Chicago Business Litigation Lawyer Blog

The Illinois Securities Act of 1953 Does not Apply to Common Law Damages Claims for Breach of Fiduciary Duty by Sellers of Securities

September 8, 2011 | Peter S. Lubin and James V. DiTommaso

As a Chicago law firm that focuses on business litigation, DiTommaso Lubin pays close attention to shareholder lawsuits filed in Illinois’ courts. Our Elmhurst business attorneys discovered a case filed in the Appellate Court of Illinois, First District, Fourth Division that answers questions regarding the appropriate statute of limitations to apply in a shareholder action for common law damages.

Carpenter v. Exelon Enterprises Co. is a case filed by multiple minority shareholders against the majority shareholder, Exelon, for breach of fiduciary duty and civil conspiracy. Defendant Exelon owned 97% of InfraSource, and Plaintiffs owned a portion of the remaining 3% of the company. Defendant then allegedly decided to divest its interest in the company through a series of complex merger transactions. The alleged end result of these transactions was to grant all shareholders in InfraSource would receive a pro rata share of the net proceeds. Using its majority stake in InfraSource, Defendant allegedly voted its shares in favor of the merger transactions, which was subsequently executed according to Defendant’s plan. After the merger, Plaintiffs filed suit against Exelon alleging breach of fiduciary duty and civil conspiracy that caused the minority shareholders to be inadequately compensated for their shares in InfraSource. Defendant then moved to dismiss the action because Plaintiffs’ claims were barred under the three year statute of limitations in the Illinois Securities Law of 1953. The trial court denied Defendant’s motion, stated that the applicable statute of limitations was the five year period contained in section 13-205 of the Illinois Code of Civil Procedure. The trial court then stayed the matter and certified the statute of limitations issue for an interlocutory appeal to the Appellate Court.

On appeal, the Court examined Defendant’s argument that, despite the fact that Plaintiffs did not allege specific statutory violations, Plaintiffs’ claims fell within the scope of the Illinois Securities Law and its three year statute of limitations. Plaintiffs argued that, because of the similarities between Illinois and federal securities law, federal case law should be utilized by the Court. Plaintiffs’ cited federal cases holding that securities fraud does not include the oppression of minority shareholders nor does it include oppressive corporate reorganizations, and thus the case did not fall within the purview of the Illinois statute. The Court performed a statutory analysis and determined that subsection 13(A) of the Law did not apply to Plaintiffs because their claims did not arise out of Plaintiffs’ role as purchasers of securities. The Court went on to explain that Defendant’s argument based upon subsection 13(G), which provides a remedy to any party in interest in the unlawful sale of securities, was unpersuasive. Instead, the Court held that subsection 13 of the Illinois Securities Law of 1953 does not “concern retroactive common law damages claims for breach of fiduciary duty brought by sellers of securities in general, or minority shareholders in particular.” By so holding, the Court declared that the three year statute of limitations did not apply and remanded the case back to the trial court.

Carpenter v. Exelon Enterprises Co. provides potential shareholder litigants with a ruling that gives them an additional two years to bring their claims. Conversely, those facing liability in a common law action surrounding a securities transaction should be aware that such claims are viable for a longer period of time than they may have previously thought.

Michigan Toxic Pollution Class Action Stalls in Circuit Court – Dow Chemical v. Henry

August 25, 2011 | Peter S. Lubin and James V. DiTommaso

A Michigan court recently pumped the breaks on a class action toxic pollution suit against Dow Chemical, finding that while property owners may be able to prove that the chemical giant contaminated local rivers and surrounding property with toxins, the plaintiffs did not meet the standards for bringing the suit as a class action.

