Commission Payment Terms in Employment Contract Trump Cable Rep’s ‘Procuring Cause’ Claim in Sales Contract Spat – IL Court

I once represented a client who sued his former employer – an energy company – for unpaid commission and bonuses.  Before he hired me, the client filed a pro se administrative claim with the Illinois Department of Labor (DOL) to recover the monies.  The DOL found in my client’s favor but could not decide on a specific dollar amount. Several months later, I sued to recover under the Illinois Wage Payment and Collection Act (Wage Act) and for breach of contract.  In that case, which settled favorably for us, the employer unsuccessfully argued my client’s prior DOL case precluded our civil Wage Act claim.  The trial court rejected this res judicata argument on the basis that the DOL proceeding was not equivalent to a prior adjudication on the merits.

Borum v. Wideopenwest Illinois, LLC, 2015 IL App (1st) 141482-U, a two-year old, unpublished decision, presents a similar fact pattern and considers whether an ex-employee’s earlier administrative claim prevents a later civil lawsuit against the same employer for the same claim.  The case also spotlights the interplay between an employment agreement’s payment terms and the procuring cause doctrine in a sales commissions dispute.

Defendant hired plaintiff to prospect for cable customers.  It agreed to pay plaintiff a commission based on customers he signed up.  The defendant’s standard employment contract documented the plaintiff’s commission payment rights: plaintiff earned his commission once a customer signed a right-of-entry agreement with the cable supplier.

After lodging an unsuccessful DOL, plaintiff sued the cable company in state court to recover unpaid sales commissions. The trial court granted defendant’s motion to dismiss all counts of the plaintiff’s complaint and plaintiff appealed.

Affirming the trial court’s dismissal, the Court first considered whether the plaintiff’s DOL proceeding barred his civil suit under res judicata or collateral estoppel principles.  Section 14 of the Wage Act authorizes an employee to file either a DOL claim or a civil action, but not both, to recover underpayment damages along with 2% per month of the underpaid amount.

The DOL ruled against the plaintiff.  It found the right-of-entry agreements were not consummated until signed by both a customer and the defendant employer.)

The Court found the DOL hearing was too informal and not “judicial” or “adjudicatory” enough to defeat plaintiff’s later civil suit under the res judicata rule.

Res judicata requires a final judgment on the merits by a court of competent jurisdiction.  Collateral estoppel precludes litigation of an issue previously decided in an earlier proceeding.  Res judicata and collateral estoppel can extend to administrative proceedings that are judicial, adjudicatory or quasi-judicial in nature.

So where administrative proceedings involve sworn testimony, are adversarial in nature and include cross-examination of witnesses, they can bar a subsequent civil suit.

Here, since the DOL conducted only an informal hearing with no cross-examination or sworn witnesses, the DOL had no adjudicatory power over the parties and so its finding for defendant had no preclusive effect against the plaintiff’s lawsuit.

The court also rejected plaintiff’s procuring cause argument.  Designed to soften the harsh impact of at-will contracts, the procuring cause doctrine allows a departed salesperson to recover commissions on sales he/she consummated before his/her employment ends even where the money isn’t paid to the employer until after the salesperson departs.  The procuring cause rule is only a gap filler though: it’s a default rule that only applies where a contract is silent on when commissions are paid.

Since plaintiff’s contract with defendant specifically provided plaintiff would be paid commissions earned during (but not after) the period of the employment, the court found this specific enough to vitiate the procuring cause rule.

Lastly, the Court considered whether defendant violated its handbook which stated compensation terms could only be changed on 30 days advance notice.  Plaintiff argued that the defendant made a unilateral change to its compensation policy without giving plaintiff the requisite notice.

The key question for the Court was whether the employee manual was an enforceable contract. For an employee handbook to vest an employee with binding contract rights, (1) the handbook promise must be clear enough that an employee reasonably believes and offer has been made, (2) the handbook offer must be distributed to the employee so that he/she actually receives it or is aware of its contents; the (3) the employee must accept the offer by commencing work after learning of the policy statement.

Since the plaintiff conceded he wasn’t aware of the employee manual until the day he was fired, the court found he couldn’t reasonably show the handbook provided him with enforceable contract rights. (¶¶ 83-85).

