Act II Jewelry, LLC v. Wooten

301 F.Supp.3d 905

ACT II JEWELRY, LLC, a Delaware Limited Liability Corporation d/b/a Lia Sophia; and Kiam Equities Corporation, a Delaware Corporation, Plaintiffs,

v.Elizabeth Ann WOOTEN; Adornable–U, LLC, a Delaware Limited Liability Company; Nicole Mead; Shannon Eckels; and Becka Daun, Defendants.

Elizabeth Ann Wooten; Adornable–U, LLC, a Delaware Limited Liability Company; Nicole Mead; and Shannon Eckels, Counter Plaintiffs/Third–Party Plaintiffs,

v.Act II Jewelry, LLC, a Delaware Limited Liability Company; and Kiam Equities Corp., a Delaware Corporation; Victor K. Kiam III; and Elana Kiam, Counterdefendants/Third–Party Defendants.

Case No. 15 C 6950

United States District Court, N.D. Illinois, Eastern Division.

Signed March 14, 2018

Jeffrey Michael Glass, SmithAmundsen LLC, Rockford, IL, Jeffrey A. Risch, Noah A. Frank, SmithAmundsen LLC, Chicago, IL, Michael F. Hughes, SmithAmundsen LLC, St. Charles, IL, Phillip Junior Fowler, Pro Hac Vice, SmithAmundsen, LLC, Indianapolis, IN, for Plaintiffs.

Diem Kaelber, FisherBroyles LLP, Columbus, OH, Bradley Paul Nelson, Fisher Broyles LLP, Chicago, IL, Douglas Landon Speights, Pro Hac Vice, Houston, TX, for Defendants.

MEMORANDUM OPINION AND ORDER

Harry D. Leinenweber, Judge

Before the Court are two Motions: a Partial Motion to Dismiss Additional Parties [ECF No. 199] brought by Defendants Elizabeth Ann Wooten, Adornable–U, LLC, Nicole Mead, Shannon Eckels, and Becka Daun (collectively, the "Defendants") and a Motion for Summary Judgment on the breach of fiduciary duty claim [ECF No. 202] brought by Defendant Elizabeth Ann Wooten ("Wooten"). For the reasons stated herein, Defendants' Motion to Dismiss Certain Parties [ECF No. 199] is granted with leave to amend and Wooten's Partial Motion for Summary Judgment [ECF No. 202] is denied.

I. BACKGROUND

The Court assumes familiarity with the underlying facts of this case as recited in its opinions [ECF Nos. 90, 95] granting in part and denying in part the parties' respective motions to dismiss the operative complaint and the counterclaims. See, generally, Act II Jewelry, LLC v. Wooten , No. 15 C 6950, 2016 WL 4011233 (N.D. Ill. July 27, 2016) (motion to dismiss the counterclaims); Act II Jewelry, LLC v. Wooten , No. 15 C 6950, 2016 WL 3671451 (N.D. Ill. July 11, 2016) (motion to dismiss the operative complaint). The facts relevant to the Motion to Dismiss were taken from the Third Amended Complaint and the facts relevant to the Motion for Summary judgment were taken from the parties' 56.1 statements.

Plaintiff Act II Jewelry, LLC ("Act II") was in the jewelry sales industry. (3d Am. Compl. ¶¶ 1, 11, ECF 188.) It marketed and sold jewelry by having a network of sales representatives hold parties in customers' homes, commonly known as the "party plan" business model. Id. Wooten was employed as Vice President of Product Development by Act II for approximately three and a half years from July 2011 to February 9, 2015. (Act II's Resp. to Wooten's Facts ¶ 14, ECF No. 214.) As Vice President of Product Development, Wooten selected, developed, and designed Act II's line of jewelry. (3d Am. Compl. ¶¶ 21–22.) Over the course of her employment, Wooten entered into several contracts with Act II, including a "Loan Agreement" between herself, Act II, and another company, Kiam Equities Corp. ("KEC"), pursuant to which Wooten was lent $300,000. (Id. ¶¶ 25–26, 51–61.) As consideration for the loan, Wooten agreed to repay KEC the principal amount plus interest, although the contract also specified circumstances in which the loan would be forgiven. (Id. )

On December 1, 2014, Act II announced it would be winding down its direct-selling, party plan jewelry business in the United States and Canada and its sales advisors would be selling its Fall/Winter 2014 collection at discounted prices through December 31, 2014. (Id. ¶ 13.) To ensure an orderly wind down process, Act II entered into a Key Employee Incentive Bonus Agreement (the "Incentive Agreement") with Wooten, which provided financial incentives for Wooten to remain employed with Act II and work diligently during the wind down period. (Id. ¶¶ 62–71.) The only signatories to the Incentive Agreement were Act II and Wooten. (Id. )

When Act II decided to close shop, Wooten decided to open her own business in the same industry. (Id. ¶ 78–79.) On October 30, 2014, several months prior to her termination, Wooten incorporated Adornable–U, a direct-selling jewelry business. (Id. ) The crux of the dispute is the propriety of Wooten's activities from October 2014 to her termination date with Act II on February 9, 2015. (Id. ¶¶ 72–130.) However, we need not delve into the details of her actions here. The pending Motion to Dismiss revolves around Wooten's relationship with KEC and one other company, not her relationship with Act II.

