3COM Corp. v. Electronic Recovery Specialists

• Decision Date: 09 June 2000
• Docket Number: No. 99 C 6981.,99 C 6981.
• Citation: 104 F.Supp.2d 932
• Parties: 3COM CORPORATION, Plaintiff, v. ELECTRONIC RECOVERY SPECIALISTS, INC., Davis Gilbert and Leonard Caldwell, Defendants.
• Court: U.S. District Court — Northern District of Illinois

104 F.Supp.2d 932

3COM CORPORATION, Plaintiff, v. ELECTRONIC RECOVERY SPECIALISTS, INC., Davis Gilbert and Leonard Caldwell, Defendants.

No. 99 C 6981.

United States District Court, N.D. Illinois, Eastern Division.

June 9, 2000.

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Anthony Joseph Carballo, Fred L. Foreman, Victor J. Pioli, Freeborn & Peters, Chicago, IL, for Plaintiff.

Andrew Kopon, Jr., John P. Lynch, Jr., Charles R. Wulf, Cremer, Kopon, Shaughnessy & Spina, Chicago, IL, Michael R. Graf, Michael R. Graf, P.C., Arlington Heights, IL, for Defendants.

MEMORANDUM OPINION AND ORDER

MORAN, Senior District Judge.

Plaintiff 3Com Corporation, as successor to U.S. Robotics, Inc. (USR), brings this diversity action against defendants Electronic Recovery Specialists, Inc. (ERS), Davis Gilbert (Gilbert) and Leonard Caldwell (Caldwell), alleging various violations of contract, tort, and state statutory law. ERS and Gilbert¹ have moved to dismiss all but one of plaintiff's claims and to curtail plaintiff's ability to recover punitive damages and prejudgment interest. For the reasons set forth below, defendants' motion is granted in part and denied in part.

BACKGROUND

Between May 1995 and April 1997, USR and ERS were engaged in a contractual agreement regarding the sale of electronic and metal scrap generated in the course of USR's business.² Under the terms of the agreement ERS would pick up the scrap from one of USR's facilities, sell the scrap to third party customers, and then pay USR 70% of the scrap's resale value. ERS would weigh the scrap after removing it from USR's facilities, and USR relied on ERS to accurately report both the amount of scrap it took from USR and the money owed to USR under the terms of the agreement.

In the complaint, plaintiff alleges that ERS and its president, Davis Gilbert, engaged in a scheme to intentionally misrepresent the amount of scrap they took from USR. Specifically, plaintiff claims that ERS and Gilbert understated the actual weight and value of the scrap they removed from USR such that they paid substantially less for the scrap than was required under the agreement. ERS and Gilbert were able to complete this scheme with the assistance of Leonard Caldwell, who served as supervisor in charge of USR's electronic component and metal scrap disposal program in Illinois. Plaintiff alleges that from at least February through September 1996, Caldwell participated in the unlawful scheme and received approximately $80,000 in kickbacks from ERS and Gilbert in return for his complicity.

USR learned of the alleged scheme in April 1997. On July 9, 1997, Caldwell was interviewed by the local police and confessed his role in the operation. On May 26, 1999, Caldwell pled guilty to theft and was sentenced to one-year probation. Plaintiff thereafter filed this lawsuit on October 25, 1999. The first amended complaint, filed January 27, 2000, alleges breach of contract against ERS (count I), tortious interference against Gilbert (count II), breach of fiduciary duty against Caldwell (count III), and against all three defendants alleges fraud/deceit (count IV), violation of the Illinois Consumer Fraud and Deceptive Business Practices Act (count V), conversion (count VI), restitution (count VII), accounting (count VIII), and constructive trust (count IX).³ Defendants seek to dismiss counts I, II, and IV-IX for failure to state a claim under Rule 12(b). See Fed. R.Civ.P. 12(b)(6). Defendants also have moved to limit plaintiff's ability to recover punitive damages and prejudgment interest with respect to certain claims under Rule 12(f). See Fed.R.Civ.P. 12(f). We address each of defendants' arguments below.

DISCUSSION

I. Breach of Contract

In count I of the complaint plaintiff alleges that ERS breached its contract with USR by intentionally paying less for the scrap than was owed under the terms of the agreement. Defendants argue that this claim is time-barred, at least in part. According to defendants the contract at issue here concerns a transaction in goods and therefore is governed by Article 2 of the Uniform Commercial Code (UCC), 810 ILCS 5/2-101 et seq. Article 2 of the UCC contains a four-year statute of limitations provision. See 810 ILCS 5/2-725. Since the original complaint was filed on October 25, 1999, defendants argue that plaintiff cannot maintain an action for any acts constituting a breach of contract that took place prior to October 25, 1995.

