Business Disputes

First District Rules Plaintiff Not Entitled to Punitives in Noncompete Clause Lawsuit

November 6, 2009 | Peter S. Lubin and James V. DiTommaso

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.

Hardship to Former Employee Should Be Considered Outside Motion to Dismiss, First District Rules

October 30, 2009 | Peter S. Lubin and James V. DiTommaso

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.

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.

Appeals Court Upholds Injunction Enforcing Salesman’s Covenant Not to Compete

October 16, 2009 | Peter S. Lubin and James V. DiTommaso

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.

Mutual Fund Owners May Not Sue Over Excessive Fees, Seventh Circuit Rules

May 28, 2008 | Peter S. Lubin and James V. DiTommaso

In a mutual fund’s shareholder dispute, the Seventh U.S. Circuit Court of Appeals ruled on May 19 that an investment advisor’s fiduciary duty to shareholders does not require that the advisor’s fees be “reasonable” by any legal definition. In Jones v. Harris Associates L.P., 07-1624 (7th Cir. 2008), the circuit affirmed a summary-judgment ruling in favor of the mutual fund manager by the U.S. District Court for the Northern District of Illinois.

Three shareholders in the Oakmark complex of mutual funds sued the fund’s advisor, Harris Associates, contending that the fees they paid toward Harris’s compensation were too high. The bulk of the opinion (which the majority called “the main event”) concerned section 36(b) of the Investment Company Act, an amendment to the 1940 act added in 1970. That law gives investment advisors at registered investment companies a fiduciary duty to shareholders with regard to any compensation they or their affiliates receive. However, said the Seventh Circuit, “a fiduciary duty differs from rate regulation…. Section 36(b) does not say that fees must be ‘reasonable’ in relation to a judicially created standard. It says instead that the adviser has a fiduciary duty.” The court goes on to note that fiduciary duty is well-defined in trust law and does not foreclose an advisor’s ability to negotiate for compensation.

In doing so, the court disapproved caselaw from Gartenberg v. Merrill Lynch Asset Management, Inc., 694 F.2d 923 (2d Cir. 1982). That case requires that “[t]o be guilty of a violation of §36(b) . . . the adviser-manager must charge a fee that is so disproportionately large that it bears no reasonable relationship to the services rendered and could not have been the product of arm’s-length bargaining.”