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King Koil Licensing Co. v. Harris

Court of Appeals of Illinois, First District, Second Division

July 11, 2017


         Appeal from the Circuit Court of Cook County No. 11 L 3020 Honorable James E. Snyder, Judge Presiding.

          JUSTICE MASON delivered the judgment of the court, with opinion. Presiding Justice Hyman and Justice Pierce concurred in the judgment and opinion.



         ¶ 1 Plaintiff, King Koil Licensing Company (King Koil), appeals a jury's verdict in favor of defendants, Roger B. Harris and Fox, Hefter, Swibel, Levin & Carroll, LLP (Fox Hefter), in King Koil's legal malpractice action. King Koil alleged that Harris negligently drafted a licensing agreement with King Koil's long-term licensee, Blue Bell Mattress Company (Blue Bell), causing a significant loss in revenue. The case proceeded to a jury trial in October 2015, resulting in a verdict in favor of Harris and Fox Hefter.

         ¶ 2 On appeal, King Koil contends that the court erred in barring the introduction of certain evidence at trial and refusing to order Harris to produce specific documents in discovery. King Koil further challenges the court's decision to allow Harris to propound special interrogatories to the jury. Finally, King Koil maintains that the jury verdict was against the manifest weight of the evidence. We find no merit in any of King Koil's arguments and affirm.

         ¶ 3 BACKGROUND

         ¶ 4 I. King Koil

         ¶ 5 King Koil licenses proprietary sleep product designs and manufacturing techniques to mattress manufacturers. Its licensees sell both King Koil branded products as well as private label products (King Koil products sold under the licensees' brand names). King Koil's income comes from licensees' payments of royalties and marketing fees based on a percentage of the licensees' sales.

         ¶ 6 In 2008, King Koil had 10 licensees in the U.S. and 30 abroad. There was no standard license agreement between King Koil and its licensees; each licensee paid a different percentage of royalties and marketing fees on its sales, with longer-term licensees paying less in royalties. Almost all of King Koil's domestic licensees paid royalties on private label sales; the purpose of this was to prevent licensees from preferring sales of their private label products over King Koil products. The only exception was that if a new licensee had an existing private label business, it would not have to pay royalties or make marketing contributions on that business. Ultimately, though, the goal was that King Koil would become the predominant part of the new licensee's business and upon renewal of the license, King Koil could insist on royalties on private label products.

         ¶ 7 The minimum marketing fee licensees paid was 1% of sales, but King Koil would routinely negotiate for a higher percentage because the licensees' contributions did not completely cover King Koil's marketing expenses.

         ¶ 8 Beginning in 2006, and throughout this litigation, David Roberts was the president of King Koil and was responsible for negotiating license agreements with licensees. As of March 2009, he had negotiated three to five license agreements. After Roberts negotiated the business terms of a license agreement, he relied on Harris to put those terms in a contract. Since Roberts, who did not graduate from college, could not always understand the "legalese" in the contracts, he would focus on what he believed to be critical issues and would rely on Harris to explain the finer points of the agreements to him in layman's terms. For similar reasons, Roberts also preferred reading "clean" versions of drafts of the agreement as opposed to the red-lined versions that tracked the document's changes over time. Roberts could not say whether he informed Harris that he did not review the red-lined versions.

         ¶ 9 Harris had been a licensed attorney since 1962 and spent the majority of his legal career at the firm of Altheimer & Gray. He began representing King Koil in 2001 while at Altheimer & Gray. When that firm dissolved in 2003, Harris joined Fox Hefter and retained King Koil as a client.

         ¶ 10 During his time representing King Koil at both firms, Harris prepared approximately 15 license agreements. Harris's practice when preparing license agreements was to make handwritten revisions to an existing agreement after receiving the business terms Roberts had negotiated with the licensee. Harris's secretary would then enter the handwritten revisions into the electronic version of the agreement, red-lining the changes. Harris then sent both a clean copy and a red-lined version of the agreement to Roberts, expecting that Roberts would read both.

         ¶ 11 II. Blue Bell

         ¶ 12 In 2008, King Koil's largest licensee in the United States in terms of sales and royalties was Blue Bell. Blue Bell had been selling mattresses under its own label since 1930, and in the early 1980s, it became a King Koil licensee. Blue Bell had two licensing agreements with King Koil: the first commencing in 1991 and covering Connecticut, Massachusetts, Maine, Rhode Island, New Hampshire, and Vermont, and the second, a 1992 agreement covering several counties in New York. Both agreements had 20-year terms. Under those agreements, the royalty rate was 2% on up to $2 million in sales (on both King Koil and private label products) and 1% thereafter. Blue Bell's marketing fees were 1% of its sales. Blue Bell's royalty and marketing contributions were lower than any other King Koil licensee due in part to the age of the contracts as well as the fact that it was King Koil's largest licensee.

         ¶ 13 III. Negotiations Between King Koil and Blue Bell

         ¶ 14 The owners of Blue Bell during the time period relevant here were Mark Kolovson and his brother-in-law, Steve Byer. Roberts and Kolovson began negotiations for Blue Bell's license renewal in September 2008, about three years before Blue Bell's 1991 license expired. On September 10, Roberts sent Harris a draft agreement with Kolovson's comments, and over the next month, Roberts and Harris worked on revising the draft. Harris sent a revised working draft to Roberts on October 15, 2008.

