Articles Posted in Stolen Corporate Opportunities

Published on:

Two shareholders and former officers of a closely-held New Jersey company, DAG Entertainment, Inc., sued two fellow shareholders, the company, and a new company formed by the defendant shareholders in U.S. District Court. The suit, Egersheim, et al v. Gaud, et al, alleged eighteen causes of action related to alleged usurpation of corporate opportunities. The defendants moved for summary judgment as to fifteen of the eighteen causes of action, and the district court ruled that those causes of action amounted to a single cause of action under the Corporate Opportunity Doctrine. The court granted summary judgment on the fifteen causes of action, allowing three causes to proceed.

Plaintiff Kathleen Egersheim owned a three percent shareholder interest in DAG and was its former Vice President and Assistant Secretary. Plaintiff Christopher Woods owned 22.5% interest and was the former Creative Director. Defendants Luis Anthonio Gaud and Philip DiBartolo owned or controlled most of the remaining stock of the company. According to the plaintiffs, DAG began exploring an opportunity to partner with the media conglomerate Comcast in 2001. The plaintiffs claim they developed characters and show ideas for children’s television programming through 2004.

In 2005, the defendant shareholders allegedly began excluding the plaintiffs from meetings and decisions regarding DAG’s activities, and also allegedly created a new business entity called Remix, LLC without plaintiffs’ knowledge. Remix entered into a formal joint venture with Comcast. The defendants proposed ceasing DAG’s major business operations, according to the plaintiffs, and the defendants voted them out of their officer positions when they objected to this plan in September 2007. DAG essentially stopped operating at that point.

Continue reading

Published on:

Super Lawyers named Chicago and Oak Brook business trial attorneys Peter Lubin and Vincent DiTommaso Super Lawyers in the Categories of Class Action, Business Litigation and Consumer Rights Litigation. DiTommaso Lubin Austermuehle’s Oak Brook and Chicago business trial lawyers have over a quarter of century of experience in litigating complex class action, consumer rights and business and commercial litigation disputes. We handle emergency business law suits involving injunctions, and TROS, covenant not to compete, franchise, distributor and dealer wrongful termination and trade secret lawsuits and many different kinds of business disputes involving shareholders, partnerships, closely held businesses and employee breaches of fiduciary duty. We also assist businesses and business owners who are victims of fraud.

Published on:

 

Our Chicago trade secrets attorneys were interested to see a recent trade secrets lawsuit coming from the high-dollar world of professional sports. Palace Sports & Entertainment, owner of the Detroit Pistons basketball team, is suing rival venue and sports company Olympia Entertainment Inc., plus nine ex-employees who moved to Olympia, for alleged theft of its confidential trade secrets. Crain’s Detroit Business reported that the claim stems from the movement of ten Palace employees to Olympia, starting in February when Palace president Tom Wilson left to run a new venture for Olympia and its parent company, Ilitch Holdings. This venture was to look into a new venue for the Detroit Red Wings, also owned by Ilitch. Nine people followed Wilson, including two executive vice presidents. In Michigan state court, Palace accuses them of breach of contract, breach of fiduciary duty, unfair competition, conspiracy, conversion, tortious interference and misappropriation of trade secrets.

According to the complaint in Palace Sports & Entertainment Inc. v. Olympia Entertainment Inc., dated June 8, 2010, Palace is accusing the ex-employees of taking and misusing trade secrets, despite having signed different versions of a confidentiality agreement that gave them a fiduciary role in Palace’s confidential information. The contract also contained restrictive covenants not to disclose such information to people outside the company, or use it for their own or anyone else’s gain. Confidential information was defined broadly, including “any technical, economic, financial, marketing or other information, which is not common knowledge.” Palace alleges that the ex-employees misappropriated information including suite prices, customer and prospect lists and sales notes, a business plan, marketing plans, suite assignments, appointment logs, proposals, vendor lists and at least one contract. When Palace notified Olympia of the first theft, it said, Olympia provided physical documents and lists of files. But Olympia did not provide the electronic data behind those files, Palace alleged and has even put some of the data on its own computers.

