Opinion
Case No. 02-cv-0148-MJR.
April 2, 2002.
MEMORANDUM AND ORDER OF PRELIMINARY INJUNCTION
I. INTRODUCTION
Before the Court is a motion for preliminary injunction (Doc. 26) filed March 12, 2002 by Plaintiff, Quality Carriers, Inc. ("Quality") which seeks injunctive relief against Defendants MJK Distribution, Inc. ("MJK"), Martin J. Klipsch ("Martin Klipsch"), K Distribution, Inc. ("K"), Merrie Lynn Klipsch ("Lynn Klispch"), William Klipsch ("Bud Klipsch"), Thomas Klipsch ("Thomas Klipsch"), and Liquid Transport Corporation. ("LTC").
The parties' dispute is centered around the transportation of bulk commodities, both liquid and dry, and the competition for certain customers in the metropolitan St. Louis area who require tank transportation for their goods. Quality seeks to enforce against MJK and Martin Klipsch a covenant not to compete contained in an agreement between its predecessor in interest, Montgomery Tank Lines, and MJK and Martin Klipsch — the "MTL Agreement" — which precludes MJK and Martin Klipsch from owning, managing, joining, controlling, or participating in the ownership, management, or operation, or being connected in any manner with the operation of any liquid or dry bulk transportation company that solicits, serves, or attempts to serve the customers previously served by MJK on behalf of Quality for a year after the contract term expires.
Quality also seeks the same relief against K and its principals, officers, agents and employees (including Lynn Klispch, Bud Klipsch and Thomas Klipsch), claiming that K is either a continuation or alter ego of MJK and, therefore, also bound by the MTL Agreement. The sole director of K is Lynn Klipsch, the wife of Martin Klipsch. Also active in the business are Martin Klipsch's brothers, Bud and Thomas.
Quality also seeks the same relief with regard to LTC, which is a competitor of Quality in some markets. In support of its request for this relief, Quality claims that LTC acted in concert with K and its officers and employees by actively participating in the breach of the covenant not to compete and by tortiously interfering with the MTL Agreement and the legitimate business expectancy of Quality.
In support of its motion for preliminary injunction, Quality asserts it has no adequate remedy at law and will suffer irreparable harm in the form of damages to its customer goodwill and its relations with its affiliates who serve as agents for Quality in the transportation of goods under independent contractor-type agreements.
On March 20 and 21, 2002, the Court heard testimony and arguments presented by counsel from all parties and, after ample consideration, makes the following Findings of Fact and Conclusions of Law and enters the following Order.
II. FINDINGS OF FACT
A. Parties
1. Quality Carriers, Inc.
Quality, formerly known as Montgomery Tank Lines, is an Illinois corporation with its principal place of business in Tampa, Florida. It is the largest tank truck company in North America and specializes in transporting liquid and dry bulk commodities. Quality has approximately 500 company employees and an additional 3,000 drivers. Sixty to seventy percent of the drivers are owner-operators who operate in a network of 152 terminals and a fleet of approximately 3,000 tractors and 7,000 trailers. Quality uses both company operations and affiliate operations to conduct its business. Affiliates provide the pick-up and delivery service for Quality customers and revenues are split. The Quality affiliates perform their services under Quality's operating authority and licenses. Over 60% of Quality's annual revenue, or approximately $50 million, is derived from Quality's affiliate operations.
2. MJK Distribution, Inc. and Martin J. Klipsch
Martin Klipsch is the sole shareholder of MJK. MJK is a Missouri corporation located at 119 East Loughborough Avenue, St. Louis, Missouri. The Loughborough realty is, and has been, owned by members of the Klipsch family since the 1950's. From 1988 until February 28, 2002, MJK was an affiliate of Quality, served as Quality's exclusive agent, and provided freight services for Quality customers pursuant to the MTL Agreement. The Quality customers that MJK serviced were customers that Martin Klipsch and MJK fostered within the 30 years prior to formation of MJK's contract with Quality. Until February 28, 2002, MJK employed 51 employees, including Bud, Lynn, Scott and Leah Klipsch — Martin Klipsch's brother, wife, son, and daughter, respectively.
On February 28, 2002, MJK unilaterally terminated the MTL Agreement between MJK and Quality. MJK has since continued operating, but now employs only four employees, and engages solely in the tank wash and truck maintenance business.
3. William "Bud" Klipsch and Thomas Klipsch
William ("Bud") Klipsch, Thomas Klipsch, and Martin Klipsch are brothers. Although there is conflicting evidence regarding whether Bud Klipsch was an MJK employee or an independent contractor, it is uncontroverted that Bud called on Quality customers for MJK before MJK terminated the contract. The weight of the testimony supports a finding that Bud was an independent contractor, especially since he received 1099s from MJK for his services. Regardless, unequivocal testimony establishes that Bud Klipsch had the authority to contract with and quote rates to Quality customers.
Thomas Klipsch has never been employed by MJK, but has 40 years of experience in the trucking industry. He has never had any contractual relationship, or covenant not to compete, with Quality. As of March 4, 2002, he serves as K's Vice President and is responsible for its financial operations. He currently serves without a salary.
4. Lynn Klipsch
Lynn Klipsch is Martin Klipsch's wife and has worked as MJK's office manager at the Loughborough Terminal until MJK withdrew from the trucking industry on February 28, 2002. She never had any ownership interest in MJK. Her work as office manager included paperwork, answering the phone, and keeping track of drivers' licensing requirements. Since February 28, 2002, Lynn Klipsch has been the director and President of K Distribution, as well as the sole shareholder. She is also employed by K as its office manager and conducts the same tasks she conducted for MJK. Mrs. Klipsch testified that her experience in the trucking business is limited to being Martin Klipsch's wife and her work in the MJK office. She also testified that she lacks the expertise to run a business like K.
