Lovejoy Electronics, Inc. v. O'Berto
| Decision Date | 27 April 1989 |
| Docket Number | Nos. 87-2068,88-1194 and 88-1269,s. 87-2068 |
| Citation | 873 F.2d 1001 |
| Parties | LOVEJOY ELECTRONICS, INC., Plaintiff-Appellant, Cross-Appellee, v. Gerald N. O'BERTO, Defendant-Appellee, Cross-Appellant. |
| Court | U.S. Court of Appeals — Seventh Circuit |
Ronald P. Kane, Siegan, Barbakoff & Gomberg, Chicago, Ill., for plaintiff-appellant, cross-appellee.
H. Carl Runge, Jr., Runge & Gumbel, P.C., Collinsville, Ill., for defendant-appellee, cross-appellant.
Before WOOD, Jr., POSNER, and COFFEY, Circuit Judges.
This case arises out of a dispute between an inventor and a family-owned corporation that makes electronic equipment. Federal jurisdiction is based on diversity of citizenship, and the parties agree that Illinois law governs the substantive (and, as it turns out, one of the procedural) issues.
Gerald O'Berto began to work for Lovejoy Electronics in 1969. He never had a formal employment agreement, but by 1977 the company was styling him a "vice president" in its internal documents and authorizing him to so represent himself to customers and suppliers, although the firm never formally appointed him an officer. In 1980, O'Berto signed the Consulting Agreement with Lovejoy that is the focus of the dispute. The agreement described O'Berto as an independent contractor (yet he would continue to be styled a vice president until the company fired him in 1983), and said he would receive specified royalties and other compensation in exchange for services provided and products invented for Lovejoy. O'Berto agreed to give Lovejoy the "majority" of his time and the first call on his services, to refrain from competing with Lovejoy in specified product areas, and to sell Lovejoy its entire requirements of a particular computer chip at a price not to exceed O'Berto's cost of procurement.
A month after signing the agreement O'Berto entered into a contract with the chip's supplier. The contract required the supplier to charge Lovejoy a price that would include a royalty for O'Berto. Although the contract described the royalty as a fee for testing the chip, all of it (so far as appears) represented a kickback to O'Berto rather than reimbursement of any testing expense. Lovejoy was not told about this side agreement; it thought it was buying the chip at O'Berto's cost.
Six weeks after O'Berto made this unauthorized side agreement--which is to say, ten weeks after the signing of the Consulting Agreement--Lovejoy signed a contract to sell certain technology to J.H. Fenner & Co., an English firm. The contract stated that O'Berto would provide certain services to Fenner and in exchange Fenner would pay royalties of $200,000 to Lovejoy that Lovejoy would turn over to O'Berto. Before O'Berto signed the Consulting Agreement, Lovejoy's chief executive, Pat Hennessy, had shown him a draft of the Fenner contract that contained a provision whereby O'Berto would for three years receive an additional $20,000 annual consulting fee from Fenner for his services in connection with the contract; but this provision was omitted from the Fenner contract as actually executed. O'Berto was unhappy when he found out about the omission and Lovejoy was unhappy when it discovered O'Berto's secret side agreement with the supplier of the chip. The relationship between O'Berto and Lovejoy deteriorated, and there was a final parting of the ways in 1983.
In 1984 Lovejoy sued O'Berto for the profits he had obtained from the side agreement, and O'Berto counterclaimed. In part the counterclaim alleges a simple breach of contract consisting of Lovejoy's failure to pay O'Berto all the royalties due him under the Consulting Agreement. Lovejoy does not contest its liability for this breach, and raises only trivial objections, unnecessary to discuss, to the computation of damages. More interesting, the counterclaim also charges that O'Berto was induced to sign the Consulting Agreement by a fraud that consisted of Pat Hennessy's falsely promising him that the deal with Fenner would generate $200,000 in royalties for O'Berto (royalties that were never paid, although duly provided for in the Fenner contract), plus the $60,000 in consulting fees that also were never paid, having been dropped from the Fenner contract before it was signed.
After the district court denied Lovejoy's motion for summary judgment, 616 F.Supp. 1464 (N.D.Ill.1985), the case was tried to a jury. On O'Berto's claim against Lovejoy, the jury found fraud as well as breach of contract and went on to compute O'Berto's damages at $410,678, of which $200,000 represented the unpaid royalties under the Fenner contract and the balance unpaid royalties under the Consulting Agreement itself. (Oddly, O'Berto had not sought damages for the loss of the annual consulting fee that the Fenner contract was supposed to provide for.) The jury deducted from the award, however, the more than $60,000 in kickbacks that O'Berto had received from the supplier of the chip. The judge awarded prejudgment interest to both parties.
