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Employee Owes Fiduciary Duty to Employer and Cannot Misappropriate a Corporate Opportunity

The Illinois Appellate Court has reiterated what the Illinois Supreme Court said a few years ago: Employees of a corporation owe a duty of loyalty to the company by which they are employed.  And that it is a breach of their fiduciary obligation to appropriate for their own gain an opportunity that rightfully belongs to the company.  Advantage Marketing Group, Inc. v. Keane, 2019 IL App (1st) 181126.

In this instance it was clear that the employee was far more than an ordinary employee and that it was not clear whether the company had considered the opportunity but had decided to take a pass on it.

Keane was one of the founders of Advantage Marketing Group (AMG) and, even at the time of his purported misconduct, owned 35% of AMG’s stock.  He had served AMG as an officer and director, but was simply an employee when he seized a potential corporate opportunity and made good use of it through another corporation, Keane, Inc. d/b/a The Mail House.

In addition to owning 35% of AMG, Keane performed or had performed the following for AMG:

  • Hired and fired employees
  • Had access to all of AMG’s books and records including client lists, employee records, tax documents, vendor information and billing data
  • Had a bonus equal to AMG’s majority stockholder
  • Had developed and maintained AMG’s financial records
  • Had explored potential strategic acquisitions in the letter-shop business

In the summer of 2013 Keane and AMG’s majority stockholder, Patty Herman, discussed the potential acquisition of The Mail House, a competitor of AMG.

Keane resigned from AMG on September 4, 2015.  Prior to his resignation he began making preparations for the acquisition of The Mail House.  He organized a new corporation named Keane, Inc. d/b/a The Mail House.   He told AMG’s clients and vendors AMG was in financial distress, and solicited his son, an AMG employee, to join him at the new corporation.  He also obtained samples of confidential client information and delayed in returning them after being demanded to do so by AMG’s counsel.  He registered an internet domain name “mailhousedm.com”.  After Keane left AMG, The Mail House was in direct competition with AMG.

AMG sued Keane charging breach of fiduciary duty and improperly appropriating a potential business opportunity (the acquisition of The Mail House) for himself.

Keane defended saying that as an employee he had no fiduciary duty to AMG and, furthermore, that he had discussed the potential acquisition with AMG’s majority stockholder but AMG had not moved forward with it.  The court ruled against Keane on both points.

The court said that it was settled Illinois law that an employee owes a duty of loyalty to his employer and prohibits an employee from taking advantage of a business opportunity that belongs to his employer, while still employed.

The court did say that an employee may plan, form and outfit a competing company while still working for his employer.  But that was as far as he can go.  He cannot commence competing with his employer.

What’s the point?  This was an easy decision for the court especially in view of the fact that Keane remained a 35% stockholder in AMG.  But the critical point was that an employee must be loyal to his employer while employed and not seize opportunities that would normally flow to his employer.  He can make preparations to leave, but cannot actively compete before doing so.

For more information and to raise any questions, please contact any of our business attorneys.

Michael Weissman

mweissman@lgattorneys.com

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Illinois Minimum Wage Law Update – Higher Wages and Stiffer Penalties

On February 19, 2019, newly elected Governor J.B. Pritzker fulfilled a campaign promise and signed legislation that will raise the Illinois Minimum Wage. The law made two major changes:

  • Raised the minimum wage to $15.00 per hour by 2025
  • Significantly increased the penalties for violations of the act – including misclassifying independent contractors

Minimum Wage

Under the new law, the minimum wage will increase annually for all employees over 18. For those employees that are under 18 and work no more than 650 hours in a calendar year, they will be subject to a lower minimum wage.

Businesses that have employees in Chicago or certain Cook County municipalities will need to continue to follow the local minimum wage ordinances which are higher than the Illinois state law. Both the local ordinances update on July 1 and the state law is tied to a Calendar year.

A breakdown of the relevant wage rates is below.

Significant Increase in Penalties for Violations

In addition to the increase in minimum wages across the state, the changes that went into effect on February 19, 2019, significantly increased the penalties for employers that fail to properly pay minimum wage or overtime. This is particularly important for employers that misclassify their workers as independent contractors and may be subject to significant liability as a result of that misclassification.

Under the new law, if an employee is underpaid, they can recover “treble” (three times) the amount of the underpayment. In addition to the treble damages, the statutory monthly damages penalty increases from 2 percent to 5 percent. Finally, there is now an additional penalty of $1,500.00 payable to the Department of Labor’s Wage Theft Enforcement Fund.