Lynn Klipsch has never had any contractual relationship, or covenant not to compete, with Quality.
5. K Distribution, Inc.
K was incorporated on December 18, 2001. K and MJK share the same attorney — Nelson Mitten, the same accountants, and the same bank. MJK and K are both located at the same offices at the Loughborough Terminal and share the same phone and e-mail address. As stated above, Lynn Klipsch is K's President and Thomas Klipsch is K's Vice President. K also employs Martin and Lynn Klipsch's children, Scott and Leah Klipsch, and is now servicing the same Quality business accounts and customers that are covered under the MTL non-compete clause.
Whether K was an alter ego, shell corporation, or a straw-man, its sole function was to distance MJK and Martin Klipsch from Quality and act as a business conduit for LTC. K's genesis was a conspiracy among the Defendants that ultimately culminated in Defendants' tortious interference with the MTL contract between MJK and Quality.
6. Liquid Tank Corporation
LTC is a privately-owned business headquartered in Indianapolis, Indiana. LTC provides bulk tank transportation for chemical and related products throughout the United States for all of the major chemical producers. LTC employs over 800 associates and approximately 475 owner-operator truck drivers. Under an affiliate agreement with K, LTC is now servicing the majority of the companies listed in the MTL agreement between Quality and MJK. In order to perform its affiliate duties, K uses most of MJK's former drivers and all of MJK's tractors and trailers — some of which were given to K by MJK and some of which have had their mortgages assumed by K.
B. The "MTL Agreement"
The contractual relationship between Quality and MJK began in 1988 when Martin Klipsch, as principal of MJK, entered into an agreement with Montgomery Tank Lines, which later became known as Quality Carriers. The agreement between Quality and MJK or the "MTL Agreement" states that the Agreement shall be construed as a Florida contract, under the laws of the State of Florida. In addition, it contains the following non-compete provision:
25. Non-Compete. The terms and provisions of this section shall not be applicable if this agreement is terminated by Montgomery without cause. Except as stated in the preceding sentence, upon the termination of this Agreement for any other reason, and for a period of one (1) year thereafter, neither Contractor not its principal operating officer will engage in, own, manage, join, control or participate in the ownership, management, operation or be connection in any manner with the operation of any liquid or dry bulk transportation company, or any other company that solicits, serves, or attempts to serve those customers set forth on Appendix B of this Agreement. Contractor and its principal operating officer agree that compliance with this paragraph is necessary to protect the goodwill and other proprietary interests of Montgomery and that a violation or breach of any covenant in this Section 25 will cause irreparable damage to Montgomery, the exact amount of which may not be subject to reasonable or accurate ascertainment, and therefore, Contractor does hereby consent that in the event of such violation or breach, Montgomery shall as a matter of right be entitled to injunctive relief to restrain Contractor, or any one acting for or on behalf of the Contractor or its principal operating officer, from violating any covenants contained in this Action. Such remedies, however, shall be cumulative and in addition to any other remedies to which Montgomery may be entitled. In the event Montgomery brings suit to enforce any provision hereof, Montgomery shall be entitled to receive, in addition to any relief or remedy granted, the cost of bringing such suit, including, but not limited to, reasonable attorney's fees and expenses. The covenants set forth in this Section 25 shall survive the termination or expiration of this Agreement. This does not apply to tankwash and shop facility services.
(Emphasis added).
The MTL Agreement also provides that MJK is to conduct transportation operations for various Quality customers and during the term of the Agreement, Quality will not enter into operating agreements which would create a service competitive with those of MJK. MJK also had the right to use Quality's transportation management system and to serve the customers set out in Appendix B to the contract exclusively from specific locations also set forth in Appendix B. In carrying out its duties, the contract also required MJK to provide Quality with copies of all documents, including correspondence, sent out under Quality's name, comply with all of Quality's procedures and policies, including its safety procedures, and conduct its operations in such a manner that Quality's good name and reputation are maintained.
The MTL contract requires a 30-day written notice of termination if either party breaches. No such notice was given to Quality. That leads the Court to question whether Defendants attempted, in vain, to show Quality was "insolvent" which requires no advance, written notice of termination. However, the evidence in the case did not demonstrate that Quality was insolvent so Defendants reliance on that clause was misplaced.
C. Events Leading Up to MJK's Unilateral Termination of the MTL Agreement on February 28, 2002
In the summer of 2001, LTC saw St. Louis as a good potential market for LTC to develop its business. Although LTC had an existing relationship with the Fortune family, an affiliate for the St. Louis market, LTC did not approach the Fortune family about expanding LTC's business in St. Louis. LTC approached Martin Klipsch of MJK at the suggestion of LTC employee Dan Duffner, a former Quality employee, to investigate the possibility of MJK joining LTC. Another LTC employee, Todd Tharp, first contacted Martin Klipsch a few days before August 14, 2001. This contact was followed up by a letter dated August 14, 2001. The August 14th letter identified MJK as a potential partner of LTC and further indicated that with Martin Klipsch's expertise, the two could create a "powerful team." No mention was made of Bud Klipsch in the August 14, 2001 letter. By the end of September, 2001, LTC learned of the existence of the non-compete covenant in the agreement between Quality Carriers and MJK. By mid-November, 2001, LTC concluded that it could not do business with MJK or Martin Klipsch without there being a violation of this non-compete agreement.
K was incorporated on December 18, 2001 with Lynn Klipsch as the sole shareholder and only corporate officer. As previously stated, K and MJK share the same attorney, the same accountants, the same bank, the same telephone number, the same e-mail address, and both companies are located at and run out of the Loughborough Terminal. At some time before or after K was incorporated, LTC planned to bring K on as an LTC affiliate and serve the Quality customers that had been served by MJK. Even though LTC had concluded that it could not engage in business with Martin Klipsch or MJK, it nonetheless continued to call Martin Klipsch from mid-November, 2001 until February 28, 2002 to get information about Quality's customers. Before communicating with Martin Klipsch, LTC ensured that its e-mail communications were secured from Quality.
