Appeal from the Circuit Court of McHenry County. No. 04-LA-82 Honorable Michael T. Caldwell, Judge, Presiding.
The opinion of the court was delivered by: Justice Zenoff
JUSTICE ZENOFF delivered the judgment of the court, with opinion. Justice Birkett concurred in the judgment and opinion.
Justice McLaren specially concurred, with opinion.
¶ 1 Plaintiffs, Robert W. Gaylor (Robert), Joann A. Gaylor, Robert E. Gaylor (Bobby), and Morna Gaylor, filed a two-count second amended complaint against defendants, Campion, Curran, Rausch, Gummerson & Dunlop, P.C. (the Campion firm), and Lee C. Lockwood, an associate attorney of the Campion firm, alleging legal malpractice and common-law fraud. The trial court dismissed the fraud count, and the matter proceeded to trial on plaintiffs' one-count third amended complaint alleging legal malpractice only. The jury returned a verdict in favor of plaintiffs and awarded them damages of $182,625. Plaintiffs appeal, arguing (1) that the trial court erred in dismissing their fraud count and (2) that the jury's determination of damages was manifestly inadequate and ignored proven elements of damages. For the following reasons, we affirm.
¶ 3 The relevant background begins with the filing of plaintiffs' second amended complaint alleging legal malpractice and fraud. Plaintiffs alleged the same background facts in both counts. Plaintiffs owned and operated an excavating business and had used the Campion firm for various legal matters since 1998. In June 2002, Brian Bettis approached plaintiffs about the possibility of participating in a business venture to develop, manufacture, and sell electroluminescent technology (EL technology). Bettis represented to plaintiffs that he had obtained a number of patents for EL technology and that an Illinois corporation named ISD Technologies, LLC, in which Bettis and other investors were involved, currently owned the intellectual property rights and patents associated with EL technology.
¶ 4 Plaintiffs decided to participate in the EL technology venture with Bettis through a new company that would be called Ions, Inc. Plaintiffs and Bettis planned to transfer ISD Technologies' purported assets, including all intellectual property rights in EL technology, into Ions. Bettis represented to plaintiffs that all of the present and future EL technology products would become the exclusive property of Ions. The contemplated products included a helmet kit, a safety vest, a backpack, a bicycle kit, and jewelry.
¶ 5 In their legal malpractice count, plaintiffs alleged that, beginning in early July 2002, they consulted with Mark Gummerson, a partner in the Campion firm, and told him of their business plans with Bettis. Plaintiffs sought Gummerson's legal advice in connection with the proposed transfer of ISD Technologies' purported assets to Ions. Gummerson referred plaintiffs to Lockwood, telling plaintiffs that this type of transaction was Lockwood's expertise. Bobby asked Gummerson whether separate counsel was necessary to represent plaintiffs and Bettis in the transaction, and Gummerson told plaintiffs that separate counsel was unnecessary.
¶ 6 Plaintiffs alleged that, leading up to the closing to finalize the transaction, plaintiffs informed Lockwood that their intention was for all of the EL technology ever developed by Bettis to become the sole and exclusive property of Ions. Plaintiffs also instructed Lockwood to draft an agreement that would require Bettis to transfer to Ions all intellectual property rights in all EL technology he developed, for 10 years from the date of the closing and for an additional 10 years pursuant to an automatic option to renew the agreement. Plaintiffs asked Lockwood numerous times whether he had in his possession the patents that Bettis had obtained in the EL technology, and Lockwood repeatedly indicated that he had them in his office.
¶ 7 Regarding the closing, which took place on October 10, 2002, plaintiffs alleged that Lockwood began by passing out the documents he had drafted. The closing was attended by plaintiffs; Bettis; Bettis's girlfriend, Sharon Munn; Bettis's son, Rocky Bettis; Rocky's girlfriend, Cathy; Bettis's daughter, Danielle; and Bruce Salk. Plaintiffs alleged, on information and belief, that Salk was an attorney representing himself and other investors in ISD Technologies. Plaintiffs' understanding was that Lockwood was representing plaintiffs and Bettis. Lockwood and Salk were the only attorneys present at the closing.
¶ 8 As he had prior to the closing, Bobby asked Lockwood if he had the patents that had been issued in Bettis's name. Lockwood could not find the patents. Someone telephoned patent attorney Thomas Vigil, who faxed to the closing a memo stating that he was preparing patent applications on Bettis's behalf but that he had not filed them. Lockwood, Bettis, Salk, and Munn all told plaintiffs that Bettis had "pending patent applications" in EL technology, and that the applications were "better legal protection" than patents.
