Shield Technologies Corporation v. Paradigm Positioning LLC et al
Filing
114
MEMORANDUM OPINION Signed by the Honorable John F. Grady on October 3, 2012. Mailed notice(cdh, )
11-6183.122-RSK
October 3, 2012
IN THE UNITED STATES DISTRICT COURT
FOR THE NORTHERN DISTRICT OF ILLINOIS
EASTERN DIVISION
SHIELD TECHNOLOGIES CORP.,
)
)
)
)
)
)
)
)
)
)
)
Plaintiff,
v.
PARADIGM POSITIONING, LLC, THOMAS
W. NELSON, JEFFERY D. VOLD,
TRANSHIELD, INC.
Defendants.
No. 11 C 6183
MEMORANDUM OPINION
Before the court is the joint motion to dismiss of defendants
Thomas W. Nelson and Paradigm Positioning, Inc. (“Paradigm”).
For
the reasons explained below, we deny their motion as untimely.
However, the court sua sponte dismisses the plaintiff’s common law
fraud claim without prejudice.
BACKGROUND
Plaintiff
Shield
Technologies
Corporation
(“Shield”)
manufactures and sells corrosion protective covers for the United
States
and
purchasers.
foreign
militaries,
(Am. Compl. ¶ 1.)
industry,
and
consumer
gun
The United States Department of
Defense (“DOD”) is Shield’s largest customer.
(Id. at ¶ 2.)
Defendant Transhield manufactures and sells “shrink wrap covers”
for a range of applications and it is currently marketing its
products to the DOD as an alternative to Shield’s products.
(Id.
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at ¶¶ 3, 5.)
Shield, citing Transhield’s website, alleges that
Transhield’s products purport to have “at least some of the same
technology and performance characteristics as” Shield’s products.
(Id. at ¶ 4.)
Vold,
two
Shield alleges that defendants Nelson and Jeffery
former
Shield
executives,
have
given
Shield’s
confidential information to Transhield and that Transhield is using
that information to compete with Shield for the DOD’s business.
(Id. at ¶¶ 7-10, 15, 27-31, 33.)
Shield further asserts that
Nelson and Vold are using Paradigm as their alter ego in their
dealings with Transhield.
count
complaint
(Id. at ¶ 14.)
alleging:
(1)
breach
Shield has filed a sixof
certain
employment
agreements executed by Nelson and Vold (Counts I (Nelson) and II
(Vold));
(2)
trade
secret
misappropriation
(Count
III);
(3)
tortious interference with a prospective business relationship
(Count IV); (4) civil conspiracy (Count V); and (5) common law
fraud (Count VI, against Nelson only).
DISCUSSION
Paradigm and Nelson have jointly filed a motion seeking
dismissal pursuant to Rule 12(b)(6) and summary judgment pursuant
to Rule 56(a).
On June 23, 2012, we denied their motion insofar as
it sought summary judgment: discovery is still in the early stages
and it would be premature to evaluate the sufficiency of Shield’s
evidence at this time.
However, we directed Shield to respond to
the defendants’ motion insofar as it was based upon Rule 12(b)(6).
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Rather than address the motion’s merits, Shield argues that it is
untimely
because
complaint.
the
defendants
have
already
answered
the
See Fed. R. Civ. P. 12(b) (“A motion asserting any of
these defenses [including failure to state a claim] must be made
before pleading if a responsive pleading is allowed.”).
Rule
12(h)(2) provides that a party may assert that the complaint fails
to state a claim “(A) in any pleading allowed or ordered under Rule
7(a); (B) by a motion under Rule 12(c); or (C) at trial.”
Civ. P. 12(h)(2).
Fed. R.
The defendants insist that they raised their
Rule 12(b)(6) defense in their answer, a pleading “allowed” under
Rule 7(a), citing their allegation that Shield brought its “legal
claims with no factual basis and without the minimum level of due
diligence.”
(Nelson/Paradigm Second Am. Answer at 54, ¶ 4a.)
If
proven, this would be a basis for sanctions under Rule 11, but it
is not an attack on the facial sufficiency of Shield’s allegations.
The defendants next argue that we may consider their motion under
Rule 12(c).
By its terms, Rule 12(c) applies only after the
pleadings are “closed.”
