The opinion of the court was delivered by: Judge Rebecca Pallmeyer
SECOND AMENDED MEMORANDUM OPINION AND ORDER
The "Cement-Lock" technology (hereinafter, "the Technology") at the heart of this litigation is a process by which contaminated wastes are used to make a decontaminated, beneficial cement additive. Cement-Lock Group, LLC ("CLG") was the owner of certain intellectual property and rights to the Cement-Lock Technology. This Technology, however, did not prove as profitable as its inventors hoped, and this lawsuit is the result. Plaintiffs Cement-Lock, LLC ("CL") and Richard Mell are Members of CLG who filed this derivative action on behalf of CLG, claiming that the Defendants' actions devalued CLG's intellectual property, harmed CLG's business reputation, and deprived CLG of opportunities to market and develop the Cement-Lock Technology. In their eleven-count Amended Complaint, Plaintiffs have named as Defendants a number of entities and individuals connected to the Cement-Lock Technology: Defendants Gas Technology Institute ("GTI"), Institute of Gas Technology ("IGT"), Endesco Services, Inc. ("ESI"), Endesco Clean Harbors, LLC ("ECH"), Stanley S. Borys, James E. Dunne, Francis S. Lau, and nominal defendant Cement-Lock Group, LLC ("CLG"). Defendants now move to for summary judgment on Counts I through VIII of that Complaint, which allege that each Defendant violated the Racketeer Influenced and Corrupt Organizations Act ("RICO"), 18 U.S.C. § 1962 (c) & (d) (2000); committed common law breach of fiduciary duty, fraudulent concealment, fraudulent misrepresentation, and negligent misrepresentation; and seek to recover unjust enrichment and an accounting. For the reasons explained here, Defendants' motion is granted in part and denied in part.
The Cement-Lock Technology is a process that takes contaminated wastes--such as dredged sediment--decontaminates those wastes, and converts the wastes into a beneficial cement additive. (Pls.' Resp. to Lau's 56.1 ¶ 7.) CLG owns the intellectual property rights to that process, including patents, trademarks, and service marks. The parties to this action have played various roles in attempting to develop and commercialize the Technology. The Plaintiffs are CL and Mell (together, the "Plaintiffs"). CL is a limited liability company whose members include Surjit Randhava ("Serge"), Sarabjit Randhava, Richard Kao, Wayne & Associates, and Jinnet Hemani. (Pls.' Resp. to Corps.' 56.1 ¶ 5.)*fn1 Mell is a CLG Member as well as a Manager on CLG's Operating Board. (Pls.' Resp. to Lau's 56.1 ¶ 2.) At all relevant times, Mell was a Chicago Alderman. (Pls.' Resp. to Corps.' 56.1 ¶ 7.) Plaintiffs have brought this derivative action on behalf of nominal defendant CLG, a limited liability company, which ESI, CL, and Mell formed in 1997. (Id. ¶ 8.)
The Defendants in this action--GTI, IGT, ESI, ECH, Borys, Dunne, Lau, and CLG (together, the "Defendants")--are interrelated in significant ways. IGT is a not-for-profit entity based in Illinois that engages in natural gas research and related development projects. (Pls.' Resp. to Corps.' 56.1 ¶ 1.) Gas Research Institute ("GRI"), too, is a not-for-profit entity based in Illinois that engaged in natural gas research and related development projects. (Id. ¶ 2.) GRI's principal source of funding was derived from a surcharge imposed by the Federal Energy Regulatory Commission ("FERC") on the transport of natural gas through interstate pipelines and then transmitted to GRI. (Id.) GRI also ran programs unrelated to FERC and, as part of these programs, awarded almost $2 million in funding relating to the Cement-Lock Technology to GTI and almost $500,000 in funding relating to the Technology to ECH. (Defs.' Answers to Pls.' Initial Interrogs. at No. 5, Pls.' Ex. 23.) According to Defendants, in April 2000, IGT and GRI combined their boards of directors and elected common officers; from that point forward GRI continued to operate as an entity, but IGT operates distinctly from it. (Id. at No. 10; see also Pls.' Resp. to Corps.' 56.1 ¶ 2.) IGT now operates under the name GTI. (Pls.' Resp. to Corps.' 56.1 ¶ 2.)*fn2 There is no further information in the records regarding the structure or purpose of this combination.
ESI is a wholly-owned subsidiary of IGT. (Id. ¶ 1.) ECH is a Delaware LLC with a stated mission to "design, construct, and operate a 100,000 ton cement manufacturing facility to process contaminated harbor sediment from the New York/New Jersey harbor area using the proprietary Cement-Lock Technology of the Institute of Gas Technology." (Id. ¶ 3.) GRI International, LLC and ESI own ECH, and Plaintiffs contend that GRI holds debentures convertible to a 70% ownership interest in ECH. (Id.) Together, GTI, IGT, ESI, and ECH refer to themselves as the "Corporate Defendants."
