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Thurston Enterprises, Inc. v. Safeguard Business Systems, Inc.

Supreme Court of Idaho

February 19, 2019

THURSTON ENTERPRISES, INC., an Idaho corporation, Plaintiff-Respondent,
SAFEGUARD BUSINESS SYSTEMS, INC., a Delaware corporation, Defendant-Appellant, and T3 ENTERPRISES, INC., an Idaho corporation, Plaintiff, and SAFEGUARD ACQUISITIONS, INC., et al., Defendants.

          Appeal from the District Court of the Fourth Judicial District of the State of Idaho, Ada County. Hon. Steven Hippler, District Judge.

         The judgment of the district court is affirmed. Costs and attorney fees are awarded to Thurston.

          Hawley Troxell Ennis & Hawley LLP, Boise and Weil, Gotshal & Manges LLP, Dallas, Texas, attorneys for appellant. Paul R. Genender argued.

          Givens Pursley LLP, Boise and Mulcahy LLP, Irvine, California, attorneys for respondent. James M. Mulcahy argued.

          BEVAN, Justice.

         This appeal arises from Safeguard Business Systems, Inc.'s ("SBS") alleged breach of its distributorship agreement with Thurston Enterprises, Inc. ("Thurston"). After a jury trial Thurston was awarded approximately $6.8 million in damages. SBS filed a motion for post-judgment relief, which the district court denied. We affirm.

         I. Factual and Procedural Background

         A. Factual Background

         On June 1, 1987, Thurston and SBS entered into a distributor agreement (the "Agreement"), which granted Thurston the right to solicit orders of Safeguard products designated as "Safeguard Systems" from customers. The Agreement granted Thurston the exclusive right to commissions on the sale of Safeguard products to customers located within the territory defined in the Agreement ("account protection rights"). The Agreement expressly prohibited Thurston from soliciting orders of Safeguard Systems from customers with whom other Safeguard distributors held account protection rights, but allowed SBS to sell Safeguard Systems within Thurston's territory through other "persons." If a distributor made a sale to another distributor's protected customer, it was SBS's practice to issue a rotation notice. The rotation notice informed both the infringing and the receiving party that commissions were being rotated, i.e., the commission would go to the distributor who had account protection over that customer rather than to the infringing party who actually made the sale.

         Deluxe Corporation ("Deluxe") is one of the two largest check printers in the United States and it manufactures and/or provides various personalized products and services to small businesses, financial institutions, and consumers. Deluxe purchased SBS and discontinued all SBS manufacturing operations so that Safeguard Systems products could be manufactured by Deluxe. In 2008, Deluxe and SBS launched a Business Acquisitions and Merger ("BAM") program to acquire non-Safeguard affiliated distributorships. The BAM program had four objectives: (1) increase SBS's revenue and profits by acquiring distributors; (2) increase the sales of Deluxe manufactured products to SBS distributors, thereby increasing Deluxe's revenues and profits; (3) expand Deluxe's manufacturing capabilities and increase its manufacturing capacity utilization by acquiring new product lines that could be marketed across Deluxe and SBS's various sales channels; and (4) where Deluxe does not manufacture a product, maximize the amount of orders sent to preferred suppliers paying Deluxe rebates.

         In 2013, Deluxe and SBS acquired Form Systems Inc., d/b/a/ DocuSource ("DocuSource") and Idaho Business Forms ("IBF"), two non-Safeguard distributors conducting business in the Pacific Northwest. DocuSource and IBF were in the same geographic market as Thurston and sold a full line of non-Safeguard products that directly competed with those offered by SBS, and by Thurston as SBS's distributor. As part of the BAM due diligence process, Deluxe and SBS reviewed all aspects of DocuSource and IBF's businesses, including their customer lists. This was done through a "customer scrub," intended to determine the extent of account overlap between DocuSource and IBF and any current Safeguard distributors. SBS's in-house counsel, Michael Dunlap, sought to resolve any potential account protection violations by getting the affected distributors to either share the account with the new distributor, or sell the commission rights to SBS, which would then sell the rights to the new distributor.

