Opinion
No. 01-3326
January 18, 2002
ORDER
This matter came before the Court on December 17, 2001, for hearing on Plaintiffs Innovative Clinical Solutions, Ltd. and Clinical Studies, Ltd.'s (collectively ICSL) Motion for Preliminary Injunction. Plaintiffs appeared by attorney Tracy Litzinger. Defendants Anjuli Nayak, M.D., and Nicholas Naya k, M.D., appeared personally, and attorney Stephen Thomas appeared for all Defendants. For the reasons set forth below, the Motion is ALLOW E.D. in part.
ICSL is a national site management organization engaged in the business of performing clinical drug trials. Defendants Anjuli Nayak, M.D., and Nicholas Nayak, M.D., own Defendant Clinical Research Center, P.C. (CRC). CRC conducted clinical drug trials in Central Illinois. Dr. Anjuli Nayak is a nationally recognized clinical investigator of new drugs for asthma, allergies and other respiratory illnesses. She has conducted clinical trials for most, if not all, of the major new drugs that have been developed recently to treat these illnesses. Drug companies and others who conduct clinical trials (Drug Trial Contractors) consider her to be one of the most sought after researchers to conduct clinical trials in this area.
On January 1, 1999, ICSL bought substantially all of the business assets of CRC. As part of the transaction, CRC and the Nayaks individually entered into a Clinical Research Management Agreement with ICSL (Agreement). Plaintiffs' Exhibit 1. The Agreement referred to CRC as Management, and to the Nayaks as Management's Shareholders. CRC agreed to be responsible for the day-to-day operations of the acquired business. CRC agreed to act, through its employees or agents, as the Principal Investigator for the drug trials at the acquired business location. The Agreement defined the locations of the acquired business as a site. The Principal Investigator of a clinical drug trial is responsible for conducting the trial under Food and Drug Administration rules. Anjuli Nayak was the Principal Investigator on the drug trials at the site. ICSL agreed to perform the business and accounting functions for the acquired business, including advertising, quality assurance, regulatory support, patient recruitment, business development, payroll, record maintenance, collection of receivables and payment of bills.
Section 2.3 of the Agreement called for CRC to receive a monthly management fee based on net revenues after payment of expenses and fees to ICSL. Monthly revenues were first allocated to pay site expenses and monthly ICSL fees. Defendants then receive the lesser of: (a) the actual remaining monthly revenues; and (b) a predetermined projected monthly net income. If the monthly revenues were insufficient to pay expenses and fees to ICSL, then Defendants would not receive a payment for that month. The parties represented to the Court at the TRO hearing that Defendants were entitled to a monthly fee of $75,000. Apparently, no such fee existed. Rather, the parties seem to have been referring to the monthly payment of net revenues based on the above formula.
The Agreement called for the establishment of a Steering Committee to make all major business planning decisions regarding the operation of the site. The Steering Committee was to be made up of six members, three from CRC and three from ICSL. The Steering Committee's duties included making the projections necessary to calculate the monthly fee.
The Agreement had a term of forty years. If either side defaulted on its performance under the Agreement, the non-breaching party could give notice of default and terminate the Agreement if the default was not cured within thirty days. In addition, either side could terminate the Agreement immediately if the other party filed a voluntary petition in bankruptcy.
The Agreement also had several covenants. The covenant in Section 4 required Management to, "act exclusively on behalf of [ICSL] in managing the Business . . . ." Section 7 prohibited either party from disclosing the other party's confidential information. Section 8 contained restrictive covenants. Section 8.1 stated:
[D]uring the term of this Agreement, and for a period of three (3) years after the termination hereof (the "Restrictive Covenant Period"), Management and Management's Shareholders shall not, directly or indirectly, for themselves or on behalf of any person or entity (i) contract with another [site management organization] or organization providing site management activities for the purposes of directly or indirectly engaging in the activities contemplated by this Agreement, or (ii) engage in business as a site management organization or provide site management activities. . . . This provision shall apply individually to each of Management's Shareholders throughout the Restrictive Covenant Period notwithstanding the fact such Shareholder ceases to be involved with or to be a Shareholder of Management prior to the end of such period.
Section 8.2 provided:
Management and each of Anjuli Nayak and Nicholas Nayak covenant and agree that during the Restrictive Covenant Period, unless otherwise agreed in writing by [ICSL], Management shall not, directly or indirectly, for itself or on behalf of any person or entity, hire or attempt to hire any then current employee of [ICSL] or take any other action which would encourage any such employee to leave the employment of [ICSL] . . . .
Section 8.3 stated:
Notwithstanding anything to the contrary contained in Sections 8.1 or 8.2, in the event that this Agreement . . . (ii) is terminated by Management as a result of [ICSL's] material breach of this Agreement, the Restrictive Covenant Period shall end on the effective date of the termination of the Agreement.
Section 10 of the Agreement authorized filing suit in the event of a breach. The section stated:
Each party expressly recognizes that any breach of this Agreement will result in irreparable injury to the other party and agrees that the other shall be entitled, if it so elects, to institute and prosecute proceedings in any court of competent jurisdiction, either in law or in equity, to obtain damages for any breach of this Agreement, to enforce the specific performance of this Agreement by the other party hereto, and because a remedy at law is inadequate, to enjoin the other party from activities in violation of this Agreement . . . .
