Chicago Business Litigation Lawyer Blog

Our Illinois defamation attorneys and Chicago business law lawyers were interested to see a recent Second District Court of Appeal case affirming the fair-report privilege for newspapers accused of defamation. That was one cause of action in Eubanks v. Northwest Herald Newspapers, No. 2-08-0812 (Ill. 2nd 2010), in which plaintiff Carolene Eubanks also alleged false light invasion of privacy. Eubanks was upset at the Northwest Herald for printing a police notice that she had been arrested for retail theft and attempted obstruction of justice. In fact, another woman was arrested; the police had made a mistake in their original report. Unfortunately, the mistake was caught too late and the report went to print. The newspaper printed a retraction the next day explaining that Eubanks was not the person arrested.

Nonetheless, Eubanks filed a lawsuit against Northwest Herald Newspapers about five months later, alleging defamation and false light invasion of privacy. The newspaper moved for summary judgment, asserting that it was immune from defamation lawsuits under the fair report privilege. That privilege shields the media from lawsuits as long as they use official records or reports -- including police reports -- and fairly and accurately report that official information. The motion included an affidavit from the newspaper employee who received the original, incorrect police report via email, Brenda Schory, as well as the follow-up report correcting it. Because the matter took place on a New Year’s holiday weekend, Schory said, she didn’t open the second email until the incorrect report had already been published.

The trial court denied this motion for summary judgment, saying it provided no evidence of whether another employee might have opened the email before Schory could. In response, the newspaper made another motion for summary judgment, this time including an affidavit from the employee that maintains its computer system, Ben Shaw. Shaw said he had looked through computer records and was able to prove that no employee opened the second email until late in the morning the incorrect story had been published. The trial court granted summary judgment this time. Eubanks appealed, arguing that the fair report privilege does not apply to the article at issue, and that a jury should decide whether it recklessly abused the privilege.

The Second District first addressed the issue of whether the fair-report privilege applied at all. Illinois law says the privilege applies if the report is “accurate and complete or a fair abridgement” of the official information. Eubanks argued that the Northwest Herald article was not fair and complete because it did not contain the information from the second email. The Second disagreed. Relying on caselaw including Gist v. Macon County Sheriff's Department, 284 Ill. App. 3d 367, 376 (1996), the court noted that the law asks only whether the publication was accurate, not whether the information contained in it is actually true. The newspaper had no obligation to report the contents of the second email until it opened that email, the court said. Thus, the privilege still applies.

Next, the court tackled the argument from Eubanks that summary judgment was inappropriate because a reasonable juror could find that the newspaper abused its privilege by acting recklessly. To support this, Eubanks argued that the newspaper could have covered police reports or checked email over the holiday weekend. In any case, she argued that this is inappropriate for summary judgment and a jury should decide. The Second dismissed this argument as well. Most qualified privileges in Illinois can be overcome if the plaintiff can show malice, the court said. But under Solaia Technology, LLC v. Specialty Publishing Co., 221 Ill. 2d 558, 588 (2006), not even malice overcomes the fair-report privilege. That decision said the privilege can be abused only if the defendant’s report was inaccurate, for example, by omitting information or adding incorrect information. For that reason, there was no abuse of the privilege in this case, and summary judgment was appropriate.

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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.

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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.

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Our Chicago consumer fraud attorneys were pleased to see a recent ruling affirming real estate buyers’ right to relief, and punitive damages, after fraud by the builder. Linhart v. Bridgeview Creek Development Inc., No. 1-07-2712, (Ill. 1st May 20, 2009). Plaintiffs Ken Linhart, Beverly Linhart, Amy Gable, Jane Longo, Lloyd Clark and Diane Latta bought four townhomes in the Bridgeview subdivision in Palatine, Ill. in 1997 and 1998. All four units were part of the same building. During construction of that building, a town inspector noted that the foundation was sinking. This problem was not obvious during the pre-purchase walk-throughs, but later allegedly caused the building to sink seven to ten inches, causing cracks in the walls, slanted floors, floors and ceilings pulling apart, sticking doors and windows and flooding.

In 2001, the plaintiffs sued the developer, builder and its owner over these defects, claiming breach of implied warrant of habitability; fraudulent misrepresentation and concealment; and violation of the Illinois Consumer Fraud and Deceptive Business Practices Act. A jury trial returned a verdict of $1.38 million in compensatory damages for all plaintiffs, plus punitive damages of $5,000 plus attorney fees for each plaintiff. Defendants appealed, saying the jury’s decision was against the manifest weight of the evidence; the jury was improperly instructed; the six plaintiffs should have had six separate verdicts rather than one; and punitive damages were improper.

The First District started with the meatiest issue: whether the verdict itself was not supported by the evidence. On the fraud and Consumer Fraud Act claims, the defendants argued that plaintiffs should have shown that they relied on defendants’ misrepresentations when they purchased the townhouses. As to the four plaintiffs claiming common-law fraud, the court wrote, there was in fact ample evidence that they did so. The evidence in the record shows that defendants lied about the cause of cracks in the walls and the foundation, including the statement that “it’s not like the house is going to sink or anything.” Thanks to the village inspector’s report, defendants knew this was not true. Thus, the common-law fraud verdict was valid, and because common-law fraud is enough to support a Consumer Fraud Act claim, both verdicts were affirmed. The court also upheld the amount of the damages, saying qualified expert testimony supported it.

The court next examined the defendants’ argument that plaintiffs should have presented evidence for their own claims separately and received separate verdicts. It’s true that Illinois law requires separate verdicts when separate recoveries are sought, the First District wrote, but on the relevant count -- breach of implied warranty of habitability -- all of the plaintiffs presented their case as a single plaintiff, asking for repairs to the building as a whole. Thus, the ruling was affirmed. The First also rejected defendants’ arguments that the jury instructions were deficient in several ways. It did find an error in the jury instructions for breach of implied warranty of habitability, but said this error was harmless.

