Tax Track Systems Co v. New Investor World ( 2007 )

In the
United States Court of Appeals
For the Seventh Circuit
____________
Nos. 05-2149 & 05-4287
TAX TRACK SYSTEMS CORPORATION,
Plaintiff-Appellant,
v.
NEW INVESTOR WORLD, INCORPORATED,
Defendant-Appellee.
____________
Appeals from the United States District Court
for the Northern District of Illinois, Eastern Division.
No. 01 C 6217—Robert W. Gettleman, Judge.
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ARGUED MAY 5, 2006—DECIDED FEBRUARY 27, 2007
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Before KANNE, WOOD, and SYKES, Circuit Judges.
SYKES, Circuit Judge. This diversity suit, governed by
Illinois law, pits two insurance brokerages against each
other. Tax Track Systems Corporation (“Tax Track”) sued
New Investor World, Inc. (“NIW”), for, among other things,
breaching a confidentiality agreement. The district court
concluded that Illinois law did not protect Tax Track’s
information because Tax Track made insufficient efforts
to keep that information confidential. The court granted
summary judgment for NIW and also awarded NIW
attorneys’ fees and costs under the parties’ agreement.
On appeal, Tax Track argues that whether it took
reasonable measures to keep its information confidential
2 Nos. 05-2149 & 05-4287
(which is what Illinois requires before it will enforce a
confidentiality agreement) is a factual determination that
should have gone to a jury. It also argues that the district
court erred by awarding NIW attorneys’ fees and costs.
The agreement provided for recovery of attorneys’ fees
by the “substantially prevailing party,” and Tax Track
argues NIW did not “substantially prevail” because it lost
on its counterclaims.
We affirm. Typically, whether a party took reasonable
steps to protect its confidential information is a fact
question for the jury, but here no reasonable jury could
conclude that Tax Track’s meager and inconsistent pro-
tective measures were sufficient to protect its information.
Moreover, the district court did not err in awarding NIW
attorneys’ fees and costs as the substantially prevailing
party under the parties’ agreement.
I. Background
Tax Track markets and sells insurance products. One of
its products is called “premium financed life insurance” or
“leveraged life insurance.” Leveraged life insurance is for
the very wealthy who need policies of such great value
that the premiums are unusually high. The gist of lever-
aged life insurance is that the insured finances the
premiums with a loan on which he pays only the interest,
or in some cases nothing at all, and the balance of the loan
is paid out of the death benefit after the insured dies.
Leveraged life insurance is not a new idea, but Tax
Track and its owner, William Gray, who has twenty years
of experience in the insurance industry, claim to have
put a unique spin on the idea by using policy riders to
defer payments on principal and interest for the life of the
loan. In other words, the insured pays nothing for his
policy; the entire cost of the policy is paid by the death
Nos. 05-2149 & 05-4287 3
benefit. Tax Track pitched its idea to potential clients—
those who would buy the policies, the insurance com-
panies who would underwrite them, and the banks who
would finance them—through a memo called the “Gift
Compression Techniques memo” or “GCT memo,” as Tax
Track calls it. Gray kept the memo exclusively on his
password-protected computer. However, he gave copies of
the GCT memo to 600 or 700 people over the course of
about five years; some signed confidentiality agreements,
some did not. Gray did not keep track of everyone he sent
the GCT memo to and could not identify them all. The
memos were not marked “confidential.”
In December 2000 Tax Track teamed up with NIW to
market and sell leveraged life insurance. NIW’s president,
Grace Krueger, was aware of leveraged life insurance
before joining forces with Tax Track, but NIW had not
marketed the product. The parties signed a “Confidential-
ity, Intellectual Property and Non-Disclosure Agreement,”
which bound them for a term of three years to keep
confidential all “Licensed Material,” as defined by the
agreement, and all other “confidential information,” which
the agreement did not define. Nine specific items were
listed as Licensed Material under the agreement: one
software program; two legal opinion letters; three memo-
randa, including one called the “Leverage Overview”; and
three process methodologies (like how to sell leveraged
life, how to process orders, how to respond to frequently
asked questions, and so on). Licensed Material also
included “any additional material developed over the
course of this Agreement to facilitate the concept of
Leveraged Life Insurance and the Licensed Material.” The
agreement had a three-year term, but it also contemplated
the possibility of early termination. The agreement
provided that “[t]he obligations of either party regarding
the treatment of Confidential Information and Licensed
Material shall survive any termination of the [agree-
ment].”
