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Articles Posted in Business Disputes
Service Agreements Require Timely Payment, Compliance with Contractual Terms to Be Enforceable by Consumers – M&B Graphics v. Toshiba Business Solutions
A company that leased photocopier machines to a printing company prevailed on a motion for summary judgment in a breach of contract claim brought by the business leasing the copy machines. In M&B Graphics, Inc. v. Toshiba Business Solutions (USA), Inc., the U.S. District Court for the Eastern District of Michigan ruled that the defendant was justified in terminating service agreements for its machines due to the plaintiff’s noncompliance with the terms of the agreements.
M&B Graphics (M&B), a Michigan printing company, began leasing three photocopiers from Toshiba Business Solutions on August 10, 2009. The lease had a term of sixty-three months, with monthly payments of $2,520. The parties also executed service agreements for each of the three copiers. Toshiba would perform routine repairs and maintenance on the copiers, and M&B would pay a flat monthly fee and a per-copy fee. Toshiba had the right to terminate the service agreements if M&B failed to make timely payment of the monthly service fees or failed to use the copiers in strict accordance with Toshiba’s specifications. Either party could terminate the agreements by giving written notice thirty (30) days prior to the anniversary date.
New Jersey Court Shoots Down Forum Selection Clause in UPS Franchise Case – The Business Store v. Mail Boxes Etc.
In The Business Store v. Mail Boxes Etc., the District Court for the District of New Jersey considered the effect of a “forum selection clause” in a business dispute between companies from different states, finding that these clauses are not always enforceable.
In 2003, Plaintiff The Business Store, Inc., a New Jersey company, entered into a franchise agreement with Defendants Mail Boxes, Etc. (MBE) – a California company – and United Parcel Service (UPS), under which Plaintiff was to operate a UPS franchise in Spotswood, New Jersey. The parties entered into two additional agreements for new stores in 2007. Two years later, however, a disagreement arose over $80,000 in royalties that Defendants argued they were owed. When the parties could not reach an agreement, Defendants terminated the franchise agreements.
Plaintiff sued Defendants in New Jersey state court, alleging breach of the franchise agreements and an implied duty of good faith and fair dealing, as well as tortious interference with contract, fraud and violation of the New Jersey Franchise Practices Act (NJFPA). After Defendants removed the case to federal court – on diversity of citizenship grounds: the parties are from different states – they filed a motion to transfer the case to the federal district court in the Southern District of California. Defendants argued that the “forum selection clause” in each of the franchise agreements dictated that any disputes be litigated in California.
The court denied the motion to transfer, finding that each of the factors to be considered in reviewing a venue transfer request weighed in favor of New Jersey. 28 U.S.C. Section 1404(a) provides that “for the convenience of parties and witnesses, in the interest of justice, a district court may transfer any civil action to any other district . . . where it might have been brought.” The court noted that it considers “all relevant factors to determine whether on balance the litigation would more conveniently proceed and the interest of justice be better served by transfer to a different forum,” and that the burden is on the party requesting transfer to show that it is warranted.
The court began by finding that, because MBE’s principal place of business is in San Diego, the action would have been proper if originally brought in the Southern District of California. Nevertheless, the court noted that “[a] strong presumption of convenience exists in favor of a domestic plaintiff’s chosen forum.” Moreover, the fact that the dispute arose in New Jersey – where the contract was executed and performed – also weighed against transfer.
Illinois Court Limits Consumer Fraud Claims in Business Disputes – Classic Business Corporation v. Equilon Enterprises, LLC.
In Classic Business Corporation v. Equilon Enterprises, LLC., the District Court for the Northern District of Illinois explains that while the state’s consumer fraud and deceptive business practice law is an important weapon in combating shady business operations, it is intended to protect private consumers rather than business entities.