Example. If an employee is underpaid $7,500.00 and the employee receives a judgment two years later, the employer will have to pay $33,000 to the employee. The damages are broken down as follows:

  • $22,500 in treble damages for the $7,500.00 of unpaid wages
  • $9,000.00 (at least) in the 5 percent damage penalty
  • $1,500.00 to the Department of Labor

These damages do not include attorneys’ fees, as well as other potential damages under the Federal minimum wage law (FLSA) and the local ordinances.

What does this mean for employers?

Given the significant risk if you are underpaying employees you should evaluate your pay policies and ensure that your company is in compliance. It is important to annually conduct a wage and hour audit to proactively mitigate risk.

Please contact us if you need any assistance complying with the Illinois or Federal Minimum wage and overtime laws at 312-368-0100 or Walker R. Lawrence at wlawrence@lgattorneys.com

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“For the times they are a-changing’.” Illinois Supreme Court rules that the Implied Warranty of Habitability does not apply to subcontractors.

For over 30 years, since Minton v. Richards Group of Chicago, 116 Ill.App.3d 852 (1st Dist. 1983), subcontractors in Illinois have been potentially liable to homeowners for breach of the implied warranty of habitability even though there was no contract between the subcontractor and owner.  The implied warranty of habitability is a judicially created doctrine used to protect residential homeowners and buyers from construction latent defects that interfere with the habitability of their home.  Specifically, this implied warranty was created to protect an innocent homeowner’s expectations of a defect free property by holding a contractor or its subs accountable for latent defects that made the premises uninhabitable.

That all changed on December 28, 2018.  In Sienna Court Condominium Ass’n v. Champion Aluminum Corp., 2018 IL 122022, the Illinois Supreme Court set aside over thirty years of established law and held that the implied warranty of habitability does not apply to a subcontractor unless it has a direct contractual relationship with the homeowner or buyer.

Sienna Court was a dispute regarding the habitability of a two-building 111 residential unit development located in Evanston, Illinois.  The units and common areas in the building contained several latent defects that affected the habitability of the units and common areas.  The condominium association filed suit against several parties including subcontractors, for breach of the implied warranty of habitability.  The condominium association did not have a direct contractual relationship with the subcontractors.  The trial and appellate courts allowed the lawsuit to proceed on this theory of liability following Illinois law under the Minton case.

On appeal, the Illinois Supreme Court ruled that the implied warranty of habitability had its genesis in contract law as opposed to tort law.  Accordingly, for the condominium association to proceed on a theory of a breach of the implied warranty of habitability against a subcontractor, there would have to be a contractual relationship between the parties.  Because no such contractual relationship existed between the condominium association and the subcontractor, the claim for breach of the implied warranty of habitability was dismissed.

The times have now changed.  Subcontractors no longer need to be fearful of being sued by a homeowner or buyer under the implied warranty of habitability for latent defects to a property unless they have an actual contract with the party – something that is rare.

For more information regarding construction litigation, please contact:

Roenan Patt at: (312) 368-0100 or rpatt@lgattorneys.com.

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Predictive Scheduling Legislation: What You Need To Know To Avoid Costly Surprises

In approximately a dozen states and a number of smaller municipalities across the U.S., including Illinois and Chicago, initiatives have been introduced that would allow state and local governments to dictate how restaurants (and retailers) schedule their employees. Some view this approach as interfering with employers’ rights to control the workplace while others view it as a necessary tool to protect the rights of the food industry and other retail workers.  The impetus for the new rules – often referred to as predictive scheduling laws – emanates from the fact that workers often have very little ability to make adjustments to their work schedules in order to meet their responsibilities outside of work.  And unpredictable and unstable work schedules have been fairly well documented in the food service and preparation industries, as well as in retail and commercial building cleaning occupations.

Predictive scheduling laws and proposals generally include certain common provisions: (i) advance posting of schedules, (ii) employer penalties for unexpected schedule changes, (iii) record-keeping requirements, and (iv) prohibitions on requiring employees to find replacements for scheduled shifts if they are unable to work. In Congress, the pending Schedules That Work Act would require that schedules be provided in writing two weeks in advance with penalties for changes made with less than 24 hours’ notice.  As those changes are implemented, restaurant owners are finding that they must make significant adjustments to how they run their businesses in order to stay in business.

“On-call” or “predictive scheduling” activists argue that retail employers too often use scheduling practices that directly interfere with employees’ personal lives and ability to plan around their work hours, while others believe government intervention in the scheduling of employees through a one-size-fits-all approach intrudes on the employer-employee relationship and creates unnecessary mandates on how a business should operate.  Many in the food service industry are concerned that predictive scheduling legislation will impede employers’ need to adapt to changing conditions in a store, particularly small independently owned businesses that have limited staff and resources and may not be able to afford the penalties related to violations.  Some employees have also voiced concern that they could lose some of the flexibility that attracted them to the food service industry in the first place.

