U.S. District Court for the Northern District of Illinois Decides Breach of Fiduciary Duty Claim

ABC Acquisition Co.’s breach of fiduciary duty claim was brought against James Trausche, the former president of Aetna Bearing Co. Trausche’s business assets were acquired by ABC.  This issue of law presented a question of first impression under Illinois law about an officer’s obligations to a successor corporation.

After ABC purchased substantially all of Aetna’s assets (including intellectual property) and hired three of Aetna’s employees (including Donald Koziel) Trausche formed AIP Products Corp., hired Koziel and started competing against ABC.

ABC filed a federal complaint in the Northern District of Illinois in Chicago. ABC alleged that Trausche, AIP, and Koziel violated the federal Defend Trade Secrets Act and the Illinois Trade Act (Count 1 and 2). The complaint also alleged that Koziel violated the Computer Fraud and Abuse Act and breached his employment agreement (Count 3 and 4) and that Trausche and Koziel breached fiduciary duties allegedly owed to ABC.

With no legal precedent on whether Trausche owed a fiduciary duty to ABC, the U.S. District Court Judge Manish S. Shah predicted that the Illinois Supreme Court would answer this question by focusing on the exceptions to the general rule that a corporation that purchases another company’s assets is not liable for the seller’s debts.

Concluding that there is no “de facto merger,” and that ABC was not the “mere continuation” of Aetna Bearing, Judge Shah concluded that the Illinois Supreme Court would rule that “ABC was not the successor to Aetna in any way that entitled it to enforce Trausche’s fiduciary duties.”

In the opinion, it was stated that in order to prevail on a claim for breach of fiduciary duties under Illinois law, a plaintiff has to prove that (1) a fiduciary duty exists; (2) the fiduciary duty was breached; and (3) the breach proximately caused the injury of which the plaintiff complained.

Corporate officers such as Trausche, former president of Aetna, owe fiduciary duties to their corporations. Brown v. Tenney, 125 Ill.2d 348 (1988), among them the duty of loyalty.  Everen Securities v. A.G. Edwards & Sons, 308 Ill.App.3d 268 (1999).

The duty of loyalty prohibits those officers from either “actively exploiting their positions within the corporation for their own personal benefits” or “hindering the ability of a corporation to continue business for which it was developed.” Foodcomm International v. Barry, 328 F.3d 300 (7th Cir. 2003) (citing Cooper Linse Hellman Capital Management v. Hallman, 368 Ill.App.3d 353 (1st Dist. 2006).

The “nature and intensity” of the duty depends in part on how much independent authority the fiduciary exercised and the parties’ reasonable expectations at the beginning of the relationship. Advantage Marketing Group v. Keane, 2019 IL App (1st) 181126.

The district court set out examples of breaches of this duty.  These examples include failing to inform the company that employees are forming a rival company, soliciting the business of a customer before leaving the company, using the company’s facility or equipment to assist them in developing their new business, or soliciting fellow employees to join a rival business. In addition, the corporate officers must disavow corporate opportunities where the officer’s private interests are in conflict with the corporation’s. Comedy Cottage v. Berk, 145 Ill.App.3d 355 (1st Dist. 1986).

Employees like Koziel owed their employers fiduciary duty.  Lawler v. North American Corp. of Illinois, 2012 IL 112530.  The duty prohibits employees from soliciting an employer’s customers for their own business, misappropriating corporate property, taking advantage of corporate business opportunities, or using confidential information to compete with an employer before or after their employment.

The Trade Secrets Act does not preempt ABC’s theory in the case.  The act is intended to displace all of Illinois’ “conflicting tort, restitutionary, unfair competition, and otherwise” insofar as those laws already provided civil remedies for misappropriation of a trade secret.  765 ILCS 1065/8.

The fiduciary duties of Trausche and Koziel prohibited certain courses of conduct (for instance soliciting the business of a customer before finishing employment) but went beyond simple trade secret misappropriations. See Hecny Transportation v. Chu, 430 F.3d 402 (7th Cir. 2005); General Electric v. Uptake Technologies, 394 F.Supp.3d 815 (N.D. Ill. 2019) (“Where a claim should survive regardless of whether the information at issue was non-confidential, that claim is not preempted.”).

An assertion of trade secret in a customer list does not wipe out claims of theft, fraud, and breach of fiduciary duty of loyalty that would be found even if the customer list were of “public record.” Hecny Transportation v. Chu, 430 F.3d 402 (7th Cir. 2005).

Whether former officers owe fiduciary duties to successor corporations appears to be an issue of first impression in Illinois. The Illinois Supreme Court would look to agency law, contract law, and principles of equity to determine whether a former employee of one company owes fiduciary duties to a successor corporation that purchased the former company’s assets. That is the underlying issue in this case yet to be confirmed.  If the Illinois Supreme Court were to entertain the theory that Trausche owed a fiduciary duty to ABC, it would look to contract principles and decide that ABC was not the successor to Aetna in any way that entitled it to enforce Trausche’s fiduciary duties.

AIP and Trausche’s motion for summary judgment is granted insofar as that motion seeks judgment as a matter of law on ABC’s claim that Trausche breached his fiduciary duties. Koziel did not file a motion for summary judgment as to Count V.  ABC’s claim against Koziel for breach of his fiduciary duty survives further disposition.

ABC Acquisition Co. v. AIP Products, No. 18 CV 8420 (Aug. 11, 2020).

Kreisman Law Offices has been handling commercial litigation matters, corporate shareholder disputes, limited liability companies, partnerships and Illinois corporate legal matters, employment disputes and issues of fiduciary duties owed to corporations for individuals, families, and businesses for more than 40 years in and around Chicago, Cook County and its surrounding areas, including Highland Park, Waukegan, Northbrook, Glenview, Hoffman Estates, Mundelein, Vernon Hills, Libertyville, Long Grove, Glencoe, Park Ridge, Franklin Park, Alsip, South Holland, Monee, University Park, Crete, Beecher, Lynwood, Lansing, Chicago (Rosemont, Pullman, Chatham, Calumet Heights, Stony Island Park, Woodlawn, Wrigleyville, Kenwood, Back of the Yards, South Loop, Canaryville, Bridgeport, McKinley Park, Douglas, Prairie Shores, Pilsen, Printer’s Row, Noble Square, Ukrainian Village, Palmer Square, Roscoe Village, Irving Park East, Sheridan Park, Andersonville, Edgewater Beach, Peterson Park, West Ridge, North Edgebrook), Skokie, Des Plaines, Niles, Morton Grove, Rolling Meadows and Palatine, Ill.

Robert D. Kreisman has been an active member of the Illinois and Missouri bars since 1976.

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