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The Chicago Tribune has recently reported on two lawsuits arising out of the bankruptcy of the franchisor for the Giordano’s pizza chain.

In one suit the bankruptcy trustee has sued franchisee for failing to use the the required pizza dough thus allegedly harming the quality and uniformity of Giordano’s pizzas. This type of lawsuit often arises in the franchise setting the article explains. The article states:

It’s common, especially in the restaurant business, for a franchisor to dictate suppliers in their franchise agreements.

“If a customer does not receive essentially the same product, same quality and same experience, the brand image is tarnished and the customer less likely to patronize the franchise in the future,” said Christian Burden, a Quarles & Brady LLP partner focusing on disputes involving distributors and franchises. “To use the quintessential example of the Big Mac, from the franchisor’s perspective, a Big Mac in Chicago must taste and appear generally the same as a Big Mac in Los Angeles, Toronto, Brazil, and so on.”

But it’s also not unheard of for franchisees such as those at Giordano’s to look for alternative sourcing. …

You can read the full article by clicking here.

The other Tribune article details a lawsuit filed by the former Giordano’s franchisor claiming that the franchisor’s lender-banks, former lawyers and other franchisees conspired to rob them of the business. You can view a copy of the complaint in this lawsuit by clicking here. The article describes the lawsuit’s claims as follows:

The lawsuit said that the men enlisted Fifth Third Bank, Giordano’s chief lender, as well as Chicago lawyer Michael Gesas and several Giordano’s franchisees “to participate in the scheme” in which they’d push the Apostolous out and take over the company. Secret meetings were held from September 2010 to February 2011, the lawsuit said. Gesas didn’t respond to a request for comment.

First, they intended to weaken the Chicago-based deep dish pizza chain financially, the suit said. Then, the Apostolous “were fraudulently induced” into signing agreements in August 2010 and October 2010 that worsened their lending terms with Fifth Third, which is owed more than $40 million in the bankruptcy.

Fifth Third threatened to “throw the family in the street” if they didn’t go along with the new terms, the lawsuit said. Aynessazian, who also owns eight Giordano’s franchises, Roche and Gesas made “material omissions” to the Apostolous and failed to represent the interests of the Glenview family, the suit said.

Before the execution of the October 2010 deal with Fifth Third, Apostolou had a heart attack, leaving him even more dependent on his lawyers and Aynessazian. The stress also prompted him to see a psychiatrist, the lawsuit said.

“The final step of the scheme involved seizing control of (Giordano’s) by pressuring the Apostolous into filing a Chapter 11 bankruptcy by which the assets and value of (Giordano’s) could be usurped for the benefit of Fifth Third, and the Apostolous’ ownership interests could be purchased at a materially deflated price for the benefit of the franchisee takeover group,” the lawsuit said.

You can read the full article by clicking here.

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CNN reports that French Shoe Designer Christian Louboutin lost the first round of a trademark lawsuit seeking to protect his iconic red soled high heels. Louboutin’s lawyer blasted the Court’s decision and vowed he would fight on in an appeal. The story explains that many designers want to use red soled shoes and don’t think they should be excluded from doing so with one designer receiving a monopoly on that color. The story states:

“Everyone sees the flash of red and associates the red with Louboutin,” attorney Harley Lewin said Thursday about his client.
In fact, Louboutin’s red soles have graced many a red carpets, adorning the feet of celebrities Oprah Winfrey, Heidi Klum and Sarah Jessica Parker. …
In his decision Wednesday, U.S. District Judge Victor Marrero acknowleded that in choosing a red sole for his shoes, Louboutin had “departed from longstanding conventions and norms of his industry,” to create a product, “so eccentric and striking that it is easily perceived and remembered.”
However, Marrero went on to say that, “Louboutin’s claim to the ‘the color red’ is, without some limitation, overly broad and inconsistent with the scene of trademark registration.”
“This was a trademark that never should’ve been issued,” David Bernstein, attorney for the defendant, Yves Saint Laurent said. …
Judge Marrero’s decision drew parallels between painters and fashion designers, calling them both members of a creative industry where no one should be barred from using color to achieve their aesthetic. Doing so could, “interfere with creativity and stifle competition.”
Bernstein agrees. “No designer should be able to monopolize a color.” …
Lewin says his client “separated his shoes from everyone else’s by using a red sole.”
Lewin said he’s never had such an outpouring from his fellow attorneys, law professors and members of the fashion industry, telling him, “This [verdict] is an abomination. Tell your client to appeal.”

You can read the full story by clicking here.

