Chicago Business Litigation Lawyer Blog

As Illinois trade secrets litigation attorneys, we were interested to see a trade secrets lawsuit arise out of the time-sensitive and competitive world of women’s fashion. As the Naples Daily News reported in July, Florida clothing company Chico’s FAS Inc. has sued competitor Cache Inc. and two former employees who moved to Cache, Rabia Farhang and Christine Board. Chico’s alleges that Farhang and Board shared designs from Chico’s White House/Black Market line with Cache, resulting in nearly identical spring and summer collections from the two brands. The lawsuit’s complaint includes exhibits of pictures of both collections. It accuses the women of breach of their nondisclosure agreements and legal duties, and Cache of inducing them to breach those agreements, and all defendants of tortious interference with contractual relations, misappropriation of trade secrets, unfair competition, theft, unjust enrichment and civil conspiracy.

According to the complaint in the case (PDF), which was filed in New York state court, Cache has not been financially successful in the past four or five years, during which time Chico’s White House/Black Market line has done well. Chico’s alleges that Cache tried to fix this by inducing Farhang and Board to leave Chico’s in the fall of 2009, taking their knowledge of design plans for 2010 clothing lines along with other trade secrets and confidential information. At Chico’s, Farhang and Board both participated in the designs of the 2010 lines, Farhang as a senior officer. Using the allegedly stolen designs, the complaint says, Cache saw an increase in sales in spring of 2010, and Chico’s alleges that Cache will use stolen designs in its fall line as well. Because of this, it requested preliminary and permanent injunctions stopping Cache from selling clothes from its spring, summer and fall lines, as well as a recall of the spring and summer lines. It also asked for financial damages and court orders protecting its trade secrets and confidential information.

Our Chicago business emergency lawyers believe this case is a good example of a situation in which swift action is necessary. If the allegations by Chico’s are true, its intellectual property and brand have already been somewhat diluted by Cache’s use of very similar designs in its spring and summer lines. This would be ongoing damage to the company that includes difficult-to-measure non-financial harm to its identity and customer loyalty, as well as actual financial damages from infringement. Furthermore, the tight schedules of fashion and retail companies mean that they bring out their fall lines in mid-summer, which means the court must take quick action on the July 29 lawsuit to stop the infringing on the fall line. This also means that Cache’s fiscal health could be in serious trouble if the count chooses to grant the injunction against the fall line and the recall order for the spring and summer lines. For both sides, this claim represents a legal emergency requiring quick action to protect their business.

Continue reading "Clothing Retailer Sues Competitor and Former Employees Alleging They Stole Secret Designs" »

For-Profit Colleges Mislead Students, Report Finds
By TAMAR LEWIN
Published: August 3, 2010
Recruiters for 15 for-profit colleges encouraged lying on financial aid forms and misled potential students.

The New York Times Reports:

Undercover investigators posing as students interested in enrolling at 15 for-profit colleges found that recruiters at four of the colleges encouraged prospective students to lie on their financial aid applications — and all 15 misled potential students about their programs’ cost, quality and duration, or the average salary of graduates, according to a federal report.

Our Chicago consumer rights attorneys are pursuing and investigating class-action lawsuits against for profit trade schools that have allegedly duped students into taking classes even though there is little or no prospect of the students obtaining work in the field after taking the course. We have obtained class certification in one such case and seeking to file other cases under the correct factual circumstances.

If you have been duped into paying a subtantial sum to a for profit trade school only to find that it is impossible to find a job in the field, please contact one of our Chicago consumer rights lawyers online by clicking here. DiTommaso-Lubin's Chicago consumer class action attorneys have been handling consumer rights and class action cases for over a quarter century. You can view the the types of cases we have handled at our website.

As Chicago alternative dispute resolution attorneys, we were pleased to read a decision from the First District Court of Appeal on compelling arbitration in an oral contract related to a written contract. In Marks v. Bober, No. 1-09-1988 (Ill. 1st. March 12, 2010), Carol Marks contracted with Lawrence Bober, managing director of RSM McGladrey Inc., to do accounting for investments she held. That was a written contract including an arbitration clause. Marks alleges that she later entered a separate oral contract with Bober and RSM for investment advice. However, she was unhappy with the advice she received and later sued the defendants. The defendants sought to compel arbitration under the written contract, and the trial court denied this, saying there was no arbitration agreement for the oral contract. The First upheld that decision.

Marks originally retained RSM to monitor her investment accounts. For that work, she signed an “engagement letter” as a contract, which included two clauses of interest. One specifies that RSM will use its professional judgment in applying “rule applicable to this engagement.” The other is a binding arbitration clause requiring dispute resolution to go through the American Arbitration Association. Marks signed, but during the remainder of her first year with RSM, she alleges that RSM failed to provide the portfolio reporting services she expected and instead began to promote various investments to her. She further alleges that RSM charged her separately for those services and emphasized that they were separate, but no written contract was signed. The court also notes that Bober and RSM were not registered with the state of Illinois or the SEC as providers of investment services.

As a result of the solicitations, Marks put $500,000 into Lancelot Investors Fund II, which put the money into a hedge fund called Thousand Lakes. Marks alleges this was a Ponzi scheme that damaged her economically. She sued RSM and Bober, alleging that they breached their fiduciary duties and oral contract with her by failing to investigate Lancelot and that they negligently held themselves out as investment experts. She sought to void the oral contract and the Lancelot investment. In trial court, Bober and RSM moved to compel arbitration under the engagement letter. This was denied. On their motion for consideration, the defendants alleged that they provided no investment advice and did not recommend Lancelot; rather, Bober wrote that he saw from the accounting work that Marks could use such advice, so he introduced her to advisors who did recommend Lancelot. This motion too was denied, and defendants appealed, saying the dispute is covered by the arbitration agreement. They also argued that the Federal Arbitration Act supports this because it has a presumption of arbitrability.

The First was not impressed. Under the FAA, which it said was the governing law in this case, it was proper for the trial court rather than an arbitrator to decide arbitrability. Under that law and the Supreme Court’s decision in AT&T Technologies, Inc. v. Communications Workers of America, 475 U.S. 643, 649, 89 L. Ed. 2d 648, 656, 106 S. Ct. 1415, 1418 (1986), parties cannot be compelled to arbitration unless they have agreed to do so in their contract.

Illinois caselaw seems to confirm this. The court cited Johnson v. Noble, 240 Ill. App. 3d 731, 732-33 (1992), which also concerned a case with one written contract and one oral contract. In that case, as in this one, the defendant sought to compel arbitration based on the written contract, but the plaintiff argued that the claims arose from the oral contract. The trial and appeals courts agreed, saying the dispute was not arbitrable because it arose from a separate oral contract. Similarly, in Board of Managers of Chestnut Hills Condominium Ass'n. v. Pasquinelli, Inc., 354 Ill. App. 3d 749 (2004), an appeals court upheld the plaintiff’s right to sue because the claims at issue were outside the scope of the arbitration agreement.

