Citation. 283 F.3d 856 (7th Cir. 2002)
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Brief Fact Summary.
AM General was the manufacturer of the Hummer vehicle. In a "representation agreement" (the "Agreement"), AM General appointed Beanstalk "as its exclusive agent to find licensees to use AM General's Hummer trademark." In 1999, AM General and General Motors ("GM") entered into a joint-venture agreement and General Motors acquired the Hummer trademark.
Synopsis of Rule of Law.
Courts when construing contracts must keep two principles of contract interpretation in mind. First, that contracts will not be interpreted literally if such interpretation would produce absurd results. Second, contracts must be interpreted in their entirety.
AM General was the manufacturer of the Hummer vehicle. In the Agreement, AM General appointed Beanstalk "as its exclusive agent to find licensees to use AM General's Hummer trademark." Beanstalk was entitled to a commission of 35% on all gross receipts from relevant license agreements. The Agreement was to run until the end of 2000. In 1999, AM General and GM entered into a joint-venture agreement and GM acquired the Hummer trademark. Beanstalk sued AM general "for a 35% commission on so much of the consideration running from GM to AM General as is attributable to the value of the Hummer trademark." GM had informed Beanstalk that it would not compensate them for any "license agreements made or renewed after the effective date of the joint venture agreement" because they "had not assumed any of AM General's obligations under the representation agreement." The District court dismissed Beanstalk's complaint.
Although it is not labeled as such, is the agreement between GM and AM General a license agreement, thus entitling Beanstalk to "35% of so much of the consideration running from GM to AM General as represents the value of the Hummer trademark"?
No. Judge Posner writing for the Seventh Circuit recognized two principles of contract interpretation that weigh against Beanstalk's interpretation of the contract. First, contracts will not be interpreted literally if such interpretation would produce absurd results. Those results being results "rational persons pursuing rational ends, are very unlikely to have agreed to seek." Second, that contracts must be interpreted in their entirety. Meaning, "[s]entences are not isolated units of meaning, but take meaning from other sentences in the same document." As to this case, Judge Posner observed "[i]f, while the representation agreement was in effect, a toy company wanted to make a toy Hummer, Beanstalk was authorized to grant the toy company a license in exchange for a fee that it would split 35/65 with AM General. The joint-venture agreement [between GM and AM General] was not that kind of arrangement. It was not an arrangement for the promotion of AM General's trademark." Further, "Beanstalk is not a business broker. It had nothing to do with the joint venture and indeed didn't even know about it until after it took place. The parties could hardly have intended that Beanstalk should get a commission if AM General decided, as in effect it did, to get out of the Hummer business." Also, "[t]he parties would hardly have intended Beanstalk to obtain a commission on the sale of the business merely because the sale would inevitably include the trademark. And they would not have wanted to burden the sale with the added cost of allocating the purchase price between the trademark and the other assets involved in the sale, as Beanstalk claims they must do in order to compute the commission to which it is entitled on the joint venture." The absurdity of Beanstalk's position manifest itself when taking its argument to the logical extreme and "imagining that the joint venture had taken place the day after the representation agreement between Beanstalk and AM General went into effect."
This case offers an interesting discussion of two important principles of contract construction and how courts apply them.