HANCHETT PAPER COMPANY, d/b/a | ) | Appeal from the Circuit Court |
Shorr Packing Corporation, a/k/a | ) | of Kane County. |
Shorr Paper Products, Inc., | ) | |
) | ||
Plaintiff-Appellee, | ) | |
) | ||
v. | ) | No. 02--CH--876 |
) | ||
FRANK MELCHIORRE, | ) | Honorable |
) | Patrick J. Dixon, | |
Defendant-Appellant. | ) | Judge, Presiding. |
JUSTICE McLAREN delivered the opinion of the court: Defendant, Frank Melchiorre, appeals an order granting apreliminary injunction enjoining defendant from soliciting, sellingto, or servicing customers defendant serviced while he was employedby plaintiff, Hanchett Paper Company, d/b/a Shorr PackagingCorporation, a/k/a Shorr Paper Products, Inc. Defendant wasemployed by plaintiff as a sales representative from July 1990until July 2002. Defendant then began to work for StamarPackaging, a competitor of plaintiff's. We affirm.
Plaintiff, an Illinois corporation, is a distributor ofpackaging products such as corrugated boxes, shrink wrap, tape,adhesive, protective packaging materials, and related items. Plaintiff stocks the products, provides customer service,insurance, telephone, and other support and employs warehousepersonnel to take orders, freight lines, delivery trucks, officestaff, product managers, and a management team to accompany salesrepresentatives on sales calls. Plaintiff spends millions ofdollars each year trying to develop and maintain its customers. Itcan take nine months to several years to develop a customer. Defendant stated that developing a customer is a "team effort."
David Shorr, plaintiff's president and chief operatingofficer, testified that a list of prospective customers is given toa sales representative. This list is prepared by plaintiff bynarrowing down a larger list of potential customers. This processtakes a lot of work. Although plaintiff's website contains baseprices and uses professional directories and telephone books, itspotential customer list is not readily obtainable from thesesources. These sources do not disclose which businesses areplaintiff's customers, who should be contacted at those businesses,how much the businesses have bought in the past, which productsthey have purchased, or when they make those purchases. Shorrstated that the information was confidential "[b]ecause we've gonethrough the trouble and the work of developing those [potentialcustomers] into more than just a name" and the information is notreadily available to competitors. Shorr explained that plaintiffprovided the following to help defendant: customer lists; invoices;customer usage reports indicating what, when, and how much acustomer bought; and profit margin information, including pricesand plaintiff's costs. The customer usage reports indicated whatproducts the customers purchased, when they purchased it, and howmuch they purchased.
Leo Albert Dieter, plaintiff's chief financial officer,testified that plaintiff has a long-term relationship with itscustomers and encourages its sales representative to developrelationships with customers because that is the best way ofmaintaining customers. Of the top 300 customers in sales volume infiscal year 2001, two-thirds of them had been plaintiff's customersfor at least five years. These top 300 customers accounted for 80%of plaintiff's sales in 2001-02. Dieter stated that plaintiff'scustomer and vendor lists are protected by the use of a computer-based password-accessible system.
Shorr testified that about half of defendant's customers weretransferred to defendant by plaintiff. At the time of defendant'sdeparture, two-thirds of his top 50 customers had been plaintiff'scustomers for at least five years. These top 50 customersaccounted for 90% of defendant's sales. Almost all of defendant'scustomers were within 50 miles of plaintiff's location in Aurora.
John Tedesco, president of Stamar Packaging, and defendantboth testified that plaintiff's business, that is, the packagingbusiness, is highly competitive and that the products are sold bymany different companies, all using the same vendors andmanufacturers, selling the same products. The products sold byplaintiff are fungible. Most sales are accomplished through coldcalls. Almost all of plaintiff's customers also bought packagingproducts from more than one distributor simultaneously. Thus, noneof defendant's customers's bought exclusively from plaintiff. Theyall purchased from other distributors while purchasing fromplaintiff. Vendors and manufacturers possess information aboutplaintiff's business, such as customer identities and contacts,products purchased, frequency of purchases, and pricing. Defendantcompeted by learning competitors' prices and trying to beat theprice. The customers often provided this information to defendantto get a better price. Plaintiff published its price ranges,manufacturers, and available products on its public website. Plaintiff encouraged its representatives to develop customers byusing the telephone book, Illinois Manufacturers Guide, D & BRating Book, Standard Industrial Codes, trade journals, andnewspapers.