         In February 2014, Mr. Dunlap, who also served as corporate secretary, negotiated with Mr. Roger Thurston[1] ("Mr. Thurston"), Thurston's principal, to sell some of Thurston's account protection rights to SBS. In March 2014, Mr. Thurston sold SBS the commission rights to nine customers for $32, 600. Mr. Thurston reached this valuation by looking at Thurston's own sales for the customers at issue. Mr. Dunlap did not disclose IBF's sales figures to the same customers, or what products were sold to them. After the sale occurred Mr. Thurston learned that IBF had significant sales to the customers, and claimed that had he known this information before the sale he would have increased the price "exponentially."

         B. Procedural Background

         These proceedings were started when another distributor, T3 Enterprises, Inc., ("T3") [2], filed a complaint alleging various tort claims against SBS and several other defendants. On September 16, 2014, Thurston joined the suit by filing an amended complaint, alleging claims for: (1) breach of contract; (2) breach of the covenant of good faith and fair dealing; (3) tortious interference; (4) intentional interference with prospective economic advantage; (5) conversion; and (6) accounting.

         On January 20, 2016, Thurston filed a discovery motion to challenge several of SBS's privilege designations and redactions, alleging SBS and Deluxe had engaged in the "rampant use of privilege claims" to cover up key evidence. Trial counsel for SBS conducted a new review and withdrew the claim of privilege for all but forty-one documents. The court reviewed the remaining documents in camera and rejected privilege for nearly all, finding that they concerned "factual matters and business advice about the cross-over customers made in Mr. Dunlap's capacity as corporate secretary rather than purely legal issues."

         On June 21, 2016, Thurston filed a third amended complaint which: (1) dismissed all defendants except SBS and Deluxe[3] with prejudice; and (2) included a new cause of action by Thurston against SBS for fraud in the inducement and breach of the parties' March 2014, agreement. Thurston was subsequently granted leave to amend the complaint to also request punitive damages.

         On August 26, 2016, Thurston and SBS filed cross-motions for partial summary judgment. On October 21, 2016, the district court entered its memorandum decision which denied SBS's motion, but granted Thurston's motion in part, holding that the Agreement was unambiguous and SBS breached it by failing to rotate commissions on sales IBF and DocuSource made to Thurston's protected customers. The district court determined that the resulting damage from such unpaid commissions was in dispute; as such, it was a matter for the jury to consider.

         A jury trial was held between November 29 and December 21, 2016. On December 15, 2016, after Thurston finished with its case-in-chief, SBS and Deluxe moved for a directed verdict. The district court denied the motion. At the conclusion of trial the jury fully exonerated Deluxe and awarded Thurston $1, 625, 985 for its claims against SBS; the specific amounts awarded by the jury were broken down as follows: $494, 526 for breach of the account protection clause; $156, 628 for breach of the pricing schedule clause; $532, 431 for breach of the implied covenant of good faith and fair dealing; and $442, 400 for fraud in the inducement. The jury also awarded Thurston $4, 750, 000 in punitive damages, which the district court reduced to $4, 408, 071 to comply with Idaho Code section 6-1604. On January 13, 2017, the district court entered judgment in favor of Thurston against SBS for $6, 034, 056.

         On January 27, 2017, SBS filed a motion for post-judgment relief requesting that the district court: (1) eliminate the $532, 431 award for diminution in value because that theory of loss was unsupported by the evidence; (2) reduce the award for breach of account protection by $291, 010 because the future losses were premised on impermissibly speculative expert testimony; (3) eliminate the pricing preference verdict as legally and factually unfounded as well as the damages of $156, 628 as excessive and unsupported; (4) dismiss the fraudulent inducement claim due to a failure of proof that Thurston did not know he lacked sales information for IBF or DocuSource and eliminate the punitive damages because of the lack of malice; and (5) reject the jury's award of punitive damages for breach of contract because there was no evidence SBS had an "extremely harmful state of mind" towards Thurston. The district court denied SBS's motion for post-judgment relief on all grounds. On May 5, 2017, the district court awarded Thurston $758, 593.74 in attorney fees and costs. SBS timely appealed to this Court.

