Summary
dismissing with prejudice a claim based on allegations of fraud or mutual mistake unrelated to the formation of the contract's integration clause
Summary of this case from Tibco Software, Inc. v. Gordon Food Service, Inc.Opinion
Case Number: 02-CV-10103-BC
August 31, 2002
OPINION AND ORDER ADOPTING REPORT AND RECOMMENDATION OF MAGISTRATE JUDGE, DENYING MOTION TO TRANSFER, AND GRANTING DEFENDANTS' MOTION TO DISMISS
The plaintiff in this case filed the present action on March 1, 2002 in the circuit court for the County of Isabella, Michigan seeking an order rescinding a 1999 Exclusive Licensing Agreement ("Agreement") and an award of damages against the defendant. After the defendant removed the matter to this Court on the basis of diversity of citizenship, the defendant filed a motion to transfer venue of this case to the United States District Court for the District of Massachusetts pursuant to 28 U.S.C. § 1404(a), and a motion to dismiss for failure to state a claim pursuant to Fed.R.Civ.P. 12(b)(6). The motions were referred to United States Magistrate Judge Charles E. Binder pursuant to 28 U.S.C. § 636(b)(1)(B) who, on July 18, 2002, filed a report recommending that the motion to transfer be denied and the motion to dismiss be granted. Neither party has objected to the recommended denial of the motion to transfer, but the plaintiff has filed timely objections to the recommendation that the matter be dismissed. The Court has conducted a de novo review of the matter in light of the report of the magistrate judge and the objections filed, and concludes that the magistrate judge correctly determined the issues. The Court will adopt the recommendation of the magistrate judge and dismiss the case.
The complaint filed in this case alleges that the defendant invented a machine that excavates and removes tree stumps, and eventually obtained a patent on the device. The plaintiff and defendant entered into an Exclusive Licensing Agreement which granted to the plaintiff the exclusive worldwide license to make and sell the product, in exchange for which the plaintiff agreed to pay to the defendant certain guaranteed minimal annual royalties. The gravamen of the complaint is that the plaintiff was induced to enter into the agreement by either misrepresentations made by the defendant leading up to the signing of a written contract, or a prior mutual mistake of fact of the parties. The contract itself, however, contains a so-called "merger" or "integration" clause which states:
This Agreement supercedes all prior agreements and constitutes the entire understanding between the parties with respect to the subject matter thereof, and shall not be modified in any way except by an instrument in writing duly executed by the parties hereto or their respective permitted representatives.
Defendant's Motion to Dismiss, Ex. A. The written representations contained in the Agreement contain a statement that Cook, the defendant, "is the owner of the entire right, title and interest in an to certain knowledge, data, know-how, concepts and inventions relating to an apparatus for excavating and crushing tree stumps and for splitting logs," and that both the plaintiff and the defendant "independently represent and warrant that it/he is in full possession of the right, power, and authority to enter into this Agreement and to grant the right set forth therein." Id.
The magistrate judge concluded that sophisticated commercial parties represented by counsel simply cannot reasonably rely on alleged fraudulent pre-contractual statements when they subsequently sign a contract containing an explicit integration clause that itself was not the product of fraud. The magistrate judge relied extensively on UAW-GM Human Res. Ctr. v. KSL Recreation Corp., 228 Mich. App. 486, 579 N.W.2d 411 (1998), for this proposition. The magistrate judge concluded, therefore, that the plaintiff failed to state a claim upon which relief can be granted because the complaint contained no allegations of fraud that would vitiate the merger clause or the entire contract.
In diversity cases, federal courts must apply the law of the forum state as determined by that state's highest court. Erie R.R. v. Tompkins, 304 U.S. 64, 78 (1938). In those instances in which a state's highest court has not decided an issue presented to a federal court exercising its diversity jurisdiction, the federal court must use "all relevant data" to ascertain state law. Garden City Osteopathic Hosp. v. HBE Corp., 55 F.3d 1126, 1130 (6th Cir. 1995). "Relevant data includes the state's intermediate appellate court decisions, as well as the state supreme court's relevant dicta, restatements of the law, law review commentaries, and the majority rule among other states." Ososki v. St. Paul Surplus Lines, 156 F. Supp.2d 669, 674 (E.D. Mich. 2001) (internal quotes and citation omitted) (citing Angelotta v. Am. Broad Corp., 820 F.2d 806, 807 (6th Cir. 1987)).
In UAW-GM, the Michigan Court of Appeals held that written contracts that contain an integration clause may not be attacked by parol evidence of prior or contemporaneous negotiations. Thus, the integration clause "is conclusive and parol evidence is not admissible to show that the agreement is not integrated except in cases of fraud that invalidate the integration clause or where an agreement is obviously incomplete `on its face' and, therefore, parol evidence is necessary for `filling of gaps.'" 228 Mich. App. at 502; 579 N.W.2d at 418.
Among the plaintiff's objections to the report and recommendation is the assertion that the rule in UAW-GM departs from prior Michigan Supreme Court precedent. This assertion is accompanied by citation to several cases, which the Court finds do not support the claim because, although the authority deals with written contracts generally, it does not explicate those contracts which contain explicit merger clauses. It is not clear that the Michigan Supreme Court would reject the rule of UAW-GM; to the contrary, the Michigan Supreme Court has cited the decision to emphasize the importance of adhering to parties' written contracts. See Archambo v. Lawyers Title Ins. Corp., 466 Mich. 402, 413-14, 646 N.W.2d 170, 177 (2002). Accordingly, the decision of this intermediate appellate court is a proper source from which to ascertain the law of the state. See Zebart Int'l Corp. v. CNA Ins. Cos., 78 F.3d 245, 250-51 (6th Cir. 1996).
The plaintiff also attempts to discredit the magistrate judge's heavy reliance on UAW-GM by stating that the case preserves the right of the parties to avoid a written contract when fraud is alleged. That reservation, however, was highly qualified. UAW-GM recognized the general rule that fraud can vitiate a written contract, but also found that when the written contract contains an explicit integration clause, only "fraud that would invalidate the merger clause itself, i.e., fraud relating to the merger clause or fraud that invalidates the entire contract including the merger clause" can avoid the agreement. 228 Mich. App. at 503, 579 N.W.2d at 419. In this case, the plaintiff never claims that the merger clause, much less the execution of the rest of the contract, was procured by fraud. Rather, it asserts that the defendant made a number of false, additional representations regarding the value of his invention to induce the contract. The combination of the parol evidence rule and the explicit merger clause in the parties' agreement precludes this line of attack.
Finally, the plaintiff also claims that UAW-GM is distinguishable. However, the Court finds this argument unpersuasive. As the defendant points out in his response to the objections, the case sets down unambiguous rules of law. The distinctions in fact in this case are not materially different, and the case sets forth an appropriate rule of decision for the matter before the Court.
The Court finds that the magistrate judge properly decided this issue, and made appropriate resort to a decision of a Michigan intermediate appellate court in reaching his decision.
Accordingly, it is ORDERED that the report and recommendation is ADOPTED.
It is further ORDERED that the defendant's motion to transfer venue (dkt #5-1) is DENIED.
It is further ORDERED that the defendant's motion to dismiss (dkt #5-2) is GRANTED, and the plaintiff's complaint is DISMISSED with prejudice.