Articles Posted in Business Disputes

After the seller of a business sued the buyer to enforce a promissory note, signed as part of the sale, the buyer asserted a defense of fraudulent inducement in Bu v. Sunset Deli Park of NY Corp, et al. The buyer alleged that the seller misrepresented the weekly income of the business prior to the sale. The New York Supreme Court in Brooklyn denied the plaintiff’s motion for summary judgment, finding that the defendants had raised sufficient issues of fact as to their fraud defense.

The plaintiff, Su Nam Bu, sold her deli business to defendant In Suk Cho for $220,000 in September 2010. The stock purchase agreement executed by the parties stated that Cho would pay Bu $1,000 upon signing the agreement, and $49,000 at closing. Cho signed a promissory note on September 27, 2010 for the remaining $170,000, in which she would pay thirty-six monthly installments beginning in March 2011, plus a lump sum payment of $50,000 by September 15, 2012. A security agreement, or “chattel mortgage,” signed by the parties pledged the deli’s property, inventory, accounts receivable, equipment, and fixtures as collateral for the promissory note.

Cho made six payments on the note, but the seventh and eighth payments allegdly bounced. Bu filed suit to enforce the note. Cho answered with a fraudulent inducement defense, claiming that Bu represented the deli’s weekly income as $15,000 to $17,000 prior to the sale, but Cho found it to be an average of $11,000 to $12,000 upon taking over its operations.

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It’s amazing how one person’s idea can turn into a patent war between two major companies. In the case of Carter Bryant, an idea for dolls which began with some sketches in 1998 while he was living with his parents in Missouri, later turned into a major battle. Bryant went to work for Mattel Inc., based in El Segundo, California, which claims they began work on designing the dolls with Bryant while he was working for them.

In 2000, MGA Entertainment, based in Van Nuys, California, made a deal with Bryant and, in 2001, the Bratz dolls were released. They were an immediate hit among “tweens” and threatened to de-throne the long-ruling queen of dolls, Mattel’s infamous Barbie. In 2004, Mattel sued Bryant for allegedly working with a competitor while also working with Mattel, and Mattel also sued MGA for alleged copyright infringement. The case against Bryant settled rather quickly but the battle with MGA rages on.

The case went back and forth in the courts. Initially, a jury agreed that Bryant had developed the concept while working with Mattel and thereby awarded the company $100 million.

The decision was overruled on appeal however when the 9th Circuit court overturned that decision and ordered a new trial.

MGA counter-sued, alleging Mattel had engaged in corporate espionage when some of their employees gained access to some of MGA’s designs at a toy fair. Mattel then allegedly used the information gained to try to keep Bratz dolls off the shelves and thereby participated in some illegal practices of their own.

In April 2011, a jury sided with MGA, awarding the entertainment company $3.4 for each of 26 instances they found of Mattel using misappropriated trade secrets, a total of $88.4 million. With fees and damages together, Mattel was ordered to pay $172 million in punitive damages in addition to the judge’s order of $137 million in legal fees and costs to defend against Mattel. This brought the entire award to over $309 million.

According to the U.S. District judge, the copyright case that Mattel was alleging was “stunning in scope and unreasonable in relief it requested.” He also said that the claims endangered free expression and competition.

A federal appeals court however has overturned the $172 million punitive damages ruling. The court decided that, as it is considering Mattel’s copyright infringement lawsuit against MGA, Mattel’s trade-secret thefts are irrelevant to the case. However, the court allowed the award of $137 million to cover legal fees and costs to remain. The case will now return to the courts.

MGA has said that it intends to file a new lawsuit to pursue their trade-theft claims against Mattel.

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In The Business Store v. Mail Boxes Etc., the District Court for the District of New Jersey considered the effect of a “forum selection clause” in a business dispute between companies from different states, finding that these clauses are not always enforceable.

In 2003, Plaintiff The Business Store, Inc., a New Jersey company, entered into a franchise agreement with Defendants Mail Boxes, Etc. (MBE) – a California company – and United Parcel Service (UPS), under which Plaintiff was to operate a UPS franchise in Spotswood, New Jersey. The parties entered into two additional agreements for new stores in 2007. Two years later, however, a disagreement arose over $80,000 in royalties that Defendants argued they were owed. When the parties could not reach an agreement, Defendants terminated the franchise agreements.

Plaintiff sued Defendants in New Jersey state court, alleging breach of the franchise agreements and an implied duty of good faith and fair dealing, as well as tortious interference with contract, fraud and violation of the New Jersey Franchise Practices Act (NJFPA). After Defendants removed the case to federal court – on diversity of citizenship grounds: the parties are from different states – they filed a motion to transfer the case to the federal district court in the Southern District of California. Defendants argued that the “forum selection clause” in each of the franchise agreements dictated that any disputes be litigated in California.

The court denied the motion to transfer, finding that each of the factors to be considered in reviewing a venue transfer request weighed in favor of New Jersey. 28 U.S.C. Section 1404(a) provides that “for the convenience of parties and witnesses, in the interest of justice, a district court may transfer any civil action to any other district . . . where it might have been brought.” The court noted that it considers “all relevant factors to determine whether on balance the litigation would more conveniently proceed and the interest of justice be better served by transfer to a different forum,” and that the burden is on the party requesting transfer to show that it is warranted.

