U.S. Court of Appeals for the Seventh Circuit, Yancheng Shanda Yuanfeng Equity Investment Partnership v. Wan, Docket No. 22-1199

Recognition and Enforcement in the U.S. of a Foreign Judgment

 

Default Judgment

 

Illinois’s Uniform Foreign-Country Money Judgments Recognition Act

 

Subject Matter Jurisdiction

 

Diversity of Citizenship

 

Citizenship of a Corporation

 

Citizenship of an LLC

 

Citizenship of a Partnership

 

The Citizenship of Each Partner Must Be Established

 

 

 

 

 

Appeal from the United States District Court for the Central District of Illinois

No. 2:20-cv-02198

 

 

In May 2019, Yancheng Shanda Yuanfeng Equity Investment Partnership (“Yancheng Shanda”) filed a contract claim in a Chinese court against Kevin Wan, his company, and his brother. The Chinese court entered a default judgment against Mr. Wan after he failed to appear. In July 2020, Yancheng Shanda filed a complaint in the United States District Court for the Central District of Illinois, seeking enforcement of the Chinese judgment under the Illinois foreign judgment recognition law. In that complaint, it predicated subject matter jurisdiction on diversity of citizenship.

 

 

The district court, determining that the Chinese judgment was enforceable under Illinois law, granted Yancheng Shanda’s motion for summary judgment. Mr. Wan now appeals the judgment of the district court. Because the factual predicates for the district court’s jurisdiction are not established firmly in the existing record, we vacate the judgment of the district court and remand the case for further proceedings consistent with this opinion.

 

 

Yancheng Shanda is a partnership based in Yancheng Shanda City, Jiangsu Province, People’s Republic of China. Mr. Wan is a United States citizen and the founder, owner, and chief executive officer of Zmodo Technology Shenzhen Corp., Ltd. (“Shenzhen Zmodo”), a Chinese company and global provider of security cameras.

 

 

(…) In the present action to enforce the Chinese court’s judgment, Mr. Wan maintains that he did not receive the summons mailed by the Chinese court or any other physical mail regarding the Chinese suit. He claims that he had no notice of the underlying action until August 3, 2020, when he received notice of the present attempt to enforce the judgment.

 

 

Having received a default judgment against Mr. Wan in the Chinese proceedings, Yancheng Shanda filed a complaint in the Central District of Illinois on July 13, 2020. It sought recognition and enforcement of the Chinese court’s judgment against Mr. Wan under Illinois’s Uniform Foreign-Country Money Judgments Recognition Act (“Recognition Act”), 735 ILCS 5/12-661 et seq. Invoking the district court’s diversity jurisdiction, Yancheng Shanda alleged that it was “a limited partnership organized under the laws of China” and therefore was “a citizen of a foreign state.”

 

 

The next day, the district court ordered Yancheng Shanda to make “adequate jurisdictional allegations.” The court explained that a partnership has the citizenship of all the partners and that, because Yancheng Shanda did not list its partners and their citizenships, its allegations were “insufficient to adequately establish diversity jurisdiction.” Yancheng Shanda then filed an amended complaint with an attachment alleging the Chinese citizenship of each of its four partners. Specifically, Yancheng Shanda alleged that each of its partners was a limited liability company (“LLC”) “organized under the laws of China and with its principal place of business in China.” Of particular relevance here, Yancheng Shanda alleged that one partner, Jiangsu Zhonghan Yancheng Industrial Park Investment Co., Ltd. (“Jiangsu Zhonghan”), was a Chinese LLC owned by six Chinese state or state-owned entities, each of which was “a foreign state as defined in 28 U.S.C. § 1603(a).”

 

 

The information before the district court was inadequate to establish subject matter jurisdiction. Yancheng Shanda, which had the burden on this issue, failed to present “competent proof” of its citizenship. Hertz Corp. v. Friend, 559 U.S. 77, 96–97 (2010). Yancheng Shanda did not present any evidence establishing its citizenship or the citizenship of its several partners. It submitted a declaration by its employee Mei Hu who stated simply that Yancheng Shanda “is and was domiciled in Yancheng City, Jiangsu Province, People’s Republic of China.”

 

 

However, a partnership does not have a “domicile” for purposes of diversity jurisdiction. Rather, to establish subject matter jurisdiction based on diversity of citizenship, the citizenship of each partner must be established. See Elston Inv., 731 F.2d at 439. There was no evidence in the district court record establishing the citizenship of each of Yancheng Shanda’s four Chinese LLC partners. As a result, there is no evidence to support a finding of complete diversity.

 

 

In this appeal, Yancheng Shanda presents a new declaration of employee Mei Hu. This declaration states that each of Yancheng Shanda’s partners “is a citizen of China” and further details characteristics of each partner’s business structures in an effort to establish that, as a matter of federal jurisdictional law, Yancheng Shanda’s partners are corporations and thus are considered citizens of their place of incorporation and principal place of business. Although United States LLCs are treated as partnerships for purposes of assessing diversity of citizenship, Yancheng Shanda submits that, based on our decision in BouMatic, LLC v. Idento Operations, BV, 759 F.3d 790 (7th Cir. 2014), Chinese LLCs should be treated as corporations for purposes of § 1332. In BouMatic, we identified factors for determining whether a foreign business entity is a “corporation” for diversity purposes, including whether the company has personhood, limited liability for shareholders, and shares that can be bought and sold subject to restrictions declared by the business. Id. at 791. The Mei Hu declaration states, albeit in summary fashion, that Chinese LLCs have these characteristics.