Last, the First District considered the issue of whether punitive damages were proper even though the plaintiffs never explicitly requested them. Punitive damages are available under the Consumer Fraud Act, the court noted, and plaintiffs asked for any relief provided by that law. Furthermore, evidence at trial showed that the defendants acted fraudulently or maliciously, as required for punitive damages, because they failed to correct a defect they knew about and intentionally misrepresented that defect to the buyers. And the trial court did not abuse its discretion, the appeals court said, because it considered both sides’ arguments and the defendants’ financial position. Thus, it upheld the punitive damages award and affirmed all of the trial court’s rulings.

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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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In a wage-and-hour class action, the Illinois Second District Court of Appeal reversed all parts of a Kane County trial court’s ruling denying class certification. Our Chicago unpaid overtime lawyers were interested to read the ruling in Cruz et al v. Unilock Chicago, Inc., 383 Ill.App.3d 752, 892 N.E.2d 78, 322 Ill.Dec. 831 (2008), because it helped establish that trial courts may go beyond the complaint to determine class certification -- but reminded them that they should not determine class certification on the merits of the case.

Wilfredo Cruz and the four other lead plaintiffs worked at Unilock Chicago’s Aurora manufacturing plant, which makes cement paving “stones.” They were hourly employees with a half-hour lunch break. In their complaint, the plaintiffs said they were required to be at their stations 10-15 minutes before work started, in uniform, to discuss anything the previous shift needed them to know. This required employees to show up 15-30 minutes early to change and get to their stations. Similarly, they say they were required to wait for the next shift to arrive before leaving, brief that shift, clean up and change. They say they punched in for these times, but Unilock had an automatic system that deducted up to 30 minutes before a shift and 15 minutes afterward, in order to meet the company’s labor budget. Furthermore, they claim that Unilock automatically deducted the 30-minute lunch break from their time records, then regularly required them to cut short or work through lunch. If necessary, these deletions would be backed up by a manual edit by the plant’s manager, who removed time before or shifts that went past the 30- or 15-minute defaults.

Unilock disputes much of this. It concedes that time records were manually edited, but said this was necessary because workers forgot to punch in or out, and that edits were confirmed with shift supervisors. This actually added time, it argued. Nonetheless, the plaintiffs sued, claiming that all of these practices resulted in underpayment of both regular time and overtime. Citing violations of the Illinois Wage Payment and Collection Act and the Minimum Wage Law, they moved to certify a class of more than 300 current and former hourly employees who had worked at Unilock’s Aurora plant since June of 1999. The trial court denied this motion for class certification, saying that plaintiffs had failed to meet any of the four standards for class certification. Plaintiffs appealed, arguing that the trial court improperly made findings of fact and rulings that assessed the merit of the claims themselves, rather than of the class certification request.

The Second District agreed. It started its analysis by refereeing the parties’ disagreement about whether courts may consider facts and allegations beyond the complaint in order to determine class certification. After a review of caselaw, the court decided that they can, relying in part on Szabo v. Bridgeport Machines, Inc., 249 F.3d 672 (7th Cir.2001). However, it was careful to say that courts should look into whether the plaintiff’s claim would satisfy the requirements for class certification, not the merits of the claim itself.

The Third next agreed with plaintiffs that the trial court had impermissibly decided several class certification issues on the merits of the case. For example, the trial court relied on depositions and pleadings when it determined that nobody had lost pay because employees who arrived early were permitted to leave early, “accept[ing] as conclusive the defendant’s evidence.” This and other examples are factual determinations that should not be determined at the class certification stage, the appeals court said. Many applied to the numerosity requirement of class certification. Not only were the trial court’s reasons for ruling on numerosity improper, the appeals court said, but evidence submitted by plaintiffs shows that 80 to 90 employees did not receive overtime, and defendants offered nothing in support of their assertion that this evidence was manipulated. For that and other reasons, the appeals court found sufficient evidence that the proposed class met the numerosity requirement.

It then addressed the requirement that class members have common questions to decide, which predominate over other issues in their cases. Again, it found that the trial court was incorrect in determining that these issues didn’t exist. The trial court wrote that there was no commonality or predominance because there was no evidence supporting the plaintiffs’ contentions about widespread unfair policies or time record manipulation. The plaintiffs argued that these conclusions ignored evidence or improperly reached the merits of the claim, and the appeals court agreed. The existence of disputed policies like requirements to work through lunch or editing time records is a common question, the appeals court said, regardless of how strong the evidence for it is at the pretrial stage. It would also be a predominant issue if the trial court determines that there was such a policy -- which is a question for the merits of the claim, the court noted.

Finally, the appeals court rejected the trial court’s determination that the class representatives are inadequate because plaintiff Cruz had been a low-level supervisor. The trial court incorrectly relied on caselaw that isn’t sufficiently similar, the appeals court wrote, to determine that a supervisor cannot represent a class including the supervised. When the supervisor’s interests are the same as those of the supervisees and he or she did not participate in the alleged wrongdoing, it is inappropriate to deny his or her adequacy. Jefferson v. Windy City Maintenance, Inc., No. 96-C-7686, 1998 WL 474115 (N.D.Ill. August 4, 1998). Furthermore, if evidence implicating Cruz arises in discovery, the appeals court said, he can be discharged without discharging all the representatives. Thus, it reversed the trial court on all counts and remanded the case to Kane County circuit court with instructions to certify the class.

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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.

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Our Chicago consumer fraud attorneys were interested to see a split decision from earlier this year in a case involving a dispute over faulty home repairs. In Kunkel v. P.K. Dependable Construction, No. 5-07-0684 (Ill. 5th Feb. 13, 2009), Herbert and Jeral Dean Kunkel sued P.K. Dependable Construction for failing to adequately replace their roof and adding new leaks. They also alleged that P.K. failed to provide the consumer rights pamphlet required under the Illinois Home Repair and Remodeling Act. Their lawsuit alleged breach of contract and warranty and violations of the Illinois Consumer Fraud Act.

