Medical Device Maker Can Recover Lost Profits Against Double-Dipping Salesman – IL Fed. Court

A Federal court examines the pleading and proof elements of several business torts in a medical device company’s lawsuit against its former salesman and a rival firm.  The plaintiff sued when it learned its former employee was selling on the side for a competitor.

Granting summary judgment for most of the plaintiff’s claims, the Court in HSI v. Pappas, 2016 WL 5341804, dives deep into the various employer remedies where an employee surreptitiously works for a competing firm.

The Court upheld the plaintiff’s breach of fiduciary duty claim against the former salesman as well as its aiding and abetting (the breach) claim against the competitor.  In Illinois, a breach of fiduciary duty plaintiff must show (1) existence of a fiduciary duty, (2) the fiduciary duty was breached, and (3) the breach proximately caused plaintiff’s injury.  An employee owes his employer a duty of loyalty.  (Foodcomm Int’l v. Barry, 328 F.3d 300 (7th Cir. 2003).

A third party who aids and abets another’s breach of fiduciary duty can also be liable where the third party (1) knowingly participates in or (2) knowingly accepts the benefits resulting from a breach of fiduciary duty.encourages or induces someone’s breach of duty to his employer.

Since the plaintiff proved that the ex-salesman breached his duty of loyalty by secretly selling for the medical supply rival, the plaintiff sufficiently made out a breach of fiduciary duty claim against the salesman.  The plaintiff also produced evidence that the competitor knew the salesman was employed by the plaintiff and still reaped the benefits of his dual services.  The competitor’s agent admitted in his deposition that he knew the salesman was employed by plaintiff yet continued to make several sales calls with the plaintiff to customers of the competitor.  The court found these admissions sufficient evidence that the competitor encouraged the salesman’s breach of his duties to the plaintiff.

The plaintiff also produced evidence that the competitor knew the salesman was employed by the plaintiff and still profited from his dual services.  The competitor’s representative admitted in his deposition knowing the salesman was employed by plaintiff yet still made several sales calls with the salesman to some of the competitor’s customers.  The court found this admission sufficient evidence that the competitor encouraged the salesman’s breach of his duties to the plaintiff.

With liability against the individual and corporate defendants established, the Court turned its attention to plaintiff’s damages.  Plaintiff sought over $400K in damages which included all amounts plaintiff paid to the defendant during his 10-month employment tenure, the amounts paid by the competitor to the defendant during his time with plaintiff as well as lost profits

An employee who breaches his fiduciary duties to an employer generally must forfeit compensation he receives from the employer.  The breaching employee must also disgorge any profits he gains that flow from the breach.

This is because under basic agency law, an agent is entitled to compensation only on the “due and faithful performance of all his duties to his principal.”  The forfeiture rule is equitable and based on public policy considerations.

Since the evidence was clear that the defendant failed to perform his employment duties in good faith, the Court allowed the plaintiff to recoup the nearly $180K in compensation it paid the defendant.

The plaintiff was not allowed to recover this amount from the competitor, however.  The Court held that since the payments to the salesman never came into the competitor’s possession, plaintiff would get a windfall if it could recover the same $180K from the competitor.

The Court also allowed the plaintiff to recover its lost profits from both the individual and corporate defendants.  In Illinois, lost profits are inherently speculative but are allowable where the evidence affords a reasonable basis for their computation, and the profits can be traced with reasonable certainty to the defendant’s wrongful conduct.

Since the corporate defendant didn’t challenge plaintiff’s projected profits proof, the Court credited this evidence and entered summary judgment for the plaintiff.

Take-aways:

This case serves as a vivid cautionary tale as to what lies ahead for double-dealing employees.  Not only can the employer claw back compensation paid to the employee but it can also impute lost profits damages to the new employer/competitor where it induces a breach or willingly accepts the financial fruits of the breach.

The case also cements proposition that lost profits are intrinsically speculative and that mathematical certainty isn’t required to prove them.

 

Ill. Wage Payment and Collection Act Doesn’t Apply to NY and Cal. Corps. With Only Random Ill. Contacts

As worker mobility increases and employees working in one state and living in another almost an afterthought, questions of court jurisdiction over intrastate workplace relationships come to the fore.  Another issue triggered by a geographically nimble workforce is whether a non-resident can invoke the protections of another state’s laws.

Illinois provides a powerful remedial scheme for employees who are stiffed by their employers in the form of the Wage Payment and Collection Act, 820 ILCS 115/1 (“Wage Act”).  See (here).  The Wage Act allows an employee to sue an employer for unpaid wages, bonuses or commissions where an employer breaches a written or oral employment contract.

The focal point of Cohan v. Medline Industries, Inc., 2016 WL 1086514 (N.D.Ill. 2016) is whether non-residents of Illinois can invoke the Wage Act against an Illinois-based employer for unpaid sales commissions.  The plaintiffs there, New York and California residents, sued their Illinois employer, for breach of various employment contract commission schedules involving the sale of medical devices.

The Northern District of Illinois held that the salespeople plaintiffs could not sue under Illinois’ Wage Act where their in-person contacts with Illinois were scarce.  The plaintiffs only entered Illinois for a few days a year as part of their employer’s mandatory sales training protocol.  All of the plaintiffs’ sales work was performed in their respective home states.