Plaintiffs, gas station operators in the Chicagoland area, brought the action against Shell claiming that the company violated both its contracts with Plaintiffs and a duty of good faith by unilaterally changing its pricing methodology. Plaintiffs are considered “open dealers” because they own the real property on which their gas businesses are located rather than leasing it from Shell. Pursuant to a Retail Sales Agreement (“RSA”), Plaintiffs buy gas from Shell at the price in effect “at the time loading commences at the Plant for the place of delivery” and, in turn, are free to set the retail price at which they later sell the gas.
Plaintiffs claim that after agreeing to the RSA terms, Shell changed the way in which it sells gas – using wholesalers rather than selling directly to retailers – as well as its pricing method. As a result, according to Plaintiffs, Shell now sells the same gas to wholesalers and non-open dealers at a lower price than it sells to Plaintiffs and other open dealers in an attempt to drive them out of the business. In their complaint, Plaintiffs alleged the following counts: 1) federal price discrimination; 2) breach of contract and the Illinois Commercial Code based on the unilateral fuel price increase; 3) breach of contract for invoicing Plaintiffs for more fuel than was actually delivered; 4) violation of the Illinois Consumer Fraud and Deceptive Business Practices Act, 815 ILCS 505/2 et seq. (the “CFDBPA”); and 5) a claim for declaratory relief pursuant to the Illinois Declaratory Judgment Act.
The court granted Shell’s motion to dismiss the CFDBPA count (as well as the declaratory relief claim). In so doing, it noted that the proper test in reviewing a CFDBPA claim involving two businesses who are not consumers is “whether the alleged conduct involves trade practices addressed to the market generally or otherwise implicates consumer protection concerns.” In this case, the court found that Shell’s alleged practice of selling gas to the “relatively few” open dealers in the area at a higher rate than that charged to wholsesalers and other retailers “is not equivalent to a trade practice addressed to the market generally,” despite the fact that it may ultimately result in higher prices for Plaintiffs’ customers. Finally, the court quoted the Illinois Supreme Court’s decision in Avery v. State Farm in ruling that “[a] breach of contractual promise, without more, is not actionable under the [Illinois] Consumer Fraud Act.”
Illinois Court Explains Venue Transfer Rules in Business Litigation Case – Shakir Development & Construction, LLC v. Flaherty & Collins Construction, Inc.
To transfer or not to transfer, that is often the question in inter-state business litigation where parties come from various states, often far from where the actual dispute takes place. In Shakir Development & Construction, LLC v. Flaherty & Collins Construction, Inc., the U.S. District Court for the Northern District of Illinois recently explained how a Court should decide on a request to transfer a case from one federal court to another.
Plaintiffs Shakir Development & Construction, LLC and a number of other entities as well as two individuals filed the action in Cook County Circuit Court against Defendants Flaherty & Collins Construction, Inc. and various related entities as well as two individuals, alleging fraud, breach of contract, tortuous interference with contract and unjust enrichment. According to the complaint, the parties entered into two contracts under which Defendants allegedly agreed to build and manage an apartment complex in Noblesville, Indiana. Plaintiffs allege that Defendants ultimately breached the contract, committing fraud in the course of so doing.
Defendants removed the case to the Northern District of Illinois on diversity grounds. Federal courts are empowered to hear cases in which none of the plaintiffs are from the same state as any of the defendants. In this case, the two individual defendants resided in Indiana and are Indiana citizens, while the entity defendants are Indiana corporations with their principal place of business in Indiana. The two individual plaintiffs resided in Illinois and are Illinois citizens; the entity plaintiffs are Indiana limited liability companies located in Indiana, but they are Illinois citizens for diversity purposes because their sole member is Sohail Shakir, one of the individual plaintiffs and an Illinois citizen.
Defendants then filed a motion requesting that the matter be transferred to the Southern District of Indiana, which includes Noblesville. 28 U.S.C. § 1404 allows a district court to transfer an action to another district court “for the convenience of parties and witnesses, in the interest of justice…” Citing its prior decision in Law Bulletin Publishing, Co. v. LRP Publications, Inc., the Court stated that it considers the following factors in evaluating convenience: 1) the plaintiff’s choice of forum; (2) the situs of the material events; (3) the relative ease of access to sources of proof; (4) the convenience of the witnesses; and (5) the convenience of the parties.
