Division Six Sports, Inc. v. Finish Line, Incorporated

• Court: Court of Appeals for the Seventh Circuit
• Decided: June 27, 2019
• Docket: 19-1070
• Status: Published

Opinion

In the

United States Court of Appeals For the Seventh Circuit ____________________ No. 19-1070 DIVISION SIX SPORTS, INC., Plaintiff-Appellant, v.

THE FINISH LINE, INC., Defendant-Appellee. ____________________

Appeal from the United States District Court for the Southern District of Indiana, Evansville Division. No. 1:17-cv-03879 — Sarah Evans Barker, Judge. ____________________

ARGUED MAY 23, 2019 — DECIDED JUNE 27, 2019 ____________________

Before BAUER, MANION, and BRENNAN, Circuit Judges. MANION, Circuit Judge. This case involves an alleged breach of contract between Plaintiff Division Six Sports, Inc. (“Division Six”) and Defendant The Finish Line, Inc. (“Finish Line”). The district court dismissed the case for failure to state a claim, holding the contract was not in force at the time of the alleged breach. Division Six argues on appeal that the district court misinterpreted the contract’s automatic renewal 2 No. 19-1070

provision. For the reasons below and those explained in the district court’s thorough analysis, we affirm. I. Background Finish Line is a large retailer of athletic shoes, apparel, and accessories. Through the course of its business, Finish Line generates a stock of surplus goods that includes aged mer- chandise (products that do not sell over time) and customer- returned merchandise. Division Six specializes in the resale of both aged and customer-returned athletic wear products. In 2001, Finish Line and Division Six entered an agreement by which Division Six received the exclusive right to purchase aged and customer-returned merchandise from Finish Line (the “Agreement”). Paragraph 9 of the Agreement provided for an 18-month term “commencing on March 1, 2001” that could be extended by written agreement of the parties “prior to the expiration of the term or any extension thereof.” See App’x A. Paragraph 9 also gave Division Six a right of first refusal if Finish Line received a bona fide arms-length offer from a third party to purchase its surplus merchandise within six months prior to the term’s expiration. If Finish Line did not receive such an offer, the Agreement would “automati- cally renew for an additional eighteen (18) month term.” Id. In 2002, the parties amended the Agreement (the “2002 Amendment”). One effect of this amendment was to modify Paragraph 9. The modification was set forth in a letter written by Finish Line, which stated: Finish Line would be amenable to adding language to Paragraph 9 of the Purchase Agreement to reflect a three year (3) extension of the agreement (ie. [sic] through August 31, 2005). In addition, should Finish No. 19-1070 3

Line not receive a bona fide, arm’s length written offer from any third party at any time within six months of the end of said extended term, then the Agreement will automatically renew for an additional three (3) year ex- tension. Both parties further agree that no other provisions of the Agreement shall be modified by this letter, and that all other terms and conditions of the Agreement shall remain in full force and effect and are hereby reaf- firmed by the parties. The Agreement was not re-drafted to reflect the language change contemplated in this letter. Instead, the letter itself served to memorialize the modification agreed to by the par- ties and was signed by both parties. The new extended term ran to the stated date of August 31, 2005, at which point it au- tomatically renewed for a second three-year extension until August 31, 2008, all pursuant to the 2002 Amendment. 1 In September 2008, Finish Line proposed another amend- ment (the “2008 Amendment”), once again by letter. This let- ter included the following: Finish Line would be amenable to adding language to Paragraph 9 of the Purchase Agreement to reflect a new five (5) year term extension, commencing Septem- ber 1, 2008 and ending December 31, 2013 … unless sooner terminated pursuant to any provisions of the Governing Agreements.

1 A second amendment was agreed upon in 2003, but it had no effect on Paragraph 9 and thus warrants no further discussion. 4 No. 19-1070