In this case, the court wrote, Marks and RSM had two separate agreements, one oral and one written. The dispute arose out of the oral contract, it said, so Marks was not required to conform to the terms of the written contract. In fact, the court said the language of the written contract indicates that the parties did not intend to extend the contract past “this engagement.” For those reasons, it upheld the trial court’s decision and remanded it to the trial court for further proceedings.

Continue reading "Arbitration Clause in Written Contract Cannot Compel Arbitration in Oral Agreement, First District Finds" »

Our Chicago trade secrets litigation attorneys were interested to see that a trade secrets and breach of restrictive covenant case was responsible for clarifying a point of procedure at the trial level. In Vision Point of Sale v. Haas et al., No. 103140 (Ill. Sup. Co. Sept. 20, 2007), the Cook County trial court certified a question of law having to do with unintentional noncompliance with a procedural requirement. In such a case, the court asked, may courts consider information of record that goes beyond the reasons for the noncompliance? The First District Court of Appeal said yes, but the Illinois Supreme Court reverse that decision.

The case arises from a Trade Secrets Act, breach of fiduciary duty, tortious interference and unjust enrichment claim filed by Vision Point of Sale, Inc. against Ginger Haas and Legacy Inc. Haas was an executive assistant at Vision before resigning and immediately taking a job at Legacy. Vision contended that Haas, at Legacy’s direction, stole confidential and proprietary information as she left, with the goal of soliciting Vision’s customers. Both companies refurbish and sell used point-of-sale equipment. Vision requested and received a preliminary injunction as well as a permanent injunction. Discovery on the permanent injunction included a request for admissions from defendants. When Vision returned its responses, the final page was signed by its attorney, but the final page of the document was signed by Vision CEO Frank Muscarello. This violated the Illinois Code of Civil Procedure, which required Muscarello’s signature on the final page of responses as well.

The defendants immediately moved to strike the document as defective and deem all of its facts admitted because of the missing signature. The trial court granted that motion. Vision moved for more time to file a set of amended responses. That motion argued that a good-faith reading of the rules was enough “good cause” to allow the amendment. It was denied, but after the case proceeded and the court became frustrated with the defendants’ noncompliance with the preliminary injunction, it vacated that denial and allowed Vision to amend its responses. Not surprisingly, the defendants objected and asked the court to certify the question in the instant appeal. The appellate court found that courts may consider information in the record beyond the reasons for the noncompliance, writing that in this situation, the circuit court may consider any facts that “strike a balance between diligence in litigation and the interests of justice.” The defendants appealed to the Illinois Supreme Court.

In considering this appeal, the high court said it was considering Supreme Court Rule 183, and to a lesser extent, Rule 216. Rule 183 says that courts may extend deadlines if one party makes a motion requesting the extension and shows good cause. The relevant parts of Rule 216, which deals with requests for admissions, say that recipients must respond within 28 days with a sworn statement denying the objections or a written statement saying they are improper in some way. Otherwise, every fact in the document is deemed admitted. The court started with a detailed discussion of Bright v. Dicke, 166 Ill. 2d 204 (1995), the last Illinois Supreme Court case interpreting the good-cause requirement. In that case, the high court found that circuit courts have the discretion to extend the 28-day deadline for responses to requests to admit.

However, the Bright court upheld the trial court’s decision to deny an extension in that particular case, because the movant had failed to show good cause. That court said the “mere absence of inconvenience or prejudice to the opposing party is not sufficient to establish good cause under Rule 183,” and that the burden of establishing good cause should be on the movant. Thus, the rule established by Bright says that trial courts may extend deadlines for responses to requests for admissions if the movant can show good cause. The defendants argue that this is inconsistent with the appellate court’s ruling in the instant case -- and the Supreme Court agreed. The appellate court’s analysis focused on issues other than why the plaintiffs failed to meet their deadline, the high court wrote, making it at odds with Bright. Allowing courts to consider the totality of the circumstances, the court wrote, would allow too many irrelevant issues to enter into the analysis.

However, the court did agree with plaintiffs that the cases subsequently arising from Bright created an unduly harsh discovery rule. Cases like Hammond v. SBC Communications, Inc. (SBC), 365 Ill. App. 3d 879, 893 (2006) expanded the rule in Bright to create “a second, broader, harsher, and apparently inflexible standard that ‘mistake, inadvertence, or attorney neglect’ on the part of the moving party can never serve as the sole basis for establishing good cause[.]” This can be fatal to cases and is unnecessarily severe, the high court said, but the appellate court’s decision is not the answer. Rather, the Supreme Court clarified that it never intended such a result in Bright and overruled cases creating that result. This analysis was enough for the Supreme Court to overrule the trial court’s ruling on the discovery motion in this case. However, the high court also found that the plaintiffs’ response was not deficient because the appellate ruling on which it is based, Moy v. Ng, 341 Ill. App. 3d 984 (2003), has no basis in Rule 216 or the Code of Civil Procedure. Thus, the appellate court was reversed and the case was remanded.

Continue reading "Illinois Supreme Court Resolves Question on Unintentional Missed Deadlines in Trade Secrets Case" »

As Illinois non-compete contract lawyers we were interested in a lengthy but substantial ruling from the Third U.S. Circuit Court of Appeals in January. In Zambelli Fireworks Mfg. Co. v. Wood, No. 09-1526, 2010 WL 143682 (3d Cir. Jan. 15, 2010), the appellate court upheld a preliminary injunction to enforce a covenant not to compete against Matthew Wood, a former pyrotechnician and choreographer for Zambelli, and his new employer, Pyrotechnico. Wood left Zambelli after seven years and a substantial amount of training from the company. In the course of his employment, he signed two non-compete agreements, the second of which superseded the first. However, Zambelli changed from a family business to an investor-owned corporation in 2007, and asked Wood to assume substantial new duties. He declined, and left for Pyrotechnico in early 2008.

Wood’s second non-compete agreement with Zambelli said he would not be involved in the pyrotechnic business in any way for two years after leaving the company; and would provide three months’ notice before leaving. When he left for Pyrotechnico, Wood provided 11 days’ notice. He and Pyrotechnico say they tried to avoid work that would constitute a breach of the non-compete clause, which restricted Wood to duties like training and music editing. Nonetheless, Zambelli sued in Pennsylvania district court and obtained a preliminary injunction keeping Wood from designing or choreographing fireworks displays, or promoting Wood’s accomplishments at Zambelli. Wood and Pyrotechnico appealed, arguing that the 2007 sale of the company canceled Wood’s non-compete agreement; that the restrictive covenant does not protect a legitimate business interest; and arguing some technical issues.

On appeal, the Third maintained its diversity jurisdiction by dropping Pyrotechnico, an LLC that it determined had Pennsylvania citizenship, as a party. It then turned to Wood’s assertion that the 2007 stock sale changed Zambelli enough to make it a separate “purchasing business entity.” Wood argued that Zambelli’s failure to assign his agreement to the “new entity” invalidated the agreement. The Third rejected this argument, saying that a sale of stock is not the same as a wholesale transfer of assets under Pennsylvania law.

