Meage

Filter Dynamics’s “clear and convincing” standard has neither been
cited nor disagreed with by any Court applying Illinois law over the
past thirty years. Further, Filter Dynamics strangely borrowed its
“clear and convincing” standard from a line of mostly irrelevant
conspiracy cases. Therefore, this Court seriously doubts whether

Filter Dynamics remains good law in Illinois, if indeed it ever was.

Instead of the “clear and convincing” standard suggested by
Prime, Tempco asks that the Court apply the standard found in
PepsiCo, Inc. v. Redmond, 1995 U.S. Dist. LEXIS 19437 at *37 (N.D.
Ill. 1995). This standard permits plaintiffs to:

construct a web of perhaps
ambiguous circumstantial evidence from
which the trier of fact. may draw
inferences which convince him that it
is more probable than not that what
plaintiffs allege happened did in fact
take place. Against this often
delicate construct of circumstantial
evidence there frequently must be
balanced defendants. and defendants’
witnesses who directly deny
everything.”

Id.

Although to date no Illinois state court has applied PepsiCo,
this standard was recently applied by the federal Central District of
Illinois. See Rotec Indus. v. Mitsubishi Corp., 179 F. Supp. 2d 885,
895-896 (C.D. Ill. 2002). However, the Court notes that PepsiCo
concerned a motion for preliminary injunction, not a motion for
summary judgment. As a result, the PepsiCo court considered

circumstantial evidence in the context of a “likely to prevail”

-19-



keys have no intrinsic value. Rather, their value comes solely from
their ability to enable someone to access SA/2. Prime further argues
that the penalty nature of the liquidated damage clause is shown by
the fact that it charges an additional $15,000 fee for each key not
returned - when only one key is needed to access SA/2. Because of
this, Prime claims that Tempco Vice-President of Sales Joseph Podge
(“Podge”) himself admitted in deposition that the liquidated damages
provision is a “penalty.”

Tempco responds by noting, correctly, that Prime’s citation to
Podge’s deposition testimony is out-of-context, and in no way
constitutes an admission that the liquidated damages provision is
unenforceable. Tempco then persuasively argues that the liquidated
damages provision serves as a valid check to ensure that a licensee
of SA/2 ceases to use SA/2 if Tempco revokes their license. Without
such a check, Tempco notes that these ex-licensees would have no
incentive to return all their keys, permitting them to continue
covertly to use the SA/2 illegally. Consequently, Tempco argues -
and this Court agrees ~ that the liquidated damages provision serves
the legitimate purpose of compensating Tempco for the possible but
uncertain misuse of its intellectual property. This Court further
concurs with Tempco that the clause’s charge of $15,000 per key
serves this legitimate purpose - as the more keys that go unreturned,
the greater the potential for misuse of SA/2, including simultaneous

misuse by different parties in different locations.

-13-



Mew

only speculation and conjecture. Each of Tempco’s supposed
circumstantial facts has an easily produced explanation by Prime.
For example, while Tempco makes a big deal over Prime’s failure to
return between one and three hardware access keys, Prime claims that
it simply lost or misplaced the keys. Likewise, although Tempco
notes that Prime at first hesitated regarding whether or not to
return Shoemaker’s. hardware access key to PE Products (suggesting
perhaps, a momentary urge to misappropriate SA/2), the undisputed
evidence indicates that the key was eventually returned. While these
disagreements certainly create uncertain issues of fact, the sum
total of these factual disputes do not amount to the genuine issue of
material fact necessary to survive summary judgment - given Prime’s
hard and un-refuted computer evidence that SA/2 did not remain on its
computers. Tempco claims to have constructed a “web of
circumstantial facts,” and a web certainly is the appropriate analogy
- Tempco’s rank speculation as to what might be on Prime’s computers
is as flimsy and easily broken as a spider web, and contains just as
many gaping holes.

There is one caveat to the above analysis. Tempco has produced
solid, direct evidence via Shoemaker’s deposition testimony that SA/2
remained on Shoemaker’s Prime-issued laptop computer. However, since
this evidence derives entirely from Shoemaker’s deposition testimony,
the Court finds the rest of Shoemaker’s testimony highly instructive.
Notably, Shoemaker remarks that, because he lacked a hardware access

key, “you could not use that Prime SA/2 program. Even if it was

- 23 -



jurisdiction. Prime argues that this is not surprising, as it claims
that it has always presented itself as strictly a distributor, and
not a manufacturer.