The 2008 Amendment further provided that “no other provisions of the Governing Agreements shall be modified by this … Amendment, and that all other terms and conditions of the Governing Agreements shall remain in full force effect [sic] and are hereby reaffirmed by both parties.” Despite the 2008 Agreement’s express ending date of De- cember 31, 2013, Finish Line continued to ship products to Di- vision Six in 2014. However, Finish Line eventually stopped dealing with Division Six and began dealing with other par- ties instead. In January 2015, Division Six wrote to Finish Line asserting its exclusive right under the Agreement to purchase Finish Line’s surplus products. Finish Line asserted in re- sponse that the Agreement was no longer in effect, having ter- minated in December 2013 following the end of the 2008 Amendment’s five-year extension. Division Six filed suit in October 2017. Finish Line moved to dismiss for failure to state a claim, arguing the Agreement terminated at the end of 2013. In its complaint and in opposi- tion to the motion to dismiss, however, Division Six claimed the Agreement had in fact automatically renewed for another three years at the end of 2013. Division Six argued the Agree- ment and its amendments created a perpetual self-renewal process triggered by the end of each extended term so long as Finish Line did not receive a third-party offer. The district court granted Finish Line’s motion to dismiss. The court noted the terms set forth in the original Agreement and the 2002 Amendment were expressly tied to specific dates and ran for specific lengths of time. According to the court, the automatic extension provisions of each applied specifi- cally to those defined terms and only provided for a single extension following each term. Thus, the Agreement did not No. 19-1070 5

provide for perpetual self-renewal. Furthermore, since the 2008 Amendment did not provide for any automatic exten- sion, the court held the Agreement expired in 2013. The court also rejected Division Six’s alternative argument that the contract was ambiguous about automatic renewal. Since the plain language was not ambiguous, the court re- fused to consider Division Six’s extrinsic evidence of the par- ties’ intent—namely, Finish Line’s continued shipments to Di- vision Six in 2014 after the Agreement had allegedly expired. In October 2018, Division Six moved for reconsideration pursuant to Fed. R. Civ. P. 59(e). It argued the district court committed an error of law by not “extending its reasoning” to conclude that even if the Agreement did not provide for per- petual self-renewal, the 2002 Amendment provided for one final automatic renewal following the end of the 2008 ex- tended term. Therefore, the Agreement renewed a final time in 2014. The district court rejected this argument and held its decision not to adopt Division Six’s interpretation was not “manifestly wrong.” See Cincinatti Life Ins. Co. v. Beyrer, 722 F.3d 939, 954 (7th Cir. 2013) (requiring a movant under Rule 59(e) to demonstrate “a manifest error of law or fact” commit- ted by the court). The court denied the motion for reconsider- ation. Division Six appeals the dismissal of its case. II. Discussion Our review of the district court’s dismissal for failure to state a claim is de novo, drawing all reasonable inferences in favor of Division Six as the non-moving party and accepting its factual allegations as true. O’Boyle v. Real Time Resolutions, Inc., 910 F.3d 338, 342 (7th Cir. 2018). 6 No. 19-1070

The parties agree the contract is governed by Indiana law, so we need not examine the choice-of-law question further. See Wood v. Mid-Valley Inc., 942 F.2d 425, 427 (7th Cir. 1991). The goal of contract interpretation under Indiana law is to de- termine the parties’ intent. Tender Loving Care Mgmt., Inc. v. Sherls, 14 N.E.3d 67, 72 (Ind. Ct. App. 2014). To do so, “an un- ambiguous contract should be given its plain and ordinary meaning … and … no extrinsic evidence is admissible to ex- plain the terms of such an agreement.” Louis & Karen Metro Family, LLC v. Lawrenceburg Conservancy Dist., 616 F.3d 618, 622 (7th Cir. 2010). If the contract is ambiguous, however, ex- trinsic evidence may be presented to determine the parties’ intent. Id. On appeal, Division Six has chosen not to reassert the per- petual-renewal theory. Instead, it relies on the theory it ar- gued in its motion to reconsider: Division Six was entitled to one more automatic three-year extension at the end of Decem- ber 2013. As the district court noted, an issue raised for the first time in a Rule 59(e) motion that could have been raised earlier is generally not preserved for review. However, “such an issue is subject to appellate review if the district court ex- ercises its discretion to consider the issue on the merits.” Ger- hartz v. Richert, 779 F.3d 682, 686 (7th Cir. 2015) (quoting Dy- son v. District of Columbia, 710 F.3d 415, 419 (D.C. Cir. 2013)). Finish Line has conceded the argument is preserved for our review. Alternatively, Division Six argues the Agreement is am- biguous about whether one more extension occurred in De- cember 2013. It asserts the district court should have consid- ered extrinsic evidence of the parties’ intent. No. 19-1070 7

