The Northern District of Illinois provides a useful synopsis of Federal court summary judgment standards and the scope of some Illinois business torts in a dispute over a canceled advertising contract to sell hand tools.
The plaintiff in Loggerhead Tools, LLC v. Sears Holding Corp., 2016 WL 5111573 (N.D.Ill. 2016) sued Sears when it canceled an agreement to promote the plaintiff’s Bionic Wrench product and instead bought from plaintiff’s competitor. The plaintiff claimed that after Sears terminated their contract, it was too late for the plaintiff to supply product to competing retailers. Plaintiff filed a flurry of fraud claims alleging the department store giant made inflated sales forecasts and failed to disclose it was working with plaintiff’s competitor. Sears successfully moved for summary judgment on the plaintiff’s claims.
Summary Judgment Guideposts
Summary judgment is appropriate where the movant shows there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law. Courts deciding summary judgment must view the facts in the light most favorable to the nonmoving party only if there is a “genuine” dispute as to those facts. A genuine fact dispute exists where a reasonable jury could return a verdict for the nonmoving party.
The summary judgment movant has the initial burden of establishing an absence of a genuine fact dispute. Once the movant meets this burden, it then shifts to the nonmovant/respondent who must point to specific evidence in the record that shows there is a genuine issue for trial. But only “material” factual disputes will prevent summary judgment. A fact is material where it is so important that it could alter the case’s outcome.
The crux of Plaintiff’s fraud suit was that Sears strung Plaintiff along by creating the false impression that Sears would market Plaintiff’s products. Plaintiff alleged that Sears concealed its master plan to work with Plaintiff’s competitor and only feigned interest in Plaintiff until Sears struck a deal with a competing vendor.
An Illinois fraud plaintiff must show: (1) defendant made a false statement of material fact, (2) defendant knew the statement was false, (3) the defendant intended the statement to induce the plaintiff to act, (4) the plaintiff justifiably relied on the statement’s truth, and (5) plaintiff suffered damages as a result of relying on the statement.
A bare broken promise doesn’t equal fraud. An exception to this “promissory fraud” rule is where the defendant’s actions are part of a “scheme to defraud:” that is, the defendant’s actions are part of a pattern of deception. The scheme exception also applies where the plaintiff can show the defendant did not intend to fulfill his promise at the time it was made (not in hindsight).
In determining whether a plaintiff’s reliance on a defendant’s misstatement is reasonable, the court looks at all facts that the plaintiff had actual knowledge of as well as facts the plaintiff may have learned through ordinary prudence.
Here, Sears’ sales forecasts were forward-looking, “promissory” statements of hoped-for sales results. Sears’ profuse contractual disclaimers that sales forecasts were just “estimates” to be used “for planning purposes” only and “not commitments” prevented the Plaintiff from establishing reasonable reliance on the projections.
The court also rejected the plaintiff’s fraudulent concealment claim. To prevail on a fraud claim premised on concealment of material facts, the plaintiff must show that the defendant had a duty to disclose the material fact. Such a duty will arise where the parties have a special or fiduciary relationship that gives rise to a duty to speak.
Parties to a contract are generally not fiduciaries. Relevant factors to determine whether a fiduciary relationship exists include (1) degree of kinship of the parties, and (2) disparity in age, health, mental condition, education and business experience between the parties.
Here, there was no disparity between the parties. They were both sophisticated businesses who operated at arms’ length from one another.
Afterwords: This case provides a good distillation of summary judgment rules, promissory fraud and the scheme to defraud exception to promissory fraud not being actionable. It echoes how difficult it is for a plaintiff to plead and prove fraud – especially in the business-to-business setting where there is equal bargaining power between litigants.
This case provides a good distillation of summary judgment rules, promissory fraud and the scheme to defraud exception to the promissory fraud rule. The case further illustrates the difficulty of proving fraud – especially in the business-to-business setting where there is equal bargaining power between the parties.