Cases from Illinois

Illinois Appellate Court
Illinois Court Addresses “bad faith” Under Illinois Trade Secret Act

In Conxall Corp v. ICONN Systems, LLC, at al. the Illinois Appellate Court determined what constitutes “bad faith” under §5 of the Illinois Trade Secret Act for purposes of awarding attorneys’ fees. In a divided decision, the court proposed two standards for defining “bad faith” under the statute.

Section 5 of the Illinois Trade Secret Act states that if “a claim of trade secret misappropriation is made in bad faith . . . the court may award reasonable attorneys’ fees to the prevailing party.” The majority held that Illinois courts should determine the meaning of “bad faith” by examining if the pleadings were frivolous or in some way abuse the judicial process. The concurring judge followed California’s approach, which held that a claim is made in “bad faith” under California’s Trade Secret Act if it consists of “(1) objective speciousness and (2) subjective bad faith." The majority noted that the California approach has been adopted in a number of federal courts.

Despite taking different approaches to defining “bad faith,” the judges all agreed to remand the issue to the lower court for consideration.

A copy of the opinion can be found here: http://www.tradesecretsnoncompetelaw.com/files/2016/09/Conxall-Corp-v-ICONN-Systems-LLC_-Illinois-App-Court-1st-Dist_opinion-from-court-site.pdf

CIRCUIT COURT OF COOK COUNTY, Circuit Court of Cook County, Chancery Division, ILLINOIS COUNTY DEPARTMENT
Illinois Attorney General Cracks Down On Overbroad Non-Competes

The Attorney General of the State of Illinois, Lisa Madigan, has filed a complaint on behalf of the People against Jimmy John’s Enterprises, LLC and Jimmy John’s Franchise, LLC (collectively, “Defendants”) for the use of overly restrictive non-compete clauses as used against low-wage, at-will employees. The state seeks declaratory and injunctive relief, as well as civil damages, for Defendants’ alleged restraint of free trade and employee mobility.

Defendants operate a national sandwich chain, incorporated in Delaware and headquartered in Illinois. They own eight Jimmy John's Sandwich Shops in Illinois, including all intellectual property associated with the stores and franchises. From approximately September 2007-April 2015, low-level employees signed a non-compete clause as a prerequisite to employment. Although the clause itself went through several iterations, it remained substantially the same. The non-compete clause applied to assistant store managers, delivery personnel, sandwich-makers, and other store employees, prohibiting them from working with an employer situated within two miles of any Jimmy John’s store, if that employer derived at least ten per cent of their revenue from certain categories of products (including “deli” sandwiches). This prohibition stretched for a period of two years after ending employment with Defendants.

The state believes Defendants’ actions were unreasonable and harmful, as these particular employees had limited access to trade secrets or other confidential information. Illinois alleges that Defendants’ conduct has resulted in a restraint of trade in the state, affecting not only Jimmy John’s employees but other Illinois businesses and the public at large. Illinois brings this action because Defendants have made no attempt to modify or rescind the non-compete.

The state requests that the Court declare the non-competes void as a matter of public policy and without adequate consideration as a matter of law. It also seeks an injunction to prevent Defendants from continuing with the non-compete clause. Finally, the state seeks restitution on behalf of Illinois consumers and businesses, a disgorgement of profits received by Defendants as a result of the alleged conduct, and a penalty of $50,000 per violation.

The complaint can be found here: https://will.illinois.edu/nfs/JimmyJohnsComplaintFILED.pdf

Chancery Division, Cook County, Illinois Circuit Court
Jimmy John's Ditches Overbroad Non-Compete Agreements

Jimmy John's, a sandwich shop chain incorporated in Delaware, has included broad non-compete agreements in employment contracts with low-income employees. The agreements at issue prevent employees from working at competing companies if they were (1) located within 2 miles of a Jimmy John's Shop, and (2) made more than 10% of their profit selling sandwiches. The agreements last for a period of two years after the employee leaves the company.

On June 8, 2016, Illinois Attorney General Lisa Madigan sued Jimmy John’s Illinois franchisees for forcing low-income workers to sign these non-compete agreements. The company announced that it told Madigan it would no longer use or enforce the non-compete agreements. Madigan’s case, People v. Jimmy John’s Enterprises, LLC, remains open.

Relatedly, Jimmy John's New York franchisees have agreed to stop enforcing the non-compete agreements, and told New York Attorney General Eric Schneiderman that they would void past agreements with their employees.

