Chicago Business Litigation Lawyer Blog

Court of Appeals Upholds Bonus Award Against Suit by Minority Shareholders, Applying Safe Harbor and Business Judgment Rules – Warren v. Campbell Farming Corp.

May 17, 2012 | Peter S. Lubin, Patrick Austermuehle and James V. DiTommaso

The Tenth Circuit Court of Appeals reviewed a dispute among shareholders of a closely-held corporation in Warren v. Campbell Farming Corporation. It affirmed a district court ruling that the majority shareholder did not breach fiduciary or statutory duties to the corporation by approving a bonus proposal over the minority shareholders’ objections. The court considered arguments relating to conflicts of interest and fairness, the business judgment rule, and the majority shareholder’s fiduciary duty.

Campbell Farming Corporation is a closely-held Montana corporation whose principal place of business is in New Mexico. The plaintiffs, H. Robert Warren and Joan Crocker, were minority shareholders with 49% of the shares, while defendant Stephanie Gately controlled 51%. Warren and Gately served as directors with Gately’s son, Robert Gately, who also served as the president. Stephanie Gately proposed a bonus to her son totalling $1.2 million in cash and company stock, in part to prevent him from leaving the company. Stephanie Gately voted all of her shares in favor of the proposal, so it passed despite Warren and Crocker’s votes in opposition.

Warren and Crocker filed suit in New Mexico federal court, asserting breach of fiduciary duties and various common law claims. The district court ruled in favor of the defendants after a bench trial. It found that, while the bonus met Montana’s definition of a “conflict of interest,” it was permissible under a safe-harbor statute that allowed conflict-of-interest transactions if they were “fair to the corporation.” Mont. Code. Ann. §§ 35-1-461(2), 35-1-462(2)(c). The court also found that the bonus was permitted by the business judgment rule and that the defendants did not breach any fiduciary duties. The plaintiffs appealed to the Tenth Circuit.

Business Owners Beware: Tips are for Employees Only – Gionfriddo v. Jason Zink, LLC. (D MD 2011)

May 17, 2012 | Peter S. Lubin, Patrick Austermuehle and James V. DiTommaso

In Gionfriddo v. Jason Zink, LLC., the District Court for the District of Maryland became the latest in a chorus of courts in business litigation to warn business owners/operators that the Fair Labor Standards Act (FLSA) – and often state law – prohibits them from participating in employee tip pools.

Plaintiffs are three former bartenders at two Baltimore bar and restaurants owned by Defendant Jason Zink: the Don’t Know Tavern and the No Idea Tavern. Mr. Zink also works as a manager and bartender at both establishments. The bartenders at both taverns, including Mr. Zink, participate in a tip pool, through which tips received are contributed to a collective pool and then divided among the bartenders each week based on the number of hours worked. Since Mr. Zink does not draw a salary from the businesses, the court noted that the tip pool “appears to be his primary mode of compensation from his tavern businesses.”

Plaintiffs sued, alleging that because Zink owns the businesses, he’s precluded under both the FLSA and the Maryland Wage and Hour Law from receiving tips from the tip pool. The FLSA establishes a federal minimum hourly wage ($7.25) for employees. “Tipped employees” – those working in positions where they “customarily and regularly” receive more than $30 a month in tips – are exempted from the minimum wage requirement. These employees may be paid $2.13 per hour, so long as their tips make up the difference. The difference between the amount paid to tipped employees and the $7.25 minimum wage is called the employer’s “tip credit.” The FLSA permits tipped employees to participate in a tip pool, as long as each employee customarily receives more than $30 per month in tips. Furthermore, the employer cannot take a tip credit where the tip pool involves employees who don’t usually receive tips.

Both parties filed motions for summary judgment, asserting that there is no dispute over material facts in the case and that each is entitled to judgment in its favor as a matter of law. The court ruled in favor of Plaintiffs, finding that Defendant is not permitted to participate in the tip pool because, as employer, he doesn’t typically receive tips. “Congress, in crafting the tip credit provision…of the FLSA did not create a middle ground allowing an employer both to take the tip credit and share employees’ tips,” the court ruled, quoting the Southern District of New York’s decision in Chung v. New River Palace Restaurant, Inc. For the same reasons, the court concluded that Defendant also violated the MWHL by participating in the tip pool.