Plaintiff responds by characterizing the agreement between USR and ERS as a contract for services and therefore outside the scope of the UCC and its four-year limitations period. Plaintiff emphasizes that the agreement required ERS to pick up and dispose of USR's scrap, making it a contract for disposal services and not for sale of goods. We are not persuaded. Under Article 2 of the UCC, the term "goods" is defined to include "all things, including specially manufactured goods, which are movable at the time of identification to the contract for sale other than the money in which the price is to be paid, investment securities and things in action." 810 ILCS 5/2-105 (internal citation omitted). Given this broad construction, it is not surprising that contracts regarding the sale of scrap traditionally have been defined as transactions in goods falling under Article 2 of the UCC. See Unisys Corp. v. Electronic Recovery, Inc., 1995 WL 746241, at *3 (N.D.Ill.Dec.7, 1995) (collecting cases).

Even if we consider the agreement between USR and ERS as a mixed contract involving both services and goods, the UCC is applicable here. When interpreting mixed contracts, courts look to the agreement's predominate purpose. See Zayre Corp. v. S.M. & R. Co., Inc., 882 F.2d 1145, 1153 (7th Cir.1989). If the transaction "was predominantly one for the sale of goods with services incidentally involved," then the contract is governed by the UCC. Republic Steel Corp. v. Pennsylvania Engineering Corp., 785 F.2d 174, 181 (7th Cir.1986). Here, the agreement between USR and ERS primarily concerned the sale of USR's scrap; the disposal services rendered by ERS were only incidental to this chief objective. Under the contract's payment structure compensation was based on the amount of scrap sold, not on the effort made by ERS in removing it from USR's facilities. See Center Ice of Dupage, Inc. v. Burley's Rink Supply, Inc., 1997 WL 43230, at *4 (N.D.Ill. Jan.24, 1997) (structure of contract relevant). Furthermore, the sale of the scrap was ERS's motivation for providing disposal services, and not vice versa. See id. The agreement between USR and ERS concerned goods first, and services second. Therefore, the UCC applies.

Applying the four-year statute of limitations provided by Article 2 of the UCC, we find that part of count I is untimely. Insofar as plaintiff alleges conduct amounting to a breach of contract which occurred prior to October 25, 1995, those acts are time-barred. Plaintiff's breach of contract claim, however, is not limited to pre-October 25, 1995 activity, but rather is based on conduct occurring from May 1995 through April 1997. Therefore, the bulk of the allegations underlying the breach of contract claim, i.e., those acts occurring from October 25, 1995 through April 1997, are unaffected by the UCC's statute of limitations and survive defendants' motion to dismiss.

II. Tortious Interference

In count II, plaintiff alleges that Gilbert tortiously interfered with the agreement between USR and ERS by participating in the scheme of understating the scrap's weight and value. Defendants argue that this count must fail for two reasons. First, defendants assert that the agreement between USR and ERS was terminable at will and therefore no basis for a tortious interference with contractual relations cause of action exists. Instead, plaintiff must proceed with a claim of tortious interference with prospective economic advantage, which it has not pled. Second, defendants argue that Gilbert, as president of ERS, is protected by a qualified privilege irrespective of the tortious interference theory plaintiff pursues.

It is well settled under Illinois law that contracts of an indefinite duration generally are presumed to be terminable at will by either party. See Jespersen v. Minnesota Min. and Mfg. Co., 183 Ill.2d 290, 233 Ill.Dec. 306, 700 N.E.2d 1014, 1016 (1998). Here, the contract, as described in the complaint,⁴ did not contain a durational limit. The complaint does not allege that the contract was of fixed duration, but simply states that "Between May of 1995 and April of 1997, USR contracted with ERS for the disposal of its metal and electronic scrap in Illinois" (cplt., ¶ 9). In its brief, plaintiff argues that USR continued to solicit bids from other scrap resellers and that the engagement with ERS was to continue only so long as ERS provided the best value. These factual allegations do not appear in the complaint, however, and plaintiff points to nothing in the pleadings to support its assertion that the agreement was of a fixed duration. Plaintiff has not rebutted the presumption that the contract at issue here was terminable at will.

Under Illinois law a plaintiff cannot bring an action for tortious interference with contractual relations based on a contract that is terminable at will. See Canel and Hale, Ltd. v. Tobin, 304 Ill. App.3d 906, 238 Ill.Dec. 64, 710 N.E.2d 861, 871 (1st Dist.), appeal denied, 185 Ill.2d 619, 242 Ill.Dec. 135, 720 N.E.2d 1090 (1999). When a plaintiff mistakenly does so, Illinois courts will classify the claim as one of tortious interference with prospective economic advantage. See id. (citing Larry Karchmar, Ltd. v. Nevoral, 302 Ill.App.3d 951, 236 Ill.Dec. 378, 707 N.E.2d 223, 228 (1st Dist.1999)). Defendants argue that plaintiff has not alleged that cause of action in its complaint. In order to state a claim for tortious interference with prospective economic advantage plaintiff must allege that...