Inacom Corp., a Delaware Corporation v. Sears, Roebuck and Company, a New York Corporation

Citations: 254 F.3d 683; 2001 U.S. App. LEXIS 12828; 2001 WL 650554Docket: 99-3085

Court: Court of Appeals for the Eighth Circuit; June 13, 2001; Federal Appellate Court

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Inacom Corporation sued Sears, Roebuck and Company for fraudulent concealment and breach of contract following the acquisition of Sears Business Centers (SBC). A jury awarded Inacom over $4.1 million in damages, while Sears received over $1 million on its counterclaim, leading to a net judgment in favor of Inacom. The case was appealed to the Eighth Circuit Court of Appeals, which affirmed the jury's decision.

Inacom, based in Omaha, Nebraska, engaged in retail and servicing of computer products and sought to purchase SBC, a division of Sears. During negotiations in 1992, Sears disclosed a contract with the U.S. Department of Defense (DOD) for the shipment of specific laptop models, which Inacom reluctantly accepted as part of the deal, contingent on written warranties from Sears regarding the DOD contract's status. 

On January 12, 1993, Inacom and Sears executed a Business Acquisition Agreement (BAA) that included representations from Sears about not being in breach of its DOD contract and a provision limiting recoveries for disputes. However, Sears did not secure necessary government approval for the transfer of the DOD contract before closing the sale. Consequently, the BAA stipulated an agency agreement where Inacom would manage the DOD contract as Sears's agent, with Sears agreeing to indemnify Inacom for claims arising from the contract, except for losses due to Inacom's performance failures.

On February 19, 1993, the DOD assessed $1.8 million in liquidated damages against Inacom for failing to deliver the computers on time. Inacom contended it could not fulfill the contract because Sears discontinued certain models, and it attempted to negotiate a substitute with the DOD.

The Department of Defense (DOD) informed Inacom that its proposed model could not adequately replace the D500 and D1075 models, leading to a negotiated reduction of liquidated damages to $1.3 million. Sears failed to indemnify Inacom as required by their agency agreement, and in November 1993, Sears obtained government approval to assign the DOD contract to Inacom. Ongoing liquidated damages from Sears's product discontinuation and Inacom's inability to fulfill the contract prompted Inacom to agree to supply a replacement product, incurring over $4.1 million in losses. Inacom subsequently filed a lawsuit against Sears in federal district court in Nebraska, alleging breach of contract, fraudulent misrepresentation, and fraudulent concealment, while Sears counterclaimed for breach of contract by Inacom.

The jury concluded that Sears breached its contract with Inacom and committed fraudulent concealment, but ruled in favor of Sears concerning Inacom's fraudulent misrepresentation claim and on Sears's counterclaim. The jury awarded Inacom $4,103,341 in damages, while the district court awarded Sears $1,199,862.46 on its counterclaim, ultimately entering judgment for Inacom in the amount of $2,903,478.54. Sears's motions for judgment as a matter of law and for a new trial were denied, leading to an appeal by Sears without a cross-appeal from Inacom regarding the counterclaim.

Regarding the choice of law, the district court directed the jury to apply Illinois law to Inacom's breach of contract claim and Nebraska law to the fraudulent concealment claim. Sears contested the application of Nebraska law, asserting that the BAA specifies Illinois law governs the contract. The district court's choice of law determinations are reviewed de novo, and Nebraska follows the Restatement (Second) of Conflict of Laws. Sears argued that the fraudulent concealment claim, being intertwined with the contract claim, should fall under the Illinois law specified in the BAA. However, the court found that the BAA's language, while applicable to contract interpretation, did not extend to tort claims like fraudulent concealment.

The contract in question did not clearly indicate an intent by the parties to apply Illinois law to all contract-related claims, as the governing clause only specified that Illinois law would be used to construe the contract itself. This limited scope does not extend to determining the appropriate forum for tort claims, specifically fraudulent concealment. As a result, the applicable law for the tort issue is guided by Section 145 of the Restatement (Second) of Conflict of Laws, which focuses on the jurisdiction most significantly related to the parties and the circumstances of the case. The analysis shows that Nebraska has the most significant relationship to the fraudulent concealment claim due to the location of the conduct, the parties’ actions, and where the injuries occurred, all of which took place in Omaha, Nebraska. Consequently, the district court correctly applied Nebraska law to evaluate the fraudulent concealment claim.