Following are a few common components of predictive scheduling legislation.

  • Employee Scheduling Requests.  Giving employees the right to make scheduling requests without employer retaliation.  Employers would be required to consider scheduling requests from all employees and provide a response. In some instances (for healthcare issues for example), the employer would be required to grant the request unless there is a bona fide business reason not to do so—e.g., an inability to reorganize work among existing staff or the insufficiency of work during the periods the employee proposes to work.
  • Shift Scheduling Changes.  Requiring employers to pay employees for a minimum of four hours of work or the minimum number of hours in the scheduled shifts, whichever is fewer, when an employee is sent home from work early without being permitted to work his or her scheduled shift.  In addition, if an employee is required to call in less than 24 hours before the start of a potential shift to learn whether he or she is scheduled to work, an employer could be required to pay the employee a premium, equivalent to one hour of pay.
  • Split shift pay. If an employee is required to work a shift with nonconsecutive hours with a break of more than one hour between work periods, an employer could be required to pay the employee a premium for that shift, equivalent to one hour of pay.
  • Advance notice of schedules. When an employee is hired, an employer could be required to disclose the minimum number of hours an employee will be scheduled to work. If, that minimum number changes, the employer could be required to give the employee two weeks’ notice of the new minimum hours before the change goes into effect. In addition, employers can be required to give employees their work schedules two weeks in advance and, if an employer makes changes to this work schedule with notice of only 24 hours or less, the employer could be required to pay the employee a premium, equivalent to one hour of pay.

In order to handle predictive scheduling mandates, business owners should explore software options and even retaining outside vendors that provide scheduling and labor management solutions.  A lack of training or understanding of predictive scheduling can be detrimental to a business’ bottom line since scheduling practices can have a dramatic impact on labor costs.

For further information regarding this topic, please contact:

Jonathan M. Weis at jweis@lgattorneys.com or 312-368-0100.

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Purchaser Collection of Pre-Closing Rent Deficiency

In the purchase and sale of real property which is leased to tenants, sellers and purchasers must pay particular attention to the allocation of rent collected both before and after the closing.  A typical purchase and sale agreement will include, among other things, language addressing the allocation of rent by the parties for the current period as well as the collection of delinquent rent after closing which is attributable to the seller’s period of ownership prior to closing.  In negotiating a contract, the parties will need to determine whether the purchaser is responsible for attempting to collect pre-closing delinquent rents and the rights of the seller to pursue tenants after closing for any such pre-closing delinquent rents.

Collection of pre-closing delinquent rent can be a complicated issue for purchasers and sellers to resolve.  On the one hand, the purchaser may be reluctant to allow the seller to undermine the financial condition of a tenant by pursuing lawsuits against a tenant that may be paying current rent to the new landlord.  On the other hand, a former owner does not have a full range of typical landlord remedies at its disposal to effectively induce tenants to pay delinquent rent as the former owner cannot assert an eviction action against a tenant and terminate the tenant’s right of occupancy.

The tension between purchasers and sellers with respect to pre-closing, delinquent rent is further complicated by a recently decided opinion issued by the Illinois Appellate Court in 1002 E. 87th Street LLC v. Midway Broadcasting Corporation (2018 IL.) App. 1st 171691, June 5, 2018).  In that case, the Court upheld a lower court ruling that Illinois law does not permit the purchaser of real estate to pursue claims against a tenant for pre-closing, unpaid rent under a lease assigned to the purchaser at closing.  The purchase and sale agreement between the purchaser and seller in that case contained standard provisions confirming that the “landlord” under the lease included any successors and assigns.  It also provided that all obligations and liabilities of the original landlord were binding on the purchaser, as successor landlord.  That would include any pre-closing landlord defaults that remained uncured.  Notwithstanding the successor landlord’s assumption of the lease, including, potential liability for pre-closing defaults of its predecessor, the Court ruled that the successor landlord did not have the right to recover pre-closing rent.  The Court specifically stated that the rule in Illinois is that rent in arrears is not assignable.

The lesson to be learned from the 1002 E. 87th Street case is that it is important to negotiate and set the expectations of the parties with respect to pre-closing delinquent rents at the time of contract.  Since a predecessor landlord may have little power other than initiating litigation (which is not desired by the successor landlord) against a tenant for delinquent rent and the successor landlord is unable to maintain an action for that delinquent rent, parties must give careful thought to the method of addressing the collection of pre-closing delinquent rent.  Fortunately, there are a number of different approaches that the parties may employ to coordinate and enhance the collection of pre-closing, delinquent rent.

