Facebook Announcement Doesn’t Equal Improper Client Solicitation: Mass. Court

In Invidia v. DiFonzo, 30 Mass. L.Rptr 390 (2012), a hair salon sued a former stylist for breaching a non-compete and non-solicitation clause in her employment agreement.  The Court examined whether the new employer’s posting a job change on defendant’s Facebook page and “friending” former clients was improper solicitation.

The employment contract contained a non-compete spanning two years and 10 miles and a two-year non-solicitation clause.  After she resigned, the defendant went to work for a competing salon less than two miles away.  Her new employer then posted an announcement on its Facebook page, promoting defendant’s new affiliation with the competing salon. 

The plaintiff saw the Facebook activity and sued.  The Court denied the request for injunctive relief because plaintiff failed to show a likelihood of success on the merits or irreparable harm.

Rules/Reasoning:

A preliminary injunction plaintiff must show (1) likelihood of success on the merits; (2) irreparable harm if the injunction is denied; and (3) the risk of irreparable harm to the movant outweighs similar risk of harm to the opposing party.  *2. 

Massachusetts courts scrutinize non-competition agreements because they often result from unequal bargaining power.  A covenant not to compete is enforceable only if it’s necessary to protect a legitimate business interest, is reasonably limited in time and space, and supported by the public interest.  *4.

The Non-Compete Provision

The salon plaintiff failed to show that it was likely to succeed on the merits on the noncompete because it was questionable whether a two-year/10-mile restriction was necessary to protect plaintiff’s interest and because plaintiff failed to show that its “legitimate business interest” – the goodwill which plaintiff claimed it lost – belonged entirely to plaintiff.  *5.  

The Court noted that in the hairdressing business, goodwill often belongs to the individual stylist rather than the salon.  That is, customers likely patronize a salon for a specific hairdresser; not because they like the salon itself. 

The Court also found the plaintiff failed to show irreparable harm, since plaintiff could clearly quantify its damages.  The Court pointed out that plaintiff offered evidence of the number of clients that it lost since defendant left (90) and the average dollar amount spent ($87.16) by each lost client.  This militated against a finding of irreparable harm.  *5.

The Non-Solicitation Clause

Turning to the non-solicitation clause, the Court found that the Facebook announcement of defendant’s affiliation with the new salon (by that salon) did not equate to active solicitation.*5.  

Nor did the defendant’s sending  friend requests to eight clients of plaintiff amount to a breach of the non-solicitation provision. 

The employer did however have some circumstantial evidence in support of its solicitation argument.  It offered documents at the injunction hearing that demonstrated that some 90 salon clients had cancelled (without rescheduling) appointments in the two-plus months since defendant’s departure. *6.  Yet the Court wasn’t prepared to find this a breach of the anti-solicitation provision.  The Court stressed that no current or former clients testified that defendant contacted them and solicited their business.

Take-aways: A third party’s passive Facebook posting and direct Facebook friends requests are not enough to establish solicitation for preliminary injunction purposes.  Instead, there must be direct evidence of active solicitation to merit injunctive relief.

 

 

 

Fraud In the Inducement and Fraudulent Concealment – Illinois Primer

hoodwinkIn Thorne v. Riggs, 2013 IL App (3d) 120244-U (September 3, 2013), the trial court rescinded a real estate contract and the Third District affirmed.  In doing so, the Court examined Illinois fraud in the inducement and fraudulent concealment law and discussed the “special relationship” fiduciary duty rule.

Facts: Plaintiffs sued two LLC members alleging they fraudulently induced them into investing in a realty development.  Plaintiffs claimed the defendants misstated the deal’s status, timing, and whether an easement existed on the property. After trial, the trial court rescinded the contract and ordered defendants to return plaintiffs’ $1.2M investment.

Holding: Appellate Court affirmed trial court.

Reasoning/rules:  Plaintiffs’ fraud claims were premised on defendants’ misrepresentations and concealing material information about the project.

To show fraud in the inducement,  a plaintiff  must show (1) a defendant’s false statement of material fact, (2) known or believed to be false by the defendant; (3) intended to induce the plaintiff to act; (4) plaintiff acted in reliance on the truth of the representation; and (5) resulting damage.  ¶ 45.

Fraudulent concealment requires a showing that: (1) defendant concealed a material fact under circumstances creating a duty to speak; (2) defendant intended to induce a false belief; (3) plaintiff couldn’t have discovered truth through reasonable inquiry or inspection (or was prevented from doing so); (4) justifiable reliance by the plaintiff; (5) plaintiff would have acted differently if he was aware of the hidden information; and (6) damages. ¶ 62.

A fraudulent concealment plaintiff must also show a fiduciary relationship between him and the defendant.  Fiduciary relationships can exist (a) as a matter of law; or (b) where there is a special or confidential relationship.  The former (as a matter of law) category includes attorneys and clients, principals and agents and partners in a partnership and joint venturers in a joint venture.  Thorne, ¶ 63.

The “special relationship” fiduciary duty rule applies where one party puts trust and confidence in another who stands in a dominant position in terms of age, education, mental status or business acumen. (¶ 64).

