an independent consultant for the year beginning October 15,
1982. Among other provisions, the Agreement stated that Holly was
to grant to Hollymatic "the exclusive right to sell the
Conversion either as a part of, or for the purpose of later
attachment to, any of [Hollymatic's] newly manufactured food
patty molding machines." Agreement, ¶ 7. It also provided that
its terms were to be construed in accordance with Illinois law.
Id. ¶ 16. Sometime after the Agreement was formed, Holly and his
partners established Holly Systems, a corporation engaged in the
leasing and sale of food portioning equipment.
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
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
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
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 can
even be implied, but for present purposes we assume they can.
Even so, we do not believe an Illinois court would apply the
scheme or device exception in this case.
Under Illinois law, fraud is a conscious, calculated course of
behavior designed to induce the victim's reliance. The continued
life of the general rule against promissory fraud demonstrates
that it remains a disfavored cause of action, at least in
Illinois and a small number of other jurisdictions. See W.
Prosser, Handbook on the Law of Torts § 109 (4th ed. 1971).
Probably this is because fraud, focusing as it does on a
subjective state of mind, can be very easy to allege and very
difficult to prove or disprove. See, e.g., Kriegel v. Miedema,
20 Ill. App.2d 235, 241, 155 N.E.2d 815, 818 (1959). In order to
survive the pleading stage, a claimant must be able to point to
specific, objective manifestations of fraudulent intent — a
scheme or device. If he cannot, it is in effect presumed that he
cannot prove facts at trial entitling him to relief. If the rule
were otherwise, anyone with a breach of contract claim could open
the door to tort damages by alleging that the promises broken
were never intended to be performed. Presumably, it is this
result that the Illinois rule seeks to avoid.
When allegations of fraud rest solely upon implied
misrepresentations, the assertion that the defendant never
intended to perform is obviously weaker and the case for
dismissal is even stronger. In such a case, each of the five
elements of the cause of action is impaired: any
misrepresentation is less likely to be material, knowingly made,
and intended to induce reliance; and any reliance so induced is
less likely to be reasonable and to engender damages. In short,
the risk that a worthy
claim will be quashed at its inception is obviated by the
probability that the claim, if allowed to proceed to trial, could
never be substantiated. For these reasons, we hold that the
threshold for bringing a fraud action under the scheme or device
exception is not met where the claimant alleges no more than an
implied promise or representation as the predicate for
Holly and Holly Systems have already been given an opportunity
to amend their counterclaim after being notified of Hollymatic's
objections in its first motion to dismiss. (Hollymatic refiled
the motion after the amended counterclaim was filed). Under these
circumstances, it is clear that Holly and Holly Systems can prove
no set of facts that would entitle them to relief. Conley v.
Gibson, 355 U.S. 41, 45-46, 78 S.Ct. 99, 101-02, 2 L.Ed.2d 80
(1957). The counterplaintiffs have tried to bring their case
within the exception by alleging that Hollymatic's
representations "were the scheme used to accomplish a fraud on
Holly Systems and Holly." Amended Counterclaim, Count II, ¶ 20.
We are not required to accept legal conclusions stated in a
pleading and we decline to do so here. Briscoe v. Lahue,
663 F.2d 713, 723 (7th Cir. 1981), aff'd, 460 U.S. 325, 103 S.Ct. 1108, 75
L.Ed.2d 96 (1983); Mitchell v. Archibald & Kendall, Inc.,
573 F.2d 429, 432 (7th Cir. 1978).
III. Count V (Product Disparagement)
Hollymatic next contends that Count V of the counterclaim must
fall because Holly and Holly Systems have failed to allege
special damages. According to Hollymatic, special damages are an
essential element of a product disparagement claim. The
counterplaintiffs reply, first, that no allegations of special
damages are necessary, and, alternatively, that they have
sufficiently pleaded special damages.
It is impossible to determine who has the better of the
argument. The parties appear to have assumed that the products
disparagement claim would be adjudged according to "general
principles," but this is of course prohibited under Erie R.R.
v. Tompkins, 304 U.S. 64, 58 S.Ct. 817, 82 L.Ed. 1188 (1938).
