Business Disputes

Illinois’ Franchise Act Does Not Require Manufacturers to Extend Contractual Agreements that Grant Exclusive Sales Territory

July 7, 2011 | Peter S. Lubin, Patrick Austermuehle and James V. DiTommaso

Lubin Austermuehle has clients that operate a variety of businesses all across the state of Illinois. While there are common laws and legal principles that apply to all companies and corporations, there are other Illinois statutes that apply to specific types of businesses. Our Elgin business attorneys came across Clark Investments, Inc. v. Airstream , Inc., which is an Appellate Court of Illinois case involving laws that govern motor vehicle dealerships.

Clark Investments, Inc. v. Airstream , Inc. is a dispute between a Recreational Vehicle (RV) manufacturer and an RV dealer over a contractual agreement between the two companies. Initially, the Plaintiff car dealer contracted with Defendant manufacturer to have exclusive rights to sell Defendant’s RV’s in the state of Illinois. The initial contract was for a period of approximately two years, and shortly before the end of that contract Defendant proposed to renew the agreement with different terms. Defendant’s new contract contained no expiration date and gave Plaintiff no exclusive sales territory. Plaintiff rejected this contract and proposed the same exclusivity terms as the first contract, but Defendant rejected Plaintiff’s proposed changes. Shortly after these negotiations, the initial contract expired, but Defendant continued to supply Plaintiff with merchandise and service and Plaintiff continued to operate its business for almost nine months. The parties then entered into a new contract that contained no exclusive sales region for Plaintiff but allowed Plaintiff to sell more types of Defendant’s RV’s. After this new contract was signed, Defendant entered into an agreement with another RV dealership located ninety miles from Plaintiff’s business. This agreement authorized that dealership to sell some, but not all of the same products contained in Plaintiff’s agreement with Defendant.

Upon learning of this new agreement, Plaintiff filed suit against Defendant alleging violations of the Franchise Act and the Franchise Disclosure Act. Defendant then filed a motion for summary judgment on both causes of action, and the trial court granted the motion as to both claims. Plaintiff appealed the court’s ruling as to the Franchise Act claim only, alleging that Defendant’s had violated section 4(e)(8) of the Act by granting an additional franchise within Plaintiff’s relevant market area and refusing to extend the first contract that granted Plaintiff all of Illinois as its exclusive sales territory. The Appellate Court rejected this argument by citing language from the Act that defines the relevant market area as the fifteen mile radius around Plaintiff’s principle location. Because the other franchise was located further than fifteen miles away, there was no violation of the Act.

Plaintiff also argued that Defendant violated section 4(d)(6) of the Act by refusing to extend the first contract that granted Plaintiff an exclusive sales territory of the whole state. The pertinent part of the Act makes it unlawful for a manufacturer
“1) to cancel or terminate the franchise or selling agreement of a motor vehicle dealer,
2) to fail or refuse to extend the franchise or selling agreement of a motor vehicle dealer upon its expiration, or
3) to offer a renewal, replacement or succeeding franchise or selling agreement containing terms and provisions the effect of which is to substantially change or modify the sales and service obligations or capital requirements of the motor vehicle dealer.”

The Court disagreed with Plaintiff’s claim that Defendant’s actions fell within the first category of conduct. The Court explained that Defendant’s conduct fell under the third category because Defendant offered Plaintiff a new contract with different terms before the initial contract expired. They held that the changes in the new contract did not substantially change the sales and service obligations or capital requirements of the Plaintiff, and upheld the lower court’s ruling.

Appellate Court of Illinois Upholds Discharge of Guaranty Contract on Discharge Grounds

June 29, 2011 | Peter S. Lubin, Patrick Austermuehle and James V. DiTommaso

Most businesses require loans to normalize their income stream and ensure that they have the cash necessary to operate. Some business owners enter into guaranty contracts to get the capital that they need, and in the process become personally liable for the debt of their company. In such instances, disputes often arise when the other party attempts to enforce the guaranty contract to collect on the debt. Lubin Austermuehle has been involved with contract disputes of all kinds, and our Elgin guaranty contract attorneys recently uncovered a case that illustrates why it is important to draft such contracts carefully and enforce them in a timely manner.