LTC's contact with Martin Klipsch included discussions regarding: equipment that would be needed by LTC to service customers that MJK was serving for Quality Carriers; services that would be provided to these customers; the placing of LTC computers at K; LTC orientation of MJK's former drivers; obtaining information pertaining to customers that MJK was servicing on behalf of Quality Carriers and uploading this information to LTC computers; training for K employees at LTC; qualification files for former MJK drivers who would now work for K; and obtaining Missouri hazardous waste permits and equipment leases. No contact was made with Bud, Tom, or Lynn Klipsch regarding these matters before February 28, 2002. In fact, Pete Legere, LTC's Vice-President of Training and Development, understood that Martin Klipsch was the "transition guy" for LTC's business venture in St. Louis. He testified that Martin Klipsch was the individual that "had his fingers on most of the information and data."
On December 31, 2001, K and LTC executed an Agency Agreement by which K agreed to become an affiliate of LTC and to provide dispatch and terminal services from the Loughborough Terminal in St. Louis. The Agency Agreement contained a non-compete clause. LTC included the non-complete clause because it views maintaining goodwill with customers after termination of an agency relationship as "very important." Even though K was an LTC affiliate as of December 31, 2001, K did not provide any services pursuant to the Agency Agreement until March 1, 2002, after MJK had unilaterally terminated its agreement with Quality. Thereafter, K began to serve Quality's customers which had previously been serviced by MJK, on behalf of LTC.
Sometime within this time frame, Bud and Martin Klipsch represented to Quality's customers that Quality was in financial trouble and was not providing adequate equipment to service the customers' needs.
On February 26, 2002, K, through Lynn Klipsch, and MJK, through Martin Klipsch, signed a Purchase Agreement by which K agreed to perform all of MJK's "unperformed and unfulfilled obligations, liabilities, and duties" with the sole exception of MJK's contractual duties to Quality. In addition, they signed a Bill of Sale and Assignment and an Assignment and Assumption Agreement. Finally, Martin and Lynn Klipsch signed a Commercial Lease whereby MJK leased the premises used by MJK to service Quality's customers to K for $73,500, payable in monthly installments of $6,125. To date, no lease payments have been made.
Under the terms of the Purchase Agreement, K assumed all of MJK's rights, title, and interest under any and all leasing, financing, loan, and security agreements between MJK and a third party with respect to or relating to any of the vehicles set forth in Exhibit A to the Purchase Agreement. K paid no money in exchange for these vehicles but instead assumed liability on the notes relating to those vehicles on which MJK still owed and acquired the unencumbered trucks free and clear with no consideration. Regardless, neither MJK nor Martin Klipsch sought acquiescence from, nor advised any of the lienholders of the transfer, and Martin Klipsch remains personally liable on these notes.
On or about February 27 or 28, 2002, Martin Klipsch attended a driver orientation meeting in conjunction with K at which he encouraged MJK's drivers to become drivers for K. He assisted in planning and preparation for the meeting. The drivers were told, in essence, that they should sign on with K and work with LTC or lose their jobs with MJK because of its financial straits. Obviously, most chose K.
K began operations on March 1, 2002 and is now providing service for LTC to the Quality customers MJK serviced before February 28, 2002. Bud Klipsch notified Quality's customers that were served through MJK that a new entity would be serving them, but assured them that the same drivers and the same trucks would continue to be used. As promised, K operates with most of the same trucks, trailers, drivers, and owner-operators that MJK used to serve Quality customers. K provides these services from the same terminal used by MJK and has the same telephone number and e-mail address which had been used by MJK to serve Quality customers prior to February 28, 2002.
On March 1, 2002, an administrative assistant to the Chairman, the President, and the Chief Financial Officer of LTC, sent an e-mail to all LTC personnel which advised them that "Marty and Bud Klipsch" had joined "the LTC team" as K Distribution. LTC received notice of Quality Carriers' lawsuit against MJK and Martin Klipsch on March 4, 2002. On March 6, 2002, the same LTC administrative assistant sent another e-mail to the LTC network retracting her previous statement that Martin Klipsch was employed or affiliated with K Distribution.
On March 4, 2002, after the filing of this lawsuit, Lynn Klipsch designated Bud Klipsch as President and Tom Klipsch as Vice President of K and relinquished the supervision of K's financial to them. To date, however, K has had no meetings of its board of directors and no formal corporate resolution was entered to support the election of Bud and Tom Klipsch as corporate officers. Even so, Bud Klipsch testified that initiating K was his idea and he worked from August 2001 until the present to get it up and running. However, Bud has no ownership interest in K. Additionally, he did not receive his first paycheck until sometime after his deposition on March 14, 2002. Moreover, the paycheck was for $1,500 — the same amount he was earning working for (or as an independent contractor of) MJK. Tom Klipsch also has no ownership interest in K, receives no salary, did not participate in hiring any drivers, does not know the salaries paid to drivers, and does not know whether K has made its lease payments to Martin and Lynn Klipsch or payments on trailers leased from Martin Klipsch.
Bud and Tom Klipsch do, however, have a financial interest in the property at 119 East Loughborough. They own a corporation which holds a $350,000 note on the property. As rent, Martin Klipsch is obligated to make payments on the note of approximately $12,000 a month. Tom Klipsch has agreed to defer those payments until August, 2002.
D. Procedural History
On March 1, 2002, a temporary restraining order ("TRO") was entered against MJK and Martin Klipsch which instructed them "not to engage in, manage, join, control, or participate in the ownership, management, operation, or be connected in any manner with the operations of any company that solicits, serves, or attempts to serve certain customers set forth in Exhibit B to the Agreement signed by MJK on October 30, 1997, for a period of ten (10) days." This Order was entered by U.S. District Judge David Herndon, who was filling in for the undersigned, with notice to and counsel for MJK present.
