Opinion
Case Nos. 96 C 4356, 99 C 5493
February 17, 2000
MEMORANDUM OPINION AND ORDER
INTRODUCTION
Before the court are two motions to dismiss by the defendants in case number 99 C 5493, which has been consolidated with case number 96 C 4356.
BACKGROUND
This litigation began in 1996 when the Hexagon Packaging Corporation ("Hexagon") and Robert G. Edison ("Edison"), as sole shareholder and board chairman of Hexagon, sued Manny Gutterman Associates; Arthur Gutterman; Blidco Inc.; Betty Day Co., Inc., Betty Day ("Day"), who subsequently passed away and was replaced by, Louis C Day, Jr. and Margaret Renfroe, as personal representatives of Day's estate; and Joseph Ruth ("Ruth"), (referred to collectively as "the Gutterman defendants") under the Racketeer Influenced and Corrupt Organizations Act ("RICO"), 18 U.S.C. § 1961, et seq, for common law fraud and civil conspiracy. Hexagon and Edison sued the Betty Day and the Gutterman defendants for violation of the Illinois Trade Secrets Act, 765 ILCS 1065/2, and Ruth and Day for breach of fiduciary duty. Hexagon alleges that the defendants, including the Guttermans were "participating in a number of schemes aimed at bleeding plaintiff dry financially, stealing its trade secrets, taking over the company, or driving it out of business." Hexagon Packaging Corp. v. Manny Gutterman Assoc., Inc. et al., No. 96 C 4356, 1997 WL 323501, *1 (N.D.Ill.). The Hexagon decision sets forth the facts of Hexagon's cause of action in detail.
On August 23, 1999, Manny Gutterman Associates, Inc., Jelmar, and Jamie Industries, Inc. ("the Guttermans") filed a complaint against Hexagon; Edison; Fred Bernstein ("Bernstein"), (referred to collectively as "the Hexagon defendants"); Blidco Inc.; Louis C. Day Jr. and Margaret Renfroe, as personal representatives of the estate of Betty Day; and Carlos Montejo ("Montejo"). The Guttermans' complaint alleges violations of RICO §§ 1962(c) and (d); the Consumer Fraud and Deceptive Business Practices Act, 815 ILCS 505/1, et seq. ("ICFA"); the Uniform Deceptive Business Practices Act, 815 ILCS 510/2, et seq. ("UDTPA"), and that the defendants committed common law fraud. The facts in the Guttermans' case are a near mirror image of those in Hexagons' case. See Hexagon at *1. On October 4, 1999, the two cases were consolidated.
Before the court are two motions, the Hexagon defendants motion to dismiss and Montejo's motion to dismiss. This court considers and sets forth below the facts of the Guttermans' complaint in the light most favorable to the Guttermans. See United States v. Yashar, 166 F.3d 873, 879 (7th Cir. 1999). The court accepts all of the Guttermans' well-pleaded factual allegations as true. See Fredrick v. Simmons Airlines, Inc., 144 F.3d 500, 502 (7th Cir. 1998)
The Guttermans market a line of household cleaning products, including the products "CLR" and "Tarn-X," for which they hold the trademarks. Hexagon is a contract packager of chemical products. Between 1985 and 1996, Hexagon was the contract packager for the Gutterman line of household cleaning products. In 1986, Day was hired by Hexagon and introduced to Gutterman by Edison and Ruth, the former president of Hexagon. Edison introduced Day to the Guttermans so that Edison and Hexagon could gradually assume control over the Guttermans' products and trademarks. Also in 1986, Edison and Hexagon hired Montejo to work with the compounders of the Guttermans' products, giving Montejo total inventory control.
Thereafter, Day, individually and through her company, Blidco, worked as an independent consulting chemist for the Guttermans. Before 1989, Hexagon, Edison or the Hosiery Mate Company, a corporation solely owned and controlled by Edison, purchased the chemicals used in Guttermans' products. In 1989, Day and Blidco began ordering the chemicals and the Guttermans paid for them. Day and Blidco moved into a facility offsite from Hexagon and, in 1991, Montejo went to work at the Blidco facility. The Guttermans allege that the new facility and Montejo's employment at Blidco afforded Edison and Hexagon the ability defraud the Guttermans while masking their various schemes.
