United States District Court, N.D. Illinois, Eastern Division
June 4, 2004.
THE JOLLY GROUP, LTD., Plaintiff,
MEDLINE INDUSTRIES, INC., Defendant.
The opinion of the court was delivered by: SUZANNE CONLON, District Judge
MEMORANDUM OPINION AND ORDER
In this diversity action, Jolly Group, Ltd. ("Jolly") sued
Medline Industries, Inc. ("Medline") for breach of contract.
Jolly moves for reconsideration of the court's order dismissing
its amended complaint with prejudice and for leave to file a
second amended complaint. In separate motions, Medline moves for
sanctions pursuant to Fed.R.Civ.P. 11 and 28 U.S.C. § 1927.
In February 2003, Jolly and Medline representatives met to
discuss Medline's possible licensing and marketing of Jolly's
patented bandages. Compl. at ¶ 6; Am. Compl. at ¶ 6; 2nd Am.
Compl. at ¶ 6. On March 4, Medline proposed that it market and
manufacture the bandages in exchange for a royalty of $.20 per
box sold. Id. at ¶ 6-7. Medline's proposal stated it had "no
legal bearing until we draw up a contract." Id. During the next
three months, the parties discussed contractual terms. Id. at ¶
8. Medline maintains the parties' negotiations ultimately failed
and no contract resulted. See, e.g., Def. Mot. Dismiss Compl.
at 1. Conversely, Jolly contends the parties entered into a
valid, binding and enforceable contract subsequently repudiated
by Medline. See, e.g., Compl. at ¶¶ 13, 17. Over the course of these proceedings, Jolly
has proffered no less than four different versions of the
so-called final contract to which the parties allegedly agreed.
I. Original Complaint
In the original complaint, Jolly alleged Medline forwarded a
contract on May 7 (hereinafter, "May 7th contract") that
"reflected the essential terms of the parties' agreement," but
that a revised contract followed the next day (hereinafter, "May
8th contract"). Compl. at ¶¶ 9-10. The May 7th and May
8th contracts substantially differed in numerous respects.
Compare Compl. Ex. B with Ex. C. In response, Medline
purportedly sent Jolly a red-lined version of the May 8th
contract (hereinafter, "July red-lined contract"); the parties
orally agreed on the terms. Id. at ¶¶ 12-13. Jolly then
re-typed the July red-lined contract and sent the final contract
(hereinafter, "final contract") to Medline for signature. Id.
at ¶ 13. Among other things, the final contract differs from the
July red-lined contract insofar as it required Medline to pay an
annual minimum royalty payment of $250,000 and to purchase $5
million in products liability insurance. Id. Ex. E. Jolly did
not allege that Medline signed either the July red-lined contract
or the final contract. Id.
Upon receipt of Jolly's complaint, Medline moved to dismiss.
Medline argued Jolly's complaint failed to allege the existence
of a valid contract and the statute of frauds barred enforcement
of the purported oral contract. Jolly did not respond. Instead,
Jolly filed the amended complaint.
II. Amended Complaint and Rule 11
Jolly changed its tack in the amended complaint. Jolly again
alleged that Medline sent it the May 7th contract
"reflect[ing] the essential elements of the parties' oral
agreement." Am. Compl. at 9. However, Jolly eliminated reference
to the May 8th contract. Compare Compl. at ¶ 10 with Am. Compl. at ¶¶ 9-10. Jolly simply alleged that Medline's vice
president Don Malin signed the May 7th contract on May 18
(hereinafter, "May 18th signed contract"). Am. Compl. at ¶ 9.
According to Jolly, the May 18th signed contract constituted
a valid, binding and enforceable contract. Id. at ¶ 17. Jolly
also proffered the July red-lined contract as a valid, binding,
enforceable modified contract to which the parties' thereafter
agreed. Id. at ¶¶ 12, 17. The amended complaint contained no
reference to the final contract identified in Jolly's original
complaint. Id. at 13. Instead, Jolly merely alleged that it
requested, but Medline rejected, additional modifications to the
July red-lined contract. Id. at ¶ 13.