In Riley Acquisitions Inc. v. Drexler, Defendant and her husband initially entered into a guaranty contract and promissory note with a third party to get credit for the two companies owned by the couple. Eventually, the marriage dissolved, and each spouse took control of one of the companies. Defendant’s company dissolved shortly thereafter, and Defendant then sent a letter to the third party revoking her personal guaranty. Her ex-husband eventually filed for bankruptcy – discharging his liability under the guaranty in the process, and leaving Defendant as the only guarantor on the loan. The third-party who owned the debt eventually sold and assigned its interest to Plaintiff, who filed suit to collect on the loan. Defendant asserted affirmative defenses that her obligation under the note terminated after her company (the principal on the note) dissolved and that Plaintiff’s claims were barred under the applicable ten-year statute of limitations. Defendant won a directed verdict on the basis of her discharge and statute of limitations defenses, and Plaintiff appealed.

The Appellate Court found that because Defendant’s company dissolved, its obligation on the note terminated five years later under the applicable portion of the Illinois Business Corporation Act of 1983. This effectively terminated Defendant’s liability as well because the guaranty contract did not expressly provide that liability would continue in such a situation. Thus, because Plaintiff filed suit nine years after the dissolution of Defendant’s company, the Court upheld the trial court’s verdict on discharge grounds and did not address the statute of limitations issue.

Northern District of Illinois Federal Court Dismisses Double Derivative Shareholder Action Due to Lack of Parent / Subsidiary Corporate Relationship

June 15, 2011 | Peter S. Lubin, Patrick Austermuehle and James V. DiTommaso

Members of the board of directors of a corporation have the responsibility to orchestrate the business in such a way that is advantageous to the shareholders and the continued growth and prosperity of the company. However, there are times when those directors may act in a way that serves their own interests, and the only way to protect the business is for shareholders to file a derivative suit on behalf of the company. Lubin Austermuehle is always researching new developments in this field of law, and our Chicago shareholder derivative action attorneys recently came across one such case filed here in the Northern District of Illinois, Eastern District federal court.

Reiniche v. Martin is a double derivative suit brought by individual plaintiffs who are shareholders of a corporation, Health Alliance Holdings (HAH), that itself is a primary shareholder of HA Holdings (Holdings), another corporation. Plaintiffs allege that Defendants sought to freeze them and other HAH shareholders out through a series of illegal and wasteful acts that resulted in an insider transaction to sell Holdings for $10 and debt relief to another company in which Defendants had an interest. That transaction was approved by Holdings’ board of directors in spite of the fact that there was no quorum present to do so, and HAH was denied its right to sit on the board. In doing so, Plaintiffs alleged that the Defendant directors and other shareholders of Holdings breached their fiduciary duties to the company. Defendants then moved to dismiss the suit under Federal Rule of Civil Procedure 12(b)(6), claiming that Plaintiffs lacked standing, their claim was untimely, and the claims are insufficient under the law and barred by the business judgment rule.

The Court held that Plaintiffs did not have double derivative standing because such standing is only granted in the context of a parent/subsidiary relationship, and HAH was only a shareholder in Holdings – it was not a parent or holding company of Holdings. The Court went on to say that because the individual Defendant shareholders were each minority owners, none of them had a controlling interest in Holdings, and therefore did not owe a fiduciary duty to the Plaintiffs. As such, the Court found no policy reason for invoking a double derivative action and granted Defendants’ motions to dismiss.

Settlement Agreements With Former Employees Containing Broad Release Language May Prevent Subsequent Qui Tam Actions

May 25, 2011 | Peter S. Lubin, Patrick Austermuehle and James V. DiTommaso

No matter what kind of business you own and operate, an unfortunate part of running a company is the inevitable employment disputes with employees. Whether it is an action over wages, job duties, or other issues, many business owners will find themselves in court opposite a current or former employee at some point. Lubin Austermuehle’s Naperville business attorneys know the legal challenges that business owners face, and are always mindful of new case law that affects our clients.

Enterprise Recovery Systems, Inc. v. Salmeron is a decision handed down by the Appellate Court of Illinois earlier this year regarding an employer/employee dispute filed in the circuit court of Cook County. Plaintiff Enterprise Recovery Systems hired Defendant Salmeron as general manager and director of operations for their recovery and resolution of delinquent student loans business. Defendant worked for Plaintiff for four years before being terminated, and she sued Plaintiff for sexual harassment. This case settled, and Defendant signed a broadly worded release containing language that discharged Plaintiff from any other claims arising out of Defendant’s employment with Plaintiff in exchange for $300,000. After this settlement, Defendant Salmeron filed a qui tam action against Plaintiff Enterprise on behalf of the federal government alleging that Enterprise had defrauded the government. The federal government declined to intervene in the qui tam action, and the lawsuit was eventually dismissed with prejudice due to the misconduct of Salmeron’s lawyer, according to the court. Because of issues brought to light in the qui tam action, Plaintiff filed suit against Defendant alleging fraud in the inducement and breach of Defendant’s duty of loyalty to Plaintiff. After the court found repeated misconduct by Defendant’s attorney (which included multiple violations of court orders), the trial court banned Defendant from presenting evidence in her defense of the fraud and breach of fiduciary duty action. Plaintiff then moved for summary judgment on both claims.