The individual Defendants have served, variously, as officers or directors of the Corporate Defendants. Though Plaintiffs suggest that he held other titles as well, Borys served at least as Senior Vice President of IGT until September 1, 1998; then as Executive Vice President of IGT until November 10, 1999; and as Executive Vice President and Chief Operating Officer of IGT after that. (Corps.' 56.1 ¶ 10.) Borys also served on ESI's Board of Directors beginning on November 8, 1999 and as ESI's President except between August 10, 2000 and March 22, 2001. (Id.) Finally, he served on the CLG Board of Managers from December 1, 1997 until July 1, 2004 and again beginning on January 5, 2005. (Id.) Though Plaintiffs suggest that he held other titles as well, Dunne served at least as Vice President for Administration and Secretary of IGT between 1997 and June 15, 2000 and as Vice President for Administration and Chief Financial Officer of IGT from June 15, 2000 through 2005. (Id. ¶ 11.) He ran the administrative section of IGT, which included its contracts division. (Defs.' Resp. to Pls.' 56.1 ¶ 36.) After 2001, all CLG licenses were supposed to be prepared by GTI's legal or contracts department, each of which were part of Dunne's Administrative Division. (Id. ¶ 42.) Dunne also served on the CLG Board of Managers and as its Secretary from February 6, 2002 until July 1, 2004 and again beginning on January 5, 2005. (Pls.' Resp. to Corps.' 56.1 ¶ 11.) Though Plaintiffs suggest that he held other titles as well, Mr. Lau was at least the Managing Director of IGT from 1997 until June 15, 2000; its Director until June 1, 2001; its Associate Director until December 1, 2003; its Executive Director until April 1, 2005; and then its Director through 2005. (Id. ¶ 12.) Mr. Lau first served on the CLG Board of Managers from January 30, 2003 until July 1, 2004 and again beginning on January 5, 2005. (Id.) He was President of CLG between March 17, 2003 and July 1, 2004. (Id.)
In addition, several other individuals played a significant role in the various entities. S. Peter Barone was President of ECH and Vice President of ESI from February 2002 until January 2003; he also worked for GRI and/or GTI from 1981 until January 2003. (Pls.' Resp. to Corps.' 56.1 ¶ 17.) Anthony Lee held the title of CLG President at IGT from February 2001 to January 2003; he was also an IGT employee from 1961 until January 2003 and was the project manager for certain Cement-Lock Technology subcontracts. (Id. ¶ 13.) Amirali Rehmat was a GTI employee and the ECH President from March 1999 through January 2002; he was also the project manager for certain Cement-Lock Technology related subcontracts. (Id. ¶ 15.) There is no dispute among the parties to this action that, acting together, Barone, Lee, and Rehmat perpetrated a fraud related to the Cement-Lock Technology (the "BLR Fraud"). (Pls.' Opp'n 1; Corps.' Mem. 6; Borys' Mem. 2; Lau's Mem. 3; Dunne's Mem. 2.) Plaintiffs define the BLR Fraud as the "fraudulent and criminal conduct of Barone, Lee and Rehmat," which they claim benefitted the officers and employees through increased salaries and bonuses. (Pls.' Resp. to Corps.' 56.1 ¶ 38.) The GTI management learned of the BLR Fraud in October 2002. (Resp. to Lau's 56.1 ¶ 44.) Soon thereafter, in late 2002, GTI began an investigation into the BLR Fraud. (Id. ¶ 45.) In late 2002, GTI notified the FBI of the BLR Fraud. (Id. ¶ 46.) That fraud is the subject of another civil lawsuit pending in this court: Gas Technology Institute v. Rehmat, No. 05 C 2712. In addition, Barone, Lee, and Rehmat, as well as Zulfikar Rehmat and Minazali Rehmat, were indicted on September 5, 2007. See Indictment at 1, United States v. Barone, No. 07 CR 0574 (N.D. Ill. Sept. 5, 2007).
II. ECH Licenses and Promissory Notes
Plaintiffs' allegations against the Defendants in this action largely revolve around various licenses from CLG to ECH of the right to practice the Cement-Lock Technology. On December 1, 1997, Borys, on behalf of the CLG Operating Board, and Rehmat, on behalf of ECH, signed a License Agreement. (Defs.' Resp. to Pls.' 56.1 ¶ 3; Borys' Resp. to Pls.' 56.1 ¶ 3.) In it, CLG granted ECH a limited, royalty-free, exclusive license to practice the Technology in New York and New Jersey through construction and operation of a full-scale plant to demonstrate the effectiveness of the Technology. (Id.) The License permitted ECH to process a maximum of 100,000 tons per year of sediments and soils. (Id.) The License did not give ECH the right to grant sublicenses. (Id.)
