Articles Posted in Business Litigation

The issue in this case was whether the financial condition of Wexford Health Sources, the defendant in this federal lawsuit, is relevant for Federal Rule of Civil Procedure 26(b) to apply. This rule limits discovery to that which is “relevant to any party’s claim or defense.” If a corporate defendant’s wealth may not be considered when assessing punitive damages, it is not “relevant,” but if it may be properly considered then, of course, it is relevant. In this U.S. Federal District Court of Illinois (Central District) lawsuit, the initial question to be answered was whether Wexford’s financial condition could be investigated through discovery; this was answered mostly by the case of Zazu Design v. L’Oréal, 979 F.2d 499 (7th Cir. 1992).

In Zazu, a case relied upon by Wexford, the defendant in this case, the court considered the defendant’s appeal in a trademark infringement action. The court reversed and remanded, finding that the plaintiff did not have superior rights in trademark to the defendant and, even if it had, the damages award was excessive.

Regarding the punitive damages award, the court noted that although courts “take account of a defendant’s wealth when an amount sufficient to punish or deter one individual may be trivial to another,” such may not be the case when the defendant is a corporation. The court explained:

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Doug Miller owned two companies in Indiana:  E.T. Products, which blended and sold fuel-additive products, and Petroleum Solutions, which blended and sold lubricant products.

Petroleum Solutions also supplied a few customers with fuel additives from E.T. Products.

In January 2011, a group of investors led by Tom Blakemore purchased E.T. Products. As part of the sale, Miller and his son, Tracy, signed essentially identical non-competition agreements.

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Trade secrets can be among the most valuable assets of any business. Laws in Illinois and on the federal level have long protected trade secrets.

Before 1995, the protection of trade secrets was based on the common law as defined by the Restatement of Torts. Illinois has adopted the Illinois Trade Secrets Act, 765 ILCS 1065/1, et seq.

The Illinois Trade Secrets Act is modeled on the Uniform Trade Secrets Act. There are many instances in which the Illinois Trade Secrets Act could be utilized.

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A new law in Illinois prohibits employers from entering into noncompete contracts with employees who earn $13 per hour or less. The Illinois Freedom to Work Act (Public Act 099-0860) became effective on Jan. 1, 2017. The law makes it illegal for an Illinois employer to enter into a “covenant not to compete” contract with any of its “low-wage employees.”

The term “covenant not to compete” is defined to extend to any agreement restricting a covered employee from the following:

  • Working for another employer for a specified period of time.
  • Working in a specified geographic area.
  • Performing other “similar” work for another employer.

Any contract with a “low-wage employee” who contains any covenant not to compete is “illegal and void.” The act is limited to agreements entered into after the effective date of Jan. 1, 2017. The act comes out of the movement to curb employers from locking lower-level employees into unfair noncompeting contracts.

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In a federal court of appeals, the Federal Rule of Civil Procedure 9(b) was addressed by the Seventh Circuit Court of Appeals in Chicago regarding the specificity required in complaints. On Sept. 1, 2016, the U.S. Court of Appeals for the Seventh Circuit in Chicago affirmed dismissal of the amended complaint pursuant to the particularity requirement of Federal Rule of Civil Procedure 9(b).

In this case, a nurse alleged that a number of practices at the Acacia Mental Health Clinic where she worked were not medically necessary. The allegations were that the clinic required patients to see multiple practitioners before receiving medications; required patients to undergo mandatory drug screenings at each visit; and required patients to come to the clinic in-person in order to receive a prescription or speak to a doctor. It was also alleged that the clinic misused a billing code.  This was the only claim the Seventh Circuit permitted to go forward. In dismissing the majority of the complaint, Seventh Circuit began with a robust discussion of the importance of Rule 9(b) in screening out a baseless False Claims Act (FCA).

“Rule 9 requires heightened pleading standards because of the stigmatic injury that potentially results from allegations of fraud. We have observed, moreover, that fraud is frequently charged irresponsibly by people who have suffered a loss and want to find someone to blame for it. The requirement that fraud be pleaded with particularity compels the plaintiff to provide enough detail to enable the defendant to repose swiftly and effectively if the claim is groundless. It also forces the plaintiff to conduct a careful pretrial investigation and thus operates as a screen against spurious fraud claims.”

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The 1st District Appellate Court has reversed in part, vacated in part and remanded a decision by a Cook County judge in a case involving the use of trust money and investments.

