United States District Court, N.D. Illinois
May 27, 2004.
TEMPCO ELECTRIC HEATER CORPORATION, Plaintiff
TEMPERATURE ENGINEERING COMPANY, d/b/a PRIME INDUSTRIES, Defendant
The opinion of the court was delivered by: HARRY LEINENWEBER, District Judge
MEMORANDUM OPINION AND ORDER
Plaintiff Tempco Electric Heater Corporation ("Tempco") brought suit
against one of its former distributors, Temperature Engineering Company,
d/b/a Prime Industries ("Prime"), alleging trademark infringement,
various breaches of contract, and misappropriation of trade secrets.
Prime has now moved for Partial Summary Judgment.
I. FACTUAL BACKGROUND
Tempco manufactures electric heaters and temperature sensors used
largely as component parts on manufacturing equipment in the plastics
industry. Prime distributes such products throughout the southeastern
United States. In 1996, Tempco and Prime signed a "Distributor
Agreement," that allowed Prime to become an authorized distributor of
For purposes of this litigation, three clauses of this agreement are
relevant: Sections I, IX(D), and XII(B). Section I is entitled
"Geographical." Section 1(A) is the only subsection of § 1, and reads in its entirety "State [sic] of Georgia, Alabama, Tennessee, and
Mississippi." Section IX(D). is a restrictive covenant that states
"Distributor shall be allowed to carry other lines in related fields,
none to be competitive with Tempco products, as illustrated in Tempco's
Product Line Catalog." Lastly, Section XII(B) is an integration clause
reading "This agreement embodies the entire agreement and understanding
between Prime Industries and Tempco Electric Heater Corporation and
supersedes all prior agreements and understandings related to the subject
Hand-in-hand with the Distributor Agreement came a License Software
Agreement that permitted Prime, as an authorized Tempco distributor, to
use Tempco's trade secret electric pricing program known as SA/2. This
agreement mandated that Prime use SA/2 "exclusively for purposes
consistent with your relationship with TEMPCO." The agreement also
provided Prime with Tempco-supplied "hardware access keys" that allowed
SA/2 to work. The License Software Agreement further stipulated that
Prime must pay Tempco $15,000 plus interest in "liquidated damages" per
key that it fails to return to Tempco at the conclusion of their
Tempco claims that shortly after signing the Distributor Agreement,
Prime began violating it by selling competitors' products. To this end,
Tempco alleges that Prime misused SA/2 by using it to allow Tempco's
competitors to underprice Tempco. In Tempco's version of the facts,
Prime's misuse of SA/2 began during the distributorship and continued
after the distributorship ended. According to Tempco, Prime accomplished this latter unauthorized use of SA/2 by improperly
retaining three hardware access keys in violation of the License Software
Tempco further claims that Prime removed Tempco's name and identifying
information from Tempco products sold to Prime' s customers. As alleged
by Tempco, this "reverse passing-off," as the process is known in
legalese, allowed Prime to claim falsely that it manufactured the
products it sold depriving Tempco of the name-recognition necessary to
obtain repeat business.
A. Counts I & II: Violations of § 43(a) of the
Lanham Act, 15 U.S.C. § 1125(a); Breach
of Trademark License Agreement
Tempco's Count I states a claim for "reverse passing off" under a false
designation of origin theory under the Lanham Act. On the same set of
allegations, Tempco also presents Count II, under a theory of breach of
the trademark license agreement. Prime seeks summary judgment on Counts I
and II arguing that Tempco has submitted no evidence to support its
claims. In particular, Prime claims that Tempco has no evidence that it
ever engaged in "reverse passing off" of Tempco-manufactured products.
Rather Prime says that the only "reverse passing off" that did occur
happened when Tempco itself agreed to label privately some of its
products for Prime. Prime also argues that even if the Court finds such
false designation of origin, Tempco has submitted no evidence that
Prime's conduct generated the "likelihood of confusion" necessary to
invoke the Lanham Act's jurisdiction. Prime argues that this is not surprising, as it claims that
it has always presented itself as strictly a distributor, and not a
Reverse passing off, as its name implies, occurs when "a producer
misrepresents someone else's goods or services as his." Dastar Corp. v.
Twentieth Century Fox Film Corp., 539 U.S. 23, 28 (2003). It is a
cognizable legal theory allowing one to recover under the Lanham Act. See
Id. at 30. However, even if a plaintiff establishes that "reverse passing
off" occurred in fact, the plaintiff must still show that defendant's
actions caused a "likelihood of confusion." However, if a defendant
"willfully appropriates the mark of another, a court is more inclined to
find likelihood of confusion." Rust Env't & Infrastructure v.
