Breach of Fiduciary Duty

Fifth District Reverses Decision to Deny Arbitration Clause in Fiduciary Duty Case

December 21, 2010 | Peter S. Lubin and James V. DiTommaso

Our Illinois alternative dispute resolution lawyers noted an opinion from the Fifth District Court of Appeal reversing a trial court that declined to compel arbitration. In Hollingshead v. A. G. Edwards & Sons, Inc., No. 1-09-0067 (Ill. 5th Jan. 22, 2009), the court ruled there simply was not enough evidence to support the trial court’s decision to deny to compel arbitration. The case pits Carol Hollingshead, independent administrator of the estate of Selma Elliott, against Elliott’s investment company and Leonard Suess, an investment advisor there and Elliott’s son-in-law. Hollingshead sued the defendants for various causes of action related to financial mismanagement, but defendants moved to compel arbitration under several contracts related to the investment accounts. The trial court denied this motion without an explanation or an evidentiary hearing.

Elliott passed away in 2003 at the age of 101. During her lifetime, she had an account at A.G. Edwards, managed by Suess. Her power of attorney was granted to her daughter, Judy Suess, at the time of her death, so that Judy Suess could manage Elliott’s affairs. Those affairs included 11,000 shares of stock in the pharmaceutical company Merck, which had a value of $985,000 in 2001. Around 1994, defendants used that value to open up a margin account and buy other stock. Unfortunately, the value of her portfolio dropped significantly and the defendants began selling off the Merck stock to cover margin calls. Plaintiff claims this triggered tax liabilities that could easily have been avoided if the sale had happened after Elliott’s death. She sued them for breach of fiduciary duty, breach of contract and negligence.

However, Elliott had signed three contracts with Edwards before her death and Judy Suess as power of attorney had signed another, and all of them had an arbitration agreement. Defendants moved to dismiss the case and compel arbitration on this basis. The trial court heard arguments that did not get into the record on appeal, then denied the motion without comment. Defendants filed an interlocutory appeal. They argued that the contracts are the only evidence in the record and clearly apply to the lawsuit. The plaintiff argued in response that the arbitration agreements are substantively and procedurally unconscionable and the product of undue influence, all of which make them unenforceable. Defendants responded that this is a question for an arbitrator to decide.

The Fifth started with this last issue. It did not agree. Under caselaw, arbitrability is an issue for the courts unless the parties have specifically agreed otherwise, it wrote. The plaintiff is not challenging the validity of the contracts as a whole — indeed, she is relying on them in the breach of contract count.

Next, the court examined the plaintiffs’ arguments to invalidate the arbitration agreements. Under the Federal Arbitration Act, arbitration agreements are enforceable except “on such grounds that exist at law or in equity for the revocation of any contract.” This includes the plaintiff’s claims of unconscionability and undue influence. However, the court found that generally, there was no support in the record for the plaintiff’s arguments. To support the claims of unconscionability, the plaintiff made allegations in her complaint about Elliott’s age and the relationship between her and the Suesses, but did not provide any evidence, the court said. Nor do the allegations in the complaint, even if taken as true, support those defenses, it added. Under caselaw, advanced age is not enough in itself to show that a person is incapable of signing contracts, the court noted, and there is nothing per se procedurally unconscionable about having a relative for a broker.

Similarly, the Fifth found no evidence in the record to support the undue influence claim, aside from unsubstantiated claims about the familial relationship between Elliott and the Suesses. The plaintiff also made claims for substantive unconscionability, saying the $1,575 cost of arbitration is too high and the forum is biased. Again, the Fifth found, these claims are not supported by sufficient evidence in the record. It also dismissed a claim that waiving judicial review is inherently unconscionable, noting that this is directly contradicted by the FAA. For those reasons, the Fifth found that the trial court should not have declined to compel arbitration without an evidentiary hearing. It reversed that decision and remanded it to the trial court for further proceedings — including an evidentiary hearing, the Fifth said, if the plaintiff requests one.

