One Source Environmental, LLC v. M + W Zander, Inc.

Citations: 13 F. Supp. 3d 350; 2014 U.S. Dist. LEXIS 46743; 2014 WL 1350353Docket: Case No. 2:12-cv-145

Court: District Court, D. Vermont; April 4, 2014; Federal District Court

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One Source Environmental, LLC filed a lawsuit against various defendants, including M.W. U.S. Inc., M.W. Products GmbH, and Total Facility Solutions (TFS), related to a 2004 Manufacturer’s Representation Agreement with M.W. Zander, Inc. (the predecessor of M.W. U.S.). The claims include breach of contract and breach of the implied covenant of good faith against all defendants, along with tortious interference claims against M.W. Group and M.W. Products, as well as a request for punitive damages. Following amendments to the complaint aimed at clarifying claims against the German defendants and TFS, the defendants moved to dismiss the Second Amended Complaint (SAC) on several grounds, including lack of standing and personal jurisdiction.

The court granted the motion to dismiss Counts III-VI concerning the nonsignatory defendants but denied dismissal for the breach of contract claim, the implied covenant of good faith claim against M.W. U.S. (Count II), and the tortious interference claims (Counts VII and VIII). The court also denied the motion regarding personal jurisdiction over the German defendants and the claim for punitive damages (Count IX). Consequently, Counts I, II, VII-IX remain active, while Counts III-VI were dismissed without prejudice.

The case stems from a Manufacturer’s Representative Agreement dated January 16, 2004, which designated One Source as the exclusive sales representative for M.W. Zander in a specified territory, with obligations for confidentiality and non-competition in exchange for commissions on sales, although the commission amounts were not explicitly detailed in the agreement.

The Agreement does not have a termination date but allows the Company and/or the Representative to cancel it with thirty days' notice. Both parties have undergone structural and nomenclature changes since the 2004 Agreement's inception. The original Agreement was between One Source Environmental Testing Services (OSETS) and M. W Zander, Inc., the U.S. division of German company M. W Zander AG. M. W Zander, Inc. later became M. W U.S., a Delaware corporation based in Watervliet, New York. The SAC asserts claims against M. W U.S. as the successor to M. W Zander, Inc. 

At the time of the Agreement, One Source operated under the trade name registered by founder Jeffrey Jimmo. In 2004, Jimmo registered the business as an LLC, shortening its name, but the SAC argues that One Source LLC is a continuation of OSETS. Jimmo remained the owner, with consistent management, assets, and contact information post-conversion, leading One Source to claim it is the successor in interest to the original Agreement.

One Source acknowledges that the Agreement was signed for M. W Zander, Inc., but brings claims against several nonsignatory entities—M. W Group and M. W Products (the "German Defendants") and TFS—based on apparent authority. One Source claims that the Agreement was intended to establish One Source as the exclusive representative of M. W Group, which manufactures clean room components, while M. W Products produces items for M. W Group and is wholly owned by M. W Facility Engineering GmbH, also owned by M. W Group. 

The SAC contends M. W Group and M. W Products are parties to the Agreement because Ralf Graber and M. W U.S. had apparent authority to bind them. One Source supports this with evidence indicating that M. W divisions operated as a single entity, such as sharing a website, letterhead, and email addresses. Additionally, an email exchange reflects that M. W U.S. and the German subsidiary viewed the relationship with One Source as interconnected. One Source cites an email expressing excitement about making M-W Zander successful in the U.S. as evidence of its understanding that it was engaging with M. W Germany.

Plaintiff asserts that communications between Mr. Jimmo and Mr. Braeuer of M.W. Facility Engineering support the belief that the German Defendants were involved in the 2003 and 2004 Agreements. The Agreement is titled "M.W. Zander Manufacturer’s Representative Agreement," suggesting that M.W. Group and M.W. Products, the sole manufacturer of M.W. products in Germany, were parties to the contract. The Plaintiff argues that since M.W. Group was the only trademark holder at the time, it is reasonable to conclude that M.W. Group was a party to the Agreement. The Plaintiff further claims, based on "information and belief," that Ralf Graber, the Agreement's signatory, was employed by M.W. Group, which the Defendants dispute.

In addition to pre-Agreement communications and the Agreement itself, Plaintiff cites post-Agreement conduct as evidence of M.W. U.S. Inc.’s authority to bind the German Defendants. Notably, an email from Marvin Joanis of M.W. U.S. indicated he reported directly to Germany and had their approval for projects. A 2009 proposal letter from Rick Grauke of M.W. U.S. on behalf of M.W. Products and another email from Bill Spain emphasized the importance of German engineering in marketing efforts, further implying a connection to the German entities.

One Source also performed warranty work on M.W. Group and M.W. Products' products in Vermont, reinforcing the claim that the German Defendants were parties to the Agreement. The Plaintiff concludes that M.W. U.S. was portrayed as an agent of M.W. Group, leading them to reasonably believe that M.W. Group and M.W. Products were parties to the Agreement.