The Guttermans allege two specific schemes. The first is the "chemical billing scheme." The Guttermans were billed for years for chemicals which Day allegedly developed and added to the Guttermans' products to improve the quality and lower the price of the products. However, the chemicals were fictitious, and Day added water or nothing to the products. Edison knew about the deceits and acquiesced in order to continue Hexagon's relationship with the Guttermans and eventually gain control over the Guttermans' product line.
Specifically, Edison gave Day the formulas to the Guttermans' products, and Day made minor changes and claimed to have developed new products. The Guttermans were then fraudulently billed for the "new products." Furthermore, between 1991 and 1993, Montejo faxed false inventory reports to the Guttermans. For example, Day claimed to have developed the "CLR Detergent System." Day purported that the CLR Detergent System could be used as a detergent in several of the Guttermans' products. In reality, the CLR Detergent System was never added to any products; rather, the products were being diluted with water and the Guttermans' were being overbilled. The overbilling included approximately 57 invoices, seeking payments of approximately $3,974,552. Day also charged the Guttermans $33,500 for Surfact SP, a fictitious chemical allegedly added as an ingredient to Aluminum Glaze and Jewelry Cleaner and $13,797 for Chemical 50, a fictitious chemical allegedly used in Liquid Magnet.
The second scheme is the "water billing scheme." During the period between January 1991 and April 1996, Edison and later Bernstein directed that the Guttermans be incorrectly billed for water used in its products. Day falsely reported the water usage and Hexagon personnel prepared at least 36 false invoices, which were sent out monthly between 1991 and 1994. When Bernstein because president in 1995, he tried to cover up the overbilling by underbilling the Guttermans for water.
The Guttermans aver that the defendants also engaged in various cover up schemes. First, Day paid Montejo thousands of dollars in bribes to keep him quiet, and Hexagon rehired Montejo so that Montejo could maintain control over the inventory used in the Guttermans' products.
Second, in 1994, Edison fabricated grounds in order to terminate then-President Ruth. Edison's daughter formed an independent corporation, MRE Associates, Inc., which subcontracts with Hexagon to provide Bernstein's services as president. The subcontract is intended to shield Bernstein from personal liability.
Third, Edison and Bernstein arranged that Bernstein would falsely claim, through a series of letters to the Guttermans, that Hexagon owned the formulas to all of the Guttermans' products and the right to use all of the Guttermans' trademarks, including those for CLR and Tarn-X. The letters also threatened the Guttermans with litigation if the Guttermans did not comply with Hexagon's right to control the distribution of the products.
Fourth, Edison, Hexagon and Bernstein attempted to assume control over the trademarks and products by filing the underlying lawsuit, Hexagon v. Gutterman, No. 96 C 4356, that is consolidated with this case.
On August 17, 1999, in open court, this court denied the Guttermans' motion for leave to file counterclaims, cross-claims, and a third party complaint.
DISCUSSION Montejo's Motion to Dismiss
Montejo argues that all of the Guttermans' allegations against him should be dismissed because they are barred by res judicata. In February 1998, Arthur Gutterman filed a lawsuit in federal court against Montejo for defamation. Montejo alleges that the 1998 lawsuit involves the same events and circumstances as involved in this case and therefore the Guttermans should have raised the instant legal theories and claims in 1998.
In order to show that res judicata applies, three elements must be present: (1) identity of parties or their privies; (2) identity of causes of action; and (3) final judgment on the merits. See Anderson v. Chrysler Corp., 99 F.3d 846, 852 (7th Cir. 1996) (internal citations omitted)
The Guttermans only dispute the presence of the second element, arguing that there is not an identity between the two suits with regards to the claims. In order to apply the doctrine of res judicata, courts employ the "same transaction" test, which states that all claims arising out of transaction must be brought in one lawsuit or the claims are lost. Id. at 852. A "transaction" is a "single core of operative facts which give rise to a remedy." Id. at 852.
