Breach of Contract

Law.com Reports: “National Class Action Status Granted in Conseco Life Insurance Case”

October 30, 2010 | Peter S. Lubin and Patrick Austermuehle

National Class Action Status Granted in Conseco Life Insurance Case
By Petra Pasternak
October 26, 2010
Instead on alleging fraud based on state consumer fraud statutes this article explains that this class action against Conseco relies on a breach of contract claim for the life insurance carrier’s alleged failure to honor the terms of similar life insurance policies. The article describes the Federal Judge Ilston’s decision to approve class certification because Judge Ilston concluded contract law is subtantially the same in throughout the different States:

The plaintiffs alleged that Conseco was breaching nearly 10,000 “LifeTrend” insurance policies … including improper premium charges and improper deductions from policyholders’ accounts — could result in losses of tens of thousands of dollars per policyholder. …
Conseco tried to smack down class certification … But Illston wrote that Conseco was exaggerating any variations when it came to breach-of-contract.
“Contrary to Conseco’s representations, several courts have recognized that the law relating to the element of breach does not vary greatly from state to state,” Illston wrote.

This trend to to allow use of contract law to obtain national class certification is a breath of fresh air. Class actions are the only way to protect against this type of mass breach of contract by a large insurer. Absent a national class action many victims in smaller states would obtain no redress.

You can read the entire article by clicking here.

First District Rules Creditor Has No Lien Rights on Payment of Unrelated Debt

October 19, 2010 | Peter S. Lubin and Patrick Austermuehle

Our Chicago business attorneys were interested to see a decision sorting out how an individual creditor with a judgment in his favor may collect on the debt. In Tobias v. Lake Forest Partners LLC, No. 1-09-1054 (Ill. 1st June 22, 2010), Andrew Tobias lent $500,000 to Lake Forest Partners, a Nevada corporation. The company defaulted on the loan and Tobias won a judgment awarding him the loan principal, interest and attorney fees, against Lake Forest as well as three people who personally guaranteed the loan: Mark Weissman, Christopher French and Albert Montano. The judgment originally called for more than $668,000 to be paid to Tobias, but Tobias successfully moved to amend the judgment to call for $662,172.21 “plus costs,” possibly to account for post-judgment attorney fees, costs and interest.

Meanwhile, intervenor Greystone Business Credit II won a judgment against Weissman individually in Florida federal court. Both Greystone and Tobias sought to recover their judgments by discovering assets owned by Weissman and held by another company, MEA Management LLC. Tobias filed his request some months earlier than Greystone, and Greystone’s request was stayed. MEA had $339,444 belonging to Weissman. Tobias requested that MEA release enough to satisfy his judgment and Greystone intervened to point out that it also had an interest in the money. Tobias later petitioned for post-judgment attorney fees and costs. After entertaining out-of-court attempts to resolve this conflict, the court awarded $86,845.12 to satisfy the original judgment for Tobias, and $126,299.44 each to Weissman and Greystone. The petition by Tobias for post-judgment fees was not addressed.

Tobias appealed, arguing that the $86,845.12 award was not “full satisfaction” of his judgment, since the post-judgment attorney fees were not paid. He argued that his post-judgment attorney fees claim should have been given the same priority as the rest of the judgment, meaning priority over any other party, including Greystone. Not surprisingly, Greystone disagreed, arguing that the post-judgment attorney fees had never been reduced to a judgment and could therefore not be enforced in this situation. The First District Court of Appeal agreed with Greystone. Under sec. 2-1402 of the Illinois Code of Civil Procedure, a judgment creditor may discover assets held by a third party for the debtor. But Supreme Court Rule 277 says these proceedings “may be commenced at any time with respect to a judgment which is subject to enforcement.” Under Bank of
Matteson v. Brown, 283 Ill. App. 3d 599, 602, 669 N.E.2d 1351 (1996), the First said, that means credits cannot discover assets until a judgment has been entered.

The First rejected the argument from Tobias that his post-judgment claim should have the same priority as the underlying claim because it is ancillary to the underlying debt. Because of Supreme Court Rule 277, the court wrote, no claim can achieve lien status until there is a judgment. The judgment in favor of Tobias never included post-judgment attorney fees, the court wrote. If he later obtains one, it would be prioritized behind earlier judgments, including Greystone’s. For those reasons, the First found that the trial court’s order was proper and affirmed its decision.

