Tag: Federal courts

Discovery Screw-Up Not Enough To Sustain Negligence Claim – 7th Cir.

Nixing an $8M Federal jury verdict, the Seventh Circuit recently held, among other things, that a discovery rule violation cannot undergird a negligent misrepresentation claim.

The plaintiffs in Turubchuk v. Southern Illinois Asphalt Company, 958 F.3d 541 (7thCir. 2020), twice sued a joint venture consisting of two paving contractors for personal injuries sustained in a 2005 traffic accident.  The first lawsuit, sounding in negligence, settled for $1MM, the amount plaintiff believed was the maximum available insurance coverage based on the defendant’s for the JV defendant’s attorneys’ pretrial discovery disclosures.

When the plaintiffs learned that the $1MM coverage cap only applied to the joint venture entity and not to the venture’s component companies, they sued again.  This second suit alleged fraud and negligent misrepresentation – that the defendant’s counsel misrepresented its insurance coverage limits.  Plaintiffs eventually went to trial only on their negligent misrepresentation claim.

This second suit culminated in the jury’s $8MM-plus verdict.  Defendant appealed citing a slew of trial court errors.

Reversing, the Court first considered the effect of Defendant’s erroneous Rule 26 disclosure.   Under Illinois law, an actionable negligent misrepresentation claim requires proof of a legal duty on the person making the challenged statement to convey accurate information.

The Plaintiffs alleged the Defendant’s duty was found in the disclosure requirements of Rule 26 – the Federal rule governing pre-trial witness and document disclosures.  The Court found no case authority that grounded a negligence duty in a federal procedural rule.  Instead, the Court noted, cases from the 9thCircuit and 7thCircuit held just the opposite and further opined that discovery rules are “self-policing:” a discovery violation subjects the violator to sanctions under Rules 26 and 37.

The 7thCircuit also ruled that the District Court erred in finding as a matter of law (on pretrial summary judgment and in-limine orders) that defendant breached its duty to plaintiffs and that plaintiffs justifiably relied on the representations.

Whether a defendant breaches a legal duty and whether a plaintiff reasonably relies on a representation are natural fact questions. Here, on the existence of a legal duty prong, there were a plethora of unanswered questions – i.e. what information did the attorney have at his disposal when plaintiff made a $1MM policy limits (or so he thought) demand before discovery even started? – that raised possible disputed fact questions that are normally jury questions.  The District Court’s pre-trial ruling on these issues hamstrung the defendant’s efforts to challenge whether defendant’s counsel acted negligently. [15]

Another trial court error stemmed from the non-reliance clause contained in the written release that settled the Plaintiffs’ first negligence lawsuit.  A non-reliance clause will normally foreclose a future fraud suit since reliance is one of the salient fraud elements.

That said, Illinois case law is in flux as to whether a non-reliance clause precludes a later fraud action.

In addition, whether reliance is justified in a given fact setting is quintessentially a triable fact question involving what a statement recipient knew or could have learned through the exercise of ordinary prudence.  This case authority uncertainty coupled with the multiple fact issues endemic to the justifiable reliance inquiry made it improper for the District judge to make a per se, pre-trial finding that plaintiffs justifiably relied on the defendant’s counsel’s insurance coverage disclosure.

The evidence was also conflicting on whether the defendant entities even had a joint venture.  Whether or not defendants were a joint venture was integral to the amount of insurance available to settle Plaintiffs’ claims and so it impacted the causation and damages elements of plaintiffs’ negligent misrepresentation case.

A hallmark of a joint venture is joint ownership or control of a business enterprise. See http://paulporvaznik.com/joint-ventures-in-illinois-features-and-effects/6699. This created disputed fact questions that should have been decided by the jury.

Next, the Court overturned the jury’s finding that Plaintiffs’ established that Defendant’s attorney intended to induce Plaintiffs’ reliance on the amount of available insurance coverage. [The intent to induce reliance element was the only negligent misrepresentation element that went to the jury.]

Federal Rule of Evidence 602 requires a witness to testify based on personal knowledge.