         ¶ 15 This case turns on three provisions in that October 2008 draft: (1) section 1.6, defining "Total Annual Sales" as "gross sales of all Sleep Products minus only documented amounts of credits properly granted for (i) actual returns and (ii) invoicing errors related to quantities shipped or unit pricing"; (2) section 6.2(a)(ii), imposing a royalty fee of 2.75% of "licensee's Total Annual Sales of Sleep Products each Year of this Agreement"; and (3) section 6.3(a)(ii), requiring the licensee to contribute to a marketing budget managed by King Koil, which was "no less than 1% and no more than 2.5% of all U.S. licensees' Total Annual Sales of King Koil Sleep Products. (Licensee's sales to Bob's Furniture[1] are excluded from Licensee's Total Annual Sales of King Koil Sleep Products for purposes of calculating the marketing budget and Licensee's contribution thereto but not for other purposes)."

         ¶ 16 Regarding section 6.3, according to Harris, Roberts and another King Koil executive told him orally to exempt from marketing fees both Blue Bell's sales to Bob's, as well as Blue Bell's private label sales. That prompted Harris to include the above-quoted parenthetical in section 6.3(a)(ii). Harris could find no written record of that instruction, and Roberts denied so instructing Harris.

         ¶ 17 Roberts e-mailed the October 2008 working draft to Kolovson, but the two did not go over the agreement until March 2009. In March, Roberts and Kolovson spent five to six hours reviewing the draft in person. During the meeting, Roberts made handwritten notes on the agreement. One of the changes Roberts made was to increase the marketing contribution percentage to 1.5%, but at the time he made that handwritten change, he did not notice that the marketing contribution excluded private label sales.

         ¶ 18 After the meeting, on March 30, 2009, Roberts sent a letter to Kolovson attaching a term sheet for the new license agreement. The term sheet represented Roberts's understanding of the points which he and Kolovson had agreed on. Roberts copied Harris on the letter and asked him to incorporate the terms into the October 15, 2008, working draft.

         ¶ 19 IV. The April 2009 Communications

         ¶ 20 During the time Harris was working on Blue Bell's license renewal, he was simultaneously working on a license agreement for White Dove, a new King Koil licensee. White Dove's license agreement did not require it to pay royalties or marketing fees on its private label sales.

         ¶ 21 On April 24, 2009, John Skelton, Blue Bell's counsel, asked Harris to provide him with White Dove's license agreement. Harris forwarded the request to Roberts, who responded in an e-mail:

"I do not want to share or be specific regarding other agreements we may have with other licensees. Essentially, however, you should inform [Skelton] that the agreement he is working off of IS for all practical consideration [sic], the same as what we have with White Dove and others. It is not necessarily a goal of [King Koil] to have exact or similar agreements with all licensees. Each licensee is a separate entity and may have significantly different strategic value and [King Koil] reserves the position to engage and contract with each entity separately and individually." (Emphasis in the original).

         ¶ 22 According to Roberts, he meant that approximately 90% of the language in the licensing agreements was the same for all licensees, and the 10% difference was in the financial terms, which he did not want to share. Roberts did not mean to instruct Harris to change the Blue Bell agreement.

         ¶ 23 But Harris understood Roberts's e-mail as an instruction to revise the Blue Bell agreement to reflect the terms of the White Dove agreement. In other words, Harris did not interpret Roberts's e-mail as an instruction to lie to Skelton, but to in fact ensure the Blue Bell and White Dove agreements had the same terms. The effect of merging the White Dove and Blue Bell agreements was to change the definition of "Total Annual Sales" in the Blue Bell agreement from "gross sales of all Sleep Products" to "gross sales of all King Koil Proprietary Sleep Products minus only documented amounts of credits properly granted for (i) actual returns and (ii) invoicing errors related to quantities shipped or unit pricing." (Emphasis added.) Because the royalty provision required licensees to pay royalties on "Total Annual Sales, " the changed definition of that term meant that Blue Bell had to pay royalties only on sales of "King Koil Proprietary Sleep Products" and not on the sale of "all Sleep Products, " including private label products. The merging of the two agreements had no effect on Blue Bell's marketing fees, as the calculation already excluded sales of private label products, although merging the two agreements removed the specific reference to Blue Bell's sales to Bob's, as that was a customer unique to Blue Bell.

         ¶ 24 On April 27, 2009, Harris sent a clean and red-lined copy of the Blue Bell agreement with the changes, including the changed definition of "Total Annual Sales, " to Roberts. Harris pointed out a blank portion in one section but, other than that, did not direct Roberts's attention to any particular provision. Specifically, Harris did not tell Roberts about the change in definition of "Total Annual Sales." According to Roberts, if Harris had told him about the change, he would not have signed the agreement.

         ¶ 25 Roberts probably reviewed the clean copy of the agreement on April 29, 2009, on his way to Boston with Harris to meet Skelton and Kolovson. He paid particular attention to the points he and Kolovson had discussed in March 2009. At the meeting in ...

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