Grand Vehicle Works Holdings Corporation v. Frey

Full title: GRAND VEHICLE WORKS HOLDINGS CORPORATION, Plaintiff, v. THOMAS FREY and…

Court: United States District Court, N.D. Illinois, Eastern Division

Date published: Jul 8, 2005

No. 03 C 7948 (N.D. Ill. Jul. 8, 2005)

Opinion

No. 03 C 7948.

July 8, 2005

MEMORANDUM OPINION AND ORDER

AMY J. ST. EVE, District Judge

Plaintiff Grand Vehicle Works Holdings Corporation ("GVW") sued Defendants Thomas Frey ("Frey") and Richard Fish ("Fish"), (collectively "Defendants"), for breach of contract, tortious interference with a contractual relationship, breach of fiduciary duty, and unfair competition. Defendants move pursuant to Rule 12(c) for judgment on the pleadings on GVW's breach of contract, breach of fiduciary duty, and unfair competition claims because the non-solicitation provision at issue is unenforceable. For the reasons discussed below, the Court grants Defendants' motion.

BACKGROUND ¹

1 The Court provided a discussion of the factual background of this case in its Opinion on summary judgment. Grand Vehicle Works Holding Corp. v. Frey, No. 03 C 7948, 2005 WL 1139312 (N.D. Ill. May 11, 2005).

On May 11, 2005, the Court granted partial summary judgment for Defendants on the basis that the non-competition agreement in Defendants' Agreements² was unenforceable under Illinois law. The Court denied summary judgment on the breach of contract claim related to the non-solicitation provision of Defendants' Agreements because material questions of fact existed whether Defendants had recruited or solicited GVW employees in breach of that provision. The Court did not address the issue of the enforceability of the non-solicitation provision because Defendants did not properly raise that issue. Because genuine questions of fact existed whether Defendants breached the non-solicitation provision, the Court also denied summary judgment on GVW's breach of fiduciary duty, tortious interference,³ and unfair competition claims. On June 8, 2005, Defendants moved to modify the scheduling order to permit them leave to file their Motion for Judgment on the Pleadings pursuant to Rule 12(c). The Court granted Defendants' motion for leave and set a briefing schedule.⁴

2 Defendants' Agreements are attached as Exhibits A-C to GVW's Complaint and consist of the Confidentiality and Non-compete Agreements that GVW's subsidiary, Workhorse, presented to Frey and Fish in connection with a stock option grant and a Confidentiality and Non-compete Agreement entered into by Fish with Workhorse in Spring 2002. (R. 91-1; Ct.'s Memorandum Opinion and Order of May 11, 2005 at 5-6.)

3 Based on the Court's ruling that the non-competition clause in Defendants' Agreements was unenforceable, GVW has abandoned its tortious interference with a contractual relationship claim, although it has reserved the right to renew that claim if for any reason its breach of the non-competition provision claim is revived.

4 In granting Defendants' motion for leave and setting a briefing schedule, the Court specifically directed GVW's attention to the issue of "what additional evidence, if any, it has beyond that presented to the Court in response to Defendants' summary judgment motion, regarding the issue of whether Defendants used any of Plaintiff's confidential information." (R. 118-1; Ct.'s June 10, 2005 Minute Order.)

ANALYSIS

I. Legal Standard

On a motion for judgment on the pleadings pursuant to Federal Rule of Civil Procedure 12(c), a court ordinarily applies the same standard that applies to a Rule 12(b)(6) motion to dismiss. North Indiana Gun Outdoor Shows, Inc. v. City of South Bend, 163 F.3d 449, 452 (7^th Cir. 1998) (citing Frey v. Bank One, 91 F.3d 45, 46 (7^th Cir. 1996)). Therefore, a court must grant a Rule 12(c) motion only if "it appears beyond doubt that the plaintiff cannot prove any facts that would support his claim for relief." Thomason v. Nachtrieb, 888 F.2d 1202, 1204 (7^th Cir. 1989).

II. The Pleadings Before The Court

GVW attached Defendants' Agreements to its Complaint and therefore those agreements are part of the pleadings. See North Indiana Gun Outdoor Shows, 163 F.3d at 452-53 (holding that the pleadings include "written instruments attached [to the complaint] as exhibits, such as contracts"). (R. 1-1; Compl., Exs. A, B, and C.) The Court may also rely on its Summary Judgment Opinion in deciding Defendants' Rule 12(c) Motion. See U.S. v. Wood, 925 F.2d 1580, 1582 (7^th Cir. 1991) (holding that a district court "may also take judicial notice of matters of public record" without converting the motion into one for summary judgment); also see Henson v. CSC Credit Servs., 29 F.3d 280, 284 (7^th Cir. 1994).