The Court granted Defendants’ transfer motion, finding that the factors “weigh heavily” in favor of transfer. Although Plaintiffs preferred to stay in Chicago, the Court noted that “choice of forum has only minimal value where none of the conduct occurred in the forum selected by the plaintiff.” Here, the alleged breach and fraud occurred in statements mailed from and made in meetings in Indiana. Similarly, the material events all occurred in Indiana and, as a result, the majority of witnesses – including Defendants’ employees along with subcontractors, architects and engineers – and parties were located in Indiana. Thus, the Court granted the motion to transfer.
Does the Lanham Act Prohibit Allegedly False Claims of Authorship? – Gensler v. Strabala
Claims for trademark infringement and false advertising under the Lanham Act do not apply to allegedly false assertions of “authorship of a creative work,” according to the U.S. District Court for the Northern District of Illinois. In M. Arthur Gensler, Jr. & Associates, Inc. v. Jay Marshall Strabala, the court dismissed a Lanham Act suit based on claims of authorship of architectural designs, but suggested that a copyright claim might be more appropriate.
The plaintiff, M. Arthur Gensler, Jr. & Associates, Inc. (“Gensler”) is a design firm with offices in multiple countries. It employed the defendant, Jay Marshall Strabala (“Strabala”) as an architect from 2006 to 2010. Gensler sued Strabala under the Lanham Act and two Illinois deceptive trade practice statutes. Strabala moved the court to dismiss Gensler’s suit for failure to state a claim for which relief may be granted, pursuant to Rule 12(b)(6) of the Federal Rules of Civil Procedure. The court agreed and dismissed the case.
In considering a 12(b)(6) motion, a court must consider all of a plaintiff’s “well-pleaded factual allegations” as true. While Strabala was an employee of Gensler, he worked on multiple high-profile projects, including the Shanghai Tower in China and multiple buildings in Houston, Texas. Strabala left Gensler in February 2010 and began practicing under an assumed business name, 2DEFINE Architecture. While based in Chicago, he advertised offices in Shanghai, China and Seoul, South Korea. Strabala set up a website and a page on the photo-sharing site Flickr to market his business. His Flickr site included claims that he designed the Shanghai Tower and several of Gensler’s Houston buildings. Gensler sued to stop Strabala from claiming primary responsibility for the design of these buildings.
Gensler alleged that Strabala’s claims constituted “false designation of origin” and “false advertising” under the Lanham Act. The court considered whether a claim of authorship of a creative work could be considered a “false designation of origin,” and concluded that it cannot. In Dastar Corp. v. Twentieth Century Fox Film Corp., a 2003 Supreme Court case involving a film studio and a video publisher, the Supreme Court considered whether “origin of goods” included the author/producer of the films themselves, or just the actual physical videotapes. It specifically interpreted the “origin of goods” provision to refer to actual tangible goods, not creative works. Because Gensler could not cite any authority that overruled the Dastar holding, the Illinois district court found its claim unpersuasive. The court did note, however, two federal appellate cases that applied Dastar but allowed the possibility of copyright claims.
Illinois Court Explains Tortious Interference with Contract Claim – Metro Premium Wines v. Bogle Vineyards, Inc.
The legal theory of tortious interference with a contract protects a business’s relationships from tampering by others. In Metro Premium Wines v. Bogle, the District Court for the Northern District of Illinois explains how the theory is applied.
Plaintiff Metro Premium Wines, Inc. (Metro), an Illinois wine distributor, sued Bogle Vineyards, Inc. (Bogle), a California vineyard, and fellow distributor Winebow, Inc. (Winebow), alleging that Bogle and Winebow hatched an improper scheme to take away Metro’s distributorship of Bogle’s wine in Chicago in favor of Winebow.
