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Gruner v. Huron Consulting Group, Inc.

United States District Court, N.D. Illinois, Eastern Division

August 12, 2019

RONALD GRUNER, individually, and as Representative of the former Stockholders of Sky Analytics, Inc., Plaintiffs
v.
HURON CONSULTING GROUP, INC., and CONSILIO, INC., Defendants.

          MEMORANDUM OPINION AND ORDER

          JOHN J. THARP, JR. UNITED STATES DISTRICT JUDGE

         Plaintiff Ronald Gruner, on behalf of himself and other former shareholders of Sky Analytics, Inc., brings this suit against Huron Consulting Group, Inc. for allegedly violating the Illinois Securities Law, 815 ILCS 5/12 et seq. and engaging in common law fraudulent inducement during its acquisition of Sky. Consilio is sued as successor to Huron's Legal division, which it purchased after the Sky acquisition. Both companies moved to dismiss the complaint, arguing that Gruner is collaterally estopped by a prior arbitration from re-litigating issues central to both of his legal theories and that he nevertheless fails to state a claim. Because the issues presented in the prior arbitration are not identical to the ones raised here, collateral estoppel does not bar Gruner's complaint. And because Gruner adequately states a claim upon which relief can be granted, the motions are denied.

         BACKGROUND

         At this juncture, the story is based on the plaintiffs' view of the facts, as set forth in the complaint. In March 2014, Huron Consulting Group, Inc. entered into negotiations with Sky Analytics, Inc. (and specifically with Sky's co-founder and CEO, Ronald Gruner) to acquire Sky- from what the Court can glean from the complaint, both companies were involved in the field of legal analytics. The parties agreed early on that the acquisition would include two components: 1) an immediate cash payment and 2) subsequent “earn-out” payments whereby each dollar of revenue earned by Huron's legal division above a specified threshold would be paid to Sky shareholders. Compl. ¶ 18. While the parties were negotiating the level at which the threshold would be set, Huron presented Gruner with various projections regarding the legal division's ability to earn certain revenue amounts. Huron pitched the projections, which according to Gruner depended on Huron's commitment and ability to add new Sky customers as well as its own stability, as “conservative.” Id. ¶ 20, 25. But the projections were in fact quite aggressive; relatedly, and unbeknownst to Sky, the revenue earned by Huron's legal division had fallen almost 50% from the first quarter of 2014 to the fourth. Id. ¶ 30.

         As negotiations neared completion in December 2014, Gruner e-mailed Huron leadership to confirm that the companies' objectives with respect to achieving the earn-outs were aligned. Huron, making no mention of its financial condition, responded that it was “committed at all times to making sure we have the tightest alignment possible for every objective we pursue.” Id. ¶ 33. The parties subsequently reached a deal, which was memorialized in a written “Stock Purchase Agreement” (“SPA”) and signed by the parties on January 8, 2015. Id. ¶ 35. In addition to an up front purchase price of $9 million, the SPA provided for two earn-out periods. The revenue threshold was set at $2.5 million for the first period beginning April 2015 and $4 million for second period beginning April 2016, with the total amount of earn-out payments to the shareholders capped at $3 million. Huron and Gruner also signed a separate “Master Subcontractor Agreement and Statement of Work” outlining a variety of post-acquisition services Gruner would provide to Huron. Id. ¶ 38.

         After the deal closed, Huron paid the initial purchase price but did not focus on selling Sky products and made little effort to achieve the revenue threshold necessary to trigger the earn-out payments. During the first earn-out period, Huron delivered less than 20% of its projected revenue amount. Id. ¶42. Further, Huron never engaged Gruner to perform post-closing services despite Gruner's requests to do so. Then, in December 2015 (less than a year after the acquisition and a few months before the first earn-out period ended), Huron sold its legal division (which included Sky) to Consilio Inc., another legal analytics company. Id. ¶45.

         Upon learning that the threshold revenue amount had not been reached for the first earn-out period, Gruner initiated private arbitration against both Huron and Consilio in April 2017 seeking damages for breach of contract.[1] Specifically, Gruner alleged that the defendants violated the SPA's implied covenant of good faith and fair dealing by failing to take various actions which Gruner contends would have maximized the likelihood of achieving the full amount of the earn-outs. In a 34-page Arbitration Award, the arbitrator found that Huron (and Consilio, standing in Huron's shoes in relation to obligations owed to shareholders under the SPA) had not breached the covenant because their performances under the contract comported with its terms and because the inclusion of an earn-out provision did not by itself impose a duty on the defendants to make achievement of the earn-out a primary business objective. Arbitration Award, ECF No. 30-1.[2]

         Gruner subsequently initiated this lawsuit against Huron and Consilio on behalf of himself and other former Sky shareholders. In contrast to the arbitration proceeding, Gruner does not allege that Huron and Consilio breached the terms of the SPA; instead, he alleges that Huron fraudulently induced him and the other shareholders into entering the contract by making false representations about its intentions and ability to achieve the earn-out payments, in violation the Illinois Securities Law (“ISL”), 815 ILCS 5/12 et seq. and Illinois common law. Id. ¶ 53. He also alleges that Consilio assumed Huron's liabilities when it purchased Huron Legal by virtue of an agreement between the two companies. Id. ¶¶ 61, 72. Both defendants moved pursuant to Federal Rule of Civil Procedure 12(b)(6) to dismiss the complaint for failure to state a claim.

         DISCUSSION

         In its motion to dismiss, Huron argues that Gruner has failed to allege facts showing that he is entitled to relief under either the ISL or Illinois common law. Consilio argues that Gruner is barred by collateral estoppel from litigating certain issues essential to both of his legal theories and that he also fails to state a claim against Consilio because he has not established successor liability. For the reasons discussed below, the Court concludes that Gruner is not barred by collateral estoppel and that he adequately stated a claim against Huron and Consilio. Their motions to dismiss are therefore denied.

