Beanstalk Group, Inc. v. AM General Corporation
283 F.3d 856 (2002)
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Rule of Law:
A contract will not be interpreted literally if doing so would produce an absurd commercial result that the parties, presumed to be rational, would not have intended, especially when read in the context of the entire agreement.
Facts:
- In 1997, AM General, manufacturer of the Hummer vehicle, entered into a 'representation agreement' with Beanstalk.
- The agreement appointed Beanstalk as AM General's exclusive agent to obtain licenses for the 'HUMMER' trademark.
- The contract entitled Beanstalk to a 35% commission on gross receipts from any 'License Agreement.'
- The contract defined a 'License Agreement' broadly as 'any agreement or arrangement, whether in the form of a license or otherwise, granting merchandising or other rights in the Property [the trademark].'
- In 1999, AM General entered into a major joint-venture agreement with General Motors (GM) without Beanstalk's involvement.
- As part of the joint venture, AM General transferred the Hummer business, including the Hummer trademark, to GM.
- GM informed Beanstalk it would not assume AM General's obligations and would not pay any commissions under the representation agreement.
Procedural Posture:
- Beanstalk filed a diversity suit against AM General and General Motors in federal district court, alleging breach of contract and tortious interference.
- Beanstalk attached the representation agreement to its complaint.
- The defendants filed a motion to dismiss the complaint for failure to state a claim pursuant to Federal Rule of Civil Procedure 12(b)(6).
- The district court granted the defendants' motion and dismissed the complaint.
- Beanstalk, as appellant, appealed the dismissal to the U.S. Court of Appeals for the Seventh Circuit.
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Issue:
Does a joint venture agreement that transfers a trademark as part of the sale of an entire business fall within a contractual definition of a 'License Agreement' that includes 'any agreement or arrangement...granting merchandising or other rights,' thus entitling a licensing agent to a commission on the transaction?
Opinions:
Majority - Posner
No. A contract will not be interpreted literally if doing so would produce absurd results that rational parties would not have intended. The joint-venture agreement between AM General and GM was not a 'License Agreement' for commission purposes because it constituted the sale of an entire business, a transaction fundamentally different from the merchandising licenses Beanstalk was hired to procure. Reading the contract as a whole, it is clear Beanstalk was a licensing agent, not a business broker. To award Beanstalk a commission on a multi-million dollar business sale it had no part in would be a commercially absurd result, akin to paying an agent for work it did not do. The court can use its general knowledge of commercial practices to identify such absurdity without needing extrinsic evidence.
Dissenting - Rovner
The issue should not be decided on a motion to dismiss. A literal reading of the contract's broad definition of 'License Agreement' could include the GM transaction, and at minimum, the contract is ambiguous. The majority improperly substitutes its own 'cultural understanding' of business for the express terms of the contract without allowing for discovery. Evidence that AM General sought to amend the contract to exclude this type of transaction suggests that even AM General understood it might be covered. Dismissing the claim as 'absurd' is premature and inappropriate at the 12(b)(6) stage, as the plaintiff may be able to prove a set of facts that would entitle it to relief.
Analysis:
This case is a significant application of the 'absurd results' canon of contract interpretation, championed by Judge Posner's law-and-economics approach. It establishes that courts may reject a plain-meaning, literalist reading of a contract provision when it contradicts the commercial reality and purpose of the overall agreement. The decision empowers judges to use their general understanding of business practices to determine the parties' likely intent, even at the motion-to-dismiss stage. This pragmatic approach prioritizes commercially sensible outcomes over strict textualism, potentially creating uncertainty for parties who rely on broadly drafted contractual language.
