Tag: joint venture

Joint Ventures, Close Corporations and Summary Judgment Motion Practice – IL Northern District Case Snapshot

The featured case is Apex Medical Research v. Arif (http://cases.justia.com/federal/district-courts/illinois/ilndce/1:2015cv02458/308072/52/0.pdf?ts=1447939471)

A medical clinical trials firm sued a doctor and his company for breach of contract and some tort claims when the firm learned the doctor was soliciting firm clients in violation of a noncompete signed by him.

In partially granting and denying a flurry of summary judgment motions, the Illinois Northern District highlights the importance of Local Rule 56 statements and responses in summary judgment practice. Substantively, the court provides detailed discussion of the key factors governing whether a business arrangement is a joint venture and what obligations flow from such a finding.

The clinical trials agreement contemplated that plaintiff would locate medical trial opportunities and then provide them to the doctor defendant.  The doctor would then conduct the trials in exchange for a percentage of the revenue generated by them.  The plaintiff sued when the parties’ relationship soured.

Procedurally, the court emphasized the key rules governing Local Rule 56 (“LR 56”) statements and responses in summary judgment practice:

– LR 56 is designed to aid the trial court in determining whether a trial is necessary; Its purpose is to identify relevant admissible evidence supporting the material facts.  LR 56 is not a vehicle for factual or legal arguments;

– LR 56 requires the moving party to provide a statement of material facts as to which the moving party contends there is no genuine issue;

– The non-moving party must then file a response to each numbered paragraph of the movant’s statement of facts and if it disagrees with any statement of fact, the non-movant must make specific reference to the affidavits and case record that supports the denial;

– A failure to cite to the record in support of a factual denial may be disregarded by the court;

– The non-movant may also submit its own statement of additional facts that require denial of the summary judgment motion;

– Where a non-movant makes evasive denials or claims insufficient knowledge to answer a moving party’s factual statement, the court will deem the fact admitted.

(**2-3)

The court focused its substantive legal analysis on whether the individual defendant owed fiduciary duties to the plaintiff.  Under Illinois law, a joint venturer owes fiduciary duties of loyalty and good faith to his other joint venturer.  So too does a shareholder in a close corporation (a corporation where stock is held in the hands of only a few people or family members) – but only if that shareholder is able to influence corporate policy and management.

The hallmarks of an Illinois joint venture are: (1) an express or implied association of two or more persons to carry out a single enterprise for profit; (2) a manifested intent by the parties to be joint venturers; (3) a community of interest (i.e. joint contribution of property, money, effort, skill or knowledge); and (4) a measure of joint control and management of the enterprise.  (*16).

The most important joint venture element is the joint control (item (4)) aspect.  Here, there were provisions of the parties’ written contract that reflected equal control and management of the clinical trials arrangement but other contract terms reflected the opposite – that the plaintiff could supervise the doctor defendant.  These conflicts in the evidence showed there was a genuine factual dispute on whether the parties jointly controlled and managed the trial venture.

The evidence was also murky as to whether the doctor defendant had enough control over the corporate plaintiff to subject the doctor to fiduciary obligations as a close corporation shareholder.  The conflicting evidence led the court to deny summary judgment on the plaintiffs’ breach of fiduciary duty claim. (**16-17).

Afterwords:

Procedurally, the case presents a thorough summary of the key rules governing summary judgment practice in Illinois Federal courts.  The party opposing summary judgment must explicitly cite to the case record for its denial of a given stated fact to be recognized by the court.

The case also provides useful substantive law discussion of the key factors governing the existence of a joint venture and whether a close corporation’s shareholder owes fiduciary duties to the other stockholders of that corporation.

 

‘Closely Intertwined’ Business Relationship Equals Possible Joint Venture – Says Illinois Court

Consider this: a multi-national plastics seller (“Seller”) has a written contract with a plastics manufacturer (the “Manufacturer”) that labels the Manufacturer as an independent contractor of the Seller.  Under the agreement, the Seller supplies material to the Manufacturer who then makes plastic products exclusively for the Seller and sells the products back to the Seller.  The Seller buys the finished products from the Manufacturer at a pre-set price and then sells them to its (Seller’s) own customers.  The Seller and Manufacturer do not share any profits on Seller’s product sales.

An employee of the Manufacturer then gets injured on the job and sues both the Seller and Manufacturer for damages claiming they are joint venturers and therefore equally responsible for his injuries.  This is a significant event given the size and financial resources of the Seller.

Question: does this claim possibly have legs?

Answer: “Maybe.”  The First District held that the question of whether there is a joint venture between Seller and Manufacturer was open enough to survive summary judgment.

The plaintiff in Hyatt v. Western Plastics, 2014 IL App (2d) 140178, suffered severe injuries when his arms got caught in an extruding machine. He sued his employer – the “Manufacturer” in the above snippet – along with the Seller on the theory that there was a joint venture between the Manufacturer and Seller.  The trial court entered summary judgment for the Seller.  The plaintiff appealed.

Reversing the trial court, the First District engaged in a detailed analysis of some Illinois business structure basics:

– A joint venture is an association of two or more persons to carry on a single enterprise for profit;

– Joint venture members  owe fiduciary duties to one another and are vicariously liable for negligent acts of the other joint venturers carried out in the course of the enterprise;

– No formal agreement is necessary to form a joint venture and it can be inferred from the parties’ conduct and surrounding circumstances;

– Joint venture is a creature of contract law; not a statute and depends on the parties’ intent;

– Cardinal joint venture traits include (1) a community of interest – manifested by the joint contribution of money, property, effort, skill or knowledge; (2) an express or implied agreement to carry on an enterprise; (3) a sharing of profits; and (4) joint control and management of the enterprise;

(¶¶ 72-77)

Synthesizing the case’s thick discovery record, the court found there was a disputed question of fact on whether the parties formed a joint venture.