For more information about People v. Jimmy John’s Enterprises, LLC, see http://tsi.brooklaw.edu/cases/people-v-jimmy-john%E2%80%99s-enterprises-llc.

N.D. Ill.
Common Law Misappropriation of Confidential Information Preempted Under ITSA Even if Information is Not A Statutory "Trade Secret"

The Northern District of Illinois held on November 7 that the Illinois Trade Secrets Act (ITSA) preempted the common law claims of misappropriation of confidential information, unfair competition, and unjust enrichment. The court additionally noted that such claims are preempted even if the information in question would not qualify as trade secrets under the Act.

Defendant Keywell Metals, LLC ("Keywell Metals") acquired the assets of Keywell, LLC ("Keywell"). Prior to the sale, Keywell had approached Plaintiff Cronimet Holdings Inc. ("Cronimet") with Cronimet as a potential purchaser of Keywell. Keywell and Cronimet entered into a Non-Disclosure Agreement ("NDA"), terms of which restricted Cronimet from hiring any Keywell employees it met during the negotiations for a period of 24 months.

Cronimet initiated this action against Keywell Metals, seeking a declaratory relief against enforcement of the employment restrictions and arguing that the acquisition extinguished the terms of the NDA. Keywell Metals responded with ten counterclaims including violation of the ITSA, misappropriation of confidential information, unfair competition and unjust enrichment. Cronimet moved for dismissal of the common law claims, arguing that the claims were preempted by the ITSA. Keywell Metals contended that the ITSA's preemption provision is inapplicable since the confidential information at issue does not rise to the level of a statutory trade secret. After reviewing its case law, the Court decided that common law claims that are "dependent on the existence of confidential information" are preempted by ITSA, even if such information does not meet the statutory definition of a trade secret.

United States District Court for the Northern District of Illinois - Chicago
Television producers allege court proceeding spoiled outcome of reality show

Contestants on a women's mixed martial arts reality show called "Ultimate Women's Challenge" were sued by the show's owners and investors for willful misappropriation of trade secrets and tortuous interference with prospective economic advantage. Each of the sixteen female contestants on the show signed a “Participant Agreement and Release from Liability” before filming commenced. However, seven of the contestants filed a lawsuit against the show's producer in Wisconsin circuit court and, in doing so, revealed the outcome of multiple matches and the ultimate winner of the series. The plaintiffs Sean Morrison Entertainment (SME) claimed that the lawsuit should have been filed under seal in order to prevent the events and outcome of the reality show from being revealed. Plaintiffs also claim that the contestants and their attorneys leaked details about "Ultimate Women's Challenge" to the media and various websites. The lawyers who represented the contestants in the Wisconsin lawsuit were also been joined as defendants.

On December 28, 2011, the Northern Illinois District court dismissed the owner-investor claims against the MMA contestants for lack of personal or specific jurisdiction. The court asserted that SME's alleged contacts were too attenuated for Illinois to be the proper forum for their claims. Further, citing only an "impact theory of minimal contacts," the court concludes that SME failed to allege activities by Thompson et al "that create a substantial connection with the forum state." (See Also Burger King v. 471 US at 475-476). Furthermore, the court found none of the individuals joined the action had any substantive connection to Illinois that would warrant personal jurisdiction for the court. Thus the Illinois court never reached the substantive issue of the trade secret misappropriation by the athletes in filing their separate Wisconsin matter, as the SME claim was dismissed for want of personal or specific jurisdiction.

Circuit Court of Cook County, Chancery Division
Three employees sued by Groupon for breach of a non-compete agreement counter Groupon's lawsuit is a "sham litigation"

The three employees whom Groupon, Inc. (“Groupon”) sued on October 21, 2011 filed a counterclaim against Groupon on January 25, 2012. The three former employees, Nikki Dorough, Brian Hanna and Michael Nolan, countered that the coupon company pursued a "sham litigation" and requested the Illinois state court to void the noncompete provisions in their Groupon employment contracts.

The employees now work Google Offers, a directly competing discount service started by Google, Inc. (“Google”) after Groupon rejected Google’s buy-out. Groupon alleged in its complaint that the employees, were provided with proprietary and confidential information relating to Groupon’s business practices and strategies, such as Groupon’s price structures and deals with merchants, its timing of the deals and its list of current and potential merchants.