Section 14 of the Agreement provided for mediation and arbitration. Section 14.1(a) stated, in part, "If . . . (ii) a dispute arises between [ICSL] and Management concerning the terms hereof, and such dispute is not resolved within thirty (30) days, the parties agree to attempt to settle the dispute by mediation . . . ." Section 14.2 stated in part, "In the event a dispute is not settled through the procedures outlined in Section 14.1, the matter shall be resolved by binding arbitration . . . ."
As part of the business acquisition, ICSL also executed a Subordinated Non-negotiable Note (Note) in the original principal sum of $4,078,269 payable to Anjuli Nayak. Defendants' Exhibit 24. The first payment of $2,000,000 was due April 1, 1999. That payment was made. The Note called for a second payment of $1,200,000 on January 1, 2002, and a final payment of $872,000 on January 1, 2004. Filing bankruptcy by ICSL constituted a default under the Note. In the event of default, Anjuli Nayak could accelerate the Note and declare all sums immediately due and payable.
Difficulties arose almost immediately in the relationship between ICSL and Defendants. Defendant Nicholas Nayak testified that ICSL was originally supposed to pay $2,000,000 at the time of the acquisition on January 1, 1999, but, at the last minute, ICSL negotiated a three-month delay in this payment. This payment then became the April 1, 1999, payment under the Note referenced above.
Anjuli Nayak testified that Defendants never performed any of their obligations under the Agreement other than advertising, payroll, accounts receivable and accounts payable. According to the Nayaks, ICSL did not perform even these three functions properly. According to Anjuli Nayak, ICSL paid far too much for advertising which resulted in cost overruns, and was consistently late in paying bills. ICSL was late in making 24 of 28 monthly revenue payments to the Site. Anjuli Nayak testified that, over time, Defendants were forced to assume responsibility for most, if not all, of ICSL's support functions under the Agreement in order to keep the research site operating.
ICSL Vice President for Site Services Bruce Gould testified that ICSL performed its obligations under the Agreement. At the time of the hearing, Gould had been Vice President for Site Services for six months. He had no direct contact with the Defendants prior to the filing of this suit. Two other individuals, Bill Sibold and Adrian Otte, managed ICSL's relationship with Defendants. Sibold left ICSL in September 2001, and Otte left in October 2001. Gould has never been to the Defendants' Site. Gould testified that prior to Otte's departure in October 2001, he was directed not to contact the Defendants directly. Instead, he spoke to an employee at the site, Site Director Jill Brennan.
ICSL Treasurer and Operations Manager Antonio Montecalvo testified that ICSL paid Site operating expenses within 30 to 60 days of receiving invoices from the Site. In addition to operating expenses, patients participating in studies were entitled to compensation for each office visit during the study. These payments were due at the time of the visit. Montecalvo stated that ICSL paid charges for patient fees upon receipt of invoices.
On February 15, 2000, Defendants' counsel sent a letter to ICSL complaining about ICSL's failure to perform under the Agreement. Defendants' Exhibit 3. The parties' attorneys traded correspondence in February and March, 2000. Defendants' counsel's letter dated M arch 14, 2000, specifically stated that ICSL was in breach of the Agreement. Defendants Exhibit 6. The letter concluded, "In conclusion, it is CRC's position that [ICSL] acknowledge the breach of the Management Agreement before CRC or its officers can proceed with any further amendments as requested." Matters seem to have been somewhat resolved at this point. The Defendants took no further action regarding their complaints with ICSL at this time. Defendants made no further written demands on ICSL until November 2000.
In the interim, ICSL filed Chapter 11 bankruptcy on July 14, 2000. ICSL negotiated the bankruptcy reorganization plan with third party creditors before filing. ICSL filed its Plan of Reorganization (Plan) at the time it filed bankruptcy. Plaintiffs' Exhibit 14A. ICSL mailed notices to certain creditors. The service list, however, does not contain the name of any Defendant. Request for Judicial Notice (d/e 32). ICSL further published notice of the bankruptcy in the Wall Street Journal on July 19, 2000, and the Providence Journal, on July 21, 2000. Plaintiffs' Exhibits 14B 14D, at 2.
The Bankruptcy Court's Confirmation Order entered August 25, 2000, states that the Bankruptcy Court entered a Scheduling Order on July 14, 2000, which authorized notice by mail to parties-in-interest, combined with notice by publication in the above referenced newspapers. Plaintiffs' Exhibit 14D, at 2. The Confirmation Order states that the notice was given and that the notice was adequate and appropriate.
Confirmation Order at 2.
The Confirmation Order states that all executory contracts were assumed in accordance with the provisions and requirements of Bankruptcy Code §§ 365 1123, except those previously rejected by order of the Bankruptcy Court or subject to a motion to reject at the time of confirmation. The Agreement constituted an executory contract under the Bankruptcy Code because each party to the Agreement still had substantial obligations to perform at the time of the filing. 11 U.S.C. § 365; In re Streets Beard Farm Partnership, 882 F.2d 233, 235 (7th Cir. 1989). The Agreement was not subject to any motion to reject or Order to reject. ICSL therefore assumed that Agreement under the reorganization plan.
