Derson Group, Ltd. v. Right Mgt. Consultants, Inc.

• Decision Date: 21 April 1988
• Docket Number: No. 87 C 2421.,87 C 2421.
• Citation: 683 F. Supp. 1224
• Parties: The DERSON GROUP, LTD. (formerly Right Associates of the Midwest, Inc.), Plaintiff and Counterdefendant, v. RIGHT MANAGEMENT CONSULTANTS, INC., Defendant, Counterplaintiff, and Third-Party Plaintiff, v. William P. SIDERIUS, Third-Party Defendant.
• Court: U.S. District Court — Northern District of Illinois

683 F. Supp. 1224

The DERSON GROUP, LTD. (formerly Right Associates of the Midwest, Inc.), Plaintiff and Counterdefendant, v. RIGHT MANAGEMENT CONSULTANTS, INC., Defendant, Counterplaintiff, and Third-Party Plaintiff, v. William P. SIDERIUS, Third-Party Defendant.

No. 87 C 2421.

United States District Court, N.D. Illinois, E.D.

April 21, 1988.

COPYRIGHT MATERIAL OMITTED

Roger L. Taylor, Delilah Brummet, Miriam G. Bahcall, Kirkland & Ellis, Chicago, Ill., for plaintiff, counterdefendant, and third-party defendant.

Don R. Sampen, Michael P. Palmer, Jenner & Block, Chicago, Ill., James M. Smith, James T. Heidelbach, Gebhardt & Smith, Baltimore, Md., for defendant, counter-plaintiff, and third-party plaintiff.

ORDER

BUA, District Judge.

This case, which began as a simple dispute between business associates, has burgeoned into a complex action involving a variety of legal claims. Plaintiff's second amended complaint originally contained eight different counts, but plaintiff has voluntarily dismissed Count VII. Defendant's counterclaim and third-party complaint have raised eight additional claims. Defendant has moved to dismiss the remaining seven counts of plaintiff's complaint. Meanwhile, plaintiff and its president, a third-party defendant, have moved to dismiss Counts VII and VIII of defendant's counterclaim and third-party complaint. For the reasons stated herein, this court grants defendant's motion to dismiss with respect to Counts I, III, and VI, but denies the motion with respect to Counts II, IV, V, and VIII. In addition, plaintiff's and third-party defendant's motion to dismiss is granted.

FACTS

Defendant Right Management Consultants, Inc., ("RMC") is a Pennsylvania corporation headquartered in Philadelphia. RMC provides its corporate clients with outplacement services, helping recently terminated employees to find new employment through general job counseling and assistance in resume preparation. RMC conducts its business under the name of "Right Associates," a name that RMC has registered as a service mark with both the federal government and the state of Illinois.

In 1981, RMC began to develop a nation-wide network, affiliating itself with a number of independently owned and operated outplacement firms in various regions of the country. Plaintiff Right Associates of the Midwest, Inc. ("RAM"), an Illinois corporation formed in 1981, became one of RMC's first affiliates. In exchange for gaining access to RMC's nationwide network of referrals and contacts, RAM agreed to pay RMC a fee of 10 percent of its revenues from outplacement services.

For several years, RAM and RMC apparently maintained a stable and profitable business relationship. Unfortunately, after the two firms entered into a formal affiliate agreement in April 1986, their relationship began to disintegrate. Ultimately, disagreements over the agreement led to an irreparable rift between the parties. By letter dated March 11, 1987, RAM officially terminated its affiliation with RMC.

The causes underlying the dissolution of the RAM-RMC affiliation remain a mystery. In attempting to establish the blame for the breakup, each party has pointed an accusing finger at the other. RAM characterizes the April 1986 agreement as part of a larger scheme by RMC to seize control of RAM's business. RMC offers an alternative explanation of the affiliation's demise, asserting that RAM failed to make required payments under the affiliate agreement. The parties' conflicting theories form the basis for a variety of legal claims: RAM filed an eight-count complaint, and RMC submitted an eight-count counterclaim as well as a third-party complaint against RAM's President, William Siderius.

RMC moved to dismiss RAM's second amended complaint in its entirety. In addition, RAM and Siderius moved to dismiss Counts VII and VIII of RMC's counterclaim and third-party complaint. For nearly a year, this court refrained from ruling on these motions while the parties conducted settlement negotiations. In the course of those negotiations, RAM agreed to change its name to The Derson Group, Ltd. ("Derson").¹ Derson then voluntarily dismissed Count VII of its complaint, which sought cancellation of RMC's registration of the service mark "Right Associates." Despite reaching agreement on this issue, the parties failed to resolve any of their other differences. Now that settlement negotiations have reached an impasse, the time has come for this court to consider the parties' respective motions to dismiss.