Illinois Securities Law Statute of Limitation Does Not Apply to Breach of Fiduciary Duty Claim

September 28, 2010 | Peter S. Lubin and James V. DiTommaso

Our Chicago business litigation lawyers were interested in a recent decision from the First District Court of Appeal. Carpenter et al. v. Exelon Enterprises Company, No. 1-09-1222 (Ill. 1st March 18, 2010) posed a certified question to the court: Does the three-year statute of limitations established by the Illinois Securities Law apply to a claim that a majority shareholder breached its fiduciary duty to minority shareholders? In this case, the First decided that it does not, allowing Timothy Carpenter and seven co-plaintiffs to pursue a claim under a more generous five-year statute of limitations under the Illinois Code of Civil Procedure. Their victory in this interlocutory appeal allows them to continue their claim at the trial court level.

The plaintiffs all held minority shares of InfraSource, Inc., a Delaware corporation. The majority shareholder at 97% was Exelon, a Pennsylvania corporation. In 2003, Exelon created a new company for the purpose of divesting its interest in InfraSource, which allowed it to merge InfraSource with the new company. The resulting corporation sold some of its (formerly InfraSource’s) assets and business units to Exelon and others to GFI Energy Ventures, an independent third party. InfraSource would continue as a company, but the former minority shareholders were paid a pro-rated share of the proceeds. In 2007, the plaintiffs sued Exelon, alleging that it abused its power as majority shareholder. They accused Exelon of structuring the transaction in a way that did not adequately compensate them for the market value of their shares.

A second amended complaint said Exelon sold itself the InfraSource assets at an artificially low price and awarded itself preferred stock. It alleged causes of action for breach of fiduciary duty, civil conspiracy, and, against Exelon’s parent company, aiding and abetting those actions. Exelon moved to dismiss the second complaint based on the three-year statute of limitations in the Illinois Securities Law. The trial court denied this, finding that the five-year statute of limitations applied. However, it stayed further proceedings until the instant interlocutory appeal had been decided, answering the question of which statute of limitations is correct.

The First District started its analysis by examining the statue of limitations portion of the Illinois Securities Law. That language says plaintiffs have three years from the date of the relevant sale to bring claims under the Act, or on matters for which the Act grants relief. Plaintiffs specifically stated their claim under Delaware law in order to distance themselves from this statute of limitations, but Exelon argued that the statute still applies under the language allowing its use for matters for which the Act grants relief, and cited two cases in support. The plaintiffs countered that Illinois courts found that because the Act is modeled after federal securities laws, courts should look at how those laws are interpreted for guidance in interpreting the Act. Tirapelli v. Advanced Equities, Inc., 351 Ill. App. 3d 450, 455 (2004).

The First rejected both lines of case law, saying that the decision “actually depends on the resolution of a straightforward and fundamental question of statutory construction.” The relevant portion of the Illinois Securities Law gives any party in interest the right to bring legal action to enforce compliance or stop a violation. Exelon relies on that language to place the plaintiffs’ complaint under the Act, the court wrote, but incorrectly. When the Legislature added this language to the Act, it explicitly said it was trying to give Illinois security holders the right to stop illegal acts. It included the right to sue for rescission, the court said, but only to enforce the remedy the law provides. In fact, Guy v. Duff & Phelps, Inc., 628 F. Supp. 252 (N.D. Ill. 1985) explicitly examined whether the law gives a retrospective right of rescission to securities sellers and concluded that it should not be interpreted that way.

The First agreed, saying another reading would make other sections of the law irrelevant. It then dismissed arguments based on the Seventh Circuit’s finding in Klein v. George G. Kerasotes Corp., 500 F.3d 669 (7th Cir. 2007), saying the arguments that led to its contradictory conclusion did not apply, for all of the reasons discussed above. Because there is no retrospective right of rescission in the Act, the First said, the plaintiffs are not seeking relief on any matter for which the Act grants relief. Nor, as noted earlier, are they seeking relief under the Act itself. For that reason, the three-year statute of limitations provided by the Act does not apply, the court concluded. It answered the certified question posed by the trial court in the negative, essentially upholding that court’s decision, and remanded it for further proceedings.

Investors May Not Go Forward With Flawed Fraud Claim, Seventh Circuit Rules

September 8, 2010 | Peter S. Lubin and James V. DiTommaso

Our Illinois class action attorneys recently noted a Seventh Circuit decision ending a class-action case in the difficult realm of securities fraud. In Re Guidant Corporation, No. 08-2429 (7th Cir. Oct. 21, 2009), is a securities class action stemming from allegedly misleading statements Guidant Corp. made about its implanted defibrillators. A design flaw with certain lines of defibrillators was discovered in February of 2002, and by April, Guidant had corrected the problem in all of the new devices it made. However, the problem remained in machines already made, and Guidant failed to recall them or warn the public. All in all, Guidant knew in 2002 of at least 25 reports of short-circuiting from the older defibrillators. More reports emerged later.