Teunissen, 131 F.3d 1210, 1219 (7th Cir. 1997). Nevertheless, a judicial
finding of likelihood of confusion depends on the outcome of a
seven-factor balancing test analyzing: "(1) similarity between the marks
in appearance and suggestion; (2) similarity of the products; (3) area
and manner of concurrent use; (4) degree of care likely to be exercised
by consumers; (5) strength of complainant's mark; (6) actual confusion;
and, (7) intent of defendant." Id. at 1217.
Here, Tempco attempts to overcome Prime's motion with a substantial
war-chest of testimonial and other evidence. Central to Tempco's case is
the testimony of former or current Prime employees Richard Hudson
("Hudson"), Romesa Sears ("Sears"), and Tara Perrin ("Perrin"), along
with the testimony of Tempco's new distributor in the southeastern United States, David Farmery ("Farmery"). Hudson, in
deposition testimony, states that former Prime employees repeatedly told
him about how Kendrick ordered them to grind off Tempco's name and/or
part number from Tempco products. Hudson, along with Farmery, also
testified that, during visits to Prime's customers, they recalled seeing
what appeared to be Tempco-manufactured heaters with Prime's name and
part number on them, and "grinder marks" in the places where Tempco's
normally located its identifying marks. Similarly, Sears testified that,
during her Prime employment, she threw away Tempco's labels on
Tempco-produced thermocouples, and replaced them with a Prime label.
Lastly, Perrin reported that she would hang tags with Prime's name and
part number onto Tempco's products tags which Hudson and Farmery
recalled seeing on Tempco products sold by Prime.
Supplementing this wealth of testimonial evidence, Tempco presents some
other evidence of a more circumstantial nature. For example, Tempco notes
that Prime possesses a bench grinder and a sanding belt, which it could
use to effectuate the "reverse passing off." In addition, Tempco points
out that Prime admits to private labeling seventy-five heaters it
purchased from Akinsun Heaters, albeit apparently with consent.
Furthermore Tempco notes that Kendrick admitted that Prime desired
putting its name on products it sold but did not manufacture, for the
"same reason Sears puts their name on Kenmore washing machines; we'd like
to have the repeat business." Prime attempts to respond to this evidence, but for the most part its
arguments are unpersuasive. Prime correctly reiterates that Tempco itself
agreed to privately label some of its heaters as "Prime Industries"
heaters. However, the undisputed record shows that Tempco agreed only
with respect to ten heaters a quantity inadequate to account totally
for Tempco's allegations. Similarly, Prime correctly notes that its
private labeling of Akinsun Heaters has no relevance to the present case.
However, Prime fails to rebut adequately the testimony of Hudson and
others that Prime purposefully and willfully misbranded Tempco's products
as their own. Therefore, for purposes of summary judgment, Tempco has
certainly met its factual burden that reverse passing off did, in fact,
The inquiry now turns to whether or not Tempco can establish that this
reverse passing off created a "likelihood of confusion" under the
seven-factor test. To support its claim, Tempco argues that Prime's
willful misbranding entitles it to a presumption of confusion. However,
the cases Tempco cites say no such thing. Rather, they merely state that
willful infringement might make courts "more inclined" to find a
likelihood of confusion, or create a "powerful inference" of confusion."
Rust, 131 F.3d at 1219; Resource Developers v. Statute of Liberty-Ellis
Island Found., Inc., 926 F.2d 134, 140 (2nd Cir. 1991). Therefore, while
the Court agrees that Prime's alleged willful infringement makes it
easier to find a likelihood of confusion indeed "intent" serves as the
seventh part of the seven-part test it certainly does not grant Tempco a
"presumption" of confusion.