Both appeal. Lovejoy challenges the verdict on liability for fraud, the damages award, and the award of prejudgment interest on O'Berto's damages, while O'Berto argues that the judge should not have awarded Lovejoy prejudgment interest on O'Berto's profits from his side agreement.
Lovejoy's first argument is that the admission of O'Berto's testimony about what Pat Hennessy told him in order to induce him to sign the Consulting Agreement, together with the admission (to corroborate O'Berto's testimony) of a draft of the Fenner contract that contained the provision for the $20,000 annual consulting fee for O'Berto for three years, violated the parol evidence rule. It does look like a case in which a party is seeking to vary the terms of a written contract, but the appearance is misleading. O'Berto does not argue that the Consulting Agreement should be construed as having incorporated the Fenner contract. He argues that he was induced to sign the Consulting Agreement by Pat Hennessy's promise that another contract would be made to which he would not be a direct party but of which he would be a third-party beneficiary--the contract between Lovejoy and Fenner--and which would contain terms particularly favorable to him. He is not, so far as the $200,000 in royalties is concerned, suing to enforce the Consulting Agreement at all, let alone the Consulting Agreement as varied by oral or other understandings within the bar of the parol evidence rule. He is suing to obtain the benefits that (he claims) Hennessy promised him, if only he would sign the Consulting Agreement, as he duly did. Lovejoy's counsel conceded at argument that Lovejoy needed to "lock in" O'Berto to a consulting relationship with the company in order to be able to go forward with the Fenner contract and other promising opportunities, and the concession is supported by the fact that Fenner conditioned the contract on Lovejoy's providing O'Berto to provide the services for which Fenner agreed to pay the $200,000 in royalties.
Against such a claim the parol evidence rule provides no defense. That is not to say the claim is necessarily a valid one. What O'Berto calls fraud looks to us more like promissory estoppel, especially when we consider the nature of the relief sought, which implies that O'Berto is seeking to enforce the promise that he would get $200,000 out of the Fenner deal if he signed the Consulting Agreement, thereby locking himself into Lovejoy's service and enabling Lovejoy to go ahead with the deal. But Lovejoy does not argue that O'Berto has failed to state a claim of fraud, only that certain evidence should not have been admitted in support of it. There are, in fact, plenty of cases in Illinois and elsewhere that uphold liability for promissory fraud--that is, for making a promise intending not to keep it--and that confirm the unavailability of the parol evidence rule as a defense to it. See, e.g., Steinberg v. Chicago Medical School, 69 Ill.2d 320, 333-34, 13 Ill.Dec. 699, 707, 371 N.E.2d 634, 641 (1977); Shanahan v. Schindler, 63 Ill.App.3d 82, 93-95, 379 N.E.2d 1307, 1316-17 (1978); Farnsworth, Contracts 253, 465 (1982); and the district judge's discussion of the issue in his ruling on summary judgment, 616 F.Supp. at 1468-69. True, the cases often preface their discussion of the issue by saying that "Illinois does not allow a recovery for promissory fraud," but then they explain that there is an exception "if the promise is part of a scheme employed to accomplish the fraud," and that the exception has swallowed the rule. Stamatakis Industries, Inc. v. King, 165 Ill.App.3d 879, 881-84, 520 N.E.2d 770, 772-73 (1987); see also Commonwealth Eastern Mortgage Co. v. Williams, 163 Ill.App.3d 103, 113-14, 114 Ill.Dec. 360, 366-67, 516 N.E.2d 515, 521-22 (1987). And true, O'Berto made no effort to prove up the damages caused by the fraud. That is, he made no effort to establish the position he would have occupied had there been no fraud and compare that to the position he did occupy. Maybe if Hennessy hadn't promised him the special benefits from the Fenner deal, O'Berto would have severed his connections with Lovejoy then and there--and who knows whether he would have been better off or worse off doing so. But while complaining about the damages on other grounds, Lovejoy does not complain about a mismatch between the theory of liability and the theory underlying the damages award. Any such complaint is therefore forfeited, and we need not consider its potential merit.
Lovejoy does, however, argue that O'Berto's testimony about his conversation with Hennessy--the key evidence of the alleged fraud--should have been excluded...
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Witnesses
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