Naturalock Solutions LLC v. Baxter Healthcare Corporation et al
Filing
158
MEMORANDUM Opinion and Order signed by the Honorable Andrea R. Wood on 10/4/2016. Mailed notice(ef, )
IN THE UNITED STATES DISTRICT COURT
FOR THE NORTHERN DISTRICT OF ILLINOIS
EASTERN DIVISION
NATURALOCK SOLUTIONS, LLC,
)
)
Plaintiff,
)
)
v.
)
)
BAXTER HEALTHCARE CORPORATION, )
a Delaware corporation,
)
BAXTER INTERNATIONAL, INC., and
)
BAXTER HEALTHCARE S.A.,
)
)
Defendants.
)
No. 14-cv-10113
Judge Andrea R. Wood
MEMORANDUM OPINION AND ORDER
Plaintiff Naturalock Solutions, LLC (“Naturalock”) and Defendant Baxter Healthcare
Corporation (“Baxter”)1 entered into a license agreement relating to the commercialization of
Naturalock’s invention of s solution to replace or supplement certain prescription drug products
manufactured by Baxter. Naturalock now alleges that Baxter engaged in a systematic scheme to
block the development of its competing product. According to Naturalock, Baxter fraudulently
procured the license agreement in an effort to prevent Naturalock from partnering with other
manufacturers and then intentionally failed to fulfill its obligations under the agreement.
Naturalock’s amended complaint seeks a declaratory judgment regarding the parties’ rights and
duties under the license agreement and asserts common law claims for fraudulent inducement,
breach of the license agreement, material breach of contract, negligence, and tortious interference.
Before the Court is Baxter’s motion to dismiss Naturalock’s second (fraudulent inducement), fifth
(negligence), and sixth (tortious interference) causes of action pursuant to Federal Rules of Civil
1
The parties filed a stipulation voluntarily dismissing Defendants Baxter International, Inc. and Baxter
Healthcare S.A. (Dkt. No. 26.)
Procedure 9(b) and 12(b)(6). (Dkt. No. 79.) For the reasons stated below, the motion is granted.
Naturalock’s three tort claims are dismissed without prejudice.
BACKGROUND
According to the amended complaint,2 Baxter develops, licenses, manufactures, and sells
the prescription drug heparin, which is an anticoagulant, or blood thinner, that prevents blood
clots. (Am. Compl. ¶¶ 5, 8, 14, Dkt. No. 77.) Heparin is derived from porcine (i.e., pig) intestines
and used primarily to decrease the chance of blood clots in patients undergoing surgery, to
prevent the formation of clots in catheters, and to treat conditions such as pulmonary embolism.
(Id. ¶¶ 9, 12.) Numerous problems have been associated with the use of heparin, including
catheter-related, blood-stream infections. (Id. ¶ 21.) In response to the proven need for a safer
product, Naturalock invented a unique, all-natural anticoagulant with bactericidal and anti-fungal
properties to guard against infection, which is meant to replace the traditional animal-derived
heparin. (Id. ¶¶ 20-23.)
In 2009, Naturalock entered into discussions with Baxter regarding the development and
promotion of its invention. (Id. ¶ 24.) In 2010, the parties executed an exclusive global license
agreement pursuant to which Baxter was to test, develop, and secure patent protection as well as
FDA approval for Naturalock’s product. (Id. ¶ 25.) Naturalock alleges that after signing the
license agreement, Baxter intentionally delayed the project for approximately 30 months. (Id.
¶ 50.) First, Baxter failed to complete the technical feasibility studies on time. (Id. ¶ 26.) The
studies were not completed until October 2011—four months after the original deadline. (Id.) In
addition, Baxter failed to provide Naturalock with regular updates on the status of the project as
2
For purposes of deciding this motion, the Court accepts as true all well-pleaded factual allegations set
forth in the amended complaint and views them in the light most favorable to Naturalock. See, e.g.,
Lavalais v. Vill. of Melrose Park, 734 F.3d 629, 632 (7th Cir. 2013) (citing Luevano v. Wal-Mart Stores,
Inc., 722 F.3d 1014, 1027 (7th Cir. 2013)).
2
promised. (Id. ¶ 27.) In November 2011, Naturalock requested an update and was promised that
the final formulation of its invention would be finished by the second quarter of 2012. (Id.) Then,
in February 2012, Naturalock requested a detailed update on the status of the project, including
information regarding production issues, clinical trials, patent status, and funding. (Id. ¶ 28.) In
response, Baxter simply stated that the project was progressing as planned without providing any
additional details. (Id.)
According to Naturalock, Baxter was also dilatory in the patent-prosecution process. (Id.