Tempco also tries to establish a likelihood of confusion through
hearsay testimony that Prime's alleged acts of false designation of
origin succeeded in sowing confusion amongst its customers. For example,
Tempco presents as evidence, testimony from Hudson that customers, such
as Daniel Dean of Amoco Fabrics and Fibers, expressed confusion about
whether Prime manufactured its heaters itself. Similarly, Tempco attempts
to submit a statement by Prime customer William Smith to Farmery
conveying Smith's impression that "Prime Industries, I figured they were
Prime challenges that this "evidence" qualifies only as inadmissable
hearsay, and asks the Court to exclude it for purposes of summary
judgment just as it would for trial. Tempco attempts to cure the hearsay
problems by claiming that the hearsay statements of Smith, Dean, and
unnamed other customers qualify as admissible "present sense impressions"
under Federal Rule of Evidence 803(1). This rule exempts from hearsay
"[a] statement describing or explaining an event or condition made while
the declarant was perceiving the event or condition or immediately
thereafter." Id. To qualify as an admissible present sense impression,
three requirements must be met: "(1) the declarant must have personally
perceived the event described; (2) the declaration must be an explanation
or description of the event rather than a narration; and (3) the
declaration and the event described must be contemporaneous." United States v. Santos, 65 F. Supp.2d 802, 822 (N.D. Ill. 1999). "The
underlying rationale of the present sense impression exception is that
substantial contemporaneity of event and statement minimizes
unreliability due to defective recollection or conscious fabrication.
There is no per se rule indicating what time interval is too long under
Rule 803(1). . . ." United States v. Parker, 936 F.2d 950, 954 (7th Cir.
1991). Lastly, the availability of the declarant is "immaterial."
After reviewing the circumstances of the alleged hearsay, the Court
agrees with Prime that Dean's statements to Hudson do not fall under the
present sense impressions exception to the hearsay rule. According to
Hudson's deposition testimony, the context of Dean's statement occurred
"in Nashville it was Daniel Dean made a comment when I was in the
storeroom one time about, you know, what what am I getting, you know
what what is this, because it had the Prime name and number on it."
Hudson Dep., pp. 143-144. In doing so, the statement appears to lack an
essential component of admissible testimony under the 803(1) exception:
it fails to describe an "event or condition." Indeed, while it was made,
no "event" was happening to or around Dean. Rather, the statement appears
to be a reflection of Dean's perhaps long-held uncertainty as to whether
or not Prime functioned as a manufacturer. Therefore, the Court excludes
Similarly, the Court also excludes Smith's statements to Farmery. These
statements occurred in the context of Farmery and Smith reviewing stock reports that included Tempco products bought from
Prime. Farmery claims that during the review, Smith casually remarked how
"at some point we thought Prime was a manufacturer for these items."
Smith also recalled about how "when he got products in, got paperwork
in, it would say Prime Industries. . . . I figured they were the
manufacturer." The first portion of Smith's declaration does not qualify
as a present sense impression because it also fails to describe a
present-time event (unlike Dean's testimony, an "event" did take place
the stock review, however, Smith's statement does not relate to any
description or explanation of this review). The latter portion of Smith's
declaration would have qualified as a present sense impression if
actually said while or Immediately after Smith's receipt of the
products. As is, however, this declaration amounts to nothing more than a
memory of a past sense impression Smith felt or said at some time
previous. Although a present sense impression need not be contemporaneous
with an event, this Court cannot agree that statements said months or
years after the event qualify as "present sense impressions."
The remainder of Hudson's hearsay testimony may or may not be
admissible. Its admissibility depends upon the specific circumstances in
which the apparently unnamed Prime customers and potential customers
expressed their confusion.
Prime responds with unrefuted evidence that it believes counters
Tempco's claims regarding a likelihood of confusion. Prime notes that its
marketing materials state that Prime "represent[s] some of the largest heater and sensor manufacturers in the nation." These
materials further describe Prime as "the largest stocking distributor"
for different types of heaters, and as "one of Tempco's largest
distributors." In Prime's view, these materials clearly show that Prime
never represented itself as a manufacturer, and therefore could not
possibly confuse anyone. Prime continues that any customer confusion was
particularly unlikely because its customers were sophisticated and
understood precisely what they were purchasing.