Reverse passing off, as its name implies, occurs when “a
producer misrepresents someone else's goods or services as his.”
Dastar Corp. v. Twentieth Century Fox Film Corp., 539 U.S. 23, 28
(2003). It is a cognizable legal theory allowing one to recover
under the Lanham Act. See Id. at 30. However, even if a plaintiff
establishes that “reverse passing off” occurred in fact, the
plaintiff must still show that defendant’s actions caused a
“likelihood of confusion.” However, if a defendant “willfully
appropriates the mark of another, a court is more inclined to find
likelihood of confusion.” Rust Env't & Infrastructure v. Teunissen,
131 F.3d 1210, 1219 (7th Cir. 1997). Nevertheless, a judicial
finding of likelihood of confusion depends on the outcome of a seven-
factor balancing test analyzing: “(1) similarity between the marks
in appearance and suggestion; (2) similarity of the products; (3)
area and manner of concurrent use; (4) degree of care likely to be
exercised by consumers; (5) strength of complainant's mark; (6)
actual confusion; and, (7) intent of defendant.” Id. at 1217.

Here, Tempco attempts to overcome Prime’s motion with a_
substantial war-chest of testimonial and other evidence. Central to
Tempco’s case is the testimony of former or current Prime employees
Richard Hudson (“Hudson”), Romesa Sears (“Sears”), and Tara Perrin

(“Perrin”), along with the testimony of Tempco’s new distributor in


Meee

standard, rather than the familiar summary judgment doctrine that no
summary judgment can issue “if the evidence is such that a reasonable
jury could return a verdict for the nonmoving party.” Anderson, 477
U.S. at 248.

Here, in considering the sufficiency of Tempco’s circumstantial
evidence, Tempco does not have to meet a burden of being “likely to
prevail,” but need only show that a reasonable jury could possibly
allow them to prevail. Therefore, although the Court finds PepsiCo's
reasoning mostly persuasive, the Court believes it should slightly
modify the standard to make it consistent with the principles of
summary judgment. Specifically, the Court finds that, under the
Illinois Trade Secrets Act, the nonmoving party may withstand summary
judgment even if they present exclusively circumstantial evidence.
However, the nonmoving party must present circumstantial evidence of
a quantity and quality sufficient to allow a reasonable jury to draw
legal inferences which would permit it to find for the nonmoving
party by a preponderance of the evidence in consideration both also
of any direct evidence submitted by the nonmoving party, and also all
evidence (both direct and circumstantial) presented by the moving
party.

Having elucidated a standard, the Court must now apply it. To
demonstrate misappropriation of trade secrets, Tempco must show that
its information was secret, misappropriated, and used in Prime’s
business. AutoMed Technologies, Inc. v. Eller, 160 F. Supp.2s 915,

920 (N.D. Ill. 2001). Obviously, a threshold issue to establishing

~ 20 -


Lad

exempted. Not a single provision in the agreement contains such an
exemption. Similarly, not a single provision including the disputed
§ IX(D) repeats § 1(A)’s language regarding the geographic
limitation. Consequently, it borders on the nonsensical for Tempco
to argue that § 1(A) applies to the entire agreement except § IX(D).
The Court, therefore, finds that § 1(A) unambiguously applies to the
entire contract including Prime’s obligations under § IX(D). Hence,

Prime’s motion for partial summary judgment on Count VI is granted.

III. CONCLUSION

For the reasons stated herein, Prj Stion for Partial

Summary Judgment is DENIED as to Count id III, and GRANTED

as to Counts IV, V, and VI.

IT IS SO ORDERED.

Harry D. Leinenweber, Judge
United States District Court

Date:

- 26 -


Ms tw

evidence. For example, in RKI, Inc. v. Grimes, 200 F. Supp. 2d 916,
922-923 (N.D. Ill. 2002) such computer evidence proved vital in
establishing the requisite amount of circumstantial evidence
necessary to find a misappropriation of trade secrets. Similarly, in
YCA v. Berry, 2004 U.S. Dist. LEXIS 8129 (N.D. Ill 2004), a case
recently before these Chambers, the plaintiff hired a computer expert
to reconstruct deleted files and create a report detailing when each
file was accessed. This Court found the evidence discovered by this
expert so compelling that not only did plaintiff withstand summary
judgment on most claims, including some trade secrets claims, but
plaintiff even succeeded in winning sanctions against the defendant
for perjury based in large part on the recovered deleted files. Id
at *22.