The Kunkels hired P.K. in July of 2003 to replace their roof, which had been leaking over their porch but nowhere else. The contract included a five-year warranty for defects and said P.K. would check for sheeting damage after tearing off shingles and make any repairs necessary for an additional fee. Mrs. Kunkel testified that during the work, she witnessed P.K. employees knocking loose the home’s stucco siding. When she complained, they patched the areas with cement. Aside from some sheeting damage, the work proceeded without incident and the Kunkels paid in full. Unfortunately, it rained a few days later and the Kunkels discovered leaks inside their home. They estimate that P.K. made 20 to 25 attempts over the next three years to fix the leaks, but not all were successful. They entered into evidence an estimate of $1,475 to repair the water damage to their kitchen ceiling.

At a bench trial, a roofing contractor hired by the Kunkels testified that the best way to fix the problem was to remove and replace the roof for an estimate of $5,250. A P.K. employee, Tim Utley, testified that damage he had seen to the sheeting suggested that there were leaks before his company did its work. He also contradicted Mrs. Kunkel’s testimony on the stucco siding, saying he did not tear it up and that it would be impossible to do what their roofing expert suggested because the condition of the stucco was so poor. Utley said he told Mr. Kunkel that he should replace the stucco siding because that was the source of the leaks, testimony that the Kunkels dispute. In the end, the court found for the Kunkels, awarding them $6,725 in compensatory damages (the amount of the kitchen ceiling and roof replacement estimates) and $6,151.50 in attorney fees and court costs. After a motion to reconsider was denied, P.K. appealed.

The Fifth District started with P.K.’s contention that the trial court’s decision was against the manifest weight of the evidence. The trial judge had to resolve conflicts in the evidence, the court wrote, but there was plenty of evidence to support the way the judge resolved it. Thus, the Fifth declined to disturb that ruling. It next turned to the question of whether damages were correctly set. The damages were based on estimates submitted by the Kunkel’s expert and another contractor. This follows Illinois law requiring damages for defective workmanship to reflect the cost of correcting the defects, the court said. Again, witnesses for P.K. testified otherwise, but the Fifth District declined to second-guess the trial judge. And attacks on the sufficiency of the estimate came late, the court said, because P.K. did not challenge its admission into evidence at the time or cross-examine the expert about it. Thus, the damages stand.

Next, the Fifth examined P.K.’s challenge to the Kunkel’s attorney fees award. The Consumer Fraud Act allows plaintiffs to recover attorney fees, the court wrote, but they must prove actual damages. In this case, that finding was based on the trial court’s determination that P.K. violated the section of the Home Repair and Remodeling Act requiring it to provide a consumer rights pamphlet. It’s true that undisputed evidence shows that P.K. did not provide the pamphlet, the court wrote, but the Act requires that violations be knowing to be actionable. No evidence is in the record showing knowledge or state of mind, the court wrote, so there was no violation of the Act. The court also noted that there was no evidence showing that P.K.’s failure to provide the pamphlet caused actual damages. Finally, it disagreed with the trial court’s finding that P.K. failed to complete its work, which would also violate the Act, because it did not believe the Legislature intended to equate defective performance with no performance at all. Thus, it vacated the attorney fee award.

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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" »

An interesting case involving enforcement of an employment contract’s restrictive covenant was recently noted by our Illinois covenant not to compete attorneys. Cambridge Engineering Inc. v. Mercury Partners 90 BI, Inc., No. 1-06-0798 (Ill. 1st Dec. 7, 2007). The suit stems from an earlier lawsuit concluded in Missouri in 2001, in which Cambridge Engineering Inc. successfully sued former employee Gregory Degar and his new employer, Brucker Company (legally Mercury Partners 90 BI), to enforce a covenant not to compete signed by Degar. Cambridge then filed this suit against Brucker to recover punitive damages and attorney fees. Cambridge and Brucker compete in the residential and business heating market in the Midwest.

Degar worked at Cambridge as a sales representative starting in 1996, and signed a contract including noncompete and nonsolicitation covenants. The contract restricted him from competing in any way with Cambridge, or soliciting its employees or customers, anywhere in the United States or Canada, for 24 months after leaving. He was terminated in 2001 and was hired by Brucker about a month later as an inside support person rather than a salesperson. Nonetheless, he admitted to using customer contacts developed at Cambridge. Cambridge sued Deger, but not Brucker, in St. Louis and was granted a permanent injunction enforcing the noncompete clause. (At that time, Brucker fired Degar.)

Cambridge then sued Brucker in Illinois for compensatory and punitive damages, for tortious interference with contract. The parties stipulated to limit compensatory damages to attorney fees but said nothing about the punitive damages. The trial court directed a verdict against Cambridge on punitive damages, saying Cambridge hadn’t proven that Brucker’s actions were so outrageous that punitive damages were appropriate. At trial, the president of Cambridge testified that the company believed the contract would prevent Degar from holding any job, even a janitorial position, with any competitor, including in areas where Cambridge does not do business. The jury found for Cambridge on compensatory damages in the amount of $50,000, but Brucker successfully moved for judgment notwithstanding the verdict on the basis that the noncompetition clause was overly broad and unenforceable. Cambridge appealed both judgments against it.

The analysis by the First started by noting that the dispute centered around whether the covenant not to compete was unenforceable under Illinois law. Cambridge argued that the covenant was reasonable on both geographic and activity (despite testimony disputing this), and that the trial court improperly excluded testimony that would show this reasonableness. The court disagreed on all counts. The geographic scope was unreasonable, the court wrote, because it restricted Degar from taking a job with a competitor anywhere in Canada even though Cambridge only had a small amount of business in Canada. This restriction did nothing to protect Cambridge from competitors gaining unfair advantage at its expense, the court wrote. And the evidence Cambridge said was incorrectly excluded would not have changed the court’s decision. Thus, the scope of the covenant was indeed unreasonable.