Wood had no more luck with his argument that the agreement itself was unenforceable because it did not protect Zambelli’s legitimate business interests. Previous Third Circuit decisions have held that legitimate business interests include trade secrets, confidential information, specialized training, extraordinary skills and customer goodwill. Victaulic Co. v. Tieman, 499 F.3d 227, 235 (3d Cir. 2007). This allowed the Third to agree with the district court that Zambelli had a legitimate business interests to protect with an injunction. Wood had a longstanding relationship with Zambelli’s customers, the court said, and they viewed him as an expert in the industry. Similarly, Zambelli had provided Wood specialized training and skills, and had a legitimate business interest in protecting it. However, because the district court had failed to require Zambelli to post a bond, the Third vacated the injunction and remanded the case with instructions to require a bond if the court decides to reimpose the injunction.

Continue reading "Third Circuit Upholds Non-Compete Clause But Changes Unreasonable Restriction on Activity" »

As Chicago class-action attorneys, we were pleased to see that the Seventh Circuit upheld a decision in favor of retired UPS employees protesting a change in their employee contributions to health benefits. In Green v. UPS Health & Welfare Package for Retired Employees, No. 09-2445 (7th Cir. Feb. 10, 2010), a class of participants in the UPS retiree health plan (the Plan) belonging to the International Brotherhood of Teamsters Local 705 challenged a decision by UPS to raise the amount of health insurance contributions required of them, but not of other plan participants.

UPS employs Teamsters and negotiates its collective bargaining agreements with the international office of the IBT as well as with a few locals, including Local 705. Local 705’s agreement at issue here was negotiated in 2002 and expired on July 31, 2008. That agreement said UPS would provide the same health plan to Local 705 retirees that it provides to all retirees. The Plan said UPS may raise participants’ contributions once a certain threshold average annual cost per participant is reached, but that each employee shall share equally in the cost. If an additional contribution is retired, the Plan said additional contributions would not be required until after the collective bargaining agreement ended.

The average annual cost of health care rose above the threshold in 2006. In October of 2007, UPS sent out a notice that retirees’ monthly contributions would increase from $50 to $114 as of January 1, 2008. The international union complained that the increase was being implemented too early, before the July 31 end of the original collective bargaining agreement. However, it was also negotiating a new collective bargaining agreement with UPS at the time and eventually won an agreement from UPS not to implement the new fee until after the new agreement expired. This was not the case for Local 705, which complained that it wouldn’t even start a new bargaining process until July 31. UPS responded by delaying the extra payment until after the agreement expired.

After the July 31, 2008 expiration date, Local 705 negotiated a new collective bargaining agreement incorporating the Plan with no changes. In January of 2009, UPS sent out another letter saying that effective in February, it would increase retirees’ monthly contributions from $50 to $157.58 to $472.75, depending on how many family members were covered. This was not applied to the international Teamsters, who were under a separate agreement. The Local 705 retirees filed this lawsuit, arguing that their monthly contribution, higher than the international union’s, violated the Plan’s provision that all retirees would share equally in a rate hike. They also argued that the Plan barred UPS from making the rate hike effective before the end of their collective bargaining agreement. They asked for an injunction against the rate hike and agreed to a bench trial. The court found for the retirees on the “shared equally” issue and for UPS on the timing of the rate hike. Both appealed.

On appeal, the Seventh Circuit agreed with the trial court that the “shared equally” language applied to payments. UPS had argued that this language applies to how it calculates contributions, but the Seventh and the district court both found this was contradicted by the plain language of the Plan and thus “arbitrary and capricious” under Hess v. Hartford Life & Accident Ins. Co., 274 F.3d 456, 461 (7th Cir. 2001).

However, the appeals court also upheld the district court’s ruling that UPS could collect the additional contributions before the end of the current collective bargaining agreement. UPS interpreted “current” to refer to the 2002 agreement, when the Plan’s language was written; Local 705 interpreted it to refer to the 2008 agreement. The Seventh found that the interpretation by UPS was reasonable, in part because it had incorporated the Plan into the collective bargaining agreement without changes. It also said the December 2007 notice that rates would go up was further evidence that UPS was using the 2002 agreement as “current.” Thus, its interpretation was not arbitrary and capricious. The judgment of the district court was affirmed on both counts.

Continue reading "Seventh Circuit Rules UPS Violated ERISA by Raising Contributions for Only Some Retirees" »

As Chicago employment contract litigation attorneys, we noted a favorable decision for employees from the Seventh Circuit in October. Lewitton v. ITA Software, Inc., No. 08-3725 (7th Cir. Oct. 28, 2009) upheld a former employee’s right to buy stock options that had vested during his employment, even though he tried to make the purchase after leaving. Derek Lewitton was hired in April of 2005 as vice-president of sales at ITA Software, which makes a software program that compares the prices of airplane flights. His contract said some of his stock options would be forfeited if ITA didn’t meet certain revenue goals, subject to a time delay to account for delays in the development of a new program called 1U.

Unfortunately, 1U was never widely adopted among ITA’s clients, and ITA scaled it back considerably. Lewitton left ITA in May of 2007. In August of the same year, he tried to buy 138,900 shares of ITA stock. ITA let him buy only 34,722, arguing that the remaining 104,178 were forfeited under his contract. Lewitton sued ITA for breach of his employment contract. ITA removed the case to federal court under diversity jurisdiction, after which Lewitton moved for summary judgment, arguing that his employment contract was clear on his right to purchase stock options. The judge granted summary judgment, agreeing that the contract “unambiguously” granted 5,660 options for each month he was at ITA, and that no forfeiting events had taken place. ITA appealed.

The Seventh Circuit started by examining whether the language of Lewitton’s employment contract was ambiguous under Illinois law, which both parties agreed applies. The principal question, the court wrote, is whether the contract unambiguously allows Lewitton to buy the 5,660 shares per month he claims. The contract specifies that those shares are forfeited if ITA didn’t meet certain goals in by the end of an assessment period, but that assessment period would be deferred it the development schedule for 1U was “materially deferred.” In trial court, both sides agreed that 1U’s development didn’t go the way it was expected to go. On that basis, the trial court found that the assessment period was never triggered, and thus the stock options were not forfeited. On appeal, ITA argued that “materially deferred” was ambiguous and not intended to apply when ITA put the program on indefinite hold.

The Seventh disagreed, finding the term unambiguous. The ordinary dictionary definitions of the words are clear, the court wrote. And in fact, the contract includes parts that explain a material deferral by using the words “defer” and “delay” interchangeably. That example clearly shows that the parties agreed to delay the assessment period until after 1U was launched. Because 1U was never launched, the assessment period was never started, the court wrote, and thus the stock option forfeiture provision does not apply. The court dismissed ITA’s argument that the contract was never intended to give Lewitton more shares than other ITA executives. That argument was supported by negotiations and internal ITA communications, the court wrote, and caselaw requires it to consider none of that extrinsic evidence. Furthermore, the contract had a clause specifying that it supersedes all prior “agreements, understandings or negotiations.”

