Williams Electronics Games, Inc. v. Garrity

• Decision Date: 29 April 2004
• Docket Number: No. 03-1665.,No. 03-1669.,No. 03-1648.,03-1648.,03-1665.,03-1669.
• Citation: 366 F.3d 569
• Parties: WILLIAMS ELECTRONICS GAMES, INC. et al., Plaintiffs-Appellants, v. James M. GARRITY et al., Defendants-Appellees. Milgray Electronics, Inc., Defendant/Counter-Plaintiff/Cross-Plaintiff/Cross-Appellant, v. Williams Electronics Games, Inc., Plaintiff/Counter-Defendant/Cross-Appellee, and Lawrence J. Gnat and Richard S. Slupik, Defendants/Cross-Defendants/Cross-Appellees.
• Court: U.S. Court of Appeals — Seventh Circuit

366 F.3d 569

WILLIAMS ELECTRONICS GAMES, INC. et al., Plaintiffs-Appellants, v. James M. GARRITY et al., Defendants-Appellees.

Milgray Electronics, Inc., Defendant/Counter-Plaintiff/Cross-Plaintiff/Cross-Appellant, v. Williams Electronics Games, Inc., Plaintiff/Counter-Defendant/Cross-Appellee, and Lawrence J. Gnat and Richard S. Slupik, Defendants/Cross-Defendants/Cross-Appellees.

No. 03-1648.

No. 03-1665.

No. 03-1669.

United States Court of Appeals, Seventh Circuit.

Argued February 24, 2004.

Decided April 29, 2004.

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Edward M. Kay, Clausen Miller, Damon E. Dunn, Glenn A. Rice, Funkhouser Vegosen Liebman & Dunn, Chicago, IL, for Plaintiffs-Appellants.

Anthony Pinelli, Chicago, IL, John N. Gallo, Sidley Austin Brown & Wood, Kenneth M. Kliebard (argued), Howrey Simon Arnold & White, Chicago, IL, for Defendants-Appellees.

Damon E. Dunn (argued), Wilson P. Funkhouser, Funkhouser Vegosen Liebman & Dunn, Chicago, IL, for Plaintiff-Appellee.

James R. Ferguson (argued), Mayer, Brown, Rowe & Maw, Chicago, IL, for Defendant-Counter Plaintiff-Appellant and Defendants-Appellees.

Before POSNER, RIPPLE, and EVANS, Circuit Judges.

POSNER, Circuit Judge.

Williams, the manufacturer of Mortal Kombat and other video games, brought suit for fraud and related misconduct, federal and state (Illinois law governs the state law claims), against two of its components suppliers, Arrow and Milgray. (National Union, Williams's insurer, joined as a plaintiff, but need not be discussed separately.) Williams charges the suppliers with, among other things, having bribed one of its buyers, Greg Barry, to buy from them. Williams also named as a defendant James Garrity, a salesman for Arrow. Milgray counterclaimed. It charged that Williams had conspired with two of Milgray's employees, Gnat and Slupik (against whom Milgray filed cross-claims), to defraud Milgray by purchasing components from a company named Microcomp that Gnat and Slupik had created and were operating in violation of their duty to their employer.

The jury returned a verdict for Williams against Garrity for $78,000 but exonerated the other defendants. The judge then rejected Williams's equitable claims. Williams appeals — as does Milgray, because the judge rejected its claims against Williams, Gnat, and Slupik. We'll discuss Williams's claims first.

Barry received more than $100,000 in cash bribes from Arrow and Milgray over a four-year period during which these two suppliers sold Williams some $100 million in component parts. Eventually Williams discovered Barry's bribe-taking and fired him. The company may have been careless in failing to discover the bribes sooner; it may even have known about the bribes but not cared because it thought it was getting a good price and excellent service from Arrow and Milgray. That is a matter of fierce dispute but Williams does admit being aware that some of its suppliers, not limited to Arrow and Milgray, were giving gift certificates ranging from $25 to $500 to its employees at Christmas time. Williams had no policy against its employees' accepting Christmas gifts, provided that any gift in excess of $100 was disclosed to and approved by a company audit board, except that buyers (such as Barry) were forbidden to accept any gift, period. The cash bribes received by Barry were not considered by either donor or recipient to be Christmas gifts.

Commercial bribery is a garden variety of fraud, e.g., Ash v. Wallenmeyer, 879 F.2d 272, 273 (1989), appeal after remand, Ash v. Georgia-Pacific Corp., 957 F.2d 432 (7th Cir.1992); see Ginsburg v. United States, 909 F.2d 982, 989-91 (7th Cir.1990); Walker v. Marshall Field & Co., 179 Ill.App. 3 (1913), here consisting of the suppliers' concealing from Williams the fact that they were bribing its buyer. The judge gave a standard fraud instruction. It required the jury to find that Williams had justifiably relied on the facts known to it in continuing to purchase from Arrow and Milgray — or in other words that Williams hadn't known about the bribes. At the request of the defendants, however, the judge also gave instructions on the affirmative defenses of ratification and in pari delicto. He instructed the jury that if Williams had known or "should have known" of the defendants' bribing Barry, it should find that Williams had ratified the fraud and could not recover damages. And likewise if Williams had been in pari delicto (equally at fault) with the defendants, which it would be, the judge told the jury, if Williams either (1) "was aware of a general practice of bribery of its buyers by its suppliers" or (2) "knew or was recklessly indifferent to the fact that Greg Barry was soliciting and/or accepting kickbacks from Williams' vendors." The jury found that Williams had proved fraud, in accordance with the instruction on fraud, but also found that the corporate defendants (Garrity did not assert these defenses) had proved both affirmative defenses; and so Arrow and Milgray were exonerated.

