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From Antitrust Law Daily, September 14, 2018

Furniture dealer can’t change legal theory in breach suit against manufacturer

By Robert B. Barnett Jr., J.D.

Quality Office Furnishings, Inc., a California furniture dealer, was denied leave to amend its breach of contract suit against Allsteel, Inc., an Iowa furniture manufacturer—an effort the court characterized as an attempt "to change the entire legal basis for the lawsuit." A federal district court in Iowa decided that: (1) the motion was filed after the scheduling order deadline, and Quality Office lacked due diligence in meeting the filing deadlines and (2) undue prejudice would result to Allsteel in having to defend an entirely different lawsuit. Quality Office sought to change its legal theory from breach of a written authorized dealer agreement to breach of an oral contract to avoid the contractual provision limiting its right to pursue a fraudulent business practices claim that exists under California law but not under Iowa law. After determining that the written agreement was valid, even though Allsteel never signed it, and that Iowa law should apply, the court dismissed Quality Office’s California-based claim for fraudulent business practices (Quality Office Furnishings, Inc. v. Allsteel, Inc., September 11, 2018, Gritzner, J.).

Background. Quality Office Furnishings (QOF) is a small California furniture dealer whose primary revenue is derived from furniture manufactured by Allsteel, an Iowa-based company. For 37 years they had been operating under a series of annual authorized dealer agreements. Between 2010 and 2013, Allsteel informed QOF that, if it wanted to continue as an Allsteel dealer, it would need to make changes to its business model, including acquiring a larger showroom, hosting architect and designer events, and expanding its customer base. QOP incurred significant costs in complying with these demands, including moving into a new facility in 2013. In December 2016, however, Allsteel informed QOF that it would not renew their contract in 2017.

QOF later filed suit against Allsteel in California state court asserting claims for (1) breach of contract, (2) breach of the implied covenant of good faith and fair dealing, (3) fraud via inducement, (4) intentional misrepresentation, (5) unfair and fraudulent business practices in violation of the California business code, and (6) unjust enrichment. Allsteel removed the case to California federal district court based on diversity jurisdiction. Allsteel then, applying the provisions of the parties’ 2016 agreement, filed a motion to transfer the case to the Iowa federal court, which the California federal court granted on June 23, 2017. The Iowa court adopted the California court’s scheduling order, which set October 3, 2017, as the deadline for filing motions to amend pleadings. On April 18, 2018, however, more than six months after the deadline ended, QOF filed a notice of intent to amend its complaint. Allsteel opposed that effort, and it renewed its call for the court to dismiss QOF’s fifth count for fraudulent business practices under California law, given that their contract provided that only Iowa law would govern disputes.

Leave to amend. QOF argued that it should be allowed leave to amend, despite missing the filing date, because it recently discovered new information on which to assert promissory estoppel and it discovered other facts to support its existing claims. The new evidence was an Allsteel officer’s admission in a deposition that Allsteel never signed the 2016 agreement. As a result, QOF argued, the agreement was unenforceable, and QOF should not be bound by the contractual provision requiring that disputes be resolved under Iowa law. QOF also argued, essentially, unfairness, given that Iowa has no unfair business practices statute. QOF based its arguments for leave in Federal Rule of Civil Procedure 15, which governs amended pleadings and provides that the court should freely give leave when justice demands it. Allsteel, on the other hand, argued that Rule 16, which governs amended and supplemental pleadings where a scheduling order limits the time for amendments, should apply instead. Under Rule 16, a scheduling order may be amended only for good cause and with the judge’s consent. The court agreed that Rule 16 applied, and it determined that QOF failed to meet the good cause standard. QOF failed to act diligently. The deposition testimony was not new information that entitled QOF to amend its complaint. At the time it filed its complaint, QOF knew that it did not have a fully executed copy of the contract. Thus, no information learned in the deposition was not available to QOF when it filed the complaint. Had QOF been diligent, it would have learned the information before the filing deadline lapsed.

Furthermore, the court said, Allsteel would be prejudiced if QOF were allowed to amend because QOF sought to change the entire legal basis for its lawsuit. Whereas the original complaint alleged breach of the written contract, the amended complaint would allege a contrary theory, that the contract was invalid and that Allsteel had breached an oral contract defined by 37 years of trust, growth, and future investment. Under this theory, given that the contract was invalid, QOF also argued that it would have the right to challenge the California court’s transfer order and send the case back to California. Although the court noted that a finding of prejudice was unnecessary, given its determination that QOF lacked diligence in meeting the scheduling order, it nevertheless determined that Allsteel would be prejudiced by the amendment because it would have to defend the suit in an entirely new way. The court then went on to note that QOF would still have lost its argument even if the court had applied the more lenient standard in Rule 15 because of futility. QOF’s argument would have been deemed futile because the agreement was valid despite Allsteel’s failure to sign it. Both parties treated the agreement as valid and performed obligations under it as if it were fully executed. The motion for leave to amend, therefore, was denied.

California fraudulent business practices. The court then turned its attention to Allsteel’s motion to dismiss the count alleging violations of California’s fraudulent business practices statute. The court rejected QOF’s argument that the California law should apply in this case because the business practices upon which it was based did not involve the dealer agreement. The court noted that QOF’s count five complaint was based on allegations of an implied deal that Allsteel would renew the contract in 2017 if QOF invested in the new showroom and made other changes. Clearly, the court said, these allegations were based on the 2016 dealer agreement. In the alternative, the court also determined that a conflict of laws analysis reached the same result. At best, the negotiation and enforcement of the 2016 agreement occurred equally in California and Iowa. Where neither state has a greater interest in the controversy, the court will defer to the parties’ choice of law. Finding the choice of law provision in the 2016 agreement valid and enforceable, the court concluded that Iowa law applied and that count five must be dismissed.

The court, therefore, denied QOF’s motion to amend, and it granted Allsteel’s motion to dismiss count five.

The case is No. 3:17-cv-00041-JEG.

Attorneys: Eric David Puryear (Puryear Law PC) and Kathryn M. Casey (Jackson Tidus) for Quality Office Furnishings, Inc. Richard Cofer Landon (Gray Plant Mooty & Bennett PA) and Thomas H. Walton (Nyemaster Goode PC) for Allsteel, Inc.

Companies: Quality Office Furnishings, Inc.; Allsteel, Inc.

MainStory: TopStory FranchisingDistribution IowaNews

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