Next, on August 25, 1999, Borys and Rehmat signed a License Agreement giving ECH the exclusive right to practice the Technology anywhere in the world, on any waste stream up to 600,000 tons per year. (Defs.' Resp. to Pls.' 56.1 ¶ 4.) The 1999 License also gave ECH the right to sublicense the Technology. (Id. ¶ 5.) The 1999 License purported to be royalty-bearing, though it contained no royalty rate and the parties dispute whether there was genuine intent from either party that ECH would make royalty payments. (Id.) It is undisputed, however, that ECH paid CLG $150,000 in consideration for the 1999 License. (Id. ¶ 6.) On September 27, 1999, $150,000 was wired into CLG's bank account and $111,209 was wired out of that account. (Id. ¶ 7.) The parties offer no further detail on those transactions. It is undisputed, however, that only GTI employees were the signatories to the CLG bank account, and the CLG bank account statements were sent only to GTI's office. (Id. ¶ 8.) Plaintiffs claim that they rarely, if ever, saw CLG bank account statements. (Id. ¶ 24)
Then, on February 2, 2001, Lee, on behalf of CLG, and Rehmat, on behalf of ECH, signed a License Agreement giving ECH the exclusive right to practice the Technology anywhere in the world, on any waste streams up to 1,100,000 tons per year. (Defs.' Resp. to Pls.' 56.1 ¶ 9; License Agreement at G053409, Pls.' Ex. 7.) ECH was not required to pay any royalties under the 2001 License, but enjoyed the right to sublicense the Technology. (Id. ¶ 9.) The 2001 License also significantly extended the date by which ECH was required to complete the demonstration plant. (Id.) In consideration for the 2001 License, ECH was to pay CLG $150,000. (Id. ¶ 10.) On May 25, 2001, $150,000 was wired into and out of CLG's bank account. (Id. ¶ 11.) Again, the parties offer no further detail on those transactions.
Meanwhile, CLG was incurring debt to IGT and ESI. According to IGT records, as of March 27, 2001, CLG owed IGT and ESI more than $200,000. (Defs.' Resp. to Pls.' 56.1 ¶ 12.) Plaintiffs claim that, as far as CL and Mell were told, the sum was owed because of patent protection costs and expenses. (Id. ¶ 13.) Defendants counter that the sum was owed at least in part because of work the companies did on CLG projects, and that Plaintiffs were told as much. In other words, the parties agree that IGT and ESI were charging CLG for certain services but dispute whether CL or Mell was properly informed of these debts. (Id. ¶ 14; Borys' Resp. to Pls.' 56.1 ¶ 14.)
On April 1, 2001, ECH loaned CLG $100,000, and CLG executed a promissory note in that amount. (Defs.' Resp. to Pls.' 56.1 ¶ 15.) In the event of default CLG agreed to grant ECH "a non-exclusive, world wide royalty free license, with the right to sublicense, to the Cement Lock Technology for up to 500,000 tons per year of processing capacity in addition to the licensed processing capacity [ECH] then has a right to use." (Promissory Note ¶ 4, Pls.' Ex. 11.) According to CLG's designated corporate representative, as of April 1, 2001 CLG did not have any revenues other than those license fees from ECH. (O'Laughlin Dep. 97, Pls.' Ex. 12.) CLG eventually defaulted on the loan and therefore executed an amendment to the February 2001 license granting ECH an additional 500,000 tons of processing capacity. (Defs.' Resp. to Pls.' 56.1 ¶ 17.)
On April 1, 2002, ECH again loaned CLG $100,000 and CLG executed a second promissory note. (Defs.' Resp. to Pls.' 56.1 ¶ 18.) In the event of default on this $100,000 note, CLG agreed to grant ECH "a non-exclusive, world wide royalty free license, with the right to sublicense, to the Cement Lock Technology for up to 500,000 tons per year of processing capacity in addition to the licensed processing capacity [ECH] then has a right to use." (Promissory Note ¶ 4, Pls.' Ex. 14.) At that time, ECH's designated corporate representative testified that, as in April 2001, CLG did not have any licensing revenues other than those license fees from ECH. (Chromek Dep. 126, Pls.' Ex. 16.) CLG eventually defaulted on this loan, as well, and CLG therefore executed an amendment to the February 2001 license granting ECH an additional 500,000 tons of processing capacity. (Defs.' Resp. to Pls.' 56.1 ¶ 21.) The second Amendment clarified that the first 1,100,000 tons per year of process plant capacity would be exclusively licensed to ECH, while the remaining one million tons per year of process plant capacity would be subject to a non-exclusive license to ECH. (Id.) Lau signed this Amendment on behalf of CLG. (Id.)
ECH was able to parlay these licenses into researching funding. In total, the parties agree that ECH received approximately $17 million in funding pursuant to research contracts with specific objectives related to the Cement-Lock Technology. (Defs.' Resp. to Pls.' 56.1 ¶ 33.) A May 1, 2003 e-mail from Dunne to Lau, Borys, and others explains that, as of that date, ECH and GTI had received $20.3 million in Cement-Lock contract funding from various sources, $2.9 million of which remained unspent. (Id. ¶ 47; E-mail from Dunne to Lau et al. of 5/1/03, Pls.' Ex. 39.) According to a March 2003 calculation, almost $3.5 million of this funding came from GRI, in the form of capital contributions and research contracts. (E-mail from Dunne to Lau et al. of 5/1/03, Pls.' Ex. 39.)