4 Nos. 05-2149 & 05-4287
NIW terminated the agreement after only three months,
claiming Tax Track had not lived up to its end of the
bargain. NIW then began to compete with Tax Track in
the leveraged life insurance market, selling a product
similar to Tax Track’s. NIW also developed what it
called an “Executive Summary” of its leveraged life insur-
ance product that bears striking resemblance to Tax
Track’s GCT memo.
Tax Track sued NIW for breach of the confidentiality
agreement, tortious interference with prospective econ-
omic advantage, common law misappropriation, and
quantum meruit. NIW filed compulsory counterclaims
alleging breach of contract and fraudulent misrepresenta-
tion. Both parties moved for summary judgment. The
district court granted both motions; Tax Track was
defeated on its four claims and NIW on its two.
The agreement contemplated an award of attorneys’ fees
and costs for the “substantially prevailing [p]arty” “[i]n
any suit, proceeding or action to enforce any term, condi-
tion or covenant of this Agreement or to procure . . .
determination of the rights of any of the Parties.” Although
NIW lost on its counterclaims, which by NIW’s estimates
were worth over $1.3 million, the district court awarded
NIW costs and attorneys’ fees. The court concluded that
NIW had defeated Tax Track’s claims and that NIW’s
counterclaims were “clearly defensive”—they were com-
pulsory and would have been waived if not brought in
this suit. FED. R. CIV. P. 13(a). Accordingly, the court
held that NIW was the substantially prevailing party.
II. Discussion
Tax Track alone has appealed—NIW is apparently
satisfied with the outcomes below, including its own defeat
on its counterclaims. Tax Track raises two issues. First,
Nos. 05-2149 & 05-4287 5
Tax Track argues summary judgment was improper on its
claim for breach of the confidentiality agreement because
the issue of whether it took reasonable steps to keep its
information confidential is a question of fact for a jury.
Second, Tax Track claims NIW is not the substantially
prevailing party and should not have been awarded at-
torneys’ fees. By Tax Track’s lights, the litigation below
was a draw since both sides lost on their affirmative
claims.
A. Summary Judgment on the Confidentiality
Agreement
We review summary judgments de novo, taking all the
facts and their reasonable inferences in the light most
favorable to the nonmovant, Tax Track in this case.
Valentine v. City of Chi., 452 F.3d 670, 677 (7th Cir. 2006).
We affirm summary judgment when the pleadings, deposi-
tions, answers to interrogatories, and admissions on file,
together with any affidavits, show there is no genuine
issue of material fact and the moving party is entitled to
judgment as a matter of law. FED. R. CIV. P. 56(c); Celotex
Corp. v. Catrett, 477 U.S. 317, 322-23 (1986). Accordingly,
assuming Tax Track’s version of events is true, summary
judgment is appropriate if NIW is nevertheless entitled
to judgment as a matter of law.
Confidentiality agreements like the one in this case
are restrictive covenants and under Illinois law are
reviewed with a suspicious eye. Springfield Rare Coin
Galleries, Inc. v. Mileham, 620 N.E.2d 479, 485 (Ill. App.
Ct. 1991); Label Printers v. Pflug, 564 N.E.2d 1382, 1387
(Ill. App. Ct. 1991). An Illinois court, in whose place we
sit, will enforce such agreements only when the informa-
tion sought to be protected is actually confidential and
reasonable efforts were made to keep it confidential. Curtis
1000, Inc. v. Suess, 24 F.3d 941, 947 (7th Cir. 1994);
6 Nos. 05-2149 & 05-4287
N. Am. Paper Co. v. Unterberger, 526 N.E.2d 621, 624-25
(Ill. App. Ct. 1988). The information need not always be
kept under lock and key only for the viewing eyes of
company officials with the highest security clearance. See
Rockwell Graphic Sys., Inc. v. DEV Indus., Inc., 925 F.2d
174, 180 (7th Cir. 1991) (noting “perfect security is not
optimum security” given the costs involved). Some disclo-
sure of confidential information is often necessary to
profitably exploit the information. Rockwell Graphic Sys.,
925 F.2d at 177. Tax Track need not show its information
rises to the level of a trade secret, but it must neverthe-
less establish that it engaged in reasonable steps to keep
the information confidential. Tower Oil & Tech. Co. v.
Buckley, 425 N.E.2d 1060, 1066 (Ill. App. Ct. 1981). If the
party seeking to protect its information “did not think
enough of it to expend resources on trying to prevent
lawful appropriation of it, this is evidence that it is not
an especially valuable interest.” Curtis 1000, Inc., 24 F.3d
at 947.