Two years after this redesign, Guidant entered into merger talks with Johnson & Johnson. As part of these negotiations, it issued a press release expressing confidence about its growth prospects in the implanted defibrillator market. In their claim, plaintiffs said this was false and misleading because Guidant knew it still had liability for the Ventak defibrillators. Subsequent press releases on the merger also omitted this information, as were three merger-related forms Guidant filed with the SEC. However, in March of 2005, a young man died after his Guidant defibrillator short-circuited. Guidant issued several other SEC filings and press releases without disclosing this before it finally sent a letter to doctors in May of 2005 disclosing reported problems, an act prompted by an article about to be published in the New York Times.

The FDA recalled the defibrillators the next month, and Guidant’s stock dropped immediately. It dropped further when Johnson & Johnson announced that it was reconsidering the merger. All in all, the stock fluctuated between $63 a share and $80 a share until Guidant was purchased by Boston Scientific. The instant case is a consolidated class action filed against Guidant and eleven officers and directors as a result of these drops. In addition to alleging that all defendants made false and misleading statements about the company and omitted material information from their statements, it alleged that the individual defendants used insider knowledge and the approval of the Johnson & Johnson merger to sell stock during the period at issue.

Over the course of pre-trial motions, the plaintiffs attempted to amend their complaint at least three times, twice because of new information revealed in related product liability cases. At some point, Guidant moved to dismiss the complaint for failure to state a claim. The claims were brought under the Securities Exchange Act, which requires heightened pleading standards for plaintiffs alleging securities fraud. Specifically, the court found that the plaintiffs’ pleadings were not particular enough and failed to include facts showing that defendants knowingly and with malice misled investors. It dismissed the case with prejudice. It also declined to reconsider based on new evidence from a products liability case, and declined a motion to amend their complaint based on the same evidence. The plaintiffs appealed all three decisions.

In its analysis, the Seventh started by noting that plaintiffs had ample time to make changes to their complaint. In addition to the consolidated complaint from individual claims, it allowed an amendment at the start to change the class period. Plaintiffs notified the court twice of new evidence from other cases, but failed to amend their complaint with that evidence. The Seventh found that this was ample time for plaintiffs to amend their complaint to meet the admittedly strict standards provided for securities cases by the Private Securities Litigation Reform Act.

It then moved to the trial court’s denial of reconsideration of the dismissal. The plaintiffs claimed that it should have been reconsidered because they had new evidence from product liability cases, a standard ground for reconsideration. They acknowledged that those facts were older, but said the trial court stymied them by refusing to lift a stay of discovery. The Seventh found this unpersuasive, saying the trial court could have ruled either way without abusing its discretion. The trial court must have assessed the new evidence, it wrote, and decided that a new amended complaint would still have lacked the necessary specific facts and evidence of scienter. And the plaintiffs could have entered the new evidence into the record earlier. Thus, the district court did not abuse its discretion by denying reconsideration. For the same reasons, it was also not an abuse of discretion to deny the motion to amend, the Seventh said. Thus, all of the district court’s rulings were affirmed.

Fortune Reports: “How Ronald Perelman Met His Match”

September 8, 2010 | Peter S. Lubin and James V. DiTommaso

Fortune Reports: How Ronald Perelman Met His Match

Fortune magazine provides an insightful account of billionaire Ronald Perelman’s litigation on behalf of his daughter against his ex-wife’s family of New Jersey book store and publishing distributor magnates. The New Jersey state court sanctioned Perelman’s counsel in excess of a million dollars for allegedly pursuing frivilous litigation. The article states:

When the Revlon chairman sued his ex-father-in-law Robert Cohen and his ex-brother-in-law James Cohen in 2008, hardly anyone batted an eyelash. …

Even by modern standards of dysfunctional-family estate battles — think of the Astor clan — this one was a lulu. … But Perelman, it turned out, tangled with the wrong octogenarian. …

Judge Koblitz’s decisions fell like a lash on Perelman’s legal team. In June she found Robert Cohen competent, rejecting Perelman’s demand that a guardian be appointed to represent him during the litigation. Later in the month she ruled on the central claim in Perelman’s case, that Robert Cohen had made a promise to Claudia before Sept. 1, 1978. “It’s just not there,” the judge said. “You can’t make a silk purse out of a sow’s ear.”

