Antitrust Law Daily Wrap Up, FRANCHISING & DISTRIBUTION—Ill. App.: Distribution company’s claims against parent companies of commercial bakery fail, (Oct 31, 2014)

By Edward L. Puzzo, J.D.

Claims by a distribution company against the parent companies of a commercial bakery with whom it had a distribution agreement—on theories of agency, contract ratification, piercing the corporate veil, promissory estoppel and unjust enrichment—were properly dismissed, the Illinois Appellate Court in Chicago has ruled (Saletech, LLC v. East Balt, Inc., October 29, 2014, Hyman, M.).

In 2011, Saletech, a Ukrainian company, entered into an agreement with commercial bakery EB Ukraine to be the exclusive distributor of the latter’s bakery products. EB Ukraine was a Ukrainian company, owned by Illinois company EB Europe, which in turn was owned by EB Inc., a Delaware company.

Saletech alleged that EB Ukraine had breached the exclusive distribution agreement. Saletech pursued EB Ukraine’s American parent companies, EB Europe and EB, Inc., on theories of agency, contract ratification, piercing the corporate veil, promissory estoppel and unjust enrichment. The trial court ruled against Saletech, dismissing the complaint. Saletech appealed, seeking a reversal of the order of dismissal. The appellate court affirmed the judgment of the lower court.

Agency. Saletech alleged that EB Ukraine had entered into the exclusive distribution agreement as the actual or apparent agent of EB Inc. The court explained that, while the existence of an agency relationship is generally a question reserved to the trier of fact, a plaintiff must still plead facts, which if proved, could establish the existence of an agency relationship. Saletech’s complaint alleged that EB Ukraine was the actual or apparent agent of EB Inc., but failed to allege facts which would show that EB Inc. gave EB Ukraine the actual authority to enter into an agreement on its behalf, such as pre-agreement communications between Saletech and EB Inc., or apparent authority, such as a good-faith belief that EB Ukraine had the authority to bind EB Inc. In the absence of these necessary allegations, the trial court did not err in finding Saletech failed to properly allege an agency relationship between EB Ukraine and EB Inc. and in dismissing that count with prejudice.

Contract ratification. Saletech also alleged that EB Europe and EB Inc. had ratified the exclusive distribution agreement that was the basis of their breach of contract claims by telling Saletech’s Vice President that they would honor the terms of the agreement if Saletech assisted in their investigation of alleged improprieties by EB Ukraine’s management.

For ratification to be effective, the principal, with full knowledge of an unauthorized transaction, must manifest intent to abide and be bound by it either retaining its benefits or taking a position inconsistent with nonaffirmance. Nothing in the pleadings support a finding that, once EB Inc. and EB Europe learned of the agreement when they were notified by Saletech of the breach, they retained any benefits of the agreement or took any steps manifesting an intent to be bound by it. The statements by EB Inc. and EB Europe that the terms of the agreement would be honored if Saletech helped investigate EB Ukraine must be viewed in light of their additional statement that the management of EB Ukraine would be replaced if the investigation bore fruit. A more reasonable interpretation was that EB Inc. and EB Europe were assuring Saletech that any new management of EB Ukraine would honor the terms of the agreement, not that they would retain a benefit or agree to be bound by it. Therefore the trial court did not err in dismissing those counts, the appellate court ruled.

Piercing the corporate veil. Saletech also sought to pierce the corporate veil on the grounds that EB Ukraine was the alter ego of EB Europe, its parent company. Saletech alleged that the two entities had commingled funds as a means of defrauding creditors, had a unity of interests so that their separate identifies ceased, and had the same address in Chicago. They further alleged that EB Ukraine’s bylaws showed that EB Europe had control over its day-to-day activities, management, compensation, and organizational structure.

The protection from liability afforded by the corporate form, the court explained, may be disregarded where the corporation stands as the business conduit, or alter ego, of another dominant personality. In Illinois, the courts will pierce the corporate veil where: (1) a unity of interest and ownership appears so strong that the separate personalities of the corporation and the parties who compose it no longer exist, and (2) under the circumstances, adhering to the fiction of a separate corporation would promote injustice or inequitable circumstances.

The court found that the complaint had no support for the allegation that the two entities had commingled funds as a means of defrauding creditors. The other assertions as to EB Europe’s level of control over EB Ukraine were apparently the product of bylaws produced in discovery. In deciding a Section 2-615 motion (lliinois Code of Civil Procedure, 735 ILCS 5/2-615), the court may not consider affidavits, products of discovery, or documentary evidence not incorporated into the pleadings as exhibits, or other evidentiary material. Therefore, the appellate court ruled, the trial court did not err in dismissing Saletech’s claims in the absence of factual allegations within the pleadings sufficient to warrant piercing the corporate veil.

Promissory Estoppel. Saletech made a claim of promissory estoppel, based on EB Inc.'s promise that the terms of the exclusive distributorship agreement would be honored if Saletech agreed to assist EB Inc. and EB Europe in their investigation of EB Ukraine’s management. The defendants’ argued that promissory estoppel could provide recovery only when no contract was present, but here the distributorship agreement was the contract.

Promissory estoppel exists to provide a means to enforce promises unsupported by consideration; not to give a party to a negotiated commercial bargain a "second bite at the apple" if it cannot prove breach of contract. The existence of the distributorship agreement itself barred the claim for promissory estoppel, the court ruled.

Unjust enrichment. Saletech claimed that EB Inc. and EB Europe induced Saletech into assisting in their investigation of EB Ukraine's management and then refused to honor the terms of the agreements. However, Saletech failed to articulate what benefit defendants obtained to Saletech's detriment. It was Saletech who contacted EB Inc. and EB Europe after EB Ukraine breached the exclusive distribution agreement; it was Saletech who requested help and offered to participate in the investigation for its own benefit. In the absence of allegations that defendants obtained any benefit from Saletech’s assistance in the investigation, the claim for unjust enrichment failed as a matter of law, the court ruled.

The case is 2014 IL App (1st) 132639.

Attorneys: (Drost Gilbert Andrew Apicella LLC) for Saletech, LLC. (DLA Piper U.S. LLP) for East Balt Inc., East Balt of Eastern Europe LLC, and Lou-El Ltd.

Companies: Saletech, LLC; East Balt Inc.; East Balt of Eastern Europe LLC; Lou-El Ltd.

Cases: FranchisingDistribution IllinoisNews