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Vendo Company v. Stoner





Appeal from the Appellate Court for the Second District; heard in that court on appeal from the Circuit Court of Kane County; the Hon. John S. Petersen, Judge, presiding. MR. JUSTICE SCHAEFER DELIVERED THE OPINION OF THE COURT:

This appeal is the outgrowth of litigation which commenced in 1965 with the filing of a complaint in the circuit court of Kane County by plaintiff, The Vendo Company, against Harry B. Stoner and Stoner Investments, Inc., a company of which Stoner is the president and whose sole stockholders are Stoner and his wife.

The case was tried without a jury and resulted in a judgment against Stoner in the amount of $250,000 and a judgment against Stoner and Stoner Investments, Inc., of $1,100,000. An appeal was taken by defendants to the Appellate Court for the Second District, and that court reversed the judgment in part and remanded the cause for further hearings with respect to the amount of damages properly recoverable by the plaintiff. (Vendo Co. v. Stoner (1969), 105 Ill. App.2d 261.) Plaintiff filed a petition for leave to appeal which was denied by this court.

Following the hearings on remand the circuit court entered a judgment against Stoner for $170,835 and a judgment against both defendants for $7,345,500. The case was again appealed to the appellate court by defendants. That court affirmed the judgment awarding damages against Stoner individually, but it reversed the judgment rendered against the two defendants jointly for $7,345,500, and remanded the cause for additional hearings as to the amount of damages. (Vendo Co. v. Stoner (1973), 13 Ill. App.3d 291.) Each party filed a petition for leave to appeal, and each petition was allowed.

The intricate and prolonged litigation now before us concerns the development and marketing of a new and successful type of candy-vending machine by a concern called Lektro-Vend, allegedly with the active support of each defendant, during the period when Stoner was an employee and a director of plaintiff. Before discussing the two decisions hitherto rendered and the contentions now made by the parties, it is necessary to review various events which took place in 1959 and thereafter.

In April of 1959 the defendant Harry B. Stoner was the president and the controlling owner of Stoner Manufacturing Corporation, an Illinois corporation with its principal place of business in Aurora, Illinois, and a predecessor of the corporate defendant here. Stoner Manufacturing Corporation had been engaged for many years in the business of making and selling candy-vending machines throughout the United States. The plaintiff, a Missouri corporation located in Kansas City, Missouri, was at that time engaged in the business of manufacturing and selling vending machines designed to handle beverages, ice cream, and various other products. It did not make a machine for vending candy, but at least as early as 1958 it had considered the possibility of making a candy-vending machine, and had undertaken some research into that matter.

In April, 1959, plaintiff and Stoner Manufacturing Corporation entered into a contract for the purchase by plaintiff of the assets of the corporation, including inventions, patents, drawings, designs, and research and development work. Plaintiff's purpose in making the acquisition was in part to add a candy-vending machine to its line. So far as Harry B. Stoner was concerned, the motive for the sale appears to have arisen from a concern that the poor state of his health would prevent him from continuing in the active direction of his company.

Under the sale agreement plaintiff was to pay the Stoner Manufacturing Corporation $3,400,000 in cash and to deliver to it 60,000 shares of plaintiff's stock. The land and the property constituting the Stoner Manufacturing Corporation plant was leased to plaintiff at a stipulated rental for 10 years with an option of renewal for a like period. Plaintiff was also given an option to purchase the property on or after December 31, 1961.

Plaintiff agreed to pay annually, for a period of 10 years or until such time as it might exercise its option to purchase the plant, all profits in excess of $250,000 realized from the use of the assets being purchased. Any amount theretofore paid by plaintiff out of profits was to be credited upon the purchase of the plant. Plaintiff further agreed to pay, for a period of 10 years, 25% of the income received from foreign sales realized from the use of the assets being purchased.

The corporation agreed to use its best efforts to preserve its business organization intact, and to keep available to plaintiff the services of its present officers and employees.

The sales contract contained several restrictions on competition by the selling corporation. The contract specified:

"From and after the closing, the Company [i.e., Stoner Manufacturing Corporation] will not own, directly or indirectly, manage, operate, join, control or participate in the ownership, management, operation or control of, or be connected in any manner with, any business engaged in the manufacture and sale of vending machines under any name similar to the Company's present name, and, for a period of ten (10) years after the closing, the Company will not in any manner, directly or indirectly, enter into or engage in the United States or any foreign country in which Vendo or any affiliate or subsidiary is so engaged, in the manufacture and sale of vending machines or any business similar to that now being conducted by the Company. The Company also agrees that during its corporate existence it will, without incurring any financial obligation, co-operate with Vendo to prevent the use by others of the names `Stoner' and `Stoner Mfg. Corp.' in connection with any business similar to that now carried on by the Company and also agrees not to disclose to others, or make use of, directly or indirectly any formulae or process now owned or used by the Company."

On June 1, 1959, Stoner executed an employment contract with plaintiff. The contract recited plaintiff's desire to employ Stoner's services, and it stated that the value of his services consisted of his "advice and counsel in the operation of the Aurora, Illinois, facility, and his know-how, experience and reputation in the vending machine field."