On March 4, 2002, Quality faxed a copy of the TRO to LTC's president, Lanny Wilhelm, demanding that LTC cease doing business with the customers listed in Exhibit B. However, Quality failed to attach Exhibit B in its fax. On March 6, 2002, Quality filed a motion to show cause, seeking to hold MJK, Martin Klipsch, and LTC in contempt of court for violating the TRO. On March 7 and 8, 2002, a hearing was held and the Court denied Quality's motion to show cause, finding no violation of the TRO. The Court also denied Quality's oral motion to expand the TRO to include LTC and to preclude LTC from doing business with the customers listed in Exhibit B.
On March 12, 2002, Quality filed an amended petition and motion for preliminary injunction, which added Martin Klipsch, K Distribution, Lynn Klipsch, Bud Klipsch, Thomas Klipsch, and LTC as defendants. Within the amended petition, Quality alleges breach of contract against MJK and Martin Klispch, tortious interference of business relations and defamation against Martin Klipsch, and tortious interference with contractual relations against Lynn Klipsch, William Klipsch, Thomas Klipsch, K, and LTC.
On March 20 and 21, 2002, a hearing was held on Quality's motion for a preliminary injunction. All parties appeared in person or by representatives and were represented by counsel. Testimony was taken from Lanny Wilhelm, Lynn Klipsch, Tom Klipsch, Bud Klipsch, Todd Tharp, Martin Klipsch, Bo Leslie, Jerry Thomasson, and Dallas Nichols. The depositions of Lynn Klipsch, Bud Klipsch, Tom Klipsch, Leah Klipsch, Scott Klipsch, Lanny Wilhelm, Todd Tharp, and Peter Legere, as well as Quality's 30(b)(6) deposition and all deposition exhibits were admitted into evidence by stipulation of the parties.
The testimony given by Bo Leslie, Martin Klipsch, and Lanny Wilhelm at the March 7 and 8, 2002 hearing on Quality's motion to show cause was also admitted into evidence by stipulation of the parties. The March 7, 2002 testimony given by Robert Davis, Shannon Greene, and Raymond Griffiths at the show cause hearing was excluded from evidence because counsel for K Distribution, Lynn Klipsch, Bud Klipsch, and Tom Klipsch had no opportunity to cross-examine, as they were not parties at that time.
The affidavit of Steve Sahagian introduced at the show cause hearing was admitted in part (paragraphs 1 through 7, and paragraphs 9 through 11) as to the claims against MJK and Martin Klipsch only and for limited purposes only because, at that time, MJK was the only named Defendant and MJK and Martin Klipsch were the only parties represented by counsel. Because the remaining Defendants were not parties at the time Mr. Sahagian's affidavit was introduced at the show cause hearing, it was not admitted into evidence with regard to Quality's claims against them.
At the conclusion of the preliminary injunction hearing, the Court, sua sponte, extended the TRO against MJK and Martin Klipsch until March 29, 2002, at 5:00 p.m. By subsequent Order, the TRO was extended further until April 5, 2002 at 5:00 p.m.
III. CONCLUSIONS OF LAW
A. Jurisdiction and Venue
A hearing related to jurisdiction and venue was held March 6, 2002.
This Court enjoys diversity jurisdiction over this action pursuant to 28 U.S.C. § 1332 because Plaintiff and Defendants are of diverse citizenship and the amount in controversy exceeds $75,000, exclusive of interest and costs. This Court has personal jurisdiction over the parties and venue is proper in this Court, as found by previous Order, pursuant to 28 U.S.C. § 1391.
B. Standard for Issuance of Preliminary Injunction
A party seeking a preliminary injunction must demonstrate, as a threshold matter: (1) that its case has some likelihood of succeeding on the merits; (2) that no adequate remedy at law exists; and (3) that it will suffer irreparable harm if preliminary relief is denied. Abbott Laboratories v. Mead Johnson Co., 971 F.2d 6, 11 (7th Cir. 1992). If the moving party clears those thresholds, the court must then weigh these factors along with (a) any irreparable harm the non-moving party will suffer if preliminary relief is granted, balancing the harm against the irreparable harm to the moving party if relief is denied; and (b) the public interest, meaning the consequences of granting or denying the injunction to non-parties. Id.
"Sitting as would a chancellor in equity," the court must weigh all of these factors using a sliding scale approach. Id. at 12. That is, the more likely the plaintiff will succeed on the merits, the less the balance of irreparable harms need favor the plaintiff's position. Id. However, the "sliding scale" approach is not mathematical in nature, rather "it is more properly characterized as subjective and intuitive, one which permits district courts to weigh the competing considerations and mold appropriate relief." Id.
In order for this Court to determine if Quality has a likelihood of success on the merits of the case, the Court must ascertain under which state's law the claim should be analyzed.
C. Choice of Law
In diversity cases, the Court applies the choice of law doctrines of the state in which the Court sits. Kohler v. Leslie Hindman, Inc., 80 F.3d 1181, 1184 (7th Cir. 1996). Illinois follows the Restatement (Second) of Conflict of Laws in making such decisions. Midwest Grain Products of Illinois, Inc. v. Productization, Inc., 228 F.3d 784, 787 (7th Cir. 2000). For cases like this one, the Restatement refers courts either to a choice of law provision in the contract at issue or to the place of performance. Id. Illinois law respects a contract's choice of law clause as long as the contract is valid. Kohler, 80 F.3d at 1184.