Plaintiff’s motion showed that Defendant produced company log reports in the qui tam suit and those reports were stolen from the Plaintiff. Furthermore, Plaintiff alleged that Defendant failed to alert Plaintiff about the supposed illegal conduct of Plaintiff’s employees prior to notifying the government and filing the qui tam lawsuit. Additionally, Plaintiffs contended that Defendant planned to file the qui tam action before signing the release that was a part of the sexual harassment suit settlement. Defendant failed to file a response to the motion for summary judgment, so the court granted the motion. Plaintiff appealed, and the matter was reviewed de novo by the Appellate Court.

The Appellate Court upheld the trial court’s grant of summary judgment as to the fraud in the inducement claim because the court found that Defendant knew she had information for the qui tam case against Plaintiff at the time she negotiated the sexual harassment claim’s settlement and release. Furthermore, the court found that Defendant waited until she had received her last settlement payment before filing the qui tam lawsuit and signed the settlement agreement with no intention of honoring it. The Court upheld summary judgment as to Plaintiff’s breach of the duty of loyalty cause of action because Defendant was a high-level member of Plaintiff’s management team and owed a duty of loyalty to the company. This duty was breached when Defendant sought to profit from information harmful to the company that was obtained through her position of trust within the company. The Court also explained that it was reasonable for Plaintiffs to expect Defendant to neither exploit her position for personal gain nor hinder the business operations of the company

Northern District of Illinois Grants Motion to Dismiss in Trade Secrets Case Due to Lack of Personal Jurisdiction

May 24, 2011 | Peter S. Lubin, Patrick Austermuehle and James V. DiTommaso

After hiring someone, businesses expect not only that their new employee will perform his job adequately, but also that he will do no harm to the company or its ability to do business. Employers know that their expectations are not always met by those employees, which is why the use of employment contracts with non-compete clauses are quite common these days. Our Chicago restrictive covenant attorneys just discovered a recent court decision that details a dispute between an employer and an ex-employee regarding one such employment agreement.

In Zep Inc. v. First Aid Corp., Plaintiff Zep employed the individual Defendants as sales representatives for its industrial cleaning products business pursuant to an employment agreement that contained non-disclosure, non-solicitation, and non-compete provisions. During their employment, Defendants had access to Plaintiff’s customer lists, supplier lists, pricing information, and other proprietary information. Eventually, a competitor, Defendant First Aid, hired the other named Defendants away from Plaintiff and subsequently solicited Plaintiffs clients and other employees.

As a result, Plaintiff filed suit for breach of contract, trade secret misappropriation under the Illinois Trade Secrets Act (ITSA), and tortious interference with contract. Plaintiff contends that First Aid induced the other Defendants to breach the employment agreements they signed with Plaintiff and that the other Defendants used and disclosed Plaintiffs trade secrets. In response, Defendants filed motions to dismiss the claims, which were granted as to three of the individual defendants due to a lack of personal jurisdiction. The Court found that because three of the individual Defendants were residents of Michigan and Ohio, Plaintiff is located in Georgia, and the employment agreements were signed outside of Illinois, they did not have the requisite minimum contacts to give an Illinois court jurisdiction over the matter. Furthermore, Plaintiff had not alleged that any of Defendants’ actions were aimed at Illinois, and neither had their actions caused harm to Plaintiff in Illinois, so specific personal jurisdiction was also improper. The Court denied the remaining motions to dismiss – finding that the non-compete provisions were enforceable because the geographic limitations were reasonable and the non-solicitation clause was limited in scope to Plaintiff’s competitors for a span of one year. Plaintiff’s allegations were also found to be sufficient to support a claim under the ITSA because it had identified a list of confidential information and trade secrets in its pleadings.

NPR Reports: “Gulf Residents, Businesses Entangled In Bitter Legal Battle”

May 12, 2011 | Peter S. Lubin, Patrick Austermuehle and James V. DiTommaso

Over the course of three months, the BP Macondo well gushed an estimated 200 million gallons of oil into the Gulf of Mexico. One year since the explosion, hundreds of Gulf residents and business owners are still embroiled in a complex legal battle with BP and other companies involved. Host Michel Martin discusses the legal aftermath of the oil spill with Steve Korris, a reporter for The Louisiana Record.