Applying these elements, the Court held that the plaintiffs proved fraud in the inducement and fraudulent concealment at trial.

(1) Misrepresentation/concealment: defendants misrepresented status of the project and failed to alert plaintiffs that part of the property was subject to an easement and repurchase agreement (¶¶ 47-63);

(2) Knowledge of falsity – multiple witnesses testified that defendants knew of storm water issues affecting the parcels for several years but never told plaintiffs (¶¶ 52, 57);

(3) Justifiable reliance: defendants controlled the flow of information from the municipality concerning the project’s status.  Defendants divulged only selective information to plaintiffs concerning governmental requirements necessary to complete the project.  The defendants control of information made it reasonable for plaintiffs to rely on defendants.  (¶ 69, 82-83).

The court rejected defendants argument that the information was public record and therefore prevented a finding of justifiable reliance.  The court stressed that plaintiffs were neophyte investors who relied on defendants’ real estate experience.

Another factor relied on by the Court was the absence of record evidence that the easement or the storm water issues were recorded public documents.  (¶ 82).

(4) Fiduciary Duty: while plaintiffs were highly educated, they were real estate novices compared to defendants and completely relied on defendants’ expertise.  This led the Court to sustain the trial court’s “special relationship” fiduciary duty finding.  The Court also found that since defendants controlled the project information they received from the Municipality, they owed plaintiffs a precontractual fiduciary duty.  (¶ 69);

(5) Inducement – there was no other reason for defendants to represent that there were no impediments to plat approval other than to entice plaintiffs to sign the purchase agreement (¶¶ 73-75);

(6) Injury/Damages – plaintiff paid $1.2M for an investment that was promised not to exceed $550,000.  (¶¶ 85-86).

Take-aways: Both plaintiffs had multiple post-graduate degrees.  Still, the court found that they relied on and were in a vulnerable position compared to the defendants, experienced real estate developers.

Thorne also illustrates that where a defendant monopolizes the flow of a deal’s information from outside sources (i.e. a governmental agency), the plaintiff can establish the justifiable reliance prong of his fraud claim.

 

Illinois Court: LLC Member Can File Mechanics’ Lien Against Property Owned by That LLC

How meta is this fact pattern? Peabody-Waterside v. Islands of Waterside, LLC, 2013 IL App (5th) 120490, examines the distinction between LLC entity liability and an LLC member’s personal liability through the lens of a mechanics lien claim filed against an LLC by one of its own members.

Recall that Illinois law recognizes a clear line of demarcation between the LLC entity and its constituent members.

A judgment against a limited liability company (LLC) doesn’t equate to a judgment against an LLC member.  805 ILCS 180/10-10.  Similarly, a judgment against an LLC member isn’t binding on the LLC.  805 ILCS 180/30-20(a), (b).

A judgment creditor of an LLC member cannot look to LLC assets to satisfy the judgment.  Instead, the creditor must seek a “charging order” against the LLC’s distribution to the member – the member’s “distributional interest.”

In Peabody, the defendant LLC owned real estate that had a $7.5M mortgage on it.  That LLC was itself comprised of two separate LLCs, each holding a 50% interest in the defendant.  The plaintiff was one of the LLC members.

Plaintiff recorded a contractor’s lien against the LLC’s property for about $4.5M after the plaintiff did site preparation and grading work on the site under a written cost-plus construction contract with the LLC owner.  Plaintiff sued naming the owner LLC and the lender as defendants.

The prior lender moved for summary judgment on the plaintiff’s lien claim.  It (the lender) argued that since the plaintiff – as 50% member of the owner entity – was in effect a “joint owner” of the property, it couldn’t lien its own property.  The trial court agreed and entered judgment for the lender. The plaintiff appealed.

Result: Reversed.

Q: Why?

A: The general rule is that a contractor can’t lien its own property. ¶ 8.  For example, a joint venturer can’t lien property owned by the joint venture.  That’s because joint venturers are each viewed as co-owners of the joint venture’s property and the law doesn’t allow a co-owner to lien his own property.

Not so with an LLC.  Where property is titled in an LLC, the members do not have ownership interests in the property.  An LLC has an independent legal existence from its members and managers.  Any real or personal property that an LLC owns is owned by the LLC; not its members.

Membership in an LLC does not confer an ownership interest in the LLC’s real or personal property.  An LLC member is not a co-owner of LLC property and has no transferable interest in it.  805 ILCS 180/30-1.

Here, since the liened property was owned by the LLC, plaintiff – a member – wasn’t a joint owner of the property.  In addition, contrary to the lender’s argument, there was no evidence of fraud or collusion between the plaintiff, the other LLC’s other member and the LLC property owner.  ¶¶ 10-11.  As a result, plaintiff’s mechanics lien was valid.

Take-aways: Peabody-Waterside provides solid example of a court recognizing the separate, independent existence of an LLC from its members.

The Court also shows a willingness to look at “policy” reasons or equitable concerns in reaching its holding: it discussed how the plaintiff had a standard cost-plus contract with the owner, that it performed over $4.5M worth of services that enhanced the land and wasn’t paid.

Taken together, these factors weighed in favor of allowing the plaintiff’s lien.