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HOLLYMATIC CORP. v. HOLLY SYSTEMS

October 29, 1985

HOLLYMATIC CORPORATION, PLAINTIFF,
v.
HOLLY SYSTEMS, INC., MARVEL INC., AND HARRY H. HOLLY, DEFENDANTS.



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

MEMORANDUM OPINION

This case involves a commercial dispute between former associates in the meat processing industry. Plaintiff-counterdefendant Hollymatic Corporation ("Hollymatic") filed a complaint alleging unfair competition, breach of contract, trademark infringement, and violations of the Illinois Deceptive Trade Practices, Consumer Fraud, and Anti-Dilution Acts. Defendants-counterplaintiffs Harry Holly ("Holly") and Holly Systems, Inc. ("Holly Systems") countered with charges against Hollymatic of breach of contract, fraud, intentional interference with prospective economic advantage, product disparagement, and violation of the Sherman Act and the Illinois Deceptive Trade Practices Act.*fn1 Both sides seek damages and injunctive relief.

Before us is Hollymatic's motion to dismiss, under Federal Rule of Civil Procedure 12(b)(6), Counts II (fraud) and V (product disparagement) of the amended counterclaim. For the reasons stated herein, the motion is granted as to Count II and denied as to Count V.

I. Background

In deciding this motion, we must take the facts alleged in the counterclaim as true. Miree v. DeKalb County, 433 U.S. 25, 27 n. 2, 97 S.Ct. 2490, 2492 n. 2, 53 L.Ed.2d 557 (1977). The presentation of the facts is supplemented by the terms of a contract attached to the complaint and by the admissions set forth in the answer to the complaint and reply to the counterclaim. See 5 C. Wright & A. Miller, Federal Practice and Procedure § 1357 (1969).

Hollymatic is engaged in the manufacture, distribution and sale of meat processing, meat handling, and food portioning equipment. Through a network of independent, authorized dealers, Hollymatic sells its products to meat processors, restaurants, supermarkets, institutional food suppliers and wholesale butchers.

From 1946 through 1978, Holly was the chief executive officer, principal engineer and inventor for Hollymatic's predecessor in interest. Between 1978 and 1982, Holly worked for Hollymatic's predecessor as an independent consultant pursuant to a number of written agreements. During this period, he developed a new invention, the "Conversion," which attached to meat patty molding machines, including Hollymatic models, and resulted in a differently formed patty.

II. Count II (Fraud)

Count II of the amended counterclaim begins by incorporating the allegations of Count I, the breach of contract claim. In Count I, the counterplaintiffs allege that Hollymatic failed to perform two implied obligations contained in the Agreement. The first is a duty to make good faith efforts to market the Conversion and is alleged to arise from ¶ 7 of the Agreement*fn2; the second, allegedly arising from ¶¶ 7.10 and 1.2, is a duty not to interfere with Holly's right to sell the Conversion.*fn3

In Count II, the counterplaintiffs attempt to convert these allegations into a fraud claim by additionally claiming (1) that Hollymatic falsely represented its intention to perform its obligations under the Agreement; (2) that Hollymatic's representations were known by Hollymatic to be false; (3) that Hollymatic made the representations with the intent to induce Holly to enter the Agreement; (4) that Holly reasonably relied on the misrepresentations; and (5) that Holly suffered damages as a result of his reliance. Thus, the allegations of Count II track the five essential elements of common law fraud in Illinois. See, e.g., Soules v. General Motors Corp., 79 Ill.2d 282, 286, 37 Ill.Dec. 597, 599, 402 N.E.2d 599, 601 (1980); Higgins v. Kleronomos, 121 Ill.App.3d 316, 76 Ill.Dec. 913, 917, 459 N.E.2d 1048, 1052 (1984).

Hollymatic argues that the defendants have not stated a cause of action for fraud because the alleged misrepresentations related to future conduct, not a present condition of fact. It is true that, traditionally, Illinois courts have been reluctant to entertain actions for "promissory fraud." See generally, Pollele, An Illinois Choice: Fossil Law or an Action for Promissory Fraud?, 32 DePaul L.Rev. 565, 578-88 (1983). The general rule is that a promise made without intent to perform it is not a misrepresentation. Roda v. Berko, 401 Ill. 335, 340-41,81 N.E.2d 912, 915 (1948). A recognized exception exists, however, "where the false promise or representation of intention or of future conduct is the scheme or device to accomplish the fraud." Id. at 340, 81 N.E.2d 912, 915; Steinberg v. Chicago Medical School, 69 Ill.2d 320, 334, 13 Ill.Dec. 699, 706, 371 N.E.2d 634, 641 (1977); Sommer v. United Savings Life Ins., 128 Ill.App.3d 808, 813-14, 84 Ill.Dec. 77, 82, 471 N.E.2d 606, 611 (1984). The question we must decide is whether the general rule or the exception controls the instant case.

The Illinois cases are not easily reconciled and the Illinois courts have rarely made more than half-hearted attempts to do so. Certainly the language in which the exception is stated is not illuminating in itself. One court of appeals suggested that a scheme or device was equivalent to a "carefully constructed plan of deceit." Metropolitan Bank & Trust Co. v. Oliver, 4 Ill. App.3d 975, 978, 283 N.E.2d 62, 64 (Ill.App.Ct. 1972); see also Zaborowski v. Hoffman Rosner Corp., 43 Ill.App.3d 21, 24-25, 1 Ill.Dec. 465, 468, 356 N.E.2d 653, 656 (Ill.App.Ct. 1976) (total facts must show scheme or device). Another court, acknowledging that "the exception tends to engulf and devour much of the general rule," recently held that a scheme had been properly alleged when the defendant had done no more than make a promise without intention of performing it. Vance Pearson, Inc. v. Alexander, 86 Ill.App.3d 1105, 1112, 42 Ill.Dec. 204, 209, 408 N.E.2d 782, 787 (1980); see also Brudnicki v. General Elec. Co., 535 F. Supp. 84, 88 (N.D.Ill. 1982) (exception applied where misrepresentation was an "integral step in achieving the agreement"). In short, the precedents appear to turn upon a case-by-case weighing of the equities, rather than clearly-defined principles.

We are aware of no Illinois case in which an alleged or even proven implied promise or representation was found to be a sufficient basis for applying the scheme or device exception. After examining the entire contract in this case, we find that the alleged representations at issue — the duties not to interfere and to make good faith efforts to sell the Conversion — are not expressly stated in the Agreement. Holly and Holly Systems admit as much in their pleadings, where they refer to each of the duties as "implied" duties. Amended Counterclaim, ¶¶ 8, 9. We have some doubt as to whether these obligations ...


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