The Michigan Messenger’s Eartha Jane Melzer reports that “[o]perations at Dow’s Midland plant have spread dioxin — a highly toxic and cancer-causing byproduct of the chemical manufacturing process — and other chemicals, through the Tittabawassee and Saginaw Rivers and into Lake Huron. Flooding of the rivers downstream from Dow has deposited dioxin-laden sediments on properties in the floodplain.”
Dow Chemcial v. Henry concerns a suit by roughly 150 Tittabawassee property owners filed against Dow on behalf of the more than 2,000 people with property in the floodplain in 2003 and claiming that their property had lost value due to contamination. Two years later, Saginaw County Judge Leopold Borello certified the class of property owners, a ruling that Dow appealed to the Michigan Supreme Court.

In order to be certified as a class, Michigan law requires that a group of plaintiffs meet the following criteria:

(a) the class is so numerous that joinder of all members is impracticable;
(b) there are questions of law or fact common to the members of the class that predominate over questions affecting only
individual members;
(c) the claims or defenses of the representative parties are typical of the claims or defenses of the class;
(d) the representative parties will fairly and adequately assert and protect the interests of the class; and
(e) the maintenance of the action as a class action will be superior to other available methods of adjudication in promoting the convenient administration of justice.

MCR 3.501(A)(1). On appeal, the state supreme court remanded the case to Judge Borello, requiring that he analyze the action under criteria (c) and (d) above.

Upon further consideration, Borello reversed his earlier approval of class status for the group. In so doing, he relied on the recent U.S. Supreme Court decision in Wal-Mart Stores v. Dukes, a 5-4 ruling in which the court reversed a lower court’s decision to certify a class of women employees alleging bias in pay and promotions, noting that the company’s decentralized structure meant that the case involved millions of employment decisions and that the women failed to show “some glue holding the alleged reasons for all those decisions together.”

7th Circuit Court of Appeals Rules Employees Entitled to Compensation for Time Spent Donning Safety Gear Under State Law

August 24, 2011 | Peter S. Lubin and James V. DiTommaso

The federal government passed the Fair Labor Standards Act (FLSA) to ensure that American workers would be paid appropriately for the work they provide. While some people may think of the FLSA as a statute that is concerned only with getting workers their unpaid overtime, the language of the law is broad enough to ensure that employees are paid for all of their time spent working, regardless of whether that time is overtime or not. Our Downers Grove wage and hour class-action attorneys found a case in the Seventh Circuit Court of Appeals involving employees who were not paid for the time they spent donning safety gear and wanted to share it with our readers.

In Spoerle vs. Kraft Foods Global, Plaintiffs were employed in Defendant’s plant in Madison, Wisconsin preparing meat products as hourly workers and spent several minutes at the outset of each work day putting on steel-toed boots, hard hats, and other safety gear required to perform the job. Plaintiffs filed suit to challenge a trade-off — struck in a collective bargaining agreement between Plaintiffs’ union and Defendant — where Plaintiffs would not be paid for their time spent donning this protective gear in exchange for a higher base pay rate. The FLSA permits such a tradeoff under §203(o), but Plaintiffs argued that Wisconsin law has no equivalent exception, and therefore state law requires payment for time spent donning such gear. Defendant argued that the FLSA and federal labor laws pre-empt the state law, so the CBA agreement should be honored and the time spent dressing in safety gear should remain noncompensable. The district court found in favor of the Plaintiffs, and Defendant appealed.

On appeal, defendant argued that §203(o) was the federal government’s decision to “permit a collectively bargained resolution to supersede the rules otherwise applicable to determining the number of hours worked.” The Court of Appeals did not find this argument persuasive, however, because nothing placed in a CBA exempts an employer from state laws of general application. Therefore, the Court found that the district court did not err in ruling that Plaintiffs were entitled to be paid for their time spent equipping themselves with safety gear.

Court Certifies Class-Action for Unpaid Employee Login Time

August 18, 2011 | Peter S. Lubin and James V. DiTommaso

Courts have been flooded lately with claims by non-exempt employees who have not been compensated for time spent logging into computer systems and performing other start-up procedures. As experienced overtime lawyers, DiTommaso Lubin has been tracking many of these cases, and the Northern District of Illinois made a recent ruling on one such case.

