Butler v. Balolia

736 F.3d 609

David BUTLER, Plaintiff, Appellant,

v.Shiraz BALOLIA, Defendant, Appellee.

No. 13–1329.

United States Court of Appeals, First Circuit.

Nov. 22, 2013.

Michael J. Lambert, with whom David Hartnagel and Sheehan Phinney Bass + Green were on brief, for appellant.

Laura L. Carroll, with whom Joseph F. Schmidt, Shefsky & Froelich Ltd., and Burns & Levinson LLP were on brief, for appellee.

Before THOMPSON, SELYA and LIPEZ, Circuit Judges.

SELYA, Circuit Judge.

This bi-coastal case requires a Boston-based federal court to make an informed prophesy as to whether the Washington Supreme Court, if squarely confronted with the question, would recognize a cause of action for breach of a contract to negotiate. Applying the methodology that federal courts have developed to vaticinate how state courts are likely to rule on unsettled questions of state law, we find spoor for the cognoscenti and answer the question before us in the affirmative. And because the complaint plausibly states such a cause of action, we vacate the district court's order of dismissal and remand for further proceedings consistent with this opinion.

I. BACKGROUND

Inasmuch as this is an appeal from an order of dismissal for failure to state a claim upon which relief can be granted, seeFed.R.Civ.P. 12(b)(6), we draw the facts primarily from the complaint. See Rodríguez–Reyes v. Molina–Rodríguez, 711 F.3d 49, 51 (1st Cir.2013). We may supplement those factual allegations by examining “documents incorporated by reference into the complaint, matters of public record, and facts susceptible to judicial notice.” Haley v. City of Bos., 657 F.3d 39, 46 (1st Cir.2011).

Plaintiff-appellant David Butler is an inventor who has spent years researching and developing safety technology for cutting tools. Among the fruits of his labors is the so-called “Whirlwind” technology, which relies on both existing and pending patents.

Defendant-appellee Shiraz Balolia is the president of Grizzly Industrial, Inc. He sought to purchase the Whirlwind technology from the plaintiff and, after some initial haggling, the two men signed a letter of intent (the LOI) in April of 2012.

The LOI is not quite three pages in length. It memorializes the parties' mutual intention “to negotiate and enter into a separate Purchase Agreement by June 20, 2012,” describes the technology to be purchased in some detail, and specifies a purchase price “payable upon closing.” ¹ The LOI also stipulates that the parties “will use their best efforts to negotiate and attempt to agree to terms for the Purchase Agreement” and that the plaintiff will refrain from negotiating with any other prospective purchasers before the signing deadline. Last—but far from least—the LOI contains a choice-of-law provision that directs the application of Washington law.

For reasons that are hotly disputed, the transaction fell through and no purchase agreement was ever signed. The plaintiff blames the defendant: according to the complaint, the defendant professed to have discovered deficiencies in the Whirlwind technology and used these “specious” deficiency claims as a basis for attempting to renegotiate the arrangement.

After the deal imploded but before the end of the exclusivity period, the plaintiff sued the defendant in a Massachusetts state court. The plaintiff sought, among other things, a declaration that the LOI was an enforceable contract, pecuniary damages for breach of contract and breach of an implied covenant of good faith and fair dealing, and damages for violation of the Massachusetts Consumer Protection Act, seeMass. Gen. Laws ch. 93A, §§ 2, 11. Citing the diverse citizenship of the parties (the defendant is a citizen of Washington and the plaintiff is a citizen of Massachusetts) and the existence of a controversy in the requisite amount, the defendant removed the case to federal court. See28 U.S.C. §§ 1332(a), 1441.

Once the case was transplanted, the defendant filed a motion to dismiss. The plaintiff opposed this motion and, in addition,moved for leave to amend his complaint. The defendant objected to the latter motion.

The district court granted the motion to dismiss. See Butler v. Balolia, No. 12–11054, 2013 WL 752363, at *2 (D.Mass. Feb. 26, 2013). It reasoned that the LOI was not an enforceable contract of any kind under Washington law and, therefore, that all of the plaintiff's claims failed. Id. In the same order, the court denied the motion to amend as futile. Id. This timely appeal ensued.

II. ANALYSIS

We review de novo a district court's dismissal of a complaint for failure to state a claim. Rodríguez–Reyes, 711 F.3d at 52. In conducting this tamisage, “we accept as true all well-pleaded facts alleged in the complaint and draw all reasonable inferences therefrom in the pleader's favor.” Santiago v. Puerto Rico, 655 F.3d 61, 72 (1st Cir.2011).

