercially and financially at a "B+" rate (Defs.' Facts ¶ 51; Defs.' Ex. 12, at 18; Pl.'s Resp. Facts ¶ 51; Pl.'s Add'l Facts ¶ 87). Mr. Willis admits that he did not examine Kinesoft's profit history in order to calculate Kinesoft's lost profits, because Kinesoft has none in this line of business (Defs.' Ex. 44, Willis Rep., at 251). Mr. Willis' report utilizes Mr. Bruehl's general industry information, but "his lost profits projections are not based on any analysis of a comparable company selling comparable games" (Defs.' Facts ¶ 53; Pl.'s Resp. Facts ¶ 53).
Against the backdrop of this evidentiary record, we consider Softbank's request for summary judgment. For the reasons explained below, the Court denies Softbank's motion for summary judgment on Counts I, II, IV and V, as well as the compensatory and punitive damages claims, but grants the motion as to Count III and the lost profits claims.
In Count I, Kinesoft alleges that Softbank breached the 1997 Agreement. Kinesoft offers two theories to support this claim: (1) a "non-performance" theory (that Softbank breached the contract by improperly rejecting Kinesoft's request for a Capital Advance the Digital Anvil venture) (Second Am. Compl. ¶ 29); and (2) a "repudiation theory" (that Softbank, by its words and conduct, utterly renounced any intention of ever honoring any requests by Kinesoft for a Capital Advance) (Id. ¶¶ 30-32). Softbank denies that it breached the 1997 Agreement. Softbank claims that its obligations under the 1997 Agreement were never triggered, because Kinesoft failed to present a Draw Request for the Digital Anvil proposal in accordance with the agreed-upon procedures necessary to obtain a Capital Advance, thereby failing to satisfy a condition precedent (Defs.' Mem. at 4; Defs.' Reply at 1). Softbank also denies that it repudiated the 1997 Agreement, on the ground that Softbank never made any "unequivocal statements" of repudiation (Defs.' Mem. at 6; Defs.' Reply at 5-6).
The parties agree that Illinois law governs the determination of this claim, pursuant to the choice of law provision in the
Softbank argues that because Kinesoft failed to submit a procedurally correct Draw Request, there could be no breach because Softbank had no contractual obligation to perform. This "conditions precedent" argument is an affirmative defense for which Softbank bears the burden of proof. See Capitol Plumbing & Heating v. Van's Plumbing,
"Illinois courts define a condition precedent as one which must be performed either before a contract becomes effective or which is to be performed by one party to an existing contract before the other party is obligated to perform." MXL Industries, Inc. v. Mulder,
The determination of whether an agreement contains a condition precedent is a question of law for the court. "A court determines whether an agreement makes an event a condition by the process of interpretation." See E. ALLEN FARNSWORTH, FARNSWORTH ON CONTRACTS ("FARNSWORTH ON CONTRACTS"), § 8.2, at 394 (2d ed.1998). In Illinois, the process of interpreting contractual language is, at the threshold, a matter for the court alone. A court "must initially determine, as a question of law, whether the language of a purported contract is ambiguous as to the parties' intent." Quake Construction, Inc. v. American Airlines, Inc.,
That is precisely the kind of language that the 1997 Agreement uses in describing Capital Advances. For example, Section 2.01(d) of the 1997 Agreement states that: "Softbank's obligation to make Capital Advances is
Read together, those terms unambiguously express the parties' intent to make the procedures outlined in Section 2.01(e)(ii) conditions precedent to Softbank's obligation to make a Capital Advance. The issue of interpretation in this case is therefore not whether the language of the contract reflects the parties' intent to create conditions precedent or to require that those conditions be fully satisfied prior to the actual distribution of a Capital Advance: that language is unambiguous. The particular question that has arisen here is whether the language of the contract requires those same conditions to be fully satisfied not only before a Capital Advance is paid, but also before it is even considered. The absence of clear language governing this precise question creates an ambiguity.
Where an ambiguity is present in a contract, Illinois permits courts to admit "parol evidence" to "aid the trier of fact in resolving the ambiguity." Air Safety, 185 Ill.2d at 462-63, 236 Ill.Dec. 8,
It is clear that under Illinois law the parties' course of performance is admissible
The next question is whether the Court may consider extrinsic evidence in resolving the ambiguity on a motion for summary judgment. In general, Illinois gives questions of contractual ambiguity to the trier of fact, together with the evidence necessary to resolve them. See generally Air Safety, 185 Ill.2d at 462-63, 236 Ill.Dec. 8,
Having found an ambiguity in the 1997 Agreement regarding whether the parties intended for all conditions precedent to be fully satisfied not only before a Capital Advance was issued, but also before a request for one would even be considered, the Court also finds that this ambiguity can be answered by resort to undisputed extrinsic evidence of the parties' course of performance. Under the rule articulated in Baker, we therefore treat this question of ambiguity, and its resolution, as a matter of law.
Accordingly, the Court concludes as a matter of law that Section 2.01(e)(ii) imposes certain procedural requirements as a conditional precedent to the granting by Softbank of a request for Capital Advance. However, the Court further concludes as a matter of law that compliance with those procedures is not a condition precedent to Softbank considering a request for Capital Advance.