KEC was one of Act II's creditors. Following the wind down of Act II's business, Act II transferred its inventory and most of its other assets to KEC pursuant to an asset foreclosure. (3d Am. Compl. ¶ 1.) KEC then established K–FIVE LLC ("K–FIVE") as a Delaware limited liability company to market and license jewelry styles under Act II's brand through e-commerce channels. (Id. ¶ 3.) It is unclear exactly what rights were transferred from Act II to KEC and, similarly, from KEC to K–FIVE.

Relevant to Wooten's Partial summary judgment motion, Wooten was never a member, controlling member, manager, or director of Act II. (Act II's Resp. to Wooten's Facts ¶ 16.) Her sole relationship with Act II was as an employee, even if a prominent one. Additionally, Wooten never played any role—employee, member, manager, or director—at KEC or K–FIVE. (Id. ¶¶ 18, 21.)

After a prior ruling which dismissed several counts, four counts remain against Wooten: the breach and default of the Loan Agreement (Count II); the breach of the Incentive Agreement (Count III); the breach of fiduciary duty (Count IV); and the violation of the Illinois Trade Secrets Act (Count VI). The Third Amended Complaint alleges these same claims, but adds two new parties, KEC and K–FIVE, as well as several counts that were previously dismissed. (See, generally, 3d Am. Compl.) Defendants' Motion to Dismiss takes issue with the additional parties and Wooten's Motion for Summary Judgment deals exclusively with the breach of fiduciary duty claim. The Court takes each in turn.

II. ANALYSIS

A. Motion to Dismiss

1. Standard of Review

To survive a motion to dismiss under Federal Rule of Civil Procedure 12(b)(6), a complaint "must state a claim that is plausible on its face." Adams v. City of Indianapolis , 742 F.3d 720, 728 (7th Cir. 2014) (quoting Bell Atl. Corp. v. Twombly , 550 U.S. 544, 570, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007) ). When considering motions to dismiss under Rule 12(b)(6), a district court accepts as true all well-pleaded factual allegations and draws reasonable inferences therefrom in favor of the non-moving party. See, e.g., Jakupovic v. Curran , 850 F.3d 898, 902 (7th Cir. 2017). Documents attached to the Complaint are considered part of it. See, e.g., Moranski v. Gen. Motors Corp. , 433 F.3d 537, 539 (7th Cir. 2005) (citing FED. R. CIV. P. 10(c) ).

2. Previously dismissed Counts I, V, VII, VIII, and XI

Counts I, V, VII, VIII, and XI were dismissed with prejudice in this Court's Memorandum Opinion and Order dated July 11, 2016. (ECF No. 90.) Plaintiffs explained in a footnote that these counts were re-asserted in the Third Amended Complaint to prevent any argument of waiver on appeal. For the reasons expressed in its earlier opinion, Counts I, V, VII, VIII, and XI are dismissed with prejudice. See, Act II Jewelry, LLC v. Wooten , No. 15 C 6950, 2016 WL 3671451 (N.D. Ill. July 11, 2016).

3. Additional parties for Counts II, III, IV, and VI

Defendants move to dismiss KEC and K–FIVE from several of the remaining counts on the basis that they are not real parties in interest under Rule 17 of the Federal Rules of Civil Procedure. "[Federal Rule] 17(a) provides that ‘[e]very action shall be prosecuted in the name of the real party in interest.’ The real party in interest is the one who ‘by the substantive law, possesses the right sought to be enforced, and not necessarily the person who will ultimately benefit from the recovery.’ " Checkers, Simon & Rosner v. Lurie Corp. , 864 F.2d 1338, 1343 (7th Cir. 1988) (quoting Illinois v. Life of Mid–America Insurance Co. , 805 F.2d 763, 764 (7th Cir. 1986) ).

Defendants argue that KEC and K–FIVE are not the real parties in interest because absent from the Complaint is any allegation that Act II's contractual or other rights were assigned or transferred to KEC or K–FIVE. Plaintiffs contend that their Third Amended Complaint is sufficient, pointing to its allegations that most of Act II's inventory and assets were transferred to KEC and that K–FIVE was established to sell Act II's brand through e-commerce channels. (3d Am. Compl. ¶¶ 1, 3.) Plaintiffs rely on an Article III standing case, Alliant Energy Corp. v. Bie , to argue their allegations are sufficient. See, Alliant Energy Corp. v. Bie , 277 F.3d 916, 920 (7th Cir. 2002) ("It is easy to imagine facts consistent with this complaint and affidavits that will show plaintiffs' standing, and no more is required.").

Plaintiffs conflate Article III standing with Rule 17(a)'s real-party-in-interest requirement. "The requirements of Rule 17 should not be confused with the jurisdictional doctrine of standing." Rawoof v. Texor Petroleum Co. , 521 F.3d 750, 756 (7th Cir. 2008) ; see also, Arbaugh v. Y & H Corp. , 546 U.S. 500, 511, 126 S.Ct. 1235, 163 L.Ed.2d 1097 (2006). The federal rules, including Rule 17(a), do not confer or withdraw federal subject matter jurisdiction. Constitutional subject matter jurisdiction is a separate inquiry. The cases cited by Plaintiffs, including Bie , relate to constitutional standing and do not address the Rule 17(a) issue at bar. See, Lujan v. Defenders of Wildlife , 504 U.S. 555, 560–61, 112 S.Ct. 2130, ...