Dorough, Hanna and Nolan began work for Google Offers allegedly in breach of their non-compete agreement with Groupon which bars them from working with a direct competitor for 24 months after leaving the company. Groupon does not claim that Hanna and Nolan already disclosed the above trade secrets to Google or stole any trade secrets, in violation of the Illinois Trade Secrets Act. Rather, it alleges that Hanna and Nolan would inevitably disclose the trade secrets to Google because Google Offers directly competes with Groupon. According to Groupon, the “ongoing and/or threatened” disclosure by Hanna and Nolan would cause the company irreparable harm if the two employees are not enjoined from continuing their activities at Google Offers.

The inevitable disclosure doctrine is preemptively used by a court to prevent disclosure of a trade secret where a former employee’s “new employment will inevitably lead him to rely on [a former employer’s] trade secrets.” PepsiCo, Inc. v. Redmont, 54 F.3d 1262, 1269 (7th Cir. 1995). The doctrine is not universally adopted and even limited in some jurisdictions. See , e.g., EarthWeb, Inc. v. Schlack, 71 F. Supp. 2d 299 (S.D.N.Y. 1999). The doctrine may prevent a former employee from working with a direct competitor even if the employee was never subject to a non-compete agreement and attempts in good faith to prevent using his knowledge of a former employer’s trade secrets. See PepsiCo, 54 F.3d at 1270 (finding that even though no trade secrets were stolen or misappropriated, defendant, PepsiCo, Inc.’s former employee, could not help but rely on Pepsi’s confidential and proprietary information on how to price, distribute and market sports drinks in his work for Quaker Oats Company’s competing GATORADE branded sports drinks).

United States District Court for the Northern District of Illinois
Rash of EEA Prosecutions Continues with Indictment of Boeing Engineer Accused of Transmitting Trade Secrets to China

In yet another indictment in the continuing trend of prosecution of trade secret theft under the Economic Espionage Act, the government has indicted Chunlai Yang with two counts of trade secrets theft in the United States District Court for the Northern District of Illinois (Chicago). The government asserts that Yang stole proprietary source code from his employer, CME Group Inc., in order to start his own futures exchange software company. Yang pled not guilty to both counts.

CME brought the case to the U.S. Attorney with evidence that Yang had downloaded over 1,000 source code files from the secure company computer system to his unsecure work computer. Yang then moved the files to his own personal computer. His apparent intent was to use the source code of CME’s own Globex trading system as the backbone for his own company’s system. His company was to be entitled Tongmei Futures Exchange Software Technology Co.

The potential repercussions for Yang are up to 10 years in prison and a $250,000 for each count. In addition, the government seeks to take control over Yang’s computers and other equipment and any proceeds from his actions.

The fact that CME brought the case directly to the U.S. Attorney has been touted by the U.S. Attorney’s office as a good example of corporate and law enforcement cooperation on the protection of trade secrets.

Northern District of Illinois
In Fire 'Em Up's suit for patent infringement and trade secrets misappropriation, both parties seek to dismiss the other's claims

Fire 'Em Up (FEU) brought a suit including claims of patent infringement and trade secret misappropriation against multiple defendants. The trade secret misappropriation claims pertain to misappropriation of customer lists, supplier lists, as well as materials necessary to create FEU's product, and software technology which is known to only one of FEU’s employees, software developer Jeffrey Bach.

FEU voluntarily dismissed claims against Intigreen Technologies, Inc. on February 24, 2011 and against David Shea, Peter Gordon, and Jeffrey Buecheler on March 16, 2011. The remaining defendants, Technocarb Equipment (2004) Ltd. and Aurora Electronics, Ltd. filed an answer on April 11, 2011 containing affirmative defenses and counterclaims, as well as a motion to dismiss FEU’s claims of trade secret misappropriation, conversion, fraud and accounting. FEU, in turn, filed on May 16, 2011 a motion to dismiss the defendants’ counterclaims for deficiencies.

Appellate Court of Illinois, First District, First Division
Illinois Court Finds Lack of Consideration to Support Non-Compete Agreement

Plaintiff Eric Fifield, an insurance administrator, began working for Defendant Premier Services, Inc. (Premier) after Premier acquired Fifield’s former employer in 2009 and offered Fifield employment. As a condition of employment with Premier, Fifield was required to sign a nonsolicitiation/noncompetition agreement that prevented him from soliciting Premier’s customers anywhere in the US for a period of two years following employment. In February 2010, Fifield resigned from Premier and began working for Enterprise Financial Group (EFG). Fifield and EFG filed this action seeking a declaratory judgment invalidating certain provisions of the contract, and Premier filed an answer, as well as a counterclaim for injunctive relief. The lower court ruled in favor of Fifield, holding that the non-solicitation portions of the contract were void for lack of consideration.