Additionally, One Source raises contract claims against Total Facility Solutions (TFS), asserting it was considered a branch of M.W. U.S. at the time of the Agreement. They reference a 2004 email describing TFS as a "self-performing branch" of M.W. Zander and note that M.W. U.S. and TFS share letterhead, a signature block, an email address, and corporate offices, with the same CEO and Executive Vice President. This relationship leads One Source to argue that TFS is a successor to M.W. U.S.'s previous electrical and mechanical construction branch, thus making it a party to the 2004 Agreement.

In terms of breach and termination, One Source discovered in 2010 that it was not receiving commissions on all M.W. work in its territory. In January 2011, One Source communicated with Markus Huegle regarding its entitlement to commissions for a specific project. Subsequently, Ralf Graber sent a letter on April 14, 2011, terminating the Agreement.

The plaintiff's termination from the Agreement was abrupt, leading to the conclusion that it was prompted by a request for compensation. Allegations of bad faith against the defendants stem from an email suggesting personal biases against the plaintiff's representative, indicating a reluctance to honor the Agreement to avoid paying additional commissions. The plaintiff claims significant lost commissions and has filed a nine-count lawsuit against the defendants, which includes breach of contract and breach of the implied covenant of good faith and fair dealing, alongside tortious interference claims. The defendants counterclaimed for various breaches by the plaintiff. The complaint has been amended twice, with the latest amendment following a June 2013 court hearing that allowed limited discovery regarding nonsignatory defendants. Defendants have moved to dismiss the suit and for partial summary judgment, arguing that the plaintiff lacks standing and fails to state a plausible claim. The court will accept the facts in the complaint as true when considering a motion to dismiss, while for summary judgment, the moving party must show there are no genuine material facts in dispute. The defendants assert that the plaintiff does not have standing because it is not a signatory to the Agreement, as the original contract was with a sole proprietorship, whereas the plaintiff is an LLC. The plaintiff contends it has standing as the successor in interest to the original entity, citing Vermont law that retains rights after conversion to an LLC, though the application to sole proprietorships has not been specifically addressed by Vermont courts. However, a Connecticut Supreme Court ruling supports treating sole proprietorships similarly for successor liability purposes.

The newly formed LLC retained a name similar to the sole proprietorship, operated from the same address, and continued the same business activities, including honoring the contract in dispute. When a legal dispute arose, the defendants argued that the plaintiff LLC was not a party to the contract. The Connecticut Supreme Court ruled against the defendants, determining that the plaintiff LLC was a "successor in interest" to the sole proprietorship. The court referenced the Connecticut LLC act, which aligns with Vermont law, stating that an entity converted into an LLC retains the same identity for all purposes, thus transferring the rights and obligations of the sole proprietorship to the LLC by operation of law. 

Although the Vermont Supreme Court has not directly addressed this issue, the court found the reasoning in a similar case, C.J. Builders, applicable due to the parallel facts and identical statutory language. The LLC continued operations as the sole proprietorship, maintained the same management, and fulfilled the contract's terms, further supporting its standing to pursue the action. 

Defendants also sought dismissal based on a failure to state a claim regarding contract interpretation, arguing that One Source's interpretation of its commission was inconsistent with the contract's explicit terms. One Source contended it was owed a fixed commission on all sales and services, contrary to the contract's language limiting commissions to product sales. The defendants claimed that One Source's interpretation suggested a modification of the contract, which required a high evidentiary burden to prove. Under Delaware law, modifications can be made through conduct but must be demonstrated with specificity. The defendants argued that One Source failed to provide sufficient evidence of a modification, asserting that no written or oral agreement existed for such a change.

One Source's claims are challenged by Defendants on the grounds that the language used is vague and does not meet the specificity required for modification claims. Defendants assert that any alleged modification lacks consideration and should lead to dismissal, or alternatively, summary judgment in their favor. However, the argument for dismissal under Rule 12(b)(6) is unsupported because One Source's commission theory relies on the interpretation of the Agreement rather than modification. One Source has provided sufficient factual allegations to meet the plausibility standard, asserting that the contract was executed in line with its interpretation, which included payments as a percentage of total work costs rather than product sales alone.

The dispute over the interpretation of the contract's terms indicates that summary judgment is premature, as the underlying facts are contested. One Source's evidence, including emails showing a mutual understanding of the Agreement's terms, has not yet been fully explored due to limited discovery focused on jurisdictional matters. Although Delaware courts impose a stringent burden for proving modifications based on course of conduct, this does not warrant summary judgment at this stage, as One Source has not had the opportunity to present supporting evidence.