III. Whether The Non-Solicitation Provisions Are Enforceable

A. Illinois Law On Restrictive Covenants

Illinois courts disfavor and closely scrutinize restrictive covenants because they are "repugnant to the public policy encouraging an open and competitive marketplace." Roberge v. Qualitek Int'l, Inc., No. 01-C-5509, 2002 WL 109360, at *4 (N.D. Ill. Jan. 28, 2002) (citing Bishop v. Lakeland Animal Hosp., 268 Ill.App.3d 114, 644 N.E.2d 33, 36 (Ill.App.Ct. 1994)). Under Illinois law, a covenant not to recruit is enforceable to the extent that it supports the employer's legitimate business interest in guarding its confidential information⁵ from potential competitors. YCA, LLC v. Berry, No. 03 C 3116, 2004 WL 1093385, *17 (N.D. Ill. May 7, 2004); also see Springfield Rare Coin Galleries, Inc. v. Mileham, 250 Ill.App.3d 922, 189 Ill.Dec. 511, 620 N.E.2d 479 (Ill.App.Ct. 1993) (requiring that a plaintiff prove that the defendant tried to use the plaintiff's confidential information for his own benefit in order for a court to find a restrictive covenant narrowly tailored to protecting the plaintiff's confidential information). Restrictive covenants should be narrowly tailored so as to protect the protectable interest of the employer. Outsource Int'l, Inc. v. Barton, 192 F.3d 662, 669 (7^th Cir. 1999); Lawrence and Allen, Inc. v. Cambridge Human Resource Group, Inc., 292 Ill.App.3d 131, 138, 685 N.E.2d 434, 441, 226 Ill.Dec. 331 (Ill.App.Ct. 1997). Even if an employer has a legitimate business interest in barring some recruiting activity, a restrictive covenant will be unenforceable on its face if it unreasonably bars more than that activity. See YCA, 2004 WL 1093385, *18; Pactiv Corp. v. Menasha Corp., 261 F.Supp.2d 1009, 1014-15 (N.D. Ill. 2003).

5 GVW does not assert any other protectable business interest related to its non-solicitation provision other than the protection of its confidential information.

B. Whether The Non-Solicitation Provision Is Narrowly Tailored To Protect GVW's Protectable Business Interest

In defending the enforceability of the non-solicitation provision, GVW merely argues that such a provision, "on the facts of this case, [is] fully enforceable," citing to YCA, LLC v. Berry, No. 03 C 3116, 2004 WL 1093385 (N.D. Ill. May 7, 2004). In YCA, the court held that "Illinois law declares a covenant not to recruit enforceable, to the extent that it supports the employer's legitimate business interest in guarding his confidential information from potential competitors." YCA, 2004 WL 1093385, *17. The YCA court then analyzed the non-recruitment provision and found that it was not narrowly tailored to protect only the employer's legitimate business interest because the provision was neither limited to only barring recruitment of associates who might possess any confidential information nor barring recruitment on behalf of a YCA competitor. Id. at *18.

Similar to the YCA non-recruitment provision, the non-solicitation provision here also lacks these two limitations. The non-solicitation provision of Defendants' Agreements provides:

During the Term of Non-Competition, Employee will not, and will not permit any of his affiliates to, directly or indirectly, recruit or otherwise solicit or induce any employee, customer, subscriber or supplier of the Company to terminate its employment or arrangement with the Company, otherwise change its relationship with the Company or establish any relationship with the Employee or any of his affiliates for any business purpose deemed competitive with the business of the Company.