On June 24, 2013, the Appellate Court of Illinois confirmed the lower court’s decision, explaining that under Illinois case law, an employee must be continuously employed pursuant to a noncompetition/nonsolicitation agreement for a period of two years before the court will recognize adequate consideration in exchange for a non-compete agreement. Because Fifield left Premier after only 3 months, there was not adequate consideration and the contract was unenforceable.

On September 25, 2013, the Supreme Court of Illinois denied appeal in the case.

Northern District of Illinois
Despite a modest damages award, plaintiffs win more than a million dollars in attorneys' fees

SKF USA Inc. v. Bjerkness et. al.

Docket Number: 1:08-cv-04709
Case Filing Date: Tue, 2008-08-19
Jurisdiction: Federal Court
Location: Illinois
Court Name: Northern District of Illinois
Summary

SKF USA Inc. successfully brought an action against former employees for willful and malicious misappropriation of trade secrets, consisting of thousands of computer files. A 2010 bench trial resulting in an award of $41,000 in actual damages and $40,000 in exemplary damages. SKF then requested more than $1.25 million in attorneys’ fees and costs. Defendants objected, arguing that such fees failed to take into account prior settlement offers that could have saved costs, were grossly disproportionate to actual damages, and that plaintiff’s billing was excessive. Nonetheless, the court awarded almost the entire requested amount of fees.

Case Report
Relevant Facts and Procedural History

Dale Bjerkness, Kevin Koch, Joseph Sever, and Walter Remick were all employees of Preventive Maintenance Company, Inc. when, in January 2007, it was acquired by SKF USA. Bjerkness had worked his way up through the company from Sales Engineer, eventually becoming a Director for SKF Reliability Systems. Similarly, at the time of their departures, Koch was working as a Reliability Engineer Manager, while both Sever and Remick were working as Reliability Engineers. Defendants continued to work for SKF until May 2008, when Bjerkness departed and opened his own competing enterprise, Equipment Reliability Services, Inc. (“ERSI”). The other defendants soon followed, and it was shortly thereafter determined that ERSI had come into possession of thousands of computer files belonging to SKF. SKF filed suit against the employees and ERSI for violation of the Illinois Trade Secrets Act (“ITSA”). Their 2008 Complaint marked the beginning of what Judge Rebecca Pallmeyer described as “dismayingly contentious litigation.”

In 2009, SKF won a preliminary injunction. In a 2010 bench trial, SKF received damages totaling $81,068 (actual damages in the amount of $41,068 and exemplary damages in the amount of $40,000). Given a finding a willful and malicious misappropriation, the court also awarded reasonable attorney’s fees and costs. When SKF filed a Bill of Costs for $44,852.84, defendants objected that the amount was excessive by $16,495.14. SKF then proceeded to petition the court for an award of attorneys’ fees and non-taxable costs totaling $1,299,579.60. Defendants objected.

Lodestar Calculation

The court first calculated a lodestar figure, a standard method for determining attorney’s fees that entails multiplying SKF’s reasonable billable hours times the reasonable hourly billing rate. Under 7th Circuit law, this calculation is presumed reasonable. In arguing that the figure should be reduced, defendants cited (A) the history of settlement offers between the parties and (B) the proportionality of fees to damages. Also, while defendants did not challenge the hourly billing rates of SKF’s lawyers, it challenged the number of hours billed as unreasonable.

A. Settlement History

Defendants argued that based on the damages awarded by the court, SKF’s rejection of offers to settle constituted bad faith, and therefore justified reducing the Lodestar amount. Defendants showed that they had offered settlements of $173,247 in November 2008, $75,000 in January 2010, and $250,000 in September 2010. They claimed that SKF had been unwilling to negotiate, and that after January 6, 2009 (the date by which Defs. argued SKF had had sufficient time to contemplate and accept the 2008 settlement offer) all efforts to continue litigation were solely directed at eliminating ERSI as competition. Using the damages ruling’s calculation that, as of January 6, 2009, SKF had only suffered $31,494 in damages, Defendants argued that the choice to continue litigation after the November 2008 offer was made in bad faith.