In Shoemaker v. United States, No. 96 CV 1465, 1997 WL 96543 *3 (S.D.N.Y.), the court held that res judicata barred a RICO suit because an earlier federal defamation suit involved same factual allegations of schemes and conspiracies. In the 1998 defamation lawsuit, Arthur Gutterman sued Montejo because Montejo allegedly stated that Arthur Gutterman was involved with Day and Blidco in false billing for chemicals. The operative facts and circumstances are the same as in the Guttermans complaint in this case. In fact, the Guttermans seemingly admit to the factual similarities underlying the two cases: "Arthur Gutterman's action for libel stated that the matter asserted in Montejo's utterances were false. Libel Compl., ¶ 10. The Gutterman Plaintiffs now seek to prove the truth of the fraudulent schemes underlying Montejo' s utterances." Pl. Resp. at 3. In other words, in the 1998 lawsuit, the Guttermans were disavowing blame for the fraudulent schemes, in this lawsuit, the Guttermans are shifting blame for the fraudulent schemes. Although the legal theories differ, the factual predicates are the same. See also, Sutton v. Sutton, 71 F. Supp.2d 383, 390 (D.N.J. 1999) (federal defamation suit involved same transaction as instant RICO suit and would have been res judicata if defamation suit would have proceeded to final judgment). On March 17, 1998, Hexagon brought a motion to consolidate the defamation case with Hexagon's underlying RICO case. In open court, this court stated that there were facts in common between the two cases but denied the motion because Hexagon was not a party to the defamation suit. The identity of parties is not an issue in this case. Therefore, all remaining claims against Montejo are dismissed.
The Hexagon Defendants' Motion to Dismiss
The Hexagon defendants assert six arguments in support of their motion to dismiss the Guttermans' claims. The court will address the arguments in turn.
A. Federal Rule of Civil procedure 13(a) .
The Hexagon defendants' first argument is that the claims against the Hexagon Corporation should be dismissed because the claims should have been filed as compulsory counterclaims under Federal Rule of Civil Procedure 13(a). The court notes that Edison is a plaintiff in the underlying action, and this first argument includes him as well.
In response, the Guttermans do not refute that they were aware of the counterclaims, nor do they argue that the claims are not true counterclaims; instead the Guttermans argue that their claims could not have been raised because they did not become certain of them until June, 1999. The Guttermans contend that they waited to file this case, in order to prevent any threat of Federal Rule of Civil procedure 11 sanctions for filing a frivolous suit.
Referring to Rule 13(a), the Supreme Court held:
The requirement that counterclaims arising out of the same transaction or occurrence as the opposing party's claim `shall' be stated in the pleadings was designed to prevent multiplicity of actions and to achieve resolution in a single lawsuit of all disputes arising out of common matters. The Rule was particularly directed against one who failed to assert a counterclaim in one action and then instituted a second action in which that counterclaim became the basis of the complaint.Southern Const. Co. v. Pickard, 371 U.S. 57, 60, 83 S.Ct. 108, 110 (1962). In Fagnan v. Great Central Ins. Co., 577 F.2d 418, 420 (7th Cir. 1978), the court barred a party's claim, reasoning that the claims should have been brought as counterclaim. See also Baker v. Southern Pacific Transportation 542 F.2d 1123, 1126 (9th Cir. 1976) (dismissing the defendant's case because it should have been brought as a counterclaim in the original action)
The Guttermans do not refute that the two cases are logically related or that they arise out of the same set of transactions or occurrences. This court denied the Guttermans' motion for leave to file counterclaims because the facts alleged herein were known to the Guttermans far earlier in the litigation. On August 7, 1999, in open court, this court refused to "open a can of worms that big at this stage of the case." It did not take three years and extensive discovery for the Guttermans to assemble a suit which would survive a Rule 11 motion. Furthermore, the Guttermans assert that they finally felt confident in their claims after the deposition of Ruth in June 1999. However, Ruth has been a defendant alongside the Guttermans throughout the pendency of the underlying litigation. The Guttermans have had access to Ruth's testimony and knowledge since 1996. The claims alleged in the Guttermans' complaint should have been filed as counterclaims earlier in the underlying lawsuit. Therefore, all claims against Hexagon and Edison are dismissed.