The Confirmation Order stated that all defaults under such assumed contracts would be cured under the Plan. The Plan further indicates that only one class of creditors was impaired by the Plan. The Note was not in this class and so was not impaired by the bankruptcy reorganization. The Confirmation Order approved the Plan of Reorganization.
The Defendants, however, continued to have problems with ICSL. On November 13, 2000, Anjuli and Nicholas Nayak wrote a letter to ICSL complaining of the deficiencies in ICSL's performance. Defendants Exhibit 7. After listing 12 specific complaints, the letter states,
We can go on and on, but at the end of almost two years we have realized that ICSL has made our functioning difficult, stressful and full of roadblocks. We are stretching ourselves thin and walking on eggshells as we spend ninety to one hundred hours at work each week. You have failed to provide the infrastructure and support that you promised. Your services are countered productive [sic], non-congenial and unpredictable. Your attitude is to feast on all our hard work and labor. This cannot be allowed to go on!
The Nayak's letter demanded changes in the relationship or termination of the Agreement. The letter concludes,
We will allow two weeks, until Monday, November 27, for you to come to a decision on the above. We would like to have everything resolved and to be able to begin a fresh business year on January 1, 2001. We also do not expect any further payments from you following the termination date. (emphasis in the original).
After this letter, the parties negotiated and executed the First Amendment to Clinical Research Management Agreement, dated January 15, 2001 (Amendment). Defendants Exhibit 8. The Amendment also addressed a major issue that had developed regarding office space. The Site facility in Bloomington, Illinois, was in the office building owned by the Bromenns Foundation. Anjuli Nayak's medical practice was across the hall in the same office building. ICSL had signed a long term lease for the Site's space in the building without consulting Defendants. The lease of Nayak's medical practice space ended in July 1999. Bromenns Foundation agreed to extend her tenancy one year, but no further. Defendants wanted Nayak's medical practice and the Site facility to be in the same or adjoining office space for the convenience of her patients and herself. Most, if not all, of the research subjects were also patients of Anjuli Nayak. ICSL representatives told Anjuli Nayak to keep her practice in the space across the hall form the Site facility even after her lease had expired. The lack of a lease and the need to keep the practice and the Site together caused great concern to the Defendants.
Gould had never seen the Amendment prior to the hearing.
The Amendment also added definitions of ICSL's duties under the Agreement. Defendants' Exhibit 30.
The March 14, 2000, letter (Defendants' Exhibit 6) states that this was done without consulting Dr. Nayak and violated the Acquisition Agreement. The Acquisition Agreement is not before the Court.
The Amendment attempted to resolve this problem. The Amendment provided that Anjuli Nayak would negotiate in good faith for an extension of the lease on her space. If she was unable to secure a new lease, ICSL agreed to relocate the Site, "to mutually agreeable commercial space with the intention that the Site and the medical practice of Anjuli Nayak M.D. will operate from the same or adjoining offices." The Amendment further provided that ICSL would pay up to $15,000 in legal fees for Nayak to defend against any action by Bromenns Foundation against her.
Anjuli Nayak attempted, but was unable to negotiate a lease extension on her space. ICSL insisted that Anjuli Nayak keep her private practice in the office space at the Bromenns Foundation building as long as possible. Bromenns Foundation proceeded with its action to evict Nayak from the space she had occupied for her private practice. The State Court gave Nayak verbal notice on May 15, 2001, that her practice would be evicted. ICSL representative Otte told her to stay as long as possible rather than start looking for new office space. She finally received the written eviction notice in July 2001. The notice gave Nayak two weeks to move out.
Nayak immediately searched for new, adjoining space for her practice and the Site. She orally agreed to rent a space for both without consulting ICSL. Defendants thereafter immediately contacted ICSL and offered to let their representatives look at the new space prior to signing a lease. ICSL representatives declined. At the end of July and beginning of August 2001, Defendants moved Nayak's practice and the Site to the new space. The rush in moving, caused by ICSL's decision to stay at the Bromenns Foundation building as long as possible, resulted in a hurried and expensive move. The Defendants state that ICSL's share of the moving expenses totaled $51,900.
On August 1, 2001, Nicholas Nayak and ICSL representatives held a telephone conference. The notes from the conference indicate that ICSL agreed, in principle, to pay two-thirds of the rent at the new facility and pay a similar proportion of the moving expenses. ICSL representatives were to prepare a sublease for the space used by the Site. ICSL representatives also asked for documentation of the moving expenses. Plaintiffs' Exhibit 10A; Defendants' Exhibit 32. ICSL also did not pay the Defendants a management fee for August 2001, because revenues did not exceed expenses plus ICSL's fees. Under the formula, Defendants were not entitled to a fee that month.
ICSL Vice President Don Palazini sent a letter to Nicholas Nayak dated August 13, 2001. Plaintiffs' Exhibit 11. The letter stated that Palazini submitted a request for reimbursements of $6,444.12 of the requested moving expenses and requested further documentation on most of the remaining expenses. The attachment to the letter shows that the parties disputed the amount of the moving expenses. The attachment lists total moving expenses as $43,503.09, far less than the $51,900 that Defendants' believed to be ICSL's share. The attachment shows that ICSL questioned expenses totaling $318.75 and claimed to have no receipts for expenses totaling $33,417. The letter further states that ICSL had not received a copy of the lease on the new facility. The letter states, "Without a copy of the lease, we are unable to reimburse you for our portion of the expense." Nicholas Nayak testified that he had already provided a copy of the lease. The letter concludes, "Upon our receipt of the requested backup, you will be reimbursed for ICSL's agreed upon share of these expenses."