¶ 78.) Baxter assured Naturalock that the process was moving along as expected, but Naturalock
later learned that, after receiving a non-final objection from the U.S. Patent and Trademark Office
(“USPTO”), Baxter had simply resubmitted the applications without making any substantive
modifications. (Id. ¶ 32.) Moreover, Baxter ignored Naturalock’s request that certain test data and
other supporting information be included in the submissions. (Id. ¶¶ 33, 39.) As a result, in
September 2013, the USPTO issued a final rejection of the previous submissions and set a
deadline of December 11, 2013 for the filing of a final revision request. (Id. ¶¶ 34-35.) In October
2013, Baxter informed Naturalock that a final draft of the patent submission would soon be ready
for review. (Id. ¶ 34.) However, Naturalock did not receive the final draft until December 2,
2013—just over a week prior to the deadline. (Id. ¶ 35.) During a December 9, 2013 conference
call to discuss the final submission, Baxter’s patent counsel advised that the inclusion of certain
test data, which Baxter had omitted from previous submissions, would be instrumental in
supporting Naturalock’s patent claims. (Id. ¶ 36.) Due to its delay, Baxter had no choice but to
procure an extension of time from the USPTO. (Id.) Naturalock alleges that the prosecution of its
patent application languished for many months thereafter. (Id. ¶ 38.)
3
In the meantime, Baxter had promised to provide Naturalock with a list of foreign
countries where it intended to pursue patent protection. (Id.) The list was to be completed in
sufficient time to allow Naturalock to provide input prior to the deadline for international filing.
(Id. ¶ 38.) Naturalock’s primary goal was to obtain patent protection in Middle Eastern countries
with large Muslim populations, where an all-natural solution was likely to sell more successfully
than the pig-based heparin already on the market. (Id. ¶ 42.) Despite the parties’ understanding,
Baxter did not provide a country list; nor did it notify Naturalock of international filing
requirements or the filing deadline. (Id. ¶ 43.) When Naturalock followed up regarding the list,
Baxter advised that the deadline had already passed. (Id.) Baxter had filed the applications
without providing Naturalock an opportunity to review or comment and had elected not to file in
the 79 countries that had been a focus of Naturalock’s marketing research, including a number of
Middle Eastern countries. (Id. ¶¶ 43, 46.)
In March 2014, shortly after learning that the international filing deadline had passed,
Naturalock raised concerns regarding Baxter’s delays, misrepresentations, and failures in
performing its obligations under the license agreement. (Id. ¶ 47.) Baxter responded by giving
notice of its election to terminate the agreement. (Id. ¶¶ 47, 49.) According to Naturalock,
Baxter’s explanation for the termination—that the project was not commercially feasible—was
inconsistent with its representations, made in February 2014, that despite the delays, the project
was still on track for completion that year. (Id. ¶¶ 49-51.) Naturalock alleges that the termination
was in direct retaliation for its identification of Baxter’s potential breaches of the license
agreement. (Id. ¶ 98.) After receiving notice of the termination, Naturalock requested that Baxter
turn over all test data and materials so that it could attempt to pursue patent prosecution, FDA
4
approval, and commercialization on its own. (Id. ¶ 53.) Despite its data transfer obligations under
the license agreement, Baxter refused to provide the necessary materials. (Id. ¶¶ 53-54.)
Naturalock claims that Baxter’s intention all along was to block the development of its
invention in order to maintain its nearly 50 % share of the heparin market. (Id. ¶¶ 16, 99.)
Naturalock alleges that Baxter, through misrepresentation of its intent to pursue in good faith the
commercialization of its invention, fraudulently induced Naturalock to enter into the license
agreement in an effort to prevent it from partnering with other manufacturers. (Id. ¶¶ 68, 102.)
Naturalock further alleges that Baxter intentionally delayed, and failed to exercise due diligence
in connection with, the patent application process in a systematic scheme to cause its failure. (Id.
¶ 37.) According to Naturalock, as a result of Baxter’s intentional delay and lack of
communication with respect to the filing of foreign patent applications, it has forever lost the
ability to protect its invention in the countries that were a focus of its marketing research. (Id.
¶ 46.) Finally, Naturalock alleges that Baxter’s refusal to turn over the test data and other
materials is just another attempt to prevent the timely commercialization of its invention. (Id.
¶ 54.) Naturalock claims that Baxter’s conduct will prevent it from commercializing its product
for a significant period of time, thereby ensuring that it will not interfere with Baxter’s current
business plans. (Id. ¶ 56.)
Naturalock’s amended complaint sets forth six causes of action. The first is a declaratory
judgment action seeking a determination of the parties’ rights and responsibilities under the
license agreement, specifically with respect to the test data required for the continued prosecution
of Naturalock’s patent application before the USPTO. Second, Naturalock claims that Baxter
committed fraud in the inducement in connection with the negotiation and execution of the license
agreement. Naturalock’s third and fourth causes of action are for breach of the license agreement
5
and material breach of contract, respectively. In its fifth claim, Naturalock alleges that Baxter was
negligent in pursuing its patent application, in obtaining patent protection in foreign countries, and
in commercializing its invention. Finally, Naturalock purports to state a claim for tortious breach
of agreement and intentional interference with business relations, alleging that Baxter entered into
the license agreement to prevent Naturalock from partnering with other manufacturers. With the
present motion, Baxter seeks to dismiss Naturalock’s second, fifth, and sixth causes of action.3
DISCUSSION
I. Choice of Law
As an initial matter, the Court must determine which state’s substantive law governs
Naturalock’s common law tort claims. The license agreement between the parties includes a
choice-of-law provision, which states:
This Agreement will in all events and for all purposes be deemed to have been
executed in, and shall be governed by, and construed according to, the laws of the
State of Delaware, applicable to contracts made and to be performed in that State[.]