Regarding the ambiguity argument, Division Six points to the phrase “adding language” used in both the 2002 and 2008 Amendments. It asserts this phrase is ambiguous because the district court and Finish Line interpreted it differently than Division Six. However, “[a] contract is not ambiguous merely because the parties disagree as to its proper construction; ra- ther, a contract will be found to be ambiguous only if reason- able persons would differ as to the meaning of its terms.” Vin- cennes Univ. ex rel. Bd. of Trs. v. Sparks, 988 N.E.2d 1160, 1165 (Ind. Ct. App. 2013). Our question, then, is whether the Agree- ment and its amendments are susceptible to multiple reason- able interpretations. The interpretation that Division Six proposes is not a rea- sonable one. Division Six argues that, because the amend- ments each purported to “add” language to the Agreement while leaving all other terms in full force and effect, the mod- ified Agreement could reasonably be understood to strike out and replace incongruous language related to term lengths and automatic extensions. This, it asserts, would allow for a final automatic extension after December 2013. To illustrate its position, Division Six provided us with two separate modified versions of Paragraph 9 (included with this opinion as appendices). The first supplements the origi- nal Paragraph 9 by deleting the specific language defining the original term length, dates, and the automatic extension length. It then replaces them with the 2002 Amendment’s ex- tended term length as well as the automatic extension length (three years). This modified version also adds the word “ex- tended” before every subsequent mention of the word “term” in Paragraph 9. The apparent intent is that each provision of the paragraph may be understood to relate to the new 8 No. 19-1070

extension rather than the original term. For example, the phrase “If within six (6) months prior to the end of the term” in the original Agreement is changed to “If within six (6) months prior to the end of the extended term” in the modified version. Notably, Division Six’s modified Paragraph 9 does not include the 2002 Amendment’s language tying the three- year automatic extension to “the end of said extended term” (emphasis added). See App’x B. The second modified version begins with the first modi- fied version but now deletes the term length and ending date that had been added by the 2002 Amendment and replaces them with the five-year extension set forth in the 2008 Amendment. Because the 2008 Amendment made no mention of another automatic extension, the language providing for a three-year extension is left intact. The result is that the three- year extension now applies to “the end of the extended term,” which, in this second modified version, would be the five- year extension ending in December 2013. See App’x C. Thus, Division Six argues the final result of the Agreement as modified by both amendments required one final auto- matic renewal after December 2013. The problem with this interpretation is that nothing in the amendments evidences an intent to strike out the language relating to the previous terms’ lengths or the dates to which the terms were anchored. The amendments only state an in- tent to “add” language, which ordinarily does not mean to delete. See generally Add, Webster’s Third New International Dictionary Unabridged (1981). Absent a clear indication to the contrary, we must construe the words in a contract according to their ordinary meaning. THQ Venture v. SW, Inc., 444 N.E.2d 335, 338–39 (Ind. Ct. App. 1983). No. 19-1070 9

Nor do the amendments say anything about adding the word “extended” to change the meaning of Paragraph 9 the way Division Six has proposed. See Evan v. Poe & Assocs., Inc., 873 N.E.2d 92, 98 (Ind. Ct. App. 2007) (holding a court may not “add provisions [to a contract] not agreed upon by the parties”). The 2002 Amendment expressly defined the ex- tended term it created and anchored it to the beginning date of September 2002. It then created an automatic extension provision that applied to a specific term, i.e. “said extended term,” not any extended term. Division Six’s proposed inter- pretation ignores this. Indeed, in another portion of the original Paragraph 9, where the Agreement contemplates the parties agreeing in writing to an extension, the Agreement specifically stated this could occur “prior to the expiration of the term or any exten- sion thereof.” The parties could have used this same language if they intended the automatic renewal provision to apply to any extension of the original term, but they did not. Furthermore, the three-year automatic extension in the 2002 Amendment already occurred at the end of the 2002 Amendment’s first three-year extended term in 2005, result- ing in an extension to 2008. Division Six’s argument requires the court to read into the parties’ agreement the idea that the automatic extension provision was revived and reapplied af- ter the 2008 Amendment’s five-year extension. This is not a reasonable interpretation of the parties’ Agreement. The only reasonable interpretation is that each automatic renewal provision applied to the specific term or extension to which it was expressly attached. Thus, the original Agree- ment, the 2002 Amendment, and the 2008 Amendment to- gether created the following sequence of events: 10 No. 19-1070