 

 

Classification of a foreign business entity can be difficult because other nations may use subsets of the characteristics that distinguish corporations from other business entities in the United States.” BouMatic, 759 F.3d at 791 (citation omitted). In the case of Chinese business entities, however, we already have indicated that significant care needs to be taken in determining the precise characteristics of the organization in question. See Fellowes, Inc. v. Changzhou Xinrui Fellowes Off. Equip. Co. Ltd., 759 F.3d 787 (7th Cir. 2014). Accordingly, in the present case, we vacate the district court’s judgment and remand the case so that the district court may explore in more depth the nature of the Chinese businesses in question and determine whether the requirements of diversity jurisdiction have been fulfilled. The district court is in a better position than this court to give the parties a plenary and even-handed opportunity to present evidence on the nature of these entities.

 

 

On remand, the district court must first address whether Yancheng Shanda’s partners can be characterized as corporations and, if so, the jurisdiction of their incorporation and of their principal place of doing business. If the district court determines that these entities do not qualify as corporations under the diversity statute, the court must treat them as partnerships. Because partnerships take the citizenship of each of their partners, the court must identify each partner’s citizenship.

 

 

Finally, the district court must address particular questions about one of the partners, Jiangsu Zhonghan, and its six state or state-owned entity owners.22

 

 

22 The exact shape of this inquiry will depend upon whether the district court determines that Jiangsu Zhonghan, as a Chinese LLC, should be treated as a corporation or a partnership under § 1332. If it is a corporation, then the district court should evaluate Jiangsu Zhonghan itself for potential status as a “foreign state” under §§ 1332(a)(4) and 1603(a). If, instead, it is a partnership, the district court will need to evaluate each of Jiangsu Zhonghan’s partners.

 

 

If this entity is directly and majority-owned by a “foreign state or political subdivision thereof,” it is itself a “foreign state” for purposes of federal jurisdiction. 28 U.S.C. §§ 1332(a)(4), 1603(a), (b)(2); Dole Food Co. v. Patrickson, 538 U.S. 468, 473–77 (2003).

 

 

 

(U.S. Court of Appeals for the Seventh Circuit, Jan. 31, 2023, Yancheng Shanda Yuanfeng Equity Investment Partnership v. Wan, Docket No. 22-1199)

U.S. Court of Appeals for the Seventh Circuit, REXA, Inc. v. Mark V. Chester and MEA, Inc., Docket No. 20-2953

Assignment

Breach of an Implied Contractual Obligation (of Employee) to Assign Patent Rights (to Employer, Then to Successor Corporation)

 

May Employer’s Rights Under a Written Employment Agreement Be Assigned Without the Employee’s Consent?

 

May an Implied-In-Fact Contractual Obligation Regarding Intellectual-Property Rights Be So Assigned?

 

Successor Corporation

 

Patent Law

 

Illinois Law

 

Wisconsin Law

 

Common Law of Massachusetts (Contract Formation)

 

 

 

 

(…) REXA also challenges the district court’s grant of summary judgment to Chester on Count IV, REXA’s claim for breach of an implied-in-fact contractual obligation to assign any patent rights in connection with the patent application. In evaluating such a claim, federal courts “apply state-law principles of contract formation to determine whether an implied contract existed.” Farmers Edge Inc. v. Farmobile, LLC, 970 F.3d 1027, 1031 (8th Cir. 2020) (citing Teets v. Chromalloy Gas Turbine Corp., 83 F.3d 403, 407 (Fed. Cir. 1996)). The parties agree that REXA’s claim for breach of an implied-in-fact contract arises under the common law of Massachusetts, where Koso employed Chester.

 

 

Massachusetts law provides that if an employer “contemplates the discovery of an invention” and contracts with an employee to build it such that the employee “must have reasonably understood that such inventions as resulted from his performance of the contract should belong to the employer,” the employee has “an implied obligation to assign any patents ... for said inventions to his employer.” Nat’l Dev. Co. v. Gray, 55 N.E.2d 783, 787 (Mass. 1944) (citations omitted). Subsequent cases have extended that proposition. When an employee—even if hired in a general capacity—is specifically “directed during the course of his employment to develop or perfect new or existing machinery or processes, his employer becomes the owner of resulting inventions and may compel the assignment of patents taken in the employee’s name.” Steranko v. Inforex, Inc., 362 N.E.2d 222, 233–34 (Mass. App. Ct. 1977); see also Silica Tech, L.L.C. v. J-Fiber, GmbH, 2009 WL 2579432, at *13 (D. Mass. Aug. 19, 2009) (same).

 

 

REXA is correct that the question of whether an employer’s rights under a written employment agreement may be assigned without the employee’s consent is materially distinct from whether an implied-in-fact contractual obligation regarding intellectual-property rights may be so assigned. The concerns that weigh against permitting a successor corporation to enforce a contract for employment, a personal service, do not necessarily apply to an implied contractual right to assign intellectual property. Chester and MEA do not sufficiently account for the differences between employment and intellectual-property rights. Notably, in other cases involving similar allegations, courts and parties have assumed that successors-in-interest may enforce the type of implied-in-fact contractual right at issue here.