Medical Debt Collectors Stoop to New Lows According to the New York TImes

May 10, 2012 | Peter S. Lubin, Patrick Austermuehle and James V. DiTommaso

The Colbert Report

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Colbert commented on an interesting New York Times article which reported on how debt collectors are now secretly embedded in hospitals posing as hospital staff to collect on hospital bills and other medical debts.

Our law firm fights to stop these illegal practices when the debt collectors cross the line and engage in illegal collection practices such as those described by the New York Times.

Car Fraud, Arbitration Clauses and Unconscionability – Tolbert v. Coast to Coast Dealer Services, Inc.

May 3, 2012 | Peter S. Lubin, Patrick Austermuehle and James V. DiTommaso

Solid evidence and strong legal arguments are all well and good, but in order to successfully sue a car dealer for fraud, you first have to bring the action in the right venue. In Tolbert v. Coast to Coast Dealer Services, Inc., the Northern District of Ohio explains that it will enforce an arbitration clause requiring a dispute to be resolved via arbitration unless the provision is “unconscionable.”

Plaintiffs Leah Tolbert and Diana Barker bought a 2004 Jeep Sports Liberty Truck from Defendant Coast to Coast Dealer Services, Inc. (Coast to Coast), a used car dealership. Plaintiffs made a $3,500 down payment and agreed to pay the remaining purchase price ($4,400) in $300 monthly payments. They also purchased a Vehicle Service Agreement (VSA), under which Defendant agreed to service and repair the car. The VSA included an arbitration clause providing that “any and all claims, disputes, or controversies of any nature whatsoever” between the parties is subject to arbitration, a dispute resolution format in which parties submit the matter to one or more private arbitrators.

Plaintiffs allegedly began having trouble with the car shortly after driving it off of the lot. The “check engine” light allegedly went on within a day of the purchase, the first of what would be a long string of alleged issues related to the car. According to the court, Plaintiffs “had to bring the vehicle back to [the dealership] over ten different times for various problems, including the engine light, engine smoke, fan relay system, and replacement of the water pump and thermostat.” Plaintiffs stopped making the monthly payments on the car when it allegedly became inoperable due to an engine problem and Coast to Coast repossessed the vehicle after performing repairs on it.

Plaintiffs filed the lawsuit, alleging that Defendant committed fraud by selling the car without disclosing various mechanical defects and by offering the VSA with no intent of honoring it. Whether or not this was the case, however, will be decided elsewhere. The court granted Defendant’s motion to compel arbitration, finding that the VSA’s arbitration clause is valid and requires that Plaintiffs’ claims be resolved by an arbitrator.

While Plaintiffs argued that the arbitration clause was “unconscionable” – because it forces them to give up their right to be awarded attorneys’ fees and punitive damages and arbitration proceedings will result in significantly higher costs – and therefore unenforceable, the court disagreed. “An unconscionable contract is one in which there is an absence of meaningful choice on the part of one of the parties to a contract, combined with contract terms that are unreasonably favorable to the other party,” the court stated. In an arbitration proceeding, the court found that Plaintiffs retained the full slate of remedies available under Ohio law and noted that the arbitration clause includes a provision requiring Defendant to advance Plaintiffs’ arbitration costs if they are unable to pay them. As a result, the arbitration clause was not unconscionable.

7th Circuit Reverses its Decision in Sears Class-Action

May 2, 2012 | Peter S. Lubin, Patrick Austermuehle and James V. DiTommaso

The Thorogood lawsuit against Sears, characterized by the 7th Circuit as purportedly “near frivolous,” concerned marketing of a clothes dryer. It was certified and later decertified as a class action on the ground that no issues could be resolved in a single, class-wide evidentiary hearing, and was ultimately dismissed. Murray, a member of the proposed class, who did not become a party, filed a “copycat” class action, using the same attorney. Following a third visit to the Seventh Circuit, the district court enjoined the Murray suit as defiant of the decertification. The Supreme Court remanded. The Seventh Circuit consolidated the Thorogood and Murray cases for its fourth opinion. On the merits, the court stated that “One would have to have a neurotic obsession with rust stains (or be a highly imaginative class action lawyer) to worry about Sears’ drum,” and that it would “unsay nothing,” in its previous opinions, but vacated the injunction. “We were wrong. The Supreme Court’s decision—rendered after we ordered the injunction … although it does not refer to the All Writs Act, inclines us to doubt that Murray, not having been a party to the Thorogood suit, can nevertheless be bound by a ruling in it, including the ruling decertifying the class.” You can view the 7th Circuit’s decision here.