In April 2003, Dunne e-mailed Lau, asserting that "the ECH project is completely out of money we are paying bills with GTI money. This is not good." (E-mail from Dunne to Lau et al. of 4/24/03, Pls.' Ex. 87.) Dunne requested a proposal for the estimated costs cost to complete the project, so that money could be moved "into the FERC pot and subsequently into ECH to fund this work." (Id.) Lau submitted to GRI in May 2003 a Proposal in which ECH requested a total of $2,697,088 in additional funding. (Proposal, Pls.' Ex. 88.) In June 2003, GTI expressed its intent to seek from GRI approximately $500,000 "to manage and support the Cement Lock Demonstration plant in New Jersey." (E-mail from Vitalo to Dunne of 6/11/03, Pls.' Ex. 89.) Without fully explaining the mechanics of the scheme, Plaintiffs assert that this proposal was a "ruse" for GTI to reimburse GRI, a funder of the Cement-Lock Technology, for the BLR Fraud with GRI's own assets. (Pls.' 56.1 ¶ 110.) To support this theory, Plaintiffs cite to e-mail correspondence and meeting notes regarding this reimbursement of GRI's FERC program, from its non-FERC cash. (E-mail from Momot to Dunne et al. of 4/9/04, Pls.' Ex. 90; Meeting Notes of 4/15/04, Pls.' Ex. 91.) As the court understands their position, Plaintiffs claim that GRI paid its FERC program back by transferring money internally. Neither document draws any explicit connection to ECH's proposal. (Id.)
In July 1998, IGT submitted a Cement-Lock Technology Statement of Work to Brookhaven National Laboratory, which Borys signed on behalf of IGT. (Cement-Lock Technology TM Statement of Work, dated 7/97, Pls.' Ex. 25.) In February 1999, IGT submitted a Proposal to the Gas Research Institute, which Borys again signed on behalf of IGT. (Proposal, Pls.' Ex. 26.) In June 1999, IGT submitted a Proposal to the Michigan Department of Environmental Quality surface Water Quality Division, which Borys signed on behalf of IGT. (Proposal, Pls.' Ex. 27.) In December 1999, IGT submitted a Proposal to Brookhaven National Laboratory, which Borys signed on behalf of IGT. (Proposal, Pls.' Ex. 28.) In September 2001 and again in September 2003, Gas Research Institute and IGT entered into a Contract for Research, each of which Dunne signed on behalf of IGT. (Contract, Pls.' Ex. 29; Contract, Pls.' Ex. 30.)
The parties dispute whether GTI had any right to practice the Cement-Lock Technology, but it is agreed that IGT never entered into a written license agreement with CLG. (Defs.' Resp. to Pls.' 56.1 ¶ 34.) They agree, however, that in total, GTI secured over $6 million in connection with research and development contracts relating to the Cement-Lock Technology and entered into subcontracts with ESI related to the Cement-Lock Technology. (Id.) Plaintiffs assert that IGT thus misappropriated CLG's rights to the Technology for its own purposes; Defendants counter that the fundraising and subcontracts furthered ECH's rights to the Technology. (Id.)
Plaintiffs also argue that the exclusive license which ECH eventually precluded other--potentially profitable--licenses CLG could have issued. In an April 18, 2003 memorandum to the CLG Board, Lau reported that the exclusive license CLG had granted ECH appeared to conflict with later, non-exclusive licenses granted by CLG to other entities, though the parties do not specify to whom. (Defs.' Resp. to Pls.' 56.1 ¶ 45.) The CLG Board made no decision regarding whether ECH's license was exclusive and therefore in conflict with later licenses granted by CLG.
(O'Laughlin Dep. 228-29, Pls.' Ex. 12.) The CLG Operating Board did, however, terminate existing Tefes Pure Tech and RenuTech licenses. (Id.) Soon after, the question of whether ECH's exclusive license rights barred CLG from awarding licenses to other entities became significant.