Palace demanded that Olympia return all of the electronic files and physical documents; that each ex-employee swear an oath that all of the information has been returned; and that a third-party expert be allowed to comb Olympia’s computers and the ex-employees’ personal computers for the information. Olympia has not complied. In its lawsuit, Palace said this caused it immediate and irreparable harm by enabling unfair competition. Olympia said publicly that it believed Palace simply did not like losing its employees. No further court documents are freely available, but trial is set for May 27, 2011.

This case generated great interest in the Detroit press, in part because Ilitch was considering buying the Pistons from Palace. But as Illinois business lawyers, we would like to discuss the strength of Palace’s case, judging by the allegations made in its complaint. Specifically, we suspect that the defendants could consider a defense based on whether the information they are accused of stealing was actually confidential trade secrets. Under the laws of Michigan, Illinois and other states, some information is not a trade secret because it is widely available to the public and not valuable. Thus, a trade secrets lawsuit cannot survive if it is based on the use of information such as lists of businesses copied from a phone book. Even if Palace’s confidentiality agreement defines such information as confidential, employees would be under no obligation to comply. The agreement cited in the complaint may also be subject to a challenge for being overly broad or vague because its definition of confidential business information includes “any information, not known to the general public.” This could easily include information with no special economic value.

Continue reading

Published on:

 

Our Illinois business and commercial emergency attorneys were interested to read an article about a lawsuit suggesting corporate “dirty tricks” by the parent company of the Jewel-Osco chain of grocery stores. Rubloff Development Group Inc., a commercial real estate developer, made that accusation in a lawsuit filed in Chicago federal court in June. According to the Chicago Tribune’s Chicago Breaking Business blog, Rubloff believes Jewel-Osco hired Saint Consulting, a Massachusetts company, in secret to “harass and interfere” with a shopping center Rubloff was trying to develop in Munedelin, Ill., with a Wal-Mart as its “anchor.” Rubloff and other developers are seeking a declaratory judgment that documents in its possession do not contain confidential trade secrets belonging to Saint, as Saint has alleged.

According to Rubloff’s complaint (PDF), file in late June, Rubloff has documents it believes show that Jewel-Osco “secretly retained” Saint to delay or stop development of shopping centers slated to contain Wal-Mart stores, which might compete with Jewel-Osco. The complaint alleges that Saint is responsible for “false statements and sham litigation” against several of the plaintiffs’ developments, particularly the one in Mundelin. Sometimes, this was enough to make the Wal-Mart pull out, causing tens of millions of dollars in costs to the developers, it says. Rubloff claims it sent SuperValu a letter in early May with these accusations. Although that letter did not name Saint and was not sent to Saint, the complaint said, Saint responded a week later with a threat to sue Rubloff for “wrongful possession of … confidential, proprietary business information.”
Rubloff and its co-plaintiffs responded with this lawsuit. In it, they ask the court for a declaratory judgment that the information at issue is not privileged, confidential or trade secrets. They also ask the court to enjoin the defendants from spoiling any evidence, something they claim the defendants do routinely, and request damages for any evidence already spoiled. If permitted to submit the controversial information to the court under seal, they say they can raise claims of racketeering, tortious interference with business opportunities, fraud, antitrust claims and more, with tens of millions in potential damages.

As Chicago business emergency lawyers, we believe a declaratory judgment is a smart way for Rubloff and the other plaintiffs to strike first and avoid potentially damaging litigation in Massachusetts. A declaratory judgment is a court order declaring the legal relationships and obligations between the parties. In this case, it is likely to be a judgment declaring whether the documents at issue are trade secrets that deserve protection under Illinois law. If Saint is bluffing about this, filing for a declaratory judgment allows Rubloff to establish that fact without fighting a frivolous lawsuit, and in its own home court rather than halfway across the United States. A declaratory judgment in Rubloff’s favor would also allow the developer to go forward with its own business lawsuit against Saint and Jewel-Osco.