Tempco has a valid point that a more thorough examination of
Prime’s computers than that conducted by PC AfterDark might have
revealed the presence of SA/2-related files. However, Tempco - as
the plaintiff - has the burden of proof, and therefore the
responsibility to conduct such a thorough inspection. Tempco cannot
simply sit back and complain about the inadequacy and/or bias of
Prime’s inspection efforts. Put simply, the Prime-ordered inspection
of Prime’s computers, as done by PC AfterDark, met Prime’s initial
summary judgment burden of showing an absence of material fact by
showing that SA/2 did not exist on Prime’s computers. To rebut,
Tempco must produce some actual evidence that SA/2 or SA/2-related

files remained in Prime’s possession. Instead, Tempco has produced

- 22 -


or

v. City of Kankakee, 122 F.3d 417, 419 (7th Cir. 1997). Here, Tempco
narrated its claim, effectively “Prime misappropriated SA/2 by
retaining it unlawfully after termination of the license agreement.”
Although “a plaintiff may substitute one legal theory for another
without altering the complaint,” the complaint must still “specif [y]
the wrong done to him.” Id. In this case, Tempco specified the wrong
done to it ~ Prime’s retention and use of SA/2 after termination of
its License Software Agreement. As the Seventh Circuit notes,
“[t]here must be a point at which a plaintiff makes a commitment to
the theory of its case.” UJohnson v. Methodist Medical Ctr., 10 F.3d
1300, 1304 (7th Cir. 1993). In the present case, Tempco elected to
proceed throughout the entire litigation under a narrow, overly
specific theory of trade secrets misappropriation. At this late
stage, it violates principles of justice to permit Tempco to succeed
in effectively “hiding” this claim until shortly before trial.
Consequently, the Court grants summary judgment as to any or all
claims regarding Count IV’s allegations that Prime misappropriation
trade secrets prior to the termination of the License Software
Agreement on March 18,. 2002.

That being said, the Court notes that Count III of Tempco’s
complaint concerns Prime’s alleged “Breach of the Software/System
Agreement.” Unlike Count IV, Tempco chose broadly and unspecifically
to plead Count III stating only that “Prime has materially breached
the Software/System Agreement as alleged herein.” Under this

agreement, Prime contracted to “use [Prime’s] best efforts to protect

-17-


Smith reviewing stock reports that included Tempco products bought
from Prime. Farmery claims that during the review, Smith casually
remarked how “at some point we thought Prime was a manufacturer for
these items.” Smith also recalled about how “when he got products
in, got paperwork in, it would say Prime Industries. . .. I figured
they were the manufacturer.” The first portion of Smith’s
declaration does not qualify as a present sense impression because it
also fails to describe a present-time event (unlike Dean’s testimony,
an “event” did take place - the stock review, however, Smith’s
statement does not relate to any description or explanation of this
review). The latter portion of Smith's declaration would have
qualified as a present sense impression - if actually said while or
immediately after - Smith’s receipt of the products. As is, however,
this declaration amounts to nothing more than a memory of a past
sense impression Smith felt or said at some time previous. Although
a present sense impression need not be contemporaneous with an event,
this Court cannot agree that statements said months or years after
the event qualify as “present sense impressions.”

The remainder of Hudson’s hearsay testimony may or may not be
admissible. Its admissibility depends upon the specific
circumstances in which the apparently unnamed Prime customers and
potential customers expressed their confusion.

Prime responds with unrefuted evidence that it believes counters
Tempco’s claims regarding a likelihood of confusion. Prime notes

that its marketing materials state that Prime “represent[s] some of

-9-


Prime attempts to respond to this evidence, but for the most
part its arguments are unpersuasive. Prime correctly reiterates that
Tempco itself agreed to privately label some of its heaters as “Prime
Industries” heaters. However, the undisputed record shows that
Tempco agreed only with respect to ten heaters - a quantity
inadequate to account totally for Tempco’s allegations. Similarly,
Prime correctly notes that its private labeling of Akinsun Heaters
has no relevance to the present case. However, Prime fails to rebut
adequately the testimony of Hudson and others that Prime purposefully
and willfully misbranded Tempco’s products as their own. Therefore,
for purposes of summary judgment, Tempco has certainly met its
factual burden that reverse passing off did, in fact, take place.

The inquiry now turns to whether or not Tempco can establish
that this reverse passing off created a “likelihood of confusion”
under the seven-factor test. To support its claim, Tempco argues
that Prime’s willful misbranding entitles it to a presumption of
confusion. However, the cases Tempco cites say no such thing.
Rather, they merely state that willful infringement might make courts
“more inclined” to find a likelihood of confusion, or create a
“powerful inference” of confusion.” Rust, 131 F.3d at 1219; Resource
Developers v. Statute of Liberty-Ellis Island Found., Inc., 926 F.2d
134, 140 (2nd Cir. 1991). Therefore, while the Court agrees that
Prime’s alleged willful infringement makes it easier to find a

likelihood of confusion - indeed “intent” serves as the seventh part


the southeastern United States, David Farmery (“Farmery”). Hudson,
in deposition testimony, states that former Prime employees
repeatedly told him about how Kendrick ordered them to grind off
Tempco’s name and/or part number from Tempco products. Hudson, along
with Farmery, also testified that, during visits to Prime’s
customers, they recalled seeing what appeared to be Tempco-
manufactured heaters with Prime’s name and part number on them, and
“grinder marks” in the places where Tempco’s normally located its
identifying marks. Similarly, Sears testified that, during her Prime
employment, she threw away Tempco’s labels on Tempco-produced
thermocouples, and replaced them with a Prime label. Lastly, Perrin
reported that she would hang tags with Prime’s name and part number
onto Tempco’s products - tags which Hudson and Farmery recalled
seeing on Tempco products sold by Prime.