CLG and Unitel Technologies, Inc. ("Unitel") had previously entered into an agreement, dated December 3, 2001, which allowed Unitel to practice the Cement-Lock Technology throughout the world, except for in the State of Alabama, USA; Taiwan; and Kuwait. (License Agreement, Pls.' Ex. 78.) That contract was royalty-bearing. (Defs.' Resp. to Pls.' 56.1 ¶ 90.) On September 5, 2003, Serge sent Lau and Borys a fax on Unitel letterhead, asking Lau to delete the Taiwan restriction on Unitel's license. (Fax from Serge to Borys of 9/5/03 & Fax from Serge to Lau of 9/5/03, Pls.' Ex. 77.)In the letter itself, Serge provided no explanation for the request, but Plaintiffs contend that this was an "enormous revenue-generating possibility" for CLG. (Defs.' Resp. to Pls.' 56.1 ¶ 89.) No one requested additional information from Serge regarding the license or his contact in Taiwan. (Pls.' Resp. to Corps.' 56.1 ¶ 68; Defs. Resp. to Pls.' 56.1 ¶ 89.) Serge has estimated that the opportunity in Taiwan would involve the processing of more than five million tons of sediments and other wastes per year. (Randhava Aff. ¶ 30, Pls.' Ex. 1.)*fn3
Nevertheless, on September 26, 2003, Borys, Lau, Dunne, and Mell all communicated to Serge, denying his request for expansion of Unitel's license. (Defs.' Resp. to Pls.' 56.1 ¶ 91.) Borys, Lau, and Dunne explained that this denial was based on concerns about conflict with the ECH license. (Letter from Lau to Serge of 9/26/03; Letter from Borys, Lau, and Dunne to Serge of 9/26/03; & Letter from Mell to Serge of 9/26/03, Pls.' Ex. 79.) In one letter, dated September 26, 2003, Lau, writing on ECH letterhead, identified the "clear conflict" between Unitel's license and ECH's "worldwide royalty free exclusive rights for 1,100,000 tons per year." (Letter from Lau to Serge of 9/26/03, Pls.' Ex. 79.) In a letter to Serge withdrawing his approval, Mell cited the ECH conflict as well as the failure to consider consolidation of intellectual property rights. (Letter from Mell to Serge of 9/26/03, Pls.' Ex. 79.) Mell has testified, however, that Borys wrote that letter. (Mell Dep. 306, Pls.' Ex. 80.) He further testified that the actual reason he refused to approve the license was that Serge and Ravi Randhava, Unitel's President, were under investigation by the FBI, and he was concerned that CLG not get caught up in any illegal activity. (Id. at 305-306.)
On December 1, 1997--also the date of the first ECH-CLG subcontract--GRI agreed in a Purchase Agreement with ECH to invest $4.5 million "for the costs involved in the formation of" ECH, a company formed to "design, construct and operate a 100,000 ton cement manufacturing facility." which will process contaminated harbor sediment . . . using the proprietary cement-lock technology of the Institute of Gas Technology." (Defs.' Resp. to Pls.' 56.1; Purchase Agreement at Recitals Paragraph, Pls.' Ex. 74.) Barone testified that the contract specified that the $4.5 million could only be used to purchase equipment. (Barone Dep. 302, Pls.' Ex. 83.) Neither party points to a contractual provision specifying this restriction. In any case, it is clear that not all of the $4.5 million investment was spent on equipment: approximately $1.1 million was subcontracted to ESI, IGT, and Homatex. (E-mail from F. Vitalo to J. Dunne of 3/11/98, Pls.' Ex. 82.)
In fact, Plaintiffs have suggested that the purchase of inadequate equipment crippled the Cement-Lock Technology. Richard Kao testified that the demonstration plant was built incorrectly. (Kao Dep. 67, Pls.' Ex. 84.) GTI opted to use a less-expensive used kiln, which Kao estimated was ten to twenty years old. (Id. at 67-69.) In addition, it was a non-slagging kiln--that is, it could not be run at very high temperatures and was therefore less effective than a slagging kiln. (Id. at 67; Douglas Dep. 220-221, Defs.' Resp. Ex. 49.) According to Kao, using this improper equipment undermined attempts to commercialize the Technology. (Kao Dep. 67-68, Pls.' Ex. 84.) Defendants dispute the impetus for purchasing the used, non-slagging kiln but do not dispute that it "could not sustain continuous production to meet the specified tonnage." (Defs.' Resp. to Pls.' 56.1 ¶ 99.)
Plaintiffs have brought this derivative action to enforce the rights of the company. See FED. R. CIV. P. 23.1. In that capacity, they have filed eleven claims against Defendants. In Cement-Lock I, the court granted Defendants' motion to dismiss Counts II and III of Plaintiffs' original complaint for failing to state a claim under RICO, 18 U.S.C.A. § 1962(c) & (d). See Cement-Lock v. Gas Tech. Inst., No. 05 C 0018, 2005 WL 2420374, *23 (N.D. Ill. Sept. 30, 2005). Plaintiffs re-alleged their RICO claims in an Amended Complaint, filed November 30, 2005. In Cement-Lock II, the court denied Defendants' motion to dismiss the Plaintiffs' re-articulated RICO claims as well as Count IV (fraudulent concealment), Count V (fraudulent misrepresentation), and Count VI (negligent misrepresentation) against Lau. Cement-Lock LLC v. Gas Tech. Inst., No. 05 C 00018, 2006 WL 3147700, *11 (N.D. Ill. Nov. 1, 2006). Defendants have now moved for summary judgment on eight of Plaintiffs' claims, each of which is asserted against all of the named Defendants: Count I (breach of fiduciary duty); Count II (RICO); Count III (RICO conspiracy); Count IV (fraudulent concealment); Count V (fraudulent misrepresentation); Count VI (negligent misrepresentation); Count VII (unjust enrichment); and Count VIII (accounting). For the reasons explained below, Defendants motion is granted with regard to Count VII as to all Defendants and denied as to Counts I-IV and VIII with regard to all Defendants. With regard to Counts V and VI, the motion is granted with regard to Lau and denied as to Borys, Dunne, and the Corporate Defendants. Defendants have not moved for summary judgment on Count IX (trademark infringement, asserted against GTI, IGT, ESI, and ECH), Count X (unfair competition, asserted against GTI, IGT, ESI, and ECH), or Count XI (deceptive trade practices, asserted against GTI, IGT, ESI, and ECH), and the court therefore does not consider those claims.