 

 

Yet, we decline to hold that as a matter of Massachusetts law, an implied-in-fact obligation to assign patent rights may be transferred to a successor-in-interest. After all, state courts are the “ultimate expositors” of their own laws. Smart Oil, LLC v. DW Mazel, LLC, 970 F.3d 856, 863 (7th Cir. 2020) (citation omitted). “A federal court sitting in diversity must proceed with caution in making pronouncements about state law,” especially given that such pronouncements “inherently involve a significant intrusion on the prerogative of the state courts to control that development.” Lexington Ins. Co. v. Rugg & Knopp, Inc., 165 F.3d 1087, 1092 (7th Cir. 1999) (citations omitted). Here, there is no need to resolve the Massachusetts state-law issue concerning the transferability of implied-in-fact obligations to assign patents. Instead, we adjudicate REXA’s implied-in-fact contractual claim by applying a requirement common to all such claims.

 

 

As a general rule, “an individual owns the patent rights to the subject matter of which he is an inventor, even though he conceived it or reduced it to practice in the course of his employment.” Banks, 228 F.3d at 1359. But there are exceptions. In the archetypal case involving an inventor’s breach of an implied-in-fact contractual obligation, an employer may be entitled to ownership rights associated with “the inventions of employees hired to direct or to engage in inventive research.” Steranko, 362 N.E.2d at 233 (citations omitted). Also, when an employee is specifically “directed during the course of his employment to develop or perfect new or existing machinery or processes, his employer becomes the owner of resulting inventions and may compel the assignment of patents taken in the employee’s name.” Id. at 233–34. By adhering to this rule, Massachusetts follows the law of many other states. See, e.g., Teets, 83 F.3d at 408 (“Even if hired for a general purpose, an employee with the specific task of developing a device or process may cede ownership of the invention from that task to the employer.”) (applying Florida law); Goodyear Tire & Rubber Co. v. Miller, 22 F.2d 353, 356 (9th Cir. 1927) (applying federal common law).

 

 

The pertinent question is whether the employer “specifically directed” the employee to create the invention at issue. Farmers Edge, 970 F.3d at 1032; Teets, 83 F.3d at 408. “The primary factor courts consider in determining whether an employed to invent agreement exists is the specificity of the task assigned to the employee.” Farmers Edge, 970 F.3d at 1032 (quoting Skycam LLC v. Bennett, 900 F. Supp. 2d 1264, 1276 (N.D. Okla. 2012)). In Skycam, the court correctly reasoned that if the employee was not employed or specifically directed “to invent the entirety” of the system described in a claim of the patent application for which assignment is sought, the employer “is not entitled to ownership of the invention described therein.” 900 F. Supp. 2d at 1277.

 

 

 

(U.S. Court of Appeals for the Seventh Circuit, July 28, 2022, REXA, Inc. v. Mark V. Chester and MEA, Inc., Docket Nos. 20-2953, 20-3213, 21-2033)

 

 

Trade Secrets - Misappropriation of Trade Secrets

Misappropriation of Trade Secrets

 

 

Illinois Law

 

Wisconsin Law

 

 

 

 

Appeals from the United States District Court for the Northern District of Illinois, Eastern Division. No. 1:17-cv-08716

 

 

REXA brought its claim for misappropriation of trade secrets under the Illinois Trade Secrets Act (“ITSA”), 765 ILL.COMP.STAT.1065/1, et seq. To prevail on such a claim, the plaintiff must demonstrate “that the information at issue was a trade secret, that it was misappropriated and that it was used in the defendant’s business.” Learning Curve Toys, Inc. v. PlayWood Toys, Inc., 342 F.3d 714, 721 (7th Cir. 2003) (citations omitted). The statute defines a trade secret as:

 

Information, including but not limited to, technical or non-technical data, a formula, pattern, compilation, program, device, method, technique, drawing, or process ... that: (1) is sufficiently secret to derive economic value, actual or potential, from not being generally known to other persons who can obtain economic value from its disclosure or use; and (2) is the subject of efforts that are reasonable under the circumstances to maintain its secrecy or confidentiality. 765 ILL.COMP.STAT. 1065/2(d). There is also a specificity requirement inherent in a claim for misappropriation of trade secrets; a plaintiff must show “concrete secrets” rather than “broad areas of technology.” Life Spine, Inc. v. Aegis Spine, Inc., 8 F.4th 531, 540 (7th Cir. 2021) (quoting Composite Marine Propellers, Inc. v. Van Der Woude, 962 F.2d 1263, 1266 (7th Cir. 1992)). As relevant here, misappropriation under the ITSA involves the “disclosure or use of a trade secret of a person without express or implied consent” by another person who, at the time, knew or had reason to know that knowledge of the trade secret was either “acquired under circumstances giving rise to a duty to maintain its secrecy or limit its use” or “derived from or through a person who owed a duty to the person seeking relief to maintain its secrecy or limit its use.” 765 ILL.COMP.STAT. 1065/2(b). A misappropriation may also occur when a person produces “modified or even new products that are substantially derived from the trade secret of another.” Mangren Rsch. & Dev. Corp. v. Nat’l Chem. Co., 87 F.3d 937, 944 (7th Cir. 1996) (citations omitted).

 

 

Case law requires a high level of specificity when a plaintiff makes a claim for misappropriation of a trade secret. Life Spine, 8 F.4th at 540; Composite Marine, 962 F.2d at 1266. When a plaintiff presents complex or detailed descriptions of methods and processes but fails to isolate the aspects that are unknown to the trade, no trade secret has been identified. IDX Sys. Corp. v. Epic Sys. Corp., 285 F.3d 581, 583–84 (7th Cir. 2002). Our court has emphasized that “a plaintiff must do more than just identify a kind of technology and then invite the court to hunt through the details in search of items meeting the statutory definition.” Id. at 584 (citing Composite Marine, 962 F.2d at 1266). The key task for a plaintiff is to present a specific element, or combination of elements, that is unknown to the trade and was allegedly misappropriated.