(Pl. Resp. to Mot. to Dismiss at 8, Dkt. No. 84.) In light of that provision, Naturalock’s response
brief cites only Delaware law. Baxter, on the other hand, relies on Illinois law but also asserts that,
to the extent conflict-of-law principles dictate that Delaware law applies, Delaware law is
substantially the same as Illinois law with respect to Naturalock’s tort claims.4
3
Naturalock argues that Baxter has waived the right to bring this motion to dismiss. According to
Naturalock, none of the amendments to the complaint justify allowing Baxter to raise defenses which could
have been raised at the time Baxter filed its answer to the original complaint. However, failure to state a
claim is not a defense subject to waiver under the applicable Federal Rules of Civil Procedure. See
Ennenga v. Starns, 677 F.3d 766, 772-73 (7th Cir. 2012). Moreover, those Rules are intended to prevent
defendants from bringing successive motions to dismiss on various grounds. That is not what Baxter has
done here. There is no reason that the intervening filing of an amended complaint should prevent Baxter
from moving for dismissal pursuant to Rule 12(b)(6).
4
Because of their differing views, the Court ordered the parties to file supplemental briefs specifically
addressing choice-of-law issues—specifically, which jurisdiction’s choice-of-law rules apply, which
6
A federal court exercising its diversity jurisdiction generally must apply the choice-of-law
rules of the state in which it sits. See, e.g., Auto-Owners Ins. Co. v. Websolv Computing, Inc., 580
F.3d 543, 547 (7th Cir. 2009). However, because this lawsuit was transferred to this District from
the Western District of Oklahoma pursuant to 28 U.S.C. § 1404(a), Oklahoma’s choice-of-law
rules apply. See Van Dusen v. Barrack, 376 U.S. 612, 639 (1964) (where a defendant seeks a
change of venue under § 1404(a), the transferee district court must apply the state law that would
have been applied if there had been no change of venue); Ferens v. John Deere Co., 494 U.S. 516,
519 (1990) (the same rule applies when a plaintiff moves to transfer); Edwardsville Nat'l Bank &
Tr. Co. v. Marion Labs., Inc., 808 F.2d 648, 650 (7th Cir.1987) (“A transfer under § 1404(a)
changes venue but not law; the transferee court must apply the transferor’s choice-of-law rules.”).
In tort cases such as this one, Oklahoma courts apply the substantive law of the state with
“the most significant relationship to the occurrence and the parties.” Hambelton v. Canal Ins. Co.,
405 F. App’x 335, 337 (10th Cir. 2010) (quoting Hightower v. Kan. City S. Ry. Co., 70 P.3d 835,
842 (Okla. 2003)). Or rather, Oklahoma courts would apply the most significant relationship test
in the absence of a valid choice-of-law provision requiring the application of another state’s law.
Thus, before proceeding, this Court first must determine whether the choice-of-law provision in
the parties’ license agreement covers Naturalock’s tort claims; if it does, there is no need to go
through the most significant relationship analysis. In a diversity case, the federal district court
looks to the forum state (here again, Oklahoma) to determine how its conflict-of-law principles
treat choice-of-law clauses in contracts. See, e.g., DeValk Lincoln Mercury, Inc. v. Ford Motor
Co., 811 F.2d 326, 330 (7th Cir. 1987). In other words, this Court must honor the license
agreement’s choice-of-law provision if Oklahoma courts would do so. See Agfa-Gevaert, A.G. v.
state’s substantive law governs the claims, and whether applicable law dictates that the choice-of-law
provision in the license agreement covers Naturalock’s tort claims.
7
A.B. Dick Co., 879 F.2d 1518, 1520 (7th Cir. 1989). Because Oklahoma courts generally enforce
choice-of-law provisions—and because the parties do not dispute, at least at this stage, the
provision’s validity—the Court will consider it valid and enforceable. See, e.g., Empire Bank v.
Dumond, 28 F. Supp. 3d 1179, 1184 (N.D. Okla. 2014) (citing Fossil Creek Energy Corp. v.
Cook’s Oilfield Servs., 242 P.3d 537, 541-42) (Okla. Civ. App. 2010)); Pre-Paid Legal Servs.,
Inc. v. Cahill, No. 12-CV-346-JHP, 2016 WL 1056571, at *5 (E.D. Okla. Mar. 16, 2016)
(Oklahoma will enforce a choice-of-law provision when it is clear and unambiguous) (citing
Fossil Creek, 242 P.3d at 542).