However, there was no such testimony adduced at trial. Instead, the only trial evidence on this negligent misrepresentation element was  Plaintiffs’ counsel’s self-serving speculative testimony that defendant’s counsel misrepresented the available insurance coverage to induce Plaintiffs’ to accept a relatively paltry $1MM to settle the case. [21, n. 11]. Moreover, the District Court improperly excluded evidence of Plaintiff’s counsel’s credibility since he had previously surrendered his law license in lieu of disbarment for alleged acts of dishonesty, fraud or misrepresentation. See FRE 608.

In the end, the Court found there was insufficient evidence at trial for the jury to find that Defendant’s counsel intended to induce Plaintiffs’ reliance on the Rule 26 discovery disclosures of insurance coverage.

Afterwords:

A negligent misrepresentation claim cannot be premised on violation of a Federal discovery rule;

The court invades province of the jury when it rules on elements that are inherently fact-driven;

Evidence Rules 602 and 608 respectively limit a trial witness to testifying to matters of personal knowledge and allow an opponent to probe that witness’s credibility by delving into his/her reputation for truthfulness.

 

 

 

Limitation of Damages Clause Doesn’t Bar Trade Secrets, Copyright Claims – IL ND

A Federal district court in Illinois recently addressed the scope of a limitation of damages provision in a dispute over automotive marketing software. The  developer plaintiff in Aculocity, LLC v. Force Marketing Holdings, LLC, 2019 WL 764040 (N.D. Ill. 2019), sued the marketing company defendant for breach of contract – based on the defendant’s failure to pay for plaintiff’s software – and joined statutory copyright and trade secrets claims – based on the allegation that the defendant disclosed plaintiff’s software source code to third parties.

The defendant moved for partial summary judgment that plaintiff’s claimed damages were foreclosed by the contract’s damage limitation provision. The court denied as premature since no discovery had been taken on plaintiff’s claimed damages.

The agreement limited plaintiff’s damages to the total amount the software developer plaintiff was to be paid under the contract and broadly excluded recovery of any “consequential, incidental, indirect, punitive or special damages (including loss of profits, data, business or goodwill).”  The contractual damage limitation broadly applied to all contract, tort, strict liability, breach of warranty and failure of essential purpose claims.

In Illinois, parties can limit remedies and damages for a contractual breach if the agreement provision is unambiguous and doesn’t violate public policy.

Illinois law recognizes a distinction between direct damages and consequential damages. The former, also known as “general damages” are damages that the law presumes flow from the type of wrong complained of.

Consequential damages, by contrast, are losses that do not flow directly and immediately from a defendant’s wrongful act but result indirectly from the act. Whether lost profits are considered direct damages depends on their (the lost profits) degree of foreseeability. In one oft-cited case, Midland Hotel Corp. v. Reuben H. Donnelley Corp., 515 N.E.2d 61, 67 (Ill.1987), the Illinois Supreme Court held that a plaintiff’s lost profits were direct damages where the publisher defendant failed to include plaintiff’s advertisement in a newly published directory.

The District Court in Aculocity found that whether the plaintiff’s lost profits claims were direct damages (and therefore outside the scope of the consequential damages disclaimer) couldn’t be answered at the case’s pleading stage.  And while the contract specifically listed lost profits as an example of barred consequential damages, this disclaimer did not apply to direct lost profits. As a result, the Court denied the defendant’s motion for partial summary judgment on this point. [*3]

The Court also held that the plaintiff’s statutory trade secrets and copyright claims survived summary judgment. The Court noted that the contract’s damage limitation clause spoke only to tort claims and contractual duties. It was silent on whether the limitation applied to statutory claims – claims the court recognized as independent of the contract. [*4] Since the clause didn’t specifically mention statutory causes of action, the Court refused to expand the limitation’s reach to plaintiff’s copyright and trade secrets Complaint counts.

Take-aways:

Aculocity and cases like it provide an interesting discussion of the scope of consequential damage limitations in the context of a lost profits damages claim. While lost profits are often quintessential consequential damages (and therefore defeated by a damage limitation provision), where a plaintiff’s lost profits are foreseeable and arise naturally from a breach of contract, the damages will be considered general, direct damages that can survive a limitation of damages provision.

