Newman-Green, Inc. v. Alfonzo-Larrain

• Decision Date: 03 August 1984
• Docket Number: 82 C 7933.
• Citation: 590 F. Supp. 1083
• Court: U.S. District Court — Northern District of Illinois
• Parties: NEWMAN-GREEN, INC., et al., Plaintiffs, v. Alejandro ALFONZO-LARRAIN R., et al., Defendants.

590 F. Supp. 1083

NEWMAN-GREEN, INC., et al., Plaintiffs, v. Alejandro ALFONZO-LARRAIN R., et al., Defendants.

82 C 7933.

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

August 3, 1984.

Rowe W. Snider, Michael D. Sher, Friedman & Koven, Chicago, Ill., for plaintiffs.

Michael P. Connelly, Chicago, Ill., for defendants.

MEMORANDUM OPINION AND ORDER

SHADUR, District Judge.

On April 23, 1984 Newman-Green, Inc. ("NGI") moved, pursuant to various subparts of Fed.R.Civ.P. ("Rule") 12, against each count of the Amended Counterclaim ("Counterclaim," for convenience) brought by intervenor-defendant Newman-Green de Venezuela ("NGV"). This Court's oral bench ruling that day:

1. denied NGI's motion as to five of the Counterclaim's seven counts and

2. set for briefing NGI's Rule 12(b)(6) challenge to the remaining two counts.

For the reasons stated in this memorandum opinion and order, NGI's motion to dismiss Counterclaim Count IV is granted and its motion to dismiss Counterclaim Count VII is denied.

Facts¹

This litigation's underlying dispute concerns efforts by all parties to distribute NGI's product, aerosol valves, in Venezuela. NGV was formed by the other defendants in this action to manufacture and sell NGI aerosol valves in Venezuela. NGV entered into a "License Agreement" with NGI that included a promise by NGI to supply NGV with materials and expertise. For reasons as to which plaintiffs' current Amended Complaint ("Complaint") and the Counterclaim do not entirely agree, NGV's purpose was never carried out and it was forced to close its operation after various losses had been incurred. This lawsuit ensued.

Plaintiffs' Complaint comprises three counts:

1. In Count I NGI sues NGV's shareholders for breach of an alleged guaranty agreement imposing limited liability on them if NGV breaches its License Agreement.

2. In Count II NGI sues NGV itself for the price of parts and equipment ordered from NGI and delivered to NGV but never paid for.

3. In Count III NGI's affiliate Arnel, Inc. ("Arnel") sues NGV for breach of an equipment lease (which NGV claims was in substance an installment sale contract).

NGV's Counterclaim, directed exclusively against NGI, alleges NGI breached the License Agreement and warranties (Counts I and II), defrauded NGV in violation of state and federal law (Counts III-V) and interfered with NGV's business relations (Counts VI and VII). Because all the other counts survived NGI's Rule 12 attacks in this Court's April 23 oral ruling, only Counts IV and VII are now at issue:

1. Count IV alleges NGI violated Illinois' Consumer Fraud and Deceptive Business Practices Act (the "Act," Ill. Rev.Stat. ch. 121½, ¶¶ 261-272) by fraudulently inducing NGV to enter into the License Agreement. NGV's theory is akin to promissory fraud: NGI's allegedly false statements were to the effect it would adequately perform the License Agreement.

2. Count VII alleges NGI interfered with an advantageous business relationship between NGV and Arnel by causing Arnel to declare NGV in breach of the equipment lease (sued on in Complaint Count III) after an inadvertent failure by NGV to make a payment.

Count IV

Act § 2 (Ill.Rev.Stat. ch. 121½, ¶ 262) by its terms covers "unfair methods of competition and unfair or deceptive acts or practices" without any express limitation. However that section goes on to say:

In construing this section consideration shall be given to the interpretations of the Federal Trade Commission and the federal courts relating to Section 5(a) of the Federal Trade Commission Act.

Thus Illinois' Act is a "little FTC Act." Consequently, although Illinois courts are not bound by federal level decisions, they have construed the Act with reference to those decisions. See Fitzgerald v. Chicago Title & Trust Co., 46 Ill.App.3d 526, 5 Ill.Dec. 94, 361 N.E.2d 94 (1st Dist.1977).

NGI argues the Act was not intended to reach isolated breaches of contract, such as the one asserted here, between parties neither of which is a consumer. NGI suggests if the Act did reach such garden variety breaches of contract, it would effectively supplant Illinois' common law of contracts and fraud, because it permits recovery more readily than that law in at least two respects:

1. Illinois courts have applied the Act to provide "broader consumer protection than does the common law of fraud," making actionable in that area "innocent misrepresentations," including "false promises" not pertaining to "existing material facts." See Duhl v. Nash Realty Inc., 102 Ill.App.3d 483, 495, 57 Ill.Dec. 904, 914, 429 N.E.2d 1267, 1277 (1st Dist. 1981).