In this case, there has been no serious argument that the MTL Agreement between Quality and MJK was invalid. The MTL Agreement states that the Agreement shall be construed as a Florida contract, under the laws of the State of Florida. Accordingly, the law of the State of Florida will govern the issues of breach of contract and the enforceability and application of the covenant not to compete.
In order to determine which state's law applies to Quality's claims for tortious interference and defamation, the Court should apply the "most significant relationship" test and balance the factors to determine which state's law applies to substantive matters. Esser v. McIntyre, 661 N.E.2d 1138, 1141 (Ill. 1996). "In absence of unusual circumstances, the highest scorer on the `most significant relationship' test is . . . the place where the tort occurred." Spinozzi v. ITT Sheraton Corp., 174 F.3d 842, 844 (7th Cir. 1999). However, it is well settled that the place of the injury controls. Ferguson v. Kasbohm, 475 N.E.2d 984, 986 (Ill.App. 1985). Under the "most significant relationship" test, the Court should consider: (1) the place of injury; (2) the place where the injury-causing conduct occurred; (3) the domicile of the parties; and (4) the place where the relationship of the parties is centered. Id.
Applying this test, the facts show that the alleged tortious interference occurred in Missouri where the Klipsch Defendants helped facilitate LTC's stealing of Quality's customers. Accordingly, the Court will apply Missouri law with regard to the tortious interference claim. However, the facts relevant to the alleged defamation show that the alleged defamation occurred in Illinois at the offices of the former Quality customers. Accordingly, the Court will apply Illinois law with regard to the defamation claim.
D. Likelihood of Success on the Merits
Under Florida law, restrictive covenants are enforceable so long as the employer proves a legitimate business interest justifying the restrictions. Austin v. Mid State Fire Equipment of Central Florida, Inc., 727 So.2d 1097, 1098 (Fl.App. 1999). A "legitimate business interest" includes "substantial relationships with specific prospective or existing customers, patients, or clients," and "customer . . . goodwill associated with: (a) an ongoing business or professional practice, by way of trade name, trade mark, service mark or `trade dress'; (b) a specific geographic location; or (c) a specific marketing or trade area." Fl. Stat. Ann. § 542.335(1)(b)(3). While in the absence of an agreement, there is normally nothing improper with an agent or employee terminating the employment relationship and proceeding to compete with his former principal or employer, there nevertheless exists during the ongoing relationship a common law duty not to engage in disloyal acts in anticipation of future competition. Insurance Field Services, Inc. v. White White Inspection and Audit Service, Inc., 384 So.2d 303, 308 (Fl.Ct.App. 1980).
Furthermore, a party who has signed a non-compete agreement cannot be allowed to do indirectly, through his wife and her controlled corporation, that which he covenanted not to do himself. Dad's Properties, Inc. v. Lucas, 545 So.2d 926 (Fl.Ct.App. 1989) (granting preliminary injunction to enjoin wife of signatory to non-compete agreement from operating a competing business).
The evidence before the Court shows that Quality has enjoyed long relationships and substantial goodwill with its customers in the Southern Illinois area — with some of the relationships dating back 13 years or more. Based upon this evidence, Quality had a legitimate business interest in keeping the customers it had within the Southern Illinois area and in maintaining goodwill with those customers as well as preserving any goodwill which would have led to the acquisition of other customers in the area. Accordingly, the covenant not to compete contained in the MTL Agreement is enforceable against Martin Klipsch and MJK.
Based upon the evidence before the Court regarding Martin Klipsch and MJK's behavior leading up to the unilateral termination of the Agreement, it is likely that Quality will prevail on its claim that Martin Klipsch and MJK breached the contract. There is also a likelihood that Quality will succeed on its theory that the covenant is enforceable against K Distribution, since under Florida law, Martin Klipsch cannot do indirectly, through his wife and her controlled corporation, that which he covenanted not to do himself.
There is also a great likelihood that Quality will succeed on its claims for tortious interference against all Defendants. Under Missouri law, a plaintiff must show each of the following in order to establish tortious interference with a contract or business expectancy: (1) the existence of a contract or valid business expectancy; (2) the defendant's knowledge of the contract or expectancy; (3) a breach induced or caused by defendant's intentional interference; (4) absence of justification for the interference; and (5) damages. Hensen v. Truman Medical Center, Inc., 62 S.W.3d 549, 552-53 (Mo.App. 2001).
In this case, Quality had a contract with MJK and Martin Klipsch which included a non-compete clause. The evidence shows that all of the Defendants were not only aware of the contract, but also of the non-compete clause and its consequences. The evidence also shows that LTC specifically used Martin Klipsch and MJK to set up K Distribution through the other Klipsch Defendants in order to transfer all of Quality's customers and MJK's holdings to K so that LTC could obtain Quality's St. Louis and Southern Illinois business. The record is replete with testimony and documentary proof of Defendants' conspiracy to tortiously interfere with the MTL contract.
For example, on December 6, 2001, three full months before MJK terminated its agreement with Quality, LTC Vice President Tharp sent an interoffice e-mail which read: "Gents, here is the boilerplate that I sent to Bud and Marty." Even more damning was the subject line which read: "MJK Agency Agreement." This was sent after LTC knew of the MTL/Quality covenant not to compete. The last paragraph of that e-mail speaks volumes:
"WORD OF CAUTION!!!!!!! WHEN CONTACTING MARTY, MAKE SURE YOU ARE TALKING TO MARTY PRIOR TO IDENTIFYING YOURSELF AS BEING WITH LIQUID TRANSPORT. IF OTHER INDIVIDUALS IN HIS ORGANIZATION NEED TO BE CONTACTED, ONLY MARTY CAN INITIATE THIS. WE MUST KEEP THIS AS LOW PROFILE AS POSSIBLE.
John Miskimen Vice President, Operations Liquid Transport Corp."
Of course, the operation needed to be as surreptitious as possible in order to avoid a pre-emptive strike by Quality.