         II. Issues on Appeal

         1. Whether the district court erred in ruling as a matter of law that Thurston's account protection rights were breached under the Agreement.

         2. Whether the district court's ruling on SBS's attorney-client privilege was an abuse of discretion.

         3. Whether the district court erred in denying post-judgment relief regarding the jury's finding of fraud in the inducement of the March 2014 agreement.

         4. Whether the district court erred in denying post-judgment relief regarding the jury's finding that SBS breached the "pricing guarantee" in the Agreement.

         5. Whether the district court erred as to the good faith and fair dealing claim.

         6. Whether the district court erred in denying post-judgment relief regarding the jury's award of punitive damages.

         7. Whether the district court erred in denying post-judgment relief regarding the jury's award of future damages.

         8. Whether either party is entitled to attorney fees on appeal.

         III. Standard of Review

         A. Summary Judgment

         This Court applies the same standard of review that was used by the trial court in ruling on a motion for summary judgment. Lincoln Land Co., LLC v. LP Broadband, Inc., 163 Idaho 105, 108, 408 P.3d 465, 468 (2017). Summary judgment is proper if there is "no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law." I.R.C.P. 56(a). "[T]his Court construes disputed facts, and all reasonable inferences that can be drawn from the record, in favor of the non-moving party." Grabicki v. City of Lewiston, 154 Idaho 686, 690, 302 P.3d 26, 30 (2013) (internal citation omitted).

         B. Discovery and Evidentiary Matters

         "When reviewing the trial court's evidentiary rulings, this Court applies an abuse of discretion standard." Edmunds v. Kraner, 142 Idaho 867, 871, 136 P.3d 338, 342 (2006). These include trial court decisions admitting or excluding expert witness testimony and excluding evidence because it is more prejudicial than probative. Perry v. Magic Valley Reg'l Med. Ctr., 134 Idaho 46, 50-51, 995 P.2d 816, 820-21 (2000) (internal quotations and citations omitted). "Error is disregarded unless the ruling is a manifest abuse of the trial court's discretion and affects a substantial right of the party." Id. The test for an abuse of discretion is

whether the trial court: (1) correctly perceived the issue as one of discretion; (2) acted within the outer boundaries of its discretion; (3) acted consistently with the legal standards applicable to the specific choices available to it; and (4) reached its decision by the exercise of reason.

Lunneborg v. My Fun Life, 163 Idaho 856, 863, 421 P.3d 187, 194 (2018).

         C. Judgment Notwithstanding the Verdict

         "In determining whether a directed verdict or judgment n.o.v. should have been granted, the appellate court applies the same standard as does the trial court which passed on the motion originally." Quick v. Crane, 111 Idaho 759, 764, 727 P.2d 1187, 1192 (1986) (internal citation omitted).

When a trial judge receives such a motion, the judge begins the inquiry by asking him or herself whether there is substantial evidence in the record upon which the jury could properly find a verdict for the party against whom the judgment notwithstanding the verdict is sought. See Quick v. Crane, 111 Idaho 759, 763, 727 P.2d 1187, 1191 (1986). The judge's task in answering this question is to review all the evidence and draw all the reasonable inferences therefrom in the light most favorable to the non-moving party. Id. at 764, 727 P.2d at 1192. (The party seeking a judgment notwithstanding the verdict admits the truth of all the other side's evidence and every legitimate inference that can be drawn from it. Stephens v. Stearns, 106 Idaho 249, 252-53, 678 P.2d 41, 44-45 (1984).) The judge is not an extra juror, though; there is no weighing of evidence or passing on the credibility of witnesses or making of independent findings on factual issues. Gmeiner v. Yacte, 100 Idaho 1, 4, 592 P.2d 57, 60 (1979). Instead, the judge must determine whether the evidence is substantial-that is, whether it is of sufficient quality and probative value that reasonable minds could arrive at the same conclusion as did the jury. Mann v. Safeway Stores, Inc., 95 Idaho 732, 736, 518 P.2d 1194, 1198 (1974).