(R. 1-1; Compl. Exs. A, B, and C.) First, the provision bars recruitment or solicitation of "any employee, customer, subscriber, or supplier of the Company" and is not limited to only such employees that may have confidential information. Second, the provision bars recruitment on behalf of any company, whether or not that company competes with GVW. Defendants contend that the language "for any business purpose deemed competitive with the business of the Company" in the non-solicitation provision limits only the prohibition against "establish[ing] any relationship with the Employee or any of his affiliates" rather than modifying each prohibition contained in the non-solicitation provision. In other words, Defendants contend that the non-solicitation provision purports to bar Defendants from recruiting for any purpose and is not limited to a "business purpose deemed competitive with the business of [Workhorse]." The Court agrees with Defendants and GVW tacitly consents to this construction because it does not address this issue. As Defendants note, this interpretation is grammatically correct because there is no comma separating the "for any business purpose deemed competitive" clause from the preceding phrases in the series. See Elliot Coal Mining Co., Inc. v. Director, Office of Workers' Compensation Progs., 17 F.3d 616, 630 (3^rd Cir. 1994) ("use of a comma to set off a modifying phrase from other clauses indicates that the qualifying language is to be applied to all of the previous phrases and not merely the immediately preceding phrase"). Properly construed, the provision bars recruiting on behalf of any company, regardless of the nature of that company's business, and is overbroad. The Court finds the reasoning of YCA persuasive to the extent it holds unenforceable a non-solicitation provision that is not limited to protecting the employer's confidential information from a competitor. Applying that reasoning here, the non-solicitation provision in Defendants' Agreements is unenforceable on its face.

IV. Whether The Court Should Reform The Non-Solicitation Provision To Render It Enforceable

GVW's primary argument is the Court should follow the lead of the YCA court and rewrite the non-solicitation provision to render it enforceable. In YCA, the court found that although the restrictive covenant was unreasonable on its face, it was reasonable as applied to the defendant's conduct. YCA, 2004 WL 1093385, *18. The court relied on a provision in the contract providing that "[i]n the event a court should determine not to enforce a covenant as written due to overbreadth, you specifically agree that said covenant shall be enforced to the extent reasonable, whether said revision be in time, territory, or scope of prohibited activities." Id. The court further found that such a revision was "easy to accomplish" and that the individuals recruited by the defendant "likely had access to [confidential information], which they could use to benefit [their new employer]." Id. at *19.

The Court declines to rewrite the non-solicitation provision in Defendants' Agreements. Unlike the contract in YCA that the court found "require[d]" it to attempt to reform the covenant, YCA, 2004 WL 1093385, *18, here Defendants' agreements merely grant the Court the "power to reduce the duration or scope of such provision and to enforce such provision as so reduced." (R. 1-1; Compl. Exs. A and B, ¶ 6, Ex. C, ¶ 7.) The modification provision at issue in YCA reflected an express agreement between the parties to the contract that the non-recruitment provision would be modified to preserve its enforceability. YCA, 2004 WL 1093385, *18. Therefore, the plain language of the agreement made clear that the parties intended a court to enforce the non-recruitment provision to the extent the provision could reasonably apply to the facts of the case. Here, the plain language of the modification provision in paragraph 6 of Defendants' Agreements, at most, indicates that the parties intended the Court to use its discretion in determining whether or not to modify the restrictive covenants. See Thomas v. Pearle Vision, Inc., 251 F.3d 1132, 1138 (7^th Cir. 2001) (recognizing that a party's intent is best determined from the plain language of the contract and recognizing the distinction between mandatory and permissive language in ascertaining the parties' intent). The language, however, provides no guidance as to when the parties intended a court to modify the scope. Without express guidance as to the parties' intention, the Court will not modify their agreement.

Also, unlike in YCA where the Court found that the employees recruited by the defendant could use the plaintiff's confidential information at their new employer, here, the Court has already found that Defendants never tried to use GVW's confidential information to their own benefit. (R. 91-1; Ct.'s Memorandum Opinion and Order of May 11, 2005 at 12-13.)⁶ Accordingly, there is no reasonable construction of the non-solicitation provision that still covers Defendants' conduct here.⁷ See Lawrence and Allen, 292 Ill.App.3d 131, 143-44 (finding restrictive covenant unenforceable as applied to defendant's conduct because "beyond bald conclusions, plaintiff failed to offer any evidence that [defendant] actually tried to use any confidential information for his own benefit"); See Springfield Rare Coin Galleries, Inc. v. Mileham, 250 Ill.App.3d 922, 189 Ill.Dec. 511, 620 N.E.2d 479 (Ill.App.Ct. 1993) (holding that in order for a restrictive covenant to be narrowly tailored to protecting a plaintiff's legitimate July 8, 2005business interest in confidential information the plaintiff must show that the defendant used the confidential information to his or her benefit).

