Federal courts apply state law, but not state procedural rules. The long but clearly written opinion by the U. S. Court of Appeals in Cole v. Homier Distributing Company provides good examples of how federal courts apply state law, but use federal procedural rules to do so.
Cole and Homier entered into an agreement by which Cole would sell Homier’s tractors and parts branded as Farm Pro. Cole would be the sole Missouri distributor of Farm Pro tractors. Cole set up several Farm Pro dealerships.
In 2004, Homier sent Cole a memo stating that distributors such as Cole could not sell Farm Pro tractors and equipment on electronic auction websites. Cole apparently thought that Homier had also agreed to refrain from selling directly to the public through internet auctions.
By 2007, Cole’s sales volume had declined sharply, and Homier terminated the distributorship agreement, though it did not terminate Cole’s right to sell Farm Pro tractors and equipment as a dealer. Homier sent Cole a 90-day notice, announcing Homier’s intent to cancel the distributor agreement, but allowing Cole to continue as a Farm Pro dealer.
Cole believed that Homier, about the time of this 90-day period, tried to sell Farm Pro products directly to Cole’s dealers, in violation of the distributorship agreement.
Cole sued Homier in Missouri state court in July 2007 on two counts of breach of contract and also for tortious interference, fraud and violation of the Missouri franchise statutes.
Homier moved the case to federal district court. Unlike state courts, which have general jurisdiction, federal court jurisdiction is limited to federal questions (patents, federal statutes, cases where the federal government is a party, conflicts between states, etc.) and “diversity” cases. Diversity cases are those which involve citizens of different states in which the amount in controversy is more than $75,000.
The federal district court wields its sword
In Missouri’s state courts, the Supreme Court has through many opinions instructed the trial judges to try to give all plaintiffs a trial and created high standards for motions to dismiss and for summary judgments.
But Federal trial judges don’t mess around. The federal judge threw out Cole’s claims for tortious interference and fraud on a motion to dismiss. The federal procedural standard is that the suit must be plausible on its face, “allowing the court to draw the reasonable inference that the defendant is liable for the misconduct alleged.” A mere possibility is not enough.
By contrast, Missouri’s court rules give the plaintiff 30 days to redo the petition if the court finds that plaintiff has failed to address all the necessary elements of the claim.
Tortious interference with a contract or business expectancy is the unjustified meddling with an independent contract between two parties by one who is not a part of that contractual relationship. To be successful on such a claim, the plaintiff has to prove that the defendant knew of the contract and intentionally interfered with it, resulting in damages to the plaintiff. Often alleged, this tort is extremely hard to prove.
The federal judge looked at Missouri cases which define tortious interference, but concluded that Cole could not prove his case. The contracts between Cole and his dealers were not in existence when Cole entered into the distributorship agreement with Homier. Cole entered into the dealership contracts as a result of his distributorship contract with Homier. The federal judge said that the dealership contracts weren’t independent of Cole’s relationship with Homier, dismissing the claim.
Fraud is also devilishly hard to prove. Even under Missouri’s procedural rules, fraud must be alleged with “particularity.” Again, the federal judge looked to Missouri law for the definition of fraud, which must involve an intentional misrepresentation with the intent that the plaintiff rely on it, among other things. Cole said that Homier intended for Cole to build up a dealership network, then go around Cole’s distributorship, supplying the dealers directly. That’s what happened.
But Cole had nothing to convince the federal judge that Cole would be able to prove that Homier intended to go around Cole at the time that Homier and Cole entered into the distributorship contract.
Summary Judgment and Breach of Contract
Summary judgment occurs when one party assembles the evidence that the party intends to use if the case goes to trial, with a legal argument, presents it to the judge, and persuades the judge that the opposing party cannot refute the evidence. The opposing party also gets to attack the facts and legal arguments presented by the party who filed the motion for summary judgment. If the judge agrees with the party seeking summary judgment, then the case (or that part of the case) is decided without a trial.
In Missouri’s state courts, summary judgments are rare. When they are appealed, most of them are reversed and sent back to the trial court for a trial. In both federal and state courts, the appellate court reviews the summary judgment motion without consideration of the trial judge’s legal analysis. But federal appeals courts are much less likely to disturb a summary judgment, unless they find that the trial court abused its discretion.
Here’s one way that the federal court found to support the summary judgment. Cole’s expert witness on damages resulting from the alleged wrongful termination of the distributorship contract was Dr. Basi. In response to Homier’s motion for summary judgment, Cole offered Dr. Basi’s report. The trial judge said that Dr. Basi’s report “failed to rise above the level of speculation,” which would not meet Missouri’s strict standards for proving lost profits. The appellate court would not reverse on this point, stating “we cannot find that the district court erred by taking issue with Dr. Basi’s twenty-five year forecast.”
Cole argued that it had other ways of showing the amount of its lost profits, but the court rejected it, because it contradicted other sworn testimony submitted by Cole.
Without being able to prove damages, Cole’s breach of contract claim was dead.
The court throws Cole a bone
Missouri’s franchising laws require 90-day notice of termination. Homier gave Cole the 90-day notice, but Cole claimed that Homier jumped the gun by selling directly to Cole’s dealers before the 90-day period had ended. The trial judge apparently believed Homier’s arguments that Cole’s affidavit showing that Homier had made $3,247.84 in sales was just a sham.
The appellate court looked at this and other documents submitted by Cole in response to Homier’s summary judgment motion and concluded that Cole had credible evidence that Homier had jumped the gun.
What does it all mean?
By moving the case to federal court, Homier gained tremendous advantages. As an out-of-state defendant, Homier wanted to reduce the possibility of what lawyers refer to as “home-cooking” and get a more neutral court. Federal diversity jurisdiction probably encourages interstate commerce.