Manufacturer's Fraud Claim Against Walgreens Dismissed Under Rule 9(b)

IMAGENETIX, INC. v. Walgreen Co., Dist. Court, ND Illinois 2012 - Google Scholar:

The plaintiff is a manufacturing company that sold goods to Walgreens.  Plaintiff participated in a Walgreens coupon program under which those who purchased its product would receive a coupon.  After the program ended Walgreens sent Plaintiff an invoice for rebates totaling $640,000.

Plaintiff claimed that Walgreens engaged in fraud by charging it for rebates that were not valid.

Federal Rule of Civil Procedure 9(b) requires a heightened state of pleading for fraud claims.  The court explained:

"Allegations of fraud are subject to a heightened pleading requirement. Rule 9(b) requires that "[i]n all averments of fraud or mistake, the circumstances constituting fraud or mistake shall be stated with particularity." The heightened pleading therefore requires a complaint alleging fraud to contain more substance to survive a motion to dismiss as compared to a Rule 12(b)(6) motion based on another cause of action. See Ackerman v. Nw. Mutual Life Ins. Co., 172 F.3d 467, 469 (7th Cir. 1999) (stating that Rule 9(b) forces "the plaintiff to do more than the usual investigation before filing his complaint"). A satisfactory fraud pleading must include "the who, what, when, where, and how: the first paragraph of any newspaper story." DiLeo v. Ernst & Young, 901 F.2d 624, 627 (7th Cir. 1990)."

As the court noted, the plaintiff claimed that it grew suspicious of Walgreens' rebate claim.  Therefore, according to the Court there was no reliance and no fraud.  The Court explained as follows:

"The motion to dismiss the fraud claim is granted. To prove common law fraud, Plaintiff must plead the following elements: (1) a false statement of material fact; (2) defendant's knowledge that the statement was false; (3) defendant's intent that the statement induce the plaintiff to act; (4) plaintiff's reliance upon the truth of the statement; and (5) plaintiff's damages resulting from reliance on the statement. Tricontinental Indus. v. PricewaterhouseCoopers, LLP, 475 F.3d 824, 841 (7th Cir. 2007) (citing Connick v. Suzuki Motor Co., Ltd., 675 N.E.2d 584, 591 (Ill. 1996)). As described above, the elements must be described with particularity.

The first, second, and third elements here are well-pled. Plaintiff has provided sufficient specifics about what statements were false: namely, the billing statements from Walgreens to Plaintiff. These statements, according to Plaintiff, essentially inflated the redemption rate in order to prompt Plaintiff to overpay for the Register Rewards and Easy Saver programs. The second and third elements can be pled generally under Rule 9(b), and the complaint quite clearly alleges knowledge of the falsity and intent to induce.

Where the complaint falls flat is on reliance and damages. I take reliance first. As to the Register Rewards program, Paragraphs 14 and 15 illustrate the point. Paragraph 14 reads as follows:

Following the week of the promotion, Walgreens represented to Imagenetix that it issued approximately 54,000 Register Rewards coupons related to the purchase of Celadrin and that 52,039 of those coupons were redeemed by customers. The redemption rate of over 95 percent was excessively high, especially considering the relatively short expiration period (i.e., two weeks) for each Register Rewards coupon. Walgreens billed Imagenetix $533,000 for coupons purportedly redeemed, plus $188,000 for scan down charges and a co-op charge related to the Register Rewards program.

It is this representation by Walgreens that Imagenetix claims was false. Even if true, however, Paragraph 15 not only fails to specify reliance, it comes close to pleading Plaintiff out of court on that element:

Because of the extremely high redemption rate for its Register Rewards promotion, Imagenetix audited the program. Imagenetix analyzed the purportedly redeemed coupons that were sent to Imagenetix by Walgreens' coupon processor, NCH Marketing Services, Inc. ("NCH"). Each Register Rewards coupon has a fourteen-digit code with the store number, lane number, and the date and time the coupon was printed. Imagenetix's audit revealed wide-spread fraud by Walgreens.

The most likely interpretation of this paragraph is that Imagenetix was suspicious of Walgreens' alleged misrepresentation, and sought to check out Walgreens' claims for reimbursement. If so, Plaintiff did not rely on Walgreens' representations — false or otherwise — and thus could not prove common law fraud.^[1]

But I must interpret the complaint in Plaintiff's favor and there is one interpretation that could save Plaintiff's case. This interpretation is that Plaintiff in fact paid Walgreens the full amount Walgreens had fraudulently demanded, and audited the program shortly after. If that is what Plaintiff is trying to say, then reliance may be present and the fraud complaint might plausibly be plead. I note that this interpretation only saves Plaintiff from a "with prejudice" dismissal.^[2]The claim of fraud is dismissed because the fourth element is not plead with sufficient particularity, but Plaintiff may attempt to amend the complaint to more clearly and specifically plead the reliance element.