 

 

(Fn. 2: Although IDX involved a claim for misappropriation of a trade secret under Wisconsin law, the statute at issue was materially identical to the ITSA, and federal courts have properly cited IDX in applying Illinois trade secret law. See, e.g., NEXT Payment Sols., Inc. v. CLEA Result Consulting, Inc., 2020 WL 2836778, at *10–11 & n.5, 15 (N.D. Ill. May 31, 2020).)

 

 

Applying that framework, we agree with Chester and MEA that REXA has failed to identify a concrete trade secret, as it must, to defeat summary judgment. IDX considered and rejected an argument similar to the one REXA advances. There, the plaintiff alleged that certain aspects of billing software which the defendants had misappropriated qualified as trade secrets. In support, the plaintiff, IDX, submitted “a 43-page description of the methods and processes underlying and the inter-relationships among various features making up IDX’s software package.” Id. at 583. Our court noted that IDX’s “tender of the complete documentation for the software leaves mysterious exactly which pieces of information are the trade secrets.” Id. at 584. Without information sufficient to separate “the trade secrets from the other information that goes into any software package,” the court could not determine “which aspects are known to the trade, and which are not.” Id. Thus, in IDX this court affirmed the district court’s grant of summary judgment to the defendants on the claims for misappropriation of trade secrets. Id. at 584, 587.

 

 

Alleged Misappropriation:

 

REXA alleges that its trade secrets were misappropriated.

 

Recall that to prove misappropriation, REXA must show the “disclosure or use of a trade secret” by Chester and MEA and that they knew the trade secret had been either “acquired under circumstances giving rise to a duty to maintain its secrecy or limit its use” or “derived from or through a person who owed a duty to the person seeking relief to maintain its secrecy or limit its use.” 765 ILL.COMP.STAT. 1065/2(b).

 

 

(…) Illinois courts “have read the preemptive language in the ITSA to cover claims that are essentially claims of trade secret misappropriation.” Spitz v. Proven Winners N. Am., LLC, 759 F.3d 724, 733 (7th Cir. 2014) (citation omitted). That is, consistent with the law of other jurisdictions, the ITSA forecloses claims “when they rest on the conduct that is said to misappropriate trade secrets.” Hecny Transp., Inc. v. Chu, 430 F.3d 402, 404–05 (7th Cir. 2005) (citations omitted). In Spitz this court held that the plaintiff’s “quasi-contract” theories of unjust enrichment and quantum meruit were preempted by the ITSA because they were essentially claims of trade secret misappropriation. 759 F.3d at 733.

 

 

 

 

(U.S. Court of Appeals for the Seventh Circuit, July 28, 2022, REXA, Inc. v. Mark V. Chester and MEA, Inc., Docket Nos. 20-2953, 20-3213, 21-2033)

 

U.S. Court of Appeals for the Seventh Circuit, Smart Oil, LLC v. DW Mazel, LLC, Docket No. 19-2542

 

 

Purchase and Sale Agreement

 

Flip Deal

 

Escrow Account

 

Earnest Money

 

Due Diligence Period

 

Liquidated Damages Clause

 

Contract Drafting

 

Illinois Law

 

 

During 2014, Smart Oil’s sole member, Mehmood Syed, marketed for sale numerous properties with gas stations and convenience stores. After lengthy negotiations, Smart Oil and DWM executed a Purchase and Sale Agreement and Joint Escrow Instructions (the “Agreement”) by which DWM agreed to purchase thirty such parcels of real property for $67 million. Both parties were represented by counsel throughout the negotiations.

 

The Agreement requires DWM to initially deposit $300,000 into an escrow account. That deposit was to take place during a due diligence period following acceptance of the Agreement. The Agreement obliges the escrow account holder to transfer that deposit to the title company. Then, at the close of the due diligence period, DWM is to pay a second deposit of $450,000 to the title company. The total earnest money of $750,000 is about one percent of the total purchase price.

 

DWM never paid the initial earnest money deposit. Despite DWM’s failure to do so, the parties continued their due diligence investigations and negotiations. By the close of the due diligence period, the Agreement requires DWM to provide Smart Oil with written notice if, after its investigations, DWM disapproved of the purchase. If DWM had provided this written notice, the Agreement would have terminated, and the earnest money would have been returned to DWM. If DWM did not provide that written notice, section 4(a)(i) of the Agreement states that such “failure to timely deliver written notice of its disapproval shall be deemed Buyer’s approval of such investigations,” and Smart Oil would be entitled to keep the earnest money if the deal otherwise fell through. DWM asserts it negotiated with Smart Oil to lengthen the due diligence period, extending the time to provide written notice of disapproval. Regardless, DWM failed to provide written notice of disapproval, which DWM does not dispute. At the close of the due diligence period, DWM also did not pay the second deposit.

 

In the meantime, Syed contacted property owners about selling their properties to Smart Oil which would then sell them in the aggregate to DWM. This is known as a “flip deal,” and according to Smart Oil was contemplated under section 17(c) of the Agreement, which states in bold: “The parties acknowledge that Seller is the holder of a portfolio of gas station businesses, real estate and/or leases and only nominal title holder for purposes of transferring title to the Buyer.” To make good on its end of the Agreement, Smart Oil executed contracts with various property owners for the sale of their properties.

 

Ultimately, DWM failed to close under the terms of the Agreement and the parties’ deal fell through. The individual property owners did not sell their properties to Smart Oil under the individual contracts, and Smart Oil never flipped those properties to DWM.