Treasurer Cannot Commit Resources of Family Business Without Board Authorization, Court Finds

September 7, 2010 | Peter S. Lubin and James V. DiTommaso

As Illinois closely held business dispute attorneys, we read with interest an appellate decision in a dispute over the extent to which a company officer can act without the board’s approval. In Fritzsche v. LaPlante, No. 2-09-0329 (Ill. 2nd March 2010), the “rogue” officer was M. Christine Rock, the secretary/treasurer for family business Fritzsche Industrial Park, Inc. (FIP), which leases real estate at an industrial park in Lakemoor, Ill. Rock also had power of attorney for her father, Herbert Fritzsche, and those two roles allowed her to lease property to Gregory LaPlante, her longtime live-in boyfriend. Separately, Rock also signed a promissory note to Gerald Shaver as payment for work he had done for FIP. This led to a lawsuit by other family members and corporate members, who alleged that she acted without authorization from the board and that the note and lease were invalid.

FIP was incorporated in 2005, although the family had owned the property for decades before. The other corporate officers were Herbert Fritzsche, president, and Scot Fritzsche, vice president and son of Herbert Fritzsche. Shares of stock were divided among the officers and other sons, daughters and grandchildren, with Herbert Fritzsche getting 68 percent. In July of 2006, Herbert Fritzsche suffered a brain hemorrhage, which affected his health and may have compromised his mental capacity. One result of this was that Rock and LaPlante moved into Herbert Fritzsche’s home after he moved in with another sibling. On the first day of August, Rock signed the lease to LaPlante, which gave him 16 properties at Fritzsche Industrial Park and 10 more owned by Herbert Fritzsche individually. LaPlante was to pay rent in the amount of the property taxes, plus 10 percent of his income, although it was not clear what that income referred to.

A week later, on August 8, Rock signed the promissory note to Shaver in exchange for work done on the property, possibly through his trucking and excavating business. It obligated FIP and Park National Bank, trustee of Herbert Fritzsche’s properties, to pay $450,000 by putting a lien on the properties they owned. Park National Bank did not sign. Three months later, Herbert Fritzsche, FIP, Park National Bank and First Midwest Bank, a trustee for some FIP properties, sued Rock and LaPlante, alleging Rock was not authorized to commit the company’s or her father’s resources. The complaint alleged that Rock was suspected of stealing rents from FIP to pay her personal expenses and refused to provide documentation of rental income, which led to a shareholder decision to remove her as secretary/treasurer in May of that year. After his illness, Herbert also allegedly revoked her power of attorney. Therefore, plaintiffs alleged, Rock had no authority to enter into the lease or the note, and they were invalid. They also claimed the rental agreement was too vague to be enforced.

During the next two years, discovery in the case moved very slowly, possibly because Rock and LaPlante also faced criminal prosecution for theft, conspiracy and financial exploitation of an elderly person. In December of 2008, the plaintiffs moved for summary judgment. They argued that even if Rock was not properly removed as power of attorney and a corporate officer, Illinois law does not allow her to enter into the lease or the note without the board’s approval. They also argued that FIP’s bylaws required approval of the note because it was a form of debt. Defendants responded that the board knew about the lease through e-mails sent among the members, and that no board approval was necessary for the lease and the note because Rock was exercising Herbert’s executive authority through the POA, and because many properties were owned by individual family members rather than the board. After oral arguments, the board granted summary judgment to the plaintiffs, saying Rock did not have the authority to act unilaterally as a matter of law. This appeal followed.

Because it was an appeal of a summary judgment order, the Second noted, it had only to decide whether there were genuine issues of material fact to try. Nonetheless, it found that the defendants failed to meet that standard. Under common law, the court said, the highest officer of a corporation must still get board approval to make contracts, especially ones that are unusual or extraordinary. The lease is such an unusual contract, it wrote, because it involved no trustees for the properties and provided LaPlante with the land for little or nothing. Rock also needed board approval for the lease under the Illinois Business Corporation Act, which requires corporate formalities for transactions involving “substantially all” the corporation’s assets. The lease covered all of the property in the industrial park, the court noted, thus making it impossible for FIP to continue its business.