Kinesoft claims that if Section 2.01(e)(ii) imposes procedural conditions precedent, then those conditions have been modified or waived by Softbank's course of performance. Under Illinois law, a party may modify or waive a condition precedent. See, e.g., MXL, 252 Ill.App.3d at 26,
Kinesoft's claim of modification runs headlong into Section 5.01 of the 1997 Agreement, which specifically requires that all "modifications of the terms or provisions" in the Agreement "be in writing and duly executed by the parties." Section 2.01(e)(ii) states that "Kinesoft shall request a Capital Advance by submitting to Softbank a written request ... in accordance with Section 5.04" (a "Draw Request"). Under Section 5.04, written notices must be directed to Mr. Fisher. Kinesoft essentially argues (although not
Kinesoft also argues more broadly that the parties' course of performance establishes a modification of the conditions precedent. That argument stretches the use of course of performance beyond the breaking point. Course of performance may be used only to interpret the terms of an agreement; but, here Kinesoft seeks to use it to create terms inconsistent with the language of Sections 2.01(e) and 5.01. In Illinois, extrinsic evidence is not admissible to contradicts or vary with the written terms of a final agreement. See Air Safety, 185 Ill.2d at 462, 236 Ill.Dec. 8,
Although not foreclosed by Section 5.01, Kinesoft's waiver argument does not advance its cause very far. The determination as to what facts are sufficient to constitute waiver is a question of law. Whalen v. K-Mart Corp.,
Whether viewed as an interpretation of Section 2.01(e), as aided by the course of performance (as the Court has held), or a matter of waiver (which is an alternative basis for the holding), the Court agrees that Kinesoft was not required to submit a Draw Request in order for Softbank to consider a Capital Advance request. See generally FARNSWORTH ON CONTRACTS, § 7.13, at 319 ("It is sometimes difficult to draw the line between conduct that is the basis for a course of performance, on the one hand, and conduct that is the basis for waiver or modification, on the other."). But Kinesoft's claim of waiver nonetheless falls short because, while Softbank did not require compliance with the Section 2.01(e) conditions in a single writing or on a designated time-frame, the course of performance evidence establishes that Softbank never waived Kinesoft's obligation to provide all the information in Section 2.01(e)(ii)(A)-(C) to Mr. Fisher prior to Softbank granting a Capital Advance. The 1997 Agreement requires that Kinesoft submit the required information to Mr. Fisher before Softbank is obligated to grant a request, a requirement that has not been waived and that Softbank claims stands as an impediment to Kinesoft's nonperformance claim.
However, even if not waived, an express condition may be excused. MXL, 252 Ill. App.3d at 26,
Excuse by breach "may take the form of nonperformance, either by prevention or by failure to cooperate, or it may take the form of repudiation. The duty of good faith and fair dealing that is usually imposed requires at least that a party do nothing to prevent the occurrence of a condition of that party's duty." FARNSWORTH ON CONTRACTS, § 8.6, at 431 and n. 3 (citing Harold Wright Co. v. E.I. Du Pont De Nemours & Co.,
The covenant of good faith and fair dealing is thus a derivative principle of contract law that usually aids in the construction of a contract. Perez v. Citicorp Mortgage, Inc.,
On the summary judgment record submitted, the Court finds that there are
The disputed facts regarding breach of the duty of good faith and fair dealing deal largely with questions of what inferences to draw from these facts. Kinesoft argues that the 1997 Agreement contains an implied duty of good faith and fair dealing that required Softbank to "to do nothing to injure" Kinesoft's "right to enjoy the benefits of the contract" by hindering the occurrence of the condition through "uncooperative conduct" (Pl.'s Mem. at 5-6). Kinesoft argues that by denying the Digital Anvil request on the merits rather than for procedural reasons, Softbank dissuaded Kinesoft from making a Draw Request that conformed with the procedural requirements. Softbank argues that nothing prevented Kinesoft from making a conforming request, but a jury could reasonably find that argument disingenuous. A jury might reasonably decide that had Softbank indicated that its denial was based on procedural deficiencies, then Kinesoft would have gladly (and quickly) rectified the situation. But Softbank did not rely on procedural deficiencies; it rejected Kinesoft's proposal on the merits, by stating that the Digital Anvil proposal did not fit within Softbank's interpretation of the term "Business Plan" in the 1997 Agreement.