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The New York Times reports that the SEC has now opened for business its new whistblower office as required by the Dodd-Frank financial reform bill. The office will respond to consumer tips regarding securities fraud. If a consumer tip leads to a successful prosecution and recovery, the consumer and the federal goverment will benefit (and, securities fraud will be deterred). Under the whistle blower program, corporate insider tipsters could receive up to 30 percent of the money the SEC collects from the corporate wrong doer and its officers or directors. To qualify for the fraud tip bounty, an employee needs to provide new information that leads to successful enforcement achieving more than $1,000,000 in fines. The SEC will tap into the $450 million Investor Protection Fund to hand out the rewards. The S.E.C. says the program will help it save money as insider tipsters provide a road map to the financially strapped SEC investigators and attorneys.

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One of the most important issues at the outset of every class-action lawsuit is determining the size of the class itself. In some instances, making such a determination can be accomplished through preliminary investigations by the named plaintiff in the suit. However, the true size and scope of the class can only be confirmed by documentation obtained from the defendant company. Our Berwyn overtime class-action attorneys recently encountered a case involving a dispute over the potential members of the class, and wanted to share it with our readers.

In Smallwood v. Illinois Bell Telephone, Plaintiffs held multiple different positions, but were all classified as Outside Plant Engineers (OSPs) at Defendant’s facilities in Elgin and Des Plains, Illinois. Plaintiffs generally performed design and analysis of Defendants plant facilities and Defendant’s network and were classified as exempt employees until 2009, when Defendant reclassified all OSP engineers as non-exempt employees, which entitled them to overtime. After this reclassification, Plaintiffs filed suit for unpaid overtime wages in violation of the Fair Labor Standards Act (FLSA) because they had regularly worked in excess of forty hours per week during the entirety of their employment and had never been paid overtime previously. Plaintiffs then filed a motion requesting conditional collective action certification under §216(b) of the FLSA for all persons who were employed by Defendant as OSPs during the previous three years. Plaintiffs also requested approval of a 90-day opt-in period and a 7-day time period for Defendant to supply them with a list of putative claimants.

Defendants argued that Plaintiffs were not similarly situated because the Plaintiffs had separate and distinct job duties despite being generally referred to OSPs, and provided job descriptions as evidence of these differences. The Court found that Defendant’s arguments regarding the day-to-day work activities of the individual Plaintiffs were premature at this early stage of the case, and because the case was not “clearly beyond the first tier” of FLSA class certification. Therefore, applying a stricter standard of review was inappropriate. The Court then granted the motion for conditional certification, finding that Plaintiffs – through their individual declarations — had met the statutorily required modest factual showing that Plaintiffs were the subject to the Defendant’s common policy or plan to violate the FLSA by failing to pay OSPs overtime wages. Defendants also requested that the notice period be limited to 30 days, but the Court found that an opt-in period of 60 days was appropriate, and gave Defendants two weeks to supply the putative member list, so that collective action notices could be mailed in a timely manner.

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There are hundreds of new cases filed in Illinois courts every day, and many of those cases involve business disputes. At Lubin Austermuehle DiTommaso, we pride ourselves on staying on top of new court filings so that we know of changes in the law as they happen. Our Waukegan business attorneys just found a decision rendered by the Appellate Court of Illinois that provides some useful information for our business clients.

Zahl v. Krupa is a dispute between investors in a fund allegedly run by a company and the directors of that company. Plaintiffs alleged that they were approached by Defendant Krupa, President of Jones & Brown Company, Inc., who solicited money to be invested in a fund only available to the officers and directors (and their family members) of the company. There were two agreements allegedly written on company letterhead that set out the terms of the investments, whereupon Plaintiffs would invest between $100,000 and $160,000 each and receive an 11.1% return guaranteed by Jones & Brown. Plaintiffs each allegedly signed an agreement with Defendant Krupa and gave him the funds requested. There was no other written documentation regarding the investments or the agreements. Plaintiffs allegedly never got the return on their investment nor did they get their money back.

Plaintiffs then filed suit against Krupa, the other officers of Jones & Brown, and the directors of the business. Plaintiffs sued for breach of contract, fraud, and negligent hiring, supervision, and retention. The breach of contract and fraud causes of action were reliant upon the alleged assertion that Defendant Krupa, in soliciting Plaintiffs, was acting as an agent or apparent agent of Jones & Brown. The remaining causes of action sought to hold Defendants liable for Defendant Krupa’s deception because they knew or should have known that he was untrustworthy.

