Seventh Circuit Strikes Down Employer’s Claim for Permanent Injunctive Relief in Non-Compete Case

Earlier this month, in Tradesman International, Inc. v. Black, et al., 2013 WL 3949020 (7th Cir. 2013), the Seventh Circuit affirmed summary judgment against a plaintiff construction staffing firm that sued four former employees for violating restrictive covenants they signed while employed by plaintiff. 

The Plaintiff sought to enforce 18-month long and (effectively) nation-wide restrictive covenants (“non-competes”) that prevented defendants from (a) ever disclosing plaintiff’s proprietary information and (b) from soliciting construction staffing business within 100 miles of a Tradesman field office and within 25 miles of any Tradesman customer location.  2013 WL 3949020 at *2. 

The District Court granted summary judgment for the defendants on all claims because plaintiff failed to prove compensable damages and therefore could not show irreparable harm: a required permanent injunction element.

Disposition: The Seventh Circuit affirms District Court on summary judgment ruling; reverses on denial of defendants’ attorneys’ fees under Illinois Trade Secrets Act claim. 

Grounds: (1) Plaintiff employer failed to show irreparable harm; and (2) Plaintiff’s restrictive covenants (the “non-competes”) were unreasonable – both in terms of content and geographic scope.

Reasoning:  Plaintiff showed no harm, much less irreparable harm.  Irreparable harm means damages that are ongoing and difficult to quantify.  The Court held that since plaintiff failed to seek preliminary injunctive relief (as opposed to permanent injunctive relief), this undermined its irreparable harm claim (in other words, why didn’t the plaintiff move for preliminary injunctive relief if its damages were so dire?). 

The Court noted that a permanent injunction would be too “costly” as it would require defendants to reverse several years worth of efforts in building up their competing staffing firm.  Tradesman, at *7-8.

The Seventh Circuit also found the non-competes signed by the defendants unreasonable under Ohio law.  A contractual choice-of-law clause provided that Ohio law would govern (The plaintiff was an Ohio corporation.)

Ohio considers a restrictive covenant’s time and space limitations, whether trade secrets or confidential information are/is involved, whether the employer seeks to stifle ordinary competition, and the detrimental impact on the employee’s livelihood.  Id. at *9.

Applying the factors, the Tradesman Court found that the proprietary information which plaintiff sought to protect was unreasonable.  The Court noted that the information plaintiff was suing on – worker’s compensation and manager compensation rates, marketing materials and Dun & Bradstreet reports – was either publicly available, generally known or was information that the plaintiff didn’t try to keep secret.  *8-9. 

A plaintiff generally has to show that it tried to keep information confidential (under “lock and key”) for that information to qualify as a trade secret.

The Court also found the non-competes’ geographic restrictions unreasonable.  They were so expansive, they were basically nation-wide restraints.  To comply with the non-competes as  written, the defendants really couldn’t work anywhere in the U.S.  *9-10.

Lessons:

1/ publicly available or generally known information will not qualify for proprietary or trade secret information protection;

2/ restrictive covenants that don’t involve true trade secrets or proprietary information and that have nation-wide reach (“you can’t work anywhere in the U.S.”, e.g.) will not be enforced; and

3/ the party that loses a trade secrets case may have to pay the winning party’s fees even if the party had good faith belief in its claim when it filed the lawsuit – but later learns that its claim lacks merit (and still presses forward with the case).

Defendant Bank Not Liable for Permitting Judgment Debtor to Transfer Over $700,000 from Accounts

The Citation to Discover Assets to a Third Party or “third-party citation”  allows a judgment creditor to serve a citation on a third-party –  a bank, for instance – who holds property of the judgment debtor and attach that property until the court orders the property released.  See 735 ILCS 5/2-1402(f)(1). 

The third-party citation prohibits the citation respondent from allowing any transfer or other disposition of debtor’s property pending further order of court or termination of the citation. 

When a bank is the third-party citation respondent, the creditor serves the citation upon the bank (either by personal service or certified mail) and upon receipt of the citation, the bank must freeze the debtor’s account until the court enters an order dismissing the citation or releasing the account. 

What’s simultaneously enticing (to a creditor) and sinister (to a debtor) about third-party citation practice is that the creditor doesn’t have to notify the debtor of the third-party citation until 3 business days have passed. 735 ILCS 5/2-1402(b).  This makes it next to impossible for a debtor to deplete his bank account(s) and hide funds – something which could easily happen if he caught wind of a creditor’s attempts to seize his accounts. 

Mendez v. Republic Bank, 2013 WL 3821532 (7th Cir. 2013), examines whether a bank that unfreezes the wrong bank accounts (and allows a judgment debtor to transfer hundreds of thousands of dollars in the process) can be liable to the judgment creditor for violating a citation’s restraining provisions. 

The Court affirmed the trial court’s finding that the bank was not liable to the plaintiff.

The plaintiff won a judgment and froze some 22 separate accounts of the corporate judgment debtor.  After several of the banks moved to quash various citations, the district court judge entered an order requiring that all bank accounts except for three (3) specified accounts be unfrozen. 

The defendant bank released from the citation two of the debtors’ accounts which totalled over $700,000 – all of  which of course was dissipated by the debtors within a few months. 

Plaintiff then moved to refreeze the accounts and to hold the bank liable for violating the citation restraining provision.