The court has federal question jurisdiction over this civil action because there are claims arising under section 1964 of RICO, 28 U.S.C. §§ 1331, and under the United States Trademark Act, 15 U.S.C. §§ 1501 et seq. 15 U.S.C. § 1121(a); 28 U.S.C. § 1338(a). The court has supplemental jurisdiction over Plaintiffs' state law claims pursuant to 28 U.S.C. § 1367 and 28 U.S.C. § 1338(b).
Summary judgment should be granted "if the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law." FED. R. CIV. P. 56(c). Summary judgment is not appropriate if the "evidence is such that a reasonable jury could return a verdict for the nonmoving party." Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248 (1986). As the moving parties, the Defendants bear the initial burden of proving that there is no genuine issue of material fact and that they are entitled to judgment as a matter of law. Hicks v. Midwest Transit, Inc., 500 F.3d 647, 651 (7th Cir. 2007). The Plaintiffs retain the burden of producing evidence sufficient to support a reasonable jury verdict in their favor. Id.
Under this court's Local Rule 56.1, Defendants were required to serve and file "a statement of material facts as to which the moving party contends there is no genuine issue and that entitle the moving party to a judgment as a matter of law. . . ." L.R. 56.1(a)(3). In response to such a statement, Local Rule 56.1(b)(3)(B) requires Plaintiffs to serve and file "a response to each numbered paragraph in the moving party's statement, including, in the case of any disagreement, specific references to the affidavits, parts of the record, and other supporting materials relied upon . . . ." Thus, Plaintiffs were required to deny with particularity, and citation to the record of the case, any factual allegations that they dispute. "An answer that does not deny the allegations in the numbered paragraph with citations to supporting evidence in the record constitutes an admission." Michas v. Health Cost Controls of Ill., Inc., 209 F.3d 687, 689 (7th Cir. 2000) (quoting McGuire v. United Parcel Serv., 152 F.3d 673, 675 (7th Cir. 1998)). Accordingly, the court will accept as true any properly-supported factual allegations in Defendants' 56.1(a) statements of material fact that are not rebutted with citation to the factual record of the case. Michas, 209 F.3d at 689; see also Raymond v. Ameritech Corp., 442 F.3d 600, 608 (7th Cir. 2006) (holding that party failing to comply with Local Rules has admitted the uncontroverted facts in moving party's Local Rule 56.1(a) submission). For example, where a stated fact is based on an accurate characterization of deposition testimony, and Plaintiffs provide no contrary evidence, the court will accept that statement as true. The court will, however, view all of the facts in the light most favorable to Plaintiffs, as the non-moving parties. Michas, 209 F.3d at 689.
Plaintiffs have brought their claims as a derivative action, rather than in their individual capacities. Rule 23.1 permits members of a company to bring a derivative action to enforce the rights of that company. "The derivative form of action permits an individual shareholder to bring suit to enforce a corporate cause of action against officers, directors, and third parties. Devised as a suit in equity, the purpose of the derivative action was to place in the hands of the individual shareholder a means to protect the interests of the corporation from the misfeasance and malfeasance of faithless directors and managers." Kamen v. Kemper Fin. Servs., 500 U.S. 90, 95 (1991) (internal quotation marks and citation omitted). There appears to be no dispute in this proceeding that CLG owned rights to license the Cement-Lock Technology, as well as various intellectual property rights in the Cement-Lock Technology. In this derivative action, Plaintiffs contend that the members and managers of CLG misappropriated research grants and funding, which precluded development of the Technology and ultimately devalued it and the associated intellectual property rights, injured CLG's business reputation, and wasted corporate opportunities. (Pls.' Opp'n 23.) More specifically, Plaintiffs argue that steering research funds to entities other than CLG; actively suppressing development of the technology to avoid triggering the obligation to repay GRI; granting expansive licenses to ECH, and particularly the exclusive license; and purchasing inadequate equipment for the demonstration plant are compensable injuries. (Pls.' Opp'n 24.)*fn4 On this basis, Plaintiffs do have standing, as the court explained in Cement-Lock I, 2005 WL 2420374, at *13-16.