Enforceability is not the same as scope, however. That the license agreement’s choice of
Delaware law to govern the contract between the parties is enforceable under Oklahoma choiceof-law rules does not necessarily mean that the choice-of-law provision is broad enough to cover
Naturalock’s tort claims as well. The parties, relying on Oklahoma law, agree that the choice-oflaw provision is limited in scope and does not require the application of Delaware law to the
claims at issue here. And that does appear to be the correct conclusion under Oklahoma law. See,
e.g., Hawk Enters., Inc. v. Cash Am. Int’l, Inc., 282 P.3d 786, 790 (Okla. Civ. App. 2012) (choiceof-law provision in franchise agreement was not broad enough to include plaintiff’s claim for
tortious interference); Pine Tel. Co., Inc. v. Alcatel Lucent USA Inc., 617 F. App'x 846, 852-53
(10th Cir. 2015) (choice-of-law provision governed contract and warranty claims but, because
fraud claims did not arise out of the agreement, the forum state’s—Oklahoma’s—choice-of-law
principles determined which law governed those claims). Cf. Tribal Consortium, Inc. v. Pierson,
No. CIV-06-238-D, 2009 WL 5194374, at *6 (W.D. Okla. Dec. 28, 2009) (participation
agreement’s choice-of-law provision applied to plaintiff’s fraud claims because those claims were
8
based on alleged misrepresentations of the exclusive nature of the agreement and thus required
interpretation of the agreement). But as recognized by the Second Circuit:
Determining which jurisdiction’s law governs the scope of a valid choice-of-law
clause is not a simple matter. On the one hand, once a court finds that a contractual
choice-of-law clause is valid, the law selected in the clause dictates how the
contract’s provisions should be interpreted, and so arguably that law should also
dictate how the choice-of-law clause—which is itself one of the contract’s
provisions—should be interpreted. More commonly, however, courts consider the
scope of a contractual choice-of-law clause to be a threshold question like the
clause’s validity. Courts therefore determine a choice-of-law clause’s scope under
the same law that governs the clause’s validity—the law of the forum.
Fin. One Pub. Co. Ltd. v. Lehman Bros. Special Fin., Inc., 414 F.3d 325, 332-33 (2d Cir. 2005)
(internal citation omitted). The Seventh Circuit similarly has held that, “while the choice of law
provision may govern the interpretation of the contract, its legal effect and unrelated questions of
tort law may nevertheless be governed by the law of the forum state, depending upon its choice of
law rules.” Kessinger v. Grefco, Inc., 875 F.2d 153, 155 (7th Cir. 1989).
While it appears that the parties are correct to assume that Oklahoma’s choice-of-law rules
determine whether the selection of Delaware law extends to Naturalock’s tort claims, as a
practical matter the outcome is likely the same if Delaware law dictates the scope of the choiceof-law provision as if Oklahoma law applies. As explained in VSI Sales, LLC v. International
Fidelity Insurance Co., No. CV 15-507-GMS, 2015 WL 5568623 (D. Del. Sept. 22, 2015):
Before applying a choice-of-law provision to a claim, Delaware courts examine
whether the contracting parties drafted the provision broadly or narrowly. Courts
have held that choice-of-law provisions that explicitly apply to “any claim arising
out of or relating to” a contract are broad enough to cover quasi-contract and tort
claims arising from contractual agreements. Courts have held that narrow choiceof-law provisions that do not include such expansive language apply only to claims
directly arising from the contracts themselves.
9
Id. at *3 (internal citations omitted).5 Unlike broader clauses that expressly extend to any and all
claims arising out of the agreement, the clause here states only that the agreement is to be
governed by and construed according to Delaware contract law. See, e.g., Underhill Inv. Corp. v.
Fixed Income Disc. Advisory Co., 319 F. App’x 137, 141 (3d Cir. 2009) (choice-of-law provision
stating that it was to be governed by and construed in accordance with Delaware law was by its
express terms limited to claims arising from the agreement and thus did not apply to quasicontract claims). Given its narrow language, the Court finds that—regardless of whether
Oklahoma or Delaware law applies to this particular issue—the choice-of-law provision in the
license agreement does not cover Naturalock’s fraudulent inducement, negligence, and tortious
interference claims. See, e.g., Kuehn v. Childrens Hosp., L.A., 119 F.3d 1296, 1302 (7th Cir.
1997) (choice-of-law provisions will not be construed to govern tort as well as contract disputes
unless it is clear that this is what the parties intended) (citing Second and Fifth Circuit cases).
Therefore, the law applicable to the tort claims at issue here is that of the state with the
most significant relationship to the occurrence and the parties. To determine which state’s
relationship is most significant, Oklahoma courts consider the following factors: (1) where the
injury occurred; (2) where the conduct causing the injury occurred; (3) each party’s domicile,
residence, nationality, place of incorporation, and place of business; and (4) where the
relationship between the parties occurred.” Hambelton, 405 F. App'x at 337 (citing Brickner v.