The instructions on the affirmative defenses were erroneous at a quite fundamental level. As countless cases affirm, a victim's negligence is not a defense to an intentional tort, such as fraud. Chapman v. Hosek, 131 Ill.App.3d 180, 86 Ill.Dec. 379, 475 N.E.2d 593, 599 (1985); Ty Inc. v. Softbelly's Inc., 353 F.3d 528, 537 (7th Cir.2003); Eastern Trading Co. v. Refco, Inc., 229 F.3d 617, 625 (7th Cir.2000); In re Mercer, 246 F.3d 391, 421 (5th Cir.2001). (For that matter, it is no longer a complete defense to an unintentional tort, having been replaced by the partial defense of comparative negligence. E.g., Spinozzi v. ITT Sheraton Corp., 174 F.3d 842, 847 (7th Cir.1999); Alvis v. Ribar, 85 Ill.2d 1, 52 Ill.Dec. 23, 421 N.E.2d 886, 896-97 (Ill.1981). That should have been a clue as to how the law would treat the victim's negligence in the setting of an intentional tort.) Yet by instructing the jury that it should return a verdict for the defendants if it found that Williams "should have known" that Barry was taking bribes, the judge allowed the jury to exonerate the defendants on the basis of the carelessness of their victim in failing to discover that it was a victim.

The error was compounded by a misunderstanding of the legal meaning of ratification. Had Williams after discovering Barry's bribe-taking decided that it was on the whole beneficial to Williams (maybe because it allowed Williams to pay him a lower salary!), and had decided not to fire him or otherwise discipline him, that would be ratification, much as if a restaurant owner decided after discovering that his headwaiter was accepting tips in order to seat patrons to condone the practice (still common, especially in nightclubs). Cf. State v. Brewer, 258 N.C. 533, 129 S.E.2d 262, 276 (1963). Or as if Barry, as Williams's agent, had made an unauthorized transaction on Williams's behalf that Williams, after discovering the transaction, had decided was in its interest after all, and so it would retain the benefits of it. E.g., Eastern Trading Co. v. Refco, Inc., supra, 229 F.3d at 625; Hurd v. Wildman, Harrold, Allen and Dixon, 303 Ill.App.3d 84, 236 Ill.Dec. 482, 707 N.E.2d 609, 616 (1999); Progress Printing Corp. v. Jane Byrne Political Committee, 235 Ill.App.3d 292, 176 Ill.Dec. 357, 601 N.E.2d 1055, 1067-68 (1992). Obviously it couldn't retain the profits of the transaction but shuck off the costs on the ground that it had never authorized the transaction and therefore wasn't bound by it. See Extra Equipamentos E Exportação Ltda. v. Case Corp., 361 F.3d 359, 360 (7th Cir.2004).

But that isn't the defendants' theory. It is that Williams knew all along about Barry's bribe-taking. If so, this would exonerate the defendants, all right, because it would mean there had been no fraud in the first place, not that the fraud had been washed away by ratification. No ratification instruction should have been given, let alone one that misstated the law by supposing that ratification can be premised on a careless accident.

The defense of in pari delicto is intended for situations in which the victim is a participant in the misconduct giving rise to his claim, Pinter v. Dahl, 486 U.S. 622, 636, 108 S.Ct. 2063, 100 L.Ed.2d 658 (1988); Crawford v. Colby Broadcasting Corp., 387 F.2d 796, 798 (7th Cir.1967), as in the classic case of the highwayman who sued his partner for an accounting of the profits of the robbery they had committed together. Note, "The Highwayman's Case," 9 L.Q. Rev. 197, 197-99 (1893) (Everet v. Williams (Ex. 1725)); Byron v. Clay, 867 F.2d 1049, 1051-52 (7th Cir.1989); see also Cisna v. Sheibley, 88 Ill.App. 385 (1899). It has been extended to the case — illustrated not by the in pari delicto defense asserted by Arrow and Milgray but by the separate in pari delicto defense asserted by Milgray — in which each party is accused of having wronged the other; Milgray, as we'll see, claims that Williams committed fraud against it at the same time that it was committing fraud against Williams.

That is not the character of the in pari delicto defense that Arrow and Milgray asserted jointly against Williams. Clause (2) of the instruction ("knew or was recklessly indifferent to the fact that Greg Barry was soliciting and/or accepting kickbacks from Williams' vendors") barred Williams from recovering against either defendant if the jury found that Williams knew that, or was recklessly indifferent to whether, Barry was taking bribes. This part of the instruction didn't define a defense distinct from ratification, but merely repeated in different words the instruction on ratification, except that for negligence it properly substituted reckless indifference, which the law treats for most purposes including this one the same as knowledge. E.g., Vigortone AG Products, Inc. v. PM AG Products, Inc., 316 F.3d 641, 645 (7th Cir.2002); AMPAT/Midwest, Inc. v. Illinois Tool Works Inc., 896 F.2d 1035,...