The question here is how much effort to keep informa-
tion confidential is enough to be considered reasonable?
Courts evaluate this question on a case-by-case basis,
considering the efforts taken and the costs, benefits, and
practicalities of the circumstances. See, e.g., id. at 947-48;
Rockwell Graphic Sys., 925 F.2d at 179. As we have noted,
some disclosure is usually necessary. Typically, what
measures are reasonable in a given case is an issue for a
jury. Rockwell Graphic Sys., 925 F.2d at 179-80. In some
circumstances, however, it may be readily apparent
that reasonable measures simply were not taken. Id.
at 179.
It is not entirely clear what exactly Tax Track is trying
to protect. At times, Tax Track appears to claim the
concept of leveraged life insurance is protected, but that
cannot be so. The evidence overwhelmingly demonstrates
Nos. 05-2149 & 05-4287 7
(and Tax Track does not contest) that leveraged life
insurance is widely known and has been around for
decades. Tax Track also appears to claim that its busi-
ness relationships were confidential, but it has come
forward with nothing to substantiate that. Tax Track
also suggests that its specific method of selling leveraged
life insurance—by using term policy riders—is confiden-
tial. But those policies and their riders are issued by the
insurance companies who underwrite them, and the
documents are generally required to be on file as a
public record with the states where the insurance is sold.
Based on the evidence Tax Track has produced, the only
material even conceivably falling within the confiden-
tiality agreement is the GCT memo. According to Tax
Track, the GCT memo is referred to in the agreement as
“the Leverage Overview memo” and is part of the Licensed
Material the parties specifically agreed to keep confiden-
tial. Although NIW contests this, we assume (as we must)
that Tax Track’s assertion is true. Regarding the efforts
Tax Track made to protect the GCT memo, both sides
claim support from this court’s decision in Rockwell
Graphic Systems.
Rockwell Graphic Systems, a trade secrets case, involved
“piece part” drawings, which were detailed drawings of
parts for Rockwell machines that indicated materials used,
dimensions, tolerances, and methods of manufacture. Id.
at 175. Rockwell stamped the drawings “Confidential” and
kept them in a vault with limited access. The drawings
could be used by Rockwell’s 200 engineers, who had to
sign them out and replace them after use. All photocopies
had to be destroyed. Id. at 177. Rockwell also gave some
third-party manufacturers copies of the drawings because
it sometimes hired them to build the parts. Everyone
who had access to a drawing signed a confidentiality
agreement. Id. Noting that disclosure of confidential
information is often necessary to profit off the information,
8 Nos. 05-2149 & 05-4287
id. at 177, we held in Rockwell Graphic Systems that
the mere fact the drawings were shared with third-
party manufacturers did not necessarily destroy the
confidential nature of the documents as a matter of law.
Id. at 180. We reversed summary judgment and re-
manded the case for a jury to decide whether Rockwell’s
confidentiality efforts were reasonable. Id. at 180.
Tax Track maintains that it, like Rockwell, took reason-
able measures to protect its GCT memo, strategically
disclosing it to outsiders only to profit. But Tax Track
behaved nothing like Rockwell. Tax Track concedes that
Gray distributed the GCT memo to 600-700 people and
sought confidentiality agreements from only 190 of them
at most, and that Gray cannot identify the people he
gave the memo to. The GCT memo was not stamped
“Confidential.” Tax Track emphasizes that the memo was
stored exclusively on Gray’s password-protected computer,
but that effort was entirely undermined by Gray’s wide-
spread nonconfidential disclosure of the memo to hundreds
of outsiders. No reasonable jury could find Tax Track
took reasonable efforts to keep its GCT memo confidential
so as to warrant protection under the restrictive covenant.
B. Attorneys’ Fees
The agreement provides that the “substantially prevail-
ing” party “[i]n any suit, proceeding or action to enforce
any term, condition or covenant of this Agreement or to
procure . . . determination of the rights of any of the
Parties” shall be awarded attorneys’ fees and costs. The
district court determined that although NIW lost its
counterclaims, it was the substantially prevailing party.
Tax Track disagrees. It sees the case as a tie, both sides
having won and lost equally.