Defendant was first employed by plaintiff in July 1990 as asales representative. Before defendant's employment withplaintiff, he had no prior experience as a sales representative inthe packaging industry. However, defendant testified that he hadexperience as a sales representative for three years with threedifferent companies. Defendant testified that when he was hired byplaintiff defendant received two weeks of "intense" producttraining, which consisted of outside vendors coming in to describetheir products and explain how to sell the products. Defendantreceived no other formal training. Defendant was responsible forgenerating sales for plaintiff. Defendant testified that about 33of defendant's 102 customers were transferred to defendant byplaintiff. Defendant developed the remaining customers. Defendantdeveloped customers through cold calls and referrals and byvisiting companies and speaking to their employees. Defendantearned $100,000 to $125,000 a year while working for plaintiff andpaid his own business expenses, such as client entertainment andgifts, travel, cell phone, and his home office.
Defendant stated that in April 2000, before defendant leftplaintiff, defendant began to direct customer orders to be filledby Stamar, through Tedesco, defendant's future boss. Over $11,000in orders were filled this way before defendant left plaintiff'semploy. Defendant voluntarily left plaintiff's employ on July 3,2002, and was hired by Stamar on August 7, 2002. While at Stamar,all but one of defendant's customers were developed by defendantwhile he worked for plaintiff. By September 23, 2002, defendantgenerated over $213,000 in sales from these customers. Theproducts sold and prices charged to customers for sales madethrough Stamar were roughly the same as the products sold andprices charged them while defendant was employed by plaintiff. Defendant used the deviated pricing information he learned fromplaintiff to get the same prices for the same customers whiledefendant worked for Stamar.
Tedesco testified that Stamar is a competitor of plaintiff's. Defendant sold the same products and performed the same salesfunction for Stamar as he performed for plaintiff. The priceslisted on plaintiff's websites are not actual prices but merely astarting point for a sale. Tedesco opined that pricing informationsuch as profit margins is valuable and confidential information. Defendant received no commission from Stamar for the sales hereferred to Stamar before he began to work for Stamar.
At the beginning of defendant's employment with plaintiff,defendant entered into a written employment contract withplaintiff. The written contract provided, in pertinent part, that
defendant agreed that: while he worked for plaintiff he would workfor no other company; following defendant's termination for anyreason, he would not solicit, service, sell or cater to anybusiness similar to plaintiff's or engage in, assist, be interestedin or connected with any other entity that solicited from, served,sold or catered to any customer or solicited customer within 50miles of plaintiff's place of business for one year; customersserviced by defendant would be determined at the time ofdefendant's termination; customers, customer names, price lists,sales invoices, names of customers' personnel in defendant's tradearea were plaintiff's customers, had great value, and wereconfidential; defendant would return such information at the timeof his termination; customer information defendant learned whileemployed by plaintiff was confidential and would not be disclosedby defendant either during employment or after termination; ifdefendant breached the agreement, monetary damages would beinadequate and plaintiff could seek equitable relief, and; theterms in paragraph seven survive the termination of the agreement.
Robert Taylor, a branch manager for plaintiff, testified thatduring an exit interview defendant stated that he did not intend tocompete with plaintiff and indicated that he might go into hisfriends' restaurant business. Taylor also asked defendant toreturn all "customer files," but defendant replied that he hadnone. Actually, defendant had retained his customer list, whichshowed sales, costs, profit, and margin pricing, and his customerusage reports, which he later returned to plaintiff through hisattorney. Shorr testified that such information is confidential. Tedesco testified that margin pricing information is confidential. Larry Stein, a sales representative with a competitor ofplaintiff's, testified that customer usage reports areconfidential.
Defendant testified that he left plaintiff's employ afterplaintiff changed his compensation from 100% commission to salaryplus a small percentage of commission. Defendant stated that hemet with plaintiff's plant manager, Robert Taylor, after heresigned and that he gave Taylor a box of material relating toplaintiff's business. Months later, defendant returned additionalmaterial he had discovered in his possession. Defendant statedthat he did not use these forgotten materials in his new positionat Stamar.