The e-mails and other letters authored by Mr. Levy and Mr. Fisher could lead a reasonable jury to conclude that Softbank had no intention of approving Kinesoft's request for a Capital Advance, even if Kinesoft had strictly conformed to the procedural requirements set out in Sections 2.01(e)(ii)(A)-(C) for making a Draw Request. A jury reasonably could find that once Softbank (through Messrs. Levy and Fisher) said it would not approve the Digital Anvil proposal on the merits, there was no reason for Kinesoft to go through the futile exercise of revising the request procedurally. If the jury so finds, then Kinesoft's failure to submit a conforming Draw Request could not be used by Softbank to defeat the contract claim in Count I. Yale Development Co., Inc. v. Oak Park Trust & Savings Bank,
Even if the requirement of a Draw Request were excused, that would not automatically spell victory for Kinesoft. Rather, it would lead to consideration of the fundamental issue raised by Kinesoft in Count I: whether Softbank had the right to reject Kinesoft's request for a Capital Advance to fund the Digital Anvil deal based on its view that this deal did not fit within the "Business Plan" outlined in § 2.01(e)(i) of the 1997 Agreement. To prevail on Count I, Kinesoft still would have to prove that it was a breach for Softbank to say that, on the merits, the Digital Anvil proposal did not qualify for a Capital Advance. Softbank has not sought summary judgment on that theory, and from our review of the record, with good reason. There appear to be genuine disputes regarding the parties' intent regarding what the "goals" of the Business Plan were; the types of transactions the parties intended would qualify for a Capital Advance; whether Kinesoft's proposal fell within the parameters of the "Business Plan"; and whether Softbank's position was unreasonable under Section 2.01(e)(iii).
On these questions, the trier of fact may consider the entire course of dealing (presettlement conduct) and course of performance (post-settlement conduct) to determine the parties' true intent as to the agreement's terms. See Quake Construction, Inc., 141 Ill.2d at 288,
Kinesoft urges another theory in support of its breach of contract claim against Softbank in Count I: repudiation (Second Am. Compl. ¶¶ 24-25, 30-32). While Kinesoft's complaint (Second Am. Compl. ¶¶ 30) and the Final Pretrial Order (Final Pretrial Order, § II(c)) could be construed as asserting that Mr. Fisher's October 19, 1999 letter constituted repudiation, in the briefing on summary judgment Kinesoft has squarely abandoned any such assertion (Pl.'s Mem. at 8) ("Kinesoft never alleged that Fisher's statements amounted to a repudiation"). Kinesoft now plainly asserts that the act(s) of repudiation were the comments allegedly made by Mr. Levy at the August 6, 1999 meeting (id.), and Softbank's non-performance: that is, its refusal to fund the Digital Anvil proposal.
In Illinois, "anticipatory repudiation is actionable as a breach of contract when—and only when— the repudiating party unequivocally and without justification renounces its duty to perform the contract on its date of performance." Draper v. Frontier Ins. Co.,
There are several responses an injured party may make when the alleged repudiation comes before the time for performance. First, the injured party may treat the contract as terminated and claim damages. Second, the injured party may attempt to "save the deal" by insisting that the other party perform or by urging retraction of the repudiation (this is similar to seeking assurances if one party suspects that the other party intends not to perform). Third, the injured party may ignore the repudiation, wait for the time of performance, and sue if the other party fails to perform. FARNSWORTH ON CONTRACTS, § 8.21, at 540. In cases where the injured party claims that the repudiation "accompanies a breach by nonperformance," as Kinesoft now claims, then "the injured party may treat the breach as
A repudiation can be revoked, but only before the injured party has experienced a material change in condition as a result of the repudiation. FARNSWORTH ON CONTRACTS, § 8.21, at 542-43. "As soon as the injured party has materially changed its position in reliance on the repudiation, ... it is too late for the repudiating party to retract." Id. at 543. If the injured party notifies the repudiating party that it considers the repudiation final, either by statements to that effect or by filing a lawsuit, then it need not show reliance on the repudiation to prevent revocation. Id. at 543, n. 15. However, if there has been no material change in reliance on the repudiation, and no notice that the repudiation is considered final, such as by the filing of a lawsuit, then revocation is possible. If the repudiation was by words, then "the repudiating party can nullify it by giving notice of retraction to the injured party." Id. at 542. If the repudiation was by deeds, then "the repudiating party can nullify it by correcting the situation that amounted to the repudiation." Id. at 543.
Kinesoft argues that Mr. Levy's statements during the August 6, 1999 meeting constituted a repudiation by Softbank of the 1997 Agreement. In particular, Kinesoft claims Mr. Levy repudiated the 1997 Agreement, on behalf of Softbank, when he allegedly stated that Softbank was denying Kinesoft's draw request and "would never honor another Draw Request from Kinesoft" (Pl.'s Resp. at 8-9; Pl.'s Add'l Facts ¶ 82). Although the parties never use the word "agent," and the parties further dispute whether a "Draw Request" was made and/or rejected (Defs.' Reply Facts ¶ 82), their dispute raises the threshold issue of whether Mr. Levy was Softbank's agent; if so, there remains the question of whether the statements he made on August 6, 1999 constituted repudiation. The Court finds that both issues raise questions for the jury.