Schwan's Sales Enterprises, Inc. v. Idaho Transp. Dep't, 142 Idaho 826, 830, 136 P.3d 297, 301 (2006). "Whether the trial court should have entered a judgment notwithstanding the verdict is purely a question of law." Id.

         IV. Analysis

         A. The district court correctly decided that SBS breached Thurston's account protection rights under the Agreement as a matter of law.

         The district court entered summary judgment in favor of Thurston on its claim that SBS breached the account protection provision of the Agreement after finding the provision was not ambiguous. The account protection provision stated:

For so long as is specified in Attachment B, you shall have the exclusive right to the commissions generated on sales of Safeguard Systems to any customer listed on Attachment B. This exclusive right to commissions applies to all new and repeat Safeguard System sales to each customer until this Agreement is terminated (see paragraph 7).

         SBS argued that account protection-as a matter of plain language and historical practice-applied only to the specific products a distributor was first to successfully solicit from a particular account. SBS argued that any other interpretation would enable Thurston to receive commissions where it solicited the sale of a single envelope from one biller in an entity like St. Luke's Hospital and sit back to receive commissions on all sales to the entire hospital system by others even if Thurston did not offer the products (e.g., medical ID bands) or have the capabilities demanded by the customer (e.g.¸warehousing/drop shipping). On appeal SBS contends that the district court's grant of summary judgment was erroneous because: (1) a product-specific interpretation is supported by the Agreement's plain language; (2) there was a factual issue of whether the products sold by IBF and DocuSource were "Safeguard Systems" under the Agreement; and (3) there is a latent ambiguity in the term "customer".

         As a threshold matter we reject SBS's position that there is a latent ambiguity in the term "customer" because this argument was not argued before the district court. Kolar v. Cassia Cnty. Idaho, 142 Idaho 346, 350, 127 P.3d 962, 966 (2005) ("we will not entertain issues or theories not raised in the court below"). We will only address the first two arguments.

         The purpose of interpreting a contract is to determine the intent of the contracting parties at the time the contract was formed. Shawver v. Huckleberry Estates, L.L.C., 140 Idaho 354, 361, 93 P.3d 685, 692 (2004) (internal citation omitted). In determining the intent of the parties, the contract is to be viewed as a whole. Daugharty v. Post Falls Highway Dist., 134 Idaho 731, 735, 9 P.3d 534, 538 (2000).

[T]his Court begins with the document's language. In the absence of ambiguity, the document must be construed in its plain, ordinary and proper sense, according to the meaning derived from the plain wording of the instrument. Interpreting an unambiguous contract and determining whether there has been a violation of that contract is an issue of law subject to free review. A contract term is ambiguous when there are two different reasonable interpretations or the language is nonsensical. Whether a contract is ambiguous is a question of law, but interpreting an ambiguous term is an issue of fact.

Phillips v. Gomez, 162 Idaho 803, 807, 405 P.3d 588, 592 (2017) (quoting Potlatch Educ. Ass'n v. Potlatch Sch. Dist. No. 285, 148 Idaho 630, 633, 226 P.3d 1277, 1280 (2010)).

         There are two types of ambiguity, patent and latent. Knipe Land Co. v. Robertson, 151 Idaho 449, 455, 259 P.3d 595, 601 (2011). A patent ambiguity is an ambiguity clear from the face of the instrument in question. Id. On the other hand, "[a] latent ambiguity exists where an instrument is clear on its face, but loses that clarity when applied to the facts as they exist." Id. If the Court finds an ambiguity, the interpretation of the contract term is a question for the fact-finder. Id. If the Court finds no ambiguity, "the document must be construed in its plain, ordinary and proper sense, according to the meaning derived from the plain wording of the instrument." Potlatch, 148 Idaho at 633, 226 P.3d at 1280 (quoting C & G, Inc. v. Rule, 135 Idaho 763, ...

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