Opinion
No. 01-3023
February 5, 2001
ORDER
This cause comes before the Court on Plaintiff's motion for a preliminary junction. Pursuant to 28 U.S.C. § 636(c)(1), the parties consented to United States Magistrate Judge Byron G. Cudmore. Having heard all of the testimony, reviewed the proffered exhibits and the parties' proposed findings, and considered the arguments presented, the Court makes the following findings of fact and conclusions of law pursuant to Fed.R.Civ.P. 52(a).
I. BACKGROUND
Plaintiff ECE Insulation ("Plaintiff" or "ECE") filed its complaint on January 22, 2001. It alleges several causes of action against Defendants Chris Gleeson ("Gleeson"), Brett Bone ("Bone"), and Interior Comfort, Inc. ("Interior Comfort"). Plaintiff's motion for a preliminary injunction was filed along with its complaint. Plaintiff seeks injunctive relief on two theories, Count I and Count VIII. Count I alleges the breach of a non-compete agreement and is advanced against Defendants Gleeson and Bone. Count VIII alleges trade secret misappropriation and is advanced against all Defendants. The Court heard testimony on Plaintiff's motion at a hearing that was held on January 30-31, 2001.
II. FINDINGS OF FACT
ECE is engaged in the business of installing insulation in central Illinois. Its customer base consists largely of contractors who are building residences and some light industrial buildings. Initially, ECE focused on the Decatur and Champaign markets. It then began doing business in other parts of central Illinois, including Springfield. ECE currently has multiple warehouses and offices in central Illinois. In 1999, ECE was purchased by Williams Consolidated I, Ltd. ("Williams"), a Texas conglomerate. The nature of ECE's business did not change.
The Defendants Gleeson and Bone have not challenged the standing of the Plaintiff herein to enforce the ECE non-compete agreement.
For several years in the 1990's, Gleeson had run his own insulation installation business, Energy Management Systems ("EMS"). Gleeson's business began to fail in the mid 1990's. Prior to accepting employment with ECE, Gleeson offered to sell EMS to ECE. ECE did purchase certain equipment such as trucks and ladders from Gleeson. There is a dispute as to whether ECE purchased EMS' goodwill. The Court finds that ECE purchased selected hard assets of EMS and that the written sales documents offered into evidence do not list or value good will. ECE hired Gleeson as a salesman in 1998. This position required interaction with customers and potential customers. At ECE, Gleeson received a base salary, a monthly commission of three percent (3%) of his sales, and a ten percent (10%) annual commission on the net profit of his sales. When Gleeson was hired, he entered into a non-compete agreement which for a three year period after termination with ECE restricted his ability to engage in the insulation installation business in a particular geographical area and also prevented him from contacting customers with whom he had contact while at ECE.
Bone was also employed as a salesman by ECE and therefore had essentially the same duties as Gleeson which required interaction with customers. He was initially employed by Plaintiff in 1997. In 1998, he took another job but returned to ECE in November 1999. In 1997, Bone signed a non-compete agreement which was almost identical to that signed by Gleeson. Bone did not sign such an agreement when he returned to ECE in 1999.
At some point in 1999, Gleeson and Bone discussed being unhappy with their employment situation at ECE. On more than one occasion, Gleeson also discussed his unhappiness with an area businessman and family friend, Joe Rupnik. Rupnik eventually decided to investigate the market for an insulation installation business in Springfield. His main inquiry was whether there was money to be made in the business. Rupnik discovered that ECE had only one major competitor in the insulation installation market, R.P. Lumber. On December 7, 2000, Rupnik created Interior Comfort. He is the sole shareholder, officer and director of the corporation.
Gleeson and Bone resigned without notice from ECE on Tuesday, December 19, 2000. On Sunday, December 17, a meeting was organized by Rupnik and Gleeson. Several ECE employees, most of whom worked in Springfield, attended the meeting. Rupnik had contacted the individuals after getting their telephone numbers from Gleeson. Rupnik was introduced as the man who would head an insulation company that would be in competition with ECE. Gleeson also spoke at the meeting and informed those who were present that there would be work at Interior Comfort.
Gleeson had wanted to be a partner with Rupnik at Interior Comfort.