The evidence shows no justification for any of the Defendants' interference with the contractual obligation of Martin Klipsch and MJK not to compete, especially given the fact that all of the Defendants were clearly aware of the non-compete clause. Since Quality lost most of its Southern Illinois customers to LTC as a result of the Defendants' actions, it is clear that Quality suffered damages. Therefore, it is likely that Quality will succeed on the merits of its claim for tortious interference against the Defendants.
Last, it is likely that Quality will succeed on the merits of its claim for defamation against Martin Klipsch. Under Illinois law, a plaintiff must establish the following elements in order to prove defamation: (1) that the defendant made a false statement about the plaintiff, (2) there was an unprivileged publication to a third party with fault by the defendant, and (3) the publication damaged the plaintiff. Parker v. House O'Lite Corp., 756 N.E.2d 286, 291-92 (Ill.App. 2001). "The law of defamation is well-settled: `A statement is considered defamatory if it tends to cause such harm to the reputation of another that it lowers that person in the eyes of the community or deters third persons from associating with him.'" Id. at 292. "Certain limited categories of defamatory statements are deemed actionable per se because they are so obviously and materially harmful to the plaintiff that injury to the plaintiff's reputation may be presumed." Id.
Illinois recognizes five categories of statements which are considered actionable per se, including those imputing an inability to perform or want of integrity in the discharge of duties. Id. In determining whether the statement is defamatory, courts must focus on the predictable effect the statement had on those who received the publication. Id.
In this case, Quality can establish the elements required to prove defamation and may also be able to succeed on a claim for defamation per se. First, Martin and Bud Klipsch admitted that they told at least some of Quality's customers that Quality was in financial trouble and was not providing adequate equipment to service the customers' needs. Martin and Bud Klipsch were aware that making these statements would lessen the customers' confidence in continuing business with Quality. At the hearing on the motion for preliminary injunction, Defendants proffered extensive testimony regarding their assessment of Quality Carriers' financial condition. However, the Court finds this testimony not credible. Defendants relied on outdated financial information from June, 2001 and their economic expert relied on reports of Quality's parent company which he admitted would not reflect Quality's financial condition alone. Accordingly, the Court finds that Martin Klipsch's statements regarding Quality's poor financial condition were false and made at the fault of Martin Klipsch. Since "proof of publication requires that the defamatory statements were communicated to some person other than the plaintiff" and Martin Klipsch admitted he made these statements to Quality's customers, publication has also been demonstrated. Damages are also established because an inference can be drawn from the evidence that Martin Klipsch's statements contributed to the decisions by the customers at issue to terminate their relationships with MJK and Quality and obtain services through K and LTC. Therefore, Quality is likely to succeed on the merits of its claim for defamation.
Additionally, because Quality's claim for defamation entails a statement that imputed an inability to perform or want of integrity in the discharge of duties, Quality is also likely to succeed on the merits of a claim for defamation per se.
E. Adequacy of Remedy at Law and Issue of Irreparable Harm
Because the Court has found that Quality is likely to succeed on the merits of its claims against Defendants, the Court must now examine whether Quality lacks an adequate remedy at law and will suffer irreparable harm if a preliminary injunction is not issued.
Although it could be argued that Quality's lost revenues incurred as a result of the loss of their Southern Illinois customers can be quantified, the evidence before the Court shows that Quality lacks an adequate remedy at law with regard to the loss of the goodwill it enjoys with these customers. See Barnes Group, Inc. v. Rinehart, 2001 WL 301433, at *23 (S.D.Ind. Feb. 26, 2001); and Maaco Enterprises, Inc. v. Bremner, 1998 WL 669936, at *5 (E.D.Pa. Sept. 29, 1998).
The Court doubts, however, that even lost revenues can be quantified. It is quite possible that Quality has lost the customers at issue forever. Therefore, there is no way to quantify how long the customers would have remained with Quality if Defendants had not interfered and the extent of revenues lost.
Clearly, MJK and Martin Klipsch recognized the importance of goodwill and all of its intangible benefits by entering into the non-compete provisions within the MTL Agreement. Interestingly, LTC's actions also confirm the importance of its own goodwill. LTC considers its customer list so confidential that its independent contractor agreement calls for an injunction if the names are disclosed. Its Agency Agreement with K also specifically requires K to "uphold the goodwill and reputation" of LTC and provides for a one year non-solicitation term within a 75 mile geographical radius of St. Louis, Missouri. The importance of this non-compete clause is also emphasized by the fact that a breach of any of the other 20 paragraphs can be cured within 30 days, "except the non-complete clause." ("[I]n the event that the Agent (K Distributions, Inc.) has breached paragraph 17 of the Agreement, LTC shall not be required to provide written notice and an opportunity to cure and may seek all legal and equitable relief immediately.")
The same evidence supports a finding that Quality will suffer irreparable harm if the preliminary injunction is not issued. If Defendants are not enjoined from continuing to serve Quality's customers, there is little hope that Quality could recover their Southern Illinois customers or the goodwill it previously enjoyed. It is also clear that the longer LTC has a relationship with Quality's customers, the less chance it has of recovering them. In a "cut-throat" business such as this with "circling sharks" waiting to take on any lost business, it is clear that goodwill takes years to build up and only seconds to lose.
The Court also notes that it observed the witnesses closely as they testified. Body language, demeanor, voice, tone, inflection, and ability to field questions all provide the Court insight regarding a witness's credibility. Plaintiff's witnesses were candid and forthright. To the contrary, three of Defendants' witnesses, when confronted with tough questions requiring revealing answers, looked like a "deer caught in the headlights of a car night." The Court also recalls that one witness would emit a primal grunt, and then answer reluctantly; another refused to look the examiner, or the Court, in the eyes; the voice of another raised an octive when an admission was about to be made.