With most, indeed possibly all, of Tempco's evidence of actual
confusion excluded, Tempco has only its evidence of "reverse passing off"
and defendant's intent" to support its claims under the seven-factor
test. Nevertheless, the Court believes this evidence sufficient to
withstand summary judgment. Looking at the seven-factor test, the first
and fifth factors the "similarity between the marks" and the "strength
of complainant's mark" bear no relevance in a "reverse passing off"
action. Of the remaining factors, factors two and three the "similarity
of the products" and the "area and manner of concurrent use" heavily
favor Tempco as the products and their use were the same regardless of
whose mark they bore. Correspondingly, factor seven, the "intent of
defendant" also favors Tempco, as it sufficiently alleges willful
infringement. This leaves only factors four and six "degree of care"
exercised by consumers and evidence "actual confusion" as possibly
favoring Prime. This Court has no desire to assume improperly the role of
a fact finder in weighing the respective strengths and weaknesses of both
parties' cases under the balancing test. Suffice it to say, the Court believes
that a reasonable jury could find for either side under this balancing
test rendering this issue inappropriate for summary judgment. This is
consistent with the Seventh Circuit's guidance that Courts should decide
likelihood of confusion issues on summary judgment only if "the evidence
is so one-sided that there can be no doubt about how the question should
be answered." Door Sys., Inc. v. Pro-Line Door Sys., Inc., 83 F.3d 169,
171 (7th Cir. 1996).
Consequently, the Court denies summary judgment on Count I. As Count II
is based on the same factual allegations, and also states a sufficient
legal claim, the Court similarly denies summary judgment on Count II.
B. Count III: Legality of the $15,000 Lost Key
With respect to Count III, Prime seeks only a limited summary judgment
on the issue of the License Software Agreement's $15,000 "liquidation
damages" provision for each hardware access key that Prime failed to
return to Tempco. Prime argues that the $15,000 fee actually constitutes
an unenforceable penalty under Illinois law. Tempco responds by arguing
that the fee is enforceable, and that Prime waived its right to challenge
the fee by failing to raise this argument as an affirmative defense in
its answer to Tempco's amended complaint.
In Illinois, "whether a contractual provision for damages is a valid
liquidated-damages provision or a penalty clause is a question of law.
There is no fixed rule applicable to all liquidated-damages agreements, and each one must be evaluated on its own facts and
circumstances." Penske Truck Leasing Co., L.P. v. Chemetco, Inc.,
311 Ill. App.3d 447, 454 (Ill.App. Ct. 2000) (internal citations
omitted). Generally, Illinois courts uphold liquidated damage provisions
only when: "(1) the parties intended to agree in advance to the
settlement of damages that might arise from the breach; (2) the amount
of. liquidated damages was reasonable at the time of contracting, bearing
some relation to the damages which might be sustained; and (3) actual
damages would be uncertain in amount and difficult to prove." MED㲵
Neck & Back Pain Ctr. v. Noffsinger, 311 Ill. App.3d 853, 860 (Ill.App.
Ct. 2000) (internal citation omitted). Additionally, "the damages must be
for a specific amount for a specific breach; they may not be a penalty to
punish nonperformance or as a threat used to secure performance." Id
(internal citation omitted). When faced with a close call, Illinois
courts "lean toward a construction which excludes the idea of liquidated
damages and permits the parties to recover only damages actually
sustained." Penske, 311 Ill. App.3d at 457. Nevertheless, the party
seeking to exempt itself from a liquidated damages provision to which it
has freely consented "has the burden of proof" to show that the clause is
in reality an unenforceable penalty. First Nat'l Bank v. Atlantic
Tele-Network Co., 946 F.2d 516, 522 (7th Cir. 1991).
Here, Prime attempts to establish that the provision constitutes an
unenforceable penalty by noting that both parties agree that the keys have no intrinsic value. Rather, their value comes solely from their
ability to enable someone to access SA/2. Prime further argues that the
penalty nature of the liquidated damage clause is shown by the fact that
it charges an additional $15,000 fee for each key not returned when
only one key is needed to access SA/2. Because of this, Prime claims that
Tempco Vice-President of Sales Joseph Podge ("Podge") himself admitted in
deposition that the liquidated damages provision is a "penalty."
Tempco responds by noting, correctly, that Prime's citation to Podge's
deposition testimony is out-of-context, and in no way constitutes an
admission that the liquidated damages provision is unenforceable. Tempco
then persuasively argues that the liquidated damages provision serves as
a valid check to ensure that a licensee of SA/2 ceases to use SA/2 if
Tempco revokes their license. Without such a check, Tempco notes that
these ex-licensees would have no incentive to return all their keys,
permitting them to continue covertly to use the SA/2 illegally.
Consequently, Tempco argues and this Court agrees that the liquidated
damages provision serves the legitimate purpose of compensating Tempco
for the possible but uncertain misuse of its intellectual property. This
Court further concurs with Tempco that the clause's charge of $15,000 per
key serves this legitimate purpose as the more keys that go
unreturned, the greater the potential for misuse of SA/2, including
simultaneous misuse by different parties in different locations. Because this Court agrees with Tempco that the liquidated damages
provision is valid, it does not reach the issue of whether or not Prime
waived its right to contest such use.