B. The RICO Claims.
1. 18. U.S.C. § 1962(c).
The Hexagon defendants construe their arguments against the RICO allegations on behalf of Hexagon, Edison, and Bernstein; however, the court narrows the remaining arguments to Bernstein in light of Hexagon and Edison's dismissal from this case pursuant to Rule 13. Bernstein argues that the Guttermans' § 1962(c) claims against him fail to state a claim upon which relief can be granted. First, Bernstein argues that the Guttermans have failed to sufficiently plead the "conduct" element of § 1962(c) Specifically, Bernstein argues that the Guttermans have pleaded that he engaged in "negative acquiescence" and under RICO, the Guttermans need to allege that he actively participated in a racketeering enterprise.
The relevant portion of the RICO statute reads, "[i]t shall be unlawful for any person employed by or associated with any enterprise engaged in, or the activities of which affect, interstate or foreign commerce, to conduct or participate, directly or indirectly, in the conduct of such enterprises s affairs through a pattern of racketeering activity or collection of unlawful debt." 18 U.S.C. § 1962 (c). In order to satisfy the conduct element of the claim, the defendant must participate in the operation or management of the enterprise and play "some part" in directing the enterprise's affairs. Reves v. Ernst Young, 507 U.S. 170, 178, 113 S.Ct. 1163, 1170 (1993).
The court first analyzes Bernstein's role in the water billing scheme under the operation and management standard. The complaint is completely inconsistent with regards to Bernstein's role. Paragraph 28 of the Guttermans' complaint reads, "[d]uring a continuous period from January, 1991 through and including April, 1996, Hexagon, at the direction of Edison in the beginning and then later Bernstein, charged the Guttermans for the usage of water in its products in an amount greater than was actually used." In contrast, in paragraph 29, the Guttermans allege that the overbilling only took place until 1994. Then, paragraph 30 reads that Bernstein undercharged the Guttermans. According to the complaint, Bernstein did not become president until 1995. Thus, there is a gap in the pleading between 1994 and 1995 with regards to the billing for water. See Tregenza v. Great Am. Communications Co., 12 F.3d 717, 718 (7th Cir. 1993) (plaintiff who pleads facts that show his suit is "without merit" has "pleaded himself out of court). Furthermore, according to the Guttermans' complaint, in paragraph 28, Bernstein overcharged the Guttermans; whereas, in paragraph 30, he undercharged them.
The allegations in the water billing scheme are also deficient because they fail to satisfy the particularity requirements of Federal Rule of Civil Procedure 9(b) and of pleading fraud under RICO. According to the Seventh Circuit in Jepson, Inc. v. Makita Corp., 34 F.3d 1321, 1328 (7th Cir. 1994), "the plaintiff must, within reason, describe the time, place, and content of the mail and wire communications, and it must identify the parties to these communications." In the underlying lawsuit, this court found Hexagon's allegations lacking; however, the allegations survived because the information was not in Hexagon's control.Hexagon at *8. The Guttermans have not alleged the times, places or contents of the mailings which "caused" the Guttermans to be underbilled for water. Compl. ¶ 30. The allegation is set forth as one net injury. Furthermore, the invoices are in the Guttermans' control. There is no excuse for the Guttermans' lack of particularity.
The court next turns to Bernstein's role in the chemical billing scheme. All of Gutterman' s allegations involving the chemical billing scheme involve acquiescence by Bernstein. See Compl. ¶¶ 618-27. There is no allegation that Bernstein directed, conducted, managed or operated any of the activities that Day engaged in involving the manipulation of chemicals in the detergents at issue. In fact, Bernstein became the president of Hexagon mere months before the underlying lawsuit was filed. Bernstein's only alleged involvement in the scheme to gain control over the Guttermans' products entailed sending the Guttermans letters asserting Hexagon's legal control over the products. See I.S. Joseph Co. v. J. Lauritzen A/S, 751 F.2d 265, 266 (8th Cir. 1984) (two threats to file civil action do not constitute pattern of racketeering activity), Manax v. McNamara, 660 F. Supp. 657, 659 (W.D.Tex. 1987) (initiation of lawsuits does not constitute scheme to defraud under mail or wire fraud statutes), aff'd, 842 F.2d 808 (5th Cir. 1988); Paul S. Mullin Associates v. Bassett, 632 F. Supp. 532, 540 (D.Del. 1986) (lawyer's act of posting letter in which he states client's legal position not mail fraud predicate for RICO); American Nursing Care of Toledo v. Leisure, 609 F. Supp. 419, 429 (N.D.Ohio 1984) (threat of litigation regarding commercial agreements not criminal act and consequently not predicate act for RICO).
