United States District Court, N.D. Illinois
April 14, 2004.
FIELDTURF INTERNATIONAL, INC., and FIELDTURF. INC. Plaintiff's,
TRIEXE MANAGEMENT GROUP INC., SPORTEXE CONSTRUCTION SERVICES, INC., SPORTEXE INTERNATIONAL, INC., and SPORTEXE, INC. Defendants
The opinion of the court was delivered by: NAN NOLAN, Magistrate Judge
MEMORANDUM OPINION AND ORDER
This patent infringement action is before the Court on plaintiff's'
motion to compel. For the reasons explained below, the motion is granted
in part and denied in part.
Unless otherwise noted, the following facts are taken from plaintiff's'
Stipulated Third Amended Complaint and the parties' Initial Joint Status
Report, Plaintiff Fieldturf International, Inc. is a Florida corporation
which manufacturers, sells, and installs synthetic turf products in the
United States, Plaintiff Fieldturf, Inc. is a Canadian corporation which
designs synthetic turf products and distributes these products worldwide.
Fieldturf, Inc. is the owner, by assignment, of U.S. Patent No. 6,338,885
(the "`885 patent") entitled "Synthetic Turf which discloses and claims a
synthetic grass sports surface for use in connection with, among other
things, sporting activities such as soccer and football. Fieldturf, Inc.
is also the owner, by assignment, of U.S. Patent No. 6,551,689 B1
(the'"689 patent") entitled "Synthetic Grass with Resilient Granular Top
Surface Layer." FieldTurf International, Inc. is the exclusive licensee from FieldTurf Inc. under
the `885 and `689 patents for the right to manufacture, sell, offer to
sell and install synthetic turf products in the United States. Defendants
Triexe Management Group, Inc. ("Triexe"), Sportexe Construction
Services, Inc. ("Sportexe Construction"), and Sportexe, Inc. supply and
install artificial turf systems. Defendants' Answer states that defendant
Sportexe International was dissolved on or about October 17, 2003.
Plaintiff's assert claims against defendants for infringement of the
`885 patent and the `689 patent, for intentional interference with
prospective economic advantage, and for common law conversion arising from
the sale or offer to sell by defendants of synthetic turf products to the
University of Wisconsin, the University of California at Berkeley, the
Baltimore Ravens, and a fourth project in Ireland. Defendants have denied
the material allegations of the Third Amended Complaint and three of the
four defendants have asserted counterclaims, The counterclaims seek,
among other things, a declaratory judgment on non-infringement as to the
"885 patent and `689 patent as well as U.S. Patent No. 5,958,527 (the
"`527 patent") en titled "Process for Laying Synthetic Grass." Defendants
have additionally asserted counterclaims for alleged violations of §
43(a) of the Lanham Act and 15 U.S.C. § 2, tortious interference with
contract, tortious interference with pre-contractual relations, and
common law unfair competition based on plaintiff's' alleged
misrepresentations to defendants' customers and prospective customers,
Federal Rule of Civil Procedure 26(b)(1) prescribes the scope of
matters upon which a party may seek discovery. "Parties may obtain
discovery regarding any mailer, not privileged, that is relevant to the
claim or defense of any party . . . Relevant information need not be
admissible at trial if the discovery appears reasonably calculated to
lead to the discovery of admissible evidence." Fed.R. Civ. P. 26 (b)(1). Trial courts have broad discretion in resolving matters
relating to discovery, Patterson v. Avery Dennison Corp., 281 F.3d 676
681 (7th Cir. 2002). The discovery requests at issue in plaintiff's'
motion to compel seek information relating to: (1) defendants' financial
status and (2) the relationship between the corporate defendants. The
Court discusses each of these categories in turn.
A. Defendants' Financial Status
Plaintiff's' First Set of Document Requests seek, among other things,
the following documents that refer or relate to defendants' financial
status for the period six months prior to incorporation to the present:
(1) shares issued by defendants (Request No. 2); (2) current assets
and/or liabilities (Request No. 3); (3) director and officer compensation
(Request Nos. 8 & 9); (4) stockholder dividends issued by defendants
(Request No. 10); (5) tax and tax-related filings (Request No. 14); (6)
bank accounts and/or bank account statements (Request No. 15); (7)
payment of debts and/or liabilities (Request No. 16); (8) indemnifications
given by defendants to any other defendant or any third party (Request
Nos. 17 & 18); (9) transfer of assets between defendants (Request No.