C. Counts IV & V: Misappropriation of Trade
Count IV alleges that Prime misappropriated Tempco's trade secrets by
inappropriately using SA/2 to benefit Tempco's competitors. Count V seeks
relief for the same factual allegations under a common-law theory of
conversion. Similar to its motion with respect to Counts I and II, Prime
seeks summary judgment concerning Counts IV and IV on the grounds that
Tempco has not presented any evidence that Prime ever misused the SA/2
pricing program. Tempco responds to Prime's motion by claiming there
exists both direct evidence and a "web of circumstantial facts that lead
to the inference" that Prime misused SA/2. As to direct evidence, Tempco
notes that former Prime employee Richard Hudson testified in deposition
that he used SA/2 as a "standard" that allowed Prime to "shop around" for
the best price among Tempco and its competitiors. Similarly, Tempco's
list of "circumstantial facts" includes, among other things: Prime's
sales of the products of Tempco's competitors; Prime President Larry
Kendrick's request to new Prime employees Steven Shoemaker and Chuck
Hixson that they not return hardware access keys acquired while working
at PE Products; Prime's website claim that it has "developed a
Manufacturer's OEM cross reference," one of SA/2's functions; Hudson's
testimony that Kendrick told one of Prime's salespersons that he had found a way to access SA/2 databases
using a commercially available software program called Crystal Reports;
Prime's failure to remove SA/2 from Shoemaker's laptop at the end of its
distributorship; and Prime's failure to return three hardware access keys
at the end of its distributorship.
Judging from this list, and Tempco's response brief, Tempco appears to
make the argument that Prime not only misused SA/2 after the end of its
License Software Agreement with Tempco, by illegally retaining and using
it without permission, but also during its distributorship as a tool to
benefit Tempco's competitors. This theory does not appear anywhere in
Count IV of Tempco's Complaint or Amended Complaint, Instead, Count IV of
Tempco's Amended Complaint states a clear and limited theory of trade
secrets misappropriation: that Prime "used the software [SA/2] and the
information contained therein for its own commercial advantage after the
termination of the System/Software Agreement on March 18, 2002)."
Therefore, it appears that Tempco is attempting constructively to amend
its complaint at the summary judgment stage. Parties may constructively
amend their complaint during the early stages of litigation, such as by
interrogatory answers, or by waiver of the opposing party. See Hytel
Group, Inc. v. W.L. Gore and Assocs., 2004 U.S. Dist. LEXIS 2472 at *2-3
(N.D. Ill. 2004). However, "a plaintiff may not amend his complaint
through arguments in his brief in opposition to a motion for summary
judgment." Shanahan v. City of Chicago, 82 F.3d 776, 781 (7th Cir.
1996). In its late-filed surreply, Tempco argues that its claim is neither
"new or novel" because "the license created a confidential relationship
between Prime and Tempco, and imposed a duty upon Prime to maintain the
secrecy of SA/2 software and limit its use by competitors of Tempco and
all others who lack a bonafide interest in purchasing Tempco products."
While possibly true, the Court fails to see how the simple terms of the
License Software Agreement between Tempco and Prime creates a de facto
claim that Prime misappropriated trade secrets prior to the termination
of the license agreement by using SA/2 to benefit Tempco competitors.
Second, Tempco argues that under Federal notice pleading requirements,
it did not need to specify that its trade secrets misappropriation claim
derives both from Prime conduct during and after the termination of the
License Software Agreement. In effect, Tempco argues that the complaint's
allegation of trade secrets misappropriation under one theory and set of
allegations (i.e., Prime's purported retention and use of SA/2
post-termination of the license) provided Prime with proper notice of an
unmentioned separate theory of trade secrets misappropriation based on
different and undisclosed factual allegations. This argument is not
convincing. True, the Federal Rules of Civil Procedure do not require
complaints to "articulate legal theories." Pond v. Michelin North
America, Inc., 183 F.3d 592, 597 (7th Cir. 1999). However, "[a] complaint
must narrate a claim, which means a grievance such as `the City violated
my rights by preventing me from renovating my apartments.'" Albiero v. City of Kankakee, 122 F.3d 417, 419 (7th Cir. 1997). Here, Tempco
narrated its claim, effectively "Prime misappropriated SA/2 by retaining
it unlawfully after termination of the license agreement." Although "a
plaintiff may substitute one legal theory for another without altering the
complaint," the complaint must still "specif[y] the wrong done to him."
