Act II Jewelry, LLC v. Wooten
318 F.Supp.3d 1073 (2018)
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Rule of Law:
A qualified privilege protects litigation-related communications from claims of tortious interference unless actual malice is proven, and a new business typically cannot establish lost profits with reasonable certainty. The Illinois Consumer Fraud Act does not apply to business-to-business communications that are not directed to the general market or do not implicate broader consumer protection concerns.
Facts:
- Act II Jewelry, LLC operated a party-plan jewelry sales business, employing Ann Wooten as Vice President of Product Development from July 2011 to February 9, 2015.
- On December 1, 2014, Act II announced its plan to wind down its direct-selling business in the United States and Canada, ceasing all operations by March 7, 2015.
- Act II entered into a Key Employee Incentive Bonus Agreement with Wooten, which reaffirmed a Non-Disclosure Agreement requiring confidentiality of trade secrets but specifically allowed Wooten to continue working as a jewelry designer without infringing Act II's intellectual property.
- In September 2014, Wooten disclosed to Act II her intention to start her own direct-sales jewelry company, Adornable-U, which she incorporated on October 30, 2014.
- Act II alleges that while still employed, Wooten used Act II’s proprietary information, directed Act II designers to work for Adornable-U, and took Act II’s unreleased jewelry styles and other proprietary data by emailing documents to her personal account.
- On January 20, 2015, Wooten posted Adornable-U's first product catalog online, which Act II claims contained many of its work products, including items from its Fall/Winter 2014 collection and unreleased designs.
- Act II terminated Wooten's employment for cause on February 9, 2015, and Adornable-U began selling jewelry on March 6, 2015, with 62 styles later becoming subject of the lawsuit.
- Between March and August 2015, Act II sent letters and subpoenas to actual and potential Adornable-U sales agents, advising them of the pending lawsuit and potential discovery obligations, but stating it did not seek to block agents from working with Adornable-U.
Procedural Posture:
- Act II filed suit against Ann Wooten and Adornable-U in the Circuit Court of Cook County, Illinois, on March 20, 2015.
- The case was subsequently removed to the United States District Court for the Northern District of Illinois.
- The District Court previously ruled on various motions, including motions to dismiss and partial summary judgment, in prior orders (e.g., ECF Nos. 90, 95, 252).
- Plaintiffs Act II Jewelry, LLC, et al. moved for partial summary judgment on the breach of fiduciary duty claim and all remaining counterclaims.
- Defendants Elizabeth Ann Wooten, Adornable-U, LLC, et al. moved for partial summary judgment on Act II's trade secret and breach of contract claims.
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Issue:
Does a qualified privilege protect a former employer's litigation-related communications (letters and subpoenas) from claims of tortious interference with a new business's prospective economic advantage or contract, absent proof of actual malice or reasonably certain lost profits, and are such communications outside the scope of the Illinois Consumer Fraud Act when not directed to the general market?
Opinions:
Majority - Harry D. Leinenweber, Judge
No, a qualified privilege protects a former employer's litigation-related communications from claims of tortious interference and such communications are outside the scope of the Illinois Consumer Fraud Act if not directed to the general market, provided actual malice is not proven and lost profits cannot be established with reasonable certainty. The court granted Act II summary judgment on Adornable-U's tortious interference claims, finding that Act II's letters and subpoenas to Adornable-U's sales agents were subject to a qualified privilege because they were made to protect Act II's contractual and intellectual property rights and to advise recipients of their duties. Adornable-U failed to prove Act II acted with 'actual malice' (a desire to harm unrelated to protecting its interest) as the communications were directly related to legitimate legal interests. Additionally, Adornable-U could not establish its alleged lost profits with reasonable certainty, as the 'new business rule' makes expected profits of new businesses too uncertain, and Adornable-U's expert reports relied on non-analogous businesses rather than comparable historical data. For the Illinois Consumer Fraud Act claim, the court granted Act II summary judgment because the communications were sent to specific recipients (sales agents), not to the market generally, and did not implicate broader consumer protection concerns in this business-to-business dispute. The court denied Adornable-U's summary judgment motion regarding Act II's breach of the Key Employee Incentive Bonus Agreement, holding that post-employment restrictive covenants are enforceable if they protect a legitimate business interest (like confidential information), do not impose undue hardship (as the agreement allowed Wooten to continue as a designer), and are not injurious to the public. The court denied Act II's summary judgment on the breach of fiduciary duty claim against Wooten, finding her to be a 'key managerial employee' but concluding that material facts regarding the alleged breach were heavily disputed and required a jury's determination. Similarly, the court denied Adornable-U's summary judgment on Act II's trade secret claims against Wooten and Adornable-U, finding Act II sufficiently identified its trade secrets and presented disputed facts regarding misappropriation. However, summary judgment was granted for defendants Mead, Eckels, and Daun on the trade secret claims due to insufficient evidence of their access to or misappropriation of sensitive materials.
Analysis:
This case clarifies the high bar for proving tortious interference when a qualified privilege applies to litigation-related communications, underscoring the necessity of demonstrating actual malice and not merely negative business impact. It also reinforces the 'new business rule,' making it challenging for nascent companies to claim lost profits without robust, analogous historical data. The decision further delineates the limited scope of the Illinois Consumer Fraud Act in business-to-business disputes, requiring a nexus to general market practices or consumer protection. Lastly, it affirms that post-employment restrictive covenants, when reasonably drafted to protect legitimate business interests, remain enforceable even if the employer is winding down operations.