Continue reading

Published on:

 

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

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

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

Continue reading

Published on:

A client list and information on clients’ computer networks do not qualify as trade secrets under the Illinois Trade Secrets Act, the Fifth District Court of Appeal decided April 13 in a business trade secrets lawsuit. In System Development Services v. Haarman, No. 04-CH-30 (Ill. 5th 2009), System Development Services (SDS) sued four former employees who left to start a competing business offering networking services to businesses in Effingham County. A trial court found that the defendants had misappropriated a list of clients and potential clients, as well as information on SDS clients’ networks, but the Fifth District Court of Appeal overturned that decision.

SDS sets up and maintains computer networks for local businesses. It maintains a database of clients and potential clients, and stressed to employees that both the list and the clients’ network information should be kept private. Defendants Timothy Haarman, Jason Repking, Rick Hoene and Terry Oldham left SDS after a bad financial year and started a competing business, Technical Partners. None had signed a restrictive covenant limiting their right to compete with SDS. However, when starting out, they sent out a mailing to potential clients that SDS thought was suspiciously similar to addresses in its client database. They also relied on former SDS customers during their first month inbusiness. SDS sued them for violations of the Illinois Trade Secrets Act and breach of fiduciary duty.

At a bench trial, the plaintiff testified that some of the addresses at issue contained information not found in the telephone book, and that work orders and emails were deleted from their system shortly before defendants left. However, the company’s owners told the court that they had no personal knowledge that a client list was stolen. The defendants testified that they made their mailing list using the phone book, the Internet and a chamber of commerce listing. They also relied on client relationships formed at SDS and personal connections. One defendant testified that no special knowledge other than the ordinary knowledge of a network technician was necessary to serve SDS and Technical Partners clients.

Published on:

As Chicago business, shareholder rights and commercial law litigators, we frequently handle cases involving allegations of business fraud or financial mismanagement, often as part of complex business dispute, that require significant expertise in financial issues. When handling a divorce involving a family business or other closely held company, we also sometimes find we need an expert’s help properly valuing the business, so we can help our clients get the most equitable possible distribution of marital property.

Our Chicago, Oak Brook, Wheaton and Naperville business trial attorneys have handled many complex business and commecial law litigation matters which have involved presenting or cross-examining accounting witnesses.

While we’re confident in our legal skills, these situations call for specialized financial skills. To give our clients the best possible representation in business, shareholder and other commercial disputes, we sometimes retain a forensic accountant or fraud examiner. Both of these jobs are twofold: They help attorneys and their clients understand the complex financial aspects of their cases, and they may also be called to testify as expert witnesses. A forensic accountant’s job is to examine a person or corporation’s accounts “cold,” from the outside; the subject isn’t generally expected to cooperate. Similarly, a fraud examiner delves deep into a company’s finances, looking for the source of anything that seems inconsistent or suspicious. Both can serve as expert witnesses who help establish the value of a business or testify to the existence of fraud.

Published on:

Only managers in manager-operated limited liability corporations have a fiduciary duty to the company or to other members, the First District Court of Appeal ruled in a usurpation of corporate opportunity lawsuit involving a closely held LLC. Katris v. Carroll, No. 1-04-3639 (Dec. 23, 2005).

Peter Katris was one of four members/officers and two managers of an Illinois limited liability corporation, Viper Execution Systems LLC. Viper LLC was formed to market a type of options-related software, also called Viper, written by LLC member Stephen Doherty for member Lester Szlendak. Its articles of organization specified that management was vested in Katris and the other manager, William Hamburg.