Nicolas Nayak responded to Palazini's letter with a letter to Otte dated August 15, 2001. Plaintiffs' Exhibit 12. The letter said, in part, "You need to pay all the moving expenses which are $51,900 (ICSL share) dated 8-3-01. If this bill is not paid within 30 days, I will ask the [Drug Trial Contractors] to pay us in advance and we will pay our bills."
In August 2001, Anjuli Nayak gave an interview that was published in the Peoria Journal Star newspaper. Plaintiffs' Exhibit 6. In the interview she said that ICSL was going out of business and that she would contract directly with drug companies for future studies.
Anjuli Nayak also started contacting Drug Trial Contractors in August 2001. She told them that she was no t being paid by ICSL. She told the Drug Trial Contractors that they needed to pay her directly. She started signing agreements with Drug Trial Contractors calling for direct payments to her. She testified at the hearing that she had signed approximately 18 agreements with Drug Trial Contractors since August. She testified that prior to November 8, 2001, she did not tell Drug Trial Contractors that she was severing her ties with ICSL. Rather, she only told them that she needed to be paid directly.
The parties continued negotiations throughout August and September 2001. Defendants' Exhibit 13. The Defendants wanted assurances that the January 1, 2002, payment on the Note would be made and that moving expenses and other expenses would be paid in a timely manner. Anjuli Nayak continued to contact Drug Trial Contractors to secure direct payment for the ongoing trials. ICSL continued to refuse to pay moving expenses and rent.
On October 4, 2001, Defendants sent two Notices of Default to ICSL. Defendants' Exhibits 14 15. The first Notice declared a default on the Note and the second declared a default under the Agreement. Both Notices cited the July 2000 bankruptcy as the act of default. The Notice of Default on the Note stated that the Note was now accelerated and all sums were due and owing immediately. The Agreement Notice said that the Agreement was terminated immediately. On October 5, 2001, Defendants offered employment to Site employees if they resigned as employees of ICSL. Three refused and were denied access to the offices by Defendants thereafter. Defendants also sent letters to Drug Trial Contractors stating that all financial agreements and contracts should be made directly with Anjuli Nayak from now on. The letters did not state whether she was severing her ties with ICSL.
Counsel for the parties continued to negotiate. Defendants decided to step back from the position that the Agreement was terminated completely. On October 7, 2001, Defendants sent a second Notice of Default on the Agreement. Defendants' Exhibit 18. The October 7 Notice declared defaults based on ICSL's,
1. Failure to provide appropriate support services such as business development, QA Support, Regulatory Support, Subject Advertising Support;
2. Failure to meet financial obligations in a timely manner . . . .
The letter said ICSL had thirty days to cure the defaults. The letter also demanded mediation with respect to the default on the Note.
The October 7 Notice also contained a list of outstanding bills according to the records of Nicolas Nayak. The list showed that most bills, other than the disputed moving expenses and rent, were paid within sixty days of the time Nicolas Nayak posted the obligation in his records. At least some of these bills were patient payments which were supposed to be paid on receipt. The documents indicate that ICSL was paying these obligations like other operating expenses. Anjuli Nayak testified that the failure to pay patients in a timely manner was a serious breach.
ICSL also stopped paying the monthly fee to Defendants beginning in August 2001. As discussed above, no fee was due in August because revenues were too low. Montecalvo testified that the fee was not paid for September or October because Defendants did not provide the data needed to calculate the fee. The move had disrupted Defendants' ability to transmit the necessary information to ICSL via computer downloads. The Agreement states that Defendants are obligated to provide necessary information in order to receive payment of fees and expenses. Montecalvo testified that, after August 1, Defendants did not provide alternate hard copy documentation necessary to calculate monthly fees.
Counsel for ICSL responded to the October 7 Notice by asking for mediation and arbitration to resolve the disagreement between the parties. Defendants' Exhibit 19. Defendants' counsel responded with the letter dated October 16, 2001.
Defendants' Exhibit 20. This letter offered to mediate the defaults raised in both the October 7 Notice and the October 4 Default Notice on the Note. Counsel included with this correspondence an updated statement of Nicholas Nayak's record of outstanding expenses. The document again showed payment within sixty days of the time Nicholas Nayak posted the obligation in his records.
Even as the parties' counsels continued negotiations, Anjuli Nayak's direct contracts with Drug Trial Contractors had a serious negative effect on ICSL. According to Gould, ten to twelve Drug Trial Contractors requested amendments to their agreements to call for payment directly to Defendants. Some sent notices of termination of study agreements. Plaintiffs' Exhibits 15, 16A 16B. Gould testified that he fielded numerous calls from Drug Trial Contractors. He said contractors became skeptical of ICSL's ability to perform drug trials generally and were reluctant to award ICSL future business.