A paragraph of the employment contract also contained a limitation on competition. It provided:

"5. During the term of this agreement and for a period of five (5) years following the termination of his employment hereunder, whether by lapse of time or by termination as hereinafter provided, Stoner shall not directly or indirectly, in any of the territories in which the Company [i.e., the Vendo Company] or its subsidiaries or affiliates is at present conducting business and also in territories which Stoner knows the Company or its subsidiaries or affiliates intends to extend and carry on business by expansion of present activities, enter into or engage in the vending machine manufacturing business or any branch thereof, either as an individual on his own account, or as a partner or joint venturer, or as an employee, agent or salesman for any person, firm or corporation or as an officer or director of a corporation or otherwise, provided however that the Company, its subsidiaries and affiliates shall be excluded from the restrictions hereof and provided also that Stoner shall be permitted to own, hold, acquire and dispose of stocks and other securities which are traded in the investment security market whether on listed exchanges or over the counter."

The candy-vending machine which was being manufactured by Stoner Manufacturing Corporation at the time it sold its assets to plaintiff in 1959 was a model which is called a "drop shelf" machine in the jargon of the trade. The "Lektro-Vend" model subsequently developed by the Lektro-Vend Company possessed three significant advantages over the drop-shelf model which made it popular and successful with companies, known as "operators," who purchase and service vending machines. The first of these advantages was that the machine could sell candy bars in the same order in which it had been stocked, a method called "FIFO," standing for first-in, first-out. The FIFO design produced savings to the operator by reducing the risk of having to vend or to discard stale items, and reducing the frequency of service calls to restock the machine. The second advantage of the Lektro-Vend model was that it permitted a continuous visible display of the item which was next to be vended. Thirdly, the Lektro-Vend employed a type of construction which permitted more than one type of product to be stocked on a single conveyor, thus eliminating the need to exhaust one product line before replacing it with a second. While each of these traits had been in existence for some years, Lektro-Vend was the first to combine all of them in a single machine having a practical design.

As the result of research into the possibility of developing a vending machine of this character, plaintiff, in August, 1959, had built two developmental models, sketches of which were shown to Stoner. Representatives of plaintiff, while agreeing on the desirability of developing a machine with such capabilities, considered this particular prototype to be defective in certain mechanical respects and also as being too expensive to produce. The research project for the machine was accordingly shelved.

In mid-1960, two engineering employees of plaintiff, Rod Phillips and his son William, each of whom had been employed by the Stoner Manufacturing Corporation prior to the date of the sale of its assets to plaintiff, became dissatisfied with their job situation with plaintiff and resigned. At this time certain disagreements had developed between Stoner and plaintiff as to Stoner's role in plaintiff's operations, which Stoner considered should be more than the merely advisory function to which plaintiff had, in his view, assigned him.

No evidence was introduced to show that Stoner played any part in inducing the resignation of either of these employees of plaintiff, but each of them approached Stoner after his resignation, and solicited his financial support in the design and development of certain devices. William Phillips, in mid-1960, induced Stoner to pay him a salary while he designed an electronic coin-detecting device. The machine, as the appellate court concluded, had no functional relation with the subsequent development of the Lektro-Vend vending machine, and consequently has no bearing on the claim made by plaintiff against defendants.

In late 1960 or early 1961, however, Rod Phillips approached Stoner with a request that Stoner provide financial support to cover the development of a vending machine, of the new type which has already been described, and Stoner agreed to do so. Stoner testified that the understanding was that Phillips would own the machine, if it were developed, and would be entitled to any profits earned from it. There is no confirmation of Stoner's testimony in this regard. Rod Phillips was not called as a witness because of a medical representation that his physical condition was unsatisfactory. While a stipulation was entered on the record as to what his testimony would have been had he appeared, the stipulated testimony did not refer to the prospective ownership of the machine.

Interest-free loans which aggregated some $200,000 were made to Phillips by Stoner Investments during 1961 and 1962. Some of these funds were used to buy equipment necessary for the engineering of the machine. Stoner also made available rent-free a building owned by him for use in conducting the development work. In 1961, when two more former employees of Stoner Construction Corporation, who had had experience in design and toolmaking, resigned from employment with plaintiff, they joined Rod and William Phillips on the research and development project. They received monthly salaries aggregating $1,150 from Stoner Investments.

By October, 1962, the developmental work on the new machine had progressed to the point where a prototype could be exhibited at a trade show held in San Francisco. The model shown differed in many important respects from and was a major improvement upon the device which plaintiff had worked on in 1958 and 1959, and it won a very favorable reaction in the industry.

Following the trade show, which had been attended by several of plaintiff's personnel, and the return of Rod Phillips to Illinois, several important developments took place. Their sequence and the exact dates when they occurred are not made wholly clear by the evidence, but in main outline they can be summarized as follows.

Shortly before December 18, 1962, on which date plaintiff's board of directors was to meet, Stoner asked the chairman, Elmer Pierson, to be released from his employment contract, stating that he had an opportunity to invest in the manufacture and sale of the Lektro-Vend machine. Stoner did not ...

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