Tag: lost profits

Medical Device Maker Can Recover Lost Profits Against Double-Dipping Salesman – IL Fed. Court

A Federal court examines the pleading and proof elements of several business torts in a medical device company’s lawsuit against its former salesman and a rival firm.  The plaintiff sued when it learned its former employee was selling on the side for a competitor.

Granting summary judgment for most of the plaintiff’s claims, the Court in HSI v. Pappas, 2016 WL 5341804, dives deep into the various employer remedies where an employee surreptitiously works for a competing firm.

The Court upheld the plaintiff’s breach of fiduciary duty claim against the former salesman as well as its aiding and abetting (the breach) claim against the competitor.  In Illinois, a breach of fiduciary duty plaintiff must show (1) existence of a fiduciary duty, (2) the fiduciary duty was breached, and (3) the breach proximately caused plaintiff’s injury.  An employee owes his employer a duty of loyalty.  (Foodcomm Int’l v. Barry, 328 F.3d 300 (7th Cir. 2003).

A third party who aids and abets another’s breach of fiduciary duty can also be liable where the third party (1) knowingly participates in or (2) knowingly accepts the benefits resulting from a breach of fiduciary duty.encourages or induces someone’s breach of duty to his employer.

Since the plaintiff proved that the ex-salesman breached his duty of loyalty by secretly selling for the medical supply rival, the plaintiff sufficiently made out a breach of fiduciary duty claim against the salesman.  The plaintiff also produced evidence that the competitor knew the salesman was employed by the plaintiff and still reaped the benefits of his dual services.  The competitor’s agent admitted in his deposition that he knew the salesman was employed by plaintiff yet continued to make several sales calls with the plaintiff to customers of the competitor.  The court found these admissions sufficient evidence that the competitor encouraged the salesman’s breach of his duties to the plaintiff.

The plaintiff also produced evidence that the competitor knew the salesman was employed by the plaintiff and still profited from his dual services.  The competitor’s representative admitted in his deposition knowing the salesman was employed by plaintiff yet still made several sales calls with the salesman to some of the competitor’s customers.  The court found this admission sufficient evidence that the competitor encouraged the salesman’s breach of his duties to the plaintiff.

With liability against the individual and corporate defendants established, the Court turned its attention to plaintiff’s damages.  Plaintiff sought over $400K in damages which included all amounts plaintiff paid to the defendant during his 10-month employment tenure, the amounts paid by the competitor to the defendant during his time with plaintiff as well as lost profits

An employee who breaches his fiduciary duties to an employer generally must forfeit compensation he receives from the employer.  The breaching employee must also disgorge any profits he gains that flow from the breach.

This is because under basic agency law, an agent is entitled to compensation only on the “due and faithful performance of all his duties to his principal.”  The forfeiture rule is equitable and based on public policy considerations.

Since the evidence was clear that the defendant failed to perform his employment duties in good faith, the Court allowed the plaintiff to recoup the nearly $180K in compensation it paid the defendant.

The plaintiff was not allowed to recover this amount from the competitor, however.  The Court held that since the payments to the salesman never came into the competitor’s possession, plaintiff would get a windfall if it could recover the same $180K from the competitor.

The Court also allowed the plaintiff to recover its lost profits from both the individual and corporate defendants.  In Illinois, lost profits are inherently speculative but are allowable where the evidence affords a reasonable basis for their computation, and the profits can be traced with reasonable certainty to the defendant’s wrongful conduct.

Since the corporate defendant didn’t challenge plaintiff’s projected profits proof, the Court credited this evidence and entered summary judgment for the plaintiff.

Take-aways:

This case serves as a vivid cautionary tale as to what lies ahead for double-dealing employees.  Not only can the employer claw back compensation paid to the employee but it can also impute lost profits damages to the new employer/competitor where it induces a breach or willingly accepts the financial fruits of the breach.

The case also cements proposition that lost profits are intrinsically speculative and that mathematical certainty isn’t required to prove them.

 

Photographer’s Subjective Belief Of Photos’ Value Not Enough to Show Copyright Damages – Seventh Cir. (Deconstructing Bell v. Taylor – Part II)

In Bell v. Taylor, the Seventh Circuit homes in on the photographer plaintiff’s dearth of damages evidence in his copyright suit about two photographs he took of the Indianapolis skyline.

A copyright owner can recover actual damages suffered as a result of infringement and any profits accruing to the infringer.  To establish an infringer’s profits, the plaintiff must show only the infringer’s gross revenue.  The infringer is then required to prove his “deductible expenses and elements of profit attributable to factors other than the copyrighted work.”  17 U.S.C. § 504(b).

Actual damages in the copyright context usually mean loss in fair market value of the infringed work (here, the two photos), measured by profits lost by the copyright holder due to the infringement.  Evidence of prior sales of the infringed work(s) can satisfy the plaintiff’s actual damages burden but his subjective belief as to the fair market value of a photo isn’t enough to prove damages.