The District Judge, while originally siding with plaintiff, reversed herself and found the bank not liable.  The reason: the prior judge’s order requiring the bank to unfreeze accounts was ambiguous “at best” and the bank’s actions were a reasonable response to and interpretation of that order.  *4.

The Seventh Circuit affirmed, noting that the prior judge’s order unfreezing certain accounts was poorly drafted and the defendant bank followed the most reasonable interpretation of the order. 

Acknowledging that under Illinois law, a citation respondent can be liable for any transfer that violates a citation’s restraining provisions (regardless of whether there is intent or contempt), the bank’s actions were reasonable in light of the order’s text.* 11. 

Take-away: In my experience, from a creditor’s standpoint, attaching a corporate debtor’s bank account via a third-party citation is often my only real chance of collecting anything on a judgment.  Any real estate is usually mortgaged to the hilt, and the corporate debtor often lacks sufficient accounts receivable, inventory or personal property to meaningfully make a dent in the judgment amount.  

This case shows why hyper-precision in drafting citation orders is critical in post-judgment enforcement proceedings.  If the order is not drafted by the parties (i.e. it’s prepared by the court) and it’s text is unclear, it is incumbent on a party to file a motion seeking clarification of the order. 

 

Discovery Rule Saves Plaintiffs’ Fraud Claims Against Investment Firm (IL – 2d Dist)

Rasgaitis v. Waterstone Financial Group, Inc., 2012 IL App (2d) 111112-U, a 20-plus page Second District case, presents a detailed synopsis of Illinois agency law, the discovery rule and the “forward-looking” fraud rule (statements of future intent or opinion do not equal fraud).

Facts: The plaintiffs sued the defendant financial services firm and two of its agents for fraud and other tort claims based on defendants’ misrepresentations in connection with selling investment and insurance products to plaintiffs.  (¶ 10).  Defendants moved to dismiss, arguing that the claims were time-barred, were non-actionable statements of future intent and was too conclusory to show an agency relationship between the individuals and the investment firm.  The trial court agreed and dismissed all 15 complaint counts.

Held: The Second District reversed the trial court on 14 of the 15 counts (the Court sustained dismissal of negligent supervision claim based on economic loss rule) and held that plaintiffs’ suit was timely based on the discovery rule.

Reasoning:

The discovery rule stops the running of the statute of limitations until a plaintiff knows or should know of his injuries and that the injuries were caused by defendant’s wrongful conduct. (¶ 31).  The rule generally presents a fact question (the question being – when did the plaintiff reasonably know he was injured?) but can be an issue of law where the key facts are undisputed.  Id.

Here, the Court held that while the defendants’ underlying misrepresentations were made in 2005 and 2006, and plaintiffs didn’t sue until 2010, the plaintiffs still pled they didn’t learn of the false promises until 2009 when they learned that the chosen investment vehicle wasn’t as good as advertised.  And since plaintiffs filed suit approximately 14 months after they discovered the defendants’ wrongful conduct (in April 2010) – the complaint was timely under the two and three-year limitations periods for suits based on the sale of life insurance policies and annuities.  ¶¶ 24, 32,  735 ILCS 5/13-214.4, 815 ILCS 5/13.

Fraud Claim Analysis

The Second District also sustained plaintiffs’ fraud claims against defendants’ various Section 2-615 arguments.  While acknowledging that statements of opinion, future intent or financial projections are generally not actionable, the Court focused on the context, not the content of defendants’ statements.  (¶ 43)  The Court held that the plaintiffs sufficiently alleged that the defendants’ statements (that plaintiffs’ funds were 100% safe and the investment plan was proven to be successful) were sufficiently factual to state statutory and common law fraud claims under Illinois pleading rules. (¶ 44).

 Agency Analysis

Sustaining the plaintiffs’ agency allegations (and therefore upholding the claims against defendants’ 2-615 motion attack), the Court provided an agency law primer:

– agency is a fiduciary relationship where the principal can control the agent’s conduct and the agent can act on the principal’s behalf;

– an agent’s authority can be actual or apparent;

– actual authority can be express or implied;

– express authority = principal explicitly grants the agent authority to perform a given act;

implied authority = actual authority proved by circumstantial evidence of the agent.  That is, the principal’s conduct reasonably leads the agent to believe that the principal wants the agent to act on the principal’s behalf;

– apparent agency = principal holds out agent as having authority to act on principal’s behalf and a reasonably prudent third party would assume the agent’s authority based on the principal’s conduct.

(¶¶ 49-51).

Applying these rules, the Court held that the plaintiffs pled sufficient facts to establish an agency relationship between the two individual financial agents and the investment firm.  Factors the court considered in its agency calculus included that the defendants used the corporate employer’s offices, business cards and same phone number. ¶ 51.  The Court also cited the fact that plaintiffs had multiple meetings with the individual defendants at the corporate defendant’s office – something that would likely lead a reasonable person to assume that the individual defendants were authorized to act for the corporate principal.  As a result, plaintiffs’ stated colorable claims under Illinois fact-pleading rules.  14 of plaintiff’s 15 claims were reinstated.

Take-aways: The discovery rule applies to common law and consumer fraud claims.  The more detailed a plaintiff’s allegations, the better chance they will survive a limitations defense.  Fraud claims cannot be based on future intent, opinions or financial forecasts unless the statements are sufficiently present-tense and factual.   The case is also instructive on what agency allegations will and won’t satisfy Illinois fact-pleading rules where a plaintiff attempts to impute an agent’s conduct to a corporate principal.