Unjust Enrichment – For When the Handshake Deal Goes Bad

An imploded business arrangement for importing and then selling Christmas decorations sets the stage for the Northern District’s (IL) analysis of a slew of signature commercial litigation issues in Sunny Handicraft, Inc. v. Envision This!, LLC, 2015 WL 231108. 

While the case only involves a ruling on a 12(b)(6) pleadings motion, it’s still post-worthy for its discussion of some important and recurring issues that arise in breach of contract lawsuits.

The plaintiff ornament maker entered into an agreement with defendants – a buyer (“Buyer”) and end-retailer (“Retailer”) of the decorations, respectively – for about $3.5M worth of Christmas-themed merchandise. Plaintiff sued when the defendants failed to pay.

The Buyer, for its part, counter-sued the plaintiff to recoup unpaid advertising costs and miscellaneous shipping charges. The Retailer moved to dismiss several complaint counts and the plaintiff moved to dismiss the purchaser defendant’s counterclaims.

Granting the Retailer’s motion to dismiss the unjust enrichment count, the court pronounced that unjust enrichment  is a ‘quasi-contract’ theory where a court implies a contract in order to prevent unjust results. 

An unjust enrichment plaintiff must allege that defendant has unjustly retained a benefit to the plaintiff’s detriment and that retention violates fundamental principles of equity, justice and good conscience.

But a party can’t claim unjust enrichment where an express contract governs the parties’ relationship. A plaintiff can, however, plead unjust enrichment as an alternative theory to a breach of contract claim as long as the plaintiff doesn’t incorporate the express contract allegations into its unjust enrichment ones.

Generally, a court will not impose unjust enrichment liability against a third party that receives a benefit from the plaintiff’s agreement with another party. So, if x and y have a contract, x normally won’t be able to sue z just because z happens to benefit from x’s services. 

The only time a third party can be liable for unjust enrichment is where the plaintiff can show that the plaintiff had a reasonable expectation of being paid by the third party. *4.

The court granted the Retailer’s motion to dismiss the plaintiff’s unjust enrichment claim and denied the plaintiff’s motion to dismiss the Buyer’s unjust enrichment counterclaim.  On the former claim, the plaintiff failed to allege any conduct by the Seller that would lead plaintiff to have a reasonable expectation of being paid by the Seller.

Plaintiff’s conclusory allegation that the Retailer “was aware” that Plaintiff expected payment was too bare to survive dismissal.  The plaintiff was required to plead specific conduct by the Retailer that could lead plaintiff to reasonably expect payment.

The court did allow the Buyer’s unjust enrichment counterclaim to proceed.  The Buyer pled unjust enrichment in the alternative to its breach of contract count and alleged that it conferred a measurable benefit – marketing services and paid shipping expenses – on the plaintiff and that the plaintiff’s retention of the Buyer’s services without paying for them was unfair.

Afterwords:

– Unjust enrichment is viable alternative claim even where there is an express contract that governs;

– A plaintiff can implicate a third party in an unjust enrichment case where he can offer evidence or plead facts that demonstrate the plaintiff had a reasonable expectation of being paid by the third party.

No Punitive Damages For Breach of Contract; Conversion of ‘Intangible’ Property = An Open Question – IL ND

Sometimes in breach of contract suits, I see clients (and attorneys, too!) let visceral considerations cloud their judgment.  They let emotions factor into a litigation equation that should purely be about “dollars and cents.”  What’s to an objective observer a simple monetary dispute, becomes a complex psychological event when a breach of contract plaintiff views the defendant’s breach as a personal affront – one calling out for revenge.  Usually though, a breaching defendant isn’t trying to make the plaintiff’s life miserable.  Instead, the defendant typically can’t meet his financial obligations under the agreement or he lets his performance lapse for purely strategic reasons. 

One way the law puts a check on emotions dominating a business dispute is by preventing plaintiffs from bootstrapping a breach of contract claim into a fraud claim.  Another way is through the firmly entrenched legal principle that punitive damages cannot be recovered for a breach of contract.

The latter rule is at play in David Mizer Enterprises, Inc. v. Nexstar Broadcasting, Inc., 2015 WL 469423 (N.D.Ill. 2015), where a business consultant sued a television broadcasting firm under various legal and equitable theories for wrongfully disclosing plaintiff’s proprietary software and business model to third parties in violation of a written licensing agreement.

The plaintiff alleged that after a three-year license period expired, defendant continued using plaintiff’s secret software and business model without permission.

The plaintiff sought over $330K in damages in its breach of contract suit and sought an award of punitive damages premised on the defendant’s bad faith.  The plaintiff also joined a conversion count based on the defendant’s unauthorized use of plaintiff’s software after the license lapsed.  Defendant moved to dismiss and to strike plaintiff’s punitive damages allegation.

Result: motion to dismiss denied; motion to strike punitive damages claim granted

Reasons:

Under Illinois law, punitive damages are generally not available for a breach of contract.  An exception to this rule applies where the contract breach amounts to an independent tort is done with “malice, wantonness or oppression.”  The court looks to a defendant’s motive for its breach in determining whether punitive damages are warranted.