Non-Compete Agreements 101: Consideration and Undue Hardship – PolyOne Corp. v. Barnett

April 19, 2012 | Peter S. Lubin, Patrick Austermuehle and James V. DiTommaso

In PolyOne Corp. v. Barnett, the district court for the Northern District of Ohio explains that just because both an employer and employee have signed a non-compete agreement doesn’t mean the agreement is necessarily enforceable. Among other requirements, the agreement must not be overly burdensome and must be executed in exchange for adequate consideration.

Plaintiff PolyOne Corporation provides polymer services and materials around the world. Defendant April Barnett worked at PolyOne’s Seabrook, Texas facility since 1992. In 2007, PolyOne began requiring certain high-level employees, including Barnett, to sign non-compete and confidentiality agreements in exchange for enrollment in the company’s long-term incentives program. Barnett signed an agreement in April of that year in which she agreed both to not compete with PolyOne for a period of one year after the termination of her employment and to protect PolyOne’s confidential and trade secret information and return such information upon termination of her employment.

In 2010, PolyOne allegedly demoted Barnett from her position as Marketing Director and removed her from the company’s long-term incentives plan. In March 2011, she informed the company that she was resigning to take a job with Bayshore Industrial, a competitor. PolyONE sued, claiming that Barnett would breach the non-compete and confidentiality agreements by accepting the Bayshore job and asked the court to issue a temporary restraining order (TRO) preventing Barnett from working for Bayshore or otherwise violating the agreements.

Following a hearing on the matter, the court denied the TRO request, finding that PolyOne cannot show it is likely to succeed on the merits of its case. In order to enforce a restrictive covenant – a contract that prevents a person or entity from doing certain things – the party seeking to enforce it must first prove that the covenant is valid. According to the court, PolyOne is unable to show that the non-compete agreement is valid because its interpretation of the terms – asserting that it prohibits Barnett from working for any competitor in any capacity – would impose an undue hardship on Barnett because she has spent the majority of her adult life working in the polymers industry and would have to find work in another industry.

Furthermore, the court held that the agreement was not based on adequate consideration. In order for a contract to be valid, each party must exchange something of value. In this case, PolyOne enrolled Barnett in the company’s long-term incentives plan in exchange for signing the non-compete and confidentiality agreements. However, PolyOne later withdrew this consideration when it demoted Barnett. Since, according to the Court, “it is far from certain whether the court would enforce a non-compete agreement for which the consideration has been removed,” it found that Barnett’s likelihood of success in enforcing the agreement was not sufficient to justify issuing the requested TRO.

Combining Two or More Classes into One Toxic Contamination Action – Thomas v. Wilbert & Sons, LLC

April 5, 2012 | Peter S. Lubin, Patrick Austermuehle and James V. DiTommaso

In Thomas v. Wilbert & Sons, LLC, Louisiana’s First Circuit Court of Appeals tackles the tricky situation in which two or more certified classes are combined for trial. While such a scenario can be procedurally complicated, the basic class certification principles – including that a court considering class action certification request or challenge not concern itself with the likelihood of success on the merits of an action – remain the same.

The plaintiffs, residents of a trailer home park in or around Plaquemine, Louisiana, brought the action against the defendants Dow Chemical Company (Dow), Wilbert & Sons, L.L.C. (Wilbert) and other parties claiming that the plaintiffs were injured when Dow allegedly contaminated the Plaquemine aquifer, which provides groundwater to the local area via wells. The plaintiffs seek damages for personal injury due to exposure to the contaminated water as well as property damages – alleging that the contamination damaged their wells and devalued their property – and punitive damages.