Gooden, 525 P.2d 632, 637 (Okla. 1974)). Where a tort action involves allegations of false
representations, Oklahoma courts look to the factors set forth in § 148 of the Restatement
5
But see Abry Partners V, L.P. v. F & W Acquisition LLC, 891 A.2d 1032, 1048 (Del. Ch. 2006) (“Parties
operating in interstate and international commerce seek, by a choice of law provision, certainty as to the
rules that govern their relationship. To hold that their choice is only effective as to the determination of
contract claims, but not as to tort claims . . . would create uncertainty of precisely the kind that the parties’
choice of law provision sought to avoid.”).
10
(Second) of Conflict of Laws. See Ysbrand v. DaimlerChrysler Corp., 81 P.3d 618, 626 (Okla.
2003).6 In their supplemental briefs, the parties both conclude that an analysis of those factors
requires the application of Illinois law to each of Naturalock’s tort claims. While a number of the
factors point to both Illinois and Oklahoma, the parties agree that, overall, Illinois is the state with
the most significant relationship to the dispute. The Western District of Oklahoma court that first
considered this case reached a similar conclusion (although in the context of venue, not choice of
law), noting that “the events giving rise to this lawsuit took place almost exclusively in the
Chicago area and the facts giving rise to the suit have little significant relation to Oklahoma,
although the injuries . . . occurred in Oklahoma.” (Order Granting Baxter’s Mot. to Transfer at 3,
Dkt. No. 38.) This Court agrees and thus concludes that Illinois law applies.
II. Pleading Standards
While the substantive law of Illinois dictates the elements Naturalock must plead to
establish its claims, this Court looks to federal pleading standards to determine the sufficiency of
the amended complaint. See Sabratek Liquidating LLC v. KPMG LLP, No. 01 C 9582, 2002 WL
774185, at *2 (N.D. Ill. Apr. 26, 2002) (citing Charter Oak Fire Ins. Co. v. Hedeen, 280 F.3d 730,
735 (7th Cir. 2002)). Federal Rule of Civil Procedure 8(a) requires that a complaint contain “a
short and plain statement of the claim showing that the pleader is entitled to relief.” Fed. R. Civ.
P. 8(a)(2). To survive a Rule 12(b)(6) motion to dismiss, the short and plain statement must meet
two threshold requirements. First, the complaint’s factual allegations must be sufficient to give the
6
Those factors are: (a) the place, or places, where the plaintiff acted in reliance upon the defendant’s
representations; (b) the place where the plaintiff received the representations; (c) the place where the
defendant made the representations; (d) the domicile, residence, nationality, place of incorporation, and
place of business of the parties; (e) the place where a tangible thing which is the subject of the transaction
between the parties was situated at the time; and (f) the place where the plaintiff is to render performance
under a contract which he has been induced to enter by the false representations of the defendant.
Restatement (Second) of Conflict of Laws § 148 (1971).
11
defendant fair notice of the claim and the grounds upon which it rests. Bell Atl. Corp. v. Twombly,
550 U.S. 544, 555 (2007). Second, the complaint “must contain sufficient factual matter, accepted
as true, to ‘state a claim to relief that is plausible on its face.’” Ashcroft v. Iqbal, 556 U.S. 662,
678 (2009) (quoting Twombly, 550 U.S. at 570). “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.” Adams v. City of Indianapolis, 742 F.3d 720, 728 (7th Cir.
2014) (quoting Iqbal, 556 U.S. at 678).
III. Second Cause of Action – Fraudulent Inducement
The elements of a fraudulent inducement claim under Illinois law are: (1) a false statement
of material fact that is known or believed to be false by the person making it, (2) an intent to
induce the other party to act, (3) action by the other party in reliance on the truth of the statement,
and (4) damage to the other party resulting from such reliance. Hoseman v. Weinschneider, 322
F.3d 468, 476 (7th Cir. 2003).
Naturalock here alleges that Baxter misrepresented its intent to pursue in good faith the
patent process and the commercialization of its invention and that Baxter knew or had reason to
know that those representations were false or intentionally deceiving. Naturalock further alleges
that, as intended by Baxter, it relied upon the alleged misrepresentations in entering into the
license agreement and has been damaged as a result. At first glance, those allegations appear
sufficient to survive a motion to dismiss. However, “[a]s a general rule in Illinois, a promise to
perform a future act, even though made without present intention to perform, is insufficient to
constitute fraud.” Johnson Prods. Co., Inc. v. Guardsmark, Inc., No. 97 C 6406, 1998 WL
102687, at *6 (N.D. Ill. Feb. 27, 1998) (quoting Int’l Meat Co., Inc. v. Bockos, 510 N.E.2d 1013,
1016 (Ill. App. Ct. 1987)); see also Warrentech Auto., Inc. v. Heritage Warranty Ins. Risk
12
Retention Grp., Inc., Nos. 07 C 3539, 07 C 6977, 2008 WL 4876936, at *6 (N.D. Ill. Aug. 12,
2008) (under Illinois law, misrepresentations of the intent to perform future conduct are not
actionable as fraud). This rule guards against the risk of turning every breach of contract suit into
a fraud suit and thereby thwarting the rule that denies the award of punitive damages for breach of
contract. See Desnick v. Am. Broad. Cos., Inc., 44 F.3d 1345, 1354 (7th Cir. 1995).