In diversity jurisdiction, a federal court must draw the substantive rules of decision, including conflict of law principles, from the law of the forum state. See Erie R.R. Co. v. Tompkins, 304 U.S. 64, 78, 58 S.Ct. 817, 82 L.Ed. 1188 (1938); Artuso v. Vertex Pharm., Inc., 637 F.3d 1, 5 (1st Cir.2011). Here, however, we need not perform a full-blown conflict-of-law analysis: it is transparently clear that such an analysis would lead us to the choice-of-law provision in the LOI, which renders Washington law controlling. ²See, e.g., Eureka Broadband Corp. v. Wentworth Leasing Corp., 400 F.3d 62, 67 (1st Cir.2005); see also Restatement (Second) of the Conflict of Laws § 187 (1971).

The district court's determination that the LOI cannot be construed as a binding contract of sale, see Butler, 2013 WL 752363, at *2, is unarguable. By its terms, the LOI expresses the parties' shared intention that the transaction, when fully negotiated, will be evidenced by a “separate Purchase Agreement”—an agreement that was never executed. The critical question, then, is whether the plaintiff has plausibly alleged that the LOI is a binding contract to negotiate that the defendant breached.

This question depends, in the first instance, on whether Washington would recognize contracts to negotiate as enforceable. The district court concluded that it would not. In a short passage and footnote, the court anchored this conclusion on the fact that Washington has not yet recognized the enforceability of contracts to negotiate. Butler, 2013 WL 752363, at *2 n. 23. In this regard, the court stated that it would not “extend” a doctrine not yet explicitly adopted by the Washington Supreme Court. Id.

A. Divining State Law.

The key to this puzzle is whether Washington's highest court, if squarely confronted with the question, would recognize a cause of action for breach of a contract to negotiate; that is, an action for breach of a contract that binds the parties to some course of conduct during negotiations. The most reliable guide to the interpretation of state law is the jurisprudence of the state's highest court. See, e.g., Kathios v. Gen. Motors Corp., 862 F.2d 944, 946 (1st Cir.1988). But we think that the district court erred in deeming the absence of an on-point opinion from the state's highest court dispositive. If such a lacuna exists, a federal court sitting in diversity should not simply throw up its hands but, rather, should endeavor to predict how that court would likely decide the question. See, e.g., In re Bos. Reg'l Med. Ctr., Inc., 410 F.3d 100, 108 (1st Cir.2005).

In fashioning such a prediction, the federal court should consult the types of sources that the state's highest court would be apt to consult, including analogous opinions of that court, decisions of lower courts in the state, precedents and trends in other jurisdictions, learned treatises, and considerations of sound public policy. See Andrew Robinson Int'l, Inc. v. Hartford Fire Ins. Co., 547 F.3d 48, 51–52 (1st Cir.2008). The federal court may pay particular attention to sources cited approvingly by the state's highest court in other opinions. Id. at 52. The goal is to replicate, as well as possible, the decision that the state's highest court would be likely to reach.

In this instance, we agree with the district court that the Washington Supreme Court has never recognized the enforceability of contracts to negotiate. By the same token, however, that court has not repudiated such a cause of action. The closest the court has come to either of these positions is its response to a certified question from the Ninth Circuit Court of Appeals. See Keystone Land & Dev. Co. v. Xerox Corp., 152 Wash.2d 171, 94 P.3d 945 (2004) (en banc). There, the Washington Supreme Court declared that it was “unnecessary to decide whether Washington will ever enforce a contract to negotiate.” Id. at 950.

Although Keystone left the question open, the court provided valuable insight into how it might view the issue in the future. Its approach creates a taxonomy that comprises three different types of agreements: (i) “agreements to agree,” which require a further meeting of the minds and are, therefore, nonbinding; (ii) “agreements with open terms,” in which the parties intend to be bound to key points and to have a court or other authority supply the missing terms; and (iii) “contracts to negotiate,” in which the parties agree to be bound to “a specific course of conduct during negotiations.” Keystone, 94 P.3d at 948 (citing E. Allan Farnsworth, Precontractual Liability and Preliminary Agreements: Fair Dealing and Failed Negotiations, 87 Colum. L.Rev. 217, 253, 263 (1987)). The enforceability of this third type of agreement, the court concluded, was an open question in Washington.³See id.; see also P.E. Sys., LLC v. CPI Corp., 176 Wash.2d 198, 289 P.3d 638, 644 (2012) (en banc) (referencing relevant language from Keystone ).

We find it helpful that the Keystone court went on to enumerate certain bedrock principles of contract law that would apply to any analysis it might later make of contracts to negotiate. See K...