Upon receipt of the amended complaint, Medline's counsel sent a
letter to Jolly's counsel Michael J. Rovell ("Rovell") on March
25. Def. Rule 11 Mot. Ex. H. Medline's counsel pointed out
factual inconsistencies between Jolly's original and amended
complaints and warned that a Rule 11 motion would be served in
the event Jolly did not withdraw the amended complaint within
seven days. Id. Medline's counsel challenged the "sequence of
events" laid out in the amended complaint, noting that Jolly
sought "to enforce an entirely different contract than the `final
contract' attached to its original complaint." Id. Medline's
counsel pointed out that the May 18th signed contract that
Jolly relied on as a valid, binding and enforceable contract was
actually signed on August 18th, obviously after the parties
exchanged the July red-lined contract. Id. Additionally,
Medline's counsel argued that Jolly's amended complaint was
legally defective under Illinois' "mirror image rule" governing
contract actions because Jolly repeatedly requested modifications
to the proposed contracts, including the May 7th and the July
red-lined contracts. Id.
On March 26, Medline filed a motion to dismiss. While this
court considered the motion, Medline served a Rule 11 Motion on
Jolly on April 15. Two weeks later, the court dismissed the amended complaint with prejudice. Minute Order, 4/30/04, Docket
No. 17-1. In so doing, the court found the amended complaint
legally defective because it alleged the existence of an
unfulfilled condition precedent to the formation of a binding
contract, i.e., the parties' failure to draw up a complete
contract. Id. The court further determined that the writings on
which Jolly relied for purposes of satisfying the statute of
frauds insufficiently evidenced the existence of a contract or
its terms. Id. ("Indeed, the writings reveal an obvious
disagreement about the contract's essential terms and
conditions"). Medline filed its Rule 11 motion with the court on
May 13, 2004, after dismissal of the amended complaint.
III. Second Amended Complaint and Motion for Sanctions
The day after Medline filed its Rule 11 motion, Jolly sought
leave to file a second amended complaint. Jolly now seeks to
change course yet again. Not surprisingly, Jolly no longer
alleges that the May 18th signed contract constitutes a
valid, binding and enforceable contract between the parties.
Instead, Jolly alleges that the May 7th contract constitutes
a valid, binding and enforceable contract between the parties.
2nd Am. Compl. at ¶ 17. In addition, Jolly submits an entirely
new contract dated August 25 as the parties' valid, binding and
enforceable modified contract (hereinafter, "August 25th
contract"). Jolly does not entirely abandon the July red-lined
contract. Instead, Jolly alternatively alleges that the July
red-lined contract constitutes the valid, binding and enforceable
modified contract between the parties. Id. In response, Medline
moves for sanctions pursuant to 28 U.S.C. § 1927.
IV. Pre-litigation Correspondence
In connection with its separate motions for sanctions, Medline
submits two demand letters it received from Jolly prior to the
initiation of litigation. These demand letters recount a markedly different version of the parties' dealings than Jolly represented
to the court. In one letter, Jolly contended that
In May 2003, Medline made a formal license offer in
the form of a signed contract dated May 6, 2003.
Jolly made a counterproposal in the form of its
signed contract dated June 24. Medline countered with
a marked contract redraft dated July __. Jolly
accepted this offer by retyping the July __ draft,
dating it August 28, 2003, signing it and returning
it to Medline.
Def. Rule 11 Mot. Ex. E. Incredibly, Jolly neglected to mention,
let alone attach, the contract it signed and dated August 28
(hereinafter, "August 28th signed contract") in its original,
amended, or second amended complaint. Id. Ex. F. Not only is
this the sixth contract Jolly has at some point claimed to be
legally enforceable, the August 28th signed contract differs
in substantial respects from the various contracts Jolly has
advanced during proceedings before the court.
I. Motion for Reconsideration
Motions for reconsideration serve the limited function of
either correcting manifest errors of law or presenting
newly-discovered evidence. Calumet Lumber, Inc. v. Mid-America
Industrial, Inc., No 95 C 4875, 1996 WL 308243 at * 1 (N.D. Ill.
1996). Motions for reconsideration do not provide a vehicle for a
party to introduce new evidence or legal theories that could have
been presented earlier. Caisse Nationale de Credit Agricole v.
CBI Industries, Inc., 90 F.3d 1264, 1269 (7th Cir. 1996).
Jolly ignores the standard governing its motion for
reconsideration of this court's order dismissing the amended
complaint with prejudice. Jolly contends the court erred in
determining that the parties' purported oral agreement was not
binding as a matter of law because Medline's March 4 proposal was
"not an impediment to the later formation of an oral contract on
different terms." Pl. Mot. Reconsider at 2. Jolly argues that it "never contended
that the March 4 proposal was a contract [or] that a binding oral
agreement had been reached by then with the terms reflected in
that proposal[.]" Id. This argument is improper; it directly
contradicts Jolly's response to the motion to dismiss. Pl. Opp.