The standard of review for the award of attorneys’ fees
has been the subject of some debate in this case. We
Nos. 05-2149 & 05-4287 9
review the meaning of the contract term “substantially
prevailing” de novo. Platinum Tech., Inc. v. Fed. Ins. Co.,
282 F.3d 927, 931 (7th Cir. 2002). The more difficult
question is how we review the district court’s award of
attorneys’ fees. Under Illinois law, whether to award
attorneys’ fees is usually a matter entrusted to the discre-
tion of the trial court. Raffel v. Medallion Kitchens of
Minn., Inc., 139 F.3d 1142, 1147 (7th Cir. 1998). If the
agreement permitted an award of attorneys’ fees to the
substantially prevailing party, we would review for an
abuse of discretion. But the agreement at issue here
mandates attorneys’ fees if the district court finds that
one party substantially prevailed.
Accordingly, whether NIW substantially prevailed
within the meaning of the contract is a mixed question of
fact and law, or stated differently, an application of the
legal standard (“substantially prevailing”) to the facts. In
a diversity suit when the judge acts as a fact finder (as he
does in deciding whether a party substantially prevailed),
the federal standard of review applies. Mayer v. Gary
Partners & Co., Ltd., 29 F.3d 330, 334 (7th Cir. 1994)
(noting that “[w]hen federal judges act as triers of fact in
diversity cases, all questions concerning the standard of
review are governed by federal law”). So we will review the
district court’s determination that NIW was the sub-
stantially prevailing party for clear error. Thomas v. Gen.
Motors Acceptance Corp., 288 F.3d 305, 307 (7th Cir. 2002).
As to the meaning of the contractual term “substantially
prevailing party,” we have found no Illinois contract
cases dealing with the phrase; more often litigated is the
simpler phrase “prevailing party.” Tax Track suggests
that the standard for “substantially prevailing party” is
higher than the standard for a “prevailing party.” As it
turns out, however, Illinois case law incorporates a sub-
stantiality requirement into its interpretation of contrac-
10 Nos. 05-2149 & 05-4287
tual attorneys’ fees provisions awarding fees to the
prevailing party. In this context, a “prevailing party” is one
who “is successful on any significant issue in the action
and achieves some benefit in bringing suit, when it
receives a judgment in its favor, or when it achieves an
affirmative recovery.” Med + Plus Neck & Back Pain Ctr.,
S.C. v. Noffsinger, 726 N.E.2d 687, 694 (Ill. App. Ct. 2000)
(emphasis added); Raffel, 139 F.3d at 1147; First Commod-
ity Traders, Inc. v. Heinold Commodities, Inc., 766 F.2d
1007, 1015 (7th Cir. 1985) (interpreting “prevailing party”
language used in contract governed by Illinois law by
comparing it to use of “prevailing party” in the Federal
Rules of Civil Procedure fee-shifting rule).
Because Illinois interprets “prevailing party” as one
who prevails in a “significant” respect in the litigation, we
see little distinction in meaning between a “prevailing
party” and a “substantially prevailing” one. Even assuming
the standard for a “substantially prevailing party” status
is incrementally steeper than that for “prevailing party”
status, the district court did not clearly err in conclud-
ing that NIW substantially prevailed.
NIW defeated all of Tax Track’s claims and received a
judgment in its favor dismissing the entire action against
it. NIW lost on its counterclaims. By Tax Track’s reason-
ing, a judgment in one’s favor is not enough for “substan-
tially prevailing party” status if another judgment—on a
counterclaim, for example—is adverse. Not so. A party
may win some and lose some, but it may win more than
it loses. A “prevailing party” need not win on all claims,
see, e.g., Powers v. Rockford Stop-N-Go, Inc., 761 N.E.2d
237, 240 (Ill. App. Ct. 2001), nor must a “substantially”
prevailing party—to prevail “substantially” does not
mean “totally.”
Here, the district court characterized NIW’s counter-
claims as “defensive” in that NIW brought its counter-
Nos. 05-2149 & 05-4287 11
claims only because they were compulsory. The district
court then held that NIW’s counterclaims were “not
sufficiently weighty, time-consuming or complex to war-
rant denial of fees to defendant for prevailing on all of
plaintiff ’s claims.” Tax Track notes on appeal that NIW’s
counterclaims were allegedly worth upwards of $1.3
million and argues that a loss on a counterclaim of this
size must defeat prevailing party status. We disagree. NIW
prevailed completely—not just substantially—on all of
Tax Tracks claims against it, and lost only on its compul-
sory counterclaims. Tax Track’s claims against NIW
predominated in the litigation, and in securing their
dismissal NIW won more than it lost. The district court’s
determination that NIW was the substantially prevail-
ing party entitled to an award of attorneys’ fees was not
clearly erroneous.
AFFIRMED.
A true Copy:
Teste:
________________________________
Clerk of the United States Court of
Appeals for the Seventh Circuit
USCA-02-C-0072—2-27-07