The Franchise Memorandum

The Seventh Circuit Court of Appeals has affirmed an award of lost profits against a dairy silo manufacturer that breached a promise of exclusivity made to its distributor, even though language in the contract barred such damages. Sanchelima Int'l, Inc. v. Walker Stainless Equip. Co., 920 F.3d 1141 (7th Cir. 2019). Defendant Walker entered into a distribution agreement that gave Sanchelima exclusive rights to distribute Walker’s silos in 13 Latin American countries, and Walker agreed it would not make its own direct sales of silos to customers in those countries. The distribution agreement also contained limited remedy and damages disclaimer provisions, which barred Sanchelima from making any claim for lost profits and capped Walker’s liability at amounts paid by Sanchelima in performance of the agreement. After Walker made several direct sales in violation of the agreement, Sanchelima filed suit. Walker moved for summary judgment, arguing that Sanchelima had no recoverable damages because of the limited remedy provisions. The district court denied the motion and ruled after a bench trial that the limited remedy provisions in the contract were unenforceable for failure of their essential purpose, rendering Walker liable for nearly $800,000 in commissions that Sanchelima lost because of Walker’s direct sales.

On appeal, Walker argued that the district court’s invalidation of the limited remedy provisions was a misapplication of the Uniform Commercial Code. In evaluating these provisions, the district court applied a “dependent approach,” which was adopted by the Wisconsin Supreme Court in Murray v. Holiday Rambler, Inc., 265 N.W.2d 513 (Wis. 1978). Under this approach, if a litigant proves that a limited remedy fails its essential purpose, any accompanying consequential damages disclaimer is per se unconscionable. Walker argued, however, that the district court should have followed the “independent approach,” under which the conscionability of a consequential damages disclaimer is evaluated independently of a limited remedy provision. The Seventh Circuit held it was powerless to overturn Murray, and could not certify the issue to the Wisconsin Supreme Court because, under Seventh Circuit rules and Wisconsin law, issues can be certified only if there is “no controlling precedent.” Because Murray was controlling precedent, the Wisconsin Supreme Court would lack jurisdiction. Finally, Walker argued that the district court should not have invalidated the limited remedy provisions in their entirety, but instead, should have reduced the award. But the Seventh Circuit found that Walker waived this argument by failing to include it in its summary judgment brief.