Northern District of Illinois Federal Court Grants Injunction in Misappropriation of Trade Secrets Case

May 10, 2011 | Peter S. Lubin, Patrick Austermuehle and James V. DiTommaso

Trade secrets are the lifeblood of many companies these days, and protecting those secrets is always of the utmost importance. Through our years of experience advising and representing companies, we here at Lubin Austermuehle know how to maintain the security of your trade-secret portfolio and prosecute those who attempt to misappropriate any of your trade secrets. Because employees with trade-secret knowledge come and go with such frequency these days, our Des Plaines trade-secret attorneys wanted to share a recent court decision that illustrates the perils companies face due to departing employees.

In Mintel International Group LTD v. Neergheen, Plaintiff Mintel initially employed Defendant in its London-based marketing department, and upon his hiring, Defendant signed an employment contract that included non-compete and confidentiality restrictive covenants. Defendant was then transferred to Plaintiff’s Chicago office where he signed a second employment contract containing non-compete and confidentiality clauses similar to those in the first agreement. This second contract also contained a clause prohibiting the solicitation of Plaintiff’s employees and customers – all of the clauses were in effect for one year after the cessation his employment with Plaintiff. Defendant eventually left the employ of Plaintiff and began working for a competitor company in a different product area in order to comply with his non-compete. Plaintiff failed to ask Defendant to return the laptop given to him by the company during his exit interview, and also failed to ask him about proprietary information he had emailed to himself prior to his departure – despite knowing that he had taken possession of the information before he left.

Eventually, Plaintiff filed suit against Defendant alleging violations of the Computer Fraud and Abuse Act (CFAA), the Illinois Trade Secrets Act (ITSA), and breach of the non-disclosure, non-compete, and non-solicitation provisions in his employment contract with Defendant. Plaintiff sought injunctive relief and money damages. After a bench trial, the Court found that Defendant had not violated the CFAA because he had only emailed copies of Plaintiff’s files to a private email address, which did not satisfy the damage requirement of the statute. The Court next held that, while the copied files qualified as trade secrets, Defendant did not violate the ITSA because there was no proof that he had or would use the information in his position at a competing company. Finally, the Court found that the restrictive covenants were not invalid as a matter of law, and enjoined Defendant from: ever using any of Plaintiff’s proprietary info, contacting any of Plaintiff’s customers for nine months, or working for his new employer in the same area as he had with Plaintiff for a period of six months.

Employers Should Ensure They Have Adequate Evidence Before Filing Suit Against Former Employees

May 4, 2011 | Peter S. Lubin, Patrick Austermuehle and James V. DiTommaso

Most employers at some point will face the prospect of an employee failing to perform their job adequately. Additionally, some employees breach fiduciary duties owed the company or commit fraud and other harmful acts during the course of their employment. Hytel Group, Inc. v. Butler is a recent case out of the Appellate Court of Illinois that is just such a dispute between a Plaintiff employer and its Defendant ex-employee. Our Schaumburg business litigation attorneys discovered this decision and want to pass along the information to our readers.

In Hytel Group, Inc. v. Butler, Plaintiff Hytel Group initially hired Defendant Butler as comptroller for the company in February of 2008 and fired Butler four months later in June of that year. During Butler’s employment, Hytel’s lender, GBC Funding, filed suit in response to Hytel allegedly defaulting on several obligations under their loan agreement and Hytel’s failure to respond to the notices of default sent to them by GBC. Furthermore, GBC alleged that Hytel failed to cooperate with a restructuring officer approved by GBC pursuant to another agreement. This agreement was for GBC to refrain from exercising their rights under the loan agreement in exchange for Hytel’s cooperation with the restructuring officer. Hytel then filed the action in question in December 2008 against Defendant Butler alleging that she breached her fiduciary duty of loyalty and committed fraud when she failed to perform certain job duties because of a relationship she developed with GBC.

After Butler was fired by Hytel, but before Hytel filed suit, she filed a claim with the Illinois Department of Labor for unpaid final wages, and she moved to dismiss Hytel’s lawsuit under the Citizen Participation Act. The motion was based upon the allegation that Hytel was suing her in retaliation for filing the wage claim. Butler also moved to dismiss Hytel’s suit on procedural grounds because Hytel failed to properly state a cause of action for breach of fiduciary duty or for fraud. In dismissing Hytel’s claims, the trial court found that the Citizen Participation Act did apply to Butler’s wage claim, that she did not have a fiduciary relationship with Hytel, and that Hytel did not sufficiently allege all the elements of fraud. Plaintiff Hytel appealed the trial court’s ruling on the basis that Butler’s wage claim was a private dispute and the Citizen Participation Act is concerned with protecting free speech and citizen participation in government.

