Case Information
*2 SELYA, Circuit Judge.
This bi-coastal case requires a Boston-based federal court to make an informed prophesy as to whether the Washington Supreme Court, if squarely confronted with the question, would recognize a cause of action for breach of a contract to negotiate. Applying the methodology that federal courts have developed to vaticinate how state courts are likely to rule on unsettled questions of state law, we find spoor for the cognoscenti and answer the question before us in the affirmative. And because the complaint plausibly states such a cause of action, we vacate the district court's order of dismissal and remand for further proceedings consistent with this opinion.
I. BACKGROUND
Inasmuch as this is an appeal from an order of dismissal
for failure to state a claim upon which relief can be granted, see
Fed. R. Civ. P. 12(b)(6), we draw the facts primarily from the
complaint. See Rodríguez-Reyes v. Molina-Rodríguez,
Plaintiff-appellant David Butler is an inventor who has spent years researching and developing safety technology for cutting tools. Among the fruits of his labors is the so-called *3 "Whirlwind" technology, which relies on both existing and pending patents.
Defendant-appellee Shiraz Balolia is the president of Grizzly Industrial, Inc. He sought to purchase the Whirlwind technology from the plaintiff and, after some initial haggling, the two men signed a letter of intent (the LOI) in April of 2012.
The LOI is not quite three pages in length. It memorializes the parties' mutual intention "to negotiate and enter into a separate Purchase Agreement by June 20, 2012," describes the technology to be purchased in some detail, and specifies a purchase price "payable upon closing." [1] The LOI also stipulates that the parties "will use their best efforts to negotiate and attempt to agree to terms for the Purchase Agreement" and that the plaintiff will refrain from negotiating with any other prospective purchasers before the signing deadline. Last — but far from least — the LOI contains a choice-of-law provision that directs the application of Washington law.
For reasons that are hotly disputed, the transaction fell through and no purchase agreement was ever signed. The plaintiff blames the defendant: according to the complaint, the defendant professed to have discovered deficiencies in the Whirlwind *4 technology and used these "specious" deficiency claims as a basis for attempting to renegotiate the arrangement.
After the deal imploded but before the end of the exclusivity period, the plaintiff sued the defendant in a Massachusetts state court. The plaintiff sought, among other things, a declaration that the LOI was an enforceable contract, pecuniary damages for breach of contract and breach of an implied covenant of good faith and fair dealing, and damages for violation of the Massachusetts Consumer Protection Act, see Mass. Gen. Laws ch. 93A, §§ 2, 11. Citing the diverse citizenship of the parties (the defendant is a citizen of Washington and the plaintiff is a citizen of Massachusetts) and the existence of a controversy in the requisite amount, the defendant removed the case to federal court. See 28 U.S.C. §§ 1332(a), 1441.
Once the case was transplanted, the defendant filed a motion to dismiss. The plaintiff opposed this motion and, in addition, moved for leave to amend his complaint. The defendant objected to the latter motion.
The district court granted the motion to dismiss. See
Butler v. Balolia, No. 12-11054,
II. ANALYSIS
We review de novo a district court's dismissal of a
complaint for failure to state a claim. Rodríguez-Reyes, 711 F.3d
at 52. In conducting this tamisage, "we accept as true all well-
pleaded facts alleged in the complaint and draw all reasonable
inferences therefrom in the pleader's favor." Santiago v. Puerto
Rico,
In diversity jurisdiction, a federal court must draw the
substantive rules of decision, including conflict of law
principles, from the law of the forum state. See Erie R.R. Co. v.
Tompkins,
The district court's determination that the LOI cannot be construed as a binding contract of sale, see Butler, 2013 WL *6 752363, at *2, is unarguable. By its terms, the LOI expresses the parties' shared intention that the transaction, when fully negotiated, will be evidenced by a "separate Purchase Agreement" — an agreement that was never executed. The critical question, then, is whether the plaintiff has plausibly alleged that the LOI is a binding contract to negotiate that the defendant breached.
This question depends, in the first instance, on whether
Washington would recognize contracts to negotiate as enforceable.