SKF objected to consideration of the parties’ settlement discussions on the grounds that the discussions were supposed to remain confidential. Citing Fed. R. Civ. P. 68, however, the Court found that such confidentiality did not bar consideration of settlement history. In the alternative, SKF put forth evidence that the Defendants’ own Exhibits indicated SKF’s willingness to negotiate, and that it had offered to settle for $455,000 in November 2008. SKF claimed that, even at that figure, it would have taken a loss for attorney’s fees then incurred, and noted that the damages plus requested attorney’s fees that Defendants were not challenging still exceeded the November 2008 offer.

The Court sided unequivocally with SKF, finding no evidence of that the decision to reject Defendants’ offers constituted bad faith. The court put particular weight on the fact that Defendants’ offer did not include attorneys’ fees, when the ITSA makes it likely that such fees will be awarded. The fact that the November 2008 offer also preceded SKF’s win on the motion for the preliminary injunction was also noted.

B. Proportionality

The Court grappled most with the issue of proportionality, clearly concerned by a request for attorneys’ fees totaling more than fifteen times the actual damages awarded. In upholding the fees, however, the Court noted that the Seventh Circuit has declined to set specific limits on the multiples of attorneys’ fees that may be awarded.

More importantly, the Court made clear that a small damage award does not alone demonstrate the unreasonableness of pursing the claim at great expense. The Court cited the Seventh Circuit’s decision in Anderson v. AB Painting and Sandblasting Inc., which states that the existence of a fee-shifting statute precludes the court’s consideration of the reasonableness of the claim. A party who prevails with more than nominal damages, has thereby demonstrated the claim’s validity. The Seventh Circuit therefore directs courts to, “…assume the absolute necessity of achieving that particular result and limit itself to determining whether the hours spent were a reasonable means to that necessary end.” Moreover, the Court cited other cases allowing similar, if not quite as high, proportions of fees-to-damages awards.

C. Excessive Billing

Finally the Court examined whether SKF’s billing was reasonable. In assessing Defendants’ characterization that the total hours billed was “outrageous,” the Court found that Defendants failed to demonstrate adequately that SKF’s billing records were unreasonable. The Court noted that Defendants had not adequately spent time to break down the attorney’s fees, devoting only two pages of their response memo to the issue.

Moreover, to the extent that the hours were extreme, the Court found that activities of both sides were to blame. In the process, the Court criticized both sides’ attorneys for appearing “to fan the flames” of “extraordinarily contentious” litigation, while singling out the defendants for refusing at multiple points to streamline the process. The Court therefore concluded that some portion of the sizable legal bills were in fact directly due to Defendants’ actions. It also agreed with Plaintiff’s assertion that that “the most straightforward evidence that counsels’ fees are reasonable is the fact that the client paid them,” and stated that it would also not second guess SKF’s decision to spend more than $1 million for attorneys to protect trade secrets that it had recently purchased at the time the litigation commenced.

Conclusion

The court granted SKF’s fee request, except for the fee paid to SKF’s damages expert, whose testimony the court mostly disregarded. Given Defendants’ failure to adequately address the removal of such a fee and associated attorney’s fees, the Court subtracted $107,991 from the fee award.

No appeal has been filed. In the wake of the fee award, at least one defendant, Joseph Sever, has filed for Chapter 7 Bankruptcy protection.

Significance

This case demonstrates that Illinois courts will presume validity of attorney’s fees upon the success of a claim, even for an extreme proportion of fees to damages awarded. The existence of the fee-shifting statute supports an award of fees of even more than fifteen times total damages, so long as there is no significant evidence of bad faith or unreasonable fees. There is also the suggestion that any settlement offer might need to demonstrate consideration of attorney’s fees in order to demonstrate a party’s bad faith in continuing litigation. Note that the award here is granted because the 7th Circuit has chosen not to set defined barriers on proportionate awards of attorneys’ fees to damages. Also underlying this case was the particularly contentious nature of the litigation, which the Court addresses at multiple points. General displeasure at the manner in which the case unfolded seems to have helped the Court to justify such a high award.

While the equitable underpinnings of trade secret law might suggest that some limits should be placed on fee awards, such limits remain unarticulated, at least in the Seventh Circuit. For cases of willful and malicious misappropriation, the Defendant still has the opportunity to demonstrate that Plaintiff’s requested fee amount is the result of bad faith. In this case, Defendants failed to do so. Yet it does seem somewhat unusual that SKF should bear none of the burden for the length of the litigation, given that the Court noted poor conduct on both sides. Defendants bore greater weight here, but the Court could still, it seems, have reduced some of Plaintiff’s award.