Corporate Officer Can’t Tortiously Interfere with His Company’s Contract; No Punitives for Breach of Contract – ND IL

In Richmond v. Advanced Pain Consultants, P.C., 2015 WL 4971040 (N.D.Ill. 2015), the plaintiff sued the defendants – two companies that operated suburban (Chicago) pain clinics and their doctor principal – claiming several thousand dollars in unpaid computer and accounting services plaintiff performed at the clinics over a several-month period.  The plaintiff brought claims for overtime under the Federal Fair Labor Standards Act and joined companion state law claims for breach of contract, quantum meruit and tortious interference with contract.  The defendants moved to dismiss plaintiff’s claims arguing preemption and the failure to state a claim, among other things.

In dismissing some of plaintiff’s claims (and sustaining others), the Northern District stressed some vital pleading rules and substantive law principles that apply in Federal court litigation.

Federal Notice Pleading Requirements

Federal Rule 8(a)(2) requires a “short and plain statement of the claim showing a pleader is entitled to relief.”  The plaintiff must provide enough factual context to rise above a speculative level so that a defendant has “fair notice” of what the plaintiff’s claim is.  However, “threadbare recitals of the elements of a cause of action” are not enough to survive a Rule 12(b)(6) dismissal motion.

Preemption and Punitive Damages

The defendant first argued the plaintiff’s common law claims (breach of contract, quantum merit, tortious interference) were preempted by the FLSA.  FLSA preempts common law claims that seek to recover overtime or minimum wage compensation.  But if the plaintiff’s claim seeks something other than overtime or minimum wage payments, those claims aren’t preempted.  Here, several of the plaintiff’s claims were for “regular wages” (not overtime) and so were not preempted by FLSA.

The court next struck plaintiff’s punitive damages claim from his breach of contract suit.  Under Illinois law, contract law’s sole purpose is to compensate the nonbreaching party.  It does not seek to punish the breaching party or give an economic windfall to the plaintiff.  This is true even if the breach is intentional.  Punitive damages can only be allowed in the breach of contract setting where the breach is itself an actionable, independent tort (e.g. a civil conspiracy, fraud, etc.).  Since there was no independent tortious conduct over and above the breach of contract – failure to pay plaintiff for his office services – the court struck plaintiff’s punitive damages claims.

Tortious Interference Against A Single-Member Corporation

The court dismissed the plaintiff’s tortious interference claims against the individual defendant – the sole shareholder of the two corporate defendants.

To state a claim for tortious interference with contract, a plaintiff must allege: (i) the existence of a valid and enforceable contract between a plaintiff and another; (ii) defendant’s awareness of the contractual obligation; (iii) defendant’s intentional and unjustified inducement of a breach of contract; (iv) breach of the contract by the third party caused by the defendant’s wrongful conduct.

A colorable tortious interference claim requires the involvement of at least three entities: (1)-(2) the parties to the contract and (3) the person inducing the breach.

Here, the individual defendant was the sole officer and manager of the two defendant medical offices who had unchallenged authority to make all hiring and firing decisions for the two entities.  The court noted that the two corporate defendants wouldn’t exist without the individual defendant.  There were no other shareholders or parties who had an interest in the corporate defendants.  Since the individual defendant was the only operator and stakeholder in the corporate defendants, he could not tortuously induce a breach of (effectively) his own contract with the plaintiff.

Afterwords:

The case provides some useful damages law reminders including that in a breach of contract suit, punitive damages normally can’t be recovered.  The plaintiff must show that the defendant’s breach is itself an intentional tort for a punitive claim possibly to lie.

Advanced Pain Consultants also makes clear that an officer of a corporation cannot tortiously interfere with a contract involving that corporation where that officer is the only shareholder of the corporation and has sole responsibility for the corporation’s business.

 

Staffing Firm’s Trade Secrets and Tortious Interference Claims Against Ex-Employees Rejected After Bench Trial (Part II of II)

Top Secret

The plaintiff staffing firm lost big in Instant Technology, LLC v. DeFazio, 2014 WL 1759184 (N.D. IL 2014).  The Northern District Court found for the defendants on the plaintiff’s non-compete counts (see prior post) as well as on its trade secrets, tortious interference and breach of fiduciary duty claims. 