(1) An 18-month term lasting from March 2001 until Sep- tember 2002, which could, but ultimately did not, au- tomatically renew for one additional 18-month exten- sion; (2) A three-year extension lasting from September 2002 until August 2005, which could, and did, automatically renew for one additional three-year extension until August 2008; and finally (3) A five-year extension lasting from September 2008 un- til December 2013, without any further provision for automatic renewal. Because the Agreement is clear and unambiguous, Divi- sions Six’s extrinsic evidence (that Finish Line continued to perform in 2014) is irrelevant and cannot be considered. Ten- der Loving Care, 14 N.E.2d at 72. There was no automatic ex- tension provided for following the 2008 Amendment exten- sion. Thus, the Agreement was no longer in force after De- cember 2013 and Finish Line did not commit a breach when it began dealing with third parties in 2014. III. Conclusion The Agreement and its amendments are not ambiguous, and the plain language did not provide for any extension after the end of 2013. The district court, in its thorough and well- reasoned opinion, properly dismissed the action for failure to state a claim. Accordingly, we AFFIRM the decision of the dis- trict court. No. 19-1070 11

APPENDIX A Original Paragraph 9 of the Agreement: TERM OF AGREEMENT The term of this Agreement shall be eighteen months (18) commencing on March 1, 2001 (the Effective Date). The term may be extended by the written agreement of the parties prior to the expiration of the term or any extension thereof. If within (6) months prior to the end of the term, Finish Line shall re- ceive a bona fide, arm’s length written offer from any third party to purchase the same or similar Finish Line Products that Division Six Sports is purchasing under the terms of this Agreement, then Division Six Sports shall have a right of first refusal for an additional eighteen (18) month period to extend this Agreement with Finish Line upon materially identical consideration and terms set forth in such third party’s written offer …. If Finish Line does not receive a bona fide, arm’s length written offer at any time within six months of the end of the term, then this Agreement will automatically renew for an additional eighteen (18) month term. 12 No. 19-1070

APPENDIX B 2002 Amendment Relevant Part: Finish Line would be amenable to adding language to Par- agraph 9 of the Purchase Agreement to reflect a three year (3) extension of the agreement (ie. Through August 31, 2005). In addition, should Finish Line not receive a bona fid, arm’s length written offer from any third party at any time within six months of the end of said extended term, then the Agree- ment will automatically renew for an additional three (3) year extension. Division Six’s First Modified Version of Paragraph 9: TERM OF AGREEMENT The term of this Agreement shall be eighteen months (18) commencing on March 1, 2001 (the Effective Date) extended by three (3) years (i.e., through August 31, 2005). The term may be extended by the written agreement of the parties prior to the expiration of the term or any extension thereof. If within (6) months prior to the end of the extended term, Finish Line shall receive a bona fide, arm’s length written offer from any third party to purchase the same or similar Finish Line Prod- ucts that Division Six Sports is purchasing under the terms of this Agreement, then Division Six Sports shall have a right of first refusal for an additional eighteen (18) month three-year period to extend this Agreement with Finish Line upon mate- rially identical consideration and terms set forth in such third party’s written offer …. If Finish Line does not receive a bona fide, arm’s length written offer at any time within six months of the end of the extended term, then this Agreement will au- tomatically renew for an additional eighteen (18) month term three (3) year extension. No. 19-1070 13

APPENDIX C 2008 Amendment Relevant Part: Finish Line would be amenable to adding language to Par- agraph 9 of the Purchase Agreement to reflect a new five (5) year term extension, commencing September 1, 2008 and end- ing December 31, 2013, (“Third Amendment Extended Term”) unless sooner terminated pursuant to any provisions of the Governing Agreements. Division Six’s Second Modified Version of Paragraph 9: TERM OF AGREEMENT The term of this Agreement shall be extended by three (3) five (5) years (i.e., through August 31, 2005) commencing Septem- ber 1, 2008 and ending December 31, 2013, (“Third Amend- ment Extended Term”) unless sooner terminated pursuant to any provisions of the Governing Agreements. The term may be extended by the written agreement of the parties prior to the expiration of the term or any extension thereof. If within (6) months prior to the end of the extended term, Finish Line shall receive a bona fide, arm’s length written offer from any third party to purchase the same or similar Finish Line Prod- ucts that Division Six Sports is purchasing under the terms of this Agreement, then Division Six Sports shall have a right of first refusal for an additional three-year period to extend this Agreement with Finish Line upon materially identical consid- eration and terms set forth in such third party’s written offer …. If Finish Line does not receive a bona fide, arm’s length written offer at any time within six months of the end of the extended term, then this Agreement will automatically renew for an additional three (3) year extension.