Bullet-points:

  • Administrative claims can support a res judicata defense but only where the administrative hearing is adversarial (judicial) in nature; such as where witnesses give sworn testimony that can be tested on cross-examination;
  • The procuring cause rule won’t trump specific contract payment terms;
  • A written employer policy on compensation adjustments isn’t binding against an employer where the aggrieved employee isn’t aware of the policy until on or after he/she’s fired.

 

 

 

 

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Non-reliance Clause Defeats Fraud In Inducement Claim In Employment Agreement Dispute – IL Court

Colagrossi v. Bank of Scotland, 2016 IL (App) 1st 142216 examines fraud in the inducement in an employment dispute involving parent and subsidiary companies and their respective successors.

The key question was whether a non-reliance clause in an employment contract barred a fraud in the inducement claim based on pre-contract statements by a party?  The answer:  “Yes.”

The case features a tortured procedural history and this tedious litigation timeline:

2005 – Plaintiff receives offer letter from Company 1 for plaintiff to perform futures trading services.  The offer letter contains a non-reliance clause that subsumes all oral representations concerning the offer letter’s subject matter.

2006 – Plaintiff enters into employment agreement with Company 2 – Company 1’s successor.  This agreement also has a non-reliance clause.

2006-2007 – Plaintiff contends that while negotiating the offer letter specifics, Company 1’s officer fails to disclose to Plaintiff that Company 1 is about to be sold to Company 2 and had plaintiff known this, he wouldn’t have accepted Company 1’s offer.

2008 – Plaintiff files two lawsuits.  He sues Company 1 for fraud in the inducement and then sues Company 2 under the same legal theories.  Company 2 removes that case to Federal Court (based on diversity of citizenship).

2011 – Plaintiff files a third lawsuit; this time naming Company 3 – Company 1’s parent – and Company 4, the entity that purchased Company 3.

2013 – Summary judgment for Company 1 is entered in the 2008 fraud in inducement case based on non-reliance language of offer letter.

2014 – Federal court grants summary judgment for Company 2 in removed Federal case (the removed 2008 case) based on same non-reliance clause

2014 – Plaintiff’s 2011 lawsuit against Companies 3 and 4 dismissed based on res judicata in that the same issues were already litigated in the 2008 fraud in inducement case against Company 1

Plaintiff appealed the dismissal of the 2011 lawsuit.

Held: Affirmed

Reasons:

Fraud in the inducement  requires a plaintiff to plead and prove (1) a false representation of material fact, (2) made with knowledge or belief in the representation’s falsity, (3) made with the purpose of inducing a plaintiff to act or refrain from acting, and (iv) the plaintiff reasonably relied on the defendant’s representation (or non-representation) to plaintiff’s detriment. (¶¶ 44-45)

Fraud normally is no defense to the enforceability of a written agreement where the party claiming fraud had ample opportunity to discover the fraud by reading the document.

Here, the plaintiff admitted that he read the 2005 offer letter and 2006 employment contract and signed them after reviewing with his attorney.  In addition, the two agreements each spelled out that plaintiff had not relied on any oral or written representations of the parties in signing the agreements. 

The Court held that the clear non-reliance language prevented plaintiff from establishing justifiable reliance on any oral statements made by Company 1 to induce plaintiff to sign the offer letter or on Company 2 statements before signing the employment agreement. (¶ 47)

The next question for the Court was whether summary judgment for Company 1 in the 2008 case was res judicata to the 2011 case against Companies 3 and 4.  Again, Company 3 was Company 1’s corporate parent and Company 4 purchased Company 3’s assets.

In Illinois, res judicata applies where (1) there is an identity of parties or their privies, (2) identity of causes of action, and (3) final judgment on the merits.

For the first, identity of parties prong, to apply, the parties don’t have to identical.  All that’s required is their interest must be sufficiently similar.  Under Illinois law, a corporate parent and its subsidiaries can be deemed sufficiently similar for res judicata purposes as can successor and predecessor companies.  When the only difference between a predecessor and a successor (like between Company 2 and 3 here) is a name change, “obvious privity” is present.  (¶¶ 53-54)

Since the two 2008 cases and the 2011 case all stemmed from the same underlying facts, involved the same employment contract and same corporate principals, summary judgment for Company 1 and 2 in the 2008 cases barred plaintiff from repackaging the same facts and claims against Companies 3 and 4 in the 2011 case.