Additionally, One Source alleges a breach of the implied covenant of good faith and fair dealing against M. W U.S. This claim is generally not recognized as separate from a breach of contract claim in Vermont if it is based on the same conduct. Defendants argue for the dismissal of this implied covenant claim as it overlaps with the breach of contract claim centered on the denial of commissions. However, One Source's claim includes an assertion of bad faith regarding the termination of the contract, which distinguishes it from the breach of contract claim and supports its viability.

The Plaintiff alleges that the contract termination was motivated by personal dislike rather than dissatisfaction with One Source’s performance, suggesting that M. W U.S. acted in bad faith. Since the contract was terminable at will, this termination cannot support a breach of contract claim. One Source has presented sufficient evidence of independent conduct to support its implied covenant of good faith and fair dealing claim, leading to the denial of the Defendants’ motion to dismiss Count II.

One Source concedes that M. W U.S. is the signatory to the manufacturer’s agreement but seeks to hold three nonsignatory defendants—TFS, M. W Group, and M. W Products—liable based on the theory of apparent authority. The Defendants argue for dismissal under Rule 12(b)(6) due to lack of privity of contract, asserting that nonparties cannot be sued for breach and that an implied covenant claim requires a contractual relationship.

Regarding the German Defendants (Counts V and VI), One Source claims breach of contract and implied covenant against them as the parent corporation of M. W U.S. However, parent and subsidiary are typically distinct entities, and a contract with one does not bind the other. One Source contends that M. W U.S. had apparent authority to bind M. W Germany based on the premise that the entities operated as one under M. W Group. Nonetheless, One Source fails to provide adequate facts to support this claim, offering only two emails from a representative of a different subsidiary that do not establish M. W U.S.’s authority or relevant conduct by M. W Group.

Emails alone do not establish apparent authority for M. W U.S. to bind M. W Products or M. W Group. The evidence presented does not support One Source’s theory of apparent authority, as most communications were directed to M-W U.S. and not to One Source. Communications from M. W U.S. do not demonstrate conduct by the principal necessary for apparent authority. One Source’s belief that it contracted with M. W Group lacks supporting evidence of principal conduct. Correspondence dated after the 2004 Agreement cannot substantiate One Source's claim of apparent authority at the time of the Agreement. Shared email addresses, letterhead, and logos do not confer apparent authority. The Agreement explicitly identifies M. W U.S. as the signatory, and it was this entity that paid One Source commissions, which undermines the claim of apparent authority over M. W Group and M. W Products. Consequently, the breach of contract and implied covenant claims against those entities must be dismissed. The court's ruling regarding liability for commission payments does not affect how those commissions are calculated, and despite the nonsignatory defendants not being bound by the contract, One Source can still claim commissions from the sales of all M. W Group products. However, the evidence does not contradict the contract's terms that identify M. W U.S. as responsible for any judgment in case of breach.

Claims against Total Facility Solutions, Inc. (TFS) for breach of contract and breach of an implied covenant of good faith and fair dealing have been dismissed. Defendants contend that TFS cannot be liable as it was not a party to the contract. The complaint asserts that at the time the Agreement was made, TFS was considered a branch of M. W U.S., which performed similar work. The plaintiff cites shared letterhead, email, address, and corporate officers as evidence of TFS's status as a successor entity. However, the contract was non-transferable, and the allegations do not provide grounds for TFS's liability as a successor or indicate that M. W U.S. had the authority to bind TFS. While the facts may support a claim for commissions on TFS's projects, they do not establish TFS's liability under the 2004 Agreement.

Additionally, the plaintiff brings two counts of tortious interference against M. W Group and M. W Products, alleging that the German Defendants interfered with the Agreement by selling products directly in the Sales Territory and by improperly procuring its termination. Count VIII also alleges tortious interference with prospective business relations due to continued dealings with IBM Essex Junction post-termination. To succeed on these claims, the plaintiff must demonstrate that the defendants intentionally and improperly induced M. W U.S. not to fulfill its contractual obligations. However, the direct sales into the Territory are not deemed wrongful or improper under the Agreement, as they were not prohibited and could potentially benefit the plaintiff by generating additional commissions. The court noted that there was no requirement for the defendants to notify the plaintiff of sales leads, and competitive business practices do not constitute tortious interference.

The court analyzed the tortious interference claims made by One Source against M. W Group and M. W U.S. The Agreement allowed M. W U.S. to pursue sales independently of One Source, and the primary claim of wrongful activity involved the failure to pay commissions on direct sales. However, the court noted that the Second Amended Complaint (SAC) did not allege that M. W Group instructed M. W U.S. to withhold such payments, leading to the dismissal of this aspect of the tortious interference claim.

Nonetheless, the court allowed the tortious interference claim to proceed based on an alternative theory: that M. W Germany acted in bad faith by directing M. W U.S. to terminate the Agreement after One Source inquired about unpaid commissions. This indicated a possible motive for the termination linked to One Source's request, suggesting bad faith on the part of the German Defendants.