Chemtool, Inc. v. Lubrication Technologies, Inc.,
An agent has "actual authority" to act on a principal's behalf when the principal's words or actions (i.e., the principal's "manifestation" of intent) would lead a reasonable person in the agent's position to believe that he or she was so authorized. See Opp v. Wheaton Van Lines, Inc.,
Even in the absence of actual authority, an agent has "apparent authority" to act on the principal's behalf in relation to a particular third party when the words or conduct of the principal would lead a reasonable person in the third party's position to believe that the principal had so authorized the agent. Id. at 1065. See also Anetsberger v. Metropolitan Life Ins. Co.,
The Court finds that there is evidence in the record from which a jury reasonably could determine that Mr. Levy was Softbank's agent under a theory of actual authority. First, the October 30, 1998 e-mail could be interpreted as a manifestation of an intent by Mr. Fisher, on behalf of Softbank, to make Mr. Levy Softbank's designated agent for purposes of representing Softbank's interests, which could include Softbank's interests in connection with requests for Capital Advances from Kinesoft. The April 26, 1999 e-mail from Mr. Fisher to Kinesoft could be read as a confirmation of that intent. Second, the evidence also supports a finding that Mr. Fisher was still in "control" of the relationship between Kinesoft and Softbank, as evidenced, for example, by Mr. Levy's e-mail to and Mr. Sills regarding Kinesoft's proposal to self-fund the Digital Anvil deal, in which Mr. Levy states: "I will be with Ron Fisher tonight and ask him what he thinks...." (Pl.'s Ex. W). The rest of the e-mail asks for information that Mr. Levy can convey to Mr. Fisher at that meeting (Id.). A jury reasonably could conclude that Mr. Fisher also evidenced his control in his
The Court also finds that a reasonable jury could find an apparent agency relationship here. For example, a jury could conclude that Kinesoft reasonably interpreted Mr. Fisher's statement that Mr. Levy was intended to help the parties "handle" Kinesoft's "requests" more "expeditiously" as a reference to the "future requests for capital" mentioned earlier in the April 26, 1999 e-mail. A jury also could reasonably conclude that Mr. Levy held himself out as someone with authority to act and speak for Softbank on these matters. Mr. Levy's alleged statements in the August 6, 1999 meeting regarding the Digital Anvil proposal were definitive; they did not indicate any lack of authority to say yes or no to the deal. Moreover, Mr. Levy's August 9, 1999 e-mail to Mr. Fisher summarizing the August 6, 1999 meeting stated that Mr. Levy told Kinesoft: (1) he would not support an investment by Kinesoft into the Playstation 2 venture (which a jury could reasonably conclude was calculated to convey the impression that it was Mr. Levy's approval that Kinesoft would need to obtain a Capital Advance); (2) the Digital Anvil proposal did not fit within the Softbank business; and (3) Softbank was within its "rights to withhold additional investment in anything other than [Softbank's] core strategy of PC based games" (Pl.'s Ex. U). A jury could reasonably conclude that, in the context of Mr. Fisher's prior comments concerning Mr. Levy's status, Kinesoft reasonably believed Mr. Levy had authority to speak for Kinesoft — and that Mr. Fisher did not act to change that impression.
If a jury were to find that Mr. Levy was Softbank's (actual or apparent) agent, the question then would be whether there are disputed issues of material fact regarding whether Mr. Levy repudiated the 1997 Agreement. Plainly there are. Although a number of the parties' disputes about what Mr. Levy said at the August 6, 1999 meeting raise triable issues on the repudiation claim, we focus on one point in particular. In his August 9, 1999 e-mail to Mr. Fisher, Mr. Levy said he informed Kinesoft that Softbank would "withhold additional investment in anything other than our core strategy of PC based games" (Pl.'s Ex. U) (emphasis added). If Mr. Levy was Softbank's agent in making that communication, then that statement could provide a basis upon which a reasonable jury could find repudiation by Softbank. Section 2 of the 1997 Agreement imposes on Softbank an obligation to provide Capital Advances to Kinesoft for the purpose of advancing the business plan of Kinesoft, not the business strategies of Softbank.
There are also subsequent e-mail exchanges between Mr. Levy and Kinesoft from which a jury reasonably could find repudiation. For example, in response to Mr. Sills' proposal to fund the Digital Anvil venture using Kinesoft money, Mr. Levy wrote that Softbank had "no appetite" to "do anything" regarding the Digital Anvil deal, and "that will severely constrain you going forward" (Pl.'s Ex. W). Mr. Levy also wrote that "I will not support any investment in anything that you
Softbank argues that Mr. Fisher's communications of April 26, 1999 and October 19, 1999 confirmed Softbank's intent to honor its funding obligations under the 1997 Agreement, and are thus sufficient to revoke any repudiation that might have been made by Mr. Levy (Defs.' Reply at 5). Of course, Mr. Fisher's April 26 e-mail could not revoke any subsequent repudiation by Mr. Levy, and so we focus on the October 19 letter. Softbank relies on the fact that Mr. Sills admits that the October 19 letter left him with "reservations" concerning whether Softbank intended to perform according to the "words" in the 1997 Agreement (Pl.'s Resp. Facts ¶ 38; Pl.'s Ex. D: Sills Dep., at 565). Softbank's argument might have force if Kinesoft's theory was that Mr. Fisher's October 19 letter constituted the words of repudiation. But that is not the case: Kinesoft claims Mr. Levy's earlier statements constituted repudiation. Thus, the proper question is whether Mr. Fisher's October 19 letter is sufficiently clear that, as a matter of law, it constitutes a retraction of the alleged repudiation. On this question, Mr. Sill's expressed "reservations" about Mr. Fisher's October 19 letter cuts against Softbank's summary judgment argument.