Afterwords:

This case and others like it make clear that for a fraud in the inducement plaintiff to establish reliance in the breach of written contract setting, he should show he was deprived of a chance to read the contract.  Otherwise, the rule against allowing fraud claims by one who fails to read a document will defeat the claim.

Another important case holding is that the ‘same parties’ res judicata element applies where parent and subsidiary (or predecessor and successor) companies are sufficiently connected so they sufficiently represents the other’s legal interests in two separate lawsuits.

Indy Skyline Photo Spat At Heart Of 7th Circuit’s Gloss on Affirmative Defenses, Res Judicata and Fed. Pleading Amendments – Bell v. Taylor (Part I)

Litigation over pictures of the Indianapolis skyline form the backdrop for the Seventh Circuit’s recent examination of the elements of a proper affirmative defense under Federal pleading rules and the concept of ‘finality’ for res judicata purposes in Bell v. Taylor.

There, several small businesses infringed plaintiff’s copyrights in two photographs of downtown Indianapolis: one taken at night, the other in daytime.  The defendants – an insurance company, a realtor, and a computer repair firm – all used at least one the plaintiff’s photos on company websites.  When the plaintiff couldn’t prove damages, the District Court granted summary judgment for the defendants and later dismissed a second lawsuit filed by the plaintiff against one of the defendants based on the same facts.  The plaintiff appealed.

The Seventh Circuit affirmed summary judgment of the first lawsuit and dismissal of the second action on both procedural and substantive grounds.

Turning to the claims against the computer company defendant, the court noted that the defendant denied using the plaintiff’s daytime photo.  The defendant used only the nighttime photo.  The plaintiff argued that the defendant failed to comply with Rule 8(b) by not asserting facts to support its denial that it used plaintiff’s daytime photo.

Rejecting this argument, the court noted that a proper affirmative defense limits or excuses a defendant’s liability even where the plaintiff establishes a prima facie case.  If the facts that underlie an affirmative defense are proven true, they will defeat the plaintiff’s claim even if all of the complaint allegations are true.  A defendant’s contesting a plaintiff’s factual allegation is not an affirmative defense.  It is instead a simple denial.  Since the computer defendant denied it used the daytime photo, there was no affirmative matter involved and the defendant didn’t have to comply with Rule 8’s pleading requirements.

The Seventh Circuit also affirmed the denial of the plaintiff’s attempt to amend his complaint several months after pleadings closed.  In Federal court, the right to amend pleadings is broad but not absolute.  Where allowing an amendment would result in undue delay or prejudice to the opposing party, a court has discretion to refuse a request to amend a complaint.  FRCP 15(a)(2).  Here, the Court agreed with the lower court that the plaintiff showed a lack of diligence by waiting until well after the amending pleadings deadline passed.  The plaintiff’s failure to timely seek leave to amend its complaint supported the court’s denial of its motion.

The Court also affirmed the District Court’s dismissal of the plaintiff’s second lawsuit on res judicata grounds.  When the District Court entered summary judgment for defendants on plaintiff’s copyright and state law claims (conversion, unfair competition), plaintiff’s equitable relief claims (declaratory judgment and injunctive relief) were pending.  Because of this, the summary judgment order wasn’t final for purposes of appeal.  (Plaintiff could only appeal final orders – and until the court disposed of the equitable claims, the summary judgment order wasn’t final and appealable.)

Still, finality for res judicata purposes is different from appellate finality.  An order can be final and have preclusive effect under res judicata or collateral estoppel even where other claims remain.  This was the case here as plaintiff’s sole claim against the computer company defendant was for copyright infringement.  The pending equitable claims were directed to other defendants.  So the District Court’s summary judgment order on plaintiff’s copyright infringement claims was final as to the computer defendant.  This finality triggered res judicata and barred the plaintiff’s second lawsuit on the same facts.

Afterwords:

The case’s academic value lies in its thorough summary of the pleading requirements for affirmative defenses and the factors guiding a court when determining whether to permit amendments to pleadings.  The case also stresses that finality for appeal purposes is not the same as for res judicata or collateral estoppel.  If an order disposes of a plaintiff’s claims against one but not all defendants, the order is still final as to that defendant and the plaintiff will be precluded from later filing a second lawsuit against that earlier victorious defendant.