It next examined the question of the activities prohibited by the noncompete clause, which turned on the interpretation of the contract. However, the court found that the plain language of the contract supports Brucker’s assertion that the contract was overly broad: that Degar may not “engage in any activity for or on behalf of Employer’s competitors,” a phrase that could theoretically bar Degar from taking a job filing papers for a competitor. Furthermore, testimony from Cambridge’s president at trial confirmed this interpretation; he “agreed with counsel’s contention that the St. Louis action was brought to prevent Degar from working for a competitor in any capacity.” Thus, the clause was overly broad and not reasonable, and the trial court’s decision on that issue was also correct.

Continue reading "First District Rules Plaintiff Not Entitled to Punitives in Noncompete Clause Lawsuit" »

A First District Court of Appeal ruling had an interesting lesson for our Chicago noncompete clause attorneys. In Baird and Warner Residential Sales Inc. v. Mazzone, No. 1-07-2179 (Aug. 15, 2008), the First ruled that a trial court needed more evidence in a dispute about a covenant not to compete before it could correctly grant a motion to dismiss. The case arose when Baird & Warner Residential Sales sued former employee Patricia Mazzone and her new employer, Midwest Realty Ventures (doing business as Prudential Preferred Properties). Both real estate companies have multiple branches and more than 1,000 employees in the Chicagoland area.

Mazzone was office manager for B&W’s Lincoln Park office for about 11 years before leaving for Prudential. During that time, she signed a contract that included a covenant not to solicit services from any B&W employees or independent contractors, or people who had left those jobs within the last six months, for up to a year after leaving. This contract contained a severability clause, and the “preface” to the contract specified that it applied “regarding the Lincoln Park office,” although the restrictive covenant referred to “Company.” In 2007, Mazzone resigned from her job and took another running Prudential’s Michigan Avenue office. About a month later, B&W sued for a temporary restraining order and injunction seeking to enforce the covenant and keep Mazzone and Prudential from soliciting B&W employees, alleging breach of contract by Mazzone, tortious interference with contract by Prudential, and tortious interference with prospective economic advantage by both parties.

After an injunction and expedited discovery, defendants moved to dismiss because the covenant was overly broad, alleging that it would keep any Prudential employee from soliciting any B&W employee or contractor from any office. B&W contended that the preface restricted the covenant to the Lincoln Park office and affirmatively stated that it did not seek to enforce it beyond that office. In the alternative, they argued that the severability clause should allow that portion to be separated from the rest of the agreement. The trial court granted the motion to dismiss, saying the contract’s plain language related to all of B&W’s offices. Plaintiffs appealed this ruling.

The appeals court started its opinion by considering B&W’s claim that the nonsolicitation contract was not improper under the law. It noted that motions to dismiss are not necessarily appropriate in fact-intensive situations like this one, since the rules limit courts to consideration of facts in the complaint. It then turned to the controversy over whether the contract applied to all offices or just the Lincoln Park office and found that there was insufficient evidence. The record does not show enough evidence to determine whether the contract, as written, is overly broad and poses an undue hardship on Mazzone, the court wrote, or negative effects on the public from the restraint of trade. It also disagreed that enforcing the contract would “render Mazzone unemployable,” since she would be free to solicit employees of non-B&W brokers, even within the limited one-year period specified. Thus, the trial court should not have dismissed it without hearing more evidence, the court wrote. It reversed and remanded the case for more proceedings.

Continue reading "Hardship to Former Employee Should Be Considered Outside Motion to Dismiss, First District Rules" »

Our Chicago trade secrets litigation lawyers were interested to see a recent case pitting a school bus company in Cook County against competitors and former employees. Alpha School Bus Company, Inc. v. Wagner, No. 1-06-3427 (Ill. 1st May 15, 2009). Alpha is owned by Cook-Illinois Corporation (collectively “Alpha”), which contracts to provide busing to school districts for special education students. Defendant Michael Wagner was an officer of Alpha and non-appealing defendant Leroy Meister was a managing employee. Barbara Ann Hackel owned Southwest Transit and Wagner owned Southwest Transit Leasing LLC, which leased buses to Southwest. Wagner and Meister left Alpha to join Southwest in 2003.

Alpha alleges that defendants, while employed at Alpha, conspired to secure a contract for Southwest by using their positions to make sure Southwest had a lower bid. Alpha also alleges that in forming Southwest, defendants conspired to drive Alpha out of business, sabotaged it, stole trade secrets and lured away employees. They allegedly hid their involvement in Southwest, solicited Alpha’s customers, falsified time sheets for Meister and other employees and had employees of Alpha stay to sabotage the company. Alpha sued for misappropriation of trade secrets, civil conspiracy, breach of fiduciary duty, antitrust violations and an injunction.

After Alpha filed several amended complaints, defendants moved to dismiss all of these claims, which the trial court granted with prejudice on all counts except the claim for misappropriation of trade secrets. The trial court found that all of the counts were based on the alleged theft of trade secrets and were therefore preempted by the Illinois Trade Secrets Act. Similarly, several other counts alleging conspiracy were preempted by the Antitrust Act. The remaining count was the claim for misappropriation of trade secrets, which the court dismissed without prejudice because it did not have enough information to state a cause of action. After an amended complaint that didn’t meet legal standards, the court dismissed that count with prejudice as well. The instant appeal followed.

The appeals court started by noting that Alpha did not submit a record of the trial, as required, so it could only consider the issues of law. It then took up the issue of whether the Antitrust and Trade Secrets Act preempt Alpha’s breach of fiduciary duty, conspiracy, trade secrets and antitrust claims. Alpha claims that Wagner used his position to prepare a lower bid for Southwest, which indeed would be a breach of fiduciary duty under caselaw. The court wrote that this would have involved the misappropriation of trade secrets, but does not depend on it. Thus, the Trade Secrets Act doesn’t preempt the breach of fiduciary duty claim and the trial court erred.