19); and (10) transfer, loan or other exchange of monies between
defendants (Request No. 20). Plaintiff's state that these requests are
relevant to the determination of punitive and enhanced damages.
Defendants object to these requests as overbroad and unduly burdensome,
Defendants argue that no basis exists to demand financial records going
back to the birth of defendants because only the defendants' present
financial condition may be considered in determining the appropriate
measure of punitive or increased damages.
Plaintiff's' infringement counts seeks enhanced damages, and their
state law claim for intentional interference with prospective advantage
seeks punitive damages. When punitive damages are sought, a party's financial condition is at issue and discovery on
that subject is relevant. Cruce v. Schuchmann, 1993 WL 139222, *1 (D,
Ran. March, 30, 1993) (holding "[i]nformation of a party's net worth or
financial condition is relevant . . . because it can be considered in
determining punitive damages."): Mid Continent Cabinetry. Inc. v. George
Koch Sons. Inc., 130 F.R.D. 149, 151 (D. Kan, 1990). "[T]here can be no
doubt that net worth is discoverable under Rule 26(b)(1) of the Federal
Rules of Civil Procedure, as it regards a matter `that is relevant to the
claim of a party: that is, plaintiff's punitive damages claim." Challenge
Aspen v. King World Productions Corp., 2001 WL 1403001, * 3 (N.D. Ill.
Nov. 9, 2001) (Schenkier, J.).
In the present case, defendants' present financial condition is
relevant to plaintiff's' claim for punitive damages under federal and
state law. Under 35 U.S.C. § 284, damages may be enhanced up to three
time the compensatory award. The Federal Circuit has set forth nine
factors, including a defendant's size and financial condition, that are
to be considered when district courts are making a decision about
enhanced damages. Read Corp. v. Portec, Inc., 970 F.2d 816, 926-27 (Fed.
Cir. 1992); see also Manildra Milling Com, v. Ogilvie Mills. Inc., 1991
WL17610 (D. Kan. Jan. 31, 1991) (finding that discovery into a party's
net worth is relevant to the issue of treble damages under
35 U.S.C. § 284). Moreover, under Illinois law, one of the relevant
factors in determining punitive damages is the defendant's financial
status. Pickering v. Owens-Corning Fiberglass Corp., 638 N.E.2d 1127,
1139 (Ill.App. 1994); Howard v. Zack Co., 637 N.E.2d 1193, 1194
(Ill.App. 1994).*fn1 However, defendants' objection to the broad scope of the plaintiff's'
request for financial information is well-taken. Only current financial
documents are relevant to a claim for punitive damages, see Audiotext
Communications Network. Inc. v. US Telecom. Inc., 1995 WL 625962, * 4
(D. Kan. Oct. 5, 1995) (finding the current information of plaintiff's'
net worth or financial condition relevant to the issue of punitive
damages); Raiser v. O'Shaughnessy, 1992 WL 309541, * 1 (N.D. Ill. Oct.
21, 1992) (Moran, J.) (holding plaintiff's request for defendants'
financial records would "be met by disclosure of the most recent of the
types of documents described that substantially discloses the defendant's
assets and liabilities,"). Plaintiff's' request for non-current financial
information is irrelevant to a punitive damages determination. Audio-text
Communications Network, Inc., 1995 WL 625962 at * 4. Plaintiff's' motion
to compel is granted with respect to Request Nos. 2, 3, 8-10, and 14-20
to the extent the information sought reveals defendants' current assets
Defendants also point out that plaintiff's and defendants are direct
competitors. Defendants state that plaintiffs are attempting to use this
proceeding to obtain financial information for competitive purposes which
are not relevant to the claims or defenses in this action. Plaintiff's do
not dispute that defendants are competitors, In fact, plaintiff's have
stated that the "synthetic turf industry is highly competitive," Plaintiff's' Resp. to Defs' Motion for a
Temporary Restraining Order, p. 1, The Court recognizes that disclosure
of confidential financial information to a competitor may cause a party
great harm, Mid Continent Cabinetry, 130 F.R.D. at 152 (stating that "if
a plaintiff and defendant were business competitors, disclosure of
defendant's financial records to the plaintiff, even with a protective
order, could cause the defendant great harm."). However, after balancing
the confidentiality concerns of defendants against plaintiff's' need for
access to the information, the Court finds that defendants' present
financial information is discoverable on an outside counsel "attorneys'
eyes only" basis. The Court believes this restriction on the scope of
dissemination "strikes a proper balance between plaintiff's' right to
discover relevant information and the defendants' confidentiality
interests," Challenge Aspen, 2001 WL 1403001 at * 5.*fn2
B. Relationship Between the Corporate Defendants
Plaintiff's' discovery requests also seek additional financial records
and various corporate documents to support plaintiff's' attempt to pierce
the corporate veil of the defendants.*fn3 Plaintiff's assert that defendants are essentially acting as a single corporate
entity. According to plaintiff's, questions exist regarding which of the
defendants are responsible for the conduct alleged because all of the
defendants hold themselves out to the public as a single company, namely
Sportexe, and as being able to "handle any aspect of a project, from
initial design, to the final supply and installation of equipment." Pls'
motion, pp. 5-6. Plaintiff's are concerned that "defendants are
attempting to utilize a sham liability shield to allow their various
corporate `arms' to freely infringe, while protecting the real assets of
the corporation in a parent company, namely Triexe." Pls' Reply, p. 2.