In this case, Plaintiffs claim that the Defendants' misconduct consists of "false promises, self-dealing, and suppression of the Cement-Lock Technology." (Pls.' Opp'n 1.) Plaintiffs seek to remedy what they consider to be a fraud, as a part of which the Defendants allegedly collected $25 million to develop the Technology but failed to fund CLG or develop the Technology as promised, thereby rendering it worthless. (Pls.' Opp'n 1.)The court will consider each of Plaintiffs derivative claims in turn.
A. Count I (Breach Of Fiduciary Duty)
The individual Defendants allege that Delaware law applies to this claim, and Plaintiffs also analyze the claims under Delaware law. (Lau's Mem. 10; Dunne's Mem. 10; Borys' Mem. 10-12; Pls.' Resp., 34-35.) The court is less certain, in light of the choice of law provision dictating that the agreement be construed under Illinois law (CLG Operating Agreement §13.10, Corps.' Ex. 47), but for purposes of this motion will accept the parties' agreement. Under Delaware law, the actions of a director are protected by the business judgment rule unless a plaintiff proves that the director breached her fiduciary duty of loyalty, good faith, or due care. McMullin v. Beran, 765 A.2d 910, 917 (Del. 2000).
In addition, Delaware law permits a limited liability company agreement to expand, restrict, or eliminate a manager's or member's duties, with certain exceptions not relevant in this case. DEL. CODE ANN. tit. 6 § 18-1101. Apparently pursuant to this law, the CLG Operating Agreement contains a Limitation on Liability Clause:
A Manager shall perform his duties as a member of the Operating Board in good faith, in a manner he reasonably believes to be in the best interest of the Company and the Members, and with similar care as an ordinarily prudent person in a like position would use under such circumstances. A person who so performs his duties shall not have any liability by reason of being or having been a Manager of the Company. The Operating Board shall not be liable, responsible or accountable in damages or otherwise to the Company or any Member for any action taken or failure to act on behalf of the Company within the scope of authority conferred on the Operating Board under this Agreement or the Act, except where the claim at issue is based on the fraud, gross negligence or bad faith of the Operating Board. (CLG Operating Agreement § 5.3, Corps.' Ex. 47.) The CLG Operating Agreement also defines Managers to include Members of the Operating Board as well as any successors or additional Members. (Id. § 1.15, Corps.' Ex. 47.) Thus, the CLG Operating Agreement makes explicit that Members (and therefore Managers) are liable for any fraud, gross negligence, or bad faith. It also imposes on Managers an affirmative duty of good faith and care. Finally, moreover, the duty to act in the best interest of the Company, articulated in § 5.3, constitutes the managers' duty of loyalty. See Cede & Co. v. Technicolor, 634 A.2d 345, 361 (1993), modified on reh'g on other grounds, 636 A.2d 956 (Del. 1994) ("the duty of loyalty mandates that the best interest of the corporation and its shareholders takes precedence over any interest possessed by a director, officer or controlling shareholder and not shared by the stockholders generally"). Thus, each Defendant had fiduciary duties to CLG during his tenure as a Member or Manager of the company.
The court will first consider the categories of conduct Plaintiffs claim violate those fiduciary duties generally, before turning to the question of whether particular Defendants can be held liable for those actions.
1. Alleged Improper Conduct
Self-dealing: There appears to be no dispute that GTI and ESI employees charged employee time to CLG when they performed work for CLG. (Defs.' Resp. to Pls.' 56.1 ¶¶ 14, 26, 27.) Defendants contend that these charges were proper, authorized, and disclosed. (Id. ¶ 28.) Plaintiffs argue that, since ECH was the only source of CLG's revenue, CLG could not pay from any other source, which resulted in CLG being forced to accept unfavorable contracts with ECH. (Pls.' Opp'n 4-5.) For example, CLG granted an exclusive license to ECH, and lost the opportunity to license the Technology to other entities until ECH's processing rights were exhausted. (Id. at 6.) And because ECH was not able to process 30,000 tons of waste at its demonstration plant (Defs.' Resp. to Pls' 56.1 ¶ 46), granting ECH an exclusive license on the first 1,100,000 tons of processing capacity effectively precluded CLG from licensing to others. (Pls.' Opp'n 6.) Finally, Plaintiffs contend that these actions were undertaken to ensure that ECH, ESI, and GTI would receive a continuous stream of research contract revenue. (Id.)
Misappropriation of intellectual property: Plaintiffs contend that Defendants permitted GTI to secure funding for the Technology despite knowledge that GTI had no license to use the funding, and then kept that funding a secret from CLG. (Pls.' Opp'n 8-9.) There is no dispute that GTI had no written license for the Technology, and Plaintiffs have raised a genuine issue of material fact as to the question of whether it was improper for GTI to seek out and receive funding in connection with the Cement-Lock Technology. There is also a genuine issue of material fact as to whether GTI misrepresented itself as the owner of the Cement-Lock Technology. (Defs.' Resp. to Pls.' 56.1 ¶ 57.) For example, Plaintiffs point to a 1999 Proposal, signed by Borys, in which IGT represents that it "has developed the Cement-LockTM Technology." (Proposal at G018470, Pls.' Ex. 27.) In addition, Plaintiffs have provided evidence that ECH and IGT sought to commercialize the Technology without referencing CLG's rights in that Technology. (Defs.' Resp. to Pls.' 56.1 ¶ 57.)