Supplementing this wealth of testimonial evidence, Tempco
presents some other evidence of a more circumstantial nature. For
example, Tempco notes that Prime possesses a bench grinder and a
sanding belt, which it could use to effectuate the “reverse passing
off.” In addition, Tempco points out that Prime admits to private
labeling seventy-five heaters it purchased from Akinsun Heaters,
albeit apparently with consent. Furthermore Tempco notes that
Kendrick admitted that Prime desired putting its name on products it
sold but did not manufacture, for the “same reason Sears puts their
name on Kenmore washing machines; we’d like to have the repeat

business.”


mead

such information from unauthorized discovery or use.” License
Software Agreement, § 10. Certainly, a legitimate question of
material fact at least exists as to whether or not the use of SA/2 to
sell competitor’s products violates this “best efforts” clause, and
perhaps other clauses of the License Software Agreement.
Furthermore, one can certainly read the broadly plead Count III
alleging only unspecified “material breaches” as including such
allegations. Therefore, although the Court grants summary judgment
on Count IV with respect to Tempco’s theory that Prime used SA/2
during the term of the License Software Agreement to benefit
competitors, the Court in no way wishes the parties to misinterpret
its ruling as suggesting that Tempco cannot present this claim at
trial as part of its effort to prove Count III.

As to the remaining claims for misappropriation of trade
secrets, Tempco does present a fair amount of circumstantial (but no
direct) evidence. Because direct evidence of misappropriation of
trade secrets is typically not available, under Illinois law a
plaintiff can rely on circumstantial evidence to _ prove
misappropriation. RKI, Inc. v. Grimes, 200 F. Supp. 2d 916, 923
(N.D, Ill. 2002). Beyond mere admissibility, Illinois law appears
remarkably unclear as to what level of circumstantial evidence
qualifies as sufficient to withstand summary judgment. Prime cites
Filter Dynamics Intern., Inc. v. Astron Battery, Inc., 311 N.E.2d
386, 399 (Ill. App. Ct. 1974) to justify its position that the Court

require “clear and convincing” circumstantial evidence. However,

- 18 -


States v. Santos, 65 F. Supp. 2d 802, 822 (N.D. Ill. 1999). “The
underlying rationale of the present sense impression exception is
that substantial contemporaneity of event and statement minimizes
unreliability due to defective recollection or conscious fabrication.
There is no per se rule indicating what time interval is too long
under Rule 803(1). .. .” United States v. Parker, 936 F.2d 950, 954
(7th Cir. 1991). Lastly, the availability of the declarant is
“immaterial.” Fed. R. Evid. 803.

After reviewing the circumstances of the alleged hearsay, the
Court agrees with Prime that Dean’s statements to Hudson do not fall
under the present sense impressions exception to the hearsay rule.
According to Hudson’s deposition testimony, the context of Dean’s
statement occurred “in Nashville it was - Daniel Dean made a comment
when I was in the storeroom one time about, you know, what - what- am
I getting, you know what - what is this, because it had the Prime
name and number on it.” Hudson Dep., pp. 143-144. In doing so, the
statement appears to lack an essential component of admissible
testimony under the 803(1) exception: it fails to describe an “event
or condition.” Indeed, while it was made, no “event” was happening
to or around Dean. Rather, the statement appears to be a reflection
of Dean’s perhaps long-held uncertainty as to whether or not Prime
functioned as a manufacturer. Therefore, the Court excludes this
statement.

Similarly, the Court also excludes Smith’s statements to

Farmery. These statements occurred in the context of Farmery and



‘we ae

installed you could not use it.” Shoemaker’s statements that he
couldn't use his installed SA/2 program makes the confession that it
remained installed of little practical value. In order for Tempco to
adduce anything from Shoemaker’s testimony, it would have to convince
a jury that Shoemaker testifies forthrightly when he admits that SA/2
remained on his computer, but flat out lies when he denies using it
despite having no apparent personal interest in doing so, as he no
longer remains employed by Prime. This Court does not believe that
any rational jury could reach such a conclusion. Furthermore, Tempco
has once again failed to produce computer evidence from Shoemaker’s
computer which could, for example, indicate whether SA/2 remains on
the computer now (even though Shoemaker has left Prime), or the last
time it was accessed.