DISCUSSION

I. RMC's Motion to Dismiss Derson's Second Amended Complaint

Following the dismissal of Count VII, Derson's second amended complaint presents seven different legal claims against RMC. Counts I, II, and IV concern various allegations of fraud. Count III alleges that RMC violated state law when it terminated Derson's franchise. Count V accuses RMC of tortious interference with contractual and business relationships. Count VI raises claims of libel, defamation, and slander. Finally, Count VIII charges that RMC breached the April 1986 affiliate agreement. RMC has moved to dismiss each of these counts.

A. Counts I, II, and IV — Fraud

Three of the counts in Derson's complaint allege that RMC committed fraud in order to induce Derson to enter into the April 1986 affiliate agreement. Count I claims that RMC misrepresented and omitted material facts in its offering circular and franchise disclosure statement, thereby violating section 8 of the Illinois Franchise Disclosure Act ("IFDA"), III.Rev.Stat. ch. 121½, para. 708 (1985). Count II asserts that RMC violated section 6 of the IFDA, Ill.Rev.Stat. ch. 121½, para. 706 (1985), by making misrepresentations in connection with its franchise offer to Derson. Based on these same alleged misrepresentations, Count IV raises a claim of common law fraud.

Under the liberalized pleading standards adopted by the modern Federal Rules of Civil Procedure, a "short and plain statement" will normally suffice to state a claim. Fed.R.Civ.P. 8(a). Whenever a plaintiff alleges fraud, however, the Federal Rules impose stricter pleading prerequisites. A complaint that raises a fraud claim, whether of the statutory or common law variety, must state "the circumstances constituting fraud ... with particularity." Fed.R.Civ.P. 9(b). To satisfy the particularity standard of Rule 9(b), a plaintiff pleading fraud must "specify the time, place and contents of any alleged false representations, and the full nature of the transaction." McKee v. Pope Ballard Shepard & Fowle, Ltd., 604 F.Supp. 927, 930 (N.D.Ill.1985) (quoting Lincoln Nat'l Bank v. Lampe, 414 F.Supp. 1270, 1279 (N.D.Ill.1976)).

Count I of Derson's complaint fails to allege fraud with the particularity required by Rule 9(b). Derson contends that paragraph 66 of its complaint lays a foundation for Count I with sufficient particularity. Paragraph 66 states that RMC made misrepresentations regarding three general categories: RMC's affiliate network; the affiliates' impact on RMC's profitability; and RMC's relationship with its affiliates. Nowhere in the complaint, however, does Derson disclose the specific contents of any alleged misrepresentations made by RMC in its franchise disclosure statement. Without any specific reference to allegedly fraudulent statements or omissions, the first count of Derson's complaint lacks the particularity mandated by Rule 9. The litany of general categories contained in paragraph 66 does not remedy this deficiency. Derson's complaint fails to provide the detailed notice that RMC needs in order to fashion a responsive pleading to Count I. Therefore, this court grants RMC's motion to dismiss the first count of Derson's complaint.

Counts II and IV, however, display the sort of particularity that Count I lacks. Admittedly, that particularity is not immediately apparent; the complaint does an excellent job of obscuring the specific factual basis for Counts II and IV. Whether by inartfulness or design, Derson has crafted a lengthy and confusing complaint, filled with overly generalized assertions of fraud that could not possibly survive a motion to dismiss. Nonetheless, buried amidst the host of deficient claims in Derson's complaint is a single allegation presented in sufficient detail to meet the particularity requirement of Rule 9(b). Specifically, Derson alleges in paragraph 44 that when the parties signed the affiliate agreement in April 1986, RMC promised Derson exclusive rights to the Wisconsin and Minnesota markets. The complaint describes this alleged misrepresentation with sufficient specificity to provide a particularized basis for both Counts II and IV.

Additionally, Count IV adequately asserts all five substantive elements of common law fraud:

(1) false statement of material fact (2) known or believed to be false by the party making it; (3) intent to induce the other party to act; (4) action by the other party in reliance on the truth of the statement; and (5) damage to the other party resulting from such reliance.

Soules v. General Motors Corp., 79 Ill.2d 282, 286, 37 Ill.Dec. 597, 599, 402 N.E.2d 599, 601 (1980). According to Derson's complaint, RMC never intended to grant Derson exclusive rights in Wisconsin and Minnesota, but merely made this misrepresentation to induce Derson to sign the affiliate agreement. Furthermore, Derson asserts that it acted in reliance on this misrepresentation, not only signing the agreement, but also making plans to expand into Wisconsin and Minnesota. Finally, Derson alleges that it spent considerable time, money, and effort on these expansion plans. Derson's ultimately futile expenditures on an expansion that never took place supply a basis for a claim of damages in connection with Count IV.

Although Count II does not rest on a theory of common law fraud, a recent Seventh Circuit opinion suggests that Count II's allegation of fraud under section 6 of the IFDA must include the same elements required to...