Peco Pallet, Inc. v. Nw. Pallet Supply Co.

PECO PALLET, INC., Plaintiff, v. NORTHWEST PALLET SUPPLY CO., Defendant.

NORTHWEST PALLET SUPPLY CO., Plaintiff, v. PECO PALLET, INC., Defendant.

No. 1:15-cv-06811

No. 3:15-cv-50182

UNITED STATES DISTRICT COURT FOR THE NORTHERN DISTRICT OF ILLINOIS EASTERN DIVISION

September 28, 2016

Judge Andrea R. Wood

MEMORANDUM OPINION AND ORDER

PECO Pallet, Inc. ("PECO") manufactures and supplies rented wood pallets. Northwest Pallet Supply Co. ("Northwest") is a pallet recycling company that, since approximately October 2013, has been collecting PECO pallets leased to customers and returning them to PECO. In the past, PECO paid Northwest for those services pursuant to an asset recovery program ("ARP") designed to enable PECO to recover its pallets more quickly. Recently, however, PECO advised Northwest that it would no longer pay Northwest under the terms of the ARP, instead offering a much lower rate of compensation going forward. PECO claims that, upon notification of the change, Northwest refused to return the PECO pallets then in its possession in exchange for the new rate, instead demanding payment pursuant to the terms of the ARP. As a result, PECO brought this lawsuit, claiming that Northwest has refused or failed to return certain of its pallets and that many of the pallets Northwest has returned have been physically damaged. PECO's five-count amended complaint asserts common law causes of action for replevin, conversion, detinue, trespass to chattels, and negligence.

The same day that PECO filed suit, Northwest brought its own action against PECO, claiming that, since receiving notice of the change in payment terms, it has nonetheless continued to collect and return (or attempt to return) PECO's pallets, but PECO has refused to pay reasonable compensation for those services.¹ In addition, according to Northwest, on several occasions PECO has refused to retrieve its pallets from Northwest's facilities altogether. With its complaint, Northwest seeks a declaratory judgment that PECO has abandoned the PECO pallets collected by Northwest and thus has no ownership interest in them. Alternatively, Northwest seeks a declaration that it is entitled to reasonable compensation for the services it provides. Northwest's amended complaint also includes Illinois common law claims for unjust enrichment, promissory estoppel, tortious interference with contract, and tortious interference with business expectancy. Now before the Court are (1) Northwest's motion to dismiss PECO's amended complaint pursuant to Federal Rules of Civil Procedure 12(b)(1), 12(b)(6), 12(b)(7), and 12(f); and (2) PECO's motion to dismiss Northwest's amended complaint pursuant to Rule 12(b)(6).² For the reasons stated below, both motions are granted in part and denied in part.

BACKGROUND

I. PECO's Allegations

As set forth in PECO's amended complaint, commercial goods in the United States have traditionally been transported on what are known as white wood pallets.³ (PECO Am. Compl. ¶ 7, Dkt. No. 39.) Product manufacturers purchase white wood pallets at costs ranging from $5 to $12 per pallet. (Id.) In recent years, however, a market has grown for rented wood pallets, which are leased rather than purchased and are made of a higher-quality wood than white wood pallets. (Id. ¶¶ 7-8.) While ownership of white wood pallets shifts as they are distributed, rented wood pallets remain the property of their owner (in this case, PECO) and are tracked by their owner throughout the distribution process. (Id. ¶ 9.) Manufacturers rent pallets from PECO for a fee; when retailers receive shipments from manufacturers, they unload the goods and return the pallets to PECO. (Id. ¶ 10.) Retailers are not charged for using PECO's pallets, but they must return the pallets or otherwise make them available to PECO. (Id. ¶ 11.) Some retailers return PECO's pallets for free, while others charge PECO a courtesy fee. (Id. ¶ 12.) Upon return, PECO repairs any damage to its pallets and then re-leases them. (Id. ¶ 10.)

According to PECO, pallet recyclers collect all types of pallets—white wood and rented wood—from retailers' loading docks and then sort the pallets by type. (Id. ¶ 21.) Recyclers re-sell or otherwise recycle the white wood pallets and return the rented wood pallets to their owner. (Id. ¶¶ 21, 24-25.) PECO takes the position that when a retailer receives a shipment of goods on a rented wood pallet, the retailer becomes a bailee of the pallet. (Id. ¶ 26.) PECO further argues that pallet recyclers like Northwest voluntarily receive rented wood pallets for a purpose other thanobtaining ownership, thereby forming a constructive bailment. (Id. ¶¶ 28, 30.) According to PECO, as a constructive bailee of its pallets, Northwest must preserve the pallets until they are returned to PECO "not for the sake of any benefit to [Northwest] or upon any expectation of compensation for [its] services, but solely to accommodate [PECO]." (Id. ¶ 28.)