Defendant Patrick Carroll employed Doherty before and during the organization, and defendant Ernst & Company later hired Doherty to work with Carroll. Their work included the writing of another software program, WWOW, which Katris believed was functionally similar to Viper. Five years after the organization, Katris sued Carroll and Ernst for collusion and usurpation of corporate opportunity because of WWOW’s similarity to Viper. (He also sued Doherty for collusion and breach of fiduciary duty, claims they later settled.)

Published on:

 

Experienced Illinois business litigators probably recognize Professor Charles W. Murdock of the Loyola University Chicago School of Law as a former Illinois Deputy Attorney General, former Loyola Dean and expert on Illinois business law. Given his status, it was with great interest that we read some of his scholarship on the concept of fairness in conflicts between shareholders or other parties interested in a business, especially in situations where the majority is using its greater power against a minority. These papers are a few years old, but they directly address some of the issues that are important to our firm and our clients in corporate freeze-out or squeeze-out litigation, breach of fiduciary duty and other internal business disputes in closely held companies.

In Fairness and Good Faith as a Precept in the Law of Corporations and Other Business Organizations, 36 Loy.U.Chi. L.J. 551 (2005), Murdock addresses the fiduciary duty of good faith and fairness that controlling interests of a business owe to minority interests. Noting that this internal duty is a fairly recent legal phenomenon, he surveys caselaw on the subject from around the country that applies to closely held corporations, public corporations and LLCs. Noting that the Uniform Limited Liability Company Act (ULLCA), a model law adopted by several states, doesn’t include language that gives members of an LLC fiduciary duties to one another, he praises Illinois for modifying that language to protect members in the updated Limited Liability Company Act.

Another of Murdock’s articles that directly addresses issues important to us is 2004’s Squeeze-outs, Freeze-outs and Discounts: Why Is Illinois in the Minority in Protecting Shareholder Interests?, 35 Loyola Chicago L.J.737 (2004). As you might expect from the title, Murdock argues in the article that Illinois business law, despite its “pro-shareholder” reputation, fails to protect minority shareholders in “fair value” proceedings. (Fair value proceedings are intended to resolve conflicts when majority shareholders want to do something that would harm the minority shareholders.) Until recently, those proceedings often led to marketability and liquidity discounts imposed on minorities, and the courts usually allowed it — giving rise to Murdock’s criticism. However, amendments to the Illinois Business Corporation Act in 2007 prohibited these discounts “absent extraordinary circumstances.” While the article is now out of date, fortunately for minority shareholders in Illinois, it still provides good arguments for the change and a survey of common circumstances under which fair value proceedings might arise.

Published on:

The doctrine of laches bars a plaintiff from bringing a stolen corporate opportunities lawsuit, the Illinois First District Court of Appeal has ruled. Lozman v. Putnam, No. 1- 06-0861 (February 18, 2008).

Plaintiff Fane Lozman and defendant Gerald Putnam met in 1986 as employees of the same Chicago securities firm. Eight years later, Lozman came up with an idea for a new type of software for traders, and hired another defendant, Townsend Analytics Inc., to program it. To market the software, Lozman and Putnam formed Blue Water Partners, Inc., an Illinois corporation, in 1994. Each was a 50% shareholder and a director. The plan was to barter the software for a share of a brokerage firm’s commissions on trades. Townsend Analytics and its owners, Stuart and Marrgwen Townsend, were offered 15% equity in Blue Water but no director or officer positions.

Later that year, Putnam formed Terra Nova Trading, LLC, with himself as 100% shareholder, to route profits from Blue Water. Another company, Analytic Services, LLC, was formed to sell the software, with Samuel Long as president. In April of 1995, Putnam and Lozman signed an agreement to share commissions generated through or paid by Townsend and its software. For a variety of personal and professional reasons, the relationship between Lozman and Putnam went sour, and they voluntarily dissolved the agreement six months later. A later termination agreement, back-dated to the day of the dissolution, preserved any legal claims. Putnam went on to form three more companies that used the same office and brokerage license as Blue Water, subcontracted with the Townsends and/or competed with Blue Water.