¶ 9 Plaintiffs went through with the closing. Bettis signed a licensing agreement; however, the licensing agreement did not transfer intellectual property rights in EL technology as plaintiffs had desired. Instead, the licensing agreement gave Ions "an exclusive license to modify the EL products" and granted Ions "the exclusive right to sell the modified EL products to end users." Through the preorganization subscription agreement signed at the closing, shares of stock in Ions were to be issued to plaintiffs, Bettis, Munn, Mary Nelson, Rocky, and A&B Partnership.
¶ 10 Plaintiffs alleged that they had an attorney-client relationship with the Campion firm, Gummerson, and Lockwood. Plaintiffs further alleged that the Campion firm, Gummerson, and Lockwood committed legal malpractice by, among other things, (1) failing to assign the matter to a qualified transactional attorney with expertise in patent law and contract drafting; (2) assuming multiple representations of clients with conflicting and adverse interests, without explaining the risks of doing so or obtaining conflict waivers; (3) failing to follow plaintiffs' instructions; and (4) failing to protect their clients' interests at the closing or in the EL technology. Plaintiffs alleged that they had incurred damages exceeding $400,000.
¶ 11 In their fraud count, which plaintiffs pleaded in the alternative to their legal malpractice count, plaintiffs began by alleging that there was no attorney-client relationship between plaintiffs and the Campion firm, Gummerson, or Lockwood. As they had in their legal malpractice count, however, plaintiffs alleged that, beginning in early July 2002, they consulted with Gummerson and told him of their business plans with Bettis. Plaintiffs alleged that it was only Bettis who sought legal advice from the firm. Nevertheless, Gummerson referred "plaintiffs and Bettis" to Lockwood and told them that this type of transaction was Lockwood's expertise. Bobby asked Gummerson whether separate counsel was necessary to represent "plaintiffs and Bettis" in the transaction, and Gummerson told plaintiffs that separate counsel was unnecessary.
¶ 12 As they had in their legal malpractice count, plaintiffs alleged that they informed Lockwood that their intention was for all of the EL technology ever developed by Bettis to become the sole and exclusive property of Ions. In addition, plaintiffs instructed Lockwood to draft an agreement that would require Bettis to transfer to Ions all intellectual property rights in all EL technology he developed, for 10 years from the date of the closing and for an additional 10 years pursuant to an automatic option to renew the agreement. However, plaintiffs alleged that Lockwood never informed plaintiffs that he and the Campion firm "could not work to realize their intentions because they were not acting as plaintiffs' attorneys."
¶ 13 Regarding the closing, plaintiffs alleged that they "relied exclusively on the factual representations" made by Lockwood "to lead them successfully through this complicated maze of legal documents." Plaintiffs' understanding at the closing was that Lockwood and the Campion firm were protecting plaintiffs' interests. Plaintiffs formed this belief based upon Gummerson's statement that separate counsel for plaintiffs was unnecessary, but Gummerson's statement was false.
¶ 14 Plaintiffs alleged that, in addition to misrepresenting that plaintiffs did not need separate counsel for the transaction, Gummerson, Lockwood, and the Campion firm made the following misrepresentations or omissions of material fact: (1) they failed to disclose that the Campion firm represented Bettis only; (2) they misrepresented that Lockwood was an expert in complex intellectual property transactions; (3) they misrepresented that Bettis owned patents in EL technology; (4) they misrepresented that the patents were physically present in the Campion firm's office; and (5) they misrepresented that pending patent applications offered better legal protection than patents. Plaintiffs relied on these misrepresentations or omissions in deciding to go through with the closing. Plaintiffs alleged that they had incurred damages exceeding $400,000, and they also sought damages for emotional distress and punitive damages.
¶ 15 Defendants moved to dismiss plaintiffs' second amended complaint, pursuant to section 2-615 of the Code of Civil Procedure (Code) (735 ILCS 5/2-615 (West 2006)). On April 25, 2008, the trial court struck several paragraphs of plaintiffs' legal malpractice count. In addition, the court struck plaintiffs' fraud count in its entirety. The court found that legal malpractice was "the gravamen of both counts" and considered the fraud count to be "a back door way to try to tack punitive damages onto a legal malpractice case." The court granted plaintiffs leave to file an amended complaint as to the legal malpractice count, but not as to the fraud count. The court indicated that plaintiffs were free to file a motion for leave to file an amended complaint as to the fraud count within 28 days of entry of the order.