In Kernats v. Comcast Corporation, Plaintiffs worked for Defendant as customer account representatives (CAE’s) who performed non-exempt work and were paid on an hourly basis. Plaintiffs worked in one of Defendant’s eight call centers in Illinois, and while all Plaintiffs did not perform exactly the same job, they did have the same job description and primary duty. Additionally, they all had similar training, were governed by the same employment policies, and were compensated in the same way. Also, all CAE’s were allegedly required to first log into a work computer, load all of the necessary computer applications, and log into Defendant’s phone system before the start of their shift. In addition to the customer service responsibilities, Defendant required CAE’s to learn about new products, services, marketing campaigns, and review company emails.

Plaintiffs filed suit alleging that Defendant failed to compensate Plaintiffs for the time after they first logged in, but prior to their scheduled start time, which violated the Illinois Wage Payment and Collection Act (IWPCA). Plaintiffs also claimed that working this uncompensated time caused them to work more than forty hours a week. This entitled them to overtime compensation pursuant to the Illinois Minimum Wage Law (IMWL). After some limited discovery, Plaintiffs moved to certify two classes, one for each state law claim, under Federal Rule of Civil Procedure 23.

In making their ruling, the Court found that Plaintiffs met the threshold requirements of Rule 23(a) because the class members were subject to standardized conduct by Defendant. This conduct was the implementation of a company-wide practice allowing CAE’s to work after their login, but before the start of their shift without being paid. The class-members’ claims also were based upon the same legal theory, and thus met the minimal requirements of typicality and commonality. The Court then held that the requirements of Rule 23(b)(3) were met because the evidence required to prove liability that was common to the class significantly outweighed the evidence particular to the individual class members. The Court also found that a class-action was the preferable means for adjudicating the issues because the individual recovery for individuals would be relatively small, while the aggregate recovery would be quite large. As such, the Court ruled that the requirements of FRCP 23 were met and certified the class-action.

Chicago Tribune Reports on Litigation Arising Out of Bankruptcy of Giordano’s Pizza Franchisor

August 14, 2011 | Peter S. Lubin and James V. DiTommaso

The Chicago Tribune has recently reported on two lawsuits arising out of the bankruptcy of the franchisor for the Giordano’s pizza chain.

In one suit the bankruptcy trustee has sued franchisee for failing to use the the required pizza dough thus allegedly harming the quality and uniformity of Giordano’s pizzas. This type of lawsuit often arises in the franchise setting the article explains. The article states:

It’s common, especially in the restaurant business, for a franchisor to dictate suppliers in their franchise agreements.

“If a customer does not receive essentially the same product, same quality and same experience, the brand image is tarnished and the customer less likely to patronize the franchise in the future,” said Christian Burden, a Quarles & Brady LLP partner focusing on disputes involving distributors and franchises. “To use the quintessential example of the Big Mac, from the franchisor’s perspective, a Big Mac in Chicago must taste and appear generally the same as a Big Mac in Los Angeles, Toronto, Brazil, and so on.”

But it’s also not unheard of for franchisees such as those at Giordano’s to look for alternative sourcing. …

You can read the full article by clicking here.

The other Tribune article details a lawsuit filed by the former Giordano’s franchisor claiming that the franchisor’s lender-banks, former lawyers and other franchisees conspired to rob them of the business. You can view a copy of the complaint in this lawsuit by clicking here. The article describes the lawsuit’s claims as follows:

The lawsuit said that the men enlisted Fifth Third Bank, Giordano’s chief lender, as well as Chicago lawyer Michael Gesas and several Giordano’s franchisees “to participate in the scheme” in which they’d push the Apostolous out and take over the company. Secret meetings were held from September 2010 to February 2011, the lawsuit said. Gesas didn’t respond to a request for comment.

First, they intended to weaken the Chicago-based deep dish pizza chain financially, the suit said. Then, the Apostolous “were fraudulently induced” into signing agreements in August 2010 and October 2010 that worsened their lending terms with Fifth Third, which is owed more than $40 million in the bankruptcy.