In its amended complaint, PECO claims that from May to August of 2015, Northwest collected and wrongfully detained approximately 175,000 PECO pallets, nearly 17,000 of which were held at Northwest's headquarters in Belvidere, Illinois (Id. ¶ 31.) PECO demanded that Northwest return its pallets for $0.20 per pallet, which PECO asserts is a fair courtesy fee for the cost of sorting, loading, and returning the pallets. (Id. ¶ 35.) Northwest, however, demanded that PECO pay fees ranging from $1.25 to $2.15 per pallet (plus a storage fee) and threatened to dispose of the pallets if PECO refused to pay. (Id. ¶¶ 32, 34.)⁴ On August 4, 2015, PECO brought this lawsuit to recover its pallets. (Id. ¶ 36.) The next day, PECO moved for entry of an order of replevin as to the approximately 17,000 pallets being held at Northwest's Belvidere facility. (Id.) In response, Northwest returned those pallets, and PECO thereafter withdrew its motion. (Id. ¶ 46.)

After returning the 17,000 Belvidere pallets, Northwest claimed to have returned all of the remaining 158,000 PECO pallets that it allegedly "held hostage" beginning in May 2015. (Id. ¶¶ 36, 48.) However, in October 2015, PECO was informed that approximately 7,800 of its pallets were being held at a Target Corporation ("Target") facility that is "handled" by Northwest. (Id. ¶ 52.) And at the end of October, PECO's web-based tracking system showed that Northwest still had not returned 31,009 PECO pallets from its Target facilities alone. (Id. ¶ 55.) PECO claims that Northwest has disposed of, sold, or destroyed a number of the 31,009 missing pallets. (Id.¶ 57.) In addition, PECO claims that many of the pallets it has recovered from Northwest were physically damaged while in Northwest's possession. (Id. ¶ 58.) PECO seeks: (1) a declaration that PECO owns its pallets regardless of where they are in its distribution network; (2) a declaration that PECO is not required to pay anything to Northwest for the return of its pallets; (3) a permanent injunction prohibiting Northwest from purchasing, detaining, selling, or disposing of PECO's pallets in the future; (4) damages in the amount of the net rental value of PECO's pallets while wrongfully detained by Northwest and expenses incurred in recovering those pallets; (5) an order directing Northwest to turn over the 31,009 missing pallets or to pay their replacement value; (6) compensatory damages for the physical damage to PECO's pallets caused by Northwest; and (7) punitive damages for Northwest's allegedly willful and wanton conduct.

II. Northwest's Allegations

The allegations in Northwest's amended complaint are unsurprisingly at odds with the facts alleged by PECO. While the parties appear to agree on the basic white wood (sale model) versus rented wood (lease model) structure of the pallet industry, Northwest disagrees with how PECO presents its business model. In particular, Northwest asserts that PECO does not require its lessee-customers to return its pallets but, instead, represents that it will take on the obligation of recovering them. (Northwest Am. Compl. ¶ 8, Dkt. No. 8.) In an effort to recover its pallets—which end up at retailers' distribution centers and ultimately with pallet recyclers—more quickly, PECO offered the ARP to pallet recyclers across the country, including Northwest. (Id. ¶ 9.) Under the ARP, which was rolled out in October 2013, PECO offered to pay pallet recyclers $2.25 per pallet returned to PECO or $1.25 per pallet picked up by PECO. (Id.) Specifically, PECO represented to participating pallet recyclers as follows:

If you receive a large number of PECO pallets and want to return them to our service center in your area, PECO will compensate you at the rate of $2.25 perpallet plus a Fuel Service Charge . . . If you only receive a small quantity of PECO pallets, our dedicated fleet is available to pick up the pallets from your facility. PECO will compensate you at the rate of $1.25 per pallet, loaded onto PECO's truck.

(Northwest Am. Compl. Ex. 1, Dkt. No. 8-1.) Northwest has historically partnered with large national retailers (e.g., Target) to recycle white wood pallets. (Northwest Am. Compl. ¶ 12, Dkt. No. 8.) However, relying on PECO's ARP, Northwest entered into agreements with several retailers to purchase at a fixed cost all pallets—white wood and rented wood—that accumulate at the retailers' facilities. (Id. ¶¶ 12-13.) Northwest then began collecting, sorting, and returning PECO's pallets, which are included in the pallets Northwest purchases in bulk from its retail partners, for the compensation offered in the ARP. (Id. ¶¶ 14-15, 39.) Until recently, PECO paid Northwest accordingly. (Id. ¶ 15.)

Then, in a letter dated May 12, 2015, PECO informed Northwest that it would no longer pay for Northwest's services at the rate offered under the ARP. (Id. ¶ 16.) Instead, PECO offered to pay $0.20 for each pallet Northwest returned going forward. (Id.) Northwest objected to what it characterizes as an attempt by PECO to unilaterally change the...