However, Rupnik was not interested in that arrangement. Instead, Gleeson would essentially manage the day to day activities at the insulation installation business as well as handle his duties as a salesman. Rupnik would supply the capital, management assistance, time management expertise and other services to Interior Comfort. Gleeson was given some authority including the authority to hire. Gleeson hired Brett Bone as a salesman, the same role that he had at ECE. Other ECE installation employees were also hired. Rupnik was unaware that Gleeson and Bone had non-compete agreements. He was informed by Gleeson that the non-compete agreements had expired and were not renewed when Williams purchased ECE. While still at ECE, Gleeson had inquired about his non-compete agreement on multiple occasions. He was apparently informed that the written document was in Texas at Williams.
There appears not to be a great deal of difference from one insulation company to the next regarding the industry pricing structure. Typically, after taking into account the materials' cost, insulation installation companies charge a percentage of that price as their bid price. The bid price may also be calculated based upon the square footage of the job. At times, prices have to be adjusted to stay competitive.
ECE sets its prices on a square foot basis times a certain range factor.
ECE's price schedule includes a high, medium and low range. ECE encourages its salespeople to bid the high end of the range, but discretion as to the final bid price is left to the salesman. The range is determined by the managers of ECE with reference to ECE's overhead, wholesale costs, etc. The factors which go into the price range were never disclosed to Gleeson or Bone. However, any person with a copy of an ECE bid who had knowledge of the job could easily calculate the square foot price for the insulation. ECE's bids were regularly disclosed to contractors and other insulation subcontractors. John Petit conceded during his testimony that if Interior Comfort was pricing its insulation services at 1.5 times the wholesale price of material, Gleeson and Bone were not using any pricing strategy or formula they learned from ECE.
It is generally also true that there is no secret as to how insulation installation salesmen obtain customers. It is important for a salesman to become familiar with the area and to get to know the building contractors.
However, this can be accomplished by driving around town and locating ongoing building projects or referring to the yellow pages of a phone book for a list of contractors. Moreover, building permits accessible to anyone at the various county buildings indicate the location of a job and the name of the contractor. Salesmen commonly visit a job site to measure it and make an insulation bid. There is some follow-up that is required. Installation timing appears to be very important in the industry. There is also some indication that it is difficult to break into a new area.
The customers of ECE, Interior Comfort and EMS are general contractors. The names, addresses and phone numbers of these customers can be easily found in the yellow pages of phone books. This information, as well as information as to what projects a contractor is working on, is easily obtained from public building permit records. Such information can also be obtained by simply driving around town and noting building projects. Petit did not reliably testify to even a gross number of customers that he believed were "regular" customers within the geographical area sought to be protected. His testimony regarding a percentage of customers that he believed were "regular" was speculative.
ECE did not tender to the Court any lists of its "regular" customers. The only customer list kept at ECE appears to be a Rolodex kept in the job board room at Decatur's ECE building.
Interior Comfort was able to line up jobs immediately after Gleeson and Bone left ECE. Specifically, Gleeson and Bone resigned on Tuesday, December 19. Interior Comfort lined up jobs that very week. Workers were out performing those jobs by December 26.
III. CONCLUSIONS OF LAW A. Standard for granting preliminary injunction
A preliminary injunction may be granted pursuant to Fed.R.Civ.P. 65 if the plaintiff can demonstrate that he has some likelihood of success on the merits and there would be no adequate remedy at law if relief is not granted. See Grossbaum v. Indianapolis-Marion County Bldg. Auth., 100 F.3d 1287, 1291 (7th Cir. 1996). For purposes of a preliminary injunction, "likelihood of success on the merits" exists if the movant shows a `better than negligible' chance of succeeding on the merits." See Meridian Mutual Ind. Co. v. Meridian Ins. Group, Inc., 128 F.3d 1111, 1114 (7th Cir. 1997). If this showing is made, the Court then balances the irreparable harm to the non-movant if the relief is granted versus the harm to the movant. Finally, the Court must "weigh the public interest by considering the effect of granting or denying relief on the parties." See Grossbaum, 100 F.3d at 1291.