 

Smart Oil sued DWM for breach of contract, arguing it was entitled to $750,000 in earnest money as liquidated damages under the following term: “If Buyer defaults in its performance ... under this Agreement, including the obligation of Buyer to purchase the Property if all conditions precedent to such obligations has been satisfied, Seller shall receive the entire Earnest Money Deposit and all accrued interest thereon as complete liquidated damages.” The Agreement explains the need for liquidated damages in conspicuous language: “IT BEING UNDERSTOOD THAT THE DAMAGE TO SELLER CAUSED BY ANY SUCH DEFAULT OF BUYER WOULD BE EXTREMELY DIFFICULT TO OR IMPOSSIBLE TO ASCERTAIN.” The liquidated damages clause survives termination of the contract per section 17(a). Both parties signed under that clause demonstrating their consent and agreement.

 

The district court ruled that Smart Oil satisfied all conditions precedent of the Agreement and that DWM breached the contract by not paying the earnest money. First, the court found that Smart Oil had authority to convey the properties, relying on numerous sworn statements from property owners verifying that they were ready to sell the properties to Smart Oil for Smart Oil to “flip” them to DWM. Second, the court found that DWM failed to give written notice of disapproval of the due diligence investigations, and that failure was “deemed Buyer’s approval of such investigations” under Section 4(a)(i) of the Agreement. Because DWM approved of the due diligence materials under the Agreement, Smart Oil satisfied its condition precedent for due diligence disclosures. So DWM’s obligation to pay the earnest money remained, and DWM admits it never paid.

 

The district court also held that Smart Oil was entitled to the earnest money as liquidated damages under Illinois law, noting that DWM’s representative signed the liquidated damages clause that explicitly stated actual damages would be extremely difficult or impossible to ascertain. The court found the liquidated damages figure to be a fair and reasonable amount and granted Smart Oil’s motion for summary judgment.

 

The Agreement includes a prevailing party attorneys’ fees and costs provision, under which the court granted fees and costs to Smart Oil.

 

Under Illinois law, a plaintiff suing for breach of contract must prove: (1) the contract existed, (2) the plaintiff performed the conditions precedent required by the contract, (3) the defendant breached the contract, and (4) damages. DeliverMed Holdings, LLC v. Schaltenbrand, 734 F.3d 616, 626 (7th Cir. 2013) (citing Law Offices of Colleen M. McLaughlin v. First Star Fin. Corp., 963 N.E.2d 968, 981 (Ill. App. Ct. 2011)).

 

Section 4 of the Agreement provides that DWM’s obligation to consummate the transaction is subject to the following conditions precedent for DWM’s benefit: (1) due diligence investigations and materials; (2) title insurance commitments for each of the properties; (3) inventories of the personal property for each of the businesses; and (4) that Smart Oil’s representations and warranties were truthful and accurate under Section 15 of the Agreement. DWM argues Smart Oil failed to satisfy two of these conditions: it did not have authority to convey the properties, and it failed to produce the requisite due diligence materials. Both arguments fail, however.

 

To prove Smart Oil had authority to execute the Agreement, Smart Oil provided sworn statements from owners of 21 of the 30 properties. They declared under penalty of perjury they were ready and willing to sell their properties to carry out the Agreement and that Smart Oil had authority to flip the properties to DWM.

 

Liquidated Damages

A liquidated damages clause provides a predetermined remedy in the event a party breaches. McNamara v. O’Donnell Haddad LLC, 2016 IL App (2d) 150519‐U, ¶28. “This predetermined amount may or may not exceed the actual damages and both parties agree to accept this inherent risk.” Id. An unreasonably large liquidated damages clause is unenforceable under Illinois law on grounds of public policy. Id. Liquidated damages clauses in real estate contracts are common to avoid the difficulty of proving damages by methods such as market value, resale value, or otherwise. Karimi v. 401 N. Wabash Venture, LLC, 2011 IL App (1st) 102670, ¶16 (citing Siegel v. Levy Organization Dev. Co., 538 N.E.2d 715, 717 (Ill. App. Ct. 1989)).

 

Whether a liquidated damages clause in a contract is a penalty or a valid provision is a question of law. Grossinger Motocorp, Inc. v. Am. Nat’l Bank & Trust Co., 607 N.E.2d 1337, 1345 (Ill. App. Ct. 1992). The burden of proof “rests on the party resisting enforcement of a liquidated damages clause to show that the agreed‐upon damages are clearly disproportionate to a reasonable estimate of the actual damages likely to be caused by a breach.” XCO Int’l, Inc. v. Pac. Sci. Co., 369 F.3d 998, 1003 (7th Cir. 2003).

 

“The reasonableness of the amount, though, depends not on the actual damages suffered by the non‐breaching party, but on whether the amount reasonably forecasts and bears some relation to the parties’ potential loss as determined at the time of contracting.”

 

Here, the Agreement states if DWM fails to purchase the properties, Smart Oil “shall receive the entire Earnest Money Deposit and all accrued interest thereon as complete liquidated damages.” The Agreement further explains the rationale for liquidated damages in conspicuous language that damages to Smart Oil caused by DWM’s default “WOULD BE EXTREMELY DIFFICULT TO OR IMPOSSIBLE TO ASCERTAIN.” Both parties signed immediately below the liquidated damages clause, demonstrating their consent and agreement to the provision.