Mem. at 3 ("By March 4, the parties had agreed to a distribution
agreement. . . . The parties intended, however, that this
agreement was not to be binding until a contract was drawn").
Jolly may not avail itself of a new legal theory as a matter of
convenience. Caisse Nationale de Credit Agricole, 90 F.3d at
Jolly's breach of contract claim cannot proceed because the
March 4th proposal "was not to be binding until a contract
was drawn." Am. Compl. ¶ 7. As Jolly admittedly rejected each
contract proffered by Medline, no final contract was ever drawn.
Am. Compl. ¶¶ 10, 13. Jolly's misguided argument that the May
7th contract constituted the drawn contract is untenable. The
May 7th contract cannot constitute the drawn contract because
Jolly requested it be modified. Am. Compl. ¶ 10. Nor does Jolly's
disingenuous attempt to distinguish between essential and
non-essential contract terms change this result. Pl. Mot.
Reconsider at 3 ("the modifications that Jolly requested to the
written agreements were not essential terms and the parties'
failure to agree on those does not defeat the contract"). The
price term obviously essential to the parties' contract
changes between the May 7th contract and the July red-lined
contract. Compare Am. Compl. Ex. B ("Medline shall pay Jolly . . .
a royalty of $0.22 per box) with Am. Compl. Ex. D ("Medline
shall pay Jolly . . . a royalty of $0.25 . . . per box).
Jolly's statute of frauds argument also lacks merit. Jolly's
amended complaint failed to identify writings sufficiently
evidencing "the existence of a contract and its terms and
conditions." Storm & Associates, Ltd. v. Cuculich,
700 N.E.2d 202, 209 (1st Dist. 1998). Contrary to Jolly's position, the amended complaint and exhibits did not merely
reveal disagreement about non-essential contractual terms.
Instead, Jolly pointed to three substantially different draft
contracts. None of these drafts illuminated any final agreement
regarding essential contractual terms. If anything, these drafts
pinpointed continued disputes between Jolly and Medline during
negotiations. Medline, for example, did not include the minimum
royalty payment of $250,000 in the August 25th contract,
despite purportedly agreeing to the payment in the July red-lined
contract. Compare Am. Compl. Ex. F (no minimum royalty payment)
with Ex. D ($250,000 minimum royalty payment); Am. Compl. ¶ 12
("Medline sent Jolly by e-mail a redlined version of a Jolly
draft, incorporating the modifications that had been agreed to by
both of the parties"). Absent a writing showing the existence of
a contract, any purported oral agreement must fail as
unenforceable under the statute of frauds. Jolly's proposed
second amended complaint cures neither of these defects. See,
2nd Am. Compl. ¶ 7 ("The [March 4th] proposal was to have `no
legal bearing until we draw up a contract'"); ¶ 10 ("Jolly
requested some modifications"); ¶ 13 ("Although Jolly requested
that the contract be modified by the addition of certain other
clarifying terms . . . those proposed modifications were not
accepted by Medline"); 2nd Am. Compl. Ex. B-1 ("Please take a
look at this contract and give me your thoughts"); Ex. F
("Attached is the contract that we agreed upon, correct? . . .
Richard called me and stated that it wasn't"). Accordingly, the
court denies Jolly's motion for leave to file the second amended
complaint as futile. Indiana Funeral Directors Ins. Trust v.
Trustmark Ins. Corp., 347 F.3d 652, 654 (7th Cir. 2003)
(leave to amend may be denied due to futility of amendment).
II. Rule 11 Sanctions
Under Rule 11, a motion for sanctions "shall not be filed with
or presented to the court unless, within twenty-one days after
the service of the motion (or such period as the court may prescribe), the challenged paper, claim, defense, contention,
allegation or denial is not withdrawn or appropriately
corrected." Fed.R.Civ.P. 11(c)(1)(A). This twenty-one day safe
harbor period allows a party to avoid the imposition of sanctions
simply by withdrawing the offending submission. Harding Univ. v.
Consulting Services Group, L.P., 48 F. Supp.2d 765, 770 (N.D.
Ill. 1999). It is an abuse of discretion for the court to impose
sanctions pursuant to a Rule 11 motion without ensuring
compliance with the twenty-one day safe harbor period. Divane,
Jr., et al. v. Krull Electric Co., Inc., 200 F.3d 1020, 1025
(7th Cir. 1999).
