Illinois Fraud Law, Corporate Opportunity Doctrine and Recoverable Damages – A Case Note

The Court also affirmed summary judgment on the plaintiff’s fraud claims against its former corporate President defendant in Star Forge, Inc. v. F.C. Mason Co., 2014 IL App (2d) 130527-U.  Plaintiff’s two-fold fraud claims were premised on (1) defendant misrepresenting to plaintiff the requirements of a big money contract involving John Deere so that a competitor of plaintiff’s got the contract and (2) defendant concealing his contractual relationship with different steel maker competitors.

In Illinois, fraud encompasses affirmative misrepresentations as well as omissions or concealment.  A fraud by omission plaintiff must show (1) defendant concealed a material fact under circumstances that created a duty to speak; (2) the defendant intended to induce a false belief, (3) the plaintiff could not have discovered the truth through reasonable inquiry or inspection, or was prevented from making a reasonable inquiry or inspection, (4) plaintiff relied on the defendant’s silence as a representation that the fact didn’t exist and (5) the concealed information was such that plaintiff would have acted differently had he been aware of it; and (6) plaintiff’s reliance resulted in damages.  (¶ 35).

Affirming the trial court’s fraud judgment for the plaintiff, the Second District held that the existence of a fiduciary relationship between plaintiff and defendant (the corporate President) obligated the defendant to apprise the plaintiff of material facts concerning the defendant’s other business dealings and that he violated this duty by hiding his financial interest in competing companies from the plaintiff.  The Court further found that the plaintiff established that its reliance on the defendant’s silence was equivalent to a representation that the defendant was not working for plaintiff’s competitors.  The plaintiff also showed that it would have acted differently in deciding which jobs to pursue with customers had it known the extent of plaintiff’s anti-competitive conduct and that plaintiff suffered damages as a result of its reliance on defendant’s silence.  (¶ 36).

The Court upheld the trial court’s damage award which equaled nine (9) years’ worth of compensation the plaintiff paid to the defendant during the time he was simultaneously representing both the plaintiff and competing steel companies.  In Illinois, a corporate officer who defrauds his company can be liable for the full forfeiture of compensation during the time he breaches his fiduciary duties or actively defrauds the company.   This is because a duty-breaching defendant isn’t entitled to compensation for the time span that he acts adversely to his employer’s interests.  The purpose of this damage rule is to deprive the wrongdoer of gains resulting from his breach of fiduciary duty.   A corporate plaintiff can recover both the compensation it paid to an unfaithful fiduciary as well as lost profits from competitors who benefitted from the fiduciary’s faithless conduct.  (¶ 48).(¶¶ 45-46, 48).

The Court rejected defendant’s set-off argument too: that plaintiff’s damages should be reduced or “set off” by the amount the plaintiff received from the settling corporate defendants.  But the Court refused to reduce plaintiff’s damages (lost profits against the corporate defendants plus the compensation paid out to the individual defendant) because the plaintiff’s injuries caused by the individual defendant differed from those caused by the corporate defendants.

The injury sustained as a result of the individual defendant’s (the corporate President) conduct was the loss of his impartial and undivided services during the time he was a corporate officer.  In contrast, the injury resulting from the corporate competitors’ conduct was the lost profits that the individual defendant steered away from the plaintiff and toward the competitors.

Afterword: This case shows that a fraud and breach of fiduciary duty plaintiff – at least in the corporate officer context – can recover both (1) compensation paid to the officer for the time span covering his breach as well as (2) lost profits against the competing businesses that reaped the benefits of the officer’s conduct.  It also illustrates that there is often factual overlap between breach of fiduciary duty claims and fraud claims against a corporate agent that violates his obligations of business loyalty to his corporate employer.

Tortious Interference With Prospective Economic Advantage – An Illinois Case Note

In Davidson v. Schneider, 2014 WL 656780 (N.D.Ill. 2014), the Court describes the quantum of proof required for a plaintiff to survive summary judgment on both the damages element of a breach of contract claim and the “reasonable expectancy” prong of a tortious interference claim.

The plaintiff and defendant were competitors in the baseball vision testing business.  They were also parties to prior patent infringement litigation that culminated in a written settlement agreement that contained broad non-disparagement language.

 When the plaintiff found out that one of defendant’s employee’s was bad-mouthing the plaintiff to a college softball coach and prospective client, he sued in Federal court.  After discovery finished, the Court entered summary judgment for defendants on plaintiff’s breach of contract and tortious interference claims.

An Illinois breach of contract plaintiff must show (a) existence of a contract, (b) performance by the plaintiff, (c) breach by the defendant and (d) compensable damages resulting from the breach.  Davidson, *3, Asset Exch. II, LLC v. First Choice Bank, 2011 Ill.App. (1st) 103718. 

Damage to reputation or goodwill resulting in a diminished ability to make money as a result of a breach can be recovered in a breach of contract suit.  However, where a party shows a breach but no damages, the contract claim is “pointless” and must failDavidson, *5.

Here, the plaintiff established a contract (the settlement agreement) and defendant’s breach (by disparaging plaintiff’s products and services).  However, the plaintiff was unable to pinpoint any measurable money damages resulting from the defendants’ denigrating the plaintiff’s vision training services.

 Plaintiff cited no lost clients or business opportunities traceable to the defendants disparaging comments.  Without any damages evidence, the plaintiff’s breach of contract claim failed as a matter of law.  Davidson, *4.

The Court also granted summary judgment on plaintiff’s tortious interference with prospective economic advantage claim.  Plaintiff’s tortious interference count was based on derogatory comments defendants’ employee made to another baseball coach and prospective customer of plaintiff. 

The elements of tortious interference with prospective economic advantage are: (1) a reasonable expectation of entering a valid business relationship, (2) defendant’s knowledge of the expectation, (3) purposeful interference by the defendant that prevents plaintiff’s expectation from ripening into a business relationship, and (4) damages to the plaintiff resulting from the interference.  *5

The mere  hope for or possibility of a future business relationship is insufficient to show a reasonable expectancy. 

Here, plaintiff’s evidence showed only a nebulous hope of a future business pairing with the baseball coach to whom defendants trashed plaintiff’s product.  He didn’t show any specific business arrangement that was in the works.  As a result, plaintiff failed to raise a triable fact question on whether he had a reasonable expectation of a future business relationship with the baseball coach.

Take-aways: A breach of contract plaintiff’s failure to prove damages with tangible evidence of financial loss at the summary judgment state will doom his case. 

To survive summary judgment on a tortious interference with prospective economic advantage claim, the plaintiff must offer tangible evidence that he had a specific, proposed business arrangement with an identified third party – instead of a wish or hope for one – to meet the tort’s reasonable expectancy test.