Fifth Third threatened to “throw the family in the street” if they didn’t go along with the new terms, the lawsuit said. Aynessazian, who also owns eight Giordano’s franchises, Roche and Gesas made “material omissions” to the Apostolous and failed to represent the interests of the Glenview family, the suit said.

Before the execution of the October 2010 deal with Fifth Third, Apostolou had a heart attack, leaving him even more dependent on his lawyers and Aynessazian. The stress also prompted him to see a psychiatrist, the lawsuit said.

“The final step of the scheme involved seizing control of (Giordano’s) by pressuring the Apostolous into filing a Chapter 11 bankruptcy by which the assets and value of (Giordano’s) could be usurped for the benefit of Fifth Third, and the Apostolous’ ownership interests could be purchased at a materially deflated price for the benefit of the franchisee takeover group,” the lawsuit said.

You can read the full article by clicking here.

CNN reports: Designer Loses First Round of Trademark Lawsuit on Red Soled High Heels — Lawyer Vows to Continue the Fight on Appeal and Lambasts Judge’s Decision

August 14, 2011 | Peter S. Lubin and James V. DiTommaso

CNN reports that French Shoe Designer Christian Louboutin lost the first round of a trademark lawsuit seeking to protect his iconic red soled high heels. Louboutin’s lawyer blasted the Court’s decision and vowed he would fight on in an appeal. The story explains that many designers want to use red soled shoes and don’t think they should be excluded from doing so with one designer receiving a monopoly on that color. The story states:

“Everyone sees the flash of red and associates the red with Louboutin,” attorney Harley Lewin said Thursday about his client.
In fact, Louboutin’s red soles have graced many a red carpets, adorning the feet of celebrities Oprah Winfrey, Heidi Klum and Sarah Jessica Parker. …
In his decision Wednesday, U.S. District Judge Victor Marrero acknowleded that in choosing a red sole for his shoes, Louboutin had “departed from longstanding conventions and norms of his industry,” to create a product, “so eccentric and striking that it is easily perceived and remembered.”
However, Marrero went on to say that, “Louboutin’s claim to the ‘the color red’ is, without some limitation, overly broad and inconsistent with the scene of trademark registration.”
“This was a trademark that never should’ve been issued,” David Bernstein, attorney for the defendant, Yves Saint Laurent said. …
Judge Marrero’s decision drew parallels between painters and fashion designers, calling them both members of a creative industry where no one should be barred from using color to achieve their aesthetic. Doing so could, “interfere with creativity and stifle competition.”
Bernstein agrees. “No designer should be able to monopolize a color.” …
Lewin says his client “separated his shoes from everyone else’s by using a red sole.”
Lewin said he’s never had such an outpouring from his fellow attorneys, law professors and members of the fashion industry, telling him, “This [verdict] is an abomination. Tell your client to appeal.”

You can read the full story by clicking here.

SEC Opens New Whistle Blower Office

August 14, 2011 | Peter S. Lubin and James V. DiTommaso

The New York Times reports that the SEC has now opened for business its new whistblower office as required by the Dodd-Frank financial reform bill. The office will respond to consumer tips regarding securities fraud. If a consumer tip leads to a successful prosecution and recovery, the consumer and the federal goverment will benefit (and, securities fraud will be deterred). Under the whistle blower program, corporate insider tipsters could receive up to 30 percent of the money the SEC collects from the corporate wrong doer and its officers or directors. To qualify for the fraud tip bounty, an employee needs to provide new information that leads to successful enforcement achieving more than $1,000,000 in fines. The SEC will tap into the $450 million Investor Protection Fund to hand out the rewards. The S.E.C. says the program will help it save money as insider tipsters provide a road map to the financially strapped SEC investigators and attorneys.