Internal controls: Next, Plaintiffs argue that Defendants failed to implement internal controls, which laid the groundwork for the BLR Fraud and hindered detection of that fraud. (Pls.' Opp'n 9-11.) Delaware courts have grappled with the question of what internal controls a board must implement "with respect to the organization and monitoring of the enterprise to assure that the corporation functions within the law to achieve its purposes." In re Caremark Int'l, 698 A.2d 959, 969 (Del. Ch. 1996). The Caremark court concluded that "a director's obligation includes a duty to attempt in good faith to assure that a corporate information and reporting system, which the board concludes is adequate, exists, and that failure to do so under some circumstances may, in theory at least, render a director liable for losses caused by non-compliance with applicable legal standards." Id. at 970; see Stone v. Ritter, 911 A.2d 362, 365 (Del. 2006) ("Caremark articulates the necessary conditions for assessing director oversight liability"). Meeting the Caremark standard for liability is no easy task, as "the [Caremark]decision premises liability on a showing that the directors were conscious of the fact that they were not doing their jobs." Guttman v. Jen-Hsun Huang, 823 A.2d 492, 506 (Del. Ch. 2003); see also Buckley v. O'Hanlon, C.A. No. 04-955 (GMS), 2007 WL 956947, at *5 (D. Del. March 28, 2007) (holding that officers and directors may not "consciously disregard visible 'red flags' "or otherwise act with gross negligence). Under this standard, Defendants are liable not only if they were aware of the BLR fraud but also if they should have been aware of it.
Here, Plaintiffs note that the failure of internal controls allowed Cement-Lock funding to be siphoned away in the BLR fraud, which indirectly benefitted the individual Defendants through increased salaries and bonuses. (Pls.' Opp'n 11.) In support, Plaintiffs point to the expert opinion of Ronald Vollmar that there were insufficient internal controls set up by the Defendants. (Id. at 10.) An expert conclusion regarding internal controls may not, alone, be enough to defeat summary judgment, but in this case the expert has provided "evidence of the factual basis for his conclusion," see Vollmert v. Wis. DOT, 197 F.3d 293, 299-300 (7th Cir. 1999), including particular incidents and applicable business standards, rather than merely a bare conclusion. (Expert Report of Ronald G. Vollmar, dated 3/23/07, Pls.' Ex. 81.)*fn5 The court deems Vollmar's opinion sufficient to permit Plaintiffs' internal-controls theory to survive summary judgment.
Willful suppression: In addition, Plaintiffs suggest that Defendants purposefully suppressed development of the Cement-Lock Technology. (Pls.' Opp'n 12.) Plaintiffs claim that Defendants orchestrated a contractual arrangement with ECH that encouraged suppression of the Cement-Lock Technology by delaying ECH's obligation to repay the funding it received from GRI until "Plant Startup." (Defs.' Resp. to Pls.' 56.1 ¶ 87.) This contract term is undisputed, and could lead a jury to conclude that Defendants created incentives to stall or delay efforts to commercialize the Cement-Lock Technology, which was CLG's asset. Likewise, the jury could conclude that ECH's purchase of a used, non-slagging kiln suppressed development of the Cement-Lock Technology. (See Kao Dep. 67-69, Pls.' Ex. 84.)
Unitel license: Plaintiffs argue that Defendants subordinated CLG's interests to those of ECH in 2003, by refusing to expand Unitel's royalty-bearing license. (Pls.' Opp'n 13.) There is no dispute that, at least overtly, this refusal was predicated on the conflict it would create with ECH's exclusive license. (Letter from Lau to Serge of 9/26/03; Letter from Borys, Lau, & Dunne to Serge of 9/26/03; Letter from Mell to Serge of 9/26/03, Pls.' Ex. 79.) There is also no dispute that the Unitel license was royalty-bearing (Defs.' Resp. to Pls.' 56.1 ¶ 90,) while the 2001 ECH License was not. (Id. ¶ 9.) Thus, licensing Unitel in Taiwan, where there were arguably significant processing opportunities (Randhava Aff. ¶ 30, Pls.' Ex. 1), might have generated revenue to CLG. Although there is no evidence that the individual Defendants were told how much processing capacity and profit might result from expanding the Unitel license (Defs.' Resp. to Pls.' 56.1 ¶ 89), a reasonable jury could conclude that they breached fiduciary duties simply by failing to seek out that information. In addition, according to Mell, Borys told him that Serge and Ravi were under investigation by the FBI, which was the true motivation for his decision to withdraw his approval. ...