Based on the foregoing reasons, Quality has met its burden with regard to its request for a preliminary injunction. Therefore, the Court must now use a sliding scale to weigh these factors against (a) any irreparable harm the non-moving party will suffer if preliminary relief is granted, balancing the harm against the irreparable harm to the moving party if relief is denied; and (b) the public interest, meaning the consequences of granting or denying the injunction to non-parties.
The testimony adduced from K Distribution through the Klipsch officer Defendants was that an injunction would put K out of business because it was a "start-up company" with little or no assets. As eloquently stated by the Seventh Circuit with regard to a similar argument, K and the Klipsch officer Defendants' "melodramatic interpretation" of the impact of a preliminary injunction "is without merit." Re/Max North Central, Inc. v. Cook, 272 F.3d 424, 432-33 (7th Cir. 2001). An injunction would not prohibit K and the Klipsch officer Defendants from maintaining relationships with clients that were not previously serviced by MJK on Quality's behalf. It also would not prohibit K from developing new clients for LTC. Furthermore, the evidence shows that K Distribution managed to "stay afloat" from the date of its incorporation in December, 2001 until March 1, 2002 when it first began to service Quality's customers for LTC without conducting any trucking business. In other words, if K Distribution is truly an entity separate from MJK, it will survive as a company by conducting business other than simply continuing MJK's business under a different name and relying solely on the servicing of Quality's customers that were previously serviced by MJK.
Furthermore, the Court also finds that public interest will be served by the issuance of a preliminary injunction. If the preliminary injunction is issued, Quality and other companies which provide the transportation of liquid and dry bulk commodities will now compete for the business of Quality's former Southern Illinois customers. That will result in lower shipping prices for these customers which will eventually result in lower prices for the general public who uses the shipped products. Testimony indicated there are at least eight companies vying for this business so no public harm will occur because of the issuance of the injunction.
Therefore, the Court finds that Quality has met its burden, by clear and convincing evidence as is entitled to injunctive relief, which this Court recognizes as an "extraordinary" remedy. Accordingly, based upon the evidence before the Court and the foregoing analysis, the Court finds that the issuance of a preliminary injunction is necessary and appropriate.
The MTL contact would have terminated automatically on October 30, 2002, five years after its inception. Had MJK and Martin Klipsch lived up to its terms, waited until October 30, 2002 for the contract to expire, and then waited one more year to honor the non-compete, this case would have never been brought. Under the terms of the non-compete, Quality was entitled to one year from the date of termination free from competition by MJK and Martin Klipsch. Accordingly, the Court chooses one year from the date of this Order as the term of the preliminary injunction.
IV. ORDER
For the foregoing reasons, the Court finds that a preliminary injunction is appropriate under FEDERAL RULE OF CIVIL PROCEDURE 65. Accordingly, the Court GRANTS Plaintiff's motion for a preliminary injunction (Doc. 26) and ORDERS as follows:
For docketing purposes, this Court also DENIES AS MOOT Plaintiff's motio n to strike citation s to depositions (Doc. 42) since the Court did not rely on s uch citations in the drafting of this Order.
1. Defendant MJK Distribution, Inc. and Defendant Martin J. Klipsch, as well as all of their respective principals, officers, agents, servants, and employees, and all those in active concert or participation with them who receive actual notice of this Order, are hereby ENJOINED during the pendency of this matter or until April 2, 2003, whichever comes earlier, from violating the non-compete clause contained in the MTL Agreement by directly or indirectly engaging in, owning, managing, joining, controlling, or participating in the ownership, management, or operation, or being connected in any manner with the operation of any liquid or dry bulk transportation company that solicits, serves, or attempts to serve the customers previously served by MJK on behalf of Plaintiff Quality Carriers, Inc. including, but not limited to:
National Starch — Meredosia, IL
General Chemical — East St. Louis, IL
WR Grace — Chicago, IL
Leaf, Inc. — Robinson, IL
Big River Zinc — Sauget, IL
Doe Run Company — Herculaneum, MO; Sauget, IL
Monsanto — Luling, IA
Reichhold Chemical — Valley Park, MO
Ashland Chemical — Sauget, IL; St. Louis, MO; Chicago, IL
LCI, Ltd. — St. Louis, MO
KOP-Coat — St. Louis, MO
PVS Technologies — Granite City, IL; St. Louis, MO
Lever Brothers — St. Louis, MO
Van Waters Rogers — Sauget, IL; St. Louis, MO
Pilot Chemicals — Middletown, OH; Chocolate Bayou, TX
Petrolite Corp. — Webster Groves, MO
Capacity Management — Midland, MI
GS Robins — St. Louis, MO; East St. Louis, IL
Betz Industrial — East St. Louis, IL
PBS Chemical — St. Louis, MO; Sauget, IL
HCI Chemtech — St. Louis, MO
Dyno Nobel — Louisiana, MO
PVS Chemicals — Sauget, IL
Leggett Platt — Carthage, MO
Procter Gamble — St. Louis, MO
Kasteel Chemical — St. Louis, MO
Hydrite Chemical — Belle, WV
Union Pacific — Dupo, IL; Valley Park, MO
Chemtech Products — East St. Louis, IL
PQ Corp. — St. Louis, MO
Davis Water Services — Granite City, IL
Chemical Interchange — Sauget, IL
Transchemical, Inc. — Chicago, IL
Solvay Interox — St. Louis, MO
United Lubricants — Roxanna, IL
Mississippi Lime — Ste. Genevieve, MO
Asarco — Sauget, IL
Midcontinent Commodities — Herculaneum, MO
Resource Environment — Sauget, IL.