ICSL filed this action on October 25, 2001. The action claims breach of contract, breach of covenants, and tortious interference with ICSL's business relations.
ICSL filed a Motion for Temporary Restraining Order with its Complaint. The matter was set for hearing on November 14, 2001, before this Court. In the interim, on November 8, 2001, the Defendants gave ICSL Notice that the thirty days had expired since the October 7, 2001, Notice, and the Agreement was terminated because ICSL had failed to cure the defaults. The Court denied the Motion for Temporary Restraining Order. Order entered November 21, 2001 (d/e 28).
The motion was first heard by Judge McDade of this Court on November 2, 2001. During the hearing, information came to light that required Judge McDade to recuse himself.
ICSL now seeks a preliminary injunction. ICSL asks the Court to preliminarily enjoin Defendants from: (1) violating the covenants in the Agreement, (2) otherwise breaching the Agreement; (3) interfering with ICSL's contractual relationship with its employees and Drug Trial Contractors; and (4) refusing to submit to mediation and arbitration called for in Section 14 of the Agreement. To secure this relief, ICSL must show: (1) a likelihood of prevailing on the merits, (2) an inadequate remedy at law, and (3) irreparable harm if the preliminary relief is denied. Grossbaum v. Indianapolis-Marion County Bldg. Auth., 63 F.3d 581, 585 (7th Cir. 1995). If ICSL establishes these elements, the Court must then weigh the equities between the parties, considering both the harm to ICSL by denying the relief and the harm to the Defendants in granting the relief. The Court must also weigh the public interest, meaning the effect of the equitable relief on nonparties. Id.
ICSL's Contract Claims
ICSL has failed to show a likelihood of prevailing on the merits of its contract claims, including its breach of covenant claims. A party asserting a right under contract must prove that it performed its obligations under that contract. Priebe v. Autobarn, Ltd., 240 F.3d 584, 587 (7th Cir. 2001). ICSL has not established eve n a negligible chance of showing that it performed its obligations under the Agreement. The Court finds credible the Nayaks' testimony that ICSL had never performed its obligations under the Agreement, other than payroll, accounts receivable and accounts payable.
The conflicting testimony of Bruce Gould regarding ICSL's performance of its obligations was not credible. Gould testified in a very summary fashion that ICSL provided the services called for under the contract. Gould, however, did not have responsibility over ICSL's relationship with Defendants until October 2001, after the critical events in this matter occurred. Sibold and Otte dealt with Defendants. Gould was not on the Steering Committee. He had never seen the Amendment prior to the hearing. Gould failed to demonstrate to the Court that he had any personal knowledge on which to base his assertions that ICSL performed its obligations to the Site.
Montecalvo's testimony that ICSL paid operating expenses within thirty to sixty days of receipt of invoices was credible. The Defendants' records attached to the October 7 Notice and the October 16 letter show payment within sixty days. The Defendants' records, however, show that ICSL was not paying patient fees upon receipt. Patient participation is crucial in drug trials. Thus, failure to pay these fees promptly could constitute a significant breach.
Based on the current record before the Court, ICSL has not shown that it has any likelihood of establishing that it either performed its obligations under the Agreement to provide services to the Site or to pay patient fees in a timely manner. Therefore, ICSL has not shown any likelihood of prevailing on the merits of its contract claims.
ICSL's Tortious Interference Claims
ICSL has show n a likelihood of prevailing on the merits of its tortious interference claims. To establish tortious interference with the business relationship, ICSL must show: (1) the reasonable expectation of maintaining a valid business relationship, (2) Defendants' knowledge of ICSL's expectancy, (3) the purposeful interference by Defendants that prevents ICSL's expectancy, and (4) damages resulting therefrom. Fellhauer v. City of Geneva, 142 Ill.2d 495, 568 N.E.2d 870, 878, 154 Ill. Dec. 649, 657 (1991). Purposeful interference requires proof of intentional conduct designed to interfere with the business expectancy, and, also that the conduct involved some impropriety. Dowd Dowd Ltd. v. Gleason, 181 Ill.2d 460, 484-85, 693 N.E.2d 358, 371, 230 Ill. Dec. 229, 242 (1998).
Prior to termination of the Agreement, Defendants owed a duty to ICSL under the Agreement not to interfere with ICSL's contractual relationships with either ICSL's employees or with the Drug Trial Contractors. In clear violation of this duty, Defendants intentionally induced Drug Trial Contractors to violate or modify their contractual relationships with ICSL and send payments directly to Defendants. Anjuli Nayak gave an interview to the press in which she said that ICSL was going out of business and that she would be working directly with Contractors. Defendants further intentionally induced ICSL employees to resign from ICSL and work directly for Defendants. Such activities violate the covenants in the Agreement and constitute the type of improper, intentional conduct that would support ICSL's tortious interference claim.
ICSL further has established an inadequate remedy at law and irreparable harm. Irreparable injury, "denotes transgressions of a continuing nature such as constant breach of a contract resulting in damage to the good will of a business . . . ." Prentice Medical Corp. v. Todd, 145 Ill. App.3d 692, 701, 495 N.E.2d 1044, 1051, 99 Ill. Dec. 309, 316 (1986). Such continual injury to a business's reputation cannot be adequately remedied at law. Id. Gould's testimony established that Defendants' conduct has damaged ICSL's reputation with Drug Trial Contractors. Defendants continue to engage in this conduct. The ongoing injury to ICSL's business reputation therefore is irreparable and cannot be adequately remedied at law.