         I. Collateral Estoppel

         Consilio argues that Gruner is collaterally estopped from litigating the issue of reliance, a necessary element of both of his fraudulent inducement theories (statutory and common law), because it was fully litigated in the prior arbitration.[3] Under Illinois law, collateral estoppel bars parties from relitigating issues where “(1) the party against whom the estoppel is asserted was a party to the prior adjudication, (2) the issues which form the basis of the estoppel were actually litigated and decided on the merits in the prior suit, (3) the resolution of the particular issue was necessary to the court's judgments, and (4) those issues are identical to issues raised in the subsequent suit.” Wells v. Coker, 707 F.3d 756, 761 (7th Cir. 2013).[4] Only the third and fourth elements are in dispute here.

         A. Identity of Issues

         The Court turns first to whether the issues decided in the arbitration are “identical” to the issues presented in the current complaint. To do so, the Court must “determine with precision what matters actually were decided” in the arbitration proceeding. In re Calvert, 913 F.3d 697, 701 (7th Cir. 2019).

         In the arbitration, Gruner alleged that Huron and Consilio breached their duty of good faith and fair dealing by 1) failing to operate the business in a manner that would maximize the earn-out payments; 2) not keeping Gruner involved during the period following acquisition; 3) not assuring that Huron Legal's leadership team remained intact; 4) failing to provide incentives to sales personnel in a manner that would insure that earn-out objectives would be achieved; 5) failing to support the development and marketing of Sky's products; and 6) selling Sky to Consilio, which had no interest in the product. Arbitration Award at 5.

         The arbitrator began his analysis of these contentions by explaining that the duty of good faith and fair dealing, while under Illinois law is implied in all contracts, does not create specific duties. Id. at 27 (citing Dayan v. McDonald's Corp., 125 Ill.App.3d 972, 989-90 (1984)). Rather, the duty of good faith and fair dealing “goes to work to define what is prohibited or permissible where under an agreement an obligated party is left to its own discretion with regard to matters which were outside of the contemplation of the parties when the agreement was formed.” Id. at 28. In concluding that there was no breach, the arbitrator described the parties' pre-contract negotiations and stated that the alleged shortcomings in the defendants' performance were requirements that were “either rejected by the Buyer or things that were evidenced as considered and not asked for”-i.e., they were within the contemplation of the parties and therefore outside the scope of the duty of good faith and fair dealing. The arbitrator also concluded that the mere inclusion of the earn-out as a contract term did not impose on Huron and Consilio a primary duty under the agreement to pursue the earn-out objective independently of their general business interests and that their performances with respect to the earn-out objective were reasonable and not taken with the intent to defeat the earn-out. Id. at 29.

         In the present action, by contrast, Gruner alleges that Huron and Consilio violated the ISL and engaged in common law fraudulent inducement-that is, Gruner's focus in this case is not on whether Huron performed its contractual duties under the agreement the parties reached, but whether it misled Gruner into agreeing to those terms. To succeed under both of these fraudulent inducement theories, Gruner must show (among other things) that he reasonably relied upon false statements of material fact. See Hoseman v. Weinschneider, 322 F.3d 468, 476 (7th Cir. 2003) (setting forth elements of a fraudulent inducement action); Meyer v. Ward, 13 C 3303, 2017 WL 6733726, at *6 (N.D. Ill.Dec. 18, 2017) (setting forth elements of an ISL fraud action). Gruner maintains that he and the other Sky shareholders relied on Huron's 1) false statement that its revenue projections were “conservative”; 2) false representation that it intended to meet its obligations and achieve the Earn-Out payments; 3) false representation that it had the ability to devote resources to achieve the Earn-Out payments; 4) failure to disclose that its revenues had fallen almost 50% from the first quarter of 2014 to the fourth; 5) false representation that its objectives were aligned with Sky's; and 6) false representation that it would allow Gruner to perform under the terms of the Subcontractor Agreement.

         1. Reliance[5]

         The gist of Consilio's estoppel argument is that in finding that there was no breach of contract, the arbitrator necessarily concluded that Gruner could not have relied on the alleged misrepresentations because they had been rejected rather than included in the contract's terms. As a general matter, the question of what was “within the parties contemplation” (the issue with which the arbitrator was primarily concerned) is not fully answered by reference to the specific terms each of the parties sought to include in the SPA; those terms do not delimit the boundaries of reliance. Contrary to Consilio's arguments, the fact that Huron refused to include certain terms in the contract (such that subsequent performance which conflicted with those rejected terms was “within the parties contemplation” and therefore outside the duty of good faith and fair dealing) does not mean that Gruner and the other shareholders could not have relied on other non-memorialized representations about Huron's intentions and expectations as to its operation of the Sky business. The arbitrator found, for example, that Huron rejected Gruner's request that the SPA include a clause that would commit Huron to use its best efforts to achieve the earn-out. Arbitration Award at 10. That meant (as the arbitrator concluded) that Huron could not be deemed in breach of its contractual duty of good faith and fair dealing by failing to use “best efforts” to achieve revenues that would trigger earn-out payments to the Sky shareholders. And if Gruner's claim was that it was induced to enter into the contract by Huron's representation that it would use its best efforts to achieve the earn-outs, it would fail; his reliance on that representation would not have been reasonable in light of Huron's refusal to include a best efforts requirement in the contract. But Huron's rejection of a “best efforts” contract term did not give Huron license to assure Gruner that it would be “committed at all times to making sure we have the tightest alignment possible” with respect to achieving the earn out thresholds if, in fact, its intention was (say) to avoid paying the earn outs so as ...


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