Articles Posted in Breach of Contract

 

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.

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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.

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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.

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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.

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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 630-333-0333.

 

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 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.

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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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