Similarly, the claim that Hackel induced Wagner to breach his fiduciary duty should not have been dismissed, the court wrote, because most of the allegations supporting it did not depend on misappropriation of trade secrets. And Cook-Illinois may sue Wagner for breach of fiduciary duty because Alpha properly asserted that Wagner was an officer of Cook-Illinois when he allegedly converted some of its trade secrets for use by Southwest. The First reversed the trial court on those three claims.

However, it upheld the trial court on all of the other claims. In many cases, the court wrote that the claims failed as a matter of law because of confusions between defendants as individuals and the corporations for whom they were acting as agents, or because of procedural errors. Furthermore, most of the trade secrets Alpha alleged were misappropriated failed to meet the definition of a trade secret under Illinois law: “Plaintiffs’ attempt to claim as a trade secret their “customer list,” i.e., the names of the school districts, is patently false because this information is glaringly nonsecret.” Finally, the court affirmed on the dismissal of the final complaint with prejudice, noting that the record shows no attempt by Alpha to amend its complaint again before the dismissal and appeal. Thus, the trial court was mostly affirmed and partly reversed.

Continue reading "Illinois Trade Secrets Act Does Not Preempt Breach of Fiduciary Duty Claims, First District Rules" »

A recent decision by the Fourth District Court of Appeal caught the eyes of our Illinois non-compete agreement attorneys because it created a split with other Courts of Appeal that only the Illinois Supreme Court can resolve. In September, the Fourth ruled that a trial court was correct to grant a preliminary injunction to a company suing over a covenant not to compete. Sunbelt Rentals Inc. v. Neil N. Ehlers III and Midwest Aerials & Equipment, Inc., No. 4-09-0290 (Ill. 4th Sept. 23, 2009). Sunbelt sued former sales employee Neil Ehlers and his new employer, Midwest, alleging Ehlers violated restrictive covenants when he took the new job, and Midwest tortiously interfered with the agreement when it hired him.

Sunbelt sells and rents industrial equipment for business and individual use. Ehlers was a salesman there responsible for maintaining a customer base and relationships. When he took the job in 2003, he signed a contract agreeing that he would not, for a year after leaving the job, provide services or solicit business from customers that had used Sunbelt in the preceding 12 months, or customers with whom he had had “contact, responsibility or access to confidential information.” It also forbade him from joining or starting a business “substantially similar” to Sunbelt’s. Both clauses were restricted to designated geographic areas. The contract specifically said Sunbelt would be entitled to an injunction against any breach or threatened breach of the restrictive covenants.

Ehlers quit at Sunbelt in January of 2009 to join Midwest, which rents and sells aerial platforms to construction and industry. Four days after Ehlers left, Sunbelt sent him and Midwest a “cease and desist” letter alleging that Ehlers had breached his agreement. The next month, Sunbelt sued for breach of the covenant and tortuous interference and asked for a preliminary injunction to keep Ehlers from working for Midwest. Finding that the time and geographic scope of the agreement was reasonable, the trial court granted the injunction. Ehlers and Midwest appealed, arguing that Sunbelt had not shown that it had a legitimate business interest test first set forth in Nationwide Advertising Service, Inc. v. Kolar, 28 Ill. App. 3d 671, 673, 329 N.E.2d 300, 301-02 (1975), and thus failed to follow precedent.

The Fourth District disagreed. It started by examining the question of whether the “legitimate business interests” test was valid under Illinois Supreme Court precedent, particularly the recent Mohanty v. St. John Heart Clinic, S.C., 225 Ill. 2d 52, 866 N.E.2d 85 (2006). Although every Illinois appellate court has embraced the test, the Fourth District wrote, its analysis was flawed and the Illinois Supreme Court had never embraced it. In fact, in Mohanty and several other decisions, that court never actually used the test. Instead, the Fourth said, precedent says the validity of a covenant not to compete should be based only on time and territory restrictions in the contract.

The court next took up the argument by Ehlers that the restrictive covenant should be declared invalid because it is overly broad. Ehlers argued that the restrictions were so broad that he is precluded from working for any competitor in a Midwestern city, causing him undue hardship. The court interpreted the language of the contract differently; it said the restriction meant Ehlers could not work for a competitor within 50 miles of a branch of Sunbelt where Ehlers had worked, for a year after leaving. This is consistent with previous time-and-territory decisions on restrictive covenants, the court said. Thus, the contract was valid, meaning that the trial court’s decision to issue an injunction was not unreasonable.

Continue reading "Appeals Court Upholds Injunction Enforcing Salesman’s Covenant Not to Compete " »

In a proposed class action insurance fraud lawsuit, the Illinois First District Court of Appeal has ruled that a former client may sue an insurance broker for inflating the cost of its insurance policies with “kickbacks.” DOD Technologies v. Mesirow Insurance Services Inc., No. 1-06-3300 (Ill. 1st Feb. 14, 2008). Plaintiff DOD Technologies sued Mesirow Insurance Services Inc., its insurance broker, after learning that Mesirow took contingency fees from insurance companies for steering clients toward those companies.

In its complaint, DOD said it provided confidential information to Mesirow, expecting the broker to get DOD the best price it could for insurance. But in addition to its commission from DOD, Mesirow also received “contingent commissions” from insurance companies, which were payments based on the amount of business it directed to the insurer, the number of renewals and how many losses the insurer had suffered from those clients. The payments were not disclosed to customers, DOD alleged, and created a conflict of interests for Mesirow. They also violated a part of the Illinois Insurance Code that require insurance brokers to disclose fees not directly related to premiums.

DOD sued Mesirow for breach of fiduciary duty, consumer fraud, fraudulent concealment, unjust enrichment and accounting. The complaint alleged that Mesirow steered customers to insurers who paid kickbacks, regardless of whether those insurers offered the best price, inflating the cost of insurance. The trial court dismissed three of DOD’s counts because the Insurance Code precludes breach of fiduciary duty claims and two others because it found no proof that DOD suffered damages or relied on the fraudulent concealment. DOD appealed.