Plaintiff learned of defendant's activities after defendantleft plaintiff's employ. After first sending defendant a cease anddesist letter, plaintiff filed a complaint against defendantseeking injunctive relief. On August 21, 2002, plaintiff requesteda preliminary injunction. Plaintiff requested that defendant beenjoined for one year from soliciting, selling to, or servicingthose customers or prospective customers of plaintiff's thatdefendant had solicited, sold to, or serviced while employed withplaintiff.
After an evidentiary hearing, the trial court granted apreliminary injunction, enjoining defendant from "soliciting,selling to, or servicing directly or indirectly, those customersset forth on plaintiff's exhibit No. 4 *** (that is customersserviced by defendant while employed at Shorr PackagingCorporation)." Defendant filed this timely appeal and deposited abond.
On appeal, defendant argues that the trial court erred bygranting a preliminary injunction because plaintiff did notsufficiently establish a protectable business interest. Wedisagree with defendant.
A preliminary injunction is a provisional remedy granted topreserve the status quo pending a hearing on the merits of a case. A court may not grant a preliminary injunction without a showingthat: (1) the party seeking the preliminary injunction possesses aclear right or interest needing protection; (2) the party has noadequate remedy at law; (3) irreparable harm will result if thepreliminary injunction is not granted; and (4) there is reasonablelikelihood of success on the merits. Office Mates 5, North Shore,Inc. v. Hazen, 234 Ill. App. 3d 557, 567 (1992). On review, wewill not disturb a trial court's decision to grant a preliminaryinjunction, absent an abuse of discretion. Office Mates 5, 234Ill. App. 3d at 567.
The propriety of injunctive relief based on a covenant not tocompete depends on the enforceability of that covenant. OfficeMates 5, 234 Ill. App. 3d at 568. The determination of theenforceability of a restrictive covenant is a question of law.Office Mates 5, 234 Ill. App. 3d at 568.
Because such covenants are a restraint on trade, courts muststrictly construe them to ensure that their intended effect is notto prevent competition per se. Office Mates 5, 234 Ill. App. 3d at568. In Illinois, courts will not enforce a covenant not tocompete unless the terms of the agreement are reasonable andnecessary to protect an employer's legitimate business interests. Office Mates 5, 234 Ill. App. 3d at 568. A legitimate businessinterest exists where: (1) because of the nature of the business,the customers' relationships with the employer are near permanentand the employee would not have had contact with the customersabsent the employee's employment; and (2) the employee gainedconfidential information through his employment that he attemptedto use for his own benefit. Office Mates 5, 234 Ill. App. 3d at569.
Defendant argues that plaintiff's relationships with itscustomers were not near permanent because its customers bought thesame products from other companies while they were plaintiff'scustomers. Plaintiff argues that exclusivity is not necessary toestablish a near-permanent relationship.
Illinois courts have applied two tests to determine whether anemployer has a near-permanent relationship with its customers: thenature-of-the-business test, which considers the generalcharacteristics of a business; and the seven-factors test,established in Agrimerica, Inc. v. Mathes, 199 Ill. App. 3d 435(1990). We believe that the seven-factors test is more appropriateto this case because it provides a more complete analysis of thefacts at issue here.
We recognize that it is difficult to show a near-permanentrelationship with customers of businesses that are engaged insales, do not provide a unique product, have customers that engagein cross-purchasing, and have customers whose identities are wellknown throughout the industry. Lawrence & Allen, Inc. v. CambridgeHuman Resource Group, Inc., 292 Ill. App. 3d 131, 142 (1997). However, to satisfy the near-permanency test a business need notshow that its customer relationships are perpetual or indissoluble,that it has an exclusive relationship with its customers, or thata near-permanent relationship existed with each customer. AudioProperties, Inc. v. Kovach, 275 Ill. App. 3d 145, 149 (1995).
To determine whether an employer has a near-permanentrelationship with its customers, Illinois courts consider thefollowing factors:
"(1) the length of time required to develop the clientele; (2) the amount of money invested to acquire clients; (3) thedegree of difficulty in acquiring clients; (4) the extent ofpersonal customer contact by the employee; (5) the extent ofthe employer's knowledge of its clients; (6) the duration ofthe customer's association with the employer; and (7) thecontinuity of the employer-customer relationships." AudioProperties, 275 Ill. App. 3d at 148-49.
