Photo Album Inventor’s Trade Secrets Case Survives Summary Judgment – IL ND

The Northern District recently discussed the reach of the apparent agency doctrine along with trade secret abandonment in a spat over a photo album device.

The plaintiff in Puroon, Inc. v. Midwest Photographic Resource Center, Inc., 2018 WL 5776334 (N.D.Ill. 2018), invented the Memory Book, a “convertible photo frame, album and scrapbook” whose key features included embedded magnet technology (to keep pictures in place) and an interchangeable outside view.

The plaintiff sued the defendant photo-album seller when plaintiff learned the defendant was selling a product similar to the Memory Book. Defendant opposed the suit, claiming it independently created the analogous album product.  Both sides moved for summary judgment motion on multiple claims.

Apparent Agency

The salient agency issue on plaintiff’s breach of contract claim was whether a third-party who performed manufacturing services for the defendant and to whom the plaintiff sent some photo book samples was the defendant’s apparent agent If so, defendant was potentially liable on plaintiff’s breach of contract claim which asserted defendant went back on its promise to build Memory Book prototypes.

In Illinois, a statement by a purported agent alone cannot create apparent authority. Instead, for apparent authority to apply, the court looks to statements or actions of the alleged principal, not the agent. Once a litigant establishes that an agent has authority to bind a principal, the agents’ statements are admissible as an agent’s statement made within the scope of the agency. See Fed. R. Evid. 801(d)(2)(D)(a statement is not hearsay if offered against opposing party and made by party’s agent or employee on a matter within the scope of that relationship while it existed.) [*5]

Here, there was record evidence that a high-ranking employee of defendant referred to both defendant and the manufacturer as “we” in emails. The court viewed this as creating the impression in a reasonable juror that the manufacturer was an agent of defendant.

Because of this fact question – was the manufacturer the defendant’s agent? – both parties’ summary judgment motions were denied on plaintiff’s breach of contract claim.

Trade Secret Misappropriation

The bulk of the opinion focuses on whether the plaintiff sufficiently established that its Memory Book device qualified for trade secret protection and whether there was enough misappropriation evidence to survive summary judgment. The Court answered (a muted) “yes” on both counts.

The court refused to attach trade secret protection to the Memory Book’s embedded magnets feature; the Court noted that magnets had been used extensively in other photo container products.

The Court did, however, afford trade secret protection to plaintiff’s manufacturing specifications.  It found the ‘specs’ secret enough to give plaintiff a competitive advantage.  The Court also noted that plaintiff supplied the specs to defendant only after it signed an NDA.  This was enough for the plaintiff to take its trade secrets claim to a jury and survive summary judgment.

Trade Secret Abandonment

The Court rejected defendant’s argument that plaintiff abandoned its trade secrets by sending samples to retailers and presenting Memory Book at trade shows.

It stated that the trade show attendees could not have identified the Memory Book’s manufacturing specifications merely by looking at the device or handling a sample. The court also credited plaintiff’s evidence that the album retailers weren’t provided with the Memory Book’s specs. The court opined that “reasonable steps for a two or three person shop may be different from reasonable steps for a larger company” and concluded that “[g]iven the fact that [Plaintiff] is a small, one-person company, a reasonable jury could find that [its]  efforts . . . were adequate to protect the Memory Book’s secrets.”

Afterwords:

Corporate entities should not too closely align themselves with third party independent contractors if they wish to avoid contractual liability on an agency theory;

Inventors should make liberal use of NDAs when sending prototypes to vendors, partners or retailers;

A smaller company can likely get away with less strenuous efforts to protect trade secrets than its bigger company counterparts.  The larger and more sophisticated the company, the more sedulous its efforts must be to protect its confidential data.

Course of Dealing Leads to Implied-In-Fact Contract Judgment in Construction Spat – IL First Dist.

While a signed agreement is almost always preferable to an oral one, the absence of a writing won’t always doom a breach of contract action.

Trapani v. Elliot Group, Inc., 2016 IL App (1st) 143734, examines what happens when parties don’t sign a contract but still act as if an agreement exists.

In a construction dispute, the First District affirmed a trial court’s finding that an implied-in-fact contract existed between the contractor plaintiff and the real estate developer defendant.  In upholding the $250K-plus judgment for the plaintiff, the Court highlights the nature and scope of implied contracts and discusses the agent-of-a-disclosed-principal rule.

The plaintiff submitted a draft contract that identified the defendant as “owner.”  The defendant, who wasn’t the owner (it was the developer), never signed the contract.

Despite the absence of a signed contract, the plaintiff performed the work contemplated by the draft agreement and was paid over $2M over a several-month period.  Plaintiff sued to recover for its remaining work after the developer refused to pay.  The developer denied responsibility for the plaintiff work: it claimed it merely acted as the owner’s agent and that plaintiff should have looked to the owner for payment.

The trial court entered judgment for the plaintiff.  It found that the plaintiff and developer, while lacking a signed written agreement, had an implied-in-fact contract.  The developer appealed.

Result: affirmed.

Reasons:

Whether an implied in fact contract (or “contract implied in fact”) exists depends on the surrounding facts, circumstances and expressions of the parties demonstrating an intent to be bound.

A contract implied in fact is a classic contract by conduct.  It arises where the court imposes a contractual duty on a party based on the party’s promissory expression that shows an intention to be bound;

The promissory expression can be inferred from the parties’ conduct and an implied in fact contract can be found even where there is no express contract between the parties;

An implied in law contract differs in that it is an equitable remedy based on the principle that no one should unjustly enrich himself at another’s expense;

Acceptance of an implied in fact contract can be shown by conduct of the parties and a course of dealing that demonstrates the parties’ intent to form a binding agreement.

(¶¶ 40-44)

The Court agreed with the trial court that the parties’ conduct supported a finding of an implied in fact contract.  The Court noted that throughout the construction project, the plaintiff communicated regularly with the defendant and provided lien waivers and payment certificates to the defendant.  The defendant also provided project specifications to the Plaintiff and approved multiple change orders over the course of plaintiff’s work on the site.  Significantly, the defendant never rejected plaintiff’s work or demanded that plaintiff stop working at any time during the project.

Next, the Court tackled the developer’s argument that it wasn’t liable to the plaintiff since the developer was acting as the agent of the property owner.  In Illinois, an agent who contracts with a third party generally is not liable so long as he discloses his principal’s identity.  Where the agent fails to identify his principal, it creates an “undisclosed principal” scenario which will make the agent personally liable if the contract is later breached. (¶ 60)

The reason for the undisclosed principal rule is reliance: the third party (here, the plaintiff) relies on the agent’s credit when entering the contract.  As a result, it would be unfair to immunize the agent and have the undisclosed principal shoulder the financial burden when the agent fails to reveal the principal.  The dearth of evidence showing a relationship between the developer (agent) and the owner (principal) led the Court to sustain the trial court’s finding that the developer was responsible for the outstanding amounts owed the plaintiff contractor.

Afterwords:

1/  An implied in fact contract is a valid, enforceable contract, despite a lack of express agreement.  Instead, the parties’ intention to be contractually liable can be shown through course of dealing between parties;

2/ The agent of a disclosed principal is generally immunized from liability.  However, where the agent fails to sufficiently disclose its principal’s identity, the agent remains liable if the plaintiff can show it relied on the agent’s credit and lacked notice of the agent’s principal’s identity.