B. Non-Compete agreements
Restrictive covenants operate to partially restrain trade. Such agreements are therefore subject to heightened judicial scrutiny to ensure that the intended effect is not to prevent competition per se. See Springfield Rare Coin Galleries, Inc. v. Mileham, 250 Ill. App.3d 922, 929,189 Ill.Dec. 511, 620 N.E.2d 479 (4th Dist. 1993). Specifically, "[w]hatever may be said for the freedom of contract in general, restrictive covenants impair the availability of services and interfere with competition; therefore such covenants `are carefully scrutinized by the courts.'" See Rao v. Rao, 718 F.2d 219, 223 (7th Cir. 1983) (quoting Boyar-Schultz Corp. v. Tomasek, 94 Ill. App.3d 320, 323, 49 Ill.Dec. 891, 418 N.E.2d 911 (1st Dist. 1981)). Thus, the fact that a restrictive covenant has been breached is not alone a sufficient basis to grant relief to the former employer. "In essence, plaintiff must show injury to its legitimate business interests separate and distinct from defendant's breach of the restrictive covenant in order to secure enforcement thereof through injunctive relief; otherwise, such covenant is deemed an unenforceable attempt to prevent competition per se." See Hydroaire, Inc. v. Sager, 98 Ill. App.3d 758, 765, 53 Ill.Dec. 928, 424 N.E.2d 719 (1st Dist. 1981). A covenant which has as its sole purpose the restriction of competition is unenforceable. See A.B. Dick Co. v. American Pro-Tech, 159 Ill. App.3d 786, 792, 112 Ill.Dec. 649, 514 N.E.2d 45 (1st Dist. 1987). Covenants not to compete which are reasonable may be enforced in two instances: 1) when the former employee has obtained confidential information because of his employment and then attempted to use it for his own benefit; or 2) the nature of the business is such that the customer relationship is near permanent and defendant would not have had contact with those customers but for his employment by plaintiff. See Springfield Rare Coin Galleries, Inc., 250 Ill. App.3d at 930.
A non-compete agreement may be enforced if the former employee learned trade secrets or other confidential information which he would not have otherwise obtained but for his employment with the plaintiff. See Office Mates 5, North Shore, Inc. v. Hazen, 234 Ill. App.3d 557, 574, 175 Ill.Dec 58, 599 N.E.2d 1072 (4th Dist. 1993). Here, ECE is alleging that the confidential information that Gleeson and Bone learned while employed there include its 1) product pricing and profit margins; and 2) information regarding ECE customers and jobs.
Regarding ECE's product pricing and profit margins, the evidence indicated that there is not much difference within the industry regarding pricing of the product and service and therefore how a company makes a profit. Specifically, companies typically charge a percentage or factor times the manufacturer's cost of the insulation. This figure may be adjusted in order to make a profit to account for competition or the lack of it. While EMS and Interior Comfort uses a 150% figure, ECE does not. ECE uses square footage times a range of factors to arrive at its price. Gleeson and Bone do not know how ECE arrived at its factors.
Here, ECE has failed to show that its pricing structure or how it arrives at a profit is significantly different from that of others in the industry. See Springfield Rare Coin Galleries, Inc., 250 Ill. App.3d at 934-35 (emphasizing the plaintiff's failure to show how its pricing formula was different from that of others in the industry which was easily available). ECE's pricing factor can be calculated by dividing its bid by the square footage of the job. ECE's bids are not confidential. The Court therefore finds that the information regarding ECE's product pricing and profit margins does not constitute confidential information.
The Court is concerned about the actions of Gleeson and Bone immediately prior to their resignations from ECE. Specifically, there is some indication that they were aware of certain customers who had contacted ECE regarding upcoming building projects, including those who sought bids.
Moreover, because of their association with ECE, Gleeson and Bone may have been privy to information regarding when the work of these customers was needed to be performed. However, these concerns more appropriately relate to causes of action not before this Court on Plaintiff's motion for preliminary injunction. Defendants may well have to answer for these actions at another date in this litigation.
ECE also asserts that it has acquired confidential information regarding certain customers and their jobs. As the Court noted, Gleeson and Bone may have learned of specific ECE customers that needed work performed because of their association with ECE. The fact that Interior Comfort appears to have found early jobs after December 19, 2000, supports this point. There is some indication that Gleeson learned of jobs that needed to be performed while at ECE and later used this information for the benefit of Interior Comfort. Even with limited evidence presented by ECE on this point, the Court finds that ECE's proper remedy lies at another time under another cause of action pending herein.
ECE has not been able to provide the Court with a list of its customers or a list of its regular customers.