For further information regarding the purchase and sale of commercial real estate as well as matters involving the rights of sellers, purchasers and tenants, please contact:

Jeffrey M. Galkin at:

jgalkin@lgattorneys.com or 312-368-0100.

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A Baseless Lawsuit Was Filed Against My Business. Can I Recover My Attorneys’ Fees?

Defending lawsuits is sometimes an unfortunate but necessary part of doing business. Whether the case was quickly dismissed by the court, or whether you won the case after a trial, you and your attorneys knew the case was unfounded from the beginning and yet you had to spend substantial time and money that you could have devoted to your business in order to successfully defeat the case.

Depending on the facts and circumstances and whether the suit was pending in state or federal court, your fees may be recoverable from other side as a sanction for filing a “frivolous” claim against you. However, absent a contract or statute providing otherwise, you will most likely be unable to recover your attorneys’ fees simply because you won your case.

Assuming the suit was filed in Illinois, sanctions may be available. Generally, to recover fees against a party or his or her attorney under either rule, it must be shown that the party and/or his attorney either: (1) failed to reasonably investigate the facts or the law before filing the offending complaint, (2) filed the complaint for the purpose of harassment, delay, or to increase the cost of litigation for the opposing party.  One principal difference between the federal rule and the Illinois rule is that under the federal rule, only an attorney can be monetarily sanctioned based on unwarranted legal contentions. Thus, if the complaint was filed in federal court, while both the attorney and client are responsible for ensuring that the facts contained in the complaints are accurate and complete, only the attorney may be sanctioned for a complaint based on a claim or argument that is not warranted by existing law.  By contrast, under certain circumstances, the Illinois rule permits the court to sanction both the party and his attorney—even if the complaint is found to have been legally (as opposed to factually) unwarranted.

It is important to note that not every meritless case is considered “frivolous” for purposes of recovering attorneys’ fees. The United States Supreme Court has held that an action or claim is frivolous if “it lacks an arguable basis either in law or in fact.” Similarly, the Seventh Circuit Court of Appeals has characterized a filing that is incoherent and lacks a legal basis as “frivolous.” Thus, “frivolous” does not necessarily mean “meritless,” but rather, a frivolous suit lacks a factual or legal basis, and as such, has very little chance of being won.  For this reason, it is recommended that a party wishing to seek sanctions do so at the end of the case, i.e., after the court makes a determination that the claim lacks legal and/or factual merit.

In addition, as the Seventh Circuit Court of Appeals recently determined, whether a case or claim is “frivolous” is not the end of the inquiry. A request for attorneys’ fees may nonetheless be denied where fees that were incurred were “self-inflicted” by, for example, pursuing one strategy over another, or briefing an appeal on the merits rather than filing a motion to dismiss for lack of jurisdiction.

Both the federal rule and the Illinois rule are discretionary and are strictly applied by the courts. As such, sanctions are infrequently granted. Regardless of how and when your litigation was resolved, you and your attorneys should evaluate whether it would be appropriate to seek sanctions, and if so, whether it would be worthwhile from a cost perspective.

If you have any questions regarding a litigation matter you find yourself involved in, please contact:

Katherine A. Grosh at:

(312) 368-0100 or kgrosh@lgattorneys.com


[1]  This article is the first of a three-part series: Part II will address the recovery of attorneys’ fees pursuant to various Illinois statutes, and Part III will address the recovery of attorneys’ fees pursuant to a contract where the dispute is resolved outside of the litigation context.

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Keeping your Trade Secrets Safe: The Runaway Employee

How can a business protect its critical information when an employee goes to work for a competitor? Many employers simply assume that if it deems information “confidential,” the law automatically protects it when an employee leaves and goes to work for a competitor.  That’s not necessarily the case.  In order to protect its confidential information, such as intellectual property, information, systems, customer lists, pricing information and the like, an employer must take affirmative steps long before the rogue employee leaves to ensure that its information is protected.  Such information can be protected from disclosure both under Illinois common law and pursuant to the Illinois Trade Secrets Act (“ITSA”).

