The Corporate Opportunity Doctrine: An Illinois Primer

I typically encounter a corporate opportunity issue (a claim that a defendant usurped a corporate opportunity) in situations where a former employee goes to work for a competitor and the ex-employer claims the employee is exploiting a business opportunity he learned of solely through his association with the employer.

The employer will usually sue for injunctive relief and money damages under a breach of fiduciary duty theory premised on the assertion that the employee violated the corporate opportunity doctrine. The employee typically defends by arguing that he didn’t compete with his former employer and that any business he now does is purely the product of his own initiative and was developed outside the confines of his prior position.

Illinois state and Federal cases through the decades have sharpened the doctrine’s contours to these fine points:

– A corporate officer has the duty to act with “utmost good faith and loyalty” in managing the company;

– A corporate officer breaches his fiduciary duties where (i) he tries to enhance his personal interests at the expense of the corporate interests, or (ii) he hinders his corporate employer’s ability to carry on its business;

Where a corporate officer solicits business for his own benefit or uses his employer’s facilities or resources to further his personal interests without informing the company, he breaches his fiduciary duties to that company; the core principle of the doctrine is that a fiduciary will not be permitted to usurp an opportunity developed through the use of corporate assets;

 A plaintiff alleging a defendant usurped a corporate opportunity must show that the company benefitting from the officer’s actions are in the same line of business as the plaintiff/employer; but the companies don’t have to be direct competitors;

 – A corporate opportunity exists when a proposed activity is reasonably incident to the corporation’s present or prospective business and is one in which the corporation has the capacity to engage;

– Where a corporate officer uses corporate assets to develop a business opportunity, he can’t then argue that his former employer lacked the ability to pursue that opportunity;

– Two key factors are: (1) whether the corporation had an actual or expected interest in the opportunity and (2) whether the acquisition of the questioned opportunity would impede the (ex-employer, e.g.) corporation’s ability to carry on its day-to-day business;

Additional corporate opportunity factors include: (1) the manner in which the offer was communicated to the officer, (2) the good faith of the officer, (3) the use of corporate assets to acquire the opportunity, (4) the financial ability of the corporation to acquire the opportunity, (5) the degree of disclosure made to the corporation, (6) the action taken by the corporation in response to any disclosure, and (7) the need or interest of the corporation in the opportunity;

Case Examples Of Corporate Opportunity Breach

Corporate officers have been found in breach of their fiduciary duties when, while still employed by the company, they:

(i) failed to inform the company that employees are forming a rival company or engaging in other fiduciary breaches;

(ii) solicited the business of a customer before leaving the company;

(iii) used the company’s facilities or equipment to assist in developing their new business;

(iv) solicited fellow employees to join a rival business;

(v) used the company’s confidential business information for the new business; and

(vi) orchestrated a mass exodus of employees shortly after resigning from a company.

Afterwords: The above provides a good framework for handling a corporate opportunity breach. When representing a plaintiff in this type of case, I argue that the above factors weigh in favor of a finding of breach and will focus on any secret conduct of the defendant. The more clandestine, the better. 

Conversely, when defending a corporate opportunity suit, I stress that the opportunity was developed independently of my client’s former association with the plaintiff and that it (the opportunity) came to fruition by my client’s own efforts and not from the plaintiff’s resources.

Sources:

Drench, Inc. v. South Chapel Hill Gardens, Inc., 274 Ill.App.3d 534 (1st Dist. 1995);

Star Forge, Inc. v. Ward, 2014 IL App (2d) 130527-U;

Foodcomm Int’l v. Barry, 328 F.3d 300, 303 (7th Cir. 2003);

Lindenhurst Drugs, Inc. v. Becker, 154 Ill.App.3d 61, 68 (2d Dist. 1987)

No Commercial Disparagement Or Non-Compete Equals Denial Of Injunction – IL Court

In Xylem Dewatering Solutions, Inc. v. Szablewski, 2014 IL App (5th) 140080-U,  the plaintiff corporation sued some of its ex-employees after they joined a competitor and started raiding plaintiff’s office staff.

The trial court denied plaintiff’s request for an injunction and then it appealed.

Result: Trial court’s order upheld. Plaintiff loses.

Reasons: To get a preliminary injunction, a plaintiff must establish (1) a clearly ascertained right in need of protection; (2) irreparable injury; (3) no adequate remedy at law; and (4) a likelihood of success on the merits.

The plaintiff must establish a “fair question” on each of the four elements. A preliminary injunction is an extraordinary remedy that is only granted in extreme, emergency settings. (¶¶ 20-21).

Irreparable harm can result from commercial disparagement of a plaintiff’s product but the plaintiff must show the defendant repeatedly made false or misleading statements of fact regarding the plaintiff’s goods and services to establish irreparable harm.  Statements of opinion (“their services suck!”, e.g.) don’t qualify as commercial disparagement. 

Here, the Court found that there were no repeated factual statements made by the defendants.  In addition, all statements that were attributed to the defendants were purely interpretive: they weren’t factual enough to be actionable.  (¶¶ 23-24).

In finding that the plaintiff lacked a protectable interest in its employees or customers, the court pointed out that neither individual defendant signed a non-compete and didn’t violate any fiduciary duties to the employer.