Additionally, One Source claimed tortious interference with prospective business relations, specifically regarding its dealings with IBM Essex Junction. To succeed, One Source must establish the existence of a valid business relationship, the interferer's knowledge of it, intentional interference, resulting damage, and a causal link between the interference and harm. The SAC asserted that the German Defendants continued to collaborate with IBM Essex Junction after terminating the Agreement, undermining One Source's business expectancy from a proposal with IBM. The allegations were deemed sufficient to meet the plausibility standard for Counts VII and VIII, allowing the claims to advance.

Defendants seek dismissal of the tortious interference claims, asserting that a parent company cannot interfere with its subsidiary’s contracts as a legal principle, citing Boulevard Assocs. v. Sovereign Hotels, Inc. which applies Connecticut law. In that case, the Second Circuit held that directing a subsidiary to breach a contract not in its economic interest is not tortious conduct. While this could potentially bar Plaintiffs' claims, it constitutes an affirmative defense that does not warrant dismissal at this stage, as established in Payne v. Rozendaal. Consequently, the motion to dismiss the tortious interference claims against the German Defendants is denied.

Regarding punitive damages, Defendants argue that such damages are typically unavailable in breach of contract cases, referencing Murphy v. Stowe Club Highlands. However, an exception exists if the breach is willful or fraudulent, demonstrated by actual malice, as defined by Monahan. The Court finds that Plaintiffs have presented a plausible basis for punitive damages, indicating that the Defendants acted with personal ill will. Evidence includes an email suggesting animosity toward a Plaintiff and the timing of the contract termination following a request for compliance, which implies bad faith. Since the case involves tortious interference claims and an implied covenant of good faith and fair dealing—recognized as tortious under Vermont law—the punitive damages claim is permitted to proceed.

Lastly, Defendants briefly argue against personal jurisdiction over the German Defendants, but this argument is not well-developed.

One Source must demonstrate the Court's personal jurisdiction over the Defendants to avoid dismissal under Fed. R. Civ. P. 12(b)(2). To establish this, One Source needs to present sufficient facts that comply with Vermont’s long-arm statute and the Due Process Clause of the Fifth and Fourteenth Amendments. Vermont’s long-arm statute allows personal jurisdiction to the fullest extent permissible by federal law. According to the Due Process Clause, a defendant must have "minimum contacts" with the forum state, meaning they purposefully engage in activities that would foreseeably result in being brought to court there. The Court will assess whether exercising personal jurisdiction is reasonable based on traditional notions of fair play and substantial justice.

Personal jurisdiction is categorized as general or specific. General jurisdiction relates to a defendant's overall business contacts in the state, enabling courts to assert power even when the lawsuit's subject is unrelated to those contacts. Specific jurisdiction applies when the claims arise from the defendant's contacts with the state, requiring that the defendant has purposefully directed activities toward its residents.

In this case, the claims against M.W. Products and M.W. Group involve tortious interference, which are linked to the German Defendants' activities in Vermont. The SAC provides adequate evidence of the German Defendants purposefully directing their activities toward Vermont, including causing the termination of an agreement and selling software to IBM in the state, which interfered with One Source's business expectations. This establishes specific personal jurisdiction over the German Defendants for the tortious interference claims.

The Court denies the Defendants' motion to dismiss for lack of standing and personal jurisdiction but grants the motion to dismiss for failure to state a claim regarding Counts III, dismissing those claims without prejudice. The Court also denies the motion for partial summary judgment. M.W. U.S. was previously known as M.W. Zander, Inc., which has been removed as a party to the action due to this name change.

In 2003, the parties entered a one-year agreement, followed by an open-ended agreement in 2004, which is the focus of the current action. The 2004 Agreement is signed by Ralf Graber on behalf of an M. W entity based in Phoenix, Arizona. Jurisdiction is established on diversity grounds under 28 U.S.C. § 1332, with Delaware law governing contract modification and interpretation, as specified in the choice of law provision of the Agreement. Absent contrary intent from the parties, any modifications to rights and liabilities remain under Delaware law. Delaware law requires a contractual relationship to sustain a claim for the implied covenant of good faith and fair dealing, and it prohibits duplicative claims, as established in case law. Since Delaware and Vermont laws align on these issues, there is no conflict of laws to address. The plaintiff claims that M. W Zander, Inc., the signatory, is the U.S. division of M. W Zander AG and that it has been succeeded by M-I-W U.S. Inc., with these entities being the parties bound by the Manufacturer’s Representative Agreement. A fundamental principle of contract law dictates that only parties to a contract are bound by it. Consequently, contract-based claims have been dismissed without prejudice, allowing One Source to amend its complaint if new evidence of apparent authority arises. M. W U.S. has indicated its capacity to satisfy any judgment in this action.