2. Defendant K Distribution, Inc., and all of K Distribution's principals, officers, agents, servants, and employees, including, but not limited to, Merrie Lynn Klipsch, William "Bud" Klipsch, and Thomas Klipsch and all those in active concert or participation with them who receive actual notice of this Order, are hereby ENJOINED during the pendency of this matter or until April 2, 2003, whichever comes earlier, from, directly or indirectly, engaging in, owning, managing, joining, controlling, or participating in the ownership, management, or operation, or being connected in any manner with the operation of any liquid or dry bulk transportation company that solicits, serves, or attempts to serve the customers previously served by MJK on behalf of Plaintiff Quality Carriers including, but not limited to:
National Starch — Meredosia, IL
General Chemical — East St. Louis, IL
WR Grace — Chicago, IL
Leaf, Inc. — Robinson, IL
Big River Zinc — Sauget, IL
Doe Run Company — Herculaneum, MO; Sauget, IL
Monsanto — Luling, IA
Reichhold Chemical — Valley Park, MO
Ashland Chemical — Sauget, IL; St. Louis, MO; Chicago, IL
LCI, Ltd. — St. Louis, MO
KOP-Coat — St. Louis, MO
PVS Technologies — Granite City, IL; St. Louis, MO
Lever Brothers — St. Louis, MO
Van Waters Rogers — Sauget, IL; St. Louis, MO
Pilot Chemicals — Middletown, OH; Chocolate Bayou, TX
Petrolite Corp. — Webster Groves, MO
Capacity Management — Midland, MI
GS Robins — St. Louis, MO; East St. Louis, IL
Betz Industrial — East St. Louis, IL
PBS Chemical — St. Louis, MO; Sauget, IL
HCI Chemtech — St. Louis, MO
Dyno Nobel — Louisiana, MO
PVS Chemicals — Sauget, IL
Leggett Platt — Carthage, MO
Procter Gamble — St. Louis, MO
Kasteel Chemical — St. Louis, MO
Hydrite Chemical — Belle, WV
Union Pacific — Dupo, IL; Valley Park, MO
Chemtech Products — East St. Louis, IL
PQ Corp. — St. Louis, MO
Davis Water Services — Granite City, IL
Chemical Interchange — Sauget, IL
Transchemical, Inc. — Chicago, IL
Solvay Interox — St. Louis, MO
United Lubricants — Roxanna, IL
Mississippi Lime — Ste. Genevieve, MO
Asarco — Sauget, IL
Midcontinent Commodities — Herculaneum, MO
Resource Environment — Sauget, IL.
3. Defendants K Distribution, Inc., and all of K Distribution's principals, officers, agents, servants, and employees, including, but not limited to, Merrie Lynn Klipsch, William "Bud" Klipsch, and Thomas Klipsch are also ENJOINED during the pendency of this matter or until April 2, 2003, whichever comes earlier, from tortiously interfering with the drivers under contract to haul trailers for Quality.
4. Defendant Liquid Transport Corporation is hereby ENJOINED during the pendency of this matter or until April 2, 2003, whichever comes earlier, from, directly or indirectly, soliciting, serving, or attempting to serve in the St. Louis area those customers previously served by MJK on behalf of Plaintiff Quality Carriers and which customer LTC or K Distribution have solicited, served, or attempted to serve in the St. Louis area at any time from March 1, 2002 through the date of this Order including, but not limited to:
National Starch — Meredosia, IL
General Chemical — East St. Louis, IL
WR Grace — Chicago, IL
Leaf, Inc. — Robinson, IL
Big River Zinc — Sauget, IL
Doe Run Company — Herculaneum, MO; Sauget, IL
Monsanto — Luling, IA
Reichhold Chemical — Valley Park, MO
Ashland Chemical — Sauget, IL; St. Louis, MO; Chicago, IL
LCI, Ltd. — St. Louis, MO
KOP-Coat — St. Louis, MO
PVS Technologies — Granite City, IL; St. Louis, MO
Lever Brothers — St. Louis, MO
Van Waters Rogers — Sauget, IL; St. Louis, MO
Pilot Chemicals — Middletown, OH; Chocolate Bayou, TX
Petrolite Corp. — Webster Groves, MO
Capacity Management — Midland, MI
GS Robins — St. Louis, MO; East St. Louis, IL
Betz Industrial — East St. Louis, IL
PBS Chemical — St. Louis, MO; Sauget, IL
HCI Chemtech — St. Louis, MO
Dyno Nobel — Louisiana, MO
PVS Chemicals — Sauget, IL
Leggett Platt — Carthage, MO
Procter Gamble — St. Louis, MO
Kasteel Chemical — St. Louis, MO
Hydrite Chemical — Belle, WV
Union Pacific — Dupo, IL; Valley Park, MO
Chemtech Products — East St. Louis, IL
PQ Corp. — St. Louis, MO
Davis Water Services — Granite City, IL
Chemical Interchange — Sauget, IL
Transchemical, Inc. — Chicago, IL
Solvay Interox — St. Louis, MO
United Lubricants — Roxanna, IL
Mississippi Lime — Ste. Genevieve, MO
Asarco — Sauget, IL
Midcontinent Commodities — Herculaneum, MO
Resource Environment — Sauget, IL.
5. Defendant LTC is also ENJOINED during the pendency of this matter or until April 2, 2003, whichever comes earlier, from tortiously interfering with the drivers under contract to haul trailers for Quality.
6. Defendant Martin Klipsch is also ENJOINED during the pendency of this matter or until April 2, 2003, whichever comes earlier, from defaming or otherwise disparaging Quality to the customers listed above. Such defamation includes, but it not limited to, any statement regarding Quality's financial condition or status.
7. All Defendants are also ENJOINED during the pendency of this matter or until April 2, 2003, whichever comes earlier, from encouraging Quality customers or contractors to breach their contracts or sever business relations with Quality.
8. The injunction bond previously posted by Quality Carriers shall remain as adequate bond for this preliminary injunction.
IT IS SO ORDERED.