The Court agrees with Kinesoft that a reasonable jury could decide that Mr. Fisher did not intend to retract Mr. Levy's alleged repudiation, and the October 19 letter reflected Softbank's intent to perform only under its mistaken interpretation of the contract (i.e., its interpretation of "Business Plan") or not at all. Marriage of Olsen, 124 Ill.2d at 24, 123 Ill.Dec. 980,
For the most part, the disputed facts discussed in conjunction with the allegations of repudiation by Mr. Levy largely overlap on the issue of repudiation by non-performance. We wish to note, however, that the very fact that Softbank declined to fund the Digital Anvil proposal on the merits, applying Softbank's interpretation of its obligations under the relevant agreements, is itself a basis for sending Count I to the jury on the repudiation theory. This is because the denial, as an act of non-performance, could reasonably be construed not only as a denial of the particular Digital Anvil deal, but also more generally as a precursor of things to come.
Statements attributed to both Mr. Levy and Mr. Fisher make this point clear enough to create a dispute on the issue of repudiation. For example, Mr. Levy allegedly stated that "Kinesoft would have no further access to ... funds for [the Digital Anvil] deal or any other deal or use[,]" and "[t]he nature of the use and/or deal was totally irrelevant" (Pl.'s Add'l Facts ¶ 82). Mr. Levy also allegedly stated that "Softbank had no further interest in Kinesoft or the business space Kinesoft was in[;]" "Kinesoft no longer had the right partner[;]" and Softbank "did not have to honor its commitments of funding since
Mr. Fisher's silence during all of these in person and e-mail discussions between Kinesoft and Mr. Levy could be seen by a reasonable jury as a failure to withdraw Mr. Levy's arguable repudiation. But, even without that silence, Mr. Fisher's explicit statements in his October 19, 1999 could be read as a statement that Softbank did not intend to perform either as to the Digital Anvil proposal or any other proposal of its kind under its interpretation of the 1997 Agreement. Together with the fact that Softbank did not agree to fund the Digital Anvil venture, a jury could find repudiation by non-performance (Defs.' Exs. 35 and 36).
To summarize, Kinesoft's breach of contract claim in Count I raises several ultimate issues on which there are genuine disputes of material fact: (1) whether Kinesoft was excused by Softbank's conduct from submitting a Draw Request that fully complied with all procedural conditions precedent; (2) if so, whether Softbank breached the 1997 Agreement by stating that the Digital Anvil proposal, on the merits, did not qualify for a Capital Advance; and (3) whether Softbank repudiated the 1997 Agreement in its entirety. Because these issues must be resolved by the jury, Softbank's summary judgment motion is denied as to Count I.
In Count II, Kinesoft alleges that Softbank breached an implied covenant of good faith and fair dealing in the Shareholders Agreement by invoking Section 2(c) of the Agreement to prevent Kinesoft from using its own funds to enter into the Digital Anvil venture, thus advancing the interests of Softbank at the expense of the interests of Kinesoft (Second Am. Compl. ¶ 38). Kinesoft also alleges that Softbank repudiated its existing and future obligations under the Shareholders Agreement by the statements and actions of its Board members and designated representatives (Id. at ¶ 39). For the reasons that follow, the Court concludes that Softbank is not entitled to summary judgment on Count II.
Section 2(c) of the Shareholders Agreement provides that capital expenditures of $500,000 or more cannot be undertaken by Kinesoft unless approved by all of the directors present at a Board of Directors meeting (Defs.' Ex. 4). Section 2(b) defines a quorum for a Board meeting as consisting of at least two directors designated by Kinesoft and one designated by Softbank. Thus, under the Shareholders Agreement, Softbank effectively could veto a capital expenditure of more than $500,000 by Kinesoft.
The Shareholders Agreement expressly provides that it will be governed and construed in accordance with Illinois law
Softbank argues that "[i]t is undisputed that Kinesoft never called a board meeting to consider whether it should use its own capital to fund a transaction with Digital Anvil" (Defs.' Mem. at 7), and that Softbank therefore could not have breached any duty because Softbank "never exercised its discretion under Section 2(c) of the Shareholders Agreement, i.e., it never voted to veto the Digital Anvil proposal at a Kinesoft board meeting" (Defs.' Mem. at 8). However, Mr. Sills' August 31 and September 8, 1999 e-mails asked Mr. Levy whether Softbank would approve Kinesoft's use of its own money to fund the Digital Anvil deal, and the written responses from Mr. Levy and Mr. Fisher were a clear and unequivocal "no" (Pl.'s Ex. W; Defs.' Ex. 36). A jury reasonably could find that Kinesoft did not call a Board meeting because Kinesoft concluded that, in light of Softbank's position twice expressed in writing, to do so would have been a futile exercise. And, if so, the absence of a Board meeting is not fatal to Kinesoft's claim. See, e.g., E.B. Harper, 104 F.3d at 919 (a party to whom a condition is owed cannot claim failure of the condition if that party is responsible for hindering the occurrence of the condition through "uncooperative conduct").