Under the terms of an oral agreement, Metro held the exclusive rights to distribute Bogle wines in the area for roughly 20 years. Metro asserts that in 2009 a Winebow executive approached Metro about buying the company. Claiming that he needed to perform due diligence before making an offer, the executive allegedly requested that Metro provide confidential sales, pricing and financial data. The parties signed a confidentiality agreement providing that Winebow would use this information only in relation to tendering an offer. Bogle sales manager Sam Bon allegedly then made several calls to Metro, encouraging it to sell the company to Winebow.
According to Metro, Winebow had no intention of buying the company and, with Bogle’s assistance, instead allegedly hatched the ruse in order to obtain the confidential information. Shortly after allegedly receiving the information, Winebow began operating a distributorship in Chicago and offered to buy Metro for only $500,000, despite the fact that the company had been recently appraised at $2 million. 10 days after the offer, Bogle allegedly sent a letter to Metro questioning the company’s sales performance and demanding that it take action to increase sales within four months or lose its exclusive distributorship. In September 2010, Bogle terminated Metro’s distributorship and made Winebow its exclusive distributor in the area.
Metro filed suit, bringing fraud, conspiracy and tortious interference claims against both Winebow and Bogle – as well as separate breach of contract claims against Winebow – asserting that the parties conspired to improperly take Metro’s confidential information in order to jump start Winebow’s Chicago operations. Bogle and Winebow subsequently filed a motion to dismiss the fraud, conspiracy and tortious interference claims.
Recovering Damages for Future Income in Business Breach of Contracts Cases – Hardee’s Food Systems, Inc. v. Hallbeck
A company who is injured by another entity or individual’s breach of a contract is generally entitled to recover damages. In Hardee’s Food Systems. Inc. v. Hallbeck, the District Court for the Eastern District of Missouri explains that in addition to recovering based on the immediate economic damage caused by a contract breach, a plaintiff may also seek to recoup the loss of future or expected income.
Defendants are five individuals who owned a Hardee’s fast food restaurant franchise in Ottawa, Illinois. They first opened the Ottawa franchise in the early 1970’s and owned 21 Hardee’s restaurant franchises over the following decades. By 2008, however, the Ottawa restaurant was the last remaining Hardee’s in its market area. Defendants closed this restaurant in February 2009.
Plaintiff, which operates and licenses others to operate Hardee’s restaurants, filed this action alleging that Defendants violated a five-year Renewal Franchise Agreement (Agreement) between the parties by closing the Ottawa franchise more than a year before the Agreement expired. Plaintiff seeks damages in the amount of approximately $50,000 in lost royalty and advertising fees, allegedly due under the Agreement. In response, Defendants filed a motion for summary judgment, arguing that the Agreement’s fees provision was terminated when they closed the restaurant, that the fees sought are speculative and that enforcement of the fee provision is against public policy.
The court denied Defendant’s summary judgment motion, ruling that prospective royalty and advertising fees that Plaintiff argues it would have earned if the franchise remained open may be recoverable. Noting that the Agreement provided that any disputes be governed by Missouri law, the court held that “[a] fact finder could reasonably find that absent the closure, some revenue would have been realized from continued operation, and the length of operations and amount of revenue that might have been derived are fact issues.” While it was not certain that Plaintiff would ultimately be able to recover damages here, there was, according to the court, “a genuine issue of material fact… as to whether lost royalties and advertising fund contributions in the event of a breach were reasonably within parties’ contemplation at the time they entered into the Agreement.”
The court further ruled that the damages sought were not merely speculative because Plaintiff based the figure on projected sales, applicable fee rates and the time value of money. Finally, the court noted that it was confident that the same conclusion would be reached if the matter was subject to Illinois law.
Court of Appeals Upholds Bonus Award Against Suit by Minority Shareholders, Applying Safe Harbor and Business Judgment Rules – Warren v. Campbell Farming Corp.
The Tenth Circuit Court of Appeals reviewed a dispute among shareholders of a closely-held corporation in Warren v. Campbell Farming Corporation. It affirmed a district court ruling that the majority shareholder did not breach fiduciary or statutory duties to the corporation by approving a bonus proposal over the minority shareholders’ objections. The court considered arguments relating to conflicts of interest and fairness, the business judgment rule, and the majority shareholder’s fiduciary duty.