In denying the TRO, the Court found that the tortious conduct was not ongoing because the evidence presented indicated that the Agreement was terminated no later than November 8, 2001. Once the Agreement ended, Defendants' efforts to compete with ICSL did not appear tortious. The evidence presented in support of the preliminary injunction, however, shows that ICSL is likely to prove that the Agreement was not terminated.
Defendants argue that the Agreement was terminated either: (1) on November 8, 2001, when ICSL failed to cure the defaults raised in the October 7, Notice; or (2) on October 4, 2001, when Defendants gave Notice that ICSL's July 2000 bankruptcy terminated the Agreement. The Court agreed with this argument in its order denying the TRO because the evidence then presented indicated that ICSL arbitrarily stopped paying a $75,000 monthly fee in August 2001, while Defendants did not commit any tortious acts until October 2001.
The evidence now presented paints quite a different picture. No $75,000 monthly fee existed. Rather, the Defendants received a monthly payment based on a formula in the Agreement that took into account the prior month's revenue and expenses. Under the formula, Defendants were not entitled to a payment in August 2001.
The evidence also showed that Defendants began interfering with contracts in August 2001, not October. Defendants moved the Site on or about August 1, 2001. The correspondence in early August (Defendants' Exhibit 32 and Plaintiffs' Exhibits 10A, 10B, and 11) indicate that ICSL agreed in principle to pay two-thirds of the rent at the new facility and to pay some moving expenses. On August 15, 2001, Nicholas Nayak gave ICSL thirty days to pay the disputed moving expenses in full. Defendants, however, did not wait the thirty days to give ICSL the opportunity to resolve the dispute; Anjuli Nayak started interfering with Plaintiffs' agreements with Drug Trial Contractors in August 2001.
His letter may or may not be viewed as a Notice of default under the Agreement. The Court does not decide this question.
The timing of the interference may make the October 7, 2001, Notice of Default (Plaintiffs' Exhibit 2 Defendants Exhibit 18) ineffective. Defendants violated the Agreement by attempting to divert the flow of revenues from ICSL to themselves as early as August 2001. By October 2001, this breach may have so starved ICSL of revenue that it could not cure the defaults raised in the October 7 Notice. A party to a contract cannot prevent the other party from performing its obligations under a contract and then declare breach based on that failure to perform. Cenco, Inc. v. Seidman Seidman, 686 F.2d 449, 453 (7th Cir. 1982); Restatement (Second) of Contract § 245. Under the evidence presented at this hearing, ICSL has demonstrated a likelihood of proving that Defendants were not entitled to use the ICSL's failure to cure as a basis for terminating the Agreement on November 8, 2001.
The evidence also establishes that the October 4, 2001, Notice did not terminate the Agreement. First, Defendants stepped back from their decision to terminate the Agreement when they sent the second, October 7 Notice of Default. The second Notice gave ICSL thirty days to cure defaults. The second Notice effectively withdrew the Notice to terminate based on the bankruptcy.
Also, the bankruptcy did not constitute a default that would entitle Defendants to terminate the Agreement. Under the confirmed bankruptcy plan of reorganization, ICSL assumed all of its obligations under the Agreement and cured all defaults. The Bankruptcy Code authorizes such a cure of defaults in executory contracts through confirmed plans of reorganization. 11 U.S.C. § 365, 1123, 1129 1141. The filing of the bankruptcy therefore was not an event of default that entitled Defendants to terminate the Agreement.
Defendants argue that Notice by publication is constitutionally inadequate. The Court disagrees. The Bankruptcy Court authorized Notice by publication in the July 14, 2000, Scheduling Order. Such Notice is proper. Bankruptcy Rule 2002(l). Defendants received proper Notice of the bankruptcy proceeding.
Defendants cite Chemetron Corp. v. Jones, 72 F.3d 341 (3rd Cir. 1995) to support their position that the Notice was defective. The Chemetron Court held that a debt cannot be discharged without actual Notice. 72 F.3d at 346, 47. ICSL, however, did not attempt to discharge any obligation to Defendants in the bankruptcy. Rather, ICSL assumed the obligation to perform the Agreement in full. Further, the Chemetron Court stated that Notice must be reasonably calculated to reach interested parties. A party-in-interest under the Bankruptcy Code is someone whose interest could be affected by the outcome of the proceeding. Adair v. Sherman, 230 F.3d 890, 894 n. 3 (7th Cir. 2000). In this case, Defendants' rights under the Agreement would not be affected by ICSL's prepackaged bankruptcy. The Plan of Reorganization was filed the day the case was opened. The Plan called for ICSL to assume all obligations under the Agreement. Defendants' rights under the Agreement would not be affected by the bankruptcy. Even under the holding in Chemetron, publication Notice would have been appropriate for such parties.
Certain parties are specifically named as parties-in-interest in chapter 11 proceedings. 11 U.S.C. § 1109. Non-debtor parties to executory contracts are not on this non-exhaustive list.