We must first determine the law to apply. In so doing, we must
apply the choice of law rules that an Illinois court would
apply in a products disparagement case. See Klaxon Co. v. Stentor
Elec. Mfg. Co., 313 U.S. 487, 61 S.Ct. 1020, 85 L.Ed. 1477
(1941). Although we have found no direct case authority on point,
we think it probable that an Illinois court would apply the rule
of the Restatement (Second) of Conflicts of Law, which provides
that "the local law of the state where the publication occurs
determines the rights and liabilities of the parties."
Restatement (Second) of Conflicts of Law § 149 (1971). In cases
where the offending communications are published simultaneously
in more than one state, "the local law of the state which, with
respect to the particular issue, has the most significant
relationship" applies. Id. § 150(1).*fn5 Under the Restatement
Second approach, it is even possible, when the same
communication is made to different persons in different states,
that each communication will be governed by a different law. Id.
§ 149, comment a.
While the counterclaim is sufficiently informative to satisfy
the liberal rules of notice pleading, it does not apprise the
Court of the essential facts necessary to making a reasoned
choice of law. Count V states in pertinent part that:
Hollymatic has made false statements to Hollymatic
dealers and others concerning the purported poor
quality of Holly Systems' conversion devices and
products. Hollymatic has also made false statements
concerning the purported adverse effect the
conversion devices would have on Hollymatic machines
to which they are attached.
Amended Counterclaim, Count V, ¶ 70. Nowhere in the pleadings is
it stated when, where, or by what means the alleged disparaging
comments were communicated; nowhere is it stated by whom or to
whom the comments were made, or, indeed, what was said. Under the
Restatement Second approach — and, we assume, any other approach
that an Illinois court might adopt — it is necessary to know at
least where the disparaging comments took place before a court
rationally can determine whose law to apply.
We decline to presume that Illinois law would apply to the
products disparagement claim. First, there is no indication that
any of the disparaging remarks were made in Illinois. Second, the
Agreement's choice of law provision does not govern in an action
for products disparagement. While the choice of law provision is
pertinent to the breach of contract and fraud claims, both of
which are directly predicated on the contract, it cannot extend
to claims wholly outside the contract and beyond the reasonable
expectation of the parties at the time of contracting. At best,
the contractual choice of law would be one factor an Illinois
court would consider.
We also decline to presume that all states recognize the same
elements of a cause of action for products disparagement. (One
district court that made this mistake was reversed in System
Operations v. Scientific Games Dev. Corp., 555 F.2d 1131 (3d Cir.
1977)). Although the traditional rule is that special damages
must be pleaded in every such case, we have located a number of
cases calling the traditional rule into question, albeit in
dicta. Aerosonic Corp. v. Trodyne Corp., 402 F.2d 223, 231 (5th
Cir. 1968) ("If the complaint of disparagement is based on unfair
competition and not libel, no special damages need by alleged or
proved"); Wiegand Co. v. Trent Co., 122 F.2d 920, 924 (3d Cir.
1941) (same), cert. denied, 316 U.S. 667, 62 S.Ct. 1033, 86 L.Ed.
1743 (1942); Big O Tire Dealers, Inc. v. Goodyear Tire & Rubber
Co., 408 F. Supp. 1219, 1235 (D.Colo. 1976) ("as a matter of
policy there is no reason to require special damages in a business
disparagement case"), modified, 561 F.2d 1365 (10th Cir. 1977),
cert. denied, 434 U.S. 1052, 98 S.Ct. 905, 54 L.Ed.2d 805 (1978);
Testing Systems, Inc. v. Magnaflux Corp., 251 F. Supp. 286, 290
(E.D.Pa. 1966) ("the rule respecting special damages continued in force
long after its raison d'etre had passed"); Royer v. Stoody,
192 F. Supp. 949, 953 (W.D.Okla. 1961) ("the trend is toward doing
away with the necessity of alleging special damages").
In light of what appears to be a growing trend of
dissatisfaction with the general rule, we think a more
searching examination of the applicable law, whatever it may
be, is in order. In short, it cannot be said at this stage what
law will apply, and it cannot be said that Holly and Holly
Systems will be unable to prove facts entitling them to recover
in a products disparagement theory under some state's law.
Linder Steel Erection v. Alumisteel Systems, 88 F.R.D. 629, 631
(D.Md. 1980). Discovery may fill out the missing facts and
Count V will stand or fall on that basis.
Hollymatic's motion to dismiss Counts II and V of Holly and
Holly Systems' first amended counterclaim is granted as to
Count II and denied as to Count V.
An appropriate order will enter.