The court began by finding that, because MBE’s principal place of business is in San Diego, the action would have been proper if originally brought in the Southern District of California. Nevertheless, the court noted that “[a] strong presumption of convenience exists in favor of a domestic plaintiff’s chosen forum.” Moreover, the fact that the dispute arose in New Jersey – where the contract was executed and performed – also weighed against transfer.

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In Classic Business Corporation v. Equilon Enterprises, LLC., the District Court for the Northern District of Illinois explains that while the state’s consumer fraud and deceptive business practice law is an important weapon in combating shady business operations, it is intended to protect private consumers rather than business entities.

Plaintiffs, gas station operators in the Chicagoland area, brought the action against Shell claiming that the company violated both its contracts with Plaintiffs and a duty of good faith by unilaterally changing its pricing methodology. Plaintiffs are considered “open dealers” because they own the real property on which their gas businesses are located rather than leasing it from Shell. Pursuant to a Retail Sales Agreement (“RSA”), Plaintiffs buy gas from Shell at the price in effect “at the time loading commences at the Plant for the place of delivery” and, in turn, are free to set the retail price at which they later sell the gas.

Plaintiffs claim that after agreeing to the RSA terms, Shell changed the way in which it sells gas – using wholesalers rather than selling directly to retailers – as well as its pricing method. As a result, according to Plaintiffs, Shell now sells the same gas to wholesalers and non-open dealers at a lower price than it sells to Plaintiffs and other open dealers in an attempt to drive them out of the business. In their complaint, Plaintiffs alleged the following counts: 1) federal price discrimination; 2) breach of contract and the Illinois Commercial Code based on the unilateral fuel price increase; 3) breach of contract for invoicing Plaintiffs for more fuel than was actually delivered; 4) violation of the Illinois Consumer Fraud and Deceptive Business Practices Act, 815 ILCS 505/2 et seq. (the “CFDBPA”); and 5) a claim for declaratory relief pursuant to the Illinois Declaratory Judgment Act.

The court granted Shell’s motion to dismiss the CFDBPA count (as well as the declaratory relief claim). In so doing, it noted that the proper test in reviewing a CFDBPA claim involving two businesses who are not consumers is “whether the alleged conduct involves trade practices addressed to the market generally or otherwise implicates consumer protection concerns.” In this case, the court found that Shell’s alleged practice of selling gas to the “relatively few” open dealers in the area at a higher rate than that charged to wholsesalers and other retailers “is not equivalent to a trade practice addressed to the market generally,” despite the fact that it may ultimately result in higher prices for Plaintiffs’ customers. Finally, the court quoted the Illinois Supreme Court’s decision in Avery v. State Farm in ruling that “[a] breach of contractual promise, without more, is not actionable under the [Illinois] Consumer Fraud Act.”

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To transfer or not to transfer, that is often the question in inter-state business litigation where parties come from various states, often far from where the actual dispute takes place. In Shakir Development & Construction, LLC v. Flaherty & Collins Construction, Inc., the U.S. District Court for the Northern District of Illinois recently explained how a Court should decide on a request to transfer a case from one federal court to another.

Plaintiffs Shakir Development & Construction, LLC and a number of other entities as well as two individuals filed the action in Cook County Circuit Court against Defendants Flaherty & Collins Construction, Inc. and various related entities as well as two individuals, alleging fraud, breach of contract, tortuous interference with contract and unjust enrichment. According to the complaint, the parties entered into two contracts under which Defendants allegedly agreed to build and manage an apartment complex in Noblesville, Indiana. Plaintiffs allege that Defendants ultimately breached the contract, committing fraud in the course of so doing.

Defendants removed the case to the Northern District of Illinois on diversity grounds. Federal courts are empowered to hear cases in which none of the plaintiffs are from the same state as any of the defendants. In this case, the two individual defendants resided in Indiana and are Indiana citizens, while the entity defendants are Indiana corporations with their principal place of business in Indiana. The two individual plaintiffs resided in Illinois and are Illinois citizens; the entity plaintiffs are Indiana limited liability companies located in Indiana, but they are Illinois citizens for diversity purposes because their sole member is Sohail Shakir, one of the individual plaintiffs and an Illinois citizen.

Defendants then filed a motion requesting that the matter be transferred to the Southern District of Indiana, which includes Noblesville. 28 U.S.C. § 1404 allows a district court to transfer an action to another district court “for the convenience of parties and witnesses, in the interest of justice…” Citing its prior decision in Law Bulletin Publishing, Co. v. LRP Publications, Inc., the Court stated that it considers the following factors in evaluating convenience: 1) the plaintiff’s choice of forum; (2) the situs of the material events; (3) the relative ease of access to sources of proof; (4) the convenience of the witnesses; and (5) the convenience of the parties.

The Court granted Defendants’ transfer motion, finding that the factors “weigh heavily” in favor of transfer. Although Plaintiffs preferred to stay in Chicago, the Court noted that “choice of forum has only minimal value where none of the conduct occurred in the forum selected by the plaintiff.” Here, the alleged breach and fraud occurred in statements mailed from and made in meetings in Indiana. Similarly, the material events all occurred in Indiana and, as a result, the majority of witnesses – including Defendants’ employees along with subcontractors, architects and engineers – and parties were located in Indiana. Thus, the Court granted the motion to transfer.

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