High-Tech Sports Co.’s Warranty Claims Too Late Says Seventh Circuit (Newspin v. Arrow Electronics – Part I of II)

Newspin Sports, LLC v. Arrow Electronics, Inc., 2018 WL 6295272 (7th Cir. 2018), analyzes the goods-versus-services dichotomy under the Uniform Commercial Code (UCC) and how that difference informs the applicable statute of limitations.

The defendant supplied electronic sensor components for plaintiff’s use in its high-tech sports performance products.  Plaintiff sued when most of the parts were faulty and didn’t meet Plaintiff’s verbal and written requirements.  Plaintiff brought both contract- and tort-based claims against the Plaintiff.

The Breach of Contract Claims

The Seventh Circuit affirmed the dismissal of the contract claims on the basis they were time-barred under the UCC’s four-year limitations period for the sale of goods.

In Illinois, a breach of written contract claimant has ten years to sue measured from when its claim accrues. 735 ILCS 5/13-206.  A claim accrues when the breach occurs, regardless of the non-breaching party’s lack of knowledge of the breach.  For a contract involving the sale of “goods,” a shortened 4-year limitations period applies. 810 ILCS 5/2-102 (goods df.), 810 ILCS 5/2-725(2)(4-year limitations period).

With a mixed contract (an agreement involving the supply of goods and services), Illinois looks at the contract’s “predominant purpose” to determine whether the 10-year or the compressed 4-year limitations period governs.

To apply the predominant purpose test, the court looks at the contract terms and the proportion of goods to services provided for under the contract.  The court then decides whether the contract is mainly for goods with services being incidental or if its principally for services with goods being incidental.

Here, the Court noted the Agreement was a mixed bag: the defendant promised to provide both goods and services.  But various parts of the contract made it clear that the defendant was hired to first provide a prototype product and later, to furnish components pursuant to plaintiff’s purchase orders.  The court found that any services referenced in the agreement were purely tangential to the main thrust of the contract – defendant’s furnishing electronic sensors for plaintiff to attach to its client’s golf clubs.  Support for this finding lay in the fact that the Agreement set out specific quantity and price terms for the goods (the components) but did not so specify for the referenced assembly, manufacturing and procurement services.

Other Agreement features that led to the court ruling the Agreement was one for goods included its warranty, sales tax, “F.O.B. and title passing provisions. The court noted that the warranty only applied to the manufactured products and not to any services and the contract’s sales tax provision – making Plaintiff responsible for sales taxes –  typically applied in goods contracts, not services ones.

Additionally, the Agreement’s F.O.B. (“free on board”) and title passage terms both signaled this was a goods (not a services) deal. See 810 ILCS 5/2-106(1)(sale consists in passing title from seller to buyer for a price). [*5]

Since the plaintiff didn’t sue until more than five years elapsed from the breach date, the Court affirmed the dismissal of plaintiff’s breach of contract, breach of implied covenant of good faith and fair dealing and breach of warranty claims.

The Negligent Misrepresentation Claim

The Seventh Circuit also affirmed dismissal of plaintiff’s negligent misrepresentation claim. Under New York law (the contract had a NY choice-of-law provision), a plaintiff alleging negligent misrepresentation must establish (1) a special, privity-like relationship that imposes a duty on the defendant to impart accurate information to the plaintiff, (2) information that was in fact incorrect, and (3) plaintiff’s reasonable reliance on the information.

Like Illinois, New York applies the economic loss rule. This precludes a plaintiff from recovering economic losses under a tort theory. And since the plaintiff’s claimed negligent misrepresentation damages – money it lost based on the component defects – mirrored its breach of contract damages, the economic loss rule defeated plaintiff’s negligent misrepresentation count. [*10]

Afterwords:

The case presents a useful summary of the dispositive factors a court looks at when deciding whether a contract’s primary purpose is for goods or services.  Besides looking at an agreement’s end product (or service), certain terms like F.O.B., title-shifting and sales tax provisions are strong indicators of contracts for the sale of goods.

The case also demonstrates the continuing viability of the economic loss rule.  Where a plaintiff’s breach of contract damages are identical to its tort damages, the economic loss rule will likely foreclose a plaintiff’s tort claim.