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.

 

Substantial Performance of Asset Purchase Agreement Wins the Day in Pancake House Spat

pancakes-155793_960_720The Second District affirmed summary judgment for the plaintiff pancake house (“Restaurant”) seller in a breach of contract action against the Restaurant’s buyer and current operator.  Siding with the seller, the court discussed the contours of the substantial performance doctrine and what kind of evidence a plaintiff must supply to win summary judgment in a contract dispute.

The plaintiff in El and Be, Inc. v. Husain, 2016 IL App (2d) 150011-U, sold the Restaurant for about $500K pursuant to an Asset Purchase Agreement (APA).   The defendant failed to pay the agreed purchase price when it learned the plaintiff had several unpaid vendor bills, utility debts and a lien lawsuit was filed in Texas against Restaurant equipment by a secured creditor of the plaintiff.  The plaintiff sued for breach of contract to recover the APA purchase price and the defendant counterclaimed for fraud and breach of the APA.  The trial court entered summary judgment for the plaintiff on its claims as well as defendants’ counterclaims.

Affirming summary judgment for the plaintiff, the Second District framed the salient issue as whether the plaintiff substantially performed its APA obligations.

Perfect performance isn’t required to enforce a contract.  Instead, a plaintiff must show he substantially performed.  Substantial performance is hard to define and is a fact-based inquiry.  In deciding whether substantial performance has occurred, a court considers whether a defendant received and enjoyed the benefits of the plaintiff’s performance.  Substantial performance allows a plaintiff to win a breach of contract suit; especially where his performance is done in reliance on the parties’ contract.

The court found that the defendant Restaurant buyer clearly benefitted from the plaintiff’s performance.  The buyer gained the Restaurant assets and goodwill and operated the Restaurant continuously for over a year before plaintiff sued to enforce the APA.  The defendant’s operation of the Restaurant during this pre-suit period was a tangible benefit flowing to the defendant from the plaintiff’s APA performance.  (¶¶ 25-27).

Next, the Court rejected the defendant’s fraud counterclaim – premised on plaintiff’s failure to disclose outstanding debts prior to the Restaurant sale.  The defendant claimed this omission exposed the defendant to a future lien foreclosure action and a possible money judgment by plaintiff’s creditors.

In Illinois, a fraud plaintiff must establish (1) a false statement of material fact, (2) the statement maker’s knowledge or belief that the statement was false; (3) an intention to induce the plaintiff to act based on the statement, (4) reasonable reliance on the truth of the statement by the plaintiff, and (5) damage to the plaintiff resulting from the reliance.  A fraud claimant must also prove damages (monetary loss, e.g.) with reasonable certainty.  While mathematical precision isn’t required, fraud damages that are speculative or hypothetical won’t support a fraud suit.

Here, since the defendant made only generalized allegations of possible damages and could not point to actual damages evidence – such as having to defend a lien foreclosure suit or a money judgment – the fraud claim failed.  On summary judgment, a litigant must offer evidence to support its claims.  The defendant’s failure to produce measurable damages evidence stemming from plaintiff’s pre-sale omissions doomed the fraud claim.  (¶¶ 33-36)

Afterwords:

El and Be, Inc. cements the proposition that perfect performance isn’t required to enforce a contract.  Instead, a breach of contract plaintiff must show substantial performance – that he performed to such a level that the defendant enjoyed tangible benefits from the performance.  Where a contract defendant clearly reaps monetary awards from a plaintiff’s contractual duties, the substantial performance standard is met.

The case also makes clear that fraud must be pled and proven with acute specificity and that vague assertions of damages without factual back-up won’t survive summary judgment.

 

Commercial Landlord’s Suit for Rent Damages Accruing After Possession Order Survives Tenant’s Res Judicata Defense

18th Street Property, LLC v. A-1 Citywide Towing & Recovery, Inc., 2015 IL App (1st) 142444-U examines the res judicata and collateral estoppel doctrines in a commercial lease dispute.

The plaintiff landlord obtained a possession order and judgment in late 2012 on a towing shop lease that expired March 31, 2013. 

About six months after the possession order, the lessor sued to recover rental damages through the lease’s March 2013 end date.  The defendant moved to dismiss on the basis of res judicata and collateral estoppel arguing that the landlord’s damage claim could have and should have been brought in the earlier eviction suit.  The trial court agreed, dismissed the suit and the lessor plaintiff appealed.

Held: Reversed.

Q: Why?

A:  Res judicata (claim preclusion) and collateral estoppel (issue preclusion) seek to foster finality and closure by requiring all claims to be brought in the same proceeding instead of filing scattered claims at different times.

Res judicata applies where there is a final judgment on the merits, the same parties are involved in the first and second case, and the same causes of action are involved in the cases.  

Res judicata bars the (later) litigation of claims that could have brought in an earlier case while collateral estoppel prevents a party from relitigating an issue of law or fact that was actually decided in an earlier case.  (¶¶ 20-21, 30)

In Illinois, a commercial landlord’s claim for past-due rent and for future rent on an abandoned lease are different claims under the res judicata test.

This is because the payment of future rent is not a present tenant obligation and a tenant’s breach of lease usually will not accelerate rent (i.e. require the tenant to immediately pay the remaining payments under the lease) unless the lease has a clear acceleration clause.  Each month of unpaid rent gives rise to fresh claims for purposes of res judicata.

The landlord’s remedy where a tenant breaches a lease is to (a) sue for rents as they become due, (b) sue for several accrued monthly installments in one suit, or (c) sue for the entire amount at the end of the lease.

The commercial lease here gave the landlord a wide range of remedies for the tenant’s breach including acceleration of rental payments. 

The tenant defendant argued that since the lessor failed to try to recover future rent payments in the earlier eviction case, it was barred from doing so in the second lawsuit.  The landlord claimed the opposite: that its claims for damages accruing after the possession order were separate and not barred by res judicata or collateral estoppel.

The court held that res judicata did not bar the lessor’s post-possession order damage suit.  It noted that while the lease contained an optional acceleration clause, it was one of many remedies the landlord had if the tenant breached.  The lease did not require the landlord to accelerate rents upon the tenant’s breach. 

The court also noted that the lease required the landlord to notify the tenant in writing if it (the landlord) was going to terminate the lease.  Since terminating the lease was a prerequisite to acceleration, the Court needed more evidence as to whether the lessor terminated the lease.  Without any termination proof, the trial court should not have dismissed the landlord’s suit.

Afterwords:

1/ If a lease does not contain an acceleration clause, a landlord can likely file a damages action after an earlier eviction case without risking a res judicata or collateral estoppel defense.

2/ If a lease contains mandatory acceleration language, the landlord likely must sue for all future damages coming due under the lease or else risk having its damages cut off on the possession order date.