 

Illinois “courts have considered earnest money representing up to 20% of the purchase price a reasonable sum as liquidated damages.” Karimi, 2011 IL App (1st) 102670, ¶24 (holding earnest money of 15% of the purchase price in real estate contract was reasonable liquidated damages); see, e.g., Siegel v. Levy Org. Dev. Co., 182 Ill. App. 3d 859, 860–63 (Ill. App. Ct. 1989) (holding earnest money of $320,000 on a $1,600,000 contract, representing two percent of the purchase price, was reasonable). One percent of the Agreement’s purchase price is not “clearly disproportionate” under XCO Int’l, Inc., 369 F.3d at 1003.

 

(…) The Agreement contains a clause shifting attorneys’ fees and costs to the prevailing party. Having prevailed on appeal, Smart Oil has 14 days to submit its requested attorneys’ fees and costs, and DWM has 14 days to respond.

 

 

(U.S. Court of Appeals for the Seventh Circuit, August 17, 2020, Smart Oil, LLC v. DW Mazel, LLC, Docket No. 19-2542)

U.S. Court of Appeals for the Seventh Circuit, Charles Curry v. Revolution Laboratories, LLC, Docket No. 17-2900

Trademark Infringement

First Use in Commerce

Advertisement and Sale

Unfair Competition

E-Commerce

E-Mail

Online Contacts with a Forum

Subject Matter Jurisdiction

Personal Jurisdiction

Purposefully directed activities at a forum even in the “absence of physical contacts” with a forum

Supplemental Jurisdiction (State and Federal Claims)

Venue

Illinois Law

Illinois Long-Arm Statute

Contract Drafting

The district court had subject matter jurisdiction over Mr. Curry’s four claims “arising under” federal statutes related to trademarks and unfair competition. See 28 U.S.C. §§ 1331, 1338(a)–(b). With regard to Mr. Curry’s remaining three claims for fraud, unfair competition, and trademark infringement arising under state law, amicus counsel for Mr. Curry submits that subject matter jurisdiction exists over those claims as well because the state and federal claims share a “common nucleus of operative fact.” United Mine Workers v. Gibbs, 383 U.S. 715, 725 (1966), and they are part of the “same case or controversy.” 28 U.S.C. § 1367(a). We agree. Thus, the district court had supplemental jurisdiction over the state claims. See Ammerman v. Sween, 54 F.3d 423, 424 (7th Cir. 1995) (“A loose factual connection between the claims is generally sufficient.”).

Charles Curry is the founder and Chief Executive Officer (“CEO”) of a company named “Get Diesel Nutrition” that sells dietary supplements to fitness enthusiasts and athletes. Mr. Curry contends that the “essence” of his brand is “Diesel.” Indeed, he has adopted the alter ego “Chuck Diesel,” and his company name, website address, and the product at issue, Diesel Test, all contain the word “Diesel.” He has paid for advertising for his products, including Diesel Test, in nationally distributed fitness magazines since 2002. He first manufactured Diesel Test in March 2005 and has advertised the product since June 2005. Diesel Test received awards from Planet Muscle magazine in 2015 and 2016.

In October 2016, the defendants began to sell the product that is at the heart of Mr. Curry’s complaint; the defendants’ product is a sports nutritional supplement branded Diesel Test Red Series, All Natural Testosterone Booster. Like Mr. Curry’s Diesel Test product, the defendants’ product comes in red and white packaging with right-slanted all-caps typeface bearing the words “Diesel Test.”

The defendants admittedly sold their product exclusively online through the following websites: (1) www.revlabs.com; (2) www.boostedtestforyou.com; (3) www.amazon.com; and (4) www.ebay.com. Although the defendants did not sell their product until 2016, they claimed in advertisements that their product was ranked “Best Product and Number 1” in 2015. The defendants have not denied that they concocted a fake ESPN news webpage and created a fake ESPN article touting their product. The defendants conducted all their marketing and advertising for their product through the Internet. In just over seven months, they received more than $1.6 million in gross sales from their product. At least 767 of the sales were to consumers in Illinois.

Mr. Curry promptly demanded that the defendants cease and desist selling their product. The defendants responded and said that they wished to find an “amicable resolution.” On November 15, Mr. Curry sent a second email to Revolution in which he renewed his claims and instructed them to contact his attorney. Two weeks later, however, Joshua Nussbaum, President of Revolution, filed a trademark appli- cation for the Diesel Test mark to be used in connection with dietary and nutritional supplements. In the trademark application, Mr. Nussbaum, as signatory, declared that “he believes that to the best of his knowledge and belief, no other persons ... have the right to use the mark in commerce.” He further indicated on the application that the “filing base” was “Intent to Use.” At the time he filed this application, however, the defendants already were selling their product in commerce bearing the Diesel Test mark.

On December 9, 2016, Mr. Curry filed a federal trademark application for the Diesel Test mark for dietary and nutritional supplements indicating that he had first used the mark in commerce in April 2005. The United States Patent and Trademark Office (“USPTO”) suspended the processing of both applications, citing a likelihood of confusion between the defendants’ and Mr. Curry’s marks.

(…) Federal law protects trademarks even if the owner has not yet sought federal registration.

(…) According to these affidavits, “Revolution does not hold itself out to do business in Illinois” on its website. Although Revolution lists on its website several companies where its products can be purchased, none of the listed companies are located in Illinois. It is not disputed that the defendants (1) are not registered to do business and do not have a registered agent in Illinois; (2) do not have a place of business in Illinois, a telephone, or a mailing address in Illinois; (3) do not have any employees located in Illinois or any who have traveled to Illinois for business; (4) do not have any real or personal property in Illinois; and (5) have never attended any trade shows or participated in any business- related meetings in Illinois.

