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Hanchett Paper Co. v. Melchiorre

June 27, 2003


Appeal from the Circuit Court of Kane County. No. 02-CH-876 Honorable Patrick J. Dixon, Judge, Presiding.


JUSTICE McLAREN delivered the opinion of the court: Defendant, Frank Melchiorre, appeals an order granting a preliminary injunction enjoining defendant from soliciting, selling to, or servicing customers defendant serviced while he was employed by plaintiff, Hanchett Paper Company, d/b/a Shorr Packaging Corporation, a/k/a Shorr Paper Products, Inc. Defendant was employed by plaintiff as a sales representative from July 1990 until July 2002. Defendant then began to work for Stamar Packaging, a competitor of plaintiff's. We affirm.

Plaintiff, an Illinois corporation, is a distributor of packaging 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 warehouse personnel to take orders, freight lines, delivery trucks, office staff, product managers, and a management team to accompany sales representatives on sales calls. Plaintiff spends millions of dollars each year trying to develop and maintain its customers. It can 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 operating officer, testified that a list of prospective customers is given to a sales representative. This list is prepared by plaintiff by narrowing down a larger list of potential customers. This process takes a lot of work. Although plaintiff's website contains base prices and uses professional directories and telephone books, its potential customer list is not readily obtainable from these sources. These sources do not disclose which businesses are plaintiff's customers, who should be contacted at those businesses, how much the businesses have bought in the past, which products they have purchased, or when they make those purchases. Shorr stated that the information was confidential "[b]ecause we've gone through the trouble and the work of developing those [potential customers] into more than just a name" and the information is not readily available to competitors. Shorr explained that plaintiff provided the following to help defendant: customer lists; invoices; customer usage reports indicating what, when, and how much a customer bought; and profit margin information, including prices and plaintiff's costs. The customer usage reports indicated what products the customers purchased, when they purchased it, and how much they purchased.

Leo Albert Dieter, plaintiff's chief financial officer, testified that plaintiff has a long-term relationship with its customers and encourages its sales representative to develop relationships with customers because that is the best way of maintaining customers. Of the top 300 customers in sales volume in fiscal year 2001, two-thirds of them had been plaintiff's customers for at least five years. These top 300 customers accounted for 80% of plaintiff's sales in 2001-02. Dieter stated that plaintiff's customer and vendor lists are protected by the use of a computer- based password-accessible system.

Shorr testified that about half of defendant's customers were transferred to defendant by plaintiff. At the time of defendant's departure, two-thirds of his top 50 customers had been plaintiff's customers for at least five years. These top 50 customers accounted for 90% of defendant's sales. Almost all of defendant's customers were within 50 miles of plaintiff's location in Aurora.

John Tedesco, president of Stamar Packaging, and defendant both testified that plaintiff's business, that is, the packaging business, is highly competitive and that the products are sold by many different companies, all using the same vendors and manufacturers, selling the same products. The products sold by plaintiff are fungible. Most sales are accomplished through cold calls. Almost all of plaintiff's customers also bought packaging products from more than one distributor simultaneously. Thus, none of defendant's customers's bought exclusively from plaintiff. They all purchased from other distributors while purchasing from plaintiff. Vendors and manufacturers possess information about plaintiff's business, such as customer identities and contacts, products purchased, frequency of purchases, and pricing. Defendant competed by learning competitors' prices and trying to beat the price. The customers often provided this information to defendant to get a better price. Plaintiff published its price ranges, manufacturers, and available products on its public website. Plaintiff encouraged its representatives to develop customers by using the telephone book, Illinois Manufacturers Guide, D & B Rating Book, Standard Industrial Codes, trade journals, and newspapers.

Defendant was first employed by plaintiff in July 1990 as a sales representative. Before defendant's employment with plaintiff, he had no prior experience as a sales representative in the packaging industry. However, defendant testified that he had experience as a sales representative for three years with three different companies. Defendant testified that when he was hired by plaintiff defendant received two weeks of "intense" product training, which consisted of outside vendors coming in to describe their products and explain how to sell the products. Defendant received no other formal training. Defendant was responsible for generating sales for plaintiff. Defendant testified that about 33 of defendant's 102 customers were transferred to defendant by plaintiff. Defendant developed the remaining customers. Defendant developed customers through cold calls and referrals and by visiting companies and speaking to their employees. Defendant earned $100,000 to $125,000 a year while working for plaintiff and paid his own business expenses, such as client entertainment and gifts, travel, cell phone, and his home office.

Defendant stated that in April 2000, before defendant left plaintiff, defendant began to direct customer orders to be filled by Stamar, through Tedesco, defendant's future boss. Over $11,000 in orders were filled this way before defendant left plaintiff's employ. 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 defendant while he worked for plaintiff. By September 23, 2002, defendant generated over $213,000 in sales from these customers. The products sold and prices charged to customers for sales made through Stamar were roughly the same as the products sold and prices charged them while defendant was employed by plaintiff. Defendant used the deviated pricing information he learned from plaintiff to get the same prices for the same customers while defendant worked for Stamar.

Tedesco testified that Stamar is a competitor of plaintiff's. Defendant sold the same products and performed the same sales function for Stamar as he performed for plaintiff. The prices listed on plaintiff's websites are not actual prices but merely a starting point for a sale. Tedesco opined that pricing information such as profit margins is valuable and confidential information. Defendant received no commission from Stamar for the sales he referred 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 with plaintiff. The written contract provided, in pertinent part, that defendant agreed that: while he worked for plaintiff he would work for no other company; following defendant's termination for any reason, he would not solicit, service, sell or cater to any business similar to plaintiff's or engage in, assist, be interested in or connected with any other entity that solicited from, served, sold or catered to any customer or solicited customer within 50 miles of plaintiff's place of business for one year; customers serviced by defendant would be determined at the time of defendant