The plaintiff failed to prove actual damages since all he offered was his unsupported subjective belief of what the photos were worth.  He was unable to attribute any lost profits to himself or any profits gained by the infringing defendants.  The plaintiff also couldn’t show that any of the infringing defendants attracted more clients by using the plaintiff’s skyscraper photos.

Afterwords:

While the plaintiff was able to establish ownership in the copyrighted photos as well as infringement (he unquestionably took the photos and copyrighted them and all defendants admitted using one or both of them), the lack of damages evidence doomed his claims.  The plaintiff’s unadorned opinion of the photos’ monetary value was insufficient to meet his copyright infringement damages burden.

To survive summary judgment, the plaintiff likely would have had to proven that the defendants gained increased web traffic as a direct result of using the photos and that the increased traffic translated into measurable profits for the defendants.  Since the plaintiff couldn’t do this, he couldn’t establish copyright infringement damages to the extent his claims would beat a summary judgment motion.

Legal Malpractice Claims: Elements and Damages: Illinois Case Snippets (2015)

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Two First District cases – one published, the other not – decided some eight days apart in April 2015, provide good capsule summaries of the pleading and proof elements of a legal malpractice claim in Illinois, the nature and reach of the attorney-client relationship (“A-C Relationship”) and the universe of possible damages that a plaintiff can recover in legal malpractice suits.

The plaintiff in Tuckaway Development, LLC v. Schain, Burney, Ross & Citron, Ltd., 2015 IL App (1st) 140621-U asked for over $1M but was awarded just over $1,000 in a case involving a late-recorded mortgage in connection with a related real estate deal.  Meriturn Partners, LLC v. Banner and Witcoff, Ltd.’s plaintiff (2015 IL App (1st) 131883) fared much better.  There, a jury awarded the private equity firm plaintiff a cool $6M in a case involving an intellectual property lawyer’s misguided advice concerning patents owned by a waste disposal company the plaintiff planned to invest in.

Here are some key legal malpractice points distilled from the two cases:

1/ To win a legal malpractice suit, a plaintiff must prove the existence of an A-C Relationship;

2/ An A-C Relationship requires both the attorney and client to consent to the relationship’s formation;

3/ That consent (to the formation of an A-C Relationship) can be express (by words) or implied (by conduct);

4/ A client can’t unilaterally create an A-C Relationship and his subjective belief that such a relationship exists isn’t enough to bind the attorney;

5/ Where an attorney knows a person is relying on his services or advice, an A-C Relationship exists;

6/ In some cases, third-party non-clients can establish that an attorney owes contractual duties to them (the third parties);

7/ An attorney’s obligations can extend to third-party non-clients where they are intended beneficiaries of the attorneys’ services;

8/ The measure of damages in an attorney malpractice suit are those damages that would put plaintiff in a position he would have been in had the attorney not been negligent;

9/ Legal malpractice damages present a question for a jury and that damage assessment is entitled to great deference;

10/ Absent evidence that the jury failed to follow the law, considered erroneous evidence or that the verdict was the result of passion or prejudice, an appeals court can’t negate the verdict.

Tuckaway, ¶¶ 28-30; Meriturn, ¶¶ 10, 18.

In Meriturn, the court ruled that the IP lawyer’s duties extended to third party investors even though he never signed a contract with them. The key evidence supporting the finding included testimony and e-mails that showed that the lawyer knew that outside investors were relying on his patent opinions and also illustrated some direct communications between the lawyer and the (non-client) third party investors.  

The lawyer’s failure to limit the scope of his representation to the plaintiff investment firm made it easy for the court to find the lawyer’s fiduciary duties extended beyond his immediate client, the plaintiff.  

The court also upheld the jury’s $6M damage verdict in Meriturn against the plaintiff’s claim that it was too low (the plaintiff sought over $23M,)  While the plaintiff sought lost profits (profits lost as a result of the investment going bad due to the bad patent advice), those damages were foreclosed by the “new business” rule.  

Since the plaintiff’s investment in the waste disposal company was a new venture for both the plaintiff and the company, any claimed lost profits were purely speculative and couldn’t be recovered.

Tuckaway’s paltry damages sum awarded to the plaintiff was also supported by the evidence.  There, the lawyer defendant offered uncontested expert testimony that the property that was subject of the late mortgage recording was worth next to nothing since it was already encumbered by a prior mortgage.  

As a result, the jury’s damage amount – some 800 times less than was claimed by the plaintiff – was supported by the evidence.

Take-aways:

1/ An attorney who doesn’t clearly define and limit the scope of his representation can find himself owing duties to third party “strangers” to his attorney-client agreement;

2/ A jury is given wide latitude in fashioning damage awards.  Unless there is obvious error or where it’s clear they considered improper evidence, their damage assessment will be sustained.