Regarding the sufficiency of evidence, Sears challenged the district court's denial of its motions for judgment as a matter of law and for a new trial, claiming insufficient evidence for the jury's verdicts. The standard of review for such motions involves viewing evidence in favor of the jury's conclusions. The court determined that there was ample evidence to support the jury's findings for both breach of contract under Illinois law and fraudulent concealment under Nebraska law, thus affirming the district court's decisions.

Under Illinois law, a plaintiff claiming damages for breach of contract must demonstrate compliance with a valid contract, the defendant's failure to meet obligations, and resulting injury. In this case, Sears and Inacom executed a valid contract comprising a Business Associate Agreement (BAA) and an agency agreement. The BAA included warranties from Sears regarding its compliance with obligations to the Department of Defense (DOD) and its relationship with the government. Sears agreed to indemnify Inacom for losses not due to Inacom's failure to perform. However, Inacom's inability to fulfill the DOD contract stemmed from Sears's supplier discontinuing production of necessary computers, a fact known to Sears but not to Inacom. This failure by Sears prevented Inacom from meeting its contractual obligations, leading to liquidated damages imposed by the DOD and additional losses for Inacom. The evidence did not indicate any lack of performance on Inacom's part, and its losses were directly linked to Sears's actions. Sears also failed to indemnify Inacom as promised, constituting a breach of contract, which justified the district court's denial of Sears's request for a new trial regarding the breach claim.

Additionally, under Nebraska law, to prove fraudulent concealment, a plaintiff must show the defendant's knowledge of a material fact, a duty to disclose it, intentional concealment, reasonable reliance on the concealed fact, and resultant damages. The jury found sufficient evidence of Sears's fraudulent concealment, as Sears pressured Inacom to accept the DOD contract despite Inacom’s initial hesitance due to lack of experience in defense contracting. Sears's insistence on a confidentiality agreement obstructed Inacom's ability to conduct due diligence, which would have revealed critical information regarding the DOD contract and the supplier relationship.

Inacom sought assurances from Sears regarding the profitability and condition of its contract with the Department of Defense (DOD) due to the confidentiality agreement's restrictiveness and Inacom's inexperience with government contracts. Sears's CEO, Gary Ramsey, assured Inacom that the contract was profitable and provided written assurances in the BAA that it was not in breach of the contract and maintained a satisfactory relationship with the DOD. Sears agreed to indemnify Inacom for losses incurred while administering the DOD contract, provided those losses were not due to Inacom's actions. However, contrary to these representations, Sears experienced losses under the contract, particularly after discontinuing the D1075 model computers, which constituted a material breach. The DOD expressed dissatisfaction with this decision and threatened liquidated damages against Sears.

Evidence showed that Sears failed to disclose critical information about the losses incurred, the decision to discontinue the D1075 model, and the government's threat of liquidated damages. This lack of disclosure amounted to fraudulent concealment, as Sears induced Inacom to accept the contract based on misleading representations. Inacom relied on Sears's omissions and suffered damages as a result, supporting the jury's verdict on the fraudulent concealment claim, leading the district court to deny Sears's request for a new trial and judgment as a matter of law.

Sears also contested the damage award of $4.1 million, arguing it should be reduced to the government's assessed liquidated damages of $1,349,100, claiming the excess constituted consequential damages not permitted under the BAA. Sears objected to the jury instruction allowing for the award of 'unusual' losses but did not raise the specific consequential damages argument at the district court level.

Sears's counsel failed to provide the district court with specific grounds for its objection regarding the evidence of unusual loss, neglecting to mention the contract's prohibition against consequential damages or relevant Illinois law. As a result, the court evaluated Sears's argument under a plain error standard. Illinois law defines consequential damages as losses that do not directly arise from a defendant's wrongful actions. Sears claimed that only liquidated damages flowed directly from its contract breach, asserting that Inacom’s other damages were collateral. However, the court found that Sears materially breached its contract by discontinuing the D1075 model computers, directly causing Inacom's inability to fulfill its contractual obligations. Consequently, the financial losses incurred by Inacom during its efforts to mitigate damages were a direct result of Sears's breach, qualifying as direct damages under Illinois law. The jury’s $4.1 million award was upheld and not considered a consequential loss, negating Sears's challenge to the jury instruction. Regarding the economic loss rule, the court determined that Nebraska law governed the fraudulent concealment claim, which does not bar recovery for economic loss in tort even when it overlaps with breach of contract. Ultimately, the breach of contract claim was sufficient to support the damage award, rendering the economic loss rule argument unnecessary. The judgment of the district court was affirmed.