An exception to the general rule exists “where the false promise or representation of
intention or of future conduct is the scheme or device to accomplish the fraud.” Hollymatic Corp.
v. Holly Sys., Inc., 620 F. Supp. 1366, 1369 (N.D. Ill. 1985) (quoting Roda v. Berko, 81 N.E.2d
912, 915 (Ill. 1948)). In other words, “Illinois does not provide a remedy for fraudulent promises
(‘promissory fraud’)—unless they are part of a ‘scheme’ to defraud.” Desnick, 44 F.3d at 1354. It
is widely recognized that “[t]he distinction between a mere promissory fraud and a scheme of
promissory fraud is elusive, and has caused, to say the least, considerable uncertainty[.]” Id.; see
also Hollymatic, 620 F. Supp. at 1369 (“The question we must decide is whether the general rule
or the exception controls the instant case. The Illinois cases are not easily reconciled and the
Illinois courts have rarely made more than half-hearted attempts to do so.”). The Seventh Circuit
has provided the following guidance:
Our best interpretation is that 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. The parties’ briefs do not address the “scheme or device” exception.
Naturalock, relying solely on Delaware law, simply argues that there is a difference between
breaching a contract once formed and fraudulently inducing a party to enter into a contract to that
party’s detriment with full knowledge that there was never any intent to perform. Is that sufficient
13
to state a claim for fraud under Illinois’s scheme or device exception? This Court concludes that it
is not.
Some courts have found a scheme properly alleged where the plaintiff pleaded facts to
show that the defendant simply made a promise with no intention of performing it. See
Hollymatic, 620 F. Supp. at 1369 (citing cases); see also Bower v. Jones, 978 F.2d 1004, 1011
(7th Cir. 1992) (“The scheme exception applies where a party makes a promise of performance,
not intending to keep the promise but intending for another party to rely on it, and where the other
party relies on it to his detriment.”) (internal quotation marks omitted). However, a plaintiff
alleging a scheme or device must be able to point to specific, objective manifestations of
fraudulent intent. See Hollymatic, 620 F. Supp. at 1369; see also Bower, 978 F.2d at 1012.
Naturalock does not meet this deliberately high burden, as the amended complaint contains no
facts that suggest Baxter never intended to perform its obligations under the license agreement.
Instead, Naturalock alleges only that Baxter failed to perform and then terminated the agreement,
without pleading any facts to show that Baxter’s conduct was motivated by fraud as opposed to
commercial or other reasons. See Zic v. Italian Gov’t Travel Office, 130 F. Supp. 2d 991, 995
(N.D. Ill. 2001) (“Objective proof of fraudulent intent is required because the mere failure to keep
a promise could be caused by any number of motivations besides fraud.”). Naturalock’s
allegations of delay and failure to communicate are just more detailed allegations of nonperformance; they do not support the conclusion that Baxter never intended to perform in the first
place.
In sum, Naturalock has failed to provide any support for its conclusory allegation that
Baxter fraudulently induced it into entering into the license agreement to prevent it from
partnering with other manufacturers or commercializing the invention itself. And that conclusory
14
allegation, standing alone, is insufficient to state a claim for fraudulent inducement under Illinois
law. See Zic, 130 F. Supp. 2d at 995-96 (dismissing plaintiff’s fraud claims where he had not
pleaded any specific objective proof of fraudulent intent, only conclusory allegations.); Ass’n
Benefit Servs., Inc. v. Caremark RX, Inc., 493 F.3d 841, 853 (7th Cir. 2007) (“Illinois law does
not allow [] plaintiffs to proceed on a fraud claim when the evidence of intent to defraud consists
of nothing more than unfulfilled promises and allegations made in hindsight.”). Moreover,
“[i]nitial compliance with a promise is contrary to the existence of fraudulent intent.” Sa'Buttar
Health & Med., P.C. v. Tap Pharm., Inc., No. 03 C 4074, 2004 WL 1510023, at *4 (N.D. Ill. July
2, 2004). The amended complaint clearly indicates that Baxter initially complied with, or at least
attempted to comply with, its obligations under the license agreement. Baxter took a number of
steps down the path to commercialization of Naturalock’s heparin product, including the
completion of studies and testing, multiple submissions to the USPTO, and the filing of foreign
patent applications. Those specific factual allegations undercut the amended complaint’s
conclusory allegations of fraud. Accordingly, Naturalock’s fraudulent inducement claim must be
dismissed.7
7
Baxter contends that Naturalock’s fraudulent inducement claim should be dismissed for the additional
reason that it fails to meet Rule 9(b)’s heightened pleading standard. While not a basis for the Court’s
decision, it is clear that the amended complaint does not contain the “who, what, when, where, and how”
of the alleged fraud. Naturalock asserts that it is not required to plead precise dates and times and that the
complaint adequately identifies the alleged misrepresentations and the time frames in which they were
made. It does not. Nowhere in the amended complaint does Naturalock describe the content—or even the
general gist—of the alleged misrepresentations; nor does it provide approximate date ranges. Moreover,