Id. In this case, Tempco specified the wrong done to it Prime's
retention and use of SA/2 after termination of its License Software
Agreement. As the Seventh Circuit notes, "[t]here must be a point at
which a plaintiff makes a commitment to the theory of its case." Johnson
v. Methodist Medical Ctr., 10 F.3d 1300, 1304 (7th Cir. 1993). In the
present case, Tempco elected to proceed throughout the entire litigation
under a narrow, overly specific theory of trade secrets
misappropriation. At this late stage, it violates principles of justice
to permit Tempco to succeed in effectively "hiding" this claim until
shortly before trial. Consequently, the Court grants summary judgment as
to any or all claims regarding Count IVs allegations that Prime
misappropriation trade secrets prior to the termination of the License
Software Agreement on March 18, 2002.
That being said, the Court notes that Count III of Tempco's complaint
concerns Prime's alleged "Breach of the Software/System Agreement."
Unlike Count IV, Tempco chose broadly and unspecifically to plead Count
III stating only that "Prime has materially breached the Software/System
Agreement as alleged herein." Under this agreement, Prime contracted to
"use [Prime's] best efforts to protect such information from unauthorized discovery or use." License Software
Agreement, § 10. Certainly, a legitimate question of material fact at
least exists as to whether or not the use of SA/2 to sell competitor's
products violates this "best efforts" clause, and perhaps other clauses of
the License Software Agreement. Furthermore, one can certainly read the
broadly plead Count III alleging only unspecified "material breaches" as
including such allegations. Therefore, although the Court grants summary
judgment on Count IV with respect to Tempco's theory that Prime used SA/2
during the term of the License Software Agreement to benefit
competitors, the Court in no way wishes the parties to misinterpret its
ruling as suggesting that Tempco cannot present this claim at trial as
part of its effort to prove Count III.
As to the remaining claims for misappropriation of trade secrets,
Tempco does present a fair amount of circumstantial (but no direct)
evidence. Because direct evidence of misappropriation of trade secrets is
typically not available, under Illinois law a plaintiff can rely on
circumstantial evidence to prove misappropriation. RKI, Inc. v. Grimes,
200 F. Supp.2d 916, 923 (N.D. Ill. 2002). Beyond mere admissibility,
Illinois law appears remarkably unclear as to what level of
circumstantial evidence qualifies as sufficient to withstand summary
judgment. Prime cites Filter Dynamics Intern., Inc. v. Astron Battery,
Inc., 311 N.E.2d 386, 399 (Ill.App. Ct. 1974) to justify its position
that the Court require "clear and convincing" circumstantial evidence.
However, Filter Dynamics's "clear and convincing" standard has neither been cited
nor disagreed with by any Court applying Illinois law over the past
thirty years. Further, Filter Dynamics strangely borrowed its "clear and
convincing" standard from a line of mostly irrelevant conspiracy cases.
Therefore, this Court seriously doubts whether Filter Dynamics remains
good law in Illinois, if indeed it ever was.
Instead of the "clear and convincing" standard suggested by Prime,
Tempco asks that the Court apply the standard found in PepsiCo, Inc.
v. Redmond, 1995 U.S. Dist. LEXIS 19437 at *37 (N.D. Ill. 1995).
This standard permits plaintiffs to:
. . . construct a web of perhaps ambiguous
circumstantial evidence from which the trier of fact
may draw inferences which convince him that it is more
probable than not that what plaintiffs allege happened
did in fact take place. Against this often delicate
construct of circumstantial evidence there frequently
must be balanced defendants and defendants' witnesses
who directly deny everything."
Although to date no Illinois state court has applied PepsiCo, this
standard was recently applied by the federal Central District of
Illinois. See Rotec Indus, v. Mitsubishi Corp., 179 F. Supp.2d 885,
895-896 (C.D. Ill. 2002). However, the Court notes that PepsiCo concerned
a motion for preliminary injunction, not a motion for summary judgment.
As a result, the PepsiCo court considered circumstantial evidence in the
context of a "likely to prevail" standard, rather than the familiar summary judgment doctrine that no
summary judgment can issue "if the evidence is such that a reasonable
jury could return a verdict for the nonmoving party." Anderson, 477 U.S.