While this action was pending, a second group of plaintiffs – which the court refers to as the Robichaux plaintiffs – filed a similar action in neighboring Iberville Parish in March 2002. These plaintiffs did not sue Wilbert, but sought punitive damages and injunctive relief from the state of Louisiana. The Robichaux plaintiffs attained class certification status before the Thomas plaintiffs. In 2007, the Thomas plaintiffs were certified as a class as follows: “[a]ll persons or entities who or which sustained damages to their real property since 1985 due to vinyl chloride, its successors or derivatives in the Plaquemine aquifer, or who were exposed to the drinking water supply at the [trailer home park] which occurred on or before and since the year 1997 near or in Plaquemine…”
The two actions were then consolidated for trial. At this time, the Robichaux plaintiffs appealed the court’s decision to certify the Thomas plaintiffs, arguing that the decision prejudiced their rights as the members of a previously certified class.

Illinois Court Shoots Down Unreasonable Noncompete Agreement – Peerless Industries, Inc. v. Crimson AV, LLC.

March 22, 2012 | Peter S. Lubin, Patrick Austermuehle and James V. DiTommaso

In Peerless Industries, Inc. v. Crimson AV, Llc., the Northern District of Illinois makes clear that while noncompete agreements may be valid and enforceable in Illinois, the terms of an agreement must nevertheless be reasonable.

Plaintiff Peerless Industries Inc. is an audio-visual mount equipment manufacturer that does business around the world. The plaintiff sells its products to distributors who then install them in stadiums, schools and airports, among other structures. In 2007, The plaintiff entered into a supply contract with Chinese manufacturer Sycamore Manufacturing Co., Ltd. The agreement included a noncompete provision, which provided that Sycamore would not make or distribute “Peerless Products”: those designed by the plaintiff or normally sold by the plaintiff under any of its trademarks. The agreement further prohibited Sycamore from selling a “similar product” – one that “in [the plaintiff’s] reasonable judgment, has substantially the same appearance as or reflects or contains any part of the design of any Peerless Product” – for the length of the agreement and one year thereafter.

The agreement terminated in March, 2010. The following May, Defendant Crimson AV, LLC incorporated in Illinois. According to the court, Sycamore pays the salaries of the defendant’s executives as well as their expenses. Defendant Vladimir Gleyzer, Crimson’s managing director, is a former Peerless employee. Later that summer, the plaintiff filed the present action, alleging that the defendants tortuously interfered with the plaintiff’s contract with Sycamore by purchasing “similar products” from Sycamore and offering them for sale on Crimson’s website. Plaintiff sought a preliminary injunction to enjoin the defendants from selling or offering to sell products received in breach of the supply agreement.

Following a hearing on the matter, the court denied the plaintiff’s injunction request, finding that the “similar products” provision of the supply agreement with Sycamore was overly broad and beyond that necessary to protect the plaintiff’s legitimate business interests. In Illinois, the court noted, a noncompete agreement is valid only to the extent that is reasonable. That is, the agreement’s terms must not: (1) be greater than necessary to protect the business; (2) be oppressive to the entity restricted; nor (3) injure the general public.

In this case, however, the agreement at issue barred Sycamore from selling certain equipment, even if the feature of the plaintiff’s product that appears in the similar product is not aesthetically or functionally significant to either the plaintiff’s product or the similar product. The agreement also applies even where it is unlikely that one product could not be distinguished from the other in the marketplace.

Class Action Lawsuits for Water Contamination – Osarczuk v. Associated Univs. Inc.

March 8, 2012 | Peter S. Lubin, Patrick Austermuehle and James V. DiTommaso

Toxic contamination class actions often include claims by plaintiffs asserting a whole host of problems, from serious health and medical conditions to wide-scale property damage. In Osarczuk v. Associated Univs. Inc., the New York Supreme Court for Suffolk County considered the additional economic damages caused when drinking water is contaminated.

The plaintiffs, a number of people living near the Brookhaven National Laboratory in Upton, New York, brought an action against the defendant, the laboratory’s owner and operator, alleging that the defendant unlawfully emitted toxic substances such as trichloroethane, tritium, strontium-90, uranium, argon-41 and cesium-137 into the air, soil and ground water near the lab. This, according to the plaintiffs, caused health problems, including cancer, nausea, headaches, and various immune conditions, to people living in the surrounding area as well as property damage and economic damage as a result of being forced to switch water sources. The plaintiffs sought both compensatory and punitive damages for the injuries incurred.