ITA also argued that even if the contract is unambiguous, the case presented an issue of material fact inappropriate for summary judgment. The issue in question, ITA said, is whether ITA really did delay the 1U program rather than ending it altogether. However, the court found that this was “just another attempt to create ambiguity where none exists.” At the district court, the Seventh Circuit noted, ITA made several statements through affidavits and discovery conceding that work was still being done, although resources devoted to it were significantly reduced or nonexistent. Nothing in the record points to a genuine issue of material fact on this question, the court wrote, so the trial court was upheld in its summary judgment order. Finally, the Seventh dismissed ITA’s contention that the district court should determine whether the options are valid under Delaware law (it’s a Delaware corporation), because it had explicitly waived that argument in an agreed order. Thus, the Seventh upheld the district court on all issues.

Continue reading "Former Employee’s Stock Options Remain Valid Under Employment Contract" »

Our Oak Brook and Chicago business lawyers prosecute and defend contract dispute lawsuits. Our top attorneys each have over 25 years of experience handling business trials. You can look at our Chicago business lawyers' record in business lawsuits and see our cases covered by the press at our website. Our Chicago business law attorneys have also been selected by Super Lawyers and the Leading Lawyer Network as among the top 5% of Illinois attorneys as rated by their peers in business litgation and class action litigation.

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DiTommaso-Lubin prosecutes and defends cases involving controversies over a covenant not to compete, or other restrictive covenants and other business law issues. Our Illinois restrictive covenant attorneys represent clients in active litigation over the validity and enforcement of these covenants, as well as helping to evaluate whether litigation may arise over such a contract. With more than 25 years of experience, we have handled these claims for businesses of every size, from large corporations to family-owned businesses, as well as individual employees. Based in downtown Chicago and in Oak Brook near Naperville, Hinsdale, Wheaton and Downers Grove, our Chicago business law lawyers represent clients throughout the state of Illinois, as well as in Indiana and Wisconsin. To learn more about how our Illinois covenant not to compete lawyers can help you, please do not hesitate to contact us through our Web site or call toll-free at 1-877-990-4990.

As Chicago business law attorneys, we were interested to see a recent appellate opinion reminding Illinois businesses that severability clauses won’t necessarily protect contract provisions from other clauses that have been voided. That was what happened in Kepple and Company, Inc. v. Cardiac, Thoracic and Endovasclar Therapies, S.C., No. 3-09-0033, Ill. 3rd. Dec. 16, 2009. In that case, the Third District Court of Appeal upheld a Peoria trial court’s ruling that an entire services contract between a medical biller and a medical corporation was void, because a fee-sharing provision violated the Medical Practice Act of 1987.

Kepple is a medical billing and collection services company. Cardiac, a medical corporation run by a single doctor, hired Kepple in 2003. Their services contract contained a fee-sharing clause allowing Kepple to retain 5% of all the money it collects for Cardiac. It also had non-compete, non-solicitation and no-hire clauses forbidding either company to solicit or hire away the other company’s employees without a release. And it had a severability clause specifying that if one part of the contract was found void, other parts should still be enforceable.

Cardiac became unhappy with Kepple’s services in mid-2006 and called a meeting on Aug. 3, 2006. Two days later, Kepple’s vice president, Debra Hawley, gave notice that she would leave on Nov. 3. Hawley was the sole person handling Cardiac’s work. Her employment contract had a non-compete clause preventing her from joining a company with 50% or more of its business from medical billing within one year of leaving Kepple. On Sept. 13, Cardiac gave notice that it was terminating its contract with Kepple as of Nov. 10. On Nov. 13, Hawley started working for Cardiac.

Kepple sued both of them when it found out and requested a preliminary injunction keeping Hawley from working at Cardiac. The trial court turned this down, finding that Hawley’s employment contract didn’t apply, since Cardiac is not a competitor to Kepple, and that the non-compete clause of the services contract was unenforceable because it had no time limit. It also found that Hawley was solicited, but not hired, while she was at Kepple, but that suing was an adequate remedy for this. An interlocutory appeal to the Third District upheld these findings.

On remand, the defendants promptly filed for summary judgment based on both courts’ findings. The trial court granted it, saying that the service contract’s fee-sharing clause violated the Act, which prohibits physicians from sharing fees with anyone other than physicians practicing in the same business. Thus, the court said, the contract was void in its entirety. And even if the contract was severable, the trial court had already found that Cardiac did not induce Hawley to leave her job at Kepple. Thus, there was no violation of the non-solicitation clause, the trial court found. Kepple appealed, arguing only the severability issue. It agreed that the Medical Practice Act banned the fee-sharing agreement, but said other provisions are severable and enforceable.

In its opinion, the Third District said that under the Second Restatement of Contracts, the essential issue was whether the voided part of the contract was an essential part of the contract. In this case, the court said “there can be no dispute” that it was. The fee-sharing clause is “the very essence” of the agreement, the court said, and thus the entire contract is void and unenforceable. That means the trial court was correct to grant summary judgment in Cardiac’s favor. With that settled, the appeals court noted that it did not have to consider the remainder of either side’s arguments. It also dismissed an argument by Kepple as waived on appeal because it was not raised in trial court.

Continue reading "Covenant Not to Compete Unenforceable Because Contract Violated Illinois Law -- Our Chicago Business Law Attorneys Defend and Prosecute Trade Secret Theft and Covenant Not Compete Lawsuits" »

Our Chicago business law lawyers at DiTommaso-Lubin are dedicated to helping businesses and business people in pursuing and protecting their rights in business lawsuits. To see the the wide variety of business lawsuits our Chicago business trial attorneys have handled click here. You can contact one of our Oakbrook and Chicago business law attorneys through our website by clicking here.

Our Chicago non-compete contract litigators also practice in Wisconsin, so we were interested in a decision from that state’s Court of Appeals on the severability of a covenant not to compete. In Frank D. Gillitzer Electric Co., Ltd. v. Marco Anderson et. al., 2010 WI App. 31 (Jan. 20, 2010), the court reversed a grant of summary judgment for five former employees of an electrical contractor in Milwaukee. All of them had enrolled in a training program to become licensed electricians, and signed an agreement with Gillitzer that they would reimburse the company for the cost of schooling if they failed to finish it, or left Gillitzer within four years of completing it. The same contract said they also agreed not to join a competing business in the counties where Gillitzer does business within four years of leaving the company.

All five defendants dropped out or were kicked out of the apprenticeship program before finishing, but remained with Gillitzer until voluntarily resigning. After they left, Gillitzer sued them for the cost of the training. In trial court, the defendants moved for summary judgment. They argued that the non-compete portion of the agreement was unenforceably broad and inextricably linked to the repayment portion, making the entire agreement unenforceable. They also argued that the repayment provision was a restrictive covenant under Wisconsin law. The trial court granted the summary judgment and dismissed the case, triggering an appeal from Gillitzer.