The fifth element, damages from the reliance, is also far too vague to meet the strictures of Rule 9. Regarding the alleged damages, the complaint says two things. First, in Paragraph 23, regarding the Easy Saver program, the complaint says: "[o]n information and belief, Walgreens charged Imagenetix an amount in excess of the payments received by consumers." This statement is problematic for two reasons. One, it is vague as to whether Walgreens simply presented a bill or whether Imagenetix actually paid the bill. If only the former, then Imagenetix did not rely on the statements and was not damaged. If the latter, more particularity is required. This is because allegations made "on information and belief" are inappropriate in the fraud context, unless the relevant facts are not accessible to the plaintiff and the plaintiff provides grounds for his suspicions. Pirelli Armstrong Tire Corp. Retiree Med. Benefits Tr. v. Walgreen Co., 631 F.3d 436, 442-43 (7th Cir. 2011). The exception to the general rule does not apply here, because any payments Plaintiff has made would obviously be known to them.

The second statement regarding damages is as follows: "[a]s a result of Walgreens' misconduct related to the Register Rewards, Easy Saver, and other programs, Imagenetix and other manufacturers have overpaid Walgreens." It is entirely unclear what Plaintiff paid, when it paid, and under which of the programs. Rule 9 commands that Plaintiff provide more detail about how much it paid and when it paid those amounts pursuant to which programs. Plaintiff must also show in its pleading how its reliance on Walgreens' false statements led to the payments.

The fraud allegations are dismissed for failure to plead sufficient particularities under Rule 9. For the reasons stated above, the dismissal is without prejudice."

The court gave Imaginetix leave to amend the complaint.

Comment: Obviously, the lesson here is that under the new pleading standards set forth in recent U.S. Supreme Court decisions. plaintiffs must provide much more detail than previously.  The old days of federal notice pleading are long gone.  Fact pleading, which has long been the practice in the state courts, is now slowly becoming the accepted federal practice.

Edward X. Clinton, Jr.

www.clintonlaw.net

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Advice For Homeowners Contracting With Builders

This question comes up fairly often and I would like to address it.

If you are going to renovate your home or condominium and you retain a contractor, make sure that the contractor is bonded and insured.

If he/she is not insured, you are acting at your own risk.  Your homeowner's insurance will not cover any errors or omissions by a contractor.  By the time the problem comes up (the roof leaks, the pool leaks, the deck leaks, the tiles don't stay down, the wood warps) it will be too late.  You can sue, but it is unlikely that such a contractor will have any money with with to satisfy the judgment.

Again, insist on a bonded and insured contractor.  Ask for a certificate of insurance.

Edward X. Clinton, Jr.

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Tax Season Reminder - Deal In Writing With The IRS!

Recently, a client contacted us about problems with the IRS.


The client had made a payment, but the payment was not properly credited by the IRS.  The client had spent many hours on the telephone with the IRS, but the calls had not resolved the problem.


Please understand this:  when dealing with the IRS - ALWAYS, ALWAYS CORRESPOND IN WRITING.


By writing I mean a letter with a stamp, preferably certified.  Also keep a copy of the letter.  The IRS is required to respond to correspondence.  It is not bound by what an employee said on the 800 number line.  Indeed, the employee may not even be required to keep a log of calls and what happened on the phone calls.  In sum, calling the IRS is a complete waste of time and should be avoided at all costs.


If the IRS sends a notice that you failed to pay a tax or made a mistake on your return, respond with a letter to the IRS.  Be professional and polite.  Don't waste time calling the IRS on the phone.  The organization is a 19th century dinosaur.


If you send a check to the IRS, include the tax i.d. number and identify the tax year that the check relates to.


Edward X. Clinton, Jr.

www.clintonlaw.net

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Illinois Adopts A New Citation System For Cases Decided By its Courts

Illinois Supreme Court « Illinois Lawyer Now

Illinois is finally abandoning the old reporting system for Illinois cases. Apparently, no more books will be issued. Instead, the Illinois Courts will issue opinions online with a new citation system. This will also abolish the often-confusing distinction between published and unpublished opinions.

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U.S. Supreme Court Upholds Arbitration Clause In Credit Card Agreement

The case is captioned CompuCredit Corp. v. Greenwood, No. 10-948.


Over the past 20 years, the United States Supreme Court has upheld arbitration clauses from many challenges.  The latest, upholding an arbitration clause in a credit card agreement, will force those who want to make claims against credit card companies to file arbitration proceedings.  Business groups currently prefer arbitration to claims in the court systems.  How this will work over the long-term in anybody's guess.


One result is that the plaintiff's class action against the credit card company will soon be a thing of the past.  Each wronged plaintiff must now file for arbitration.