The district court concluded that it would not. In a short passage
and footnote, the court anchored this conclusion on the fact that
Washington has not yet recognized the enforceability of contracts
to negotiate. Butler,
A. Divining State Law.
The key to this puzzle is whether Washington's highest
court, if squarely confronted with the question, would recognize a
cause of action for breach of a contract to negotiate; that is, an
action for breach of a contract that binds the parties to some
course of conduct during negotiations. The most reliable guide to
the interpretation of state law is the jurisprudence of the state's
highest court. See, e.g., Kathios v. Gen. Motors Corp., 862 F.2d
944, 946 (1st Cir. 1988). But we think that the district court
erred in deeming the absence of an on-point opinion from the
*7
state's highest court dispositive. If such a lacuna exists, a
federal court sitting in diversity should not simply throw up its
hands but, rather, should endeavor to predict how that court would
likely decide the question. See, e.g., In re Bos. Reg'l Med. Ctr.,
Inc.,
In fashioning such a prediction, the federal court should
consult the types of sources that the state's highest court would
be apt to consult, including analogous opinions of that court,
decisions of lower courts in the state, precedents and trends in
other jurisdictions, learned treatises, and considerations of sound
public policy. See Andrew Robinson Int'l, Inc. v. Hartford Fire
Ins. Co.,
In this instance, we agree with the district court that
the Washington Supreme Court has never recognized the
enforceability of contracts to negotiate. By the same token,
however, that court has not repudiated such a cause of action. The
closest the court has come to either of these positions is its
response to a certified question from the Ninth Circuit Court of
Appeals. See Keystone Land & Dev. Co. v. Xerox Corp.,
Although Keystone left the question open, the court
provided valuable insight into how it might view the issue in the
future. Its approach creates a taxonomy that comprises three
different types of agreements: (i) "agreements to agree," which
require a further meeting of the minds and are, therefore,
nonbinding; (ii) "agreements with open terms," in which the parties
intend to be bound to key points and to have a court or other
authority supply the missing terms; and (iii) "contracts to
negotiate," in which the parties agree to be bound to "a specific
course of conduct during negotiations." Keystone,
We find it helpful that the Keystone court went on to
enumerate certain bedrock principles of contract law that would
apply to any analysis it might later make of contracts to
negotiate. See Keystone,
Even though the Washington Supreme Court has not spoken
definitively to the issue, the state's intermediate appellate court
has recently enforced a contract to negotiate. See Columbia Park
Golf Course, Inc. v. City of Kennewick,
The case law elsewhere is a mixed bag. Withal, two
things seem clear. First, many more jurisdictions have recognized
the enforceability of contracts to negotiate than have repudiated
that doctrine. Compare, e.g., Brown v. Cara,
There is, moreover, abundant support for the enforcement
of contracts to negotiate in other sources that the Washington
Supreme Court would be apt to find persuasive. From first
principles, a contract is merely an exchange of promises that the
law will enforce. See Restatement (Second) of Contracts § 1
(1981). A contract is formed when the parties objectively manifest
their intention to be bound and consideration exists. See id. at
§ 17; see also Keystone,
A contract to negotiate, in which the parties' promises normally embody the duty to negotiate in good faith, presents no *12 obvious exception to this baseline rule. See Newharbor, 961 F.2d at 298-99. The manifested intention of the parties is the lodestar. See Channel Home, 795 F.2d at 299; Teachers Ins. & Annuity Ass'n v. Tribune Co., 670 F. Supp. 491, 499 (S.D.N.Y. 1987); see also 1 Arthur L. Corbin, Corbin on Contracts § 2.9 (Joseph M. Perillo rev. ed. 1993).
Scholarly works and case law describe compelling reasons
both as to why parties may desire to exchange such binding promises
and as to why courts may deem it socially beneficial to enforce
them. Modern transactions often involve significant up-front
investments in deal structuring and due diligence, and parties may
wish to protect those investments in some measure. See Schwartz &
Scott, Precontractual Liability, supra at 665-67. Without any such
protection, a rapacious counter-party may attempt to take advantage
of the other party's sunk investment by trying to retool the deal
at the last minute. See Venture Assocs.,
To forestall such gamesmanship, parties may wish to build in safeguards that will operate early in the bargaining process. This can be accomplished by binding themselves sufficiently such that they feel comfortable investing resources into the deal, but without inextricably committing themselves to a transaction that is still inchoate. Contracts to negotiate can satisfy this need.
