Tag: successor in interest

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.

Third Party Enforcement of A Non-Compete and Trade Secret Pre-emption – IL Law

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In Cronimet Holdings v. Keywell Metals, LLC, 2014 WL 580414 (N.D.Ill. 2014), the Northern District of Illinois considers whether a non-compete contract is enforceable by a stranger to that contract as well as trade secret pre-emption of other claims.

Facts and Procedural History

Plaintiff, who previously signed a non-disclosure agreement with a defunct metal company (the “Target Company”) it was considering buying, filed a declaratory action against a competitor (“Competitor”) requesting a ruling that the non-disclosure agreement and separate non-competes signed by the Target Company’s employees were not enforceable by the competitor who bought  the Target Company’s assets. The NDA and non-competes spanned 24 months.

The plaintiff moved to dismiss eight of the ten counterclaims filed by the Competitor.  It argued the Competitor lacked standing to enforce the non-competes and that its trade secrets counterclaim (based on the Illinois Trade Secrets Act, 765 ILCS 1065/1 (“ITSA”)) pre-empted several of the tort counterclaims.

In gutting most (8 out of 10) of the counterclaims, the court applied the operative rules governing when non-competes can be enforced by third parties:

– Illinois would likely permit the assignment of a non-compete to a third party;

– Enforcing a non-compete presupposes a legitimate business interest to be protected;

– A legitimate business interest is a fact-based inquiry that focuses on whether there is (i) a “near-permanence” in a customer relationship, (ii) the company’s interest in a stable work force , (iii) whether a former employee acquired confidential information and (iv) whether a given non-compete has valid time and space restrictions;

– A successor corporation can enforce confidentiality agreements signed by a predecessor (acquired) corporation where the acquired corporation merges into the acquiring one;

– A successor in interest is one who follows an original owner in control of property and who retains the same rights as the original owner;

– The ITSA pre-empts (displaces) conflicting or redundant tort claims that are based on a defendant’s misappropriation of trade secrets;

– Claims for unjust enrichment, quasi-contract relief or unfair competition are displaced by the ITSA where the claims essentially allege a trade secrets violation;

– The ITSA supplants claims that involve information that doesn’t rise to the level of a trade secret (e.g. not known to others and kept under ‘lock-and-key’);

(**4-5).

The court found that since a bankruptcy court (in the Target Company’s bankruptcy) previously ruled that the Competitor didn’t purchase the non-competes, and wasn’t the Target Company’s successor, the Competitor lacked standing to enforce the non-competes.

The Court also held that once the Target Company stopped doing business, its non-competes automatically lapsed since it no longer had any secret data or customers to protect.

The Court also agreed that the Company’s ITSA claim pre-empted its claims that asserted plaintiff was wrongfully using the Target Company’s secret data.  The court even applied ITSA pre-emption to non-trade secret information.  It held that so long as the information sought to be protected in a claim was allegedly secret, any non-ITSA claims based on that information were pre-empted.

Afterwords:

(1) A non-compete can likely be assigned to a third party;

(2) Where the party assigning a non-compete goes out of business, the assignor no longer has a legitimate business interest to protect; making it hard for the assignee to enforce the non-compete;

(3) ITSA, the Illinois trade secrets statute, will displace (pre-empt) causes of action or equitable remedies (unjust enrichment, unfair competition, etc.) that are based on a defendant’s improper use of confidential information – even where that information  doesn’t rise to the level of a trade secret.