On appeal, Gillitzer conceded that the non-compete part of the agreement was unenforceable. Wisconsin law favors former employees when examining the reasonableness of covenants not to compete. Streiff v. American Family Mutual Insurance Co., 118 Wis. 2d 602, 348 N.W.2d 505 (1984). Thus, the appeals court said, the issue was whether the training reimbursement part of the agreement was enforceable. The defendants argued that it was indivisible from the rest of the agreement, and thus, the entire agreement was indivisible under Wisconsin statutes sec. 103.465. Gillitzer argued that the two covenants are individual and divisible, and that the reimbursement portion is not a restrictive covenant under Wisconsin law.

The appeals court sided with Gillitzer. Using the divisibility test fashioned by the Wisconsin Supreme Court in Streiff, it looked at whether the reimbursement provision and the non-compete provision are interdependent and must be read together to be understood. In this case, they are not, the court said; they are “distinct, mutually exclusive [and] independent” under Streiff and can be separated with no loss of meaning. This would also be true under the more recent precedent set by Star Direct, Inc. v. Dal Pra, 2009 WI 76, 319 Wis. 2d 274, 767 N.W.2d 898, the court said, although it declined to reach the issue of whether Star Direct set a new divisibility test. Thus, it reversed the Milwaukee circuit court’s summary judgment order.

Continue reading "Contract Enforceable Despite Unenforceable Covenant Not to Compete, Wisconsin Appeals Court Rules" »

Our Illinois insurance bad faith attorneys were pleased to see a recent decision from the Fifth District Court of Appeals that upheld a driver’s right to fair treatment from her auto insurance company. American Family Mutual Insurance Company v. Stagg, Ill. 5th No. 5-08-0088 (Aug. 10, 2009) Diane Stagg had an insurance policy with American Family that included uninsured and underinsured motorist coverage. That part of the policy had a provision stating that the parties could demand arbitration if they couldn’t agree on the existence or amount of coverage. It also said that arbitration awards would be binding and could be entered as judgments in court if they did not exceed the minimum limits set by the Illinois Safety Responsibility Law. If they did exceed that limit, either party has the right to a trial. The limit for bodily injury at the time was $20,000.

Stagg was later hit by an at-fault driver with a very small amount of insurance. She collected the $25,000 available in liability insurance from the at-fault driver, but requested more under her uninsured motorist coverage. She and American Family went to arbitration and she was awarded $36,340.75. However, the arbitrators set off $25,000 for the at-fault driver’s payment and $5,000 in expenses American Family had paid, leaving her with an award of just $6,340.75. Four months later, American Family filed a complaint to enforce that judgment, saying Stagg hadn’t objected to the award within time limits set by the Illinois Uniform Arbitration Act. The next month, Stagg filed a separate action against American Family, seeking a new trial.

The parallel claims may have caused some conflicting decisions by the court, but it eventually clarified that it intended to grant Stagg’s motion to dismiss American Family’s complaint. American Family appealed, arguing that the arbitration award was $6,340.75, too low to meet the contract’s threshold for going to court. Stagg argued that the arbitration award was actually 36,340.75, making it larger than the minimum limit cited in the contract. In its analysis, the court found that the term “arbitration award” as used in the contract was subject to more than one interpretation. Under American States Insurance Co. v. Koloms, 177 Ill. 2d 473, 479 (1997), the court said, ambiguous language in an insurance policy should be construed against the drafter. Thus, Stagg is entitled to a new trial under the contract.

The court then addressed American Family’s contention that Stagg missed the deadline to appeal the arbitration award under the Uniform Arbitration Act. The Fifth agreed with Stagg, who argued that the limitation didn’t apply because she isn’t challenging the award through the Act, but instead requesting a new trial. The arbitration award was never binding under the contract’s language, the court said, meaning that Stagg had no obligation to state any grounds for overturning it. Thus, the court’s decision to dismiss American Family’s complaint was upheld.

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Our Chicago covenant not to compete lawyers wrote a blog post last autumn about an interesting case from the Illinois Fourth District Court of Appeal. In Sunbelt Rentals v. Ehlers, No. 4-09-0290 (Ill. 4th Sept. 23, 2009), the appeals court rejected the “legitimate business interests” test used by Illinois courts to determine whether a contract’s non-compete clause is enforceable against a former employee. It said the test had never been valid, particularly in light of Mohanty v. St. John Heart Clinic, S.C., 225 Ill. 2d 52, 866 N.E.2d 85 (2006). This was a departure from previous rulings and created a split with other state appeals courts, but has not yet been challenged in the Illinois Supreme Court. However, the U.S. District Court for the Northern District of Illinois rejected the Fourth District’s reasoning in a December decision.

In Aspen Marketing Services, Inc. v. Russell and Eventnext Marketing, Inc., 2009 WL 4674061 (N.D. Ill. Dec. 3, 2009), defendant Yvon Russell and his new business, Eventnext, were sued by Russell’s former employer, Aspen. Russell had formerly been Group President for Aspen, after it bought a previous marketing company of his. When that purchase took place, Russell signed a contract with non-compete, non-solicitation and non-disclosure covenants. It barred Russell from disclosing any non-public information about Aspen, ever; soliciting Aspen clients, former clients or prospects for a year and a half after leaving; and competing with the company in any business for six months after leaving.

Russell was terminated on June 27, 2007, and started Eventnext on November 27, 2007. Aspen sued, claiming Russell successfully solicited at least one Aspen client shortly afterward. In federal district court, Russell moved to dismiss all counts, saying the restrictive covenants were overly broad and thus unenforceable. In particular, he argued that the geographic limit of the non-compete clause was overbroad because it covered the entire United States. The court found that this was not unreasonable in scope, given the nationwide nature of Aspen’s business.

It went on to consider the second half of the Illinois test of enforceability of covenants not to compete: whether the restriction serves a legitimate business interest. In a footnote, the court acknowledged the Sunbelt ruling, but said it was not binding because it had not been taken up by the Illinois Supreme Court, the Seventh Circuit or the federal district court. Aspen alleged that Russell had “near exclusive” knowledge of its business, had confidential information and used it in Eventnext. Taking those assertions as true, the district court concluded that the geographic scope was reasonable. It also rejected an argument about scope of competition barred, noting that the clause barred all competition for only six months. For those reasons, Russell’s motion to dismiss on that count was denied. The court also rejected several other motions, though it granted one as to tortious interference. The case continues.

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Our Illinois trade secrets attorneys were pleased to see an evenhanded ruling handed down by the Second District Court of Appeal. In Stenstrom Petroleum Services Group, Inc. v. Mesch, No. 2-07-0504 (Ill. 2nd Sept.7, 2007), Stenstrom sued former employee Robert Mesch for breach of a noncompete clause, breach of fiduciary duty and violations of the Illinois Trade Secrets Act. The case arises out of Mesch’s decision to leave Stenstrom and join Precision Petroleum Installation Inc., a competitor with nearly the same name as a company that Stenstrom bought. The trial court granted Stenstrom a preliminary injunction on its breach of contract claim, but denied injunctions on the other claims.