Defendants contend that plaintiffs should not be permitted discovery
relative to their corporate veil theory because there is no evidence of failing to maintain adequate
corporate records, failing to comply with corporate formalities,
commingling of assets, undercapitalization, or treating the assets of one
corporation as the assets of another.
Defendants' objection to discovery regarding plaintiff's' corporate
veil theory is overruled in part. It is not surprising the factual record
has not been fully developed regarding the relationship among the
defendants because the very purpose of discovery is to obtain relevant
information, Nevertheless, the current record indicates that Sportexe
Construction and Sportexe, Inc. are wholly-owned subsidiaries of Triexe.
Triexe, Sportexe Construction, and Sportexe, Inc. have the same place of
business in Fonthill, Ontario, Canada. Sportexe International also had a
place of business in Fonthill, Ontario, Canada. Defendants confirm that
each defendant has used the "Sportexe" mark. The Florida Secretary of
State's online records regarding Triexe gives a "cross-reference name" of
Sportexe Inc. Pls' Motion, Ex, B. Further online records from the Florida
Secretary of State's office and the Georgia Secretary of State's office
indicate that Triexe, Sportexe Construction, and Sportexe Inc. have
common officers. Id., Exs. B, C, D. The website of "Sportexe"
(www.sportexe.com) indicates that it has offices in Calhoun, Georgia and
Lake Worth, Florida. Id., Ex. E. Plaintiff's state that Sportexe
Construction and Sportexe Inc. operate out of the same Calhoun, Georgia
and Lake Worth, Florida locations.
As an initial matter, the Court notes that neither side has analyzed
whether state or federal common law governs the veil-piercing inquiry in
a patent infringement action. Although this case is founded on federal
question jurisdiction, Plaintiff's' Reply seems to assume, without
discussion, that Illinois' substantive law applies to the veil piercing issue.*fn4
Defendants' pleadings fail to cite any case law regarding the
veil-piercing question. Because the parties have not argued the choice of
law question, the Court will not disturb plaintiff's' assumption that
Illinois law applies. The Court for purposes of this motion assumes that
Illinois law applies without determining whether Illinois law is the
proper choice of law. United States y. Bestfoods, 524 U.S. 51, 63 n.9
(1998); Vukadinovich v. McCarthy, 59 F.3d 58, 62 (7th Cir. 1995) (stating
"choice of law, not being jurisdictional, is normally . . .
waivable. . . .").
"The general rule, of course, in Illinois as elsewhere, is that a
shareholder qua shareholder, and a parent, subsidiary, or other
affiliate, qua affiliate, is not liable for a corporation's debts,"
Browing-Ferris Industries of Illinois. Inc. v. Ter Maat, 195 F.3d 953,
959 (7th Cir. 1999). "However, a court may disregard a corporate entity
and pierce the veil of limited liability where the corporation is merely
the alter ego or business conduit of another person or entity." Peetoom
v. Swanson, 778 N.E.2d 291, 295-96 (Ill. App. 1992), In determining
whether a corporation is really a dummy or sham for another dominating
entity or individual, courts look at a number of factors, including;
inadequate capitalization; failure to issue stock; failure to observe
corporate formalities; nonpayment of dividends; insolvency of the debtor
corporation; nonfunctioning of other officers or directors; absence of
corporate records; commingling of funds; diversion of assets from the
corporation by or to another dominant entity or individual; failure to
maintain arm's-length relationships among related entities; and whether the corporation is a mere facade for the operation
of another dominant entity or individual. Cosgrove Dist. v. Huff, 798
N.E, 2d 139, 141-42 (Ill.App. 2003). With respect to whether adhering to
the fiction of a separate corporate existence is appropriate, courts also
look to whether "unfairness . . ., akin to fraud or deception" or "the
existence of a compelling public interest" exists. Hystro Products. Inc.