Defendants argue that Anjuli Nayak should have received personal notice as the holder of the Note. A creditor, such as Anjuli Nayak, would, statutorily, be a party-in-interest in a Chapter 11 proceeding. 11 U.S.C. § 1109. The Note, however, is not before the Court. The Note and the Agreement are not integrated; a default under one is not a default under the other. Thus, any failure to give personsal notice to Anjuli Nayak as the holder of the Note, would not affect the validity of the Notice for purposes of evaluating the bankruptcy's effect on the Agreement. Finally, the Note was not discharged in the bankruptcy. Thus, it is unclear, even under Chemetron, whether she was constitutionally entitled to personal notice.
Furthermore, the parties signed the Amendment on January 15, 2001, long after ICSL's bankruptcy plan was confirmed in August 2000. An amendment to a contract is based on a new, independent offer, acceptance and consideration. See International Business Lists, Inc. v. American Tel. Tel. Co., 147 F.3d 636, 641 (7th Cir. 1998). That occurred here. The parties negotiated a resolution of at least some of the issues raised in the Nayaks' November 2000 letter. They came to an agreement that obligated Anjuli Nayak to negotiate an extension of her lease for her practice space in the Bromenns Foundation building, and obligated ICSL to pay legal fees. The Amendment further ratified and confirmed the prior Agreement. The prior bankruptcy should not affect the parties' post-bankruptcy bargained — for agreement to perform their obligations under the Amendment.
Thus, ICSL has demonstrated a likelihood of proving that the Agreement was not terminated by either the October 4, 2001, Notice, or the October 7, 2001, Notice. It did not make such a showing at the TRO hearing. ICSL is thus likely to prove that the Defendants' efforts to induce Drug Trial Contractors to modify or terminate their agreements with ICSL constituted tortious interference with ICSL's expectancy of a continued business relationship with those contractors. The ongoing nature of the violation further establishes irreparable injury and the lack of an adequate remedy at law.
Defendants argue that they should be entitled to a defense of qualified privilege to the tortious interference claim. They argue that they had to secure funds to protect the integrity of the studies, the patients participating in the studies, the interest of the Drug Trial Contractors, and the United States Food and Drug Administration, which relied upon the quality of Anjuli Nayak's research activities.
The Court is not convinced. If Defendants had determined that ICSL would not honor its commitments to pay the moving expenses and rent, or if they could no longer tolerate ICSL's failure to perform its other obligations under the Agreement, they should have given the proper notice of default under the Agreement with thirty days to cure. At the end of the thirty-day cure period, the defaults would have been cured or Defendants would have been free from any obligations under the Agreement.
Defendants started to follow this path. Nicholas Nayak gave ICSL thirty days to pay the moving expenses on August 15, 2001, but then began interfering with ICSL's contracts in August, before the thirty days had expired. The Court sees no evidence in the record to establish that Defendants could not have waited the thirty days before attempting to deal directly with the Drug Trial Contractors. The evidence before the Court does not show that the Defendants are likely to prevail on a defense of privilege.
ICSL's request for an injunction should not be barred by the doctrine of unclean hands. Under the doctrine of unclean hands, the plaintiff's fault in the situation may be relevant to determining the appropriate remedy. Shondel v. McDermott, 775 F.2d 859, 868 (7th Cir. 1985). The Court found in the TRO Order that ICSL was barred by the doctrine. The evidence at that hearing, however, indicated that ICSL stopped paying a monthly $75,000 fee and Site expenses in August 2001, but Defendants did not start interfering with ICSL's contracts until October. As explained above, the evidence presented in support of this motion shows that Defendants started interfering with ICSL's contracts in August, not October, and ICSL did not refuse to pay either monthly fees, moving expenses or rent until after Defendants' tortious conduct began. Under these facts, the Court finds that the doctrine of unclean hands will not bar ICSL from some equitable relief.
The Court must also weigh the equity of the parties and the effect on the public of any proposed injunctive relief. Defendants argue that an injunction that required Defendants to continue their relationship with ICSL would threaten Dr. Anjuli Nayak's reputation in the clinical drug trial industry. The evidence does not support this conclusion. First, the testimony of defense witnesses Drs. Donald Banerji and Thomas Scarrett gave no indication that her association with ICSL has affected her reputation in the least. Second, Anjuli Nayak repeatedly testified that she never told Drug Trial Contractors that she was severing her relationship with ICSL. Rather, she only wanted to modify the method of payment. The correspondence from defense counsel dated October 16, 2001 (Defendants' Exhibit 20), stated that Defendants wanted to mediate the dispute, not terminate the relationship. This evidence shows that Nayak was not opposed to a continuation of her relationship with ICSL until after the suit was filed. An injunction forcing some continuing relationship would not pose a substantial threat to her reputation. In contrast, Gould testified that the ongoing damage to ICSL's reputation is substantial. The equity of the parties therefore weigh in favor of granting some preliminary injunctive relief.