The court struck the plaintiff’s punitive damages claim.  The plaintiff failed to allege malice or bad faith conduct by the defendant.  Instead, plaintiff’s allegations were consonant with a basic breach of contract action.  As a result, punitive damages weren’t warranted.

Next, the court sustained the plaintiff’s conversion claim. Under Illinois law, a conversion plaintiff must establish that he (1) has a right to certain property; (2) has an absolute and unconditional right to the immediate possession of the property; (3) made a demand for possession; and (4) the defendant wrongfully and without authorization assumed control, dominion, or ownership over the property.

Typically, conversion must involve tangible, personal property like computer hardware or a car, for example.  Whether conversion applies to intangible property is an open question with cases going each way.

The defendant argued that plaintiff was suing to recover damages based on defendant’s interference with its intangible electronic data.  Rejecting this argument, the court found that since the licensing contract specifically mentioned plaintiff’s software and related writings, the lifted property was tangible enough to underpin a conversion claim.

The court held that the plaintiff’s allegation that the defendant deprived Plaintiff of the exclusive benefit of its software and information, stated a valid conversion claim sufficient to survive a motion to dismiss.

Take-aways:

Punitive damages aren’t recoverable in breach of contract suits.  The only exception is where the plaintiff can show the defendant’s breach was done with malice: for the sole purpose of harming the plaintiff;

Whether intangible property (like computer data) can underlie a conversion action is an open question.  The more “hard” or concrete property the plaintiff can point to, the better his chances of making out a civil conversion suit. 

 

Contractual Arbitration Clauses and Unconscionability – IL 4th Dist. Case Note

Courts generally favor contractual arbitration clauses. The reason is that they (in theory at least) save litigants’ time and money and also reduce court congestion.

Arbitration provisions appear in varied business settings ranging from franchise agreements and personal services contracts to employment agreements and most everything in between.

Willis v. Captain D’s , 2015 IL App (5th) 140234-U examines an arbitration clause in the employment contract context and whether the clause is expansive enough to cover an employee’s sexual harassment claim involving a co-worker.

There, a plaintiff grocery store cashier signed an employment contract that contained broad arbitration language.  Claiming her co-employee sexually harassed her and the defendant did nothing to stop it, the plaintiff filed multiple state court tort claims without first demanding arbitration. The trial court denied the employer defendant’s motion to compel arbitration finding the plaintiff’s assault and battery claims did not arise out of her employment and were beyond the scope of arbitration.  Defendant appealed.

Held: Reversed

In finding that plaintiff’s claims fell within scope of the arbitration clause, the court announced the key rules that govern arbitrability:

– Under the Illinois Uniform Arbitration Act, 710 ILCS 5/1 et seq., parties are bound to arbitrate the issues they agreed to arbitrate;

– A court (not an arbitrator) decides whether a particular dispute is subject to arbitration;

– The two main arbitrability issues are (1) whether the parties are bound by a given arbitration agreement, and (2) whether an arbitration provision applies to a particular type of controversy;

– Where two parties mutually agree to arbitrate, there is sufficient consideration to bind each side to the arbitration provision;

– Inclusion of the phrase “arising out of” or “related to” in connection with an arbitration agreement denotes broad application of the arbitration agreement;

– An arbitration clause will be deemed procedurally unconscionable where it’s difficult to find, read or understand and where a party didn’t have reasonable opportunity to appreciate the clause;

– Substantive unconscionability will negate an arbitration agreement where it’s terms are blatantly skewed in one side’s favor to the exclusion of the weaker contracting party or where arbitrating would impose substantial costs on a party;

– Continued employment after notice of an arbitration agreement is sufficient consideration to enforce the agreement.

(¶¶ 12-32)

Validating the arbitration clause, the court held that it was supported by consideration. It found the employer’s promise to employ the plaintiff and to keep employing her in exchange for plaintiff signing the employment contract was sufficient to bind the plaintiff to the arbitration agreement.

The court also rejected the plaintiff’s unconscionability arguments. On the procedural unconscionability front, the court found that the plaintiff had two separate occasions to review and accept the arbitration agreement (plaintiff was previously hired a few years ago by the same defendant) and the arbitration language conspicuously appeared in all-caps. It wasn’t buried in a maze of fine print.

Substantively, the court found that the plaintiff failed to support her claim that submitting to arbitration was cost-prohibitive – especially since the court filing fee exceeds the contractual arbitration fee.

The court also found that the arbitration agreement encompassed the plaintiff’s claims. While her assault and battery claims were against an individual employee, her remaining claims against the corporate defendant sounded in negligent hiring, retention and supervision. In light of the arbitration clause’s sweeping language, these claims clearly fell within the reach of the arbitration clause.

Take-aways:

– The court (not an arbitrator) determines whether a dispute is subject to arbitration;

– A promise of employment conditioned on employee signing arbitration agreement will likely meet requirements of a valid contract;

– Broad arbitration language that contains “arising out of” and “related to” phrasing will constitute strong support for a broad application of an arbitration clause.