Mesch had worked in the petroleum industry since 1974, eventually becoming a project manager and salesman. Stenstrom installs, maintains and repairs petroleum equipment, such as tanks, pumps and electronics. Mesch had been working for Precision Petroleum Inc. when Stenstrom bought it in 2003. Mesch was hired during the acquisition to do the same work, and signed noncompete and confidentiality agreements. The noncompete agreement restricted Mesch from working in excavation or equipment repair in Winnebago and Boone counties for six months after his employment ended. When estimating and making bids for Stenstrom, Mesch testified that he used a crude spreadsheet inherited from his old company, rather than the estimating software other project managers at Stenstrom used.

In December of 2006, Mesch left Stenstrom and joined Precision Petroleum Installation Inc., a new company at which he had the opportunity to earn a share of profits as well as a salary. He acknowledged that PPI has bid on and discussed jobs only for Stenstrom customers, and its one client as of the hearing was a Stenstrom customer. He testified that he uses the same Excel spreadsheet and other Stenstrom data to estimate bids for PPI, but said purchasing differences between the companies mean he uses different information to calculate the bids. He also said PPI does not do excavation or repair work, relying on subcontractors. He acknowledged copying Stenstrom’s files for PPI’s use while he was at Stenstrom, but destroyed some data and handed over other data as part of the case. It would not be difficult to recreate the spreadsheet from memory, he said, because he created it, had Stenstrom discounts committed to memory and could get manufacturer prices from public knowledge.

Stenstrom president David Sockness testified at trial that the Excel spreadsheet was acquired in the 2003 purchase, is full of valuable Stenstrom information and is being used by other project managers. He said PPI had bidded on work for some of its best clients, but acknowledged that there was no exclusive agreement with several of these clients and that some take competitive bids. Stenstrom IT manager Brian Cotti testified that records show Mesch tried unsuccessfully to print a bidding report to which he did not have access. Two clients testified that their lengthy relationships with Mesch influenced their bidding decisions. At the conclusion of all of this, the trial court issued a preliminary injunction to enforce the noncompete covenant Mesch had signed until the end of the six-month period, saying it was reasonable. However, it found on the other counts that Stenstrom had failed to show it was likely to win at trial or that there was no other legal remedy available. Stenstrom and Mesch both appealed.

The Second District started by rejecting Stenstrom’s argument that the six-month restrictive covenant should have been calculated from the date Mesch ceased breaching it. The court flatly rejected this, saying the contract’s language clearly pegged the period from the day Mesch left his job at Stenstrom. It also rejected Stenstrom’s claim that it should have received a preliminary injunction based on Trade Secrets Act violations. This is based on the Excel spreadsheet Mesch used to create bids at Stenstrom and later at PPI, which Stenstrom said were full of protectable information and the result of significant investment. However, the appeals court said, Stenstrom failed to rebut Mesch’s testimony that the spreadsheet was based on publicly available information and memory, so it failed to raise a fair question about whether the information was secret enough to qualify as a trade secret.

Next, Stenstrom argued that the trial court should have granted an injunction against Mesch based on his alleged breach of fiduciary duty, a claim it said it made to avoid Stenstrom’s solicitation of its customers. Mesch was working for PPI when he copied Stenstrom’s files, the company said, and used it for PPI’s benefit. However, the Second District wrote, much of Stenstrom’s argument on breach of fiduciary duty rests on its Trade Secrets Act claim. That issue was settled above, the court said. Furthermore, Stenstrom waived its breach of fiduciary duty claim by failing to argue it clearly, the court said.

Finally, the court rejected Mesch’s argument that the trial court should have entered no preliminary injunction at all on the breach of restrictive covenant claim. Mesch is wrong to argue that the enforcement of the restrictive covenant will affect the independent Trade Secrets Act and breach of fiduciary duty claims, the court wrote. But in any case, it said, the issue is moot because the preliminary injunction period ended before the case came to the Second District. And thanks to the court’s decision on Stenstrom’s argument to change the period when the restrictive covenant applies, there’s no need to consider it. Thus, all of the trial court’s decisions were affirmed.

Continue reading "Business Not Entitled to Injunctions for Alleged Trade Secrets Act and Fiduciary Duty Violations -- Our Chicago Business Law Attorneys Have Substantial Experience in Emergency Business Litigation Involving TROs and Injunctions" »

Our Oak Brook covenant not to compete attorneys were interested to see a major non-compete lawsuit happening right here in Chicago. FierceWireless.com reported Jan. 19 that wireless telephone giant Motorola sued former executive David Hartsfield in federal court, claiming he will inevitably disclose Motorola’s confidential business information if he is allowed to take a new job at Finnish wireless phone company Nokia. Motorola is seeking a restraining order to prevent Hartsfield from taking the job.

Hartsfield resigned in December from a job developing CDMA technology at Motorola to take the position of vice president of CDMA at Nokia. In its lawsuit, Motorola claims that the non-disclosure agreement in Hartsfield’s employment contract will be violated if he takes the job. In particular, Motorola claims that it needs to protect product and pricing strategies. Hartsfield has filed a motion to dismiss the suit, arguing that it unreasonably interferes with his ability to make a living, and that Motorola has not identified any wrongdoing on his part. He also plans to argue that the non-disclosure agreements common in the wireless industry are not legitimate. Motorola has aggressively pursued non-compete and non-disclosure lawsuits in the past, including a 2008 non-compete lawsuit against an executive who left for Apple’s iPhone sales business. That case was dismissed in 2009.

DiTommaso-Lubin is not involved in this case. However, our Northbrook, Evanston, Waukegan, Joliet, Lisle, Downers Grove, Wheaton, Naperville, Aurora, Elgin, and Chicago non-compete contract attorneys believe Hartsfield could build a strong defense, if his claims are true. Although the federal court has diversity jurisdiction, it must apply Illinois law, which requires it to identify a legitimate business interest behind non-disclosure and non-compete agreements. If there is none, the law says Motorola may not restrain the otherwise legal business activity of Hartsfield moving to a competitor. Hartsfield claims CDMA is an industry-wide standard, not a technology proprietary to Motorola. Similarly, at least some of Motorola’s pricing information must be public knowledge. That means the company may have an uphill battle proving that this knowledge, at least, is a trade secret worthy of protection.

Continue reading "Motorola Sues Former Executive for Moving to Competitor Nokia -- Our Chicago Covenant Not to Compete Lawyers Defend and Prosecute Non-Compete and Trade Secret Lawsuits Throughout Illinois" »

Our Chicago consumer protection attorneys were pleased to see a pro-consumer decision from the First District Court of Appeal recently. In Dubey v. Public Storage Inc., Ill. 1st No. 1-09-0094 (Oct. 23. 2009), the appeals court upheld a decision in favor of a woman who lost everything in her storage unit due to a record-keeping error. Varitka Dubey made all of her payments for a rented storage unit on time, but Metropublic Storage Fund repossessed all of the property in her unit and sold it at auction for “nonpayment.” The problem that turned out to apply to a different unit. This decision upholds a jury’s award in Dubey’s favor, but reduces the amount to conform to her agreement to store no more than $5,000 worth of property.