Court Rules Illinois Courts Should Hear Contract Dispute Despite Case in New York

September 28, 2010 | Peter S. Lubin and Patrick Austermuehle

Our Chicago business attorneys were interested to note a ruling establishing that an Illinois venue is correct in a case of dueling lawsuits between companies working in Illinois and New York. In Whittmanhart, Inc. v. CA, Inc. and Niku LLC, No. 1-09-3136 (Ill. 1st June 22, 2010), Whittmanhart bought software from CA and its wholly owned subsidiary, Niku, in 2006 and entered into an end-user license agreement. They later entered into a statement of work saying CA employees would help Whittmanhart implement and develop the software, in exchange for an hourly fee and expenses. CA invoiced Whittmanhart several times during the project, but claims no invoices were ever paid. Whittmanhart claims CA and Niku breached their own contract by failing to deliver a fully functioning software system by a specified date and failing to invoice monthly, as specified.

CA and Niku sued Whittmanhart in New York federal court Nov. 12, 2008 for breach of contract and account stated. They sought payment of the invoices, plus attorney fees and court costs. In December of that year, Whittmanhart told the court it would move to dismiss for lack of federal diversity jurisdiction, as all three companies are Delaware citizens. On the same day, CA and Niku filed a claim in New York state court. Two hours later, they voluntarily dismissed the federal case. About 40 minutes later, but in a different time zone, Whittmanhart filed a lawsuit against CA and Niku in Cook County trial court, creating dueling lawsuits. That claim asks for financial damages, attorney fees and court costs and a declaratory judgment that it did not owe further money to CA and Niku.

Whittmanhart did not answer the New York state complaint and CA moved for default judgment. Whittmanhart then argued that it had not been properly served and successfully moved to dismiss. CA then filed an identical claim in New York state court, which Whittmanhart moved to dismiss on the grounds that the Illinois action was pending and on forum non conveniens. This was denied. CA later moved to dismiss the Illinois action on the grounds that New York was considering the same claim, and this motion was granted. Whittmanhart appealed to the First District Court of Appeal.

In its analysis, the First started by dismissing arguments made by CA and Niku based on things that happened after the trial court made its decision. The court then acknowledged that the lawsuits in both states had identical parties and were based on the same contracts — the statement of work and end-user license agreement. Those contracts were written with reference to other states’ laws. But this by itself was not enough to dismiss the claim, the court said; courts may still allow parallel claims to go forward according to their judgment. “Illinois is clearly the more logical forum for this dispute,” the First wrote, noting that much of the disputed work took place in Cook County and that the Illinois action was the first properly filed claim.

Furthermore, Whittmanhart’s Illinois action has a claim for monetary damages that was not made in New York, the court noted, meaning there was a better chance of complete resolution in Illinois. And if Whittmanhart were to file a counterclaim in New York, it could proceed independently of a decision in favor of CA. That means res judicata would not completely bar the Illinois action. For those reasons, the First found that the trial court had abused its discretion. It reversed the decision and remanded the case to Cook County trial court.

Clothing Retailer Sues Competitor and Former Employees Alleging They Stole Secret Designs

August 26, 2010 | Peter S. Lubin and Patrick Austermuehle

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.

The New York Times Reports: For-Profit Colleges Mislead Students, Report Finds

August 22, 2010 | Peter S. Lubin and Patrick Austermuehle

For-Profit Colleges Mislead Students, Report Finds

By TAMAR LEWIN

Published: August 3, 2010

Arbitration Clause in Written Contract Cannot Compel Arbitration in Oral Agreement, First District Finds

August 17, 2010 | Peter S. Lubin and Patrick Austermuehle

As Chicago alternative dispute resolution attorneys, we were pleased to read a decision from the First District Court of Appeal on compelling arbitration in an oral contract related to a written contract. In Marks v. RSM et al, No. 1-09-1988 (Ill. 1st. March 12, 2010), Carol Marks allegedly contracted with RSM McGladrey Inc. to do accounting for investments she held. That was a written contract including an arbitration clause. Marks alleges that she later entered a separate oral contract with the managing director of RSM and RSM for investment advice. However, she was unhappy with the advice she received and later sued the defendants. The defendants sought to compel arbitration under the written contract, and the trial court denied this, saying there was no arbitration agreement for the oral contract. The First upheld that decision.