See Fed. R. Civ. P. 12(c) (“After the
pleadings are closed — but early enough not to delay trial — a
party may move for judgment on the pleadings.”). “Unless the court
orders a reply to an answer or third-party answer, the pleadings
close after the last of the following pleadings in the case has
been
filed:
answer,
reply
to
a
counterclaim,
answer
to
a
crossclaim, and third-party answer.” 2-12 Moore’s Federal Practice
- 4 -
- Civil § 12.38; see also Flora v. Home Federal Sav. and Loan
Ass'n, 685 F.2d 209, 211 n.4 (7th Cir. 1982) (“In a case such as
this when, in addition to an answer, a counterclaim is pleaded, the
pleadings are closed when the plaintiff serves his reply.”).1
Shield
has
not
yet
filed
its
answer
to
the
defendants’
counterclaims.
The defendants contend that Ennenga v. Starns, 677 F.3d 766,
773 (7th Cir. 2012) supports their argument that their motion is
timely, but that case dealt with a different issue.
The question
in Ennenga was whether the defendants could file a motion to
dismiss based on a statute-of-limitations defense after failing to
raise that defense in a prior Rule 12(b)(6) motion.
The Ennenga
Court held that they could, observing that such a defense is not
subject to Rule 12(h)(1)’s “consolidation requirement.”
Id.; see
also Fed. R. Civ. P. 12(h)(1) (providing that a party waives the
defenses listed in Rule 12(b)(2)-(5) — but not Rule 12(b)(6) — by
omitting them from a previous motion). Ennenga makes it clear that
1/
The defendants cite several cases for the proposition that the
pleadings are closed after the defendant files his answer. Some of the cited
cases do not address the situation where, as here, the defendant has also filed
counterclaims and the plaintiff has not yet filed his response. See Rizzi v.
Calumet City, 183 F.R.D. 639, 640-41 (N.D. Ill. 1999) (pleadings not closed
because defendant had not yet filed an answer); Maniaci v. Georgetown Univ., 510
F.Supp.2d 50, 60 (D.D.C. 2007) (pleadings closed after defendant filed his
answer, but before a court-imposed deadline to amend the complaint had passed).
Starmakers Pub. Corp. v. Acme Fast Freight, Inc., 615 F.Supp. 787, 790 (S.D.N.Y.
1985) is closer to our facts. See id. (concluding that an unanswered third-party
complaint did not make the defendant’s Rule 12(c) motion untimely). But there,
the pleadings were closed as between the plaintiff and the moving defendant,
leading the court to conclude that the third-party complaint was irrelevant. See
id. Here, the pleadings remain open as between Paradigm/Nelson and Shield while
the defendants’ counterclaim remains unanswered.
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the defendants have not waived their right to assert that Shield’s
complaint fails to state a claim for relief.
But that does not
mean that their motion is timely.
Based
on
the
foregoing
analysis,
defendants’ motion to dismiss is untimely.
it
appears
that
the
Although it is unclear
whether the Federal Rules compel us to deny the defendants’ motion,
we think it is the most prudent course.
However, we are not
persuaded that we cannot still rule on the sufficiency of Shield’s
complaint at this time.
“Sua sponte 12(b)(6) dismissals are
permitted, provided that a sufficient basis for the court’s action
is evident from the plaintiff’s pleading.”
105 F.3d 354, 356 (7th Cir. 1997).
Ledford v. Sullivan,
It would serve no purpose other
than delay to postpone addressing the issues that the defendants
raise in their motion while awaiting Shield’s response to their
counterclaims. Therefore, in the interests of avoiding unnecessary
delay, we will deny the defendants’ motion as untimely but address
their substantive arguments on our own motion.
A.
Legal Standard
The purpose of a Rule 12(b)(6) motion to dismiss is to test
the sufficiency of the complaint, not to resolve the case on the
merits.
5B Charles Alan Wright & Arthur R. Miller, Federal
Practice and Procedure § 1356, at 354 (3d ed. 2004).
To survive
such a motion, “a complaint must contain sufficient factual matter,
accepted as true, to ‘state a claim to relief that is plausible on
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its face.’
A claim has facial plausibility when the plaintiff
pleads factual content that allows the court to draw the reasonable
inference that the defendant is liable for the misconduct alleged.”
Ashcroft v. Iqbal, 129 S. Ct. 1937, 1949 (2009) (citing Bell Atl.
Corp. v. Twombly, 550 U.S. 544, 570, 556 (2007)).
When evaluating
a motion to dismiss a complaint, the court must accept as true all
factual allegations in the complaint.
However,
we
need
not
accept
as
Iqbal, 129 S. Ct. at 1949.
true
its
legal
conclusions;
“[t]hreadbare recitals of the elements of a cause of action,
supported by mere conclusory statements, do not suffice.”
Id.
(citing Twombly, 550 U.S. at 555).
B.
Claims Governed By Rule 8(a) (Counts I, III, IV, and V)
Paradigm and Nelson assert in conclusory, boilerplate fashion
that Shield’s claims for breach of contract (Count I), trade-secret
misappropriation (Count III), and tortious interference (Count IV)
“do not set forth sufficient facts to meet the ‘plausibility’
standard for pleading.”