For the reasons stated above, the Court grants summary judgment
as to Counts IV and V.

D. Count VI: Breach of Distributor Agreement

With respect to Count VI, Prime seeks only partial summary
judgment. Prime concedes that. an issue of fact exists as to whether
or not it violated the distributor agreement by selling products
within the four-state region designated by the agreement. However,
Prime argues that the distributor agreement’s geographic provision §
1(A) limits the effects of the entirety of the agreement to those
four-states. Accordingly, Prime contends that Tempco has no claim
with § 1(A). Furthermore, Prime asks the Court to interpret the

Court based on what it contends as is the agreement’s unambiguous

~ 24 -



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Name of Assigaed|Jud i Sitting Judge if Oth
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CASE NUMBER 0263572 DATE
CA Tempco Electric Heater Corporation vs. Temperature Engi:
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Wop y [In the following box (a) indicate the party filing the motion, ¢.g., plaintiff, defendant, 3rd party, viata ii ms 7 res
MOTION: | | ofthe motion being presented. [1 || i |
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(5) Oo i Status hearing[held/continued to] [set for/re-set for] on set for
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cases under the balancing test. Suffice it to say, the Court
believes that a reasonable jury could find for either side under this
balancing test - rendering this issue inappropriate for summary
judgment. This is consistent with the Seventh Circuit’s guidance
that Courts should decide likelihood of confusion issues on summary
judgment only if “the evidence is so one-sided that there can be no
doubt about how the question should be answered.” Door Sys., Inc. v.
Pro-Line Door Sys., Inc., 83 F.3d 169, 171 (7th Cir. 1996).

Consequently, the Court denies summary judgment on Count I. As
Count II is based on the same factual allegations, and also states a
sufficient legal claim, the Court similarly denies summary judgment
on Count II.

B. Count III: Legality of the $15,000 Lost Key Fee

With respect to Count III, Prime seeks only a limited summary
judgment on the issue of the License Software Agreement’s $15,000
“liquidation damages” provision for each hardware access key that
Prime failed to return to Tempco. Prime argues that the $15,000 fee
actually constitutes an unenforceable penalty under Illinois law.
Tempco responds by arguing that the fee is enforceable, and that
Prime waived its right to challenge the fee by failing to raise this
argument as an affirmative defense in its answer to Tempco’s amended
complaint.

In Illinois, “whether a contractual provision for damages is a
valid liquidated-damages provision or a penalty clause is a question

of law. There is no fixed rule applicable to all liquidated-damages

-11-



the largest heater and sensor manufacturers in the nation.” These
materials further describe Prime as “the largest stocking
distributor” for different types of heaters, and as “one of Tempco’s
largest distributors.” In Prime’s view, these materials clearly show
that Prime never represented itself as a manufacturer, and therefore
could not possibly confuse anyone. Prime continues that any customer
confusion was particularly unlikely because its customers were
sophisticated and understood precisely what they were purchasing.
With most, indeed possibly all, of Tempco’s evidence of actual
confusion excluded, Tempco has only its evidence of “reverse passing
off” and defendant’s intent” to support its claims under the seven-
factor test. Nevertheless, the Court believes this evidence
sufficient to withstand summary judgment. Looking at the seven-
factor test, the first and fifth factors - the “similarity between
the marks” and the “strength of complainant’s mark” bear no relevance
in a “reverse passing off” action. Of the remaining factors, factors
two and three - the “similarity of the products” and the “area and
Manner of concurrent use” heavily favor Tempco - as the products and
their use were the same regardless of whose mark they bore.
Correspondingly, factor seven, the “intent of defendant” also favors
Tempco, as it sufficiently alleges willful infringement. This leaves
only factors four and six - “degree of care” exercised by consumers
and evidence “actual confusion” as possibly favoring Prime. This
Court has no desire to assume improperly the role of a fact finder in

weighing the respective strengths and weaknesses of both parties’

-10-


of the seven-part test - it certainly does not grant Tempco a
“presumption” of confusion.

Tempco also tries to establish a likelihood of confusion through
hearsay testimony that Prime’s alleged acts of false designation of
origin succeeded in sowing confusion amongst its customers. For
example, Tempco presents as evidence, testimony from Hudson that
customers, such as Daniel Dean of Amoco Fabrics and Fibers, expressed
confusion about whether Prime manufactured its heaters itself.
Similarly, Tempco attempts to submit a statement by Prime customer
William Smith to Farmery conveying. Smith’s impression that “Prime
Industries, I figured they were the manufacturer.”