Marks allegedly originally retained RSM to monitor her investment accounts. For that work, she signed an “engagement letter” as a contract, which included two clauses of interest. One specifies that RSM will use its professional judgment in applying “rule applicable to this engagement.” The other is a binding arbitration clause requiring dispute resolution to go through the American Arbitration Association. Marks signed, but during the remainder of her first year with RSM, she alleges that RSM failed to provide the portfolio reporting services she expected and instead allegdly began to promote various investments to her. She further alleged that RSM charged her separately for those services and emphasized that they were separate, but no written contract was signed. The court also notes that Bober and RSM allegedly were not registered with the state of Illinois or with the SEC as providers of investment services.

As a result of the alleged solicitations, Marks allegedly put $500,000 into Lancelot Investors Fund II, which put the money into a hedge fund called Thousand Lakes. Marks alleged this conduct damaged her economically. She sued RSM and its managing director, alleging that they breached their fiduciary duties and oral contract with her by allegedly failing to investigate Lancelot and that they allegedly negligently held themselves out as investment experts. She sought to void the oral contract and the Lancelot investment.

In trial court, the defendants denied all of her allegations and also moved to compel arbitration under the engagement letter. This motion was denied without any decision rendered on the merits of the underlying breach of fiduciary duty claim. On their motion for consideration, the defendants alleged that they provided no investment advice and did not recommend Lancelot; rather, the RSM managing director saw from the accounting work that Marks could use such advice, so he introduced her to advisors who did recommend Lancelot. This motion too was denied, and defendants appealed, saying the dispute is covered by the arbitration agreement. They also argued that the Federal Arbitration Act supports this because it has a presumption of arbitrability.

The First rejected this position. Under the FAA, which it said was the governing law in this case, it was proper for the trial court rather than an arbitrator to decide arbitrability. Under that law and the Supreme Court’s decision in AT&T Technologies, Inc. v. Communications Workers of America, 475 U.S. 643, 649, 89 L. Ed. 2d 648, 656, 106 S. Ct. 1415, 1418 (1986), parties cannot be compelled to arbitration unless they have agreed to do so in their contract.

Illinois case law seems to confirm this. The court cited Johnson v. Noble, 240 Ill. App. 3d 731, 732-33 (1992), which also concerned a case with one written contract and one oral contract. In that case, as in this one, the defendant sought to compel arbitration based on the written contract, but the plaintiff argued that the claims arose from the oral contract. The trial and appeals courts agreed, saying the dispute was not arbitrable because it arose from a separate oral contract. Similarly, in Board of Managers of Chestnut Hills Condominium Ass’n. v. Pasquinelli, Inc., 354 Ill. App. 3d 749 (2004), an appeals court upheld the plaintiff’s right to sue because the claims at issue were outside the scope of the arbitration agreement.

In this case, the First wrote, defendants had two separate agreements, one oral and one written. The dispute arose out of the oral contract, it said, so Marks was not required to conform to the terms of the written contract. In fact, the court said the language of the written contract indicates that the parties did not intend to extend the contract past “this engagement.” For those reasons, it upheld the trial court’s decision and remanded it to the trial court for further proceedings.

When the case returned to the trial court, the parties ultimately agreed to it being dismissed with prejudice pursuant to a stipulation to dismiss. The defendants denied all of the allegations and the case did not proceed to trial so plaintiff’s claims remained allegations that were not proven at a trial. Defendants maintain that the allegations that they did anything wrong were baseless and lacked any merit.

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

August 11, 2010 | Peter S. Lubin and Patrick Austermuehle

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.

Third Circuit Upholds Non-Compete Clause But Changes Unreasonable Restriction on Activity

July 22, 2010 | Peter S. Lubin and Patrick Austermuehle

As Illinois non-compete contract lawyers we were interested in a lengthy but substantial ruling from the Third U.S. Circuit Court of Appeals in January. In Zambelli Fireworks Mfg. Co. v. Wood, No. 09-1526, 2010 WL 143682 (3d Cir. Jan. 15, 2010), the appellate court upheld a preliminary injunction to enforce a covenant not to compete against Matthew Wood, a former pyrotechnician and choreographer for Zambelli, and his new employer, Pyrotechnico. Wood left Zambelli after seven years and a substantial amount of training from the company. In the course of his employment, he signed two non-compete agreements, the second of which superseded the first. However, Zambelli changed from a family business to an investor-owned corporation in 2007, and asked Wood to assume substantial new duties. He declined, and left for Pyrotechnico in early 2008.