Highlights from the Court’s opinion include:

  •  The Wage Act doesn’t have “extraterritorial reach;” It’s purpose is to protect Illinois employees from being shorted compensation by their employers;
  • The Wage Act does protect non-Illinois residents who perform work in Illinois for an Illinois employer;
  • A plaintiff must perform “sufficient” work in Illinois to merit Wage Act protection;
  • There is no mechanical test to decide what is considered “sufficient” Illinois work to trigger the Wage Act protections;
  • The Wage Act only applies where there is an agreement – however informal – between an employer and employee;
  • The agreement required to trigger the Wage Act’s application doesn’t have to be formal or in writing. So long as there is a meeting of the minds, the Court will enforce the agreement;
  • The Wage Act does not cover employee claims to compensation outside of a written or oral agreement

Based on the plaintiffs’ episodic (at best) contacts with Illinois, the Court found that the Wage Act didn’t cover the plaintiffs’ unpaid commission claims.
Substantively, the Court found the Wage Act inapplicable as there was nothing in the various written employment agreements that supported the plaintiff’s damage calculations.  The plaintiffs’ relationship with the Illinois employer was set forth in multiple contracts that contained elaborate commission schedules.  Since the plaintiff’s claims sought damages beyond the scope of the written schedules, the Wage Act didn’t govern.
Take-aways:

1/ The Illinois Wage Act will apply to a non-resident of Illinois if he/she performs a sufficient quantum of work in Illinois;

2/ Scattered contacts with Illinois that are unrelated to a plaintiff’s job are not sufficient enough to qualify for a viable Wage Act lawsuit;

3/ While an agreement supporting a Wage Act claim doesn’t have to be in writing, there must be some agreement – no matter how unstructured or loose – for a plaintiff to have standing to sue for a Wage Act violation.

Debtor’s Refusal to Return Electronic Data = Embezzlement – No Bankruptcy Discharge – IL ND

FNA Group, Inc. v. Arvanitis, 2015 WL 5202990 (Bankr. N.D. Ill. 2015) examines the tension between the bankruptcy code’s aim of giving a financial fresh start to a debtor and the Law’s attempt to protect creditors from underhanded debtor conduct to avoid his debts.

After a 15-year employment relationship went sour, the plaintiff power washing company sued a former management-level employee when he failed to turn over confidential company property (the “Data”) he had access to during his employment.

After refusing a state court judge’s order to turn over the Data and an ensuing civil contempt finding, the defendant filed bankruptcy.

The plaintiff filed an adversary complaint in the bankruptcy case alleging the defendant’s (now the debtor) embezzlement and wilfull injury to company Data.

The plaintiff asked the bankruptcy court to find that the debtor’s obligations to the plaintiff were not dischargeable (i.e. could not be wiped out).

Siding with the plaintiff, the Court provides a useful discussion of the embezzlement and the wilfull and malicious injury bankruptcy discharge exceptions.

The bankruptcy code’s discharge mechanism aims to give a debtor a fresh start by relieving him of pre-petition debts. Exceptions to the general discharge rule are construed strictly against the creditor and liberally in favor of the debtor.

Embezzlement under the bankruptcy code means the “fraudulent appropriation of property” by a person to whom the property was entrusted or to whom the property was lawfully transferred at some point.

A creditor who seeks to invoke the embezzlement discharge exception must show: (1) the debtor appropriated property or funds for his/her benefit, and (2) the debtor did so with fraudulent intent.

Fraudulent intent in the embezzlement context means “without authorization.” 11 U.S.C. s. 523(a)(4).

The Court found the creditor established all embezzlement elements. First, the debtor was clearly entrusted with the Data during his lengthy employment tenure. The debtor also appropriated the Data for his own use – as was evident by his emails where he threatened to destroy the Data or divulge its contents to plaintiff’s competitors.

Finally, the debtor lacked authorization to hold the Data after his resignation based on a non-disclosure agreement he signed where he acknowledged all things provided to him remained company property and had to be returned when he left the company.

By holding the Data hostage to extract a better severance package, the debtor exhibited a fraudulent intent.

The court also refused to allow a debtor discharge based on the bankruptcy code’s exception for willful and malicious injury. 11 U.S.C. s. 523(a)(6).

An “injury” under this section equates to the violation of another’s personal or property rights. “Wilfull” means an intent to injure the person’s property while “malicious” signals a conscious disregard for another’s rights without cause.

Here, the debtor injured the plaintiff by refusing to release the Data despite a (state) court order requiring him to do so. Plaintiff spent nearly $200,000 reconstructing the stolen property and retaining forensic experts and lawyers to negotiate the Data’s return.

Lastly, the debtor’s threatening e-mails to plaintiff in efforts to coerce the plaintiff to up its severance payment was malicious under Section 523 since the e-mails exhibited a disregard for the importance of the Data and its integrity.

Take-aways:

The bankruptcy law goal of giving a debtor fiscal breathing room has limits. If the debtor engages in intentional conduct aimed at evading creditors or furthers a scheme of lying to the bankruptcy court, his pre-petition debts won’t be discharged.

This case is post-worthy as it gives content to the embezzlement and wilfull and malicious property damage discharge exceptions.