Prime challenges that this “evidence” qualifies only as
inadmissable hearsay, and asks the Court to exclude it for purposes
of summary judgment just as it would for trial. Tempco attempts to
cure the hearsay problems by claiming that the hearsay statements of
Smith, Dean, and unnamed other customers qualify as admissible
“present sense impressions” under Federal Rule of Evidence 803(1).
This rule exempts from hearsay “[a] statement describing or
explaining an event or condition made while the declarant was
perceiving the event or condition or immediately thereafter.” Id. To
qualify as an admissible present sense impression, three requirements
must be met: “(1) the declarant must have personally perceived the
event described; (2) the declaration must be an explanation or
description of the event rather than a narration; and (3) the

declaration and the event described must be contemporaneous.” United



Sore

Prime’s use of SA/2 is showing that Prime even possessed SA/2 after
March 18, 2002. To support this point, Tempco notes that: 1) Prime
failed to return between one and three hardware access keys; 2) SA/2
remained on Steve Shoemaker’s laptop computer; 3) Prime President
Larry Kendrick’s request to new Prime employees Shoemaker and Chuck
Hixson that they not return hardware access keys acquired while
working at PE Products; 4) Prime’s website claim that it has
“developed a Manufacturer’s OEM cross reference,” one of SA/2's
functions; and 5)Hudson’s testimony that Kendrick told one of Prime's
salespersons that he had found a way to access SA/2 databases using
a commercially available software program called Crystal Reports.

Prime responds to Tempco’s allegations that it retained SA/2 in
its computers by noting that it paid a company called PC AfterDark to
inspect twenty-five working computers and seven non-working computers
at Prime and report whether any remnants of SA/2 existed on those
computers. Further, Prime notes that although Tempco could have paid
for its own inspection of Prime’s computers during discovery, it
elected not to do so.

The Court finds these, facts persuasive. Although Tempco
correctly notes that PC AfterDark conducted only a minimalist
inspection of Prime’s computers, costing a mere $50, it remains a
fact that PC AfterDark’s analysis constitutes hard and undisputed
evidence. Tempco could have sought after and potentially found
rebuttal evidence that Prime secretly kept SA/2 installed and made

use of it. Numerous cases demonstrate the potential value of such

- 21 -


Prime accomplished this latter unauthorized use of SA/2 by improperly
retaining three hardware access keys in violation of the License
Software Agreement.

Tempco further claims that Prime removed Tempco’s name and
identifying information from Tempco products sold to Prime's
customers. As alleged by Tempco, this “reverse passing-off,” as the
process is known in legalese, allowed Prime to claim falsely that it
manufactured the products it sold - depriving Tempco of the name-
recognition necessary to obtain repeat business.

II. DISCUSSION

A. Counts I & II: Violations of § 43(a) of the
Lanham Act, 15 U.S.C. § 1125(a); Breach
of Trademark License Agreement

Tempco’s Count I states a claim for “reverse passing off” under
a false designation of origin theory under the Lanham Act. On the
same set of allegations, Tempco also presents Count II, under a
theory of breach of the trademark license agreement. Prime seeks
summary judgment on Counts I and II arguing that Tempco has submitted
no evidence to support its claims. In particular, Prime claims that
Tempco has no evidence that it ever engaged in “reverse passing off”
of Tempco-manufactured products. Rather Prime says that the only
“reverse passing off” that did occur happened when Tempco itself
agreed to label privately some of its products for Prime. Prime also
argues that even if the Court finds such false designation of origin,
Tempco has submitted no evidence that Prime’s conduct generated the

“likelihood of confusion” necessary to invoke the Lanham Act’s

-3-


Meee

Because this Court agrees with Tempco that the liquidated
damages provision is valid, it does not reach the issue of whether or
not Prime waived its right to contest such use.

C. Counts IV & V: Misappropriation
of Trade Secrets, Conversion

Count IV alleges that Prime misappropriated Tempco’s trade
secrets by inappropriately using SA/2 to benefit Tempco’s
competitors. Count V seeks relief for the same factual allegations
under a common-law theory of conversion. Similar to its motion with
respect to Counts I and II, Prime seeks summary judgment concerning
Counts IV and IV on the grounds that Tempco has not presented any
evidence that Prime ever misused the SA/2 pricing program. Tempco
responds to Prime’s motion by claiming there exists both direct
evidence and a “web of circumstantial facts that lead to the
inference” that Prime misused SA/2. As to direct evidence, Tempco
notes that former Prime employee Richard Hudson testified in
deposition that he used SA/2 as a “standard” that allowed Prime to
“shop around” for the best price among Tempco and its competitiors.
Similarly, Tempco’s list of “circumstantial facts” includes, among
other things: Prime’s sales of the products of Tempco’s competitors;
Prime President Larry Kendrick’s request to new Prime employees
Steven Shoemaker and Chuck Hixson that they not return hardware
access keys acquired while working at PE Products; Prime’s website
claim that it has “developed a Manufacturer’s OEM cross reference,”