To be sure, there are some considerations that may counsel against adopting a rule that contracts to negotiate are enforceable. Three such considerations are worthy of mention.
First, courts are understandably hesitant to enforce
agreements whose terms are too indefinite to allow easy and
objective identification of a breach. See Restatement (Second) of
Contracts § 33 (1981); see also Keystone,
Moreover, courts routinely make judgments as to parties'
good faith (or the lack of it) in analogous contexts. See, e.g.,
O'Tool v. Genmar Holdings, Inc., 387 F.3d 1188, 1197-1203 (10th
Cir. 2004) (discussing implied duty of good faith and fair dealing
under Delaware law); Mathis v. Exxon Corp.,
Second, courts and scholars have quibbled about the
appropriate measure of damages when a contract to negotiate has
been breached. In the opinion of some, damages should be limited
to the sums spent in reliance on the broken promise. See, e.g.,
Copeland,
Third, some judges have worried about the manifest need
for courts charged with enforcing contracts to negotiate to tread
carefully lest they "trap[] parties in surprise contractual
obligations that they never intended." Teachers,
In this case, all roads lead to Rome. After surveying the relevant legal landscape in Washington and beyond and weighing the pertinent policy considerations, we conclude that the Washington Supreme Court will in all probability recognize the enforceability of contracts to negotiate when it squarely confronts that issue.
B. The Merits.
Having made our informed prophecy about Washington law,
we move from the general to the specific. To survive a motion to
dismiss, a complaint must "state a claim to relief that is
plausible on its face." Bell Atl. Corp. v. Twombly,
Before delving into plausibility, we pause to put to rest
a claim of procedural default. The defendant tries to head off the
plausibility inquiry by suggesting that the plaintiff did not
adequately raise the "contract to negotiate" theory below. As we
explain in the following pages, however, the complaint adequately
pleaded this theory. What is more, the plaintiff argued it in
opposition to the motion to dismiss, and the district court had
sufficient notice that it felt the need to address the theory
*16
squarely in its decision. Butler,
In the case at hand, we believe that the complaint's
factual content is enough, if barely, to propel it across the
plausibility threshold. Plausibility does not demand a showing
that the claim is likely to succeed. It does, however, demand a
showing of "more than a sheer possibility" of success. Ashcroft v.
Iqbal,
We concede that the plaintiff's complaint is not a model of clarity. Although it alleges that the LOI is a binding contract, it is less than pellucid as to whether that contract is thought to be a final contract of sale or a contract to negotiate. The allegations can be read either way — and there is nothing wrong with that. See Fed. R. Civ. P. 8(d)(2) (permitting alternative pleading).
On a motion to dismiss, the averments of the complaint
must be taken in the light most favorable to the plaintiff. See
*17
SEC v. Tambone,
The LOI, which is the focal point of the complaint, can
plausibly be read as a contract to negotiate. It contains a
specific provision calling for the parties' "best efforts to
negotiate and attempt to agree" to a final transaction. It also
contains covenants of confidentiality and exclusivity — covenants
that fit comfortably under the carapace of a contract to negotiate.
See, e.g., Feldman v. Allegheny Int'l, Inc.,
What is more, the complaint alleges facts tending to show that both parties considered the LOI binding. The complaint alleges that the plaintiff, in deference to the LOI's exclusivity provision, declined inquiries from other potential buyers. Such a course of conduct tends to indicate that the plaintiff considered the LOI to be a binding contract. See, e.g., Teachers, 670 F. Supp. at 502.
Similarly, the complaint alleges that the defendant sought to "rescind" the LOI. This attempt to rescind tends to indicate that the defendant too considered the LOI to be a binding *18 agreement. After all, a party would be unlikely to seek rescission of an agreement that he did not believe to be binding.
The short of it is that the LOI, construed as a contract
to negotiate, is an agreement entered into between freely
contracting parties. It does not offend public policy. And,
finally, there is enough in the complaint to permit an inference
that the parties have objectively manifested their mutual intent to
be bound. Under Washington law, as we envision it, that is enough.