(See Defs.’ Mem. at 23, 24, 25.)
The
central factual allegation underlying each of these Counts is
Shield’s contention that Nelson (individually and through Paradigm)
is using Shield’s confidential information, obtained during his
tenure at Shield, to assist Transhield.
This core allegation
adequately supports Shield’s claim that Nelson has breached the
confidentiality and non-competition provisions of his contracts
with Shield.
(See Compl. ¶¶ 39-44 (“Stock Purchase Agreement”);
45-47 (“Employment Agreement”); 48-50 (“Settlement Agreement and
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Mutual Release”).)
It also suffices to allege “purposeful” or
“intentional” interference — i.e., “some impropriety committed by
the defendant in interfering with plaintiff’s business expectancy,”
Fidelity Nat. Title Ins. Co. of New York v. Westhaven Properties
Partnership, 898 N.E.2d 1051, 1067 (Ill. App. Ct. 2007) — for
purposes of Shield’s tortious-interference claim.
Turning to Shield’s trade-secret misappropriation claim, the
defendants argue that the complaint does not sufficiently allege
the existence of a trade secret.
See Standard Mut. Ins. Co. v.
Mudron, 832 N.E.2d 269, 272-73 (Ill. App. Ct. 2005) (“Establishing
a violation of the Trade Secrets Act requires a plaintiff to prove
that
the
information
at
issue
was:
(1)
a
trade
secret;
(2)
misappropriated; and (3) used in the defendant’s business.”). When
assessing claims for trade-secret misappropriation under Rule
12(b)(6),
courts
attempt
to
strike
a
balance
between
the
plaintiff’s obligation to provide notice of its claim and its
interest in preserving secrecy.
See, e.g., Lincoln Park Sav. Bank
v. Binetti, No. 10 CV 5083, 2011 WL 249461, *2 (N.D. Ill. Jan. 26,
2011).
As we read the complaint, Shield is claiming trade-secret
protection for the following information:
[C]rucial aspects of the specifications and manufacture
of Envelope corrosion preventative covers and all aspects
of the business relationship between Shield Technologies
and the DOD, including but not limited to the orders
placed by the DOD with Shield Technologies, the contacts
at the DOD developed by Shield Technologies with whom
Shield
has
negotiated
the
orders
of
corrosion
preventative
covers,
the
pricing
of
corrosion
preventative covers ordered by the DOD from Shield
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Technologies, and other proprietary and confidential
know-how developed by Shield Technologies pertaining to
the creation, development, manufacture, and marketing of
corrosion preventative covers and the sale of such covers
to the DOD.
(Am. Compl. ¶ 33.)
Courts have held that comparable allegations
were sufficiently detailed to satisfy the plaintiff’s obligation
to identify its trade secrets.
WL
249461,
*2
(“Although
See, e.g., Lincoln Park Sav., 2011
the
complaint
is
not
a
model
of
specificity, LPSB has alleged that defendants had access to its
trade
secrets,
specifically,
confidential
customer
and
other
information contained in its loan origination system.”); Fire 'Em
Up, Inc. v. Technocarb Equipment (2004) Ltd., 799 F.Supp.2d 846,
850 (N.D. Ill. 2011) (declining to dismiss a complaint alleging
trade-secret protection for information including customer lists,
supplier lists, business partner lists, product specifications,
financial data, marketing plans, and advertising strategies).
Consistent
allegations,
with
while
these
not
cases,
as
we
specific
conclude
that
Shield’s
as
could
be,
they
are
sufficient to identify the alleged trade secrets at issue.
Finally, the defendants correctly point out that Shield alleges in
a conclusory fashion that it has taken steps to maintain the
secrecy of its alleged trade secrets.
(See Am. Compl. ¶ 37); see
also Liebert Corp. v. Mazur, 827 N.E.2d 909, 921 (Ill. App. Ct.
2005) (to establish the existence of a trade secret, the plaintiff
must show that it “took affirmative measures to prevent others
from acquiring or using the information”).
But as we just
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discussed, the complaint cites provisions in Shield’s agreements
with Nelson prohibiting him from disclosing Shield’s confidential
information.
(See, e.g., Am. Compl. ¶ 41.)
Courts have held that
such provisions “may be considered a reasonable step to maintain
secrecy
of
a
trade
secret.”
Dick
Corp.
v.
SNC-Lavalin
Constructors, Inc., No. 04 C 1043, 2004 WL 2967556, *10 (N.D. Ill.
