Tag: preemption

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.

Corporate Officer Can’t Tortiously Interfere with His Company’s Contract; No Punitives for Breach of Contract – ND IL

In Richmond v. Advanced Pain Consultants, P.C., 2015 WL 4971040 (N.D.Ill. 2015), the plaintiff sued the defendants – two companies that operated suburban (Chicago) pain clinics and their doctor principal – claiming several thousand dollars in unpaid computer and accounting services plaintiff performed at the clinics over a several-month period.  The plaintiff brought claims for overtime under the Federal Fair Labor Standards Act and joined companion state law claims for breach of contract, quantum meruit and tortious interference with contract.  The defendants moved to dismiss plaintiff’s claims arguing preemption and the failure to state a claim, among other things.

In dismissing some of plaintiff’s claims (and sustaining others), the Northern District stressed some vital pleading rules and substantive law principles that apply in Federal court litigation.

Federal Notice Pleading Requirements

Federal Rule 8(a)(2) requires a “short and plain statement of the claim showing a pleader is entitled to relief.”  The plaintiff must provide enough factual context to rise above a speculative level so that a defendant has “fair notice” of what the plaintiff’s claim is.  However, “threadbare recitals of the elements of a cause of action” are not enough to survive a Rule 12(b)(6) dismissal motion.

Preemption and Punitive Damages

The defendant first argued the plaintiff’s common law claims (breach of contract, quantum merit, tortious interference) were preempted by the FLSA.  FLSA preempts common law claims that seek to recover overtime or minimum wage compensation.  But if the plaintiff’s claim seeks something other than overtime or minimum wage payments, those claims aren’t preempted.  Here, several of the plaintiff’s claims were for “regular wages” (not overtime) and so were not preempted by FLSA.

The court next struck plaintiff’s punitive damages claim from his breach of contract suit.  Under Illinois law, contract law’s sole purpose is to compensate the nonbreaching party.  It does not seek to punish the breaching party or give an economic windfall to the plaintiff.  This is true even if the breach is intentional.  Punitive damages can only be allowed in the breach of contract setting where the breach is itself an actionable, independent tort (e.g. a civil conspiracy, fraud, etc.).  Since there was no independent tortious conduct over and above the breach of contract – failure to pay plaintiff for his office services – the court struck plaintiff’s punitive damages claims.

Tortious Interference Against A Single-Member Corporation

The court dismissed the plaintiff’s tortious interference claims against the individual defendant – the sole shareholder of the two corporate defendants.

To state a claim for tortious interference with contract, a plaintiff must allege: (i) the existence of a valid and enforceable contract between a plaintiff and another; (ii) defendant’s awareness of the contractual obligation; (iii) defendant’s intentional and unjustified inducement of a breach of contract; (iv) breach of the contract by the third party caused by the defendant’s wrongful conduct.

A colorable tortious interference claim requires the involvement of at least three entities: (1)-(2) the parties to the contract and (3) the person inducing the breach.

Here, the individual defendant was the sole officer and manager of the two defendant medical offices who had unchallenged authority to make all hiring and firing decisions for the two entities.  The court noted that the two corporate defendants wouldn’t exist without the individual defendant.  There were no other shareholders or parties who had an interest in the corporate defendants.  Since the individual defendant was the only operator and stakeholder in the corporate defendants, he could not tortuously induce a breach of (effectively) his own contract with the plaintiff.

Afterwords:

The case provides some useful damages law reminders including that in a breach of contract suit, punitive damages normally can’t be recovered.  The plaintiff must show that the defendant’s breach is itself an intentional tort for a punitive claim possibly to lie.

Advanced Pain Consultants also makes clear that an officer of a corporation cannot tortiously interfere with a contract involving that corporation where that officer is the only shareholder of the corporation and has sole responsibility for the corporation’s business.

 

Shufflin’ Crew’s Right of Publicity Claim Not Pre-Empted by Copyright Law – IL Northern District Rules

Dent v. Renaissance Marketing Corp., 2015 WL 3484464 (N.D.Ill. 2015) involves a royalty dispute over the 1985 “Super Bowl Shuffle” – a storied (locally, at least) song and video performed by several Chicago Bears football players – the Shufflin’ Crew – to commemorate the Bears’ Super Bowl thrashing of the New England Patriots that year.