See Keystone,
The plaintiff, of course, must show more than that the complaint plausibly limns the existence of a contract to negotiate. He must also show that it plausibly alleges a breach of that contract. With respect to that issue, the factual allegations of the complaint are quite amenable to the contract to negotiate theory.
The complaint alleges that the defendant spuriously
identified deficiencies with the Whirlwind technology and used
those canards as a pretext to renegotiate the price, and that the
defendant failed to negotiate at all during critical periods.
[4]
*19
Accepted as true, these allegations plausibly suggest a failure to
use best efforts to bring the transaction to fruition. See Venture
Assocs.,
To cinch matters, "the plausibility inquiry properly takes into account whether discovery can reasonably be expected to fill any holes in the pleader's case." García-Catalán v. United States, ___ F.3d ___, ___ (1st Cir. 2013) [No. 12-1907, slip op. at 10]. To clear the plausibility hurdle, a complaint must contain "enough fact[s] to raise a reasonable expectation that discovery will reveal evidence" sufficient to flesh out a viable claim. Twombly, 550 U.S. at 556. Here, the complaint satisfies that criterion.
Let us be perfectly clear. We do not hold either that the LOI is an enforceable contract to negotiate or that, if it is, the defendant breached it. Those matters remain subject to proof. See García-Catalán, ___ F.3d at ___ [No. 12-1907, slip op. at 7] (discussing difference in burdens at summary judgment and trial as opposed to lesser burden at Rule 12(b)(6) stage). We do hold, however, that as a matter of pleading the complaint plausibly alleges that such a contract was formed and that the defendant breached it.
We offer yet another caveat. There is no present need
for us to determine exactly how the Washington Supreme Court would
configure the contours of the cause of action asserted. The core
theory of a cause of action for breach of contract to negotiate has
been more and more readily accepted by courts. That core theory
inevitably hinges on whether the parties intended to enter a
binding contract to negotiate and whether they objectively
manifested that intention. See Keystone,
We acknowledge that the contours of the "contract to negotiate" theory, at the margins, differ from state to state. See generally Browning Jeffries, Preliminary Negotiations or Binding Obligations? A Framework for Determining the Intent of the Parties, 48 Gonz. L. Rev. 1, 22-35 (2012) (describing differences between jurisdictions). Here — as would be true of virtually any case at the motion to dismiss stage — the record is skeletal and many of the factual details are obscure. This undeveloped record does not enable us to give much guidance to the district court about the precise contours of the law that it must apply to the facts that are yet to be developed. If, as the case progresses, the district court concludes that it is appropriate, it remains free to certify specific questions to the Washington Supreme Court. See Wash. Rev. Code § 2.60.020.
Our journey is not yet at an end. In addition to
dismissing the breach of contract claim, the district court also
dismissed the plaintiff's implied covenant of good faith and
Chapter 93A claims and denied his motion for leave to amend. See
Butler,
III. CONCLUSION
We need go no further. For the reasons elucidated above, we vacate the judgment below in its entirety and remand for further proceedings consistent with this opinion.
Vacated and remanded. Costs shall be taxed in favor of the plaintiff.
Notes
[1] Along with the LOI, the parties executed a non-disclosure agreement. In pursuance thereof, the district court sealed all references to the amount of the purchase price.
[2] The plaintiff questions whether the choice-of-law provision, as worded, extends to his Chapter 93A claim. We do not need to reach this question today, and we express no opinion on it.
[3] Courts and scholars have used a variety of terms to describe
contracts to negotiate. For example, some use the term Type II
preliminary agreement, see, e.g., Brown v. Cara,
[4] We note, moreover, that in the proposed amended complaint, the plaintiff also alleges that the defendant wrote an e-mail to his counsel, mistakenly transmitted to the plaintiff, seeking advice about a seemingly disingenuous plan to stonewall the plaintiff as the date arrived for signing a binding agreement for sale. Similarly, the proposed amended complaint alleges that the defendant refused to waive the exclusivity provision even after negotiations broke down.