The Appellate Court reviewed the legislative intent behind the Citizen Participation Act and found that the state of Illinois intended the law to be construed broadly. As such, the Court found that Butler’s wage claim was an exercise of her right to petition for redress of grievances and therefore fell within the express language of the Act that protects actions taken in furtherance of a citizen’s right to petition. The Court went on to hold that the Act contains no public concern requirement and the fact that the wage claim was a private dispute did not matter. Finally, the Court found that Hytel’s suit was retaliatory in nature and upheld the trial court’s dismissal of the action and the award of attorneys fees under the Act.

This case provides a warning for business owners who file suit against former employees for a breach of duty, particularly if there is an existing wage or other employment dispute between the parties. Hytel Group, Inc. v. Butler shows that Illinois courts will dismiss such claims pursuant to the Citizen Participation Act if there evidence that the suit filed by the employer is retaliatory in nature. As such, employers should ensure that they have ample evidence to show the legitimacy of their claims before filing, as they may be on the hook for the opposing party’s attorneys fees should the court find a retaliatory impetus for the action.

Video on Illinois Covenant Not to Compete Law

May 1, 2011 | Peter S. Lubin, Patrick Austermuehle and James V. DiTommaso

https://www.youtube.com/watch?v=HLvhcNrJ3u8

The above video provides an excellent overview of Illinois non-compete contract law.

Our Chicago non-compete agreement attorneys have defended high level executives in covenant not to compete and trade secret lawsuits. A case in which our firm defended a former Motorola executive was covered in Crain’s Chicago business. You can view that article by clicking here.

Northern District of Illinois Federal Court Grants Motion to Strike Plaintiff’s Request for Injunctive Relief in Breach of Contract Case

April 26, 2011 | Peter S. Lubin, Patrick Austermuehle and James V. DiTommaso

Lubin Austermuehle has successfully litigated many business disputes, and in our many years of experience we have found that contract claims are among the most contentious conflicts. Because so many of our clients deal with breach of contract issues, our Elmhurst business attorneys are always mindful of new court decisions issued in this area of the law. In fact, our lawyers just discovered one such case, Jumpfly Inc. v. Torling, in the US District Court for the Northern District of Illinois.

Jumpfly Inc. v. Torling pits a Plaintiff employer against two former employees who allegedly violated the non-compete agreements signed when they were hired by Plaintiff. Plaintiff contends that Defendant Torling started a competing pay-per-click internet advertising side-business while in Defendant’s employ, and upon discovering its employee’s side-business, fired him and sent a cease and desist letter demanding that he stop violating the non-compete. The parties eventually negotiated a settlement allowing Torling to continue his business, but the agreement prohibited him from soliciting any of Plaintiff’s employees. Torling allegedly solicited Defendant Burke — who was working for Plaintiff at the time under a similar non-compete agreement — and got him to quit his position with Plaintiff to work for Defendant Torling.

Plaintiff then filed suit against the two individuals and the new company (Windy City) that they worked for — alleging rescission of a settlement agreement, breach of contract, violations of the Lanham Act and Illinois Deceptive Trade Practices Act, and intentional interference with contract based upon non-compete agreements between the parties. Plaintiff’s requested the Court to enjoin Defendants’ competitive business conduct and for monetary damages. In response, Defendants filed a motion to strike Plaintiff’s request for injunctive relief and filed a motion to dismiss under 12(b)(6).

The Court granted the motion to strike as to the breach of contract claim because the two year term of the non-compete agreement had already expired and an injunction would result in an unreasonable restraint of trade. The Court also noted that Plaintiff’s seven-month delay — after discovery of the illicit conduct — in asking for an injunction also weighed in favor of Defendants. The Court denied the motion to strike as to the statutory claims, however, because injunctive relief is provided by both laws which rendered the motion premature.

Next, the Court granted Defendants’ motion to dismiss the breach of contract and intentional interference with contract claims due to pleading insufficient facts that Defendant Windy City induced either of the individual Defendants to breach their contracts with Plaintiff. In dismissing Plaintiffs conspiracy to interfere with contract, the Court applied the Intracorporate Conspiracy Doctrine and declined to agree with Plaintiff’s argument that Defendants’ conduct fell with in an exception to the rule. Finally, the Court denied the motion to dismiss the settlement agreement breach claim as the effect of Defendants’ breaches had yet to be determined.