The Court finds, however, that ICSL's failure to perform its obligations under the Agreement weighs against granting the complete relief that ICSL seeks. ICSL is entitled to injunctive relief under the tortious interference claim. Tortious interference depends on the reasonable expectations of Plaintiffs of ongoing business relationships with the Drug Trial Contractors. Fellhauer, 568 N.E.2d at 878, 154 Ill. Dec. at 657. Injunctive relief depends on the ongoing nature of the tortious injury. Prentice Medical Corp., 495 N.E.2d at 1051. The Plaintiffs' relationship with the Drug Trial Contractors depends on maintaining a business relationship with Defendant Anjuli Nayak because she is the Principal Investigator in the drug trials covered by the contracts with which she interfered.
The evidence concerning ICSL's continual failure to perform services called for under the Agreement makes ICSL's expectation of maintaining an ongoing relationship with Anjuli Nayak, and so the Drug Trial Contractors, tenuous at best. In weighing the equity of the parties, the Court finds that injunctive relief should therefore also reflect ICSL's chronic failure to perform services, and so, the limited nature of its reasonable expectations. The preliminary injunction therefore will expire six months from the date of entry.
The Court must also consider the interests of the public. All parties agree that the interests of the public would be served by allowing the drug trials to continue so that effective new treatments for illnesses could be developed faster. The parties further agree that Anjuli Nayak must continue to act as Principal Investigator if the trials are to continue. Defendant Anjuli Nayak testified that she did not terminate the relationship with ICSL when she interfered with their contracts with the Drug Trial Contractors. Rather, she modified the method of payment. She fully intended to account to ICSL for all funds directly received. Gould similarly stated that ICSL does not wish to terminate the relationship with Defendants. Given these statements of the parties, the Court is convinced that the drug trials and patient care will continue if a preliminary injunction set forth in this Order is entered. The preliminary injunction therefore will not threaten the interests of the public.
The Court also finds that the preliminary injunction should require mediation and arbitration. The parties were moving toward mediation when the action was filed. Defendants argue that ICSL waived any right to mediation by filing this action. The Court disagrees. The whole import of ICSL's request for a preliminary injunction is to stop the ongoing tortious conduct so that the status quo can be maintained while mediation and, if necessary, arbitration are completed. The Court has the equitable authority, in appropriate cases, to grant injunctive relief in cases that are ultimately resolved by mediation and arbitration. Gateway Eastern R y. Co. v. Terminal Rail R.R. Ass'n, 35 F.3d 1134, 1141 (7th Cir. 1994).
Finally, both parties have responded to the Notice to Parties entered by the Court on January 11, 2002 (d/e 41). ICSL has inquired of the Court whether the preliminary injunction will require the parties to comply with the terms of Agreement prospectively with respect to contracts executed by Defendants since August 1, 2001. Defendants inquired whether they could continue to sign new contracts with Drug Trial Contractors after entry of the preliminary injunction.
The injunction will not include either request. ICSL is not likely to succeed on its contract claims; therefore, the injunction should not mandate specific performance on the Agreement. Defendants, however, acted precipitously by not following the termination procedures in the Agreement before contacting Drug Trial Contractors directly. Thus, those contacts were tortious. The Court, therefore, will, for six months, enjoin Defendants from entering into future contracts. The Defendants will not be allowed to deal directly with Drug Trial Contractors, but must have the approval of ICSL for all new studies.
As to the existing contracts signed since August 2001, the Court will require Defendants to account for all funds received, but the parties will not be required to comply with terms of the Agreement. The Court notes that should ICSL ultimately prevail on either its contract or tort claims, Defendants may be required to pay ICSL significant amounts on any number of theories of recovery. Both sides should proceed with caution and good faith in accounting to the other side for revenues from drug trials during the pendency of the injunction and in attempting to mediate a global resolution of all aspects of the dispute.
Therefore, the Motion for Preliminary Injunction (d/e 36) is ALLOW E.D. in part. For a period of six months from the date of the entry of this Order, Defendants, their agents, officers, employees, and all other persons acting in concert with them are hereby enjoined:
A. To comply with the mediation and arbitration provisions set forth in sections 14.1, 14.2, and 14.3 of the Agreement;
B. Not to represent to Drug Trial Contractors or the general public that they are no longer affiliated with ICSL as long as ICSL retains Defendants to perform drug trials;
C. Not to represent to Drug Trial Contractors or the general public that ICSL cannot pay its bills, is going out of business, or any other similar statement which may harm the reputation of ICSL;
D. Not to enter into any new contracts to perform clinical drug trials (Clinical Trial Contracts) without the written consent of ICSL;
E. To produce by January 31, 2002, a current accounting of all revenues received for any work performed under Clinical Trial Contracts negotiated by ICSL prior to the date of this Order, or under Clinical Trial Contracts the Defendants have executed in their own names since August 1, 2001; and
G. To produce an accounting on a monthly basis of all revenues received during the pendency of the injunction for any work performed under Clinical Trial Contracts negotiated by ICSL prior to the date of this Order, or under Clinical Trial Contracts the Defend ants have executed in their own names since August 1, 2001. The first monthly accounting shall be due on February 15, 2002, and shall cover revenues received from the date of this Order through January 31, 2002. The subsequent monthly accountings shall be due on the 15th day of each month thereafter, and shall cover the revenues received during the preceding month.
The Court further hereby stays this proceeding pending the outcome of the mediation and arbitration.
IT IS THEREFORE SO ORDERED.