Softbank protests that without a Board meeting, "there is no way to know how Softbank ultimately would have voted" (Defs.' Reply at 7). But Softbank offers no contemporaneous evidence that Softbank might have changed its view at a formal meeting, and all the evidence indicates that with or without a formal meeting, Softbank's vote had already been cast in favor of rejecting the Digital Anvil self-funding idea — as Softbank admits in its brief, when it states that "Kinesoft informally asked Softbank for its views on the self-funding of the Digital Anvil venture (at a point when it already knew that Softbank disagreed with the venture) ..." (Defs.' Reply at 7). In any event, whether Kinesoft fairly could conclude that a formal Board meeting would have been a useless exercise is for the jury to decide. Summary judgment cannot issue on Kinesoft's claim of breach of the Shareholders Agreement.
As for Kinesoft's repudiation theory, Kinesoft argues that Mr. Fisher's statements in his October 19, 1999 letter "represent a clear statement that Softbank did not intend to perform its obligations under the Shareholders' Agreement" and "amount to an anticipatory repudiation of [that] ... Agreement" (Pl.'s Resp. at 10). Mr. Fisher's statements in his October 19, 1999 letter invoke Section 2(c) of the Shareholders Agreement as authority for his position that Softbank was not obligated to "rubber stamp" any corporate action by Kinesoft
Thus, we come full circle to the question that lies at the heart of the claim in Count II, namely, whether Softbank was obliged to permit Kinesoft to fund the Digital Anvil deal using Kinesoft's own money, or whether it could choose to say "no" and, if so, under what circumstances and for what reasons. Because there is sufficient disputed evidence in the record to create a triable issue, Kinesoft's claim that Softbank's conduct breached or repudiated the Shareholders Agreement, the Court denies summary judgment as to Count II.
In Count III, Kinesoft alleges that Softbank is liable for tortious interference with prospective economic advantage. Kinesoft claims that "Softbank, by and through its agents and representatives, Ronald D. Fisher and Jordan Levy, deliberately interfered with Kinesoft's legitimate expectancy with NewCo and with Digital Anvil and intentionally prevented that expectancy from ripening into a valid business relationship" (Second Am. Compl. ¶ 44). The specific kinds of interference alleged include: "[d]enying the Playstation 2 Draw Request"; "[p]reventing Kinesoft from funding the Playstation 2 joint venture with its own funds"; "[d]eliberately interfering with ... every effort by Kinesoft to fund the Playstation 2 Joint Venture in order to frustrate Kinesoft's business and ... force the termination of Kinesoft's business relationship with Softbank"; and "[o]therwise interfered with the efforts of Kinesoft to complete and to implement the Playstation 2 Joint Venture with Digital Anvil" (Id.). Kinesoft further claims that Softbank "obtained and held the ability to influence, to control, to hinder, and to interfere with Kinesoft's business operations" pursuant to the Shareholders Agreement, which made Softbank a shareholder and business partner to Kinesoft, and the 1997 Agreement, which made Softbank a lender to Kinesoft (Id. ¶¶ 48-51).
In Illinois, the elements of a tortious interference with prospective economic advantage claim are as follows: (1) plaintiff must have a reasonable expectancy of a valid business relationship; (2) defendant must know about it; (3) defendant must intentionally interfere with the expectancy, and so prevent it from ripening into a valid business relationship; and (4) the intentional interference must injure the plaintiff. See Schuler v. Abbott Laboratories,
Here, the allegations of the second amended complaint all identify conduct allegedly directed toward Kinesoft, not Digital Anvil; and in its summary judgment papers, Kinesoft points to no evidence that Softbank's alleged conduct in this case was directed towards Digital Anvil, the third party. Thus, under Illinois law, Kinesoft's claim would fail, requiring summary judgment in Softbank's favor. Kinesoft's response is that Texas law and not Illinois law applies, and that Texas does not require the defendant's alleged interfering conduct to be directed to the third party with whom the plaintiff expects to do business. We disagree on both scores.
First, the Court finds that in the event a "true conflict" between Texas and Illinois law existed, Illinois law would apply. Section 5.06 of the 1997 Agreement specifically provides that Illinois law will govern disputes under that contract, and in First Commodity Traders, Inc. v. Heinold Commodities, Inc.,
Third, any conflict between Illinois and Texas law on the subject of tortious interference is irrelevant, since Kinesoft has not stated a claim for tortious interference under Texas law even as Kinesoft reads it. What plaintiff alleges here is a tortious interference claim based on non-feasance or non-performance by Softbank under the Shareholders Agreement and the 1997 Agreement. However, under Texas law an alleged failure to perform is a breach of contract claim, not a tort — even if it has the effect of interfering with, hindering or preventing a reasonable business expectancy from ripening into a valid business relationship. Southwestern Bell Telephone Co. v. DeLanney,
Kinesoft argues that these authorities are inapplicable here because Softbank's "duty ... to refrain from interfering with Kinesoft's business relations does not arise from the contracts between them ... it arises from Texas law and is independent of the duties imposed by those contracts" (Pl.'s Opp. Mem. at 14). This argument misses the mark. All of tort law, including Texas tort law, imposes obligations upon every citizen to refrain from harming others and others' property. To state that Texas law imposes duties on Softbank apart from the subject matter contracts does not answer the question presented here: whether Softbank's alleged misconduct (and any injury flowing from it) can be tied to a duty arising under contract or tort law.