Arie Zweig was the trustee of the Arie Zweig Self Declaration of Trust dated June 28, 1990. He used $2 million from the trust for an equity investment in a partnership supporting an ambulatory surgical center called Bedford Med. Bedford Med was operated by Bedford Med LLC. He said he was induced to invest by Nadar Bozorgi, Mandan Garahati and Guita Bozorgi Griffiths, acting as the Bozorgi Limited Partnership.

Zweig claimed that the Bozorgi defendants represented to him that the value of the Bedford Med operation was appraised at $21 million and that permanent financing had been secured. Zweig also claimed that the Bozorgi defendants maintained that they invested more than $5 million in the project, that the real estate had been already leased or was about to be finalized and that the investment would be used as equity and for working capital, generating an annual profit of 15-20%.

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Generally the law in Illinois states that a guarantor is entitled to assert the same defenses that would be available to the principal obligor. W.W. Merck White Lead Co. v. McGahey, 159 Ill.App. 418 (1st Dist. 1911).

“Under Illinois law, ‘the liability of a guarantor is limited by and is no greater than that of the principal debtor and . . . if no recovery could be had against the principal debtor, the guarantor would also be absolved of liability.’ ‘Although the language of a guaranty agreement ultimately determines a specific guarantor’s liability, the general rule is that discharge, satisfaction or extinction of the principal obligation also ends the liability of the guarantor.’” Riley Acquisitions v. Drexler, 408 Ill.App.3d 392, 402 (1st Dist. 2011), quoting Edens Plaza Bank v. Demos, 277 Ill.App.3d 207, 209 (1st Dist. 1995).

In the Riley case, the guarantors were two joint obligations to the bank. The bank released one of the obligors. The other obligor was a dissolved corporation. Under the applicable state law, the five-year post-dissolution time period for collecting against the dissolved corporation had expired.

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The Illinois Appellate Court has ruled in a dispute regarding who should inherit a home in Highland Park, Ill. Although a trust instrument stated the house was part of the trust, there was no separate, formal documentation showing that a transfer of the house had been placed in the trust. The court In re Estate of Mendelson considered whether the house was properly transferred into the trust. The court noted that it could “find no Illinois authority on point.”

The Illinois Appellate Court held that the house was a part of the trust because it was described in it although there was no recorded deed transferring the real estate to the trust.

In the Mendelson case, the chain of title to the house was complex. In 2005, Diane Mendelson executed the deed that placed title to the house in joint tenancy with herself and her son. The deed was never recorded because she enjoyed a property tax benefit as the sole title owner of the property.

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The Illinois Appellate Court for the First District recently reviewed a case regarding the piercing of a corporate veil. Piercing the corporate veil is a practice in which a lawyer will prove that the corporation that would otherwise protect its shareowners from personal liability is really a façade or fiction that allows for the “piercing” of that veil to recover from the true owners. The appeals panel reversed a trial court’s decision that dismissed plaintiffs’ claim in a case involving whether the plaintiffs were employees or independent contractors.

Piercing the corporate veil is not a cause of action but instead a “means of imposing liability in an underlying cause of action.”

A firmly established corporate entity stands on its own unless its corporate veil is pierced for different reasons. In many cases, once a party obtains a judgment against a corporation, the party then may attempt to pierce the corporate veil of liability protection and hold the dominant shareholders responsible for the corporate judgment.

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The Neck & Back Clinic in Chicago was providing physical rehabilitation services to patients. In 1998, the clinic signed a series of leases for exterior building wall space to advertise its services. The clinic leased that advertising space through a company called Travisign, operated by David Travis. The Neck & Back Clinic alleged that Travis “represented that he was authorized to lease certain walls for advertising and that he had secured the requisite permits to place advertisements on the designated walls.”

However, in 2009, the clinic was notified that it had violated the Chicago Municipal Code by putting up advertisements without the proper city permits. The clinic was fined $3,000 and received another notice of violation. The clinic filed suit against Travis claiming breach of contract and fraud.

Travis and the clinic filed motions for summary judgment claiming that the other had failed to live up to its contractual obligations. The Circuit Court judge granted summary judgment in favor of the clinic finding that “Travis never secured the proper permits” and that he “did not perform his contractual obligations.” The Circuit Court judge awarded more than $10,000 in damages to the clinic. After dismissing a secondary claim against another party, Travis appealed.

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