Dubey entered the storage unit rental agreement in September of 2002. At that time, she signed an agreement that the property she would store would be worth no more than $5,000 and that Metropublic wouldn’t be responsible for losses of more than that amount. The agreement also said that Metropublic could pursue all legal remedies if Dubey failed to meet her obligations under the agreement. Dubey testified in court that she did not notice the unit listed on her rental agreement, nor was it emphasized by the Metropublic employee who helped her. She then moved personal property into the unit that she claimed was worth $150,000. She visited the unit several more times through the end of 2002. Her rent was automatically charged to a credit card and always paid on time.

In February of 2003, Dubey returned to her unit and discovered that her key didn’t work. A Metropublic employee told her that the unit was not hers. The employee opened the unit and Dubey discovered that nearly all of her property was gone except for some broken toys belonging to her daughters. Further investigation showed that records showed someone else was listed as the owner of the unit Dubey had used, and that Dubey’s rental agreement listed a different unit. At trial, testimony showed that the unit had already been rented to someone else. The employee told Dubey her property had been auctioned off in January for non-payment of the rent, for total proceeds of $99,145. Dubey asked about personal items like family photos and was told that they were probably thrown out, but denied permission to search the garbage.

Dubey sued Metropublic for breach of contract, conversion and violations of the Illinois Consumer Fraud and Deceptive Business Practices Act. Metropublic countersued for breach of contract because Dubey stored property worth more than $5,000 in her unit. At trial, the jury found for Dubey on all counts, awarding her
$755,000 in compensatory and punitive damages on the common-law claims and $276,580 in compensatory and punitive damages for the Consumer Fraud Act claims. She was also awarded attorney fees. Both parties appealed, with Dubey asking for more compensatory damages to reflect the true value of the lost property, and Metropublic arguing that Dubey shouldn’t have been awarded three different recoveries for the same injury and that she shouldn’t have been awarded more than the $5,000 listed in the contract. It also disputed the decision, the punitive damages and the attorney fees.

The First’s analysis started by agreeing that, under Illinois law, Dubey may recover only once for the breach of contract and conversion claims. Thus, it reduced the compensatory damages for those claims to $5,000 from $10,000. However, its analysis did not extend to the Consumer Fraud Act, and it let the $69,145 awarded under that count stand. The court then addressed the claim that the Consumer Fraud Act award should not have been larger than $5,000. The court found that Metropublic had waived that issue by ignoring chances to bring it up before and during trial. But even if it were not waived, the court declined to reconsider the trial court’s finding that the clause was an exculpatory clause invalid under the Landlord and Tenant Act. In addition to dismissing Metropublic’s arguments, the court found the contract unconscionable because Dubey had no time to read it closely and Metropublic didn’t stress the $5,000 limit.

The court then dispensed with every argument Metropublic made except its argument that the punitive damages award is unconstitutional. Among the tests for whether a punitive award is unconstitutionally excessive is the ratio of punitive to compensatory damages. The U.S. Supreme Court said in State Farm Mutual Automobile Insurance Co. v. Campbell, 538 U.S. 408, 425, 155 L. Ed. 2d 585, 605-06, 123 S. Ct. 1513, 1524 (2003) that very few ratios significantly exceeding single digits will satisfy due process. The ratio for the conversion award was 149 to 1, a disparity the First found disturbing. It also found that Dubey may be entitled to more compensatory damages for her losses, since the it had found the rental contract invalid. Thus, it vacated those two damages awards and sent them back to trial court for reconsideration.

Continue reading "Appeals Court Upholds Verdict in Case Over Storage Company Incorrectly Selling Property" »

In an unusual Illinois insurance fraud lawsuit, the First District Court of Appeal has ruled that two insureds are entitled to attorney fees, sanctions and other relief under section 155 of the Illinois Insurance Code. Siwek v. White, No. 1-07-2600 (Ill. 1st Feb. 27, 2009) pits drivers Christine Siweck and Jerrold Erickson against their former auto insurer, which the court found improperly canceled their insurance policy.

Siwek was in an auto accident while using Erickson’s vehicle in the summer of 2003. Erickson was insured by American Access Casualty Company, with Siweck on the policy as a co-operator. They notified the state of Illinois of the accident and named American as their insurer, but American told the state in September of that year that the policy had been canceled in May of that year. This led IDOT to certify both Siweck and Erickson as drivers who had been involved in an accident without auto insurance. At a hearing, Erickson successfully defended his license. Siweck testified at the same hearing that she had no notice of cancellation and presented paperwork showing that American had issued her a new declaration of coverage on the day after the supposed cancellation.

The state suspended Siweck’s driver’s license nonetheless. Siweck and Erickson sued for administrative review of the decision to suspend Siweck’s license and declaratory judgments against American. They sought a declaration that their policy was improperly canceled, meaning Siweck was insured at the time of the accident.

In response, American argued in court papers that the policy was canceled for failure to pay. Erickson bought the insurance policy through a broker and financed it through Fullerton Finance Company, which would make an up-front payment to American and accept monthly payments from Erickson. Fullerton notified American in May of 2003 that plaintiffs had failed to pay, so American canceled the policy. Because the premium had not been paid, American argued, it had no duty to insure Siweck. However, the plaintiffs responded, Fullerton had made the payment, they had no notice of the cancellation and Fullerton was not authorized to cancel the policy. Furthermore, American had issued them a declaration of coverage on the very next day after the purported cancellation.

The trial court ultimately dismissed American’s defenses with prejudice and granted summary judgment to the plaintiffs. After a settlement offer from American, the plaintiffs also dismissed their claims against the state of Illinois. They then moved for attorney fees, costs and sanctions under section 155 of the Insurance Code, which provides those payments when an insurer has been “vexatious and unreasonable.” These were granted. American appealed that decision along with the summary judgment and dismissal of its affirmative defenses.

The First District started by considering American’s appeals of the summary judgment for plaintiffs and the dismissal of its own alternative defenses. Regardless of the merits of those arguments, the court wrote, they were waived on appeal because American did not fight them at trial. It did not oppose plaintiffs’ motion for summary judgment, the court wrote, and in fact expressly said it would not in its settlement letter. However, if the court did consider those arguments, it asserted that would still affirm the trial court’s ruling. American had not effectively countered the plaintiffs’ claims about the declaration of coverage issued the day after its purported cancellation of their policy, the court wrote.

Finally, the court considered American’s appeal of the order for attorney fees and sanctions. American argued that the motion was not timely, that it had never denied liability coverage since no claim was filed and that plaintiffs had not paid the premium. Again, the appeals court disagreed. The relevant section of the Illinois Insurance Code states that a court may award attorney fees and sanctions when it believes an insurer’s delays were vexatious and unreasonable. One factor that tests this is whether the insured was forced to sue to recover, the court wrote -- as was the case here. Thus, it declined to find that the trial court abused its discretion in the matter and affirmed the court’s decision as to attorney fees and sanctions as well.

