Royal Consumer Prods. LLC v. Walgreen Co.

ROYAL CONSUMER PRODUCTS LLC, Plaintiff, v. WALGREEN CO., Defendant.

18 C 4695

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

April 15, 2019

Judge Gary Feinerman

MEMORANDUM OPINION AND ORDER

Royal Consumer Products LLC alleges in this diversity suit that Walgreen Co. breached contracts under which Walgreen purchased private-label (that is, Walgreen-branded) poster board from Royal by (1) improperly discontinuing future orders and (2) underpaying Royal for fulfilled orders. Doc. 1. Walgreen moves under Civil Rule 12(b)(6) to dismiss the claim regarding the discontinuance of future orders. Doc. 16. The motion is granted. Walgreen also moved under Rule 12(b)(1) to dismiss the underpayment claim on the ground that dismissing the discontinued-orders claim would defeat subject matter jurisdiction, ibid., but its reply brief correctly withdraws that motion, Doc. 25 at 10.

Background

In resolving a Rule 12(b)(6) motion, the court assumes the truth of the complaint's well-pleaded factual allegations, though not its legal conclusions. See Zahn v. N. Am. Power & Gas, LLC, 815 F.3d 1082, 1087 (7th Cir. 2016). The court must also consider "documents attached to the complaint, documents that are critical to the complaint and referred to in it, and information that is subject to proper judicial notice," along with additional facts set forth in Royal's brief opposing dismissal, so long as those additional facts "are consistent with the pleadings." Phillips v. Prudential Ins. Co. of Am., 714 F.3d 1017, 1020 (7th Cir. 2013) (internal quotation marks omitted). The facts are set forth as favorably to Royal as those materials allow. See Pierce v. Zoetis, Inc., 818 F.3d 274, 277 (7th Cir. 2016). In setting forth those facts at the pleading stage, the court does not vouch for their "objective truth." Goldberg v. United States, 881 F.3d 529, 531 (7th Cir. 2018).

Royal is a paper products manufacturer that supplies private-label paper products to retailers. Doc. 1 at ¶ 1. From 2013 through 2017, Walgreen—which operates a national pharmacy store chain—repeatedly ordered private-label poster board from Royal to be sold at Walgreen's stores. Id. at ¶¶ 2, 5, 15. Terms governing the transactions were set forth in a General Trade and Electronic Data Interchange Agreement ("GTA"). Id. at ¶ 5; Doc. 1-1. The GTA incorporated a second agreement, the Terms and Conditions of Electronic Data Interchange, which set forth procedures for electronically transmitting certain documents, such as purchase orders and sales forecasts. Doc. 1 at ¶¶ 11, 13; Doc. 1-1 at pp. 6-10.

The GTA provides that it "sets forth the terms and conditions under which the parties agree to facilitate their purchase and sale transactions." Doc. 1-1 at 2. The GTA further provides that, with certain exceptions not relevant here, "[t]he terms and conditions contained [in the GTA] shall apply to all merchandise ... sold by Vendor [Royal] ... to Walgreen." Ibid. Additional terms of the GTA are referenced below in the Discussion section. The GTA does not specify any kind or quantity of goods Walgreen would or was required to order from Royal.

Walgreen provided Royal with sales forecasts for the products that Royal supplied. Id. at ¶¶ 9, 13. Royal told Walgreen that it would rely on those forecasts in ordering raw materials and building an inventory of private-label products. Id. at ¶ 9. Royal also told Walgreen that to adjust its production schedule and ensure that it maintained a sufficient inventory of private-labelposter board, it would need 120 days' notice of any changes in the set of products that Walgreen ordered, including any decision to switch to a different supplier. Id. at ¶¶ 9-10. Royal alleges that Walgreen agreed to provide 120 days' notice of product set or supplier changes. Id. at ¶ 10. Royal does not allege that this 120-day notice agreement was set forth in writing in the GTA or any other contract, id. at ¶¶ 9-10, and in fact the GTA includes no such provision, Doc. 1-1.

Walgreen ordered private-label poster board from Royal about every one or two weeks from September 2013 through May 2017. Doc. 1 at ¶ 15. On May 22, 2017, Walgreen notified Royal that it was changing its poster board supplier and would not order from Royal after September 2017. Id. at ¶¶ 17, 19. Walgreen also notified Royal that it was discontinuing the private-label poster board that Royal supplied. Ibid. Royal alleges that Walgreen's notice was not in the format required by the agreed-upon electronic data transmission procedures. Id. at ¶ 21.