The plaintiffs also asked the court to certify a plaintiff class (broken into various sub-classes) consisting of people who live or work within a 10-mile radius of the lab and who have suffered personal injury or property damage as a result of the alleged pollution.

Class certification allows one or more members of a class of similarly situated plaintiffs to sue on behalf of all class members. Under New York law, a class may be certified only where: (1) the class is so numerous that joinder of all members is impracticable; (2) the class shares common questions of law or fact which predominate over any questions affecting only individual members; (3) the class representatives’ claims are typical of those of the class; (4) the representative parties will fairly and adequately protect the interests of the class; and (5) a class action is superior to other available methods for the fair and efficient adjudication of the controversy. A plaintiff seeking class certification bears the burden of proving that these requirements have been met, but need not prove that it is likely to succeed on the actual merits of the lawsuit.

The court determined that the plaintiffs satisfied each of the requirements for class certification, but limited the class to those persons living in the proscribed radius who allege to have suffered either property damage as a result of the contamination or financial loss when they were forced to switch from free local well water to that provided by the local water authority when the wells allegedly became contaminated. In so doing, the court noted that these class members share common questions regarding both their damages, including the costs attendant with switching to another water source, as well as the defendant’s legal liability for these and other injuries.

Illinois Appellate Court Denies Request for a New Trial After $1.2 million Verdict for Fraudulent Misrepresentation in Commercial Property Transaction

February 23, 2012 | Peter S. Lubin, Patrick Austermuehle and James V. DiTommaso

Most businesses are of the brick and mortar variety, meaning that they have a physical location where they conduct operations, and as a result these business have to either buy or rent properties to acquire the space they need. At Lubin Austermuehle DiTommaso, our Elgin business attorneys have handled many commercial and industrial building sale disputes, and are always researching the law in that area to better serve our clients. Napcor Corporation v. JP Morgan Chase Bank, NA is one such case about material misrepresentations made in the sale of a commercial property.

In Napcor Corporation v. JP Morgan Chase Bank, NA, Plaintiff purchased a large commercial building from Defendants. Prior to the sale, the building’s roof allegedly began to leak significantly, and the building’s broker performed an inspection to determine the extent of the damage. The broker allegedly concluded that the existing roof needed to be removed and replaced to fix the problems. Instead of replacing the damaged roof, Defendant constructed a second roof over the first because it was a cheaper option. This second roof was constructed in spite of the fact that Defendant was allegedly warned that the new roof would be susceptible to being torn off by winds. Additionally, the original leakage problem allegedly remained after the new roof’s construction.

The building was then listed for sale, and the pertinent part of the listing stated that the building had a “new roof in 1994 (tear off).” In 1996, Plaintiff purchased the building for $1.309 million through a contract where Plaintiff agreed to accept the building “as is”, and had a 30-day due diligence period. Plaintiff was allegedly not made aware of the leaks, and relied upon Defendant’s alleged representation that the old roof had been torn off. Upon moving into the building, Plaintiff allegedly found the leakage problem and over several years three sections of the roof blew off on three different occasions. Plaintiff then filed suit for fraudulent misrepresentation, and was awarded a $1.2 million judgment after a trial by jury.

Defendant appealed the decision and asked for a judgment notwithstanding the verdict and a new trial based upon faulty jury instructions and the exclusion of evidence that Plaintiff agreed to accept the building in its “as is” condition. Defendant contended that the jury instruction failed to state that Plaintiff had the burden of proof to show all the elements of fraud by clear and convincing evidence. The trial court denied Defendant’s motion.

The Appellate Court affirmed the judgment and held that the trial court did not abuse its discretion by denying Defendant’s motion for a new trial. The Court made its decision because the ‘as is’ language in the purchase agreement did not preclude Plaintiff from claiming it relied on the alleged misrepresentations, and the clause also did not serve as a defense to fraud. As such, the Court decided, the verdict was not against the manifest weight of the evidence. Finally, the Court denied the request for a new trial because the lower court used an IPI civil jury instruction that accurately stated the law, and in doing so, the trial court did not abuse its discretion.