801 F.2d 1001 (1986)
In 1979 Nexxus Products Company, a California corporation that formulates and markets hair care products, negotiated with Best Barber & Beauty Supply Company, Inc., a Texas corporation in the business of distributing beauty and hair care products to retail stores, barber shops and beauty salons throughout Texas.1
Between March and July 1979 Mark Reichek, Best’s president, negotiated with Stephen Redding, Nexxus’ vice-president, over a possible distribution agreement between Best and Nexxus.2 This resulted in an August 2, 1979 distributorship agreement executed in the form of a July 24, 1979 letter from Reichek to Redding under which Best would serve as the exclusive distributor of Nexxus hair care products to barbers and hair stylists throughout most of Texas except El Paso.3
The July 24, 1979 letter set forth pricing terms, Nexxus’s agreement to underwrite training and seminars, payment by letter of credit, and termination provisions allowing cancellation only on the anniversary date with 120 days’ prior notice and requiring Nexxus to buy back inventory at cost if it terminated the relationship.4
In July 1981 Sally Beauty Company, Inc., a Delaware corporation with its principal place of business in Texas and a wholly-owned subsidiary of Alberto-Culver Company, acquired Best in a stock purchase transaction and merged Best into Sally Beauty, which succeeded to Best’s rights and interests in all contracts; Alberto-Culver is a major manufacturer of hair care products and a direct competitor of Nexxus.5
Shortly after the merger Stephen Redding met with Michael Renzulli, president of Sally Beauty, and wrote a letter stating that Nexxus would not allow Sally Beauty to distribute its products because Sally Beauty was wholly owned by a direct competitor.6
In August 1983 Sally Beauty commenced this action by filing a complaint in the Northern District of Illinois, claiming that Nexxus had violated the federal antitrust laws and breached the distribution agreement.7 Nexxus moved for summary judgment on the breach claim.8 The district court granted the motion on January 31, 1985.9 The remaining claims were dismissed by stipulation in May 1985, and final judgment was entered on the breach of contract claim.10
Whether the distribution agreement between Nexxus and Best was a contract for the sale of goods governed by the Uniform Commercial Code?11
Yes. The July 24, 1979 letter agreement between Nexxus and Best set forth pricing terms for hair care products, payment by letter of credit, inventory buyback obligations, and freight charges, all of which centered on the sale of goods.14 Although the contract imposed best-efforts obligations, the sales terms constituted the essence of the bargain.15 The majority rule in other jurisdictions confirms that exclusive distributorships fall under UCC Article 2.16
The distribution agreement is therefore governed by the UCC as adopted in Texas.17
Whether Best could delegate its duties of performance under the exclusive distribution agreement to Sally Beauty without Nexxus's consent under UCC section 2-210?18
UCC section 2-210 permits delegation of performance under a contract for the sale of goods unless the nondelegating party has a substantial interest in having the original promisor perform or control the required acts.19
No. Although the UCC generally favors free alienability of commercial contracts, the facts establish that Nexxus possessed a substantial interest in receiving performance from Best rather than from a delegate controlled by a direct competitor.20 Nexxus had bargained for Best's best efforts in promoting Nexxus products within an exclusive territory.21 The implied obligation under UCC section 2-306(2) could not be satisfied by a substitute whose business decisions were subject to the control of Alberto-Culver.22
Best therefore could not delegate its duties to Sally Beauty without Nexxus's consent.23
Related opinions on this issue
Circuit Judge Posner dissented from the majority's per se rule.24 He argued that the UCC requires a fact-specific inquiry into whether the change in corporate form actually impairs performance.25 Common business arrangements routinely involve competitors dealing with one another without creating fatal conflicts of interest.26
Posner concluded that any risk to Nexxus was trivial.27 The merger did not render performance impossible.28 Nexxus's proper remedy was to demand assurances under UCC section 2-609 rather than repudiate the contract outright.29
Whether Sally Beauty's position as a wholly-owned subsidiary of Alberto-Culver, a direct competitor of Nexxus, created a substantial interest barring delegation of performance?30
Yes. Sally Beauty is wholly owned by Alberto-Culver, which manufactures competing hair care products and sells them through different channels.33 This ownership structure means Sally Beauty's sales efforts on behalf of Nexxus would be subject to the ultimate control of a rival.34 The arrangement creates a material risk that Nexxus would not receive the impartial best efforts it had bargained for from Best.35
Sally Beauty's status as a wholly-owned subsidiary of a direct competitor therefore created a substantial interest that barred delegation without Nexxus's consent.36
Related opinions on this issue
Circuit Judge Posner rejected the majority's conclusion that competitor ownership by itself creates a substantial interest sufficient to bar delegation under section 2-210.37 He argued that the UCC requires a fact-specific inquiry into whether the change in corporate form actually impairs performance rather than applying a per se rule based on judicial intuition.38 Sally Beauty distributes “hair care” supplies made by many different companies that compete with Alberto-Culver as vigorously as Nexxus does, including Revlon, Clairol, Bristol-Myers, and L'Oreal.39
Any supposed conflict would harm Sally Beauty's own goodwill with those other suppliers, as they would not continue to use a distributor that favors its parent's products.40 The short-term nature of the contract made any speculative injury to Nexxus too remote to justify cancellation without a factual showing of actual impairment.41 Posner concluded that the merger did not render Sally Beauty unable to perform its obligations and that Nexxus's proper remedy was to demand assurances of due performance under UCC section 2-609 rather than repudiate the contract outright.42