(…) Specifically, the defendants contended that jurisdiction was not proper over Revolution because, “while Revolution does have some minimal sales to Illinois, those sales represent only 1.8% of Revolution’s total gross sales nationwide.”

(…) Because this case involves claims under both federal law and state law, the district court’s jurisdiction rested on a federal question, 28 U.S.C. § 1331, and supplemental jurisdiction, 28 U.S.C. § 1367. In a case involving federal question jurisdiction, “a federal court has personal jurisdiction over the defendant if either federal law or the law of the state in which the court sits authorizes service of process to that defendant.” Mobile Anesthesiologists Chicago, LLC v. Anesthesia Assocs. of Houston Metroplex, P.A., 623 F.3d 440, 443 (7th Cir. 2010). The only federal statute under which Mr. Curry brings his claims is the Lanham Act, which does not authorize nationwide service of process. See be2 LLC v. Ivanov, 642 F.3d 555, 558 (7th Cir. 2011). Thus, “a federal court sitting in Illinois may exercise jurisdiction over the defendants in this case only if authorized both by Illinois law and by the United States Constitution.” Id. (citing Fed. R. Civ. P. 4(k)(1)(A)). The Illinois long-arm statute provides that “a court may also exercise jurisdiction on any other basis now or hereafter permitted by the Illinois Constitution and the Constitution of the United States.” 735 ILCS 5/2-209(c). We have held that “the Illinois long-arm statute permits the exercise of jurisdiction to the full extent permitted by the Fourteenth Amendment’s Due Process Clause.” Tamburo v. Dworkin, 601 F.3d 693, 700 (7th Cir. 2010). Thus, the question we must answer is whether the exercise of personal jurisdiction over the defendants “comports with the limits imposed by federal due process.” Walden v. Fiore, 571 U.S. 277, 283 (2014); Mobile Anesthesiologists, 623 F.3d at 443 (noting that “there is no operative difference between” the constitutional limits of the Illinois Constitution and the United States Constitution in terms of subjecting a defendant to personal jurisdiction).

(…) For the exercise of specific jurisdiction over an out-of-state defendant: First, the defendant’s contacts with the forum state must show that it “purposefully availed itself of the privilege of conducting business in the forum state or purposefully directed its activities at the state. Second, the plaintiff’s alleged injury must have arisen out of the defendant’s forum-related activities. And finally, any exercise of personal jurisdiction must comport with traditional notions of fair play and substantial justice.

(…) We also note that, although Revolution’s sales of the allegedly infringing product to Illinois consumers all took place through either its interactive website or a third party’s website, we consistently have declined “to fashion a special jurisdictional test for Internet-based cases.” Tamburo, 601 F.3d at 703 n.7. “We think that the traditional due process inquiry ... is not so difficult to apply to cases involving Internet contacts that courts need some sort of easier-to-apply categorical test.” Illinois v. Hemi Grp. LLC, 622 F.3d 754, 759 (7th Cir. 2010).

We first examine whether Revolution’s activity can be characterized as purposefully directed at Illinois, the forum state. Revolution has no physical presence in Illinois. Our cases make clear, however, that physical presence is not necessary for a defendant to have sufficient minimum contacts with a forum state. Indeed, we have noted that the “purposeful-direction inquiry ‘can appear in different guises.’” Tamburo, 601 F.3d at 702 (quoting Dudnikov v. Chalk & Vermilion Fine Arts, Inc., 514 F.3d 1063, 1071 (10th Cir. 2008)). The essential point of the inquiry is to “ensure that an out-of-state defendant is not bound to appear to account for merely ‘random, fortuitous, or attenuated contacts’ with the forum state.” Dudnikov, 514 F.3d at 1071 (quoting Burger King, 471 U.S. at 475).

The principal approach employed to ensure that a defendant’s contacts with a state are not random, fortuitous, or attenuated is to inquire whether the record demonstrates that the defendant has “‘purposefully directed’” his activities at a forum even in the “absence of physical contacts” with a forum. Burger King, 471 U.S. at 476 (quoting Keeton v. Hustler Magazine, Inc., 465 U.S. 770, 774–75 (1984)). Such “purposeful direction” may be shown by evidence that the defendant’s actions, even if initiated outside of the forum state, nevertheless were directed at the forum state. For example, a defendant may cause its product to be distributed in the forum state. See, e.g., Keeton, 465 U.S. at 774–75 (finding purposeful direction where defendant published magazines outside the forum state and circulated them in the forum state). Among our recent cases, Hemi is particularly instructive. There, the State of Illinois sued Hemi Group LLC (“Hemi”) for selling cigarettes to Illinois residents in violation of state law and for failing to report the sales in violation of federal law. Hemi was based in New Mexico; it “was not incorporated or organized under Illinois law, it was not registered to do business in Illinois, it did not have any offices or employees in Illinois, it did not bank in Illinois, and it had not advertised in print media in Illinois.” Hemi, 622 F.3d at 755–56. Hemi sold its cigarettes through its websites, and the complaint identified only one Illinois resident, a special senior agent of the Illinois Department of Revenue, who had purchased cigarettes from Hemi through its websites. This agent had purchased over three hundred packs of cigarettes from Hemi over the course of two years. Id. at 755.

We held that Hemi’s contacts with Illinois were sufficient to support personal jurisdiction in that state. We based our decision in part on Hemi’s maintenance of “commercial websites through which customers could purchase cigarettes, calculate their shipping charges using their zip codes, and create accounts.” Id. at 757–58. Because Hemi “knowingly did do business with Illinois residents ... , Hemi’s argument that it did not purposefully avail itself of doing business in Illinois rang particularly hollow.” Id. at 758.