v. MNP Corp., 18 F.3d 1384, 1390 (7th Cir 1994).
Plaintiff's' requests are relevant to several veil piercing factors,
such as: (1) the failure to maintain adequate corporate records or to
comply with corporate formalities (Request Nos. 1, 6, 7, and 11); (2) the
commingling of funds or assets (Request Nos, 15, 19, 20); and (3)
undercapitalization (Request Nos. 14-18). In addition, the failure to
issue shares of stock (Request No. 2) and the nonpayment of dividends
(Request No. 10) are relevant factors in determining whether to pierce
the corporate veil. Cosgrove, 798 N.E.2d at 141. Although common officers
and directors (Request Nos. 4 and 5) is an insufficient basis, by
itself, for piercing the corporate veil, such evidence in combination
with other factors may be sufficient to pierce defendants' corporate
veil. See Hystro, 18 F.3d at 13 89 (slating "[s]tock control and the
existence of common officers and directors are generally prerequisites to
the piercing of the corporate veil although these factors alone will not
suffice.1'); Sumner Realty Co. v. Willcott, 499 N.E.2d 554, 557
(Ill.App. 1986) (holding separate corporate entities may not be
disregarded merely because the two share common officers); Holland v. Joy
Candy Manufacturing Corp., 145 N.E.2d 101 (Ill.App. 1957) (upholding
trial court's finding that one corporate defendant was the mere
instrumentality of the other corporate defendant where the "affairs of
the two corporations were so managed and controlled by the same
interlocking officers, directors, and single shareholder, as to
constitute one corporate entity in its dealings with creditors").
Finally, defendants' current assets and/or liabilities (Request No. 3)
are relevant to determining whether defendants are inadequately funded, whether funds are
being commingled or whether one entity is treating the assets of another
as its own.*fn5
Plaintiffs' Request Nos. 8, 9, and 10 seek documents that refer or
relate to the compensation paid to the board of directors and officers of
defendants as well as stockholder dividends issued by any of the
defendants. Plaintiff's argue that such requests are relevant to
determining "the treatment of the assets of one corporation as the assets
of another, or as assets of the shareholders directly." Pls' Reply, p,
4, While the compensation of directors and officers and shareholder
dividends might be relevant if plaintiff's were seeking to pierce the
corporate veil of defendants and hold the directors, officers, or
shareholders liable for the corporate defendants' obligations, they do
not seem to be relevant to determining whether one corporate defendant is
treating the assets of another corporate defendant as its own. Because
plaintiff's have not alleged that they are seeking to hold the defendants'
shareholders, directors, of officers liable for the defendants'
obligations, Request Nos. S, 9, and 10 are denied as irrelevant to
plaintiff's' veil piercing theory. Finally, the Court is unpersuaded that the defendants1 insurance
policies (Request No. 12), licensing agreements by and between defendants
(Request No. 13), trademark applications undertaken on behalf of
defendants on the name "Sportexe" (Request No. 40), and licensing
arrangements regarding the name "Sportexe" between defendants and any
other party (Request No. 41) are relevant to plaintiffs' corporate veil
piercing theory. Without explanation, plaintiff's state that these
requests are relevant to ascertaining whether the corporate defendants
are commingling assets and liabilities. The relevancy of these categories
of documents to determining whether defendants commingle assets and
liabilities is not self-evident to the Court, Plaintiff's have not
adequately demonstrated their relevancy. Absent an explanation as to the
relevance of insurance policies, licensing agreements, and trademark
applications to the veil piercing inquiry, plaintiff's' motion to compel
their production is denied without prejudice,
For the reasons stated above, plaintiff's' motion to compel is granted
in part and denied in part. Plaintiff's' request for fees associated with
bringing this present motion is denied.