Based in Chicago and Oakbrook Terrace, Ill., the law firm of DiTommaso-Lubin handles consumer rights and consumer fraud litigation throughout the Midwest and the United States. Our Illinois, DuPage County and Chicago insurance fraud lawyers and consumer attorneys represent clients whose insurance companies refuse to pay claims or provide coverage to which the clients are contractually entitled. If that sounds like your situation, you may be able to recover the premium, attorney fees and other damages in a Chicago insurance bad faith lawsuit. To learn more at a free consultation with DiTommaso-Lubin, please contact us as soon as possible.

Our Illinois noncompete clause attorneys recently noted an important case addressing the standards for a preliminary injunction in Illinois lawsuits over covenants not to compete. In Lifetec, Inc. v. Edwards, No. 4-07-0300 (Ill. 4th Nov. 6, 2007), Lifetec sued former salesman Peter Edwards for breach of three restrictive covenants in his employment contract. It also sued his wife, Carol Edwards, and new employer, Patterson Medical Supply Inc., for tortious interference with the contract. Trial court granted Lifetec a preliminary injunction, and Edwards filed the instant appeal.

Lifetec sells medical devices and products. When Edwards began working there as a salesman, he signed a contract agreeing not to:

• Compete with Lifetec, or sell or lease the products he had been assigned during the last 18 months of his employment, or competing products, within the territory assigned to him in the last 18 months of his employment.
  
• Directly or indirectly solicit purchase or lease of the product or competing products within the same territory.
  
• Work as a distributor or sales representative for any manufacturer that was a client of Lifetec, or for a competitor that also handles the client’s products, within the last 12 months.

The restrictive covenant applied for 24 months after the employment agreement was terminated.

Edwards left Lifetec for Patterson, a larger competitor, after 10 years. According to the opinion, he knew the move could cause Lifetec to sue and gave Patterson a copy of the agreement, but Patterson said it would take care of him in any lawsuit. Several months later, he admitted to a former colleague that he was working for Patterson. Months later, Lifetec sued him for breach of contract and requested a preliminary injunction. At an evidentiary hearing, evidence was introduced that Edwards had solicited Lifetec customers, but he said all Lifetec customers were also Patterson customers because the bulk of Patterson’s business was from national contracts. On the basis of the evidence at this hearing, the trial court granted a preliminary injunction stopping Edwards from violating the contract.

Edwards appealed, asking only for a decision on whether there was enough evidence to support the granting of the injunction. The appeals court said there was. The question, the court wrote, was whether Edwards had used protectable confidential information gained at Lifetec for his own gain. Lifetec contended that its “open quotes” to buyers constituted protectable information, although not all open quotes necessarily resulted in sales. The court took it one step further, saying the way those quotes were calculated was the real confidential information, as the quotes themselves were not secret once submitted to customers. Edwards’ knowledge of the reasoning behind the bids could give Patterson an advantage in the competitive medical supply industry. The defendants’ arguments that Lifetec should have alleged that Edwards misappropriated its trade secrets also fail, the court wrote, since Lifetec is making no such claim. All of this is sufficient to raise fair questions of fact, the court said, so an injunction was proper until the merits of the case could be decided.

A special concurrence filed by Presiding Justice Robert Steigmann agreed with the outcome, but said the court was incorrect to use the “legitimate business interests” test. This test is three decades old, the justice wrote, but the Illinois Supreme Court had never embraced it and in fact failed to use it at all in its 2006 decision in Mohanty v. St. John Heart Clinic, S.C., 225 Ill. 2d 52, 866 N.E.2d 85 (2006). Because of this, he wrote, the court should have stopped its analysis after finding that the time and territory restraints in the covenant were reasonable. The majority noted, however, that the parties made no argument on this basis.

Continue reading "Scope of Injunctions Enforcing Restrictive Employment Covenants Must Be Clear, Fourth District Decides" »

As Illinois limited partnership litigation attorneys, we were pleased to note a recent ruling clearing up a potential conflict between Illinois and Delaware limited partnership law. Delaware law time-bars claims in a limited partnership dispute even though Illinois law typically controls statute of limitation issues, the First District Court of Appeal ruled. Freeman v. Williamson, No. 1-07-2058 (Ill. 1st Dist. June 24, 2008). The case is a victory for members of the Freeman family, who are former investors in a fund set up as a Delaware limited partnership. The plaintiffs invested in the Lipper Fixed Income Fund in 1993 and withdrew in 1999.

In 2002, the fund’s general partner realized that a former manager had overstated its returns, leading to overpayments to partners. It liquidated the partnership and appointed Richard Williamson as the trustee of the fund. In 2006, Williamson demanded that the Freemans return those overpayments. In response, the Freemans filed a lawsuit in Illinois, asking for a declaratory judgment that they were not obligated to repay the overpayments because Delaware law time-barred any claim by Williamson. They also argued that the partnership agreement for the fund specifically said partners had no obligation to restore a negative balance in the fund’s capital account. Williamson countersued for unjust enrichment, conversion and money had and received.

The trial court granted the declaratory judgment and dismissed all of Williamson’s claims with prejudice, all on summary judgment. It agreed that the Delaware Revised Uniform Limited Partnership Act applied to both the partnership agreement and Williamson’s counterclaims, and that its three-year limit for bringing claims had already expired. Williamson appealed to the First District on all of the claims but conversion.

On appeal, the court started by noting that the sole issue at stake was whether the Delaware Act applies to the dispute. Williamson argued that it did not, but the First District found this unpersuasive. The partnership agreement expressly incorporates a relevant section of the Delaware Act, the court said, and also explicitly says the same law governs the partnership aspects of the agreement. Under the Delaware Act, partners are liable for knowingly accepting payments that make the partnership unable to meet its obligations to creditors -- but if they innocently accept such payments, they are not liable. Furthermore, the law applies a three-year limit to any liability “under this chapter or other applicable law” for receiving such payments, regardless of whether it was received knowingly. Thus, the court said, the three-year period applies as long as the time limitation in the Delaware Act applies to the payments the plaintiffs received.

The court rejected Williamson’s argument that Illinois law, which would not time-bar his claims, applies because the relevant part of the Delaware Act is a statute of limitations. Using Belleville Toyota, Inc. v. Toyota Motor Sales, U.S.A., Inc., 199 Ill. 2d 325, 770 N.E.2d 177 (2002), the trustee argued that the Illinois law applies when a statute of limitations is at issue because a statute of limitations is procedural rather than substantive. The plaintiffs argued that the provision is actually a statute of repose, a substantive issue that places the matter under Delaware law through the limited partnership agreement. The court agreed, saying that the Delaware Act extinguishes liability regardless of whether plaintiffs know their cause of action, making it an issue of substantive rights.

Finally, the court rejected Williamson’s argument that the partnership agreement does not apply. It agreed that the plaintiffs are also wrong to argue that the sections on partners’ obligations apply to them, because they are former partners and the agreement clearly differs between former and current partners. However, the court said there was no question that the distributions the plaintiffs received were made pursuant to the terms of the agreement. And again, the agreement specifically says the Delaware Act applies. Thus, First District said the Delaware Act applies even though the plaintiffs are now former partners. It affirmed the summary judgment rulings by the trial court.

Continue reading "First District Says Delaware Law Controls Dispute Over Returning Overpayments From Trust Fund" »