one of SA/2’s functions; Hudson’s testimony that Kendrick told one of



were

In its late-filed surreply, Tempco argues that its claim is
neither “new or novel” because “the license created a confidential
relationship between Prime and Tempco, and imposed a duty upon Prime
to maintain the secrecy of SA/2 software and limit its use by
competitors of Tempco and all others who lack a bonafide interest in
purchasing Tempco products.” While possibly true, the Court fails to
see how the simple terms of the License Software Agreement between
Tempco and Prime creates a de facto claim that Prime misappropriated
trade secrets prior to the termination of the license agreement by
using SA/2 to benefit Tempco competitors.

Second, Tempco argues that under Federal notice pleading
requirements, it did not need to specify that its trade secrets
misappropriation claim derives both from Prime conduct during and
after the termination of the License Software Agreement. In effect,
Tempco argues that the complaint’s allegation of trade secrets
misappropriation under one theory and set of allegations (i.e.,
Prime’s purported retention and use of SA/2 post-termination of the
license) provided Prime with proper notice of an unmentioned separate
theory of trade secrets misappropriation based on different and
undisclosed factual allegations. This argument is not convincing.
True, the Federal Rules of Civil Procedure do not require complaints
to “articulate legal theories.” Pond v. Michelin North America,
Inc., 183 F.3d 592, 597 (7th Cir. 1999). However, “[a] complaint must
narrate a claim, which means a grievance such as ‘the City violated

my rights by preventing me from renovating my apartments.’” Albiero

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reads in its entirety “State [sic] of Georgia, Alabama, Tennessee,
and Mississippi.” Section IX(D) is a restrictive covenant that
states “Distributor shall be allowed to carry other lines in related
fields, none to be competitive with Tempco products, as illustrated
in Tempco’s Product Line Catalog.” Lastly, Section XII(B) is an
integration clause reading “This agreement embodies the entire
agreement and understanding between Prime Industries and Tempco
Electric Heater Corporation and supersedes all prior agreements and
understandings related to the subject matter.”

Hand-in-hand with the Distributor Agreement came a License
Software Agreement that permitted Prime, as an authorized Tempco
distributor, to use Tempco’s trade secret electric pricing program
known as SA/2. This agreement mandated that Prime use SA/2
“exclusively for purposes consistent with your relationship with
TEMPCO.” The agreement also provided Prime with Tempco-supplied
“hardware access keys” that allowed SA/2 to work. The License
Software Agreement further stipulated that Prime must pay Tempco
$15,000 plus interest in “liquidated damages” per key that it fails
to return to Tempco at the conclusion of their relationship.

Tempco claims that shortly after signing the Distributor
Agreement, Prime began violating it by selling competitors’ products.
To this end, Tempco alleges that Prime misused SA/2 by using it to
allow Tempco’s competitors to underprice Tempco. In Tempco’s version
of the facts, Prime’s misuse of SA/2 began during the distributorship

and continued after the distributorship ended. According to Tempco,


al

language. Prime argues that this supposedly unambiguous language,
when combined with the agreement’s integration clause in § XII(b),
prevents any finder of fact from resorting to parole or extrinsic
evidence to interpret the agreement.

Tempco responds by noting that the plain language of § IX(D)
(i.e., “Distributor shall be allowed to carry other lines in related
fields, none to be competitive with Tempco. . . .”) does not include
any geographic provision. This lack of a geographic provision,
Tempco contends, at least creates an ambiguity in the contract as to
whether or not § I(A) applies to the entirety of the agreement or
only limits the territory of the distributorship. Given this alleged
ambiguity, Tempco asks the Court to turn to extrinsic evidence
regarding the parties’ contractual intent. Tempco believes that this
parole evidence, combined with the ambiguity, qualifies as enough to
defeat Prime’s motion for summary judgment.