Royal stopped producing the private-label poster board on May 22, 2017, and Walgreen did not place orders after that date. Id. at ¶¶ 22-23. Royal alleges that because Walgreen did not provide sufficient notice that it was changing suppliers, Royal was left with "a substantial inventory" of private-label poster board. Id. at ¶¶ 24-25. Royal spent $82,419.40 to remove the Walgreen private-label markings from that inventory so that it could return the product to its regular stock. Id. at ¶ 26.

Royal also alleges that Walgreen breached the parties' contracts by underpaying Royal $20,278.73 for fulfilled orders. Id. at ¶¶ 28-33.

Discussion

Walgreen moves to dismiss Royal's discontinued-orders claim, arguing that Walgreen was never required to order anything under the GTA and thus cannot have breached the GTA byrefusing to order more poster board. Doc. 17 at 6-9. Royal responds that the GTA was either a requirements contract or an irrevocable option contract under which Walgreen had to continue purchasing private-label poster board from Royal unless it gave 120 days' notice of its intent to discontinue the orders. Doc. 22 at 3-13.

The GTA's choice of law provision points to Illinois law, Doc. 1-1 at p. 4, § D(11), and in any event, the parties agree that Illinois law governs, Doc. 17 at 5, 8; Doc. 22 at 3. The court therefore applies Illinois law. See Thomas v. Guardsmark, Inc., 381 F.3d 701, 704-05 (7th Cir. 2004) (noting that, "[i]n a diversity case, the federal court must apply the choice of law rules of the forum state to determine applicable substantive law," and that "Illinois respects a contract's choice-of-law clause as long as the contract is valid and the law chosen is not contrary to Illinois's fundamental public policy").

"The basic rules of contract interpretation under Illinois law are well settled. In construing a contract, the primary objective is to give effect to the intention of the parties." Right Field Rooftops, LLC v. Chi. Cubs Baseball Club, LLC, 870 F.3d 682, 689-90 (7th Cir. 2017). "A court must initially look to the language of a contract alone, as the language, given its plain and ordinary meaning, is the best indication of the parties' intent." Id. at 690 (quoting Gallagher v. Lenart, 874 N.E.2d 43, 58 (Ill. 2007)). "Moreover, because words derive their meaning from the context in which they are used, a contract must be construed as a whole, viewing each part in light of the others." Gallagher, 874 N.E.2d at 58. "If the words in the contract are clear and unambiguous, they must be given their plain, ordinary and popular meaning." Right Field Rooftops, 870 F.3d at 690 (quoting Cent. Ill. Light Co. v. Home Ins. Co., 821 N.E.2d 206, 213 (Ill. 2004)). By contrast, "[i]f the language of the contract is susceptible tomore than one meaning, it is ambiguous," and in that event "a court may consider extrinsic evidence to ascertain the parties' intent." Gallagher, 874 N.E.2d at 58.

Read as a whole, the GTA unambiguously does not require Walgreen to buy anything from Royal. Instead, the GTA is a master agreement setting out the terms under which Walgreen could buy goods from Royal whenever Walgreen chose to submit a purchase order and Royal chose to accept it. The GTA begins by stating that it "sets forth the terms and conditions under which the parties agree to facilitate their purchase and sale transactions" and that those terms and conditions "shall apply to all merchandise" (with certain exceptions not relevant here) "sold by [Royal] ... to Walgreen." Doc. 1-1 at p. 2. The GTA contemplates that the parties' "purchase and sale transactions" will be conducted using purchase orders. For example, the GTA states:

Vendor's performance shall be in accordance with these terms, dating and conditions. Any other terms in Vendor's acceptance are rejected unless agreed to in writing and signed by Walgreen's authorized representative. Walgreen shall pay item cost in effect as of the date of issue of Walgreen's purchase order, or as otherwise agreed to by the parties.

Id. at p. 2, § C(1). That provision contemplates that when Walgreen wants to order merchandise, it will do so by submitting a purchase order to Royal, which Royal may accept or reject, and that if Royal accepts the order, the resulting transaction will be governed by the GTA. Ibid. Moreover, in providing that "[n]either the merchandise described in any purchase order nor the terms set forth herein shall be modified in any way, except pursuant to a written instrument signed by an authorized officer of Walgreen," id. at p. 3, § C(8), the GTA draws a distinction between its function (setting out generally applicable terms) and the function of individual purchase orders (identifying the merchandise Walgreen will buy in a specific transaction). This understanding of the relationship between the GTA and individual purchase orders is confirmed by the GTA's other references to purchase orders. See id. at p. 2, § B(2) (referring to "invoices prepared in accordance with the terms of the purchase order"); id. at p. 2, § C(2) ("Walgreen mayreturn, at Vendor's expense, or cancel a purchase order, and receive a full refund for all merchandise in excess of that ordered or which is defective or tainted or which varies from the sample from which or specifications for which the purchase order was placed, or for Vendor's failure to comply with Walgreen's shipping or billing...