Contracts II, Pages 1223–1235

Sally Beauty Co. v. Nexxus Products Co.

United States Court of Appeals for the Seventh Circuit, 1986

Judgment:

Affirmed.

Facts:

Best contracted with defendant to become the exclusive distributor of defendant's hair care products. Best was then acquired by and merged into plaintiff. Plaintiff is a wholly-owned subsidiary of Alberto-Culver, defendant's competitor. Defendant cancelled the contract, claiming that the contract was not assignable. Plaintiff sued for the breach.

Procedural History:

District court granted defendant's motion for summary judgment, ruling that the contract was for personal services and therefore not assignable.

Issue:

Could Best assign and delegate its contract to plaintiff?

Rules:

  • The "predominant factor" test states that the UCC applies to a given contract if the dominant factor in the formation of the contract was the provision of goods.

Reasoning:

Whether the contract was entered into because of personal trust and confidence is a question of fact that cannot be determined on summary judgment, and thus the trial court cannot be affirmed on this basis. However, under the predominant factor test, distributorships are to be treated as sale of goods contracts under the UCC.

However, defendant contracted for Best's "best efforts" in promoting the sale of defendant's products. Plaintiff should not be required to accept the "best efforts" of one subject to the control of its competitor, Alberto-Culver, which may be interested in promoting its own product. This is different than what defendant and Best bargained for, and defendant "has a substantial interest in having his original promisor perform or control the acts required by the contract." Even if plaintiff has an impartial policy currently, there is not guarantee that Alberto-Culver will retain this forever.

Rule/Holding:

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[T]he duty of performance under an exclusive distributorship may not be delegated to a competitor in the market place—or the wholly-owned subsidiary of a competitor—without the obligee's consent.

Dissenting Opinion:

Posner: Case law only supports distribution contracts being nondelegable when they are for the distributor's personal services.

Even though Best was acquired by plaintiff, the same people still work there. Just because the president changed cannot be enough to say that the merger resulted in a delegation of performance.

Plaintiff distributes many different types of hair care products that compete with Alberto-Culver's. Such a thing is common in business. If plaintiff did try to promote its own products over defendant's, there would still be other companies to compete against Alberto-Culver, it would harm plaintiff's reputation, and defendant could then sue for damages for the breach of the implied best efforts requirement.

Plaintiff refusing to distribute goods that only it was allowed to distribute would not stifle defendant's sales in the area.

The judgment should be reversed and remanded for a trial on whether the merger altered the conditions so much as to make defendant unable to perform.

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