After examining the contract, the Court believes that no
ambiguity exists that would allow the Court to turn to extrinsic
evidence, given § XII(B)’s integration clause. Clause I(A) of the
agreement clearly states under the heading of “Geographical,” the
“State [sic] of Georgia, Alabama, Tennessee, Mississippi.” § 1(A)
does not state its purpose (i.e., it does not state, as Tempco
evidently wishes it did, that it limits the extent only of Prime’s
rights but not its obligations), nor does it place any limits on its
applicability. Therefore, the only logical reading of § 1(A) is that

it applies to the entire agreement, unless otherwise stated or

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IN THE UNITED STATES DISTRICT COURT F
FOR THE NORTHERN DISTRICT OF ILLINOIS ] L E B
EASTERN DIVISION

TEMPCO ELECTRIC HEATER wu MAY a 7 2004
CORPORATION, DCE HARRY. BL
Us, DISTRICT COURT ee?

Plaintiff,
Case NO. 02 C 3572
v.

Hon. Harry D. Leinenweber
TEMPERATURE ENGINEERING

COMPANY, d/b/a PRIME
INDUSTRIES,

Defendant.

DOCKETED

MEMORANDUM OPINION AND ORDER JUN 03 2004

Plaintiff Tempco Electric Heater Corporation (“Tempco”) brought
suit against one of its former distributors, Temperature Engineering
Company, d/b/a Prime Industries (“Prime”), alleging trademark
infringement, various breaches of contract, and misappropriation of
trade secrets. Prime has now moved for Partial Summary Judgment.

I. FACTUAL BACKGROUND

Tempco manufactures electric heaters and temperature sensors
used largely as component parts on manufacturing equipment in the
plastics industry. Prime distributes such products throughout the
southeastern United States. In 1996, Tempco and Prime signed a
“Distributor Agreement,” that allowed Prime to become an authorized
distributor of Tempco-products.

For purposes of this litigation, three clauses of this agreement
are relevant: Sections I, IX(D), and XII(B). Section I is entitled

“Geographical.” Section 1(A) is the only subsection of § 1, and


agreements, and each one must be evaluated on its own facts and
circumstances.” Penske Truck Leasing Co., L.P. v. Chemetco, Inc.,
311 Ill. App. 3d 447, 454 (Ill. App. Ct. 2000) (internal citations
omitted). Generally, Illinois courts uphold liquidated damage
provisions only when: “(1) the parties intended to agree in advance
to the settlement of damages that might arise from the breach; (2)
the amount of liquidated damages was reasonable at the time of
contracting, bearing some relation to the damages which might be
sustained; and (3) actual damages would be uncertain in amount and
difficult to prove.” MED+PLUS Neck & Back Pain Ctr. v. Noffsinger,
311 Ill. App. 3d 853, 860 (Ill. App. Ct. 2000) (internal citation
omitted). Additionally, “the damages must be for a specific amount
for a specific breach; they may not be a penalty to punish
nonperformance or as a threat used to secure performance.” Id
{internal citation omitted). When faced with a close call, Illinois
courts “lean toward a construction which excludes the idea of
liquidated damages and permits the parties to recover only damages
actually sustained.” Penske, 311 Ill. App. 3d at 457. Nevertheless,
the party seeking to exempt itself from a liquidated damages
provision to which it has freely consented “has the burden of proof”
to show that the clause is in reality an unenforceable penalty.
First Nat'l Bank v. Atlantic Tele-Network Co., 946 F.2d 516, 522 (7th
Cir. 1991).

Here, Prime attempts to establish that the provision constitutes

an unenforceable penalty by noting that both parties agree that the

-12-



hea

Prime’s salespersons that he had found a way to access SA/2 databases
using a commercially available software program called Crystal
Reports; Prime’s failure to remove SA/2 from Shoemaker’s laptop at
the end of its distributorship; and Prime’s failure to return three
hardware access keys at the end of its distributorship.

Judging from this list, and Tempco’s response brief, Tempco
appears to make the argument that Prime not only misused SA/2 after
the end of its License Software Agreement with Tempco, by illegally
retaining and using it without permission, but also during its
distributorship as a tool to benefit Tempco’s competitors. This
theory does not appear anywhere in Count IV of Tempco’s Complaint or
Amended Complaint. Instead, Count IV of Tempco’s Amended Complaint
states a clear and limited theory of trade secrets misappropriation:
that Prime “used the software [SA/2] and the information contained
therein for its own commercial advantage after the termination of the
System/Software Agreement on March 18, 2002).” Therefore, it appears
that Tempco is attempting constructively to amend its complaint at
the summary judgment stage. Parties may constructively amend their
complaint during the early stages of litigation, such as by
interrogatory answers, or by waiver of the opposing party. See Hytel
Group, Inc. v. W.L. Gore and Assocs., 2004 U.S. Dist. LEXIS 2472 at
*2-3 (N.D. Ill. 2004). However, “a plaintiff may not amend his
complaint through arguments in his brief in opposition to a motion
for summary judgment.” Shanahan v. City of Chicago, 82 F.3d 776, 781

(7th Cir. 1996).

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