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July 17, 1980


The opinion of the court was delivered by: Shadur, District Judge.


Plaintiffs*fn1 filed a motion for summary judgment against defendants*fn2 on Count IV of plaintiffs' Complaint. For the reasons stated in this opinion and order, the Court grants plaintiffs' motion and enters summary judgment against defendants as to liability under Count IV of the Complaint. Plaintiffs' right to relief is dealt with subsequently in this opinion.

Jurisdiction in this case is based on diversity of citizenship. Although under conflict of law doctrines the facts might well give rise to the application of substantive law other than that of Illinois, defendants have not disputed the applicability of Illinois law as asserted by plaintiff, and there is no showing in any event that Bahamian law (or any other possibly applicable law) involves any principles different from those under Illinois law. Accordingly the Court will apply Illinois substantive law — after of course determining under federal law whether summary judgment is appropriate.

There are no controverted facts. Plaintiff relies on the facts as stated by Ted Flemming ("Flemming," President of each defendant corporation) in his deposition taken April 24, 1980, and defendants have filed no counter-affidavit. Thus defendants' opposition to the entry of summary judgment is predicated on their argument that the uncontroverted facts give rise to inferences that themselves create some genuine issue as to a material fact.*fn3


Corporation is the owner of a product known as Jason Winter's Herbaltea ("Herbaltea") and the related trademark and goodwill. Herbaltea involves a secret formula, both as to its ingredients and its method of preparation, and is marketed on the basis of a number of health claims. Corporation's shareholders are Jason Winter ("Winter," the "inventor" of the tea and President of Corporation) and Sung.

In 1979 defendants were purchasing Herbaltea on a wholesale basis from Corporation (pages 6 and 18 of the transcript of Flemming's April 24, 1980 deposition, hereafter "FT 6, 18"). At the end of September or the beginning of October 1979 Flemming traveled to the Bahamas to discuss with Winter an arrangement for distribution of Herbaltea (FT 4, 6). In the Bahamas Winter, acting for Corporation, and Flemming, acting for Flemming's Herbs, entered into a written agreement under which Flemming's Herbs would handle all retail orders arising in the North American continent, and all wholesale orders would be forwarded by Flemming's Herbs to "Winters International Market" for distribution. Flemming's Herbs was to pay no royalty or commission to Corporation for the retail orders but was to purchase Herbaltea from Corporation at a rate of $25 per pound (FT 9-11 and Exhibit A). When the agreement was entered into, Flemming "deduced' (as he put it) that Sung had a financial interest in Corporation (FT 50), and Winter so stated to Flemming within a few weeks after the entry into the agreement (FT 48).

Almost immediately after execution of the written agreement Flemming and Winter entered into an oral modification of its terms. Under the revised arrangement Flemming's Herbs would not purchase any tea from Corporation but would rather independently purchase the herbs and would mix, bag and label Herbaltea for all Corporation's orders, both retail and wholesale. Flemming's Herbs would pay Winter personally a royalty of $5 per bag on all tea sold and no payments of any kind would be made directly to Corporation (FT 14, 21, 24, 56, 57). As Flemming stated at FT 67:

  Flemming: I was requested to pay the royalty to Mr.
    Winter by Mr. Winter.
  Q: Directly to Mr. Winter even though the agreement
    says to the corporation?
  Flemming: He insisted on making checks out in that

In accordance with that modified agreement, Flemming's Herbs began to make and distribute Herbaltea and to make payments covering the $5 per bag royalty to Winter individually, including a payment of approximately $20,000 personally delivered to Winter by Flemming about October 30, 1979, while Flemming was visiting Winter in Canada (FT 27, 28, 34).

While in Canada visiting Winter, Flemming was notified by his office in Schaumburg, Illinois that a letter had been received from an attorney representing Won K. Sung regarding defendants' distribution of Herbaltea. Winter prepared the form of response to that letter, which Flemming allowed Winter to cable to the attorney over the name of Flemming Imports (FT 26-28, Exhibit D).*fn4

Flemming also established a checking account entitled "Jason Winter's Herbaltea" and a savings account entitled "Ted Flemming, Trustee for Jason Winter." Each account was maintained at the Suburban National Bank of Woodfield, Illinois, with Flemming as the signatory on each account. Flemming stated regarding the savings account that "when Mr. Winter came to Schaumburg, I thought it would be necessary that he would want a trust account, than what you call signatory?" (FT 60) but that when Winter visited Flemming in October "he did not want to be part of ...

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