¶ 16 Plaintiffs timely filed a one-count third amended complaint alleging legal malpractice only. The complaint contained no reference to the previously dismissed fraud count. On the same day, plaintiffs also timely filed a motion for leave to file a two-count third amended complaint alleging both legal malpractice and fraud. Plaintiffs attached to their motion a proposed amended complaint and stated in the motion that the proposed fraud count was set forth "just as it was set forth in the Second Amended Complaint." Plaintiffs contended that the count "state[d] a meritorious claim for fraud, pled in the alternative to their claim for legal malpractice." The trial court denied plaintiffs' motion for leave to file the third amended complaint containing the fraud count.
¶ 17 The matter proceeded to trial on plaintiff's third amended complaint containing the legal malpractice count only. Bobby testified that his friend Chuck August introduced him to Bettis sometime in June 2002 and that Bobby invested $20,003 in Bettis's EL technology venture in a "handshake deal." Bobby and Bettis made plans to develop EL technology through a newly formed corporation named Ions.
¶ 18 The testimony concerning plaintiffs' initial meetings with defendants was conflicting. Bobby, Robert, and Morna testified to meeting with Gummerson at the Campion firm in either late June or early July 2002, and all three recalled Gummerson saying that he would be able to represent plaintiffs and Bettis in the Ions transaction. Bobby, Robert, and Morna also testified to a second meeting with Gummerson that took place sometime in July 2002, at which Gummerson assigned the matter to Lockwood, stating that this type of transaction was Lockwood's expertise. Gummerson denied meeting with plaintiffs in either June or July 2002. Lockwood admitted to meeting with Bobby, August, and Bettis on July 12, 2002; however, he testified that Bobby was there only because he was a party to the Ions transaction, not because he was a client. Lockwood also testified to meeting with plaintiffs on two occasions in late July 2002.
¶ 19 Bobby testified that, prior to closing the Ions transaction, plaintiffs invested additional money with Bettis. On July 25, 2002, plaintiffs deposited $11,000 into a bank account created for Ions, to be used toward payment of business expenses. Plaintiffs also gave Bettis $3,000 on October 3, 2002, for Bettis's personal use because "he was short of money and pretty hard up." Copies of these checks were admitted into evidence.
¶ 20 Bobby testified that, in early October 2002, approximately one week prior to the closing, he had a 31/2 hour meeting with August in the basement conference room of the Campion firm. He testified that Lockwood was in and out of the meeting. He further testified that he asked Lockwood to get the patents and that, as before, Lockwood told Bobby that the patents were "upstairs." August testified that he recalled the early October 2002 meeting and that the "one key point" at the meeting was the patents. Lockwood denied meeting with Bobby or August in early October 2002. A fax from Lockwood to plaintiffs, dated October 10, 2002, was admitted into evidence. The fax cover sheet contained the following message: "Enclosed you will find a Preorganization Subscription Agreement, a Buy-Sell Agreement, a Licensing Agreement, and a Put Option, which I presume to prepare on your behalf."
¶ 21 Regarding the closing, Bobby testified that it lasted approximately 41/2 hours on the afternoon of October 10, 2002. He testified that Lockwood passed out the closing documents and began explaining them but that Bobby interrupted Lockwood to ask where the patents were. According to Bobby, Lockwood said that they were "upstairs" and that he would have someone bring them down. Eventually, Lockwood left the closing room to join in the search. After 20 to 25 minutes, Lockwood returned and said that he could not find the patents. Bobby testified that he said he would not close the deal unless he could see the patents with Bettis's name on them.
¶ 22 Bobby testified that Lockwood then called Vigil, who faxed a document to the closing that stated: "I have been retained by Mr. Brian Bettis to prepare and file three patent applications identified below." Lockwood then called Vigil on speaker phone in the closing room. According to Bobby, Vigil said that Bettis had patents pending, not patents.
