Medical Practice Break-Up Spawns Non-Compete Dispute

imageThe bitter breakup of a medical practice provides the setting for the Illinois Fifth District to consider the scope of a non-compete clause and how it impacts a minority shareholder’s buy-out rights.

Gingrich v. Midkiff, 2014 IL App (5th) 120332-U presents a dispute between two former partners in a medical corporation.  At the medical practice’s inception – in the late 1990s – the parties signed a stock purchase agreement that contained a 5-year/20-mile non-compete provision (the “Non-Compete”).

The Non-Compete only applied in two situations: (1) if a shareholder withdrew from the practice after giving the required written notice; or (2) where a shareholder was expelled from the practice.  The parties’ relationship quickly soured and in 2002, a decade-long cycle of litigation between the two doctors ensued.

The 2002 Lawsuit

A 2002 lawsuit between the parties culminated in the plaintiff buying defendant’s stock in the medical corporation.  The court in the 2002 case didn’t rule on whether the Non-Compete was enforceable.

The 2007 (and current) Lawsuit

In the 2007 case, plaintiff sued defendant alleging the defendant violated the Non-Compete by going to work for a rival practice within 20 miles of plaintiff’s office. 

The trial court dismissed.  It held that the Non-Compete didn’t apply because defendant didn’t withdraw and wasn’t expelled from the medical corporation.  Plaintiff appealed.

Ruling: Affirmed.

Reasoning:

The court rejected plaintiff’s law of the case (LOTC) argument.  The LOTC doctrine prevents relitigation of an issue of fact or law previously decided in the same case.  ¶ 14.  Its purpose is to avoid repetitive litigation of the same issues and to foster finality and consistency in litigation.  LOTC reflects the court’s preference to generally not reopen previously decided issues.

Here, there was no adjudication of the Non-Compete in the 2002 case.  The core issue litigated in that first suit was the valuation of defendant’s shares and whether plaintiff served a proper election to purchase those shares.

Since the cardinal issues in the 2002 and 2007 Lawsuits substantively differed, LOTC didn’t prevent defendant from challenging the Non-Compete in the 2007 case. ¶¶  17-19.

The court also found the Non-Compete wasn’t enforceable.  In Illinois, noncompetition clauses in the medical services context are heavily scrutinized and only validated where they have reasonable time and space limits.

¶¶ 22-24.

Finding the Non-Compete unambiguous, the Court held that the 5 year/20-mile strictures attached in only two circumstances: where a shareholder either (1) withdrew or (2) was expelled from the practice.  Here, defendant  didn’t withdraw and she wasn’t expelled.  As a result, the Non-Compete didn’t prevent the defendant from practicing within twenty miles of plaintiff’s office.  ¶¶ 25-29.

Afterwords: Clarity in contract drafting is critical.  The case illustrates that a Court won’t strain to find ambiguity where contract language is facially clear.  Gingrich also illustrates that a restrictive covenant will be construed in favor of permitting, instead of stifling, competition.  In hindsight, the plaintiff should have made it clear that if a shareholder departed the medical practice for any reason: whether voluntary, forced, or after a buy-out, the non-compete would still govern.

 

 

 

LLC Members Not Liable On Void Judgment Entered Against LLC

Downs v. Rosenthal, 2013 IL App (1st) 121406, features an in-depth analysis of the difference between corporate vs. individual liability, the nature of post-judgment proceedings, and appellate procedure.

Facts

Plaintiff sued defendant LLC and its individual members (the Members) for breach of fiduciary duty, breach of contract and a declaratory judgment that plaintiff was a 2.5% stakeholder in the LLC.  The trial court entered a money judgment against the LLC and Members jointly and severally.  The LLC defendant appealed the judgment but the Members did not.

The First District reversed and vacated the judgment, finding that plaintiff wasn’t an owner of the LLC and so wasn’t entitled to a share of the LLC’s profits.  But since the Members didn’t appeal the judgment, plaintiff instituted supplementary proceedings against them.  The trial court quashed the citations because the appeals court reversed the plaintiff’s judgment. Plaintiff appealed.

Held: trial court affirmed.  The voided judgment against the LLC is not enforceable against the Members.

Rules:

The LLC appealed – but the Members didn’t – the trial court’s ruling that plaintiff was entitled to 2.5% of the LLC’s profits over several years.  Usually, a nonappealing defendant can’t benefit from the efforts of an appealing defendant.   ¶ 20.

But the defendant that doesn’t appeal can benefit from a co-defendant’s successful appeal where there is an “interdependence of rights” among them that would make it unfair to allow a judgment to stand against the no appealing defendants. ¶¶ 20, 24.

The plaintiff’s right to the LLC profits was entirely dependent on his ownership interest in the LLC.  Since the appeals court found that plaintiff was not an owner of the LLC, plaintiff wasn’t entitled to any LLC profits.