Northern District of Illinois Federal Court Grants Conditional Class Certification for Lawsuit for Unpaid Overtime

August 10, 2011 | Peter S. Lubin and James V. DiTommaso

One of the most important issues at the outset of every class-action lawsuit is determining the size of the class itself. In some instances, making such a determination can be accomplished through preliminary investigations by the named plaintiff in the suit. However, the true size and scope of the class can only be confirmed by documentation obtained from the defendant company. Our Berwyn overtime class-action attorneys recently encountered a case involving a dispute over the potential members of the class, and wanted to share it with our readers.

In Smallwood v. Illinois Bell Telephone, Plaintiffs held multiple different positions, but were all classified as Outside Plant Engineers (OSPs) at Defendant’s facilities in Elgin and Des Plains, Illinois. Plaintiffs generally performed design and analysis of Defendants plant facilities and Defendant’s network and were classified as exempt employees until 2009, when Defendant reclassified all OSP engineers as non-exempt employees, which entitled them to overtime. After this reclassification, Plaintiffs filed suit for unpaid overtime wages in violation of the Fair Labor Standards Act (FLSA) because they had regularly worked in excess of forty hours per week during the entirety of their employment and had never been paid overtime previously. Plaintiffs then filed a motion requesting conditional collective action certification under §216(b) of the FLSA for all persons who were employed by Defendant as OSPs during the previous three years. Plaintiffs also requested approval of a 90-day opt-in period and a 7-day time period for Defendant to supply them with a list of putative claimants.

Defendants argued that Plaintiffs were not similarly situated because the Plaintiffs had separate and distinct job duties despite being generally referred to OSPs, and provided job descriptions as evidence of these differences. The Court found that Defendant’s arguments regarding the day-to-day work activities of the individual Plaintiffs were premature at this early stage of the case, and because the case was not “clearly beyond the first tier” of FLSA class certification. Therefore, applying a stricter standard of review was inappropriate. The Court then granted the motion for conditional certification, finding that Plaintiffs – through their individual declarations — had met the statutorily required modest factual showing that Plaintiffs were the subject to the Defendant’s common policy or plan to violate the FLSA by failing to pay OSPs overtime wages. Defendants also requested that the notice period be limited to 30 days, but the Court found that an opt-in period of 60 days was appropriate, and gave Defendants two weeks to supply the putative member list, so that collective action notices could be mailed in a timely manner.

Directors Are Not Liable for the Torts of Employees Unless Personally Involved, but Should Still Keep a Close Watch Over What Corporate Officers are Doing

July 28, 2011 | Peter S. Lubin and James V. DiTommaso

There are hundreds of new cases filed in Illinois courts every day, and many of those cases involve business disputes. At DiTommaso Lubin, we pride ourselves on staying on top of new court filings so that we know of changes in the law as they happen. Our Waukegan business attorneys just found a decision rendered by the Appellate Court of Illinois that provides some useful information for our business clients.

Zahl v. Krupa is a dispute between investors in a fund allegedly run by a company and the directors of that company. Plaintiffs alleged that they were approached by Defendant Krupa, President of Jones & Brown Company, Inc., who solicited money to be invested in a fund only available to the officers and directors (and their family members) of the company. There were two agreements allegedly written on company letterhead that set out the terms of the investments, whereupon Plaintiffs would invest between $100,000 and $160,000 each and receive an 11.1% return guaranteed by Jones & Brown. Plaintiffs each allegedly signed an agreement with Defendant Krupa and gave him the funds requested. There was no other written documentation regarding the investments or the agreements. Plaintiffs allegedly never got the return on their investment nor did they get their money back.

Plaintiffs then filed suit against Krupa, the other officers of Jones & Brown, and the directors of the business. Plaintiffs sued for breach of contract, fraud, and negligent hiring, supervision, and retention. The breach of contract and fraud causes of action were reliant upon the alleged assertion that Defendant Krupa, in soliciting Plaintiffs, was acting as an agent or apparent agent of Jones & Brown. The remaining causes of action sought to hold Defendants liable for Defendant Krupa’s deception because they knew or should have known that he was untrustworthy.