¶ 23 Bobby testified that either Bettis or Vigil stated that patents pending can be better than patents. According to Bobby, Lockwood agreed with this statement. Bobby testified that either Bettis or Vigil explained that patents pending were better because the patent applications were confidential, while the contents of the patent applications would become public after the patents were granted. Vigil testified that he explained during the conference call that the patent applications were drafts that had not yet been filed. Vigil also testified that he would not have said that patents pending were better than patents.
¶ 24 Bobby testified that he said to Lockwood, "As my attorney, are you telling me that this is what I need to close?" According to Bobby, Lockwood said, "Yes, close the deal," and Bobby relied on his advice. Lockwood denied saying that a patent pending was better than a patent. He also testified that Bobby never asked him, "As my lawyer, should I close?" According to Lockwood, he told Bobby at the closing that he did not represent him and that he represented Bettis only.
¶ 25 At the closing, plaintiffs paid $365,300 in checks, consisting of $150,000 paid to A&B Partnership, $91,850 paid to Mary Nelson, $41,750 paid to Munn, $35,000 paid to Corinne and Jordan Beller, $30,000 paid to Bettis, and $16,700 paid to Rocky. Copies of all of these checks were admitted into evidence. Also at the closing a licensing agreement was signed by which Bettis granted to Ions "an exclusive license to modify the EL Products" and "the exclusive right to sell the modified EL Products to end users." The term of the licensing agreement was 10 years, which would be followed by an additional 10-year term at Bettis's option. The recitals section of the licensing agreement stated that Bettis held "various patents" in EL technology.
¶ 26 Bobby, Robert, and Morna testified regarding their efforts to develop the Ions business following the closing, which were hampered by Bettis becoming "missing in action." Bobby testified that Vigil came up with the idea of having Bobby and Robert sign the patent applications as co-inventors. Vigil testified that plaintiffs finally got in touch with Bettis and that Bettis signed declaration pages for the patent applications in February 2003. Vigil further testified that he filed the patent applications with Bobby's and Robert's signatures as co-inventors on February 24, 2003, and that Bettis contacted him soon afterward with concern over the added signatures. Vigil testified that, ultimately, he filed amended applications on May 1, 2003, with Bettis's signature alone, but that no patents were ever issued for EL technology, because Bettis abandoned the refiled applications. Bobby testified that he paid Vigil $16,000 for his work on the patent applications. Morna testified that plaintiffs also had deposited a check for $10,000 into the Ions bank account on October 31, 2002. Copies of both checks were admitted into evidence. Bobby testified that plaintiffs decided to end their involvement with Ions after receiving a letter in March 2003 from an attorney in California whom Bettis had retained.
¶ 27 Following the closing plaintiffs received two letters from Gummerson on behalf of the Campion firm, both of which were admitted into evidence. The first letter, dated November 8, 2002, addressed several issues that Bobby had raised concerning the closing, then stated: "Although our firm has represented you in the past, and we hope to have a long, continuing relationship with you, for the transaction that was just concluded we were hired to represent Brian Bettis' interests, and we clearly communicated that to you on several occasions, including the closing." The second letter, dated April 24, 2003, stated: "As you are aware, significant disagreements have arisen between the directors and shareholders of Ions, Inc. subsequent to the transaction wherein you purchased stock of Ions, Inc. from Brian Bettis. During that transaction, as you are also aware, we represented only Brian Bettis ***." The letter concluded: "Because we consider Chuck August, Brian Bettis and you to be clients, we must regretfully terminate our representation of the corporation in this matter, due to the conflicts which have arisen."
¶ 28 The only expert witness to testify was plaintiffs' retained expert witness, Dean Small. Small testified that he was a patent attorney with several years of experience overseeing complicated business transactions involving intellectual property. Small testified to his opinion that defendants fell below the standard of care for attorneys in their handling of the Ions transaction. He testified that the standard of care required defendants to perform due diligence on Bettis's purported patents prior to recommending to plaintiffs that they proceed with the closing. Small testified that, without due diligence, a buyer would not have the information necessary to determine an appropriate price for the intellectual property he sought to buy. Small further testified that defendants fell below the standard of care in identifying and informing plaintiffs of the nature and existence of the patents.
Regarding the licensing agreement that defendants drafted, Small testified that it was defective for various reasons. Small testified that, to accomplish plaintiffs' objectives, defendants should have used an asset purchase agreement, which should have contained representations and warranties from the seller to the buyer. Finally, Small testified that defendants fell below the standard of care when they represented multiple parties at the closing without explaining the risks or obtaining waivers. This was ...