2. Act § 10a(c) (Ill.Rev.Stat. ch. 121½, ¶ 270a(c)) permits the court to award attorneys' fees to the prevailing party.

So, NGI contends, while the Act may have been "a decisive move on the part of the Illinois legislature to enact broad protective coverage of consumers" (Duhl, 102 Ill. App.3d at 495, 57 Ill.Dec. at 914, 429 N.E.2d at 1277, emphasis supplied), the legislature could not have intended it to apply to this case between businessmen, or by implication it would have replaced (and made more lenient) all contracts and fraud common law.

NGV responds the Illinois General Assembly has done exactly what NGI claims it could not have intended to do, for it passed an amendment effective October 1, 1973 extending standing to sue under the Act to "businessmen" as well as "consumers and borrowers." See People ex rel. Scott v. Cardet International, Inc., 24 Ill. App.3d 740, 746, 321 N.E.2d 386, 391 (1st Dist.1974). Thus it accepts NGI's reductio ad absurdum at face value, rather than attempting to explain how NGV's own claim might be actionable while other everyday breach of contract and fraud claims are not.²

But there is considerable evidence the Act's 1973 amendment did not effect a replacement of Illinois' common law of contracts and fraud, as did the Field Code for California's. Cases applying the Act, while giving it broad scope, have framed its purpose and reach in terms of "broader consumer protection." See, e.g., Duhl, 102 Ill.App.3d at 495, 57 Ill.Dec. at 914, 429 N.E.2d at 1277. And courts faced with simple breach of contract claims between businessmen have always denied recovery under the Act. See, e.g., Exchange National Bank v. Farm Bureau Life Insurance Co., 108 Ill.App.3d 212, 215-16, 63 Ill.Dec. 884, 887, 438 N.E.2d 1247, 1250 (3d Dist.1982).³ In short, Illinois case law teaches the Act does not extend to all common law contract and fraud actions, so the question remaining is whether this action has characteristics bringing it within the reach of the Act.

Frahm v. Urkovich, 113 Ill.App.3d 580, 69 Ill.Dec. 572, 447 N.E.2d 1007 (1st Dist. 1983), in holding the Act does not apply to sales of services by lawyers, spoke to the Act's availability to redress fraud and breach of contract in general. Citing Exchange National Bank and Evanston Motor Co. v. Mid-Southern Toyota Distributors, 436 F.Supp. 1370 (N.D.Ill.1977), Frahm, 113 Ill.App.3d at 585-86, 69 Ill. Dec. at 576, 447 N.E.2d at 1011 stated:

Lastly, we do not interpret the liberal construction requirements to mean that liability under the Act is completely open-ended. Rather, we believe that the Act is intended to reach practices of the type which affect consumers generally and is not available as an additional remedy to redress a purely private wrong.

That passage indicates there might be two ways in which Illinois courts could restrict the Act's application to simple tort and contract actions: by a "public injury" requirement or by a requirement that defendant's conduct "affect consumers generally."

Any "public injury" requirement is not uniformly applied in Illinois:

1. M & W Gear Co. v. AW Dynamometer, Inc., 97 Ill.App.3d 904, 913-14, 53 Ill.Dec. 721, 730, 424 N.E.2d 356, 365 (4th Dist.1981) expressly rejected such a prerequisite.

2. Frahm cited with approval Evanston Motor, which found such a requirement does exist.

Were that difference in approach viewed as a direct conflict, it would place this Court in Frahm's corner.⁴ Moreover M & W Gear may have rested on an unnecessarily broad ground, for instead of holding there is no "public injury" requirement it could have held deceptive advertising as shown in that case gives rise to a conclusive presumption of public injury. See Evanston Motor, 436 F.Supp. at 1374-75 n. 6.⁵ Finally, Judge McGarr's brief treatment of the issue earlier this week in Overland Bond & Investment Corp. v. Mahoney, No. 82 C 2283, slip op. at 12-13 (N.D.Ill. July 30, 1984) does not consider either Frahm or the weaknesses of M & W Gear's analysis. Thus if this Court had to resolve the issue now, it would not be prepared to follow M & W and Overland automatically. More extended analysis would be necessary.

This decision need not however rest on any "public injury" prerequisites, because another fatal flaw defeats Count IV: Under the Act an effect on consumers generally is required, and none is present here. Frahm referred to "practices of the type which affect consumers generally," while Exchange National Bank, 108 Ill.App.3d at 216, 63 Ill.Dec. at 887, 438 N.E.2d at 1250 required defendants' "practices to be part of a pattern of defendants' ... activities." However the requirement is worded, plaintiff must show defendant has engaged in deceptive practices in promoting its goods or services to its market in general. For example, a single course of deceptive conduct by a defendant toward a plaintiff was not enough in Exchange National Bank because consumer protection concerns were not implicated.

That concept is not at all inconsistent with the legislature's 1973 expansion of the Act: Certainly a fair reading of the amendment is that the General Assembly simply intended to grant businessmen standing to sue to redress competitive injury they suffer when other businessmen deceive customers.⁶ It stretches things impermissibly to infer the amendment reflected a specific intent to treat...