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STANLEY A. KLOPP, INC. v. JOHN DEERE CO.

March 23, 1981

STANLEY A. KLOPP, INC.
v.
JOHN DEERE COMPANY



The opinion of the court was delivered by: HUYETT

MEMORANDUM AND ORDER

The contract between the parties contains this clause:

 
If the Dealer's period of appointment expires and no new Authorized Dealer Agreement is entered into or if such appointment is canceled for any reason, neither party shall be entitled to any compensation or reimbursement for loss of prospective profits, anticipated sales or other losses occasioned by the termination of the relationship, except as provided in this Agreement.

 John Deere Agriculture Dealer Agreement cl. 4 (hereafter referred to as Dealer Agreement or the contract), Exhibit A to the Complaint and to defendant's motion for partial summary judgment. On defendant's motion for partial summary judgment I held that if plaintiff established a right of recovery this clause would bar the use of lost profits as a measure of damages. See Stanley A. Klopp, Inc. v. John Deere Co., (E.D.Pa. Huyett, J., 1980). Plaintiff seeks reconsideration.

 Plaintiff Stanley A. Klopp, Inc. (Klopp) had been a John Deere authorized dealer since 1936. Complaint P 8. The parties had annually executed a dealer franchise agreement. Id. P 5. In 1965, the contract contained for the first time a clause which prohibited the recovery of lost profits. Affidavit of John C. Schuett, Exhibit B to defendant's motion for partial summary judgment. In 1972, insignificant language changes were made and the clause has appeared in all future contracts. *fn1"

 The contract also contains the following clause relating to the termination of the franchise agreement by the company's failure to offer a new agreement:

 
It is intended that each succeeding year the Company will offer the Dealer a new Authorized Dealer Agreement if the Company believes that the Dealer's area of responsibility continues to afford sufficient sales potential to reasonably support an authorized dealer and that the Dealer has fulfilled the requirements of his appointment or has corrected or taken appropriate action toward correcting deficiencies in his operations which have been called to his attention by the Company. If, however, the Company determines that the Dealer's area of responsibility does not afford sufficient sales potential to continue to support an authorized dealer, or, if the Company believes the Dealer has not fulfilled the requirements of his appointment, it has the right to terminate its relationship with the Dealer by not offering to enter into such a new Agreement.

 Dealer Agreement cl. 3. This same clause requires the company to give a dealer at least twelve months' notice of its intention not to offer the dealer a new contract. This clause applies only to the company. There is no accompanying duty on the part of the dealer to notify the company in advance of its intention not to accept. Id. In May, 1978 defendant John Deere Company (Deere) notified the plaintiff that it would not be offering Klopp a new contract in October of 1979. Complaint P 10. Thus, Deere gave the plaintiff more than the twelve months' notice required by the contract. In October, 1978 defendant offered and plaintiff accepted what was to be the last contract between the parties. Plaintiff brought suit initially for injunctive relief but has since amended its complaint to demand money damages. See Amendment to Complaint, April 23, 1980.

 1. As a matter of law, is the clause in the Dealer Agreement barring the recovery of lost profits enforceable?

 In its response to defendant's partial summary judgment motion plaintiff argued, inter alia, that the no-lost-profits clause should not be enforced because it is an unconscionable clause, citing sections 2-302 and 2-719(3) of the Pennsylvania Uniform Commercial Code (UCC). 13 Pa.Cons.Stat.Ann. §§ 2302, 2719. Neither party has addressed the issue of whether the contract between these parties is within the purview of the sales article of the UCC, however, even if the UCC does not apply by its own terms, it represents a policy statement by the state legislature concerning good faith, as applicable to a franchise agreement as to a conventional article 2 contract for the sale of goods. See Zapatha v. Dairy Mart Inc., 381 Mass. 284, 408 N.E.2d 1370, 29 UCC Rep.Serv. 1121 (Sup.Judicial Ct.Mass.1980). Therefore, the law developed under the Code's unconscionability standard is generally applicable here whether by its own force or by analogy.

 The same cannot be said of the law developed to govern contracts between consumers and businesspersons such as Williams v. Walker-Thomas Furniture Company, 121 U.S. App. D.C. 315, 350 F.2d 445 (D.C.Cir.1965) cited by the plaintiff. These cases addressed the problem of contracts in which there had been no fraud or mistake but which unreasonably took advantage of the consumer's lack of sophistication, unfamiliarity with the consequences of contractual terms and need for the product or service offered for sale. The rules developed in the consumer cases are necessarily tied to the identity of the contracting parties. They involve considerations absent from cases involving contracts between commercial entities where the parties generally have sophisticated business judgment and familiarity with contract terms gleaned through repeated transactions. Although commercial contracts can be unenforceable in whole or in part for unconscionability, it would be improper to borrow, without differentiation, concepts developed to protect consumers and employ them in favor of one commercial party over another. A number of courts have recognized that, although it is possible, rarely will a commercial contract or term be found to be unconscionable. See Phillips Machinery Co. v. LeBlond, Inc., 494 F. Supp. 318, 323 (N.D.Okla.1980); Johnson v. Mobil Oil Corp., 415 F. Supp. 264, 266 (E.D.Mich.1976); W. L. May Co. v. Philco-Ford Corp., 273 Ore. 701, 543 P.2d 283, 286 (Or.1975); K & C, Inc. v. Westinghouse Electric Corp., 437 Pa. 303, 263 A.2d 390, 393 (1970). See also J. White & R. Summers, Uniform Commercial Code § 12-22, at 385-86 (1972). The general principles which follow are applied in light of this background.

 Unconscionability is a question of law for the court. See Phillips Machinery Co. v. LeBlond, Inc., 494 F. Supp. 318 (N.D.Okla.1980), 13 Pa.Cons.Stat.Ann. § 2302. So long as no genuine issue of material fact exists, a court may conclude on a motion for summary judgment that as a matter of law a contract or a contract term is enforceable despite an allegation of unconscionability. See Fleischmann Distilling Corporation v. Distillers Company Ltd., 395 F. Supp. 221 (S.D.N.Y.1975), Fed.R.Civ.P. 56.

 Unconscionability is the rubric under which the judiciary may refuse to enforce unfair or oppressive contracts in the absence of fraud or illegality. Although the concept is not susceptible of precise definition, nonetheless some convenient formulations exist. Unconscionability may be expressed as the lack of meaningful choice coupled with a contract term which is so one-sided as to be oppressive. See W. L. May Co., Inc. v. Philco-Ford Corp., 273 Ore. 701, 543 P.2d 283 (Or.S. Ct.1975). See also Restatement (Second) of Contracts § 234. The drafters of section 2-302 of the UCC explained that "(t)he principle is one of prevention of oppression and unfair surprise ... and not of disturbance of allocation of risks because of superior bargaining power." UCC § 2-302 Comment 1 (citation omitted).

 The avoidance of unfair surprise requires that the language of the clause be clear and precise. See K & C, Inc. v. Westinghouse Electric Corp., 437 Pa. 303, 263 A.2d 390, 393 (1970). The clause involved in this case, quoted at the outset, meets the clarity requirement. It would be difficult to imagine a more precise manner of stating the proposition. Cf. Ebasco Services Inc. v. Pennsylvania Power and Light Co., 402 F. Supp. 421, 430 (E.D.Pa.1975). Furthermore, the language of the clause is ...


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