In this case, the only alleged misconduct and injury arises from the contractual relationship between Softbank and Kinesoft. Softbank's duties, if any, arise under the Shareholders Agreement and the 1997 Agreement, and Kinesoft's damages, if any, stem from the economic loss caused by Softbank's alleged failure to perform under those agreements. As was the case in DeLanney, so it is the case here: Kinesoft seeks to recover the benefit of its alleged bargain with Softbank under their agreements. See DeLanney, 809 S.W.2d at 495 (citing W. PROSSER, D. DOBBS, R. KEETON & D. OWEN, PROSSER AND KEETON ON THE LAW OF TORTS § 92, at 656-67 (5th ed.1984)) (obligations in tort are imposed by the law, apart from the agreement and intention of the parties; when the only loss or damage is to the subject matter of the contract, the plaintiff's action is ordinarily on the contract; "recovery of intangible economic losses is normally determined by contract law; and ... there is no tort
Under either Illinois or Texas law, summary judgment must be entered in favor of Softbank on Count III.
In Counts IV and V, Kinesoft alleges breaches of fiduciary duty by Softbank and by Mr. Fisher, personally. To state a claim for breach of fiduciary duty, "it must be alleged that a fiduciary duty exists, that the fiduciary duty was breached, and that such breach proximately caused the injury of which the plaintiff complains." Neade v. Portes,
Softbank seeks summary judgment on Counts IV and V on the grounds that: (1) "the undisputed evidence demonstrates that Softbank did not breach [the 1997 and Shareholder] agreements, and thus there is no factual basis for Kinesoft's breach of fiduciary duty claims;" and (2) because Softbank did not breach those agreements (and therefore "lived up to its contractual obligations"), then "it (and Mr. Fisher) necessarily did not breach any fiduciary duty to Kinesoft" (Defs.' Mem. at 12). Since the Court has concluded that the breach of contract claims survive summary judgment, the threshold premise of Softbank's argument fails, and for that reason alone the motion for summary judgment must be denied.
We now turn to Softbank's attack on Kinesoft's damages claims. In the final pretrial order, Kinesoft claims $88,688,680 in damages (before reduction to present value), which fall into the following categories: (a) $9,227,903 in damages for money alleged still owed under the 1997 Agreement; and (b) $79,460,777 in economic harm attributable to the inability to publish current PC CD-Rom titles ($3,671,737), the lost opportunity in connection with three lost new PC CD-Rom game titles ($7,037,777) and two lost Playstation 2 titles ($18,395,745), and the long term continuing effect on Kinesoft's earnings ($50,355, 518) (see Final Pretrial Order, § VII, at 8). In addition, Kinesoft seeks an award of punitive damages.
Softbank seeks summary judgment on each of these damages claims. We address each argument in the order that Softbank has raised it.
Kinesoft's lost profits claims are based on the theory that, but for Softbank's breach of the 1997 and Shareholders
Softbank's legal argument is that Illinois law imposes a bar to the recovery of lost profits in this case based on Kinesoft's status as a "new business" without a track record of profit, and with a new and untested product. Kinesoft's threshold assertion that Illinois does not have such a rule is contradicted by numerous — and recent —decisions recognizing the existence of this rule. See, e.g., Stuart Park Assocs. Ltd. Partnership v. Ameritech Pension Trust,
The Court finds equally unavailing Kinesoft's argument that Texas law, which does not have a new business rule, applies to its damages claim. Kinesoft never explains why Texas law should apply in this case, when both the 1997 Agreement and the Shareholders Agreement contain specific choice of law provisions selecting Illinois law. Moreover, Kinesoft concedes that the substantive contract and fiduciary duty counts that are the springboard for this lost profits claim are governed by Illinois law, and we follow the general rule is that "remedial issues are so bound up with substantive issues that they ought to be decided according to the same law that governs the substantive issues." Patton v. Mid-Continent Sys., Inc.,
As for the first argument, it would be pure speculation for the Court to find that Kinesoft is not a "new business" based on a single pending sale to a publisher of some of the games for which it seeks lost profits, especially when there is no evidence in the record that this sale has been consummated. That kind of speculation does not create a triable issue. As for the second argument, there might be an issue raised by Kinesoft's five-year existence if Kinesoft previously had sold any of the types of games currently in development. But Kinesoft does not fall within this exception because, despite its five years of existence, Kinesoft can point to no sales or profits prior to the defendants' alleged breach. As for its third argument, the new business rule does not except those businesses, existing or new, with a product in a new line simply because that product is created by "a collection of individuals" who in previous endeavors have "track records of success." Stuart Park,
Kinesoft also argues that even if the new business rule would otherwise apply, Kinesoft's lost profit claims fit within recognized exceptions to it. One exception cited by Kinesoft is for a new business that had some profit record established prior to the alleged breach. See Malatesta, 186 Ill. App.3d at 621-22, 134 Ill.Dec. 422,
The second exception cited by Kinesoft is based on Milex Products, Inc. v. Alra Laboratories, Inc.,
Id. at 193,
The Court is mindful of Kinesoft's argument that its lost profits analysis is too "complex" to be explained and defended in Kinesoft's summary judgment brief (Pl.'s Opp. Mem. at 19 n. 14). But that argument is not good enough: a party may not survive a summary judgment motion by promising that it will explain the triable issue later. Rather, "[a] party seeking to defeat a motion for summary judgment is required to `wheel out all its artillery to defeat it.'" Caisse Nationale de Credit v. CBI Indus., Inc.,
In this case, Softbank has offered undisputed facts to show that the Illinois new business rule applies, and in the ordinary cause would bar Kinesoft's lost profits claims. It is Kinesoft that argues the rule should not apply; it thus was incumbent on Kinesoft to point to disputed facts in the record to create a triable issue on that point. Kinesoft has failed to do so.
