Tag: Corporate Officer Liability

The Corporate Opportunity Doctrine: An Illinois Primer

I typically encounter a corporate opportunity issue (a claim that a defendant usurped a corporate opportunity) in situations where a former employee goes to work for a competitor and the ex-employer claims the employee is exploiting a business opportunity he learned of solely through his association with the employer.

The employer will usually sue for injunctive relief and money damages under a breach of fiduciary duty theory premised on the assertion that the employee violated the corporate opportunity doctrine. The employee typically defends by arguing that he didn’t compete with his former employer and that any business he now does is purely the product of his own initiative and was developed outside the confines of his prior position.

Illinois state and Federal cases through the decades have sharpened the doctrine’s contours to these fine points:

– A corporate officer has the duty to act with “utmost good faith and loyalty” in managing the company;

– A corporate officer breaches his fiduciary duties where (i) he tries to enhance his personal interests at the expense of the corporate interests, or (ii) he hinders his corporate employer’s ability to carry on its business;

– Where a corporate officer solicits business for his own benefit or uses his employer’s facilities or resources to further his personal interests without informing the company, he breaches his fiduciary duties to that company; the core principle of the doctrine is that a fiduciary will not be permitted to usurp an opportunity developed through the use of corporate assets;

 – A plaintiff alleging a defendant usurped a corporate opportunity must show that the company benefitting from the officer’s actions are in the same line of business as the plaintiff/employer; but the companies don’t have to be direct competitors;

 – A corporate opportunity exists when a proposed activity is reasonably incident to the corporation’s present or prospective business and is one in which the corporation has the capacity to engage;

– Where a corporate officer uses corporate assets to develop a business opportunity, he can’t then argue that his former employer lacked the ability to pursue that opportunity;

– Two key factors are: (1) whether the corporation had an actual or expected interest in the opportunity and (2) whether the acquisition of the questioned opportunity would impede the (ex-employer, e.g.) corporation’s ability to carry on its day-to-day business;

– Additional corporate opportunity factors include: (1) the manner in which the offer was communicated to the officer, (2) the good faith of the officer, (3) the use of corporate assets to acquire the opportunity, (4) the financial ability of the corporation to acquire the opportunity, (5) the degree of disclosure made to the corporation, (6) the action taken by the corporation in response to any disclosure, and (7) the need or interest of the corporation in the opportunity;

Case Examples Of Corporate Opportunity Breach

Corporate officers have been found in breach of their fiduciary duties when, while still employed by the company, they:

(i) failed to inform the company that employees are forming a rival company or engaging in other fiduciary breaches;

(ii) solicited the business of a customer before leaving the company;

(iii) used the company’s facilities or equipment to assist in developing their new business;

(iv) solicited fellow employees to join a rival business;

(v) used the company’s confidential business information for the new business; and

(vi) orchestrated a mass exodus of employees shortly after resigning from a company.

Afterwords: The above provides a good framework for handling a corporate opportunity breach. When representing a plaintiff in this type of case, I argue that the above factors weigh in favor of a finding of breach and will focus on any secret conduct of the defendant. The more clandestine, the better. 

Conversely, when defending a corporate opportunity suit, I stress that the opportunity was developed independently of my client’s former association with the plaintiff and that it (the opportunity) came to fruition by my client’s own efforts and not from the plaintiff’s resources.

Sources:

Drench, Inc. v. South Chapel Hill Gardens, Inc., 274 Ill.App.3d 534 (1st Dist. 1995);

Star Forge, Inc. v. Ward, 2014 IL App (2d) 130527-U;

Foodcomm Int’l v. Barry, 328 F.3d 300, 303 (7th Cir. 2003);

Lindenhurst Drugs, Inc. v. Becker, 154 Ill.App.3d 61, 68 (2d Dist. 1987)

Corporate Officer Liability Under The Illinois Wage Payment And Collection Act

The Illinois’ Wage Payment and Collection Act, 820 ILCS 115/1 et seq. (the “Act”) provides some strong recourse to an employee who isn’t paid by his employer.

Not only can a corporate employer be liable to the employee claimant, but so can individual corporate officers in some cases. See Act, ss. 2, 13.  In addition, Act Section 14 outlaws retaliation against an employee who makes a claims under the Act.

Section 5 of the Act requires an employer to pay a separated employee final compensation no later than the next regularly scheduled payday. 

The Act defines “employer” variously as (1) any individual or business entity that acts directly or indirectly in the interest of an employer in relation to an employee and (2) as an officer of a corporation or agents of an employer who knowingly permit the employer to violate the Act.   820 ILCS 115/2, 13.