The court came to similar conclusions about the note. However, in this case, the main support for voiding the note came from FIP’s bylaws. Those bylaws say loans and other forms of indebtedness must be authorized by a board resolution. No such resolution exists, the court said, but the note clearly puts a $450,000 lien on FIP. The appeals court noted that the Business Corporations Act requires board approval for actions outside the ordinary course of business, but believed that the bylaws argument was stronger. Thus, the appeals court upheld the trial court’s grant of summary judgment to the plaintiffs.

Illinois Supreme Court Resolves Question on Unintentional Missed Deadlines in Trade Secrets Case

August 11, 2010 | Peter S. Lubin and James V. DiTommaso

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.

A Video of Harry Markopolos the Certified Fraud Examiner Who Uncovered the Madoff Fraud — Our Chicago Business Litigation Attorneys Engage Certified Fraud Examiners to Help Businesses, Partners and Shareholders to Recover Fraud Losses

April 19, 2010 | Peter S. Lubin and James V. DiTommaso

DiTommaso Lubin’s Chicago business trial lawyers have more than two and half decades of experience helping business clients on unraveling complex business fraud and breach of fiduciary duty cases. We work with skilled forensic accountants and certified fraud examiners to help recover monies missappropriated from our clients. Our Chicago business, commercial, and class-action litigation lawyers represent individuals, family businesses and enterprises of all sizes in a variety of legal disputes, including disputes among partners and shareholders as well as lawsuits between businesses and and consumer rights, auto fraud, and wage claim individual and class action cases. In every case, our goal is to resolve disputes as quickly and sucessfully as possible, helping business clients protect their investements and get back to business as usual. From offices in Oak Brook, near Wuakegan, Aurora, Highland Park, Wilmette, Elmhurst, and Chicago, we serve clients throughout Illinois and the Midwest.

If you’re facing a business or class-action lawsuit, or the possibility of one, and you’d like to discuss how the experienced Illinois business dispute attorneys at DiTommaso Lubin can help, we would like to hear from you. To set up a consultation with one of our Chicago, Joliet, Waukegan, Wheaton, or Naperville business trial attorneys and class action and consumer trial lawyers, please call us toll-free at 630-333-0333 or contact us through the Internet.

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

March 24, 2010 | Peter S. Lubin and James V. DiTommaso

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.

Video By a Forensic Accountant and Certified Fraud Examiner Discussing Common Types of Business Fraud — Our Chicago Business Trial Attorneys Bring Suit to Recover Monies Lost by Businesses Due to Fraud and Breach of Fiduciary Duty

February 21, 2010 | Peter S. Lubin and James V. DiTommaso

Below is a video by a forensic accountant and certified fraud examiner discussing common forms of fraud that cause losses to businesses. The video provides solutions to protecting your business from fraud.

DiTommaso Lubin’s Chicago business trial lawyers have more than two and half decades of experience helping business clients on unraveling complex business fraud and breach of fiduciary duty cases. We work with skilled forensic accountants and certified fraud examiners to help recover monies missappropriated from our clients. Our Chicago business, commercial, and class-action litigation lawyers represent individuals, family businesses and enterprises of all sizes in a variety of legal disputes, including disputes among partners and shareholders as well as lawsuits between businesses and and consumer rights, auto fraud, and wage claim individual and class action cases. In every case, our goal is to resolve disputes as quickly and sucessfully as possible, helping business clients protect their investements and get back to business as usual. From offices in Oak Brook, near Wheaton, Naperville, Evanston, and Chicago, we serve clients throughout Illinois and the Midwest.

If you’re facing a business or class-action lawsuit, or the possibility of one, and you’d like to discuss how the experienced Illinois business dispute attorneys at DiTommaso Lubin can help, we would like to hear from you. To set up a consultation with one of our Chicago, Wheaton, Elmhurst, Geneva, Aurora, Elgin, Rockford or Naperville business trial attorneys and class action and consumer trial lawyers, please call us toll-free at 630-333-0333 or contact us through the Internet.

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

October 23, 2009 | Peter S. Lubin and James V. DiTommaso

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.