The First District started with the breach of fiduciary duty count, which Mesirow alleged was precluded by provisions of the Insurance Code barring most breach of fiduciary duty claims. The exception written into the law is when the insurance producer is accused of “the wrongful retention or misappropriation... of any money that was received as premiums, as a premium deposit, or as payment of a claim.” DOD contended that its complaint falls within that exception, while Mesirow argued that it refers only to diverting premium payments for wrongful ends. The appeals court sided with DOD, holding that directing a client to an insurance policy not in its best interests in exchange for undisclosed kickbacks falls under the definition of misappropriation of premiums.

Having reversed the trial court on the counts for breach of fiduciary duty, unjust enrichment and accounting, the First District next turned to the Illinois Consumer Fraud Act claim. DOD alleged that it relied on Mesirow’s faulty information and thus paid excessive insurance premiums. However, the court noted, the Consumer Fraud Act requires that the plaintiff show actual damages. The record did not show that DOD would have done much differently if it had known of Mesirow’s alleged practices, the court wrote. Thus, the dismissal of the consumer fraud claim was affirmed.

Similarly, the court affirmed the dismissal of the fraudulent concealment complaint because DOD failed to show that it suffered actual damages. Finally, the court disposed of technical arguments raised by the plaintiff over alleged misconduct during discovery and in filings. In the end, the First District affirmed the dismissal of the Consumer Fraud Act and fraudulent concealment complaints, but reversed and remanded the other complaints for trial.

The consumer rights law firm of DiTommaso-Lubin handles consumer fraud complaints such as this one, both as individual actions and as national or Illinois class action lawsuits representing a large group of consumers with similar complaints. Our Chicago based insurance fraud attorneys and consumer lawyers help clients throughout the United States against insurance companies and others that inflated their premiums, failed to pay legitimate claims or otherwise took advantage of their relative lack of power. From offices near Wheaton, Ill., and Chicago, DiTommaso-Lubin represents clients throughout the Midwest and the United States. If you believe your insurance company has violated its own contract and you’re ready to fight back, please contact DiTommaso-Lubin online or call us toll-free at 1-877-990-4990.

A trial court was correct to find for defendants in a breach of fiduciary duty and constructive fraud lawsuit, the First District Court of Appeal ruled March 20. In Prodromos v. Everin Securities Inc., No. 1-06-3685 (1st. Dist. March 20, 2009), plaintiff John Prodromos sued Everin Securities, Inc., its predecessor company, Daniel Westrope and Dennis Klaeser over an allegedly stolen opportunity.

Prodromos was a former president and CEO of Howard Savings Bank, a family business. He was fired by his sister in 1994 after he was fined by the FDIC for failing to waive a fee and for violations of state law. In 1998, he wanted to purchase Home Federal Bank, which was looking for an investor, but needed help. He approached his broker at Everin, who connected him to Westrope, an investment banker there. After a meeting attended by all three, Westrope agreed to contact shareholders at Home Federal about voting for Prodromos in a proxy vote, but no agreement was signed and no fees were paid.At the time, Westrope had already been hired away from Everin by State Financial Services Corporation, something he did not disclose to Prodromos.

After Prodromos submitted some follow-up information to Westrope, the latter man was not responsive to messages from Prodromos. About a month after the meeting, Westrope moved to State Financial. His replacement at Everin, Klaeser, told Prodromos that Everin would not support his purchase attempt because it would be bad for the firm’s investment banking business. Prodromos met with several other banks and an attorney, but did not follow up with most. He did strike a deal for financing through Success Bank, but that deal fell through when one of the Success officials involved died suddenly. His efforts ended. A few months later, State Financial acquired Home Federal and installed Westrope as CEO and president of the bank.

Prodromos sued Everin, its predecessor, Westrope and Klaeser for breach of fiduciary duty and constructive fraud. The defendants were granted partial summary judgment, but Prodromos appealed and the First District Court of Appeal reversed and remanded that decision. On remand, Prodromos requested and did not receive a jury trial because the law does not require one for breach of fiduciary duty claims. After Prodromos presented his case at a bench trial, the court granted defendants’ motion for a directed finding. Prodromos now appeals both that decision and the decision to deny him a jury trial.

The First District Court of Appeal affirmed those decisions. It first considered the motion for a directed judgment, which Prodromos argued should not have been granted without requiring the defendants to prove that the State Financial-Home Federal transaction was fair and equitable. The court disagreed, noting that nothing in its first decision (Prodromos I) or Illinois caselaw requires that a court consider every element of a claim for breach of fiduciary duty. The trial court did not find that the defendants’ conduct proximately caused Prodromos to lose the opportunity to buy Home Federal, they wrote, and that was enough to defeat the breach of fiduciary duty claim.

Furthermore, the court wrote, Prodromos did not make his case because he was unable to show that he would have been able to close the deal if it weren’t for the defendants’ actions. And undisputed testimony shows that he did not enter into an agreement with Westrope, so he was free to pursue the acquisition opportunity elsewhere. He did not, despite evidence that the time to make such a deal was running out.

The court then took up the jury trial issue. Under Illinois law, plaintiffs are entitled to a jury trial if that right existed in English common law at the time the Illinois Constitution was written. Breach of fiduciary duty and constructive fraud are both equitable claims, the First District pointed out -- and equitable claims were not tried with the right to a jury. None of the caselaw Prodromos cited effectively contradicted the Illinois Supreme Court’s holding on that subject, the court said. Thus, the trial court was correct to deny Prodromos a right to a jury trial, and both rulings were affirmed.

The experienced business litigation attorneys at DiTommaso-Lubin have substantial experience on both plaintiff and defense sides of breach of fiduciary duty, stolen corporate opportunity, corporate freeze out and squeeze out cases and partnership and shareholder disputes involving closely held businesses or family businesses. Our Chicago and Oak Brook business trial attorneys and commercial litigation lawyers handle all types of business and commercial disputes, including stolen corporate opportunities, breach of contract and business fraud litigation. From offices in Chicago and Oak Brook, Illinois, our business litigation lawyers represent clients throughout the state of Illinois and the Midwest, in state and federal courts. To learn more about our experience and your own legal options, please contact DiTommaso-Lubin online or call us toll-free at 1-877-990-4990.

