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LOVEJOY ELECTRONICS, INC. v. O'BERTO

September 4, 1985

LOVEJOY ELECTRONICS, INC., PLAINTIFF COUNTERDEFENDANT,
v.
GERALD N. O'BERTO, DEFENDANT COUNTERPLAINTIFF.



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

  MEMORANDUM OPINION

This case arises from a contractual dispute involving the development and sale of a computer chip known as the "HOHM 8081." In the amended complaint, plaintiff-counterdefendant Lovejoy Electronics, Inc. ("Lovejoy") alleges breach of contract, breach of fiduciary duty, and negligence on the part of defendant-counterplaintiff Gerald N. O'Berto ("O'Berto"). Lovejoy also alleges breach of contract on the part of defendant International Microcircuits, Inc. O'Berto has countered with charges against Lovejoy of breach of contract and fraud.

Before us is Lovejoy's motion for summary judgment on O'Berto's amended counterclaim. For the reasons stated herein, we grant the motion in part and deny it in part. Pursuant to Fed.R.Civ.Pro. 56(d), an order will be entered specifying uncontroverted issues to be "deemed established" for purposes of any further proceedings in this case.

Japanese Exclusivity Clause

On March 16, 1980, Lovejoy and O'Berto executed a written contract ("Consulting Agreement") under the terms of which O'Berto was to supply, at O'Berto's direct cost of procurement, all Lovejoy's requirements of the HOHM 8081 chip. Consulting Agreement, ¶ 10. In exchange for these sales and O'Berto's consulting services, Lovejoy agreed to make certain royalty payments to O'Berto. Id. at ¶ 12(a)-(d). The Consulting Agreement expressly provided that it was to be interpreted in accordance with Illinois law. Id. at ¶ 19.

The first question for our consideration is whether O'Berto is precluded, as a matter of law, from recovering for Lovejoy's alleged violation of the Consulting Agreement's "Japanese exclusivity clause." Consulting Agreement, ¶ 13. Under the terms of that clause, O'Berto was to have the exclusive right to market the HOHM 8081 in Japan. Lovejoy appears to concede that, two and one-half months after the Consulting Agreement was executed, Lovejoy granted J.H. Fenner & Co. ("Fenner") a non-exclusive right to sell products embodying the HOHM 8081 in Japan. Despite the apparent conflict between this arrangement ("Fenner Agreement") and the Japanese exclusivity clause of the Consulting Agreement, Lovejoy contends that an action for breach of contract may not be maintained against it because O'Berto cannot prove damages. According to Lovejoy, damages are an essential element of a breach of contract claim under Illinois law. Lovejoy notes that O'Berto stated in his deposition that he knew of no sales activity by Fenner in Japan and that he himself had taken no affirmative steps to promote new business there. Lovejoy contends that this testimony establishes, as a matter of law, that O'Berto cannot prove damages, and that he therefore cannot recover for breach of contract under Illinois law.

It is not necessary for us to discuss the elements of a contract claim under Illinois law because, even assuming that Lovejoy is correct on the law, its approach to summary judgment is wide of the mark. The fact that O'Berto, in his deposition, could point to no specific instances of competition from Fenner does not establish that no such competition in fact took place. At trial, O'Berto may yet be able to prove that Fenner made sales in Japan or that Fenner or Lovejoy interfered in some other fashion with O'Berto's business there. In the absence of any sworn proof inconsistent with his pleadings, O'Berto is not obliged, on an adverse motion for summary judgment, to produce specific evidence in support of his claim for relief. Adickes v. S.H. Kress & Co., 398 U.S. 144, 156-60, 90 S.Ct. 1598, 1607-10, 26 L.Ed.2d 142 (1970). As his claim is well-pleaded, the burden rests upon the movant, Lovejoy, to refute the pleading allegations with sworn proof. Herman v. National Broadcasting Co., 744 F.2d 604, 607 (7th Cir. 1984), cert. denied, ___ U.S. ___, 105 S.Ct. 1393, 84 L.Ed.2d 782 (1985). Because Lovejoy has produced no evidence tending to preclude the possibility that its noncompliance with the Japanese exclusivity clause damaged O'Berto, summary judgment cannot be granted in its favor.