And while the case’s connection to football coupled with its celebrity-slash-nostalgia sensibility naturally piques a reader’s interest, the case is legally post-worthy mainly for its useful, quick-hits discussion of the operative rules governing Federal removal jurisdiction and copyright preemption.

The lawsuit pits former Bears players against a marketing firm and an individual who held a now-expired license to market the Shuffle video in an action challenging the defendants’ unauthorized use of the plaintiffs’ identities.

Removal and Remand

Removal (from state court to Federal court) is controlled by 28 USC s. 1441, which provides that any state court suit of which a Federal district court has original jurisdiction may be removed by the defendant;

Only state court cases that could have originally been filed in Federal court are subject to removal;

Once a case is removed to Federal court, it can be remanded (sent back) to the removing state court at any time where the Federal court loses subject matter jurisdiction;

Whether a case is ripe for removal is determined at time of removal – any post-removal amendments to a complaint normally won’t strip the Federal court of jurisdiction over the removed action;

A Federal court can retain supplemental jurisdiction over state law claims where the Federal claim is dismissed.  However, if all claims that gave the Federal court original jurisdiction are dismissed, the Federal court can (and most likely will) relinquish jurisdiction over the state law claims.

What About Preemption?

Preemption applies where a Federal law proverbially “covers the field.”  That is, the Federal law is so broad that it completely displaces state-law claims that cover the same topic.  If a state law complaint implicates (but doesn’t specifically mention) an expansive Federal law that touches on a complaint’s subject matter, that state law case can be removed to Federal court.

The Federal Copyright Act (17 U.S.C. s. 101 et seq.) is a prime example of a Federal statute that pre-empts equivalent state-law rights.  If a state law complaint involves legal and equitable rights that are within copyright’s subject matter, then that state law claim – even though it makes no mention of copyright law can still be removed to Federal court.  (**2-3).

To avoid copyright pre-emption in a royalty dispute, a state law claim must involve a right that is “qualitatively distinguishable” from the five copyright rights – the right to reproduce, distribute, perform, adapt (perform derivative works) and display a work. 17 U.S.C. ss. 106, 301.

Illinois Right of Publicity Act – Is it Pre-empted by the Copyright Act?

In a close call, the answer here was “no.”  The reason: there is a fine-line distinction between using a plaintiff’s identity or persona (which implicates a right to publicity) and infringing on a that plaintiff’s rights to publish (or distribute or reproduce or display) a given work (which invokes copyright law protections).

The Illinois Right of Publicity Act (“IRPA”) gives individuals the right to control and choose whether and how to use an individual’s identity for commercial purposes.  765 ILCS 1075/10.  IRPA bans the unauthorized use of a plaintiff’s personal identity for a commercial purpose.

The crux of the plaintiffs’ IRPA claim was that the defendants held themselves out as having an affiliation with or connection to the Shufflin’ Crew and used the Crew members’ personas in marketing defendants’ products and services.

The court found that the plaintiffs’ IRPA claim wasn’t pre-empted by copyright law.  The reason was because the plaintiffs’ IRPA claim was based on more than the defendants’ unauthorized marketing of the Super Bowl Shuffle music video.  Instead, the plaintiffs alleged the defendants traded in and profited from the crew members’ identities or “personas” in trying to sell Shuffle copies – an action distinct from performing or distributing the work itself.  Since plaintiffs’ IRPA claim was not based on unauthorized reproductions or distributions of the Shuffle music video, copyright law didn’t pre-empt the plaintiffs’ IRPA suit. (**4-5).

Once plaintiffs dropped their displaced state law claims (conversion, injunctive relief, declaratory relief), the Federal court remanded the remaining claims (IRPA, unjust enrichment, equitable accounting) to state court finding the state court better equipped to handle those claims.

Afterwords:

1/ When all Federal claims drop out of a removed case, a Federal court will likely remand the case to state court unless there is a compelling reason to keep it in Federal court;

2/ A state court action can be pre-empted by a Federal statute (like the Copyright Act) where the state court claims implicate Federal statutory rights and obligations even where the state claims make no mention of the Federal claims;

3/ The case illustrates that the respective legal interests vindicated by the Illinois Right to Publicity Act and Federal Copyright statute are similar yet still different enough to avoid pre-emption in certain factual contexts.