A trial court may have personal jurisdiction over a defendant outside Illinois, but only if it can determine that the defendant’s alleged tort was motivated for personal reasons, the First District Court of Appeal has ruled. Femal v. Square D Company, No. 1-07-1990 (Ill. 1st Jan. 29, 2009). The ruling came in a complex Illinois business dispute between Michael Femal, a former employee at electrical equipment manufacturer Schneider Electric, and James O’Shaughnessy, a lawyer for a company accused of violating a Schneider patent.

Femal patented a process for his employer, Square D, which was bought by Schneider Automation, Inc. Schneider sold the patent to Solaia Technologies, which was to enforce the patent and give Schneider a percentage of its earnings. Schneider agreed to let Femal help Solaia enforce the patent, for which he was to get 2% of Solaia’s earnings.

Among the alleged infringers Solaia sued was Wisconsin-based Rockwell International, which countersued Solaia for bad faith patent enforcement. The sides had a settlement conference in Illinois that included O’Shaughnessy, Rockwell’s attorney. At this meeting, Rockwell raised allegations that Femal could best refute, leading Solaia to cancel its percentage arrangement with Femal and put him on a much less lucrative hourly wage to serve as a witness. Schneider then hired outside counsel to look into the propriety of Femal’s percentage arrangement with Solaia, and eventually fired him for misuse of compay assets, gross misrepresentations and gross failure of professional judgment.

Femal sued O’Shaughnessy, among others, alleging that O’Shaughnessy told Square D’s lawyer that Femal’s percentage arrangement was a gross violation of professional ethics. He also claims that O’Shaughnessy made inappropriate factual allegations to get the percentage arrangement canceled. The alleged intent, Femal said, was to save Rockwell money by harming the business relationships between Femal and the companies. Perhaps more importantly, he alleged that O’Shaughnessy was also personally motivated to cover up for bad judgment in telling Rockwell not to pay for the patent, thus incurring many times the patent’s price in legal fees.

O’Shaughnessy, who lives and works in Wisconsin, moved to dismiss because Illinois lacks personal jurisdiction over him. He was acting solely in his capacity as an employee during the Illinois meeting, he said, an assertion that Femal disputes. The trial court dismissed the motion without a hearing, a ruling that O’Shaughnessy appealed to the First District Court of Appeal and then to the Illinois Supreme Court, which ordered the appeals court to resolve it in the instant action.

In its analysis, the First District quoted at length from Rollins v. Ellwood, 141 Ill. 2d 244 (1990), which found that employees are covered by the fiduciary shield doctrine when their employers order them into another state. It was unfair for Illinois to assert personal jurisdiction in that case, the Illinois Supreme Court said, because the defendant could have been fired for refusing to enter the state. In later cases, however, courts found exceptions to that doctrine when the actions at issue were discretionary. It also noted that it saw no reason why alleged personal interest must be pecuniary in nature.

Applying that test to the case at hand, the First District noted that Femal and O’Shaughnessy have submitted affidavits that contradict one another -- Femal claiming O’Shaughnessy had a personal interest in defaming him and O’Shaughnessy claiming he did not. This is an issue of fact that will decide whether Illinois courts have personal jurisdiction over O’Shaughnessy, the court wrote. Thus, the First District reversed the trial court’s decision and remanded it with instructions to hold an evidentiary hearing on the personal motivation issue and make written findings of fact.

DiTommaso-Lubin’s Chicago business litigation lawyers handle all kinds of business disputes in Illinois, including claims of defamation of a businessperson or a product. Based in Chicago and Oak Brook, Ill., we represent clients in the Chicago area including cities in DuPage and Lake Counties including Wheaton, Naperville and Waukegan and throughout the Midwest in federal and Illinois business dispute lawsuits. You can click here to look at a summary of some of the cases our Chicago business trial lawyers have handled. If you are in a similar situation and you would like to explore your options, please contact us online or call 1-877-990-4990 to set up a confidential consultation.

In a case of first impression, the Illinois First District Court of Appeal has ruled that copy shop Kinko's may not be held liable under the Illinois Notary Public Act for misconduct by a notary it employed, but may be held liable for common-law negligence. In Vancura v. Katris, No. 1-06-2750 (Ill. 1st. Dec. 26, 2008) , the appeals court found that Kinko's did not consent to the misconduct and vacated $233,000 in jury awards.

Plaintiff Richard Vancura helped fund a real estate investment by defendant Glenn Brown, who had trouble reselling the property. A mutual acquaintance, Randall Boatwright, agreed to give Vancura shares in his company in exchange for Brown's debt to Vancura, which he agreed to lower. Brown then struck a related deal giving defendant Peter Katris an interest in the property and arranged a real estate closing at which all of these deals would be sealed. Boatwright and his business partner had Vancura sign some papers on the day before the closing, but then realized that some would have to be notarized. They visited a local Kinko's for that purpose, but without Vancura. One of the documents they left with had purported signatures from Vancura and Gustavo Albear, the notary.

Several months later, Vancura called Brown and discovered that Brown believed the debt was resolved. Vancura, who had not been paid, did not agree, and eventually sued a variety of defendants, including Albear and Kinko's; Brown and Katris also sued those defendants, along with Boatwright. After a bench trial, the trial court found Kinko's liable to Vancura, Brown and Katris for violations of the Notary Public Act as well as negligent supervision and training of Albear. Kinko's appealed both.