Through discovery, the depositions of several parties allegedly showed that Defendant Krupa never had actual authority to enter into the investment agreements because the directors neither signed nor authorize the agreements. Testimony also revealed that the investment agreements were allegedly outside the scope of Jones & Brown’s normal business as a construction company, which showed that Krupa did not have apparent authority. As a result of these facts, Defendants successfully moved for summary judgment on the breach of contract claim based upon lack of actual and apparent authority. In moving for summary judgment on the fraud claim, Defendants cited Illinois case law holding that directors cannot be held personally liable for fraud unless they personally participated in perpetrating the fraud. As the directors did not sign the agreements or participate in their creation, the court granted summary judgment. Finally, Defendants successfully moved for summary judgment on the negligence claims because they did not know that Krupa had the potential for fraud.

Plaintiffs then appealed the trial court’s ruling against them, and the Appellate Court conducted a de novo review of Defendants’ motion for summary judgment. The Court agreed with the trial court’s findings and held that Defendants were not negligent with respect to Krupa and did not know about his dealings with Plaintiffs. The Court went on to say that there was no reason for Defendants to suspect Krupa of wrongdoing.

In reviewing Zahl v. Krupa, the case serves as a reminder for business investors to carefully examine any investment opportunities and accompanying paperwork to ensure the legitimacy of the investment. Additionally, business owners and directors should keep an eye on their officers and employees to ensure that they do not find themselves defending a lawsuit for their employees’ allegedly objectionable actions.

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Most companies encourage their employees to innovate and come up with ways to improve the processes, products, and service of the business. Such improvements may be patentable inventions, and it is important for business owners to establish who owns that intellectual property and protect any IP that accrues to the company. In the absence of an explicit employment agreement, the ownership of such inventions can come into dispute, and our Joliet business attorneys discovered one such case in the Central District of Illinois federal court.

Shoup v. Shoup Manufacturing is a dispute between a company and its former president over the ownership of several patents. Ken Shoup, Plaintiff, was the president of Defendant Shoup Manufacturing for over twenty years, and during his time as president he conceived of several inventions that were patented on behalf of Defendant. Defendant used those patents and sold products based upon them. However, Plaintiff did not have an express or written employment contract that required assignment of the inventions to Defendant. Eventually, Plaintiff terminated his relationship with Defendant, began a similar business to compete with Defendant, and filed suit alleging patent infringement for Defendant’s continued use of his inventions. Plaintiff sought an injunction to prevent that continued use and monetary damages under 35 USC §271.

Defendant responded to Plaintiffs lawsuit by denying that Plaintiff owned the patents in question, and alleged that Plaintiff was obligated to assign the patents to Defendant, and that it had a valid license to the inventions. Defendant also filed a counterclaim alleging that Plaintiff developed the patents using company resources while he was an employee and officer of Defendant, and that Defendant was the rightful owner of the patents. Defendant sought a compulsory written assignment of the patents and an accounting of Plaintiff’s unauthorized exploitation of them. Plaintiff then filed a motion for Judgment on the Pleadings to dismiss Defendant’s counterclaims.

Plaintiff argued that the Court had no jurisdiction over the claims because ownership of the patent was determined by Illinois State law. The Court agreed that it did not have original jurisdiction over the dispute, but because the counterclaims for ownership of the patents arose out of a common nucleus of operative facts regarding Plaintiff’s original patent infringement suit (which was a federal claim), supplemental jurisdiction was proper. The Court therefore denied Plaintiffs motion, finding Defendant had satisfied the requirements for supplemental jurisdiction under 28 USC §1367(a), and allowed the counterclaim to proceed.

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Class-action lawsuits are common in unpaid overtime cases because the misclassification of employees or miscalculation of overtime usually happens on a large scale because major companies have such sizable work forces. Because such lawsuits can prove to be quite costly, defendant employers will do whatever they can to dispose of those claims in any way possible. Lubin Austermuehle DiTommaso knows the ‘tricks of the trade’ that defendants use, and our Skokie overtime attorneys found a federal case the illustrates one of the tools that wage claim defendants utilize.

Wright v. Family Dollar Inc. is a putative class-action filed by former associates who worked for Defendant Family Dollar and were allegedly not paid regular and overtime wages that they earned in the course of their employment. The named plaintiff, a store manager, alleged that Defendant “withheld compensation from associates by giving its store managers unfeasibly low payroll budgets” that forced those managers to require associates to work without being paid. The case, which alleged violations of the Illinois Wage Payment and Collection Act, and the Illinois Minimum Wage Law, was initially filed in the Cook County Circuit Court, but was removed to the federal court by Defendant.

Defendant then filed a motion to strike class allegations pursuant to FRCP23(c)(1)(A) and (d)(1)(D), claiming that Plaintiffs could not establish typicality and adequacy of representation. The Court granted Defendant’s motion, holding that the named plaintiff, as a manager, participated in the wrongful conduct at issue and her counsel therefore had a conflict of interest with the class members who were associates. The Court also held that the typicality requirement was not met because there were defenses unique to the named plaintiff and other managers in the putative class that did not apply to associate class members.