Fenner Royalties Provision

Lovejoy next challenges O'Berto's claims respecting the "Fenner royalties provision" of the Consulting Agreement. In his counterclaim, O'Berto asserts that, during the negotiations leading up to the Consulting Agreement, Lovejoy promised that it would include in the Fenner Agreement a provision whereby Fenner would agree to pay O'Berto a royalty of $20,000 per year for three years. O'Berto contends that Lovejoy's failure to provide for these royalty payments constitutes breach of contract and fraud. In support of these allegations, O'Berto offers five items of proof: (1) a preliminary draft of the Fenner Agreement containing the Fenner royalties provision; (2) sworn testimony that he was shown this draft and that he relied on it in entering the Consulting Agreement; (3) a first draft of the Consulting Agreement in which reference was made to O'Berto's third party rights under the Fenner Agreement; (4) O'Berto's deposition testimony that Pat Hennessy, a Lovejoy officer, told him that the Fenner royalties provision would be included in the Consulting Agreement; and (5) O'Berto's testimony that, when he asked Hennessy why the provision was not included in the final draft of the Consulting Agreement, Hennessy told him: "Don't worry about it, we will include it in the Lovejoy-Fenner contract [Fenner Agreement] as terms of a . . . minimum royalty for the first three years." O'Berto Deposition of January 24, 1985 at 23.

Lovejoy asserts that each of these items of proof is barred by the parol evidence rule. Specifically, it urges the Court to take note of paragraph 19 of the Consulting Agreement, which provides that "[t]his Agreement represents the parties' entire understanding with respect to the subject matter hereof and supersedes all prior contracts, agreements, understandings and communications with respect to such subject matter." In Lovejoy's view, the Consulting Agreement is an integrated writing that may not be supplemented by extrinsic evidence.

We disagree. While Illinois courts follow the general rule that a writing complete on its face may not be varied or contradicted by evidence outside the writing, it is well settled that fraud in the inducement may be proved by extrinsic evidence. Shanahan v. Schindler, 63 Ill. App.3d 82, 94-95, 20 Ill.Dec. 239, 248-49, 379 N.E.2d 1307, 1316-17 (1978); American Buyers Club v. Honecker, 46 Ill. App.3d 252, 254, 5 Ill.Dec. 666, 667-68, 361 N.E.2d 1370, 1371-72 (1977). Fraud "goes to the very heart of the agreement itself," Olin Corp. v. Aspinwall, 384 F. Supp. 773 (N.D.Ill. 1974), vitiating the mutual assent necessary to the creation of a valid contract.

The fact that the contract purports on its face to be a valid integration does not alter this result. Caliber Partners, Ltd. v. Affeld, 583 F. Supp. 1308, 1311-12 (N.D.Ill. 1984); Note, Effect of a Merger Clause on the Parol Evidence Rule in Illinois, 1954 U.Ill.L.F. 665, 674 (1954). Moreover, it is clear under Illinois law that an allegation of fraud in the inducement does not preclude the defrauded party from simultaneously pursuing an action for damages for breach of the contract. Vance Pearson, Inc. v. Alexander, 86 Ill. App.3d 1105, 1112, 42 Ill.Dec. 204, 209, 408 N.E.2d 782, 787 (1980); Concord Indus. v. Harvel Indus., 122 Ill. App.3d 845, 850, 78 Ill.Dec. 898, 901, 462 N.E.2d 1252, 1255 (1984); see also Havoco of America, Ltd. v. Hilco, Inc., 731 F.2d 1282, 1292 (7th Cir. 1984) (applying Illinois law).

As we discuss further later, O'Berto's claim is that Lovejoy, by making certain representations regarding exclusive marketing rights in Japan and royalties to be paid by Fenner, fraudulently induced O'Berto to enter the Consulting Agreement. Under Illinois law, it follows that O'Berto is entitled to submit parol evidence on this issue. Taking the items of proof submitted by O'Berto into consideration, it is obvious that a factual dispute remains as to whether Lovejoy was obligated to procure Fenner's agreement to pay O'Berto a royalty of $20,000 for three years. O'Berto swears that Lovejoy was so obligated; Lovejoy asserts that it was not. Such disputes are not amenable to summary adjudication.

Fraudulent Misrepresentation

O'Berto contends that Lovejoy's promises respecting Japanese marketing rights and royalties to be paid by Fenner were false misrepresentations that fraudulently induced him to enter the Consulting Agreement. Lovejoy argues in response that O'Berto cannot recover on his fraud claims because the alleged misrepresentations related to future conduct, not present conditions of fact.

As Lovejoy correctly observes, Illinois courts are reluctant to entertain actions for "promissory fraud." The general rule in Illinois is that a promise made without intent to perform it is not a misrepresentation. Steinberg v. Chicago Medical School, 69 Ill.2d 320, 334, 13 Ill.Dec. 699, 706, 371 N.E.2d 634, 641 (1977). A recognized exception exists, however, when the false promise is "alleged to be the scheme employed to accomplish the fraud." Id. at 334, 13 Ill.Dec. at 706, 371 N.E.2d at 641. Although the distinction between the ...


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