(…) The Supreme Court has held that an out-of-state insurer who sold only a single policy within the state is subject to personal jurisdiction within the state at least with respect to a cause of action related to that policy. See McGee v. Int’l Life Ins. Co., 355 U.S. 220, 222 (1957).

We are satisfied that Revolution has formed sufficient minimum contacts with Illinois. Like Hemi, Revolution sells its products only online through its website and third-party websites. Revolution’s interactive website for the sale of its products requires the customer to select a shipping address. Illinois is among the “ship-to” options from which the customer must choose. Illinois residents purchasing Revolution’s products also receive an email from Revolution thanking them for their business, confirming their order, and listing the Illinois shipping address. Revolution admittedly sold its Diesel Test product to 767 Illinois residents between October 14, 2016, and June 1, 2017.

(…) See Hemi, 622 F.3d at 758; uBid, 623 F.3d at 428 (stating that defendant’s argument that its sales to Illinois residents were merely “automated transactions unilaterally initiated by those residents” was not persuasive because those “customers ... are not simply typing their credit card numbers into a web form and hoping they get something in return”; the defendant “itself set the system up this way”).

In the face of this sales arrangement, it is not persuasive to say that Revolution did not exploit the Illinois market simply because its advertising was not especially aimed at that state. See uBid, 623 F.3d at 428–29. There is no per se requirement that the defendant especially target the forum in its business activity; it is sufficient that the defendant reasonably could foresee that its product would be sold in the forum. See Keeton, 465 U.S. at 781. In Keeton, the Supreme Court upheld the exercise of personal jurisdiction even though the defendant magazine publisher had not targeted specifically the forum. The Court determined that, with a nationwide market, the publisher reasonably should have anticipated that it could be held accountable in the forum state for activities arising from the “substantial number” of sales in the forum state. Id. In Hemi, we concluded that personal jurisdiction was proper irrespective of the fact that Hemi “had not advertised in print media in Illinois.” Hemi, 622 F.3d at 756. Revolution’s nationwide advertisements were accessible in Illinois.

Significant caution is certainly appropriate when assessing a defendant’s online contacts with a forum “to ensure that a defendant is not haled into court simply because the defendant owns or operates a website that is accessible in the forum state.” Hemi, 622 F.3d at 760. Here, however, Revolution’s 767 sales of Diesel Test to Illinois residents provides solid evidence that Revolution has “purposely exploited the Illinois market.” be2, 642 F.3d at 558 (collecting cases). These sales certainly distinguish Revolution from “the defendant that merely operates a website, even a ‘highly interactive’ website, that is accessible from, but does not target, the forum state.” Id. at 559 (collecting cases).

The proper exercise of specific jurisdiction also requires that the defendant’s minimum contacts with the forum state be “suit-related.” Advanced Tactical, 751 F.3d at 801 (quoting Walden, 571 U.S. at 284). There must be a “connection between the forum and the specific claims at issue.” Bristol-Myers Squibb, 137 S. Ct. at 1781. “Even regularly occurring sales of a product in a State do not justify the exercise of jurisdiction over a claim unrelated to those sales.” Goodyear, 564 U.S. at 931 n.6.

We held that Advanced Tactical failed to establish personal jurisdiction. Real Action’s email to its customer list, which included customers in Indiana, could not support jurisdiction because, we explained, any connection between the lawsuit and where the email was opened would be “entirely fortuitous.” Although Real Action made at least one sale to an Indiana resident, Advanced Tactical did not provide evidence that the sale had any connection to the underlying claims of trademark infringement. No evidence, for example, suggested that Indiana residents saw Real Action’s email or website before purchasing products from Real Action. “The only sales that would be relevant,” we explained, “are those that were related to Real Action’s alleged unlawful activity,” and Advanced Tactical did “not provide evidence of any such sales.” We emphasized in Advanced Tactical that the defendant’s contacts with the forum state must be related to the plaintiff’s claims to support specific personal jurisdiction. Advanced Tactical, 751 F.3d at 801.

Mr. Curry, on the other hand, certainly has met his burden. Unlike the sales in Advanced Tactical, which were made by the defendant in the forum state but were not related to the claims underlying the suit, Mr. Curry has shown that the direct sales that Revolution made in Illinois involved Diesel Test, a product that bears the allegedly infringing trademark that forms the very basis of this action. Mr. Curry submits that Revolution participated in the Illinois market by selling its product in a manner that would lead the consumer to confuse Revolution’s product with his. The gravamen of his case is that Revolution’s advertisement and sale of its product in the national market caused confusion and consequently deprived Mr. Curry of the value of his trademark in those states, including Illinois, where the product was sold.

(…) Advanced Tactical cannot be read as requiring, at this stage of the litigation, anything more. As we have just noted, Revolution’s sales are inextricably linked to the alleged tortious activity underlying Mr. Curry’s claims. By contrast, the allegations of trademark infringement in Advanced Tactical appear to be based solely on statements made on the defendant’s website about its affiliations. The sales in the forum state therefore did not have, as the court noted, any relevance to the allegations of the complaint. Notably, Advanced Tactical made no attempt to limit our earlier decision in Hemi, which had upheld an assertion of personal jurisdiction based on sales of cigarettes to one individual in the forum state.

(U.S. Court of Appeals for the Seventh Circuit, February 10, 2020, Charles Curry v. Revolution Laboratories, LLC, Docket No. 17-2900)