Sometimes defendants are shocked when they force people to arbitration.  The fees can be steep and most arbitration organizations make the defendants pay the bulk of the fees.  Often the fees exceed the amount at issue.


The undersigned has acted as counsel in cases where the arbitrator's fees exceeded the total amount due to the plaintiff.  Many times, litigants, particularly employers, can be stunned by the size of such fees.


Edward X. Clinton, Jr.


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Illinois Supreme Court Upholds Noncompetition Agreements

RELIABLE FIRE EQUIPMENT COMPANY v. Arredondo, Ill: Supreme Court 2011 - Google Scholar:

This case was recently decided by the Illinois Supreme Court to "correct" a misconception that Illinois no longer recognizes that a noncompetition agreement must support a legitimate business interest of the employer.

The Court described the three-prong test as follows: "¶ 17 "The modern, prevailing common-law standard of reasonableness for employee agreements not to compete applies a three-pronged test." BDO Seidman v. Hirshberg, 712 N.E.2d 1220, 1223 (N.Y. 1999). A restrictive covenant, assuming it is ancillary to a valid employment relationship, is reasonable only if the covenant: (1) is no greater than is required for the protection of a legitimate business interest of the employer-promisee; (2) does not impose undue hardship on the employee-promisor, and (3) is not injurious to the public. Id.;Restatement (Second) of Contracts § 187 cmt. b, § 188(1) & cmts. a, b, c (1981).^[2] Further, the extent of the employer's legitimate business interest may be limited by type of activity, geographical area, and time. Restatement (Second) of Contracts § 188 cmt. d (1981). This court long ago established the three-dimensional rule of reason in Illinois and has repeatedly acknowledged the requirement of the promisee's legitimate business interest down to the present day."

The Court explained that Illinois recognizes the legitimate business interest test. It noted: "¶ 43 In sum, the legitimate business interest test is still a viable test to be employed as part of the three-prong rule of reason to determine the enforceability of a restrictive covenant not to compete. However, the two-factor test created in Kolar, in which a near-permanent customer relationship and the employee's acquisition of confidential information through his employment are determinative, is no longer valid. Rather, we adopt the position of Justice Hudson's special concurrence, which is: whether a legitimate business interest exists is based on the totality of the facts and circumstances of the individual case. Factors to be considered in this analysis include, but are not limited to, the near-permanence of customer relationships, the employee's acquisition of confidential information through his employment, and time and place restrictions. No factor carries any more weight than any other, but rather its importance will depend on the specific facts and circumstances of the individual case."

The court then remanded the case to the Circuit Court to allow that court to apply the proper test.

Comment: it appears that this opinion resolves a debate in the caselaw concerning the legitimate business interest test. Although it is far from certain, considering the legitimate business interest of the employer would appear to strengthen the employer's ability to enforce a reasonable noncompetition agreement.

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Illinois Company Held Liable For Agent Who Wrongfully Obtained Employee's Phone Records

Lawlor v. North American Corp. of Illinois, 949 NE 2d 155 - Ill: Appellate Court, 1st Dist., 4th Div. 2011 - Google Scholar:

This is an Illinois case in which the plaintiff, Kathleen Lawlor, obtained an award of compensatory and punitive damages against her former employer.

The court characterized Lawlor's claim as follows: "The parties engaged in four years of bruising discovery, but the testimony at the six-day trial was relatively uncomplicated. Lawlor was aggrieved that North American, through surreptitious means, acquired her mobile and home phone records in a failed effort to prove that she breached the company's noncompetition agreement. Painted with a broad brush, Lawlor presented evidence at trial to the effect that North American, through counsel and at least two independent investigators, set about the tasks of personal surveillance and getting her private phone records."

Again the bad conduct of the defendant supported the Appellate Court's decision to reinstate the punitive damages award of $1.75 million.

The court wrote: "Here, we conclude that the jury's award of $1.75 million was reasonable given North American's reprehensible conduct. The nature and the inappropriateness of the intrusive conduct in meddling with plaintiff's personal records was sufficiently malevolent to warrant punitive damages, especially considering that North American on multiple occasions, over a five-month period, specifically utilized the wrongfully obtained phone records. While several of its officers and employees testified that they were unaware of the methodology of how the records were obtained and whether unethical or illegal means were utilized, North American points to no evidence showing it was uncomfortable with the receipt or the use of this private information. To the contrary, North American employees testified that they had no hesitancy in using the phone records and that they never inquired how they were obtained. In terms of the size of the award, the jury heard that North American's net worth was approximately $50 million. It can scarcely be argued that the amount awarded by the jury was egregiously high, given both the nature of the conduct and the extent of defendant's net worth."

Edward X. Clinton, Jr.

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