The first, second, and third factors favor plaintiff. Therecord indicates that plaintiff must cultivate a potential clientfor a substantial period and that it takes months to years todevelop a customer relationship. Further, the record reveals thatplaintiff invested millions of dollars each year using the effortsof a team to acquire customers and cultivate extensive customerbuying information over a long period of time in anticipation ofdeveloping business. Plaintiff protected this information througha computer system accessible by password.
The fourth factor, the extent of personal customer contact bythe employee, favors neither plaintiff nor defendant. Here, therecord indicates that defendant enjoyed close personal contact withcustomers and possessed detailed knowledge of their respectiveneeds. However, like the customers in Tyler Enterprises of Elwood,Inc. v. Shafer, 214 Ill. App. 3d 145, 150 (1991), Agrimerica, 199Ill. App. 3d at 445-46, and McRand, Inc. v. Van Beelen, 138 Ill.App. 3d 1045, 1053 (1985), customers came to plaintiff in this casefor a product offered by plaintiff through defendant. Although thecustomers in the cases cited were not exclusive, the courts heldthat near-permanent relationships existed. See Tyler, 214 Ill.App. 3d at 150 (customers bought the employer's lawn careproducts); Agrimerica, 199 Ill. App. 3d at 445-46 (customers boughtthe employer's animal feed products); McRand, 138 Ill. App. 3d at1053 (customers bought business awards). These cases aresubstantially similar to this case in that the former employeeswere little more than sellers of the employers' products andservices. Thus, although defendant had personal contact withcustomers, we cannot say that this factor favors defendant.
The fifth factor, the extent of the employer's knowledge ofits clients, favors plaintiff. The record indicates that plaintifftook great care to acquire and retain information related to itscustomers' specific needs and requirements.
Finally, we believe that plaintiff has met its burden withregard to the sixth and seventh factors, duration of the customer'sassociation with the employer and the continuity of the employer-customer relationship. Two-thirds of plaintiff's top 300 customershad been customers for at least five years. Plaintiff transferredcustomers to defendant when defendant began working for plaintiff, and 90% of defendant's top customers had been plaintiff's customersfor at least five years. Thus, we believe that these factorssupport the trial court's decision.
We also must discuss whether defendant would have had contactwith plaintiff's customers absent his association with plaintiff. Defendant contends that, because he could have contacted thecustomers notwithstanding his employment with plaintiff and thebusiness is competitive and involves fungible goods, plaintiff didnot establish a near-permanent relationship. We note thatdefendant came to plaintiff with no knowledge of the packagingindustry. Defendant gained his knowledge of the industry throughplaintiff. Plaintiff gave defendant access to a customer list thatit had developed at great cost and transferred existing customersto defendant. Further, we do not agree with defendant's assertionthat he could have sold to plaintiff's customers absent hisemployment with plaintiff. The record indicates that two-thirds ofdefendant's top 50 customers had been plaintiff's customers for atleast five years. These top 50 customers accounted for 90% ofdefendant's sales. Consequently, while we may have ruleddifferently on these facts, we cannot say that the trial courtabused its discretion by granting plaintiff's motion for apreliminary injunction. See Lyle R. Jager Agency, Inc. v. Steward,253 Ill. App. 3d 631, 639 (1993). Here, the court granted apreliminary injunction and our review is limited to whetherplaintiff presented a prima facie case that there is a fairquestion concerning the existence of the claimed rights. SeePeople ex rel. Klaeren v. Village of Lisle, 202 Ill. 2d 164, 177(2002). In light of the record before us, and the standard ofproof before the trial court and the standard of review, we declineto disturb the trial court's order.
Defendant cites the following cases to support his argumentthat plaintiff had not established a near-permanent relationshipwith its customers: Lawrence & Allen, Inc. v. Cambridge HumanResource Group, 292 Ill. App. 3d 131 (1997); Springfield Rare CoinGalleries, Inc. v. Mileham, 250 Ill. App. 3d 922 (1993); OfficeMates 5, North Shore, Inc. v. Hazen, 234 Ill. App. 3d 557 (1992);Label Printers v. Pflug, 206 Ill. App. 3d 483 (1991); ReinhardtPrinting Co. v. Feld, 142 Ill. App. 3d 9 (1986); and IroquoisIndustries Corp. v. Popik, 91 Ill. App. 3d 505 (1980). However,these cases are factually distinguishable from the case at bar. Unlike plaintiff in this case, the plaintiffs in the cases cited
by defendant did not establish that they incurred great expense todevelop customer lists, that they needed to protect confidentialinformation, such as margin pricing information, or that theirrelationships with most of their customers had existed for fiveyears or longer. Lawrence & Allen, 292 Ill. App. 3d at 143;Springfield Rare Coin, 250 Ill. App. 3d at 931; Office Mates 5, 234Ill. App. 3d at 572; Label Printers, 206 Ill. App. 3d at 491, 493;Reinhardt Printing, 142 Ill. App. 3d at 17; Iroquois, 91 Ill. App.3d at 509. Accordingly, these cases are not controlling here.