The Court is not persuaded that the very general information pertaining to ECE's customers and the customer contact constitutes confidential information. Customer information is confidential when the information has been developed over a number of years at significant expense and been subject to some type of security. When the information is known to other employees and is or could easily be known by others in the trade, it is not confidential information. See Office Mates, 234 Ill. App.3d at 574-75. Herein, testimony indicated that the Rolodex information at ECE was available to other ECE employees, and that information was not secured. More significantly, the information regarding ECE's customers could easily without extensive time or expense be duplicated by others in the insulation installation trade by reference to telephone directories, a review of county building permits, and some field work. Another factor to consider is whether customers on the list typically do business with more than one company in such a manner that their identities are known by others in the industry. See Id at 571-72. The testimony indicated that it was not uncommon for contractors to purchase from more than one insulation company depending primarily upon the price. Customers appear to be transitory. Thus, the Court finds that the information available to Defendants Gleeson and Bone at ECE pertaining to ECE's customers does not constitute confidential information. See Springfield Rare Coin Galleries, Inc., 250 Ill. App.3d at 931 (emphasizing that the plaintiff's customers were well known in the industry or could easily be discovered and the information was therefore not confidential).
The Court will now examine whether the nature of the business is such that the customer relationship is near-permanent and Defendants would not have had contact with those customers but for their employment with ECE. In light of the Court's earlier findings, this should be a short inquiry. Some courts look to the following seven factors in determining whether the near-permanency test is met:
1) the number of years required to develop the client base;
2) the amount of money invested to acquire clients;
3) the degree of difficulty in this pursuit;
4) the extent of personal contact by the employee with customers;
5) the extent of the employer's knowledge of its clients;
6) the length of time customers had been associated with the employer; and
7) the continuity of the employers' relationship with customers.
See Agrimerica, Inc. v. Mathes, 199 Ill. App.3d 435, 444, 145 Ill.Dec. 587, 557 N.E.2d 357 (1st Dist. 1990). However, it is often the case that the outcome of the near-permanency test is determined by the nature of the business involved. See Office Mates, 234 Ill. App.3d at 572.
It is true that a near-permanent relationship with customers generally exists in the provision of professional services. See Nationwide Advertising Service, Inc. v. Kolar, 14 Ill. App.3d 522, 527-28, 302 N.E.2d 734 (1st Dist. 1973). This is typically not the case with businesses engaged in sales. See Springfield Rare Coin Galleries, Inc., 250 Ill. App.3d at 935. "When the employer's business is sales of a nonunique product, its customers also do business with its competitors, are generally known to the competitors, or are ascertainable by reference to telephone or specialized directories, the near-permanency test will not be satisfied." See Id. at 936. The insulation installation business involves the sale of a product and the service that accompanies it. However, there is no assertion that it is professional services that are being rendered. Moreover, there was ample testimony that a typical customer's primary concern is the price. Hence, custom ers typically do business with more than one insulation installation company, sometimes at the same time. Additionally, the customers are certainly known to competitors or can be easily determined as the Court has earlier noted. Significantly, only one contractor testified that he did business exclusively with ECE, but that witness was a personal friend of ECE manager John Petit. Although Petit speculated as to the percentage of regular customers at ECE, no specific evidence was offered as to the identity of those contractors that ECE believed were near-permanent.
Moreover, Gleeson indicated that some of his customers at ECE were the same customers that he did business with at EMS. Accordingly, because of Gleeson's experience in the field and the easy access to potential customers, the Court finds that Gleeson would have likely been aware of many of ECE's customers even without his prior employment at ECE.
Thus, because of the nature of the business, the Court finds that ECE's relationship with its customers does not constitute a near-permanent relationship. The Court makes this finding without an extensive analysis of the seven factors found in Agrimerica. See Springfield Rare Coin Galleries, Inc., 250 Ill. App.3d at 937 (noting that when a particular business falls clearly within the category of professional services or that of sales, a court need not resort to the Agrimerica factors).
Nevertheless, the Court will note briefly that the near-permanency test would also not be satisfied under the Agrimerica factors. This is because the first three factors involve the time, difficulty and expense of acquiring customers. Moreover, two of the factors involve the length of time that customers have done business with the employer and the continuity of that relationship. See Agrimerica, 199 Ill. App.3d at 444. As the Court's earlier findings make clear, the nature of the insulation installation business precludes a finding that a near-permanent relationship with customers exists in the industry.
The Court has reviewed the cases cited by ECE in its proposed order regarding what is required to enforce the non-compete agreements, confidential information of some type or near-permanent customer relationships, and is not persuaded. Each of those cases is factually distinguishable from the instant situation. Unlike this case, those cases involve information that is truly confidential and is the subject of measures that are reasonable to maintain its confidentiality. Moreover, the cases which address the near-permanent customer relationships are different from the case at hand in that the evidence in those cases specifically indicated the presence of a significant number of long-time customers. Here, the evidence has indicated that customers in the insulation installation industry are transitory.