Naturalock does not identify, even in general terms, who made the allegedly false statements. In its
response brief, Naturalock suggests that the heightened pleading standard should be relaxed because those
details are exclusively within Baxter’s knowledge. That simply cannot be the case. If Naturalock was
induced to rely on statements made by Baxter representatives, it should have at least some idea of what
was said and who said it. Naturalock also asserts that its written discovery responses set forth in great
detail the “who, what, when, etc.” Even if true, that is immaterial—those details are not in the complaint,
and it is the complaint that must meet the requirements of Rule 9(b). Moreover, as noted by Baxter, the
argument that Rule 9(b)’s heightened pleading standard should be relaxed because Naturalock does not
15
IV. Fifth Cause of Action - Negligence
To state a claim for negligence under Illinois law, a plaintiff must establish that the
defendant owed him a duty of care, that the defendant breached that duty, and that the plaintiff
was injured as a proximate result of the breach. Winters v. Fru-Con Inc., 498 F.3d 734, 746 (7th
Cir. 2007). Naturalock alleges that Baxter owed it a duty to timely pursue patent prosecution,
FDA approval, and the commercialization of its invention, and to protect its invention in foreign
countries. Naturalock further alleges that Baxter breached those duties and that it has been
damaged as a result. Baxter argues that Naturalock’s negligence claim—which it characterizes as
nothing more than a recast breach of contract claim—should be dismissed as barred by the
economic loss doctrine. The Court agrees.
The economic loss doctrine (known in Illinois as the Moorman doctrine) “bars recovery in
tort for purely economic losses arising out of a failure to perform contractual obligations.” Wigod
v. Wells Fargo Bank, N.A., 673 F.3d 547, 567 (7th Cir. 2012) (citing Moorman Mfg. Co. v. Nat’l
Tank Co., 435 N.E.2d 443, 448-49 (Ill. 1982)). In other words, “when a contract sets out the
duties between the parties, recovery should be limited to contract damages[.]” R.J. O’Brien &
Assocs., Inc. v. Forman, 298 F.3d 653, 657 (7th Cir. 2002). However, where a duty arises outside
of the contract, the economic loss doctrine does not prohibit recovery in tort for the negligent
breach of that extra-contractual duty. Wigod, 673 F.3d at 567. Therefore, to determine whether the
doctrine bars Naturalock’s negligence claim, the key question is whether Baxter’s duties arose by
operation of the license agreement or existed independent of the agreement. See id.
That is not a difficult question to answer here. Each of the duties alleged by Naturalock is
clearly rooted in the parties’ license agreement. Indeed, the “duties” set forth in Naturalock’s
have the required information is contradictory to the assertion that the information is provided in its
interrogatory responses.
16
negligence claim are the same as the “obligations” upon which Naturalock bases its breach of
contract claims. Because Naturalock has failed to allege any extra-contractual duty breached by
Baxter, its negligence claim is barred. In an attempt to save its claim, Naturalock points to two
exceptions to the economic loss doctrine recognized by Delaware courts. Because those
exceptions also exist under Illinois law, the Court will address each in turn.8 First, Naturalock
asserts that it can maintain a cause of action for negligence if it is able to show that Baxter
supplied it with false information for use in business transactions and that Baxter is in the
business of supplying such information. According to Naturalock, its allegation that Baxter has
refused to turn over certain test data supports a finding that the “supplying information” exception
applies. That argument is simply untenable. How can Baxter’s alleged withholding of information
support a theory that it supplied false information? For use in what business transactions? And
nowhere does Naturalock even hint that Baxter is “in the business of supplying information.”
Second, Naturalock asserts that fraudulent inducement is a recognized exception to the
economic loss doctrine and that the exception applies “to [its] fraudulent inducement claim.” (Pl.
Resp. to Mot. to Dismiss at 13, Dkt. No. 84.) Naturalock fails to explain how an exception for
fraud might be relevant to its negligence claim. And Naturalock’s separate fraudulent inducement
claim has been dismissed for the reasons discussed above, which are unrelated to the economic
loss doctrine and its exceptions. As a last ditch effort, Naturalock contends that, at least in
Delaware, decisions regarding the applicability of exceptions to the economic loss doctrine are
8
Illinois law recognizes three general exceptions to the Moorman doctrine: (1) where the plaintiff
sustained personal injury or property damage resulting from a sudden or dangerous occurrence; (2) where
the plaintiff’s damages were proximately caused by the defendant’s intentional, false representation(s), i.e.,
fraud; and (3) where the plaintiff’s damages were proximately caused by a negligent misrepresentation
made by a defendant in the business of supplying information for the guidance of others in their business
transactions. Catalan v. GMAC Mortg. Corp., 629 F.3d 676, 693 (7th Cir. 2011) (citing First Midwest
Bank, N.A. v. Stewart Title Guar. Co., 843 N.E.2d 327, 333-34 (Ill. 2006)).
