7th Circuit Panel Affirms Dismissal Of $20 Million Suit

Mealey's (July 8, 2016, 2:53 PM EDT) -- CHICAGO — A Seventh Circuit U.S. Court of Appeals panel on July 6 affirmed dismissal of a $20 million lawsuit filed by an Indiana resident who owns a real estate brokerage company that was franchised by Keller Williams Realty Inc. (Jana Caudill, et al. v. Keller Williams Realty Inc., No. 15-3313, 7th Cir.; 2016 U.S. App. LEXIS 12420). (Opinion available. Document #98-160712-044Z.) The appeals panel dismissed Jana Caudill’s claim that Keller Williams’ release of information in a franchise disclosure document (FDD) to some 2,000 existing or potential franchisees and other interested parties breached a confidentiality clause in a settlement agreement. Keller Williams is a Texas corporation that franchises real estate firms. In 2001, it had franchised Caudill’s company, Leaders LLC d/b/a Red Key Realty Leaders, with the result that it operated under the Keller Williams name. Later, she was made a regional director of Keller Williams. Their relationship soured and her position was terminated in 2010 and her company’s franchise the following year. Settlement Agreement Caudill’s breach of contract lawsuit was filed in Indiana federal court and transferred to Texas federal court and settled in 2012. The settlement agreement included a prohibition against disclosure of its terms, including the amount paid to Caudill in the settlement. The agreement allowed certain entities, such as tax professionals, insurance carriers and government agencies, to receive the disclosures, but the recipient had to promise to keep them confidential. The agreement contained a liquidated damages provisions that said that because damages for violations against the prohibition against disclosure of a settlement term “are not susceptible to precise quantification,” any such violation would entitle Caudill to damages of $10,000. Three months after the Texas court dismissed Caudill’s suit as part of the settlement agreement, Keller Williams issued an FDD to about 2,000 existing or potential franchisees and other interested firms or personal. None of the recipients was permitted by the settlement agreement to receive such disclosures, and the FDD failed to require recipients to keep the disclosed information confidential. In violation of the settlement agreement, the FDD described Caudill’s lawsuit against Keller Williams in detail – it had alleged a variety of violations of tort and contract law and of state statutes – and noted that the case had been dismissed after the parties had settled. The FDD also disclosed both the total amount paid by the defendants to Caudill and her company and the share of the settlement that Keller Williams’ insurer had contributed. Damages Sought In a suit filed in the U.S. District Court for the Northern District of Illinois, Eastern Division, Caudill contended that the widespread dissemination of the FDD was a violation of the confidentiality clause of the settlement agreement, and that since the liquidated damages clause specifies damages of $10,000 for each breach of the confidentiality clause, she was untitled to $200 million (2,000 times $10,000) in damages. Judge Charles P. Kocoras disagreed, noting that under Texas law, a liquidated damages clause is enforceable only if “the harm caused by the breach [of the contract] is incapable or difficult of estimation and . . . the amount of liquidated damages [specified in the contract] is a reasonable forecast of just compensation.” The judge cited Phillips v. Phillips, 820 S.W.2d 785, 788 (Tex. 1991). “The relevance of the second requirement lies in the twin facts that Caudill’s suit is for breach of contract and that penalty clauses in the contract are (and long have been, see, e.g. Durst v. Swift, 11 Tex. 273, 281-82 (1854)) unenforceable under Texas law, as under common law generally . . .,” the appeals panel said in an opinion written by Circuit Judge Richard Posner. “The district judge thought it unreasonable to suppose, at least in the absence of evidence – and there was virtually none -- that the dissemination of the FDD beyond the limits specified in the settlement agreement has caused a $200 million loss to Caudill. “Although the burden of proving that a liquidated damages clause is actually a penalty clause is on the defendant in an action to enforce the clause . . . Keller Williams was able to show that there was no basis for supposing the damage to have been anywhere near an average of $10,000 per unauthorized recipient of the disclosure.” No Proof Of Harm Judge Posner wrote that Caudill failed to identify a single recipient of the FDD who had come to think less of her or her company as a result of it, or a single referral that she had lost. “One can, it is true, imagine Caudill’s business being seriously harmed by the disclosure of the terms of the settlement,” Judge Posner wrote. “The disclosure alleged a frightening catalog of wrongs committed by Keller Williams, including ‘breach of contract, fraudulent misrepresentation to induce a contract, tortuous interference with a contract, promissory estoppel, unjust enrichment, fraudulent misrepresentation to induce a written contract, breach of a written contract, tortuous interference with a written contract, . . . violation of [the] Illinois Wage Payment and Collection Act, breach of the franchise agreement, and violation of the Indiana Deceptive Franchise Practices Act.’ “Reading this litany of alleged wrongs might indeed scare off prospective business partners and clients, fearing to become targets of Caudill should they enter into a business relationship with her and the relationship sour. But this is speculation.” Chief Judge Diane Pamela Wood and Circuit Judge Ilana Rovner concurred. Counsel Caudill is represented by Ruth I. Major of Law Offices of Ruth I. Major and Peter A. Silverman of Figliulo & Silverman. Keller Williams is represented by Paula J. Morency, Neil Lloyd and Michael K. Molzberger of Schiff Hardin. All are in Chicago. (Additional documents available:  Appellant brief.  Document #98-160712-052B.  Appellee brief.  Document #98-160712-053B.)...