The Court therefore finds that the restrictive covenants at issue in this case are unenforceable. No confidential information regarding customer lists or pricing information was acquired by Gleeson or Bone while employed at ECE. Moreover, the Court determines that because of the nature of the business, ECE's customer relationships were not near-permanent and Defendants may have had contact with those customers even without their association with ECE. Thus, the effect of the restrictive covenants signed by Gleeson and Bone was the prevention of competition per se. To the extent that Defendants acquired information about specific jobs while at ECE and subsequently used that information at Interior Comfort, the Court finds that ECE has an adequate remedy at law.
C. Trade Secrets
The Illinois Trade Secrets Act ("ITSA") provides that a court may enjoin the "actual or threatened misappropriation" of a trade secret. See 765 ILCS 1065/3(a); see also George S. May Int'l Co. v. Int'l Profit Associates, 256 Ill. App.3d 779, 788, 195 Ill.Dec. 183, 628 N.E.2d 647 (1st Dist. 1993). The party asking for an injunction must therefore prove the existence of a trade secret and its misappropriation. See Pepsico, Inc. v. Redmond, 54 F.3d 1262, 1268 (7th Cir. 1995). Illinois law defines trade secrets in the following manner:
information, including but not limited to, technical or non-technical data, a formula, pattern, compilation, program, device, method, technique, drawing, process, financial data, or list of actual or potential customers or suppliers that:
(1) is sufficiently secret to derive economic value, actual or potential, from not generally being known to other persons who can obtain economic value from its disclosure or use; and
(2) is the subject of efforts that are reasonable under the circumstances to maintain its secrecy or confidentiality.
The Court has already analyzed whether any confidential information was present. It is true as Plaintiff notes that recall of former employer's customer names and other information to acquire business from those customers can be a violation of ITSA. See Stampede Tool Warehouse, Inc. v. May, 272 Ill. App.3d 580, 588-92, 209 Ill.Dec. 281, 651 N.E.2d 209 (1st Dist. 1995). However, there is still a requirement under ITSA that the information is "sufficiently secret to derive economic value . . . from not generally being known to other persons who can obtain economic value from its disclosure or use." See 765 ILCS 1065(2)(d)(1). The Court finds that the information is not "sufficiently secret." ECE's typical customers are contractors who can be found in phone books. Information about specific jobs is noted on building permits which can be referenced at the various county buildings. Thus, ECE's customer list is readily available to any insulation installation company. Moreover, Gleeson was familiar with many potential customers because of having been in the business for more than a decade prior to working for ECE. Thus, the Court finds that there is nothing regarding ECE's customers which constitutes a "trade secret." Insofar as ECE's argument regarding trade secrets relates to Defendants having learned about particular jobs or bids while at ECE and subsequently contacted those customers on behalf of Interior Comfort, the Court has already noted that Plaintiff has an adequate remedy at law. Because the Court has determined that the first prong of ITSA has not been met, it will not address whether ECE's efforts to maintain the secrecy of the information have been reasonable.
IV. CONCLUSION
The Court therefore denies Plaintiff ECE's motion for a preliminary injunction. Because of the nature of the business, there was no confidential information or trade secret at issue. The non-compete agreements therefore had the sole effect of restricting competition, a practice that is not permitted. See A.B. Dick Co., 159 Ill. App.3d at 792. The Court is mindful of the standard for granting a preliminary injunction, and has suggested that ECE may have an adequate remedy at law. Moreover, the balancing of harms is particularly significant in this case. If the requested relief were granted, Defendants Gleeson and Bone would have to find another profession in central Illinois or relocate to another area to engage in their chosen profession. The potential harm to ECE in denying the injunctive relief is not nearly as great in light of the fact that Plaintiff is now owned by a Texas conglomerate. In weighing the public interest, the effect of granting the requested relief would essentially serve only to reduce competition in the industry. The Court finds that a competitive market in the insulation installation business is in the public interest. As has been repeatedly noted, this order should not be construed to suggest that the actions of Gleeson and Bone were not improper. In fact, they may have to answer for their actions at a later stage as this case proceeds.
Accordingly, Plaintiff ECE's motion for a preliminary injunction (d/e 4) is DENIED. Defendants directed to answer or otherwise plead to the Complaint on or before February 20, 2001.