6 Recognizing that GVW could potentially present evidence at trial beyond that which it presented at the summary judgment stage, the Court specifically requested GVW to address whether it had any such additional evidence regarding Defendants' use of GVW's confidential information. (R. 118-1; Ct.'s June 10, 2005 Minute Order.) GVW did not provide any such additional evidence in responding to Defendants' Rule 12(c) motion.

7 Further, unlike in YCA, the reformation of the non-solicitation provision here would not be "easy." The Court would have to restrict both the scope of employees that the provision barred Defendants from recruiting and the scope of companies that the provision barred Defendants from recruiting on behalf of.

Additionally, the Court agrees with courts applying Illinois law that have declined to modify restrictive covenants. See Pactiv Corp. v. Menasha Corp., 261 F.Supp.2d 1009, 1016-17 (N.D. Ill. 2003); Roberge, 2002 WL 109360, at *7; Nobel Biocare USA, Inc. v. Lynch, 1999 WL 958501, at *2 (N.D. Ill. Sept. 15, 1999); Trailer Leasing Co. v. Associates Commercial Corp., 1996 WL 392135, at *4 (N.D. Ill. July 10, 1996).⁸ The reasoning of Judge Holderman in Pactiv Corp., 261 F.Supp.2d at 1016-17, is particularly persuasive. The court in Pactiv noted that "modification could have the potential effect of discouraging the narrow and precise draftsmanship, which should be reflected in written agreements." Id. (citing Eichmann v. National Hospital and Health Care Servs. Inc., 308 Ill.App.3d 337, 347-48, 241 Ill.Dec. 738, 719 N.E.2d 1141 (Ill.App.Ct. 1999)). Judge Holderman also relied on the fact that if the court found the entire provision at issue to be unenforceble the agreement would still contain other enforceable provisions. Pactiv, 261 F.Supp.2d at 1016. As in Pactiv, here the Defendants' Agreements contain a provision expressly related to confidential information, (R. 1-1; Compl, Exs. A, B, and C at ¶ 4), that will remain part of the agreements even if the non-solicitation provision in paragraph 3 is unenforceable in its entirety.⁹ Accordingly, the Court declines to modify the non-solicitation provisions in Defendants Agreements.¹⁰

8 In arguing that the Court should modify the non-solicitation provision here, GVW only cites to one case, YCA, which as discussed above the Court finds distinguishable on the issue of modifying the provision.

9 As with the contract in Pactiv, Defendants' Agreements have a severability clause. (R. 1-1; Compl., Exs. A and B, ¶ 6, Ex. C, ¶ 7.)

10 Defendants also filed a motion in limine seeking to bar evidence of any breach of the non-solicitation provision because that provision was unenforceable under Illinois law. The Court notes that for the reasons discussed in this Opinion, the Court would have granted Defendants' motion in limine.

V. GVW's Breach Of Fiduciary Duty And Unfair Competition Claims

Defendants contend that if the Court finds that the non-solicitation provision in Defendants' Agreements is unenforceable, then the Court should also enter judgment against GVW on its breach of fiduciary duty and unfair competition claims, citing Composite Marine Propellers, Inc. v. Van Der Woude, 962 F.2d 1263, 1265 (7^th Cir. 1992) ("claims based on unfair competition and breach of fiduciary duty stand or fall with those based on breach of contract"). GVW does not address this argument in its response and therefore waives any argument that the Court should not enter judgment on its unfair competition and breach of fiduciary duty claims. Blise v. Antaramian, 409 F.3d 861, 866, n. 3 (7^th Cir. 2005). Even absent this waiver, judgment on the pleadings against GVW on its breach of fiduciary duty and unfair competition claim is appropriate. As the Seventh Circuit held in Composite Marine Propellers, when there is no basis for a fiduciary duty other than the contract, the breach of fiduciary duty claim fails when the breach of contract claim fails. Regarding unfair competition, the court held that "Illinois allows competition between a departing employee and his former employer in the absence of a contractual promise to refrain from such competition." Composite Marine Propellers, 962 F.2d at 1265. Therefore, because the Court finds the non-solicitation provision in Defendants' Agreements unenforceable, GVW's claim for unfair competition fails. Accordingly, the Court enters judgment for Defendants on GVW's unfair competition and breach of fiduciary duty claims.

CONCLUSION

The Court grants Defendants' motion pursuant to Rule 12(c) and enters judgment against GVW on all of its remaining claims because the non-solicitation provision in Paragraph 3 of Defendants' Agreements is unenforceable under Illinois law.