In Illinois, absent a non-compete, an employee is free both to compete with a former employer and to outfit a competing business so long as he doesn’t do so before his employment terminates.  And while a corporate officer owes heightened fiduciary duties not to exploit his position for personal gain, the ex-employee defendants were not corporate officers. (¶ 26).

Plaintiff also failed to establish a protectable interest in its pricing and bid information.  The Illinois Trade Secrets Act, 765 ILCS 1065/1 et seq. (“ITSA”) extends trade secret protection to “information” that is (1) sufficiently secret to derive economic value, from not being generally known to others who can obtain economic value from its use, and (2) that is the subject of reasonable efforts to maintain the information’s secrecy (i.e., “kept under lock and key”)

Information that is generally known in an industry – even if not to the public at large – isn’t a trade secret. Also, information that can be readily copied without a significant outlay of time, effort or expense is not a trade secret. 

The pricing data the plaintiff was trying to protect was several years old and the defendants testified that the bidding information was well known (and therefore not secret) in the pumping industry.  In combination, these factors weighed against a finding of trade secret protection for the pricing and bidding information. (¶¶ 29-31).

Afterwords:

(1) Stale data likely won’t qualify for trade secret status – no matter how arcane the information;

(2) If information is well known or can be easily accessed within an industry, it won’t be given trade secret protection;

(3) Noncompete agreements can serve vital purposes.  If a business fails to have its workers sign them, the business risks having no recourse if an ex-employee joins a competitor and later raids the former employer’s personnel.

Non-Compete Signed 16 Years After Employment Start Date Is Too Late (To Be Enforced) – Says KY High Court

In prior articles, I’ve discussed how restrictive covenants (i.e., non-disclosure, non-solicitation and non-competition provisions) are staples of modern-day employment contracts and business sale agreements.  In Creech, Inc. v. Brown (http://law.justia.com/cases/kentucky/supreme-court/2014/2012-sc-000651-dg.html) the Supreme Court of Kentucky struck down a non-competition provision in a hay supplier’s written contract the supplier made a long-time employee sign several years after he started working there.

The defendant worked for the plaintiff in various capacities through the years.  Sixteen years into his tenure, plaintiff’s new management asked the defendant to sign a Conflict of Interest Agreement (the “Agreement”) that contained broad non-disclosure provisions and a non-competition clause.  The non-compete spanned three years and had no geographic boundaries.  Fearing job loss, defendant signed the Agreement.  The defendant continued to work for the plaintiff for a couple more years when he took a job with a rival supplier.  Plaintiff then sued to enforce the Agreement’s non-competition provision.  The trial court sided with the defendant and the appeals court reversed.  On remand, the trial court entered summary judgment for the plaintiff employer and found that the defendant violated the Agreement.  This time, the appeals court upheld the non-competition clause.  Both parties appealed to Kentucky’s Supreme Court.

Held: Reversed.  The non-competition provision is unenforceable because it lacks consideration.

Reasons:

The defendant worked for nearly two decades for the plaintiff hay supplier and wasn’t asked to sign a non-compete until more than sixteen years after his start date.  The plaintiff gave defendant nothing in exchange for defendant signing the Agreement.  It didn’t give the defendant a raise, didn’t change the defendant’s job duties and offered no training or other benefits.  There was no consideration flowing to the defendant to bind him to the non-competition provision’s three-year term.

Consideration means a benefit to the party making a promise and a loss to the party to whom the promise is made.  Each side gives and gets something.  Benefit means the promisor has gained something to which he is not otherwise entitled.  Detriment or loss means that the promisee has given up something in exchange for the promise.  (p. 12).

The Court rejected the plaintiff’s claim that the defendant’s continued employment was sufficient consideration.  The plaintiff didn’t give the defendant anything in exchange for him signing the Agreement.  The Agreement was silent on defendant’s job duties or rate of pay and as a result couldn’t be considered a “rehiring.”  Nor did the Agreement alter defendant’s employment terms.  He remained an at-will employee at the same pay rate. (p. 14).  The Agreement imposed a three-year restriction on defendant seeking alternative employment without giving him any corresponding benefit.  Since the Agreement didn’t require plaintiff to give up anything in exchange for the defendant signing the Agreement, the non-competition provision lacked consideration and wasn’t enforceable.  (p. 15).

Besides defendant’s job description and pay remaining static, the plaintiff hay supplier also didn’t offer any specialized training to the defendant after he signed the Agreement.  A contract law axiom posits that a promise devoid of a reciprocal flow of benefits and detriments can’t be enforced.  (pp. 15-17).  By not giving up anything in consideration for defendant executing the Agreement, the plaintiff’s offer of continued employment was illusory.

Afterword: I’ve never practiced in Kentucky but the case is relevant to Illinois restrictive covenant law since it’s congruent with Fifield’s (Fifield v. Premier Dealer Services, Inc., http://www.state.il.us/court/Opinions/AppellateCourt/2013/1stDistrict/1120327.pdf) two-year rule. (Two years of continued employment is required for a non-compete to have adequate consideration.)  

The result in Creech seems fair.  An employer shouldn’t be able to unilaterally foist a non-compete on a long-time employee without providing some additional benefit to him.  For employers, the lesson is clear: if you’re going to have an employee sign a restrictive covenant after he’s started working, you should pay the employee a bonus, give him a raise or provide some other tangible benefit so that there is sufficient consideration – loss or detriment –  flowing to the employee so that you can bind him to a non-competition provision.