Campbell Farming Corporation is a closely-held Montana corporation whose principal place of business is in New Mexico. The plaintiffs, H. Robert Warren and Joan Crocker, were minority shareholders with 49% of the shares, while defendant Stephanie Gately controlled 51%. Warren and Gately served as directors with Gately’s son, Robert Gately, who also served as the president. Stephanie Gately proposed a bonus to her son totalling $1.2 million in cash and company stock, in part to prevent him from leaving the company. Stephanie Gately voted all of her shares in favor of the proposal, so it passed despite Warren and Crocker’s votes in opposition.
Warren and Crocker filed suit in New Mexico federal court, asserting breach of fiduciary duties and various common law claims. The district court ruled in favor of the defendants after a bench trial. It found that, while the bonus met Montana’s definition of a “conflict of interest,” it was permissible under a safe-harbor statute that allowed conflict-of-interest transactions if they were “fair to the corporation.” Mont. Code. Ann. §§ 35-1-461(2), 35-1-462(2)(c). The court also found that the bonus was permitted by the business judgment rule and that the defendants did not breach any fiduciary duties. The plaintiffs appealed to the Tenth Circuit.
Illinois Appellate Court Denies Request for a New Trial After $1.2 million Verdict for Fraudulent Misrepresentation in Commercial Property Transaction
Most businesses are of the brick and mortar variety, meaning that they have a physical location where they conduct operations, and as a result these business have to either buy or rent properties to acquire the space they need. At Lubin Austermuehle, our Elgin business attorneys have handled many commercial and industrial building sale disputes, and are always researching the law in that area to better serve our clients. Napcor Corporation v. JP Morgan Chase Bank, NA is one such case about material misrepresentations made in the sale of a commercial property.
In Napcor Corporation v. JP Morgan Chase Bank, NA, Plaintiff purchased a large commercial building from Defendants. Prior to the sale, the building’s roof allegedly began to leak significantly, and the building’s broker performed an inspection to determine the extent of the damage. The broker allegedly concluded that the existing roof needed to be removed and replaced to fix the problems. Instead of replacing the damaged roof, Defendant constructed a second roof over the first because it was a cheaper option. This second roof was constructed in spite of the fact that Defendant was allegedly warned that the new roof would be susceptible to being torn off by winds. Additionally, the original leakage problem allegedly remained after the new roof’s construction.
The building was then listed for sale, and the pertinent part of the listing stated that the building had a “new roof in 1994 (tear off).” In 1996, Plaintiff purchased the building for $1.309 million through a contract where Plaintiff agreed to accept the building “as is”, and had a 30-day due diligence period. Plaintiff was allegedly not made aware of the leaks, and relied upon Defendant’s alleged representation that the old roof had been torn off. Upon moving into the building, Plaintiff allegedly found the leakage problem and over several years three sections of the roof blew off on three different occasions. Plaintiff then filed suit for fraudulent misrepresentation, and was awarded a $1.2 million judgment after a trial by jury.
Defendant appealed the decision and asked for a judgment notwithstanding the verdict and a new trial based upon faulty jury instructions and the exclusion of evidence that Plaintiff agreed to accept the building in its “as is” condition. Defendant contended that the jury instruction failed to state that Plaintiff had the burden of proof to show all the elements of fraud by clear and convincing evidence. The trial court denied Defendant’s motion.
The Appellate Court affirmed the judgment and held that the trial court did not abuse its discretion by denying Defendant’s motion for a new trial. The Court made its decision because the ‘as is’ language in the purchase agreement did not preclude Plaintiff from claiming it relied on the alleged misrepresentations, and the clause also did not serve as a defense to fraud. As such, the Court decided, the verdict was not against the manifest weight of the evidence. Finally, the Court denied the request for a new trial because the lower court used an IPI civil jury instruction that accurately stated the law, and in doing so, the trial court did not abuse its discretion.