Through discovery, the depositions of several parties allegedly showed that Defendant Krupa never had actual authority to enter into the investment agreements because the directors neither signed nor authorize the agreements. Testimony also revealed that the investment agreements were allegedly outside the scope of Jones & Brown’s normal business as a construction company, which showed that Krupa did not have apparent authority. As a result of these facts, Defendants successfully moved for summary judgment on the breach of contract claim based upon lack of actual and apparent authority. In moving for summary judgment on the fraud claim, Defendants cited Illinois case law holding that directors cannot be held personally liable for fraud unless they personally participated in perpetrating the fraud. As the directors did not sign the agreements or participate in their creation, the court granted summary judgment. Finally, Defendants successfully moved for summary judgment on the negligence claims because they did not know that Krupa had the potential for fraud.

Plaintiffs then appealed the trial court’s ruling against them, and the Appellate Court conducted a de novo review of Defendants’ motion for summary judgment. The Court agreed with the trial court’s findings and held that Defendants were not negligent with respect to Krupa and did not know about his dealings with Plaintiffs. The Court went on to say that there was no reason for Defendants to suspect Krupa of wrongdoing.

In reviewing Zahl v. Krupa, the case serves as a reminder for business investors to carefully examine any investment opportunities and accompanying paperwork to ensure the legitimacy of the investment. Additionally, business owners and directors should keep an eye on their officers and employees to ensure that they do not find themselves defending a lawsuit for their employees’ allegedly objectionable actions.

Federal District Court Exercises Supplemental Jurisdiction Over Counterclaims Regarding Ownership of Employee-Created Farm Equipment Patents

July 27, 2011 | Peter S. Lubin and James V. DiTommaso

Most companies encourage their employees to innovate and come up with ways to improve the processes, products, and service of the business. Such improvements may be patentable inventions, and it is important for business owners to establish who owns that intellectual property and protect any IP that accrues to the company. In the absence of an explicit employment agreement, the ownership of such inventions can come into dispute, and our Joliet business attorneys discovered one such case in the Central District of Illinois federal court.

Shoup v. Shoup Manufacturing is a dispute between a company and its former president over the ownership of several patents. Ken Shoup, Plaintiff, was the president of Defendant Shoup Manufacturing for over twenty years, and during his time as president he conceived of several inventions that were patented on behalf of Defendant. Defendant used those patents and sold products based upon them. However, Plaintiff did not have an express or written employment contract that required assignment of the inventions to Defendant. Eventually, Plaintiff terminated his relationship with Defendant, began a similar business to compete with Defendant, and filed suit alleging patent infringement for Defendant’s continued use of his inventions. Plaintiff sought an injunction to prevent that continued use and monetary damages under 35 USC §271.

Defendant responded to Plaintiffs lawsuit by denying that Plaintiff owned the patents in question, and alleged that Plaintiff was obligated to assign the patents to Defendant, and that it had a valid license to the inventions. Defendant also filed a counterclaim alleging that Plaintiff developed the patents using company resources while he was an employee and officer of Defendant, and that Defendant was the rightful owner of the patents. Defendant sought a compulsory written assignment of the patents and an accounting of Plaintiff’s unauthorized exploitation of them. Plaintiff then filed a motion for Judgment on the Pleadings to dismiss Defendant’s counterclaims.

Plaintiff argued that the Court had no jurisdiction over the claims because ownership of the patent was determined by Illinois State law. The Court agreed that it did not have original jurisdiction over the dispute, but because the counterclaims for ownership of the patents arose out of a common nucleus of operative facts regarding Plaintiff’s original patent infringement suit (which was a federal claim), supplemental jurisdiction was proper. The Court therefore denied Plaintiffs motion, finding Defendant had satisfied the requirements for supplemental jurisdiction under 28 USC §1367(a), and allowed the counterclaim to proceed.