In Illinois, an LLC is a separate entity from its constituent members and an LLC member or manager is not personally liable for a judgment against the LLC. 805 ILCS 180/10-10(a).  Once the judgment against the LLC was overturned, there was nothing to bind the Members: the Court found it was unfair to allow the plaintiff to enforce the vacated judgment against the Members.   ¶24.

The First District also rejected plaintiff’s res judicata (“a thing already judged”)argument – that the judgment which the Members didn’t appeal was final and so the Members were barred from challenging plaintiff’s attempt to collect on the judgment.

Res judicata, or claim preclusion, attempts to foster closure and finality in litigation.  The doctrine applies where there are successive causes of action and it bars a second action between parties after a previous final judgment on the merits.  It requires (1) a final judgment on the merits; (2) identity of causes of actions; and (3) identical parties in both actions. ¶ 25.

Here, the Court found that plaintiff’s enforcement proceedings were “supplementary” to the underlying judgment and were not, by definition, a second cause of action.  There was only a single action – plaintiff’s lawsuit.  As a result, the Court found that the Members could properly attack the plaintiff’s post-judgment efforts once the appeals court vacated the judgment against the LLC.  ¶ 26.

Take-aways: A defendant that doesn’t appeal a judgment can still benefit from a co-defendant’s successful appeal where there is an interdependence of rights between the two defendants.

However, Downs shows that it’s a perilous practice for one defendant not to appeal a money judgment when his co-defendant does appeal.  In Downs, while the LLC members ended up winning, they ran the risk of having to answer for a judgment that was entered against another party (LLC) and ultimately overturned.

Downs also illustrates that a judgment creditor’s collection proceedings aren’t viewed as separate claims for res judicata purposes.

 

 

 

 

N.D.Ill. Examines Res Judicata and Claim-Splitting Doctrines

In Tank v. T-Mobile USA, Inc., 2013 WL 4401375, the Northern District of Illinois examined the reach of the res judicata and claim-splitting doctrines in an employment discrimination suit. 

In 2012, the plaintiff sued T-Mobile, his former employer, for employment discrimination and for violating the Telecommunications Act of 1996, 47 U.S.C. § 201 et seq. (the “TCA”), which outlaws employers accessing “customers’ proprietary network information” (basically, “cell phone records”) without the customer’s consent.  Plaintiff’s TCA count claimed the defendant accessed plaintiff’s cell phone records without his permission while looking into plaintiff’s EEOC claim against the telecom giant. 

This was plaintiff’s second discrimination suit against T-Mobile. In 2011, he filed similar Federal employment discrimination claims (but not a TCA claim) which were defeated on T-Mobile’s summary judgment motion.  After plaintiff filed his second action in 2012, T-Mobile moved to dismiss on the basis of res judicata and improper claim-splitting.  T-Mobile argued that plaintiff’s 2012 case was based on the same operative facts as his 2011 suit (which T-Mobile won on summary judgment) and so the 2012 case was defeated by res judicata’s and claim-splitting.

Held: The Court denied defendant’s motion to dismiss plaintiff’s TCA claim and granted the motion to dismiss plaintiff’s employment discrimination claims.

Reasoning/Rules

Res judicata and claim-splitting both aim to prevent repetitive and duplicative litigation; ensuring that all factually-related claims are brought in a single case. 

Res judicata’s elements:

(1) an identity of causes of actions (that is, the second claim is based on the same core of operative facts as the previously litigated “first” claim);

(2) identity of parties or their privies (a fact-specific inquiry decided on case-by-case basis); and

(3) a final judgment on the merits (final judgment = judgment based on the parties’ legal rights as opposed to matters of practice, procedure, jurisdiction or form)  

Claim-Splitting Doctrine

Related to res judicata, claim-splitting differs in only a single sense: while res judicata contemplates a final judgment and separate, sequential lawsuits, claim-splitting applies to two currently pending lawsuits that have not yet reached the final judgment stage.  The claim-splitting doctrine provides the basis for dismissal where two pending lawsuits are duplicative of  one another.    

The ‘Single Core of Operative Facts’ Element 

The Court held that plaintiff’s TCA claims (based on T-Mobile’s (alleged) cell phone snooping) were not barred by res judicata or claim-splitting.  While both the 2011 and 2012 suits pled T-Mobile’s discriminatory conduct, only the 2012 suit alleged T-Mobile violated the TCA’s privacy provisions by scouring plaintiff’s cell phone.  As a result, the Court found that the core of underlying facts giving rise to the 2011 suit (which exclusively involved employment discrimination claims) differed from the 2012 suit (which additionally involved T-Mobile’s violation of the TCA).  *5-6. 

Take-aways: Res judicata and claim-splitting are properly brought as part of a Rule 12(b)(6) motion.  The Tank Court gives content to the same claim/same core of operative facts element of res judicata/claim-splitting and shows a willingness to look into factual differences between two separate lawsuits which look on the same on the surface.

Tank provides ammunition to litigants opposing res judicata or claim-splitting pleadings motions by highlighting what a court should focus on when analyzing the same cause/identity of cause action element of the defenses.