In its analysis, the appeals court dismissed Kinko's arguments on the common-law negligence claims, citing the company's failure to cite a relevant authority as well as substantial expert testimony that the training and storage provided to Albear by Kinko's was inadequate. On the statutory claims, however, the court was more friendly to the defense. The Notary Public Act makes employers liable for a notary's "official misconduct" if the employer "consented" to the misconduct. The majority pointed out that Kinko's had never actively encouraged or tolerated misconduct by Albear, nor had it knowingly let previous misconduct slide.

Thus, the court concluded, the trial court was wrong to award damages based on the Notary Public Act claims; it vacated those judgments. Justice O'Malley dissented, however, saying that he would have reversed the statutory ruling for different reasons. The record shows Kinko's took substantial trouble to train its employee, he wrote, showing that it did not consent to any misconduct. In fact, wrote Justice O'Malley, the common-law ruling should also have been reversed because it was based on inadmissible evidence -- irrelevant expert testimony from a notary law expert -- among other problems.

The consumer protection law firm of DiTommaso-Lubin helps consumers harmed by businesses' fraud or other illegal activities. Based in Chicago and Oakbrook Terrace, Illinois, we defend clients throughout Illinois and the United States from violations of privacy, billing fraud and more. If you believe you've been harmed by this type of deceptive business practice, please contact us to learn more about your legal rights.

A trial court was correct to find a breach of fiduciary duty in a real estate partnership, the First District Court of Appeal ruled March 27. In 1515 North Wells LP v. 1513 North Wells LLC, No. 1-07-1881 (Ill. 1st. Dist. March 27, 2009), the appeals court also upheld the lower court’s rulings that one partner had breached his contract and that denied him a chance to amend his complaint to pierce the corporate veil.

The case grows out of a real estate development deal struck in 1997. Thomas Bracken, Mark Sutherland, Alex Pearsall and an uninvolved fourth partner formed 1515 North Wells LP, a limited partnership, to develop a condominium with retail space. Sutherland and Pearsall then created SP Development Corporation to serve as the general partner of 1515 North Wells LP. Bracken separately created 1513 North Wells LLC to own space in the building that was to be a health club. Bracken borrowed $250,000 to pay for his part of the property, and signed a note saying he agreed to pay it back no later than 15 days after receiving a financial statement from 1515 North Wells. He further agreed to pay it even if there was a dispute, then wait for a refund later.

To begin development, SP, the general partner, solicited bids for a general contractor. It hired yet another Sutherland and Pearsall company, Sutherland and Pearsall Development, even though its bid was the only one received that failed to state a maximum price for the project. The same general contractor, not 1515 North Wells, later received the profits from condominium upgrades.

In 2001, Bracken received his financial statement but did not pay back the loan, claiming the accounting was inadequate. The next year, 1515 North Wells sued him for breach of contract. Bracken countersued SP, and Sutherland and Pearsall as individuals, for breach of fiduciary duty, citing the choice of their own company as general contractor. SP was granted summary judgment on Bracken’s breach of contract issue, and the individuals were granted summary judgment on breach of fiduciary duty as to them personally. Bracken was unsuccessful in his own request for summary judgment, finding that there were genuine issues of material fact to address at trial.

The court also denied Bracken leave to amend his complaint to pierce the corporate veil and find Sutherland and Pearsall personally liable for the alleged breach of fiduciary duty. Bracken’s request came in 2005, seven weeks before trial and after the issue had been raised in previous filings. However, the judge in the case retired, delaying trial. At a bench trial in December of 2005, the court found for Bracken on the breach of fiduciary duty claim. Bracken then petitioned for reconsideration of the summary judgment against him and of the denial of leave to amend his petition, in light of the court’s finding. The new judge did not change the first judge’s rulings, and in fact, amended the judgment against Bracken to include more interest and attorney fees.

Everybody appealed to the First District. On appeal, Bracken argued that the trial court erred in finding him liable for breach of contract in repayment of the loan, and in not allowing him to amend his complaint to include a request to pierce the corporate veil. SP argued that the trial court should not have found a breach of fiduciary duty because of language in the partnership agreement for 1515 North Wells.

The First District started its analysis by quickly affirming the trial court’s rulings against Bracken. It was undisputed that Bracken was contractually obligated to pay the money back, the court said, and it was undisputed that he did not repay it. Thus, summary judgment on the breach of contract issue was entirely appropriate.

It next looked at Bracken’s claim for amending his case to include a count for piercing the corporate veil. Bracken argued that he had repeatedly made that request but had not been allowed, starting at least 16 months before trial. However, the court found no evidence in the record that Bracken had done so. It further concluded that the motion he did make, seven weeks before trial, was not timely. Bracken did not make his request until nearly three years after the case was filed, the court reasoned, and had no way of knowing that the late-September trial would be postponed further. In fact, allowing an amended complaint at that late date would have been prejudicial, the First District wrote.

Finally, the appeals court dismissed SP’s argument that the trial court erred in finding it breached its fiduciary duty. SP relied on language in the partnership agreement providing that partners may engage in whichever activities they choose without financial obligation to the partnership. However, the appeals court said, the Illinois Uniform Partnership Act specifies that a partnership agreement may never eliminate or reduce a partner’s fiduciary duties. Furthermore, there was ample evidence at trial that SP breached its fiduciary duty, including the “cost plus” contract with the contractor and the fact that it did not route condo sales profits back to the partnership. Thus, the First District upheld the trial court’s decisions on all counts.

Based in Chicago and near Naperville, Ill., DiTommaso-Lubin handles partnership and shareholder, and family business disputes including such disputes involving real-esate partnerships, and other business ventures for businesses, partnerships and corporations of all sizes, from closely held family businesses to larger enterprises. Our Chicago and Oak Brook commercial litigation attorneys represent businesses in state and federal courts, and alternative dispute resolution, throughout Illinois, Indiana and Wisconsin. DiTommaso-Lubin's goal is to minimize our clients’ financial risk and avoid disruptions to their business as much as possible while still protecting their legal rights. If your business, corporation or partnership is involved in an Illinois business lawsuit and you would like to learn more about how we can help, contact DiTommaso-Lubin today for a free consultation.