Finally, the court addresses the alleged cover up schemes. The Guttermans allege that Bernstein' s letter-writing was a cover up for Hexagon's fraudulent schemes. According to the facts as pleaded by the Guttermans, Bernstein was stating a legal position in his letters to the Guttermans. A cover up is "designed to lull the victims into a false sense of security or conceal the misconduct that has occurred." Perlman v. Zell, 938 F. Supp. 1327, 1341 (N.D. Ill 1996). Inflammatory letters claiming property rights and control over the Guttermans' products should not have lulled the Guttermans into any sense of security. Therefore, the § 1962(c) claims against Bernstein are dismissed for failure adequately to plead the conduct element of RICO and for failure to plead the fraud with sufficient specificity.
2. 18 U.S.C. § 1962 (d) .
Bernstein argues that the court should dismiss the Guttermans' conspiracy allegation under 18 U.S.C. § 1962 (d) because the Guttermans' allegations are too conclusory. To allege a conspiracy to violate RICO under Section 1962(d), the Guttermans must allege at least three things: (1) that each defendant agreed to conduct the affairs of an enterprise; (2) that each defendant agreed to the commission of at least two predicate acts; and (3) that each defendant knew that those predicate acts were part of a pattern of racketeering activity. Schiffels v. Kemper Fin. Servs., Inc., 978 F.2d 344, 352 (7th Cir. 1992).
Bernstein argues that the Guttermans have failed to allege that he "personally facilitated" the enterprise. See Def. Reply at 9. In Brouwer v. Raffensperger, Hughers Co., No. 99-1286, 2000 WL 28153, *6 (7th Cir.), the Seventh Circuit addressed the distinction between the level of personal participation required under § 1962(c) and the broader "agreement" required to violate § 1962(d). The court in Brouwer held that in order to be liable for conspiracy under § 1962(d), "ones's agreement must be to knowingly facilitate the activities of the operators or managers to whom subsection (c) applies." Id. at *5-6.
In this case, the complaint is too inconsistent to say for certain that Bernstein was involved in overbilling the Guttermans for water. The Guttermans do not allege that Bernstein knowingly facilitated the manipulation of chemicals in the Guttermans' products. The Guttermans only allegation with regards to Bernstein and the chemical billing schemes is that it was Bernstein's "hope" to "forever maintain its position as the sole contract packager of the Gutterman products." Compl. ¶ 24. The Guttermans have alleged that Bernstein attempted to cover up Hexagon's schemes. However this allegation is inconsistent. According to the Guttermans, Bernstein proactively sent the Guttermans letters which threatened litigation and alerted the Guttermans as to Hexagon's claims. The Guttermans have not sufficiently alleged that Bernstein knowingly facilitated a RICO conspiracy.
Furthermore, the allegations of conspiracy are conclusory for the same reasons cited in this court's earlier decision: the allegations are neither specific nor can be inferred from the pleadings. See Hexagon at *15; see also, Bajorat v. Columbia-Breckenridge Dev. Corp., 944 F. Supp. 1371, 1382 (N.D.Ill. 1996). Therefore, the 18 U.S.C. § 1962 (d) allegation against Bernstein is dismissed.
C. The Statute of Limitations.
The Hexagon defendants argue that the court should dismiss both the ICFA and the UDTPA causes of action because both actions are barred by the statute of limitations. Both parties agree that the statute of limitations, according to the ILCS and the UDTPA, is three years. 815 ILCS 505/10a(e). The Guttermans argue that the limitations period should be extended to five years because the defendants fraudulently concealed the Guttermans' causes of action.