We granted defendant's motion to cite to additional authoritybut note that the case cited is distinguishable from the case atbar. See Unisource Worldwide, Inc. v. Carrara, No. 3--1015,February 19, 2003 (C.D. Ill.). In Unisource, theplaintiff/employer did not argue that it had a near-permanentrelationship with its customers. Therefore, the case is notcontrolling here.
Next, defendant argues that the trial court erred by issuingthe preliminary injunction to rewrite an overly broad restrictivecovenant. Here, the relevant provisions of the restrictivecovenant provide:
"a) For a period of one (1) year after the termination of thisAgreement, irrespective of the time, manner or cause oftermination, employee covenants and agrees that he will not,directly or indirectly, either as principle, agent, employee,employer, stockholder, co-partner, or any other individual orrepresentative capacity whatsoever:
(1) solicit, serve, sell or cater to, in a businesssimilar to or competitive with employer,
(2) engage in, assist, be interested in or [in]connection with any other person, firm, corporation, orother entity soliciting from, serving, selling to, orcatering to any customer or employer or any person, firm,corporation or other entity, that employer has sought tobecome its customer, within the area encompassed by aradius of fifty (50) miles from the employer's place ofbusiness at 227 S. River Street, Aurora, Kane County,Illinois 60507 and within fifty (50) miles of any othersite of business from which employee is assigned to work. The determination of who are the employer's customers andthe persons, firms, corporation, and other entities thatemployer has sought to become its customers, shall bemade as of the date of the termination of thisAgreement."
The trial court's order provides:
"Frank Melchiorre is preliminarily enjoined from soliciting,selling to, or servicing directly or indirectly, thosecustomers set forth on plaintiff's exhibit no. 4 in evidence,during the pendency of this cause (that is, the customersserviced by defendant while employed at Shorr PackagingCorporation)."
In this case, plaintiff sought enforcement of only part of thecovenant, that is, the prohibition against soliciting clientsdefendant serviced while working for plaintiff. By preliminarilygranting this request, the trial court did not rewrite the contractbut did what was within its powers to do. Although, after a fullhearing, the court may inevitably find that the restrictivecovenant is unenforceable, we do not believe it abused itsdiscretion in maintaining the status quo at this point in thelitigation.
Lee/O'Keefe Insurance Agency, Inc. v. Ferega, 163 Ill. App. 3d997 (1987), cited by defendant, is distinguishable from the case atbar. In Lee/O'Keefe the court affirmed the trial court's denial ofa preliminary injunction because the restrictive covenant at issuecontained no temporal or geographical limitations and the plaintiffhad a short-term relationship with its customers. Lee/O'Keefe, 163Ill. App. 3d at 1004-05. In contrast, the restrictive covenant atissue here contains limitations of 50 miles and one year. Further,plaintiff had relationships with most of its customers for at leastfive years. Thus, we do not believe Lee/O'Keefe is controllinghere.
Defendant urges this court to limit the injunction to theaccounts that plaintiff transferred to defendant. Defendant notesthat the trial court initially decided to limit the injunction tothese transferred accounts but then broadened the injunction out offrustration. Our duty here is to determine whether the trialcourt's order amounts to an abuse of discretion. The fact that thetrial court entertained a narrower injunction before entering theorder at issue here does not warrant modification, as we havedetermined that the trial court did not abuse its discretion.
Finally, we disagree with defendant's characterization of thetrial court's order as permitting the injunction to continue for anindeterminate period of time. The order expressly states that theinjunction will be in force for no longer than through July 3,2003, which is one year after defendant's termination, in accordwith the covenant.
The judgment of the circuit court of Kane County is affirmed.
Affirmed.
BOWMAN and GILLERAN JOHNSON, JJ., concur.