17
typically made at the summary judgment stage. That may be true where a plaintiff’s allegations
plausibly suggest that an exception applies. Here, the amended complaint is completely devoid of
any allegations that might bring Naturalock’s negligence claim within the supplying information
exception. And nothing uncovered in the course of discovery will change the fact that an
exception for fraud cannot work to save a negligence claim. Naturalock’s negligence claim is
essentially an attempt to recover tort damages for negligent breach of contract, which is exactly
what the economic loss doctrine prohibits. Naturalock’s fifth cause of action is therefore
dismissed.
V. Sixth Cause of Action – Tortious Interference9
“Under Illinois law, the elements of a claim for tortious interference with business
expectancy are: (1) a reasonable expectancy of entering into a valid business relationship; (2) the
defendant's knowledge of this expectancy; (3) an intentional and unjustified interference by the
defendant inducing or causing a breach or termination of the expectancy; and (4) damages to the
plaintiff resulting from such interference.” Am. Audio Visual Co. v. Rouillard, No. 07 C 4948,
2010 WL 914970, at *2 (N.D. Ill. Mar. 9, 2010). Naturalock alleges that Baxter, aware that it had
been negotiating with other partners and manufacturers, procured the license agreement to
intentionally interfere with and prevent Naturalock from obtaining future support for its invention.
9
In the amended complaint, Naturalock’s sixth cause of action is titled “[t]ortious breach of agreement and
intentional interference with [] business relations.” (Am. Compl. at 22, Dkt. No. 77.) Naturalock’s
response brief states that it has sufficiently pleaded a cause of action for tortious interference with
prospective business relations. While the brief lists the elements of that cause of action, Naturalock goes on
to assert that it has sufficiently pleaded a cause of action for “intentional interference with contractual
relations.” (Pl. Resp. to Mot. to Dismiss at 13, Dkt. No. 84.) To the extent Naturalock attempts to state a
claim for tortious interference or intentional interference with contract, that attempt fails. Naturalock has
failed to show the existence of any agreement between it and a third party with which Baxter interfered,
and “[a] party may not be charged with tortious interference with respect to its own contract.” Cromeens,
Holloman, Sibert, Inc. v. AB Volvo, 349 F.3d 376, 397 (7th Cir. 2003). The Court thus assumes that this is
a claim for tortious interference with prospective business relations.
18
Naturalock further alleges that Baxter’s conduct has prevented it from pursuing other
manufacturers in partnerships or licensing agreements.
However, to state a claim for tortious interference, the alleged interference must be a
result of conduct directed by the defendant toward a third party. See Premier Transp., Ltd. v.
Nextel Commc’ns, Inc., No. 02 C 4536, 2002 WL 31507167, at *2 (N.D. Ill. Nov. 12, 2002)
(“[T]here is a long line of cases—both from the Illinois appellate courts and from federal courts
within this district—explaining that the element of interference requires more than mere
allegations of conduct between the plaintiff and defendant.”). Naturalock’s amended complaint
contains no allegations of conduct by Baxter directed toward any third party. Indeed, the only
interference identified is Baxter’s conduct in obtaining the license agreement. Naturalock’s
response brief puts a different spin on the claim, asserting that Baxter, in an effort to keep
Naturalock from working with other partners or marketing its product to competitors, continues to
withhold valuable information. Again, the alleged conduct is plainly directed toward Naturalock
and not toward any third parties. For that reason, Naturalock’s tortious interference claim fails
along with its other tort claims.
19
CONCLUSION
For the reasons stated above, Baxter’s motion to dismiss (Dkt. No. 79) is granted and
Naturalock’s second, fifth, and sixth causes of action are dismissed without prejudice. Naturalock
is granted leave to file a second amended complaint that cures the deficiencies detailed in this
opinion, if it is able to do so consistent with the requirements of Federal Rule of Civil Procedure
11, by October 18, 2016.10
ENTERED:
Dated: October 4, 2016
__________________________
Andrea R. Wood
United States District Judge
10
Baxter argues that Naturalock should not be granted leave to amend because it waited until the deadline
for amendments to file its amended complaint. In support, Baxter cites Alioto v. Town of Lisbon, 651 F.3d
715 (7th Cir. 2011), in which the Seventh Circuit held that the district court did not abuse its discretion in
denying the plaintiff’s motion for leave to amend his complaint, which was filed on the last day for filing a
response to the defendants’ motion to dismiss, and more than eight months after the deadline for filing
amended pleadings. Here, Naturalock moved for leave to amend on the deadline for doing so, and then
responded to Baxter’s motion to dismiss in a timely fashion. The Court does not view that as a lack of
diligence and thus sees no reason to deny Naturalock the opportunity to amend its complaint at this point.
20
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