Here, in considering the sufficiency of Tempco's circumstantial
evidence, Tempco does not have to meet a burden of being "likely to
prevail," but need only show that a reasonable jury could possibly allow
them to prevail. Therefore, although the Court finds PepsiCo's reasoning
mostly persuasive, the Court believes it should slightly modify the
standard to make it consistent with the principles of summary judgment.
Specifically, the Court finds that, under the Illinois Trade Secrets Act,
the nonmoving party may withstand summary judgment even if they present
exclusively circumstantial evidence. However, the nonmoving party must
present circumstantial evidence of a quantity and quality sufficient to
allow a reasonable jury to draw legal inferences which would permit it to
find for the nonmoving party by a preponderance of the evidence in
consideration both also of any direct evidence submitted by the nonmoving
party, and also all evidence (both direct and circumstantial) presented by
the moving party.
Having elucidated a standard, the Court must now apply it. To
demonstrate misappropriation of trade secrets, Tempco must show that its
information was secret, misappropriated, and used in Prime's business.
AutoMed Technologies, Inc. v. Eller, 160 F. Supp. 2s 915, 920 (N.D. Ill.
2001). Obviously, a threshold issue to establishing Prime's use of SA/2 is showing that Prime even possessed SA/2 after March
18, 2002. To support this point, Tempco notes that: 1) Prime failed to
return between one and three hardware access keys; 2) SA/2 remained on
Steve Shoemaker's laptop computer; 3) Prime President Larry Kendrick's
request to new Prime employees Shoemaker and Chuck Hixson that they not
return hardware access keys acquired while working at PE Products; 4)
Prime's website claim that it has "developed a Manufacturer's OEM cross
reference," one of SA/2's functions; and 5) Hudson's testimony that
Kendrick told one of Prime's salespersons that he had found a way to
access SA/2 databases using a commercially available software program
called Crystal Reports.
Prime responds to Tempco's allegations that it retained SA/2 in its
computers by noting that it paid a company called PC AfterDark to inspect
twenty-five working computers and seven non-working computers at Prime
and report whether any remnants of SA/2 existed on those computers.
Further, Prime notes that although Tempco could have paid for its own
inspection of Prime's computers during discovery, it elected not to do
The Court finds these, facts persuasive. Although Tempco correctly
notes that PC AfterDark conducted only a minimalist inspection of Prime's
computers, costing a mere $50, it remains a fact that PC AfterDark's
analysis constitutes hard and undisputed evidence. Tempco could have
sought after and potentially found rebuttal evidence that Prime secretly
kept SA/2 installed and made use of it. Numerous cases demonstrate the
potential value of such evidence. For example, in RKI, Inc. v. Grimes, 200 F. Supp.2d 916,
922-923 (N.D. Ill. 2002) such computer evidence proved vital in
establishing the requisite amount of circumstantial evidence necessary to
find a misappropriation of trade secrets. Similarly, in YCA v. Berry,
2004 U.S. Dist. LEXIS 8129 (N.D. Ill 2004), a case recently before these
Chambers, the plaintiff hired a computer expert to reconstruct deleted
files and create a report detailing when each file was accessed. This
Court found the evidence discovered by this expert so compelling that not
only did plaintiff withstand summary judgment on most claims, including
some trade secrets claims, but plaintiff even succeeded in winning
sanctions against the defendant for perjury based in large part on the
recovered deleted files. Id at *22.
Tempco has a valid point that a more thorough examination of Prime's
computers than that conducted by PC AfterDark might have revealed the
presence of SA/2-related files. However, Tempco as the plaintiff has
the burden of proof, and therefore the responsibility to conduct such a
thorough inspection. Tempco cannot simply sit back and complain about the
inadequacy and/or bias of Prime's inspection efforts. Put simply, the
Prime-ordered inspection of Prime's computers, as done by PC AfterDark,
met Prime's initial summary judgment burden of showing an absence of
material fact by showing that SA/2 did not exist on Prime's computers. To
rebut, Tempco must produce some actual evidence that SA/2 or SA/2-related
files remained in Prime's possession. Instead, Tempco has produced only speculation and conjecture. Each of Tempco's supposed circumstantial
facts has an easily produced explanation by Prime. For example, while
Tempco makes a big deal over Prime's failure to return between one and
three hardware access keys, Prime claims that it simply lost or misplaced
the keys. Likewise, although Tempco notes that Prime at first hesitated
regarding whether or not to return Shoemaker's hardware access key to PE
Products (suggesting perhaps, a momentary urge to misappropriate SA/2),
the undisputed evidence indicates that the key was eventually returned.