Wood’s second non-compete agreement with Zambelli said he would not be involved in the pyrotechnic business in any way for two years after leaving the company; and would provide three months’ notice before leaving. When he left for Pyrotechnico, Wood provided 11 days’ notice. He and Pyrotechnico say they tried to avoid work that would constitute a breach of the non-compete clause, which restricted Wood to duties like training and music editing. Nonetheless, Zambelli sued in Pennsylvania district court and obtained a preliminary injunction keeping Wood from designing or choreographing fireworks displays, or promoting Wood’s accomplishments at Zambelli. Wood and Pyrotechnico appealed, arguing that the 2007 sale of the company canceled Wood’s non-compete agreement; that the restrictive covenant does not protect a legitimate business interest; and arguing some technical issues.

On appeal, the Third maintained its diversity jurisdiction by dropping Pyrotechnico, an LLC that it determined had Pennsylvania citizenship, as a party. It then turned to Wood’s assertion that the 2007 stock sale changed Zambelli enough to make it a separate “purchasing business entity.” Wood argued that Zambelli’s failure to assign his agreement to the “new entity” invalidated the agreement. The Third rejected this argument, saying that a sale of stock is not the same as a wholesale transfer of assets under Pennsylvania law.

Wood had no more luck with his argument that the agreement itself was unenforceable because it did not protect Zambelli’s legitimate business interests. Previous Third Circuit decisions have held that legitimate business interests include trade secrets, confidential information, specialized training, extraordinary skills and customer goodwill. Victaulic Co. v. Tieman, 499 F.3d 227, 235 (3d Cir. 2007). This allowed the Third to agree with the district court that Zambelli had a legitimate business interests to protect with an injunction. Wood had a longstanding relationship with Zambelli’s customers, the court said, and they viewed him as an expert in the industry. Similarly, Zambelli had provided Wood specialized training and skills, and had a legitimate business interest in protecting it. However, because the district court had failed to require Zambelli to post a bond, the Third vacated the injunction and remanded the case with instructions to require a bond if the court decides to reimpose the injunction.

Seventh Circuit Rules UPS Violated ERISA by Raising Contributions for Only Some Retirees

June 24, 2010 | Peter S. Lubin and Patrick Austermuehle

As Chicago class-action attorneys, we were pleased to see that the Seventh Circuit upheld a decision in favor of retired UPS employees protesting a change in their employee contributions to health benefits. In Green v. UPS Health & Welfare Package for Retired Employees, No. 09-2445 (7th Cir. Feb. 10, 2010), a class of participants in the UPS retiree health plan (the Plan) belonging to the International Brotherhood of Teamsters Local 705 challenged a decision by UPS to raise the amount of health insurance contributions required of them, but not of other plan participants.

UPS employs Teamsters and negotiates its collective bargaining agreements with the international office of the IBT as well as with a few locals, including Local 705. Local 705’s agreement at issue here was negotiated in 2002 and expired on July 31, 2008. That agreement said UPS would provide the same health plan to Local 705 retirees that it provides to all retirees. The Plan said UPS may raise participants’ contributions once a certain threshold average annual cost per participant is reached, but that each employee shall share equally in the cost. If an additional contribution is retired, the Plan said additional contributions would not be required until after the collective bargaining agreement ended.

The average annual cost of health care rose above the threshold in 2006. In October of 2007, UPS sent out a notice that retirees’ monthly contributions would increase from $50 to $114 as of January 1, 2008. The international union complained that the increase was being implemented too early, before the July 31 end of the original collective bargaining agreement. However, it was also negotiating a new collective bargaining agreement with UPS at the time and eventually won an agreement from UPS not to implement the new fee until after the new agreement expired. This was not the case for Local 705, which complained that it wouldn’t even start a new bargaining process until July 31. UPS responded by delaying the extra payment until after the agreement expired.

After the July 31, 2008 expiration date, Local 705 negotiated a new collective bargaining agreement incorporating the Plan with no changes. In January of 2009, UPS sent out another letter saying that effective in February, it would increase retirees’ monthly contributions from $50 to $157.58 to $472.75, depending on how many family members were covered. This was not applied to the international Teamsters, who were under a separate agreement. The Local 705 retirees filed this lawsuit, arguing that their monthly contribution, higher than the international union’s, violated the Plan’s provision that all retirees would share equally in a rate hike. They also argued that the Plan barred UPS from making the rate hike effective before the end of their collective bargaining agreement. They asked for an injunction against the rate hike and agreed to a bench trial. The court found for the retirees on the “shared equally” issue and for UPS on the timing of the rate hike. Both appealed.