Act Section 2 binds an employer not only for its own failure to pay employee wages but also for violations committed by its agents (i.e. supervisors).  

 Section 13 imposes personal liability on an officer or agent of an employer who knowingly permits an Act violation. 

Section 13 liability applies only to corporate “decision-makers” who occupy supervisory positions at a company and have a role in setting work policy and can dictate rate of pay and working conditions.

A corporate officer can defend a personal liability Act claim by asserting he relied on corporate financial documents in failing to pay or “shorting” an employee.

Section 14 is the Act’s anti-retaliation section.  It provides that an employee can recover damages where an employer “unlawfully retaliates” him. 820 ILCS 115/14(c). 

Unlawful retaliation means simply that an employer fired or discriminated against an employee who complained that he hasn’t been paid.

A claimant can show retaliation under the Act where he makes a demand for unpaid compensation and is fired in response. 

Afterwords: Collection and employment litigators should have a working knowledge of the various sections of the Act given its prevalence in the published case law.

 

 

Illinois Wage Payment Act Applies to Ohio Resident -IL 2d Dist.

Elsener v. Brown, 2013 IL App (2d) 120209 (Sept. 2013) examines when personal liability will attach to a corporate officer under Section 13 of the Illinois Wage Payment and Collection Act, 820 ILCS 115/1 et seq. (the “Wage Act”) where that corporate officer lives out-of-state.

Facts: After plaintiff sold the business journal he founded to an Ohio corporation, plaintiff signed a three-year employment contract the Ohio company’s Illinois subsidiary to stay on as the journal’s publisher.  The contract paid plaintiff an annual salary of $85,000 and provided that if he was terminated without cause, he was entitled to a severance payment equal to the amounts owed through the contract’s expiration.  Defendant signed the employment contract as president of the Illinois subsidiary that became plaintiff’s employer.

After plaintiff was fired just 14 months into the three-year term, he sued the Illinois entity and the company president under the Wage Act.  At trial, plaintiff was awarded over $200,000 against the corporate officer who then appealed.

Held: Affirmed

 Rules/Reasoning:

 The Court found that defendant, an Ohio resident, was subject to Illinois’ long-arm jurisdiction since he was a corporate officer of an Illinois business entity.  See 735 ILCS 5/2-209(12).  The court rejected defendant’s “fiduciary shield” doctrine, which immunizes an out-of-state defendant for taking actions in a state that are required by his employer.  The court found that the defendant purposely availed himself of Illinois courts by voluntarily agreeing to serve as corporate president of the Illinois publishing subsidiary.  ¶¶ 41-47.

Substantively, the Second District noted that Section 5 of the Wage Act requires an employer to pay final compensation to a separated employee no later than the next regularly scheduled payday.  820 ILCS 115/5,  ¶ 49-50.  Here, the plaintiff was fired in August 2009 and the next payday was in September 2009.  Under Section 5 of the Wage Act, plaintiff became entitled to the full amount of his salary through the contract expiration date (about 22 months worth of payments) on the next payday.  ¶ 70.

The Court also affirmed the defendant knowingly permitted a Wage Act violation and was personally liable under Wage Act Section 13.  Under Wage Act Section 13, personal liability attaches only if the corporate employer has the ability to pay.  So, if an employer goes out of business, the employee normally can’t sue the corporate officer under the Wage Act since there’s no willful violation by the corporate officer.  ¶¶ 66-67.

Here, though, the chronology was that plaintiff was fired in August, 2009 and the corporate employer didn’t file bankruptcy until several months later in March 2010.  At the next payday – September 2009 – the corporate employer had the ability to pay plaintiff’s contractual severance based on evidence submitted in the employer’s bankruptcy case.  Defendant’s intentional conduct was also established by the multiple emails from plaintiff to defendant requesting his severance payment and defendant’s refusal to pay.  ¶ 77.

Take-aways:  Elsener’s glaring unanswered question is whether a corporate officer can be liable where there is no underlying finding that the corporate employer violated the Wage Act.  Elsener, ¶ 54.  Here, plaintiff only went to trial against the individual officer and so there was no judgment entered against the corporate employer (due to its bankruptcy).  But since the defendant failed to raise this argument at trial, the Court held that the argument was waived.  The answer would seem to be “no” – an officer cannot be liable without a parallel liability finding against the corporate employer.

Other key holdings from the case include (1) a corporate employer’s agent can still be considered “in this state” under the Wage Act even if he lacks a physical presence in Illinois; (2) a corporate officer’s knowledge of a separated employee’s wage claim can be shown by plaintiff’s unanswered written requests for payment.