Even without a "new business" rule, Kinesoft still would be limited to pursuing damages claims that can be "proved with a reasonable degree of certainty." Wilmette Partners v. Hamel,
These statements by witnesses with no ax to grind against Kinesoft, together with Kinesoft's lack of a track record, are strong evidence that any projection of lost profits would be speculative. Kinesoft has provided the Court with no contrary evidence sufficient to raise a genuine fact dispute but, has argued that because Softbank is a wrongdoer Kinesoft should be given "a fair amount of leeway in proving the amount of damages" (Pl.'s Opp. Mem. at 21). To be sure, if Kinesoft had proceeded with the Digital Anvil deal, then there might be no need to guess about how profitable (or not) it would have been. Thus, there is some force to Kinesoft's argument that if the jury finds Softbank wrongfully denied a Capital Advance or blocked Kinesoft's use of its own funds for that deal, Softbank should not benefit from the uncertainty that its conduct created. But the argument does not have so much force that it overrides the bedrock principle that damages may not be speculative, and must be proven with reasonable certainty. "Leeway" is one thing; but what Kinesoft seeks here is a license to speculate, which it is not entitled to have.
On the summary judgment record presented, Kinesoft's lost profits claim cannot survive.
The parties agree that Kinesoft's claim for compensatory damages is premised solely on Softbank's alleged repudiation of the 1997 Agreement (Defs.' Facts ¶ 50). Softbank's motion for summary judgment seeks to eliminate Kinesoft's compensatory damages claim on the basis that a "monetary award ... is not available on a repudiation claim" under the Restatement (Second) of Contracts, § 253, comment c, because Softbank has already received all of the agreed exchange for its promise to fund appropriate requests by Kinesoft under the June 1997 Agreement (i.e., the release of liability under the early Game Porting Agreement) (Defs.' Mem. at 17). Kinesoft accepts Softbank's position that it has fully performed under the 1997 Agreement, but argues that it was entitled to treat the 1997 Agreement as terminated and to sue for monetary damages once the facts showed that Softbank intended to repudiate the contract (Pl.'s Opp. Mem. at 23).
The Restatement 2d of Contracts, § 253(1) states:
The comment that Softbank relies on, comment c, states in relevant part:
Softbank's argument is premised on its application of the Restatement (Second) of Contracts, § 253 comment c, to its versions of the facts surrounding the repudiation claim. In other words, Softbank contends that Kinesoft's claim is for "anticipatory repudiation"—which is addressed by § 253 of the Restatement (as well as §§ 250-251). However, the first comment to § 253, comment a, states as follows:
And, Section 243 provides in relevant part as follows:
RESTATEMENT (SECOND) OF CONTRACTS § 243(2), at 250.
Plainly, repudiation including non-performance is one of Kinesoft's theories of repudiation (Pl.'s Opp. Mem. at 8 n. 4), and the Court has held that there are genuine issues of disputed fact on this theory (see pp. 48-50, supra). Thus, by reading the issue of non-performance out of the repudiation claim, Softbank starts from a flawed premise and thus proceeds to an erroneous conclusion.
Finally, Softbank seeks summary judgment on Kinesoft's punitive damages claims. We agree that Kinesoft's contract claim (Counts I and II) cannot support its punitive damages claim. In Illinois, the general rule is that "punitive damages are not recoverable for breach of contract." Morrow v. L.A. Goldschmidt Assocs., Inc.,
Under Illinois law, however, Kinesoft's breach of fiduciary duty claims (Counts IV and V) can be the basis for punitive damages. In Illinois, a breach of fiduciary duty claim does not arise under tort law but is instead "controlled by the substantive laws of agency, contract and equity." Kinzer v. City of Chicago,
For the foregoing reasons, defendant's motion for summary judgment (Doc. # 47) is granted in part and denied in part. The Court grants the motion as to Count III of the second amended complaint, and as to the claims for lost profits. The Court denies the motion as to Counts I, II, IV and V of the second amended complaint, as well as the claim for compensatory and punitive damages.
The matter is set for a status hearing on February 27, 2001 at 9:00 a.m. At that time, the Court will set a trial date and a schedule for filing motions in limine, proposed voir dire questions, and jury instructions.
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