Nov. 24, 2004) (citing Master Tech Prods. v. Prism Enters., Inc.,
No. 00–C–4599, 2002 WL 475192, at *5 (N.D. Ill. Mar. 27, 2002));
see also Lincoln Park Sav., 2011 WL 249461, *2.
In sum, we conclude that Shield has stated claims for breach
of contract (Count I), tortious interference (Count III), and
trade-secret misappropriation (Count IV).
The sole basis for the
defendants’ motion to dismiss Shield’s conspiracy claim (Count V)
is that it “cannot be proven” because Shield’s other claims are
deficient.
(See Defs.’ Mem. at 25.)
We have concluded otherwise,
therefore we will not dismiss Count V.
C. Common Law Fraud (Count VI)
Shield’s common law fraud claim is subject to Rule 9(b)’s
heightened pleading standard. See Fed.R.Civ.P. 9(b) (“In alleging
fraud or mistake, a party must state with particularity the
circumstances
constituting
fraud
or
mistake.”).
A
plaintiff
satisfies this standard by pleading “the who, what, when, where,
and how” of the alleged fraud.
624, 627 (7th Cir. 1990).
DiLeo v. Ernst & Young, 901 F.2d
Shield alleges “on information and
belief” that Nelson falsely represented in his agreements with
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Shield that he would abide by provisions governing confidential
information and post-employment competition.
82.)
(See Am. Compl. ¶
First, Shield has not alleged sufficient detail supporting
its suspicions to permit it to plead fraud “on information and
belief.”
See
Pirelli
Armstrong
Tire
Corp.
Retiree
Medical
Benefits Trust v. Walgreen Co., 631 F.3d 436, 443 (7th Cir. 2011)
(A plaintiff may plead fraud on information and belief only if
“(1) the facts constituting the fraud are not accessible to the
plaintiff and (2) the plaintiff provides the grounds for his
suspicions.”) (citation and internal quotation marks omitted).
Second,
Shield
has
misrepresentations
promises to Shield.
alleged
about
so-called
Nelson’s
intent
“promissory
to
comply
fraud:”
with
his
See, e.g., Government Payment Service, Inc.
v. LexisNexis VitalChek Network, Inc., No. 12 C 1946, 2012 WL
1952905, *7 (N.D. Ill. May 29, 2012) (promissory fraud consists of
false statements of intent regarding future conduct rather than
false statements of present fact). Generally speaking, promissory
fraud
is
not
actionable
in
Illinois.
See
HPI
Health
Care
Services, Inc. v. Mt. Vernon Hosp., Inc., 545 N.E.2d 672, 682
(Ill. 1989) (“[M]isrepresentations of intention to perform future
conduct, even if made without a present intention to perform, do
not generally constitute fraud.”).
However, Illinois courts
recognize a somewhat nebulous exception for “schemes of promissory
fraud.” Id.; see also Desnick v. American Broadcasting Companies,
Inc., 44 F.3d 1345, 1354 (7th Cir. 1995) (characterizing the
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difference between “promissory fraud” and a “scheme of promissory
fraud” as elusive).
In Desnick, our Court of Appeals summarized
the exception as follows: “promissory fraud is actionable only if
it either is particularly egregious or, what may amount to the
same thing, it is embedded in a larger pattern of deceptions or
enticements that reasonably induces reliance and against which the
law ought to provide a remedy.”
Desnick, 44 F.3d at 1354.
There
is nothing “particularly egregious” about the fraud alleged here,
and Shield has not identified a larger pattern of deception by
Nelson with the particularity that Rule 9(b) requires.
Instead,
it has merely repackaged its breach-of-contract claim as a claim
for fraud.
Therefore, we will dismiss Shield’s common law fraud
claim without prejudice.
CONCLUSION
Nelson’s
and
Paradigm’s
joint
motion
plaintiff’s complaint is denied as untimely.
to
dismiss
the
The court sua sponte
dismisses the plaintiff’s claim for common law fraud (Count V)
without prejudice.
The plaintiff is given leave to file a second
amended complaint by October 17, 2012 that cures the deficiencies
we have identified with its fraud claim, if it can do so.
If the
plaintiff chooses not to file a second amended complaint by that
date, we will dismiss its common law fraud claim with prejudice.
All defendants shall plead to the second amended complaint, if
filed,
including
any
amended
defenses, by October 31, 2012.
counterclaims
and
affirmative
If no second amended complaint is
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filed, the defendants shall file any amended counterclaims and
affirmative defenses by October 31, 2012.
The plaintiff shall
plead to the defendants’ counterclaims by November 14, 2012.
DATE:
October 3, 2012
ENTER:
___________________________________________
John F. Grady, United States District Judge
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