An employer’s trade secrets, such as its customer lists, are a protectable interest. An employer has a clear and ascertainable right in protecting its trade secrets. To show information is a trade secret under ITSA, an employer must meet two threshold requirements. First, it must show the information was sufficiently secret to provide the employer with a competitive advantage. Second, the employer must show that it took affirmative measures to stop others from acquiring or using the information. Examples of steps employers typically take to keep information confidential include keeping the information under lock and key, limiting computer access, requiring confidentiality agreements, and other employer efforts to advise employees that the information imparted to them must be kept secret. Establishing this second prong is where employers typically fall short.

Where employers have invested substantial time, money, and effort to obtain a secret advantage, the secret should be protected from an employee who obtains it through improper means. Although employees may take general knowledge or information with them that they developed during their employment, they may not take confidential information, including trade secrets. The taking does not have to be a physical taking by actually copying the names. A trade secret can be misappropriated by physical copying or by memorization. Using memorization to rebuild a trade secret does not transform the trade secret from confidential information into non-confidential information. A trade secret can also be obtained through reverse engineering

Whether and how an employer keeps information secret is one of the most important factors when determining whether information is a trade secret. When information is generally known or understood in an industry, even if it is unknown to the public at large, it does not constitute a trade secret. If a business fully discloses information throughout an industry through a catalog or other literature, it is not considered a trade secret. If the information can be readily duplicated without considerable time, effort, or expense, it is not considered a trade secret. If a customer list, for example, is generally available to all employees and the employees are not required to sign confidentiality agreements, the list is likely not considered a trade secret.

By far the most litigation in this area is over whether an employer’s customer list is a confidential trade secret.  Whether customer lists constitute trade secrets largely depends on the facts of each case.  Customer lists and other customer information can be considered a protectable trade secret if the information has been developed by the employer over a number of years at great expense and kept under tight security. However, the same type of information is not protectable where it has not been treated as confidential and secret by the employer, was generally available to other employees and known by persons in the trade, could be easily duplicated by reference to telephone directories or industry publications, and where the customers on such lists did business with more than one company or otherwise changed businesses frequently so that their identities were known to the employer’s competitors.

Illinois courts have found that customer lists do not constitute protectable trade secrets where, for example: a) the particular industry was competitive and customers often dealt with multiple companies; b) the employer had failed to produce sufficient evidence to demonstrate that the customer list was subject to reasonable efforts to protect its secrecy; and c) sufficient efforts had not been taken to maintain the list’s secrecy. To be a protectable trade secret, the employer must demonstrate the information it seeks to protect was sufficiently secret to provide it with a competitive advantage. However, for steps to be deemed sufficient to protect a trade secret, extensive steps must be taken to protect both the electronic and hard copies of the purported trade secret.

For more information regarding the protection of a company’s confidential information, please contact:

Howard L. Teplinsky at:

(312) 368-0100 or hteplinsky@lgattorneys.com

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Estate Tax Developments under the New Tax Act – What about Illinois residents?

Under the Tax Cuts and Jobs Act, the new federal estate tax system “exempts” from federal estate tax, all estates under $11.2 million for each decedent, meaning that a married couple could have an estate of $22.4 million and not incur any federal estate taxes. This higher amount means that most estates will not be subject to federal estate tax. These amounts will be subject to increase, based upon increases in the Consumer Price Index; however, the amount “sunsets” after 2026, and the amounts will be reduced by half.  The good news is that many estate plans can be drafted with little regard to federal estate taxes in some states. The bad news is that residents of Illinois are subject to a much lower threshold and may need to examine their estate plans in light of the Illinois thresholds.

Illinois taxes all estates in excess of $4 million AND, if not structured properly, both spouses may not be able to take advantage of the full amount. While federal law generally permits a surviving spouse to “use” any unused exemption amount of their deceased spouse, Illinois does not permit this. For federal tax purposes, if one spouse dies with a $6 million dollar taxable estate, then under some circumstances, the surviving spouse may use his or her own exemption of $11.2 million, plus the “unused” $5.2 million of the deceased spouse.

“Typical” estate planning has often maximized the federal exemption amount on the first spouse to die by putting that into a segregated trust while leaving everything else to the surviving spouse. If you have not looked at your estate planning documents, you should do so immediately. Under the “typical” plan, the surviving spouse is often only entitled to receive income from that segregated trust which holds the maximum federal exemption amount; principal distributions are based upon need. Thus, the surviving spouse may not be able to access principal of the decedent’s estate without establishing a need. And to make matters worse, if that trust holds more than $4 million dollars, then there will be liability for Illinois estate taxes upon the death of the first spouse.

If you have any questions about your estate plan or how federal and Illinois estate taxes affect your estate planning, please call or contact:

Morris Saunders at:

312-368-0100 or msaunders@lgattorneys.com.

 

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