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This American Life reports in an excellent piece on how a billioinaire inventor who founded a company to aggregate patents and to sue for infringement. This practice may in fact be hindering innovation and the economy the story reports:

Nathan Myhrvold is a genius and a polymath. He made hundreds of millions of dollars as Microsoft’s chief technology officer, he’s discovered dinosaur fossils, and he recently co-authored a six-volume cookbook that “reveals science-inspired tech­niques for prepar­ing food.”

Myhrvold has more than 100 patents to his name, and he’s cast himself as a man determined to give his fellow inventors their due. In 2000, he founded a company called Intellectual Ventures, which he calls “a company that invests in invention.”

But Myhrvold’s company has a different image among many Silicon Valley insiders.

The influential blog Techdirt regularly refers to Intellectual Ventures as a patent troll. IPWatchdog, an intellectual property site, called IV “patent troll public enemy #1.” These blogs write about how Intellectual Ventures has amassed one of the largest patent portfolios in existence and is going around to technology companies demanding money to license these patents.

Patents are a big deal in the software industry right now. Lawsuits are proliferating. Big technology companies are spending billions of dollars to buy up huge patent portfolios in order to defend themselves. Computer programmers say patents are hindering innovation.

But people at companies that have been approached by Intellectual Ventures don’t want to talk publicly.

“There is a lot of fear about Intellectual Ventures,” says Chris Sacca, a venture capitalist who was an early investor in Twitter, among other companies. “You don’t want to make yourself a target.”

You can read a print version of the entire story by clicking here or download the audio version at This American Life’s website by clicking here.

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Fraud Magazine reports on the new changes in federal false claims act. The article states:

A 123-year-old law now has new teeth to better fight today’s tricky fraudsters. Enacted in 1863, the U.S. federal False Claims Act, 31 U.S.C. §§ 3729-3733 (FCA), was designed to fight unscrupulous contractors during the Civil War. The FCA created liability for persons that knowingly submit, or cause another person or entity to submit, false claims for payment of government funds. Today, violators are liable for three times the amount of government damages as well as civil penalties of $5,500 to $11,000 per false claim. …

The U.S. Congress reinvigorated the FCA in 1986 when it changed the law in a number of ways. Among other things, the amendments bolstered the act’s qui tam provisions, provided for treble damages — allowing courts to triple the amount of the actual damages to be awarded — and added an anti-retaliation provision that imposes liability on any employer who takes retaliatory actions against an employee because of the employee’s lawful acts in furtherance of a qui tam action. This ushered in a new era for the FCA because the amendments triggered an increase in the number of qui tam suits: now relators initiate the bulk of cases under the FCA. Also, the amendments shifted the FCA’s focus from fraud involving defense contractors to a wide array of industries — most notably health care. This has led to the federal government’s significant and increasing recoveries under the FCA.

In May 2009, Congress further revamped the FCA by passing the Fraud Enforcement and Recovery Act of 2009 (FERA), which included amendments to the FCA. The amendments made key procedural changes to the FCA and expanded the scope of liability (particularly as it relates to health-care providers). The FERA also set aside $165 million to aid fraud detection and enforcement efforts.
These amendments, coupled with a handful of other legislative changes and administrative actions, are already having a material effect on how the government and private sector are combating fraud.
BY THE NUMBERS: 2010 WAS A GOOD YEAR FOR FRAUD
According to a Nov. 22, 2010, U.S. Department of Justice (DOJ) press release, the DOJ “secured $3 billion in civil settlements and judgments in cases involving fraud against the government in the fiscal year ending Sept. 30, 2010.” Of that sum, $2.3 billion is attributable to cases initiated by whistle-blowers under the FCA relator provisions. This brings the total amount of civil recoveries since the previous major overhaul of the FCA in 1986 to more than $27 billion. This total does not take into account settlements after Sept. 30, 2010, including but not limited to $600 million in civil penalties that were part of a larger $750 settlement with GlaxoSmithKline involving the manufacture and sale of adulterated drug products and three settlements announced in December 2010: 1) $102 million in civil penalties that were part of a $203.5 million global settlement with Elan Corporation resolving off-label marketing allegations, 2) a $421 million settlement stemming from Average Wholesale Price violations by Abbott Laboratories Inc. and Roxanne Laboratories Inc. and 3) a $280 million settlement with Dey, Inc. to resolve marketing spread allegations.

The article goes on to describe what lead the government to beef up the qui tam and whistle blower laws. You can read the full article by clicking here.

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