On appeal, the Seventh Circuit agreed with the trial court that the “shared equally” language applied to payments. UPS had argued that this language applies to how it calculates contributions, but the Seventh and the district court both found this was contradicted by the plain language of the Plan and thus “arbitrary and capricious” under Hess v. Hartford Life & Accident Ins. Co., 274 F.3d 456, 461 (7th Cir. 2001).

However, the appeals court also upheld the district court’s ruling that UPS could collect the additional contributions before the end of the current collective bargaining agreement. UPS interpreted “current” to refer to the 2002 agreement, when the Plan’s language was written; Local 705 interpreted it to refer to the 2008 agreement. The Seventh found that the interpretation by UPS was reasonable, in part because it had incorporated the Plan into the collective bargaining agreement without changes. It also said the December 2007 notice that rates would go up was further evidence that UPS was using the 2002 agreement as “current.” Thus, its interpretation was not arbitrary and capricious. The judgment of the district court was affirmed on both counts.

Former Employee’s Stock Options Remain Valid Under Employment Contract

June 16, 2010 | Peter S. Lubin and Patrick Austermuehle

As Chicago employment contract litigation attorneys, we noted a favorable decision for employees from the Seventh Circuit in October. Lewitton v. ITA Software, Inc., No. 08-3725 (7th Cir. Oct. 28, 2009) upheld a former employee’s right to buy stock options that had vested during his employment, even though he tried to make the purchase after leaving. Derek Lewitton was hired in April of 2005 as vice-president of sales at ITA Software, which makes a software program that compares the prices of airplane flights. His contract said some of his stock options would be forfeited if ITA didn’t meet certain revenue goals, subject to a time delay to account for delays in the development of a new program called 1U.

Unfortunately, 1U was never widely adopted among ITA’s clients, and ITA scaled it back considerably. Lewitton left ITA in May of 2007. In August of the same year, he tried to buy 138,900 shares of ITA stock. ITA let him buy only 34,722, arguing that the remaining 104,178 were forfeited under his contract. Lewitton sued ITA for breach of his employment contract. ITA removed the case to federal court under diversity jurisdiction, after which Lewitton moved for summary judgment, arguing that his employment contract was clear on his right to purchase stock options. The judge granted summary judgment, agreeing that the contract “unambiguously” granted 5,660 options for each month he was at ITA, and that no forfeiting events had taken place. ITA appealed.

The Seventh Circuit started by examining whether the language of Lewitton’s employment contract was ambiguous under Illinois law, which both parties agreed applies. The principal question, the court wrote, is whether the contract unambiguously allows Lewitton to buy the 5,660 shares per month he claims. The contract specifies that those shares are forfeited if ITA didn’t meet certain goals in by the end of an assessment period, but that assessment period would be deferred it the development schedule for 1U was “materially deferred.” In trial court, both sides agreed that 1U’s development didn’t go the way it was expected to go. On that basis, the trial court found that the assessment period was never triggered, and thus the stock options were not forfeited. On appeal, ITA argued that “materially deferred” was ambiguous and not intended to apply when ITA put the program on indefinite hold.

The Seventh disagreed, finding the term unambiguous. The ordinary dictionary definitions of the words are clear, the court wrote. And in fact, the contract includes parts that explain a material deferral by using the words “defer” and “delay” interchangeably. That example clearly shows that the parties agreed to delay the assessment period until after 1U was launched. Because 1U was never launched, the assessment period was never started, the court wrote, and thus the stock option forfeiture provision does not apply. The court dismissed ITA’s argument that the contract was never intended to give Lewitton more shares than other ITA executives. That argument was supported by negotiations and internal ITA communications, the court wrote, and caselaw requires it to consider none of that extrinsic evidence. Furthermore, the contract had a clause specifying that it supersedes all prior “agreements, understandings or negotiations.”
ITA also argued that even if the contract is unambiguous, the case presented an issue of material fact inappropriate for summary judgment. The issue in question, ITA said, is whether ITA really did delay the 1U program rather than ending it altogether. However, the court found that this was “just another attempt to create ambiguity where none exists.” At the district court, the Seventh Circuit noted, ITA made several statements through affidavits and discovery conceding that work was still being done, although resources devoted to it were significantly reduced or nonexistent. Nothing in the record points to a genuine issue of material fact on this question, the court wrote, so the trial court was upheld in its summary judgment order. Finally, the Seventh dismissed ITA’s contention that the district court should determine whether the options are valid under Delaware law (it’s a Delaware corporation), because it had explicitly waived that argument in an agreed order. Thus, the Seventh upheld the district court on all issues.