Trade Secrets Analysis

The ex-employee defendants signed broad non-disclosure agreements that prevented them from divulging plaintiff’s business information to third parties.  In finding that the plaintiff failed to establish either valid trade secrets or that the defendants used the alleged secrets, the Court applied the key Illinois trade secrets rules:

–  a trade secrets plaintiff must establish (1) that it possessed trade secrets and (2) that the defendant misappropriated them;

– a trade secret is information not generally known to others.  The plaintiff must concretely identify the secret: it isn’t enough for the plaintiff to point to “broad areas of technology” and claim that something there “must be” secret;

– misappropriation means improper acquisition, unauthorized disclosure or unauthorized use.  See 765 ILCS 1065/2(b);

 – misappropriation by “improper acquisition” means theft, bribery, breach of or inducement of a breach of a confidential relationship or espionage through electronic means;

  – misappropriation by “unauthorized disclosure” or “unauthorized use” means the defendant used the alleged trade secrets or disclosed them to others for purposes other than serving the interests of the trade secrets owner;

where information is generally known to others who could benefit from using it, the information is not a trade secret

 (*18-19).

The staffing company failed to establish a protectable trade secret.  None of the client or candidate information the plaintiff was suing on was secret.  The Court found that client names, hiring needs as well as candidate identities and qualifications were publicly available (through phone or internet searches) and information that was freely given out by plaintiff’s clients.  This is because many of the plaintiff’s clients use multiple rival staffing firms simultaneously.

The Court also held that the plaintiff failed to show misappropriation by the defendants.  The trial testimony (18 witnesses testified at the bench trial) established that the defendants were authorized to store and transport plaintiff’s documents via thumb drives and that each defendant physically returned all of plaintiff’s documents and data.

Tortious Interference Analysis

The plaintiff also lost on its tortious interference with contract and prospective economic advantage claims.  Plaintiff alleged that certain defendants tortiously interfered with plaintiff’s client and candidate relationships.

In Illinois, to show tortious interference with contract, the plaintiff must establish: (1) the existence of valid and enforceable contract between plaintiff and third party; (2) defendant’s awareness of that contract; (3) defendant’s intentional and unjustified inducement of a breach of that contract; (4) breach of the contract by the third party; and (5) damages.  Tortious interference with prospective economic advantage has identical elements except the plaintiff must specify customers who actually contemplated entering into a business relationship with the plaintiff.

Since the non-compete lacked consideration and was unreasonable, the contract was unenforceable and so plaintiff’s  tortious interference with contract claim failed.   The plaintiff’s tortious interference with prospective economic advantage count also fell short since the plaintiff couldn’t identify a specific client that didn’t materialize due to defendants’ conduct.  The Court held that proof of a past customer relationship was insufficient to prove a reasonable expectation of a future business relationship.  (¶22).

Breach of Fiduciary Duty Claim

The Court also sided with the defendants on the plaintiff’s breach of fiduciary duty claim.  An Illinois employee can form a rival corporation and outfit it for business while employed by his former employer.  And where there is no valid post-employment restrictive covenant, an employee is free to compete with his ex-employer. 

Further, only a corporate “officer” can be liable for soliciting employees for a new, competing venture.  Job title is not enough to establish corporate officer status.  Instead, the court looks to whether the defendant performs “significant managerial and supervisory responsibilities for operation of the office”.  Here, one of the individual defendants – despite being Executive Vice President of plaintiff – had no managerial authority.  As a result, this defendant wasn’t a true corporate officer and couldn’t be liable for breach of fiduciary duty in soliciting the other defendants to join her in the new staffing firm.  (¶¶ 19-20).

Take-away: The case again illustrates the high evidence burden for a plaintiff to show the existence of a trade secret and its misappropriation.  It also underscores how difficult it is for a plaintiff to prove tortious interference without specifically pinpointing lost contracts or hoped-for business relationships.  The case also construes Illinois law to subject only a corporate officer – with management authority – to breach of fiduciary duty claims where that officer solicits employees of a corporation to join the officer in a competing venture.

The CTA (Call to Action): If you have an issue similar to the above fact scenario or wish to provide feedback of any kind, please feel free to contact me at 312.332.1506,  [email protected]