While these disagreements certainly create uncertain issues of fact, the
sum total of these factual disputes do not amount to the genuine issue of
material fact necessary to survive summary judgment given Prime's hard
and un-refuted computer evidence that SA/2 did not remain on its
computers. Tempco claims to have constructed a "web of circumstantial
facts," and a web certainly is the appropriate analogy Tempco's rank
speculation as to what might be on Prime's computers is as flimsy and
easily broken as a spider web, and contains just as many gaping holes.
There is one caveat to the above analysis. Tempco has produced solid,
direct evidence via Shoemaker's deposition testimony that SA/2 remained
on Shoemaker's Prime-issued laptop computer. However, since this evidence
derives entirely from Shoemaker's deposition testimony, the Court finds
the rest of Shoemaker's testimony highly instructive. Notably, Shoemaker
remarks that, because he lacked a hardware access key, "you could not use
that Prime SA/2 program. Even if it was installed you could not use it." Shoemaker's statements that he couldn't
use his installed SA/2 program makes the confession that it remained
installed of little practical value. In order for Tempco to adduce
anything from Shoemaker's testimony, it would have to convince a jury
that Shoemaker testifies forthrightly when he admits that SA/2 remained
on his computer, but flat out lies when he denies using it despite having
no apparent personal interest in doing so, as he no longer remains
employed by Prime. This Court does not believe that any rational jury
could reach such a conclusion. Furthermore, Tempco has once again failed
to produce computer evidence from Shoemaker's computer which could, for
example, indicate whether SA/2 remains on the computer now (even though
Shoemaker has left Prime), or the last time it was accessed.
For the reasons stated above, the Court grants summary judgment as to
Counts IV and V.
D. Count VI: Breach of Distributor Agreement
With respect to Count VI, Prime seeks only partial summary judgment.
Prime concedes that an issue of fact exists as to whether or not it
violated the distributor agreement by selling products within the
four-state region designated by the agreement. However, Prime argues that
the distributor agreement's geographic provision § 1(A) limits the
effects of the entirety of the agreement to those four-states.
Accordingly, Prime contends that Tempco has no claim with § 1(A).
Furthermore, Prime asks the Court to interpret the Court based on what it
contends as is the agreement's unambiguous language. Prime argues that this supposedly unambiguous language,
when combined with the agreement's integration clause in § XII (b),
prevents any finder of fact from resorting to parole or extrinsic
evidence to interpret the agreement.
Tempco responds by noting that the plain language of § IX(D) (i.e.,
"Distributor shall be allowed to carry other lines in related fields,
none to be competitive with Tempco. . . .") does not include any
geographic provision. This lack of a geographic provision, Tempco
contends, at least creates an ambiguity in the contract as to whether or
not § I (A) applies to the entirety of the agreement or only limits the
territory of the distributorship. Given this alleged ambiguity, Tempco
asks the Court to turn to extrinsic evidence regarding the parties'
contractual intent. Tempco believes that this parole evidence, combined
with the ambiguity, qualifies as enough to defeat Prime's motion for
After examining the contract, the Court believes that no ambiguity
exists that would allow the Court to turn to extrinsic evidence, given §
XII(B)'s integration clause. Clause I(A) of the agreement clearly states
under the heading of "Geographical," the "State [sic] of Georgia,
Alabama, Tennessee, Mississippi." § 1(A) does not state its purpose
(i.e., it does not state, as Tempco evidently wishes it did, that it
limits the extent only of Prime's rights but not its obligations), nor
does it place any limits on its applicability. Therefore, the only
logical reading of § 1(A) is that it applies to the entire agreement,
unless otherwise stated or exempted. Not a single provision in the agreement contains such an
exemption. Similarly, not a single provision including the disputed §
IX(D) repeats § 1(A)'s language regarding the geographic limitation.
Consequently, it borders on the nonsensical for Tempco to argue that §
1(A) applies to the entire agreement except § IX(D). The Court,
therefore, finds that § 1(A) unambiguously applies to the entire contract
including Prime's obligations under § IX(D). Hence, Prime's motion for
partial summary judgment on Count VI is granted.
For the reasons stated herein, Prime's Motion for Partial Summary
Judgment is DENIED as to Counts I, II, and III, and GRANTED as to Counts
IV, v. and VI.
IT IS SO ORDERED.
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