According to the Seventh Circuit, the discovery rule applies to actions under the ICFA and UDTPA and can extend the statute of limitations: "a cause of action under the Consumer Fraud Act accrues when the plaintiff knows or reasonably should know of his injury and also knows or reasonably should know that it was wrongfully caused." Highsmith v. Chrysler Credit Corp., 18 F.3d 434, 441 (7th Cir. 1994) (internal citation omitted). Equitable estoppel "comes into play if the defendant takes active steps to prevent the plaintiff from suing in time, as by promising not to plead the statute of limitations." Cada v. Baxter Healthcare Corp., 920 F.2d 446, 450-51 (7th Cir. 1990).
The Guttermans' complaint belies their statute of limitations argument. In the complaint, the Guttermans' allege that Bernstein sent letters in 1995 asserting control over both the Guttermans' trademarks and their products. In their response, the Guttermans acknowledge that their complaint does not "explicitly plead" fraudulent concealment, but that the court should "infer" it. Pl. Resp. at 14. When Bernstein wrote to the Guttermans asserting control over their products and trademarks, the Guttermans was alerted to and should have discovered that misconduct was taking place.
Furthermore, Hexagon filed the underlying lawsuit on July 17, 1996; the Guttermans' complaint imitates almost every allegation that Hexagon complained of in 1996. Extensive discovery has taken place over the course of over three years; nevertheless, the Guttermans did not file the instant action until August 23, 1999. The doctrine of equitable estoppel does not apply because there is no allegation that the defendants took any action to prevent the Guttermans from filing suit in the interim period between 1996, when the breakdown in the relationship between the parties was taking place, and 1999, when this case was filed. Therefore, the Gutterman's ICFA and UDTPA actions are barred by the statute of limitations.
D. Common Law Fraud.
The Hexagon defendants contend that the court should dismiss the Count V of the Guttermans' complaint, which alleges common law fraud, because the complaint fails to allege that the Guttermans relied on the alleged fraud. The Guttermans acknowledged that they did not specifically plead detrimental reliance in their complaint. See Pl. Resp. at 11 ("although reliance was not explicitly pled, it can be easily inferred . . ."). The Seventh Circuit has held that "detrimental reliance is an essential element of common-law fraud." Richeson v. Saltzman, 142 F.3d 440, 1998 WL 152987, *3 (7th Cir.). Furthermore, the court has determined herein this opinion that the Guttermans have not alleged aspects of the fraud with the required particularity under Federal Rule of Civil Procedure 9 (b) Therefore, the fraud claims are dismissed against all of the defendants.
CONCLUSION
Therefore, for the foregoing reasons, Hexagon's Motion to Dismiss (Document #230, filed 11/30/99) is granted. Montejo' s Motion to Dismiss (Document #229, filed 11/22/99) is granted.
The Motion for Summary Judgment by Arthur Gutterman as to Count IX of the Second Amended Complaint (Document #196, filed 4/26/99) is dismissed as moot, pursuant to Gutterman's Motion for Summary Judgment filed 2/10/00.
Pursuant to the court's order in open court on January 12. 2000 freezing discovery or because they have been addressed in open court, the following motions are dismissed as moot:
1. Motion to Quash Plaintiff's Subpoena Duces Tecum (Document #179, filed 3/2/99);
2. Hexagon's Motion to Set a Fact Discovery Cutoff and a Schedule for Disclosure and Depositions of Expert Witnesses (Document #195, filed 5/4/99);
3. Hexagon's Motion for Rule to Show Cause why the Day defendants and their counsel should not be held in contempt for disregarding Court Orders regarding computer evidence (Document #216, filed 8/13/99);
4. Hexagon's Motion for leave to Supplement the Expert Reports of Roger Grabowski and Andrew Rosen (Document #217, filed 8/13/99); and
5. Ruth's Motion for Protective Order (Document #202, filed 5/17/99).
IT IS SO ORDERED.