Medline first informed Jolly of its intent to seek
Rule 11 sanctions by letter on March 25, 2004, Medline's letter expressly
warned Jolly that it would serve a Rule 11 motion if Jolly failed
to withdraw the amended complaint within seven days. The next day
Medline filed a motion to dismiss the amended complaint. Faced
with Medline's warning letter and motion to dismiss, Jolly did
not withdraw. Instead, Medline served its Rule 11 motion on Jolly
on April 15, and Jolly filed its response to Medline's motion to
dismiss on April 19. This court dismissed Jolly's amended
complaint with prejudice on April 30, six days before the
expiration of the twenty-one day safe harbor period. Therefore,
Jolly did not receive the benefit of the full safe harbor period.
Accordingly, Rule 11 sanctions cannot be imposed in this
instance. Divane, Jr., et al., 200 F.3d at 1025 (failure to
adhere to twenty-one day safe harbor period constitutes abuse of
III. Section 1927 Sanctions
Medline also moves for sanctions pursuant to 28 U.S.C. § 1927.
Section 1927 provides that "any attorney . . . who so multiplies
the proceedings in any case unreasonably and vexatiously may be
required by the court to satisfy personally the excess costs,
expenses, and attorneys' fees reasonably incurred because of such
conduct." A court has discretion to impose § 1927 sanctions when an attorney has acted in an "objectively unreasonable
manner" by engaging in a "serious and studied disregard for the
orderly process of justice," or where a "claim [is] without a
plausible legal or factual basis and lacking in justification."
Pacific Dunlop Holdings, Inc. v. Barosh, 22 F.3d 113, 119
(7th Cir. 1994) (citation omitted). An attorney's objectively
unreasonable intent may be inferred from a total lack of factual
or legal basis for the suit. Overnite Transportation Co. v.
Chicago Industrial Tire Co., 697 F.2d 789, 795 (7th Cir.
1983). Finally, § 1927 is interpreted by the Seventh Circuit "to
impose a continuing duty upon attorneys to dismiss claims that
are no longer viable." Dahnke v. Teamsters Local 695,
906 F.2d 1192, n. 6 (7th Cir. 1990).
As summarized, this court thoroughly reviewed the pleadings and
correspondence relevant to these proceedings. The record shows no
plausible factual basis for Jolly's breach of contract suit
against Medline. Instead, the record reveals Jolly has asserted
multiple, contradictory versions of events regarding the parties'
negotiations and at least four different contracts for the
purpose of bringing a baseless breach of contract claim. Nor can
Rovell plausibly claim ignorance. The record firmly establishes
that Rovell continued to press this litigation, despite repeated
warnings by Medline's counsel. Confronted with Medline's original
motion to dismiss, Rovell filed an amended complaint that not
only flatly contradicted the original complaint, but in bad faith
sought relief on the basis of the May 18th contract.*fn1
Def. Rule 11 Mot. Ex. F. Medline's subsequent Rule 11 warning
letter and motion had no effect. Instead, Rovell filed a response
brief, arguing that the amended complaint should not be
dismissed. Even after this court dismissed the amended complaint
with prejudice, Rovell continued to litigate, filing the motion for
reconsideration and leave to file the second amended complaint
currently before the court. Rovell has wasted both the parties'
and this court's resources. Viewed in light of the parties'
pre-litigation correspondence, Rovell's conduct is egregious.
Def. Rule 11 Mot. Ex. E ("Jolly accepted this offer by retyping
the July __ draft, dating it August 28, 2003, signing it and
returning it to Medline") (emphasis added). Overnite
Transportation Co., 697 F.2d at 795 (objectively unreasonable
intent may be inferred from lack of factual basis). Medline is
entitled to an award of excess costs, expenses, and attorneys'
fees it reasonably incurred due to Rovell's multiplication of
Jolly's pursuit of this litigation is at an end. Although
Rule 11 sanctions are inappropriate due to the unexhausted twenty-one
day safe harbor period, the egregiousness of Rovell's conduct in
manipulating the facts and asserting contradictory positions to
enable continuation of this frivolous lawsuit warrants sanctions
under 28 U.S.C. § 1927. Determination of reasonable costs,
expenses, and attorneys' fees due to Rovell's conduct is referred
to the assigned magistrate judge for a report and recommendation.