Some of the evidence pieces that was key to the court’s summary judgment reversal included:

(1) The Manufacturer-Seller contract was nearly thirty years’ old (automatically renewing every year) and required the Manufacturer to make some 800,000 pounds of plastic products annually and to sell them exclusively to the Seller at a pre-set formula.;

(2) Exclusivity: the contract prevented the Manufacturer from selling the plastic product to anyone other than Seller and gave Seller the final say over any product or process changes;

(3) A “Cost Improvement” section of the contract provided that Seller and Manufacturer would share the benefits of cost improvements on a 50/50 basis;

(4) Multiple emails revealed that Seller’s and Manufacturer’s personnel discussed a mutually beneficial business relationship and alluded to long-term collaboration and cost savings sharing.

(¶¶ 80-101)

In the end, the Court really didn’t know what to make of the parties’ plastics making arrangement.  The most it could say was that it was  a “long-term, closely intertwined relationship.” (¶ 101).

Taken together, the evidence of the parties’ unique business model raised a material fact question (as to whether it was a joint venture) that should have survived summary judgment.

Afterwords:

Definitely a pro-plaintiff case in the sense that a company that’s arguably twice removed from an injured plaintiff and who sells to a universe of consumers unrelated to those the plaintiff’s employer sells to can still be deemed a joint venturer of that employer.

The case could have huge liability ramifications.  If a deep-pocketed seller can be viewed as being in a joint venture with a separate manufacturer, that seller is potentially on the hook for a high dollar jury verdict or settlement for actions of the manufacturer alone.

The case lesson for business defendants is clear: If the intent is to be considered separate and independent, they should document that and take pains not to jointly control business property or share in its profits.

 

Illinois Joint Ventures – Features and Effects

Primo v. Pierini, 2012 IL App (1st) 103553-U discusses the key elements of a joint venture and how it differs from other common business arrangements.

The plaintiff contractor sued a construction manager to recover about $300k in building improvements it made in building a Chicago restaurant.  The construction manager was hired by the restaurant owner and was actively involved in funding the construction.

The construction manager in turn filed a third party suit against the restaurant owner for contribution.  It (the construction manager) claimed that it merely lent money to the restaurant owner and that there was no formal business relationship between them.

After a bench trial, the court found a joint venture existed between the construction manager and the restaurant owner based on their oral agreement to share restaurant profits among other reasons.

The court entered judgment for the plaintiff for nearly $300k and awarded defendant about $150K (one-half of the judgment) in its third-party claim  against the restaurant operator.  The court later reduced the judgment to about $140k after excising over $150k in extras and prejudgment interest from the judgment amount.  Each side appealed.

Result: Reduced judgment (minus extras and interest) affirmed.

Reasons:

The appeals court agreed with the trial court that there was a joint venture between the construction manager and restaurant owner.

– A joint venture is an association of two or more persons or entities to carry out a single, specific enterprise;

-Whether a joint venture exists is a factual inquiry and no formulaic rules ultimately determine whether a joint venture exists;

– Where the parties’ conduct evinces an intent to share profits from a common enterprise, the court will find a joint venture exists;

– The key joint venture elements are: (1) an express or implied agreement to carry on an enterprise; (2) a manifestation of intent by the parties to be associated as joint venturers; (3) joint interest as shown by the contribution of property, money or knowledge by each joint venturer; (4) joint control or ownership over the enterprise; and (5) the joint sharing of profits and losses;

– Like a partnership, each joint venture participant is an agent of the other one and is liable to third parties for another participant’s acts taken in the regular course of the venture’s business;

– Unlike an LLC or corporation, a joint venture is not a separate legal entity (i.e. like a corporation, LLC or limited partnership is): instead, a joint venture is a contractual relationship formed between the constituent venturers;

– Joint ventures can be made up of individuals, corporations, or a combination of the two.

(¶ 56-58).

The court rejected the defendant construction manager’s claim that it was only a lender (and not a partner or joint venturer) to the restaurant business.  The construction manager relied on section 202 of the Illinois Partnership Act (805 ILCS 206/202(a), (c)), which provides that receiving debt repayments from a business venture signals a lender-borrower relationship instead of a profit sharing/partnership one. (¶ 59-60)

Here, the court credited trial testimony that the parties planned to split profits well after the restaurant owner repaid the defendant’s loan.  In addition, the construction manager’s principal’s self-serving written statement that “I am not a partner” wasn’t sufficient to cast doubt on the trial testimony that defendants and the restaurant owner agreed to share profits indefinitely. (¶ 62)

In sum, the defendants’ active and direct involvement in funding the restaurant’s construction coupled with the agreement with the owner/operator to share in the profits manifested the intent to form a joint venture.

Afterwords

– A hallmark of a joint venture is the sharing of profits and losses in a common, one-time enterprise;

– Where one party lends money to another, this generally denotes a lender-borrower arrangement; not a joint venture or partnership one;

– Each enterprise participant’s active involvement in day-to-day functioning of a business, coupled with profit and loss sharing, is strong evidence of joint venture relationship.