The Northern District examines several recurring commercial litigation and employment law issues in nClosures Inc. v. Block and Company, Inc., 2013 WL 6498528. Chief among them are the facts giving rise to common law fraud liability, the fundamentals of a partnership relationship and the fiduciary duties that business partners owe one another.
Plaintiff designs and sells tablet computer accessories. In 2011, plaintiff and defendant entered a partnership agreement and a related Non–Disclosure Covenant (NDA) for the sale of the tablet items. The business relationship later imploded and plaintiff sued for damages.
Granting summary judgment for the defendant, the court examined the quantum of evidence needed to sustain fraud, breach of fiduciary duty and breach of partnership claims under Illinois law.
To establish common law fraud, a plaintiff must prove that: (1) defendant made a false statement; (2) of material fact; (3) which defendant knew or believed to be false; (4) with the intent to induce plaintiff to act; (5) the plaintiff justifiably relied on the statement; and (6) the plaintiff suffered damage from such reliance. But mere expressions of opinion or statements that relate to future or contingent events are not actionable.
Rejecting the plaintiff’s fraud claim, the court found that the plaintiff failed to establish reliance – that it took some action or refrained from action based on a false statement. The defendant’s alleged fraudulent statement – that a partnership existed – was made several months after plaintiff supplied tablet accessories. As a result, it was chronologically impossible for the plaintiff to have relied on the statement.
Next, the court found for the defendant on the plaintiff’s breach of fiduciary duty claim. To prevail on this claim, a plaintiff must show: (1) the existence of a fiduciary duty (basically, a relationship of business trust and loyalty); (2) a fiduciary duty was breached, and (3) that the breach damaged the plaintiff.
A partnership is a quintessential fiduciary relationship in Illinois. To establish a partnership under Illinois law, the plaintiff must show that two or more parties (1) joined together to carry on a trade or venture, (2) for their common benefit, (3) with each contributing property or services to the enterprise, and (4) sharing in the profits.
Here, the court rejected plaintiff’s fiduciary duty claim because there was no partnership between the parties as a matter of law. Since there was no joint sharing of profits and losses, there could be no partnership.
The plaintiff also lost its breach of contract claim based on the defendant’s alleged breach of the confidentiality agreement. In Illinois, a confidentiality agreement will be enforced only “when the information sought to be protected is actually confidential and reasonable efforts were made to keep it confidential.” How much effort is reasonable to keep information confidential is decided on case-by-case basis.
The record was devoid of any efforts the plaintiff made to safeguard its product design drawings. In fact, just the opposite was true: plaintiff freely provided copious design and product data to the defendant for sale to its ( defendant’s) customers. Since plaintiff didn’t expend any physical or fiscal resources to shield its data from disclosure, it couldn’t enforce the confidentiality agreement.
Afterwords:
A central partnership component is the sharing of profits. Without it, there can be no partnership or breach of fiduciary duty;
Fraud claims requires reliance on the false statement before the statement. If the false statement occurs after plaintiff takes action/non-action, the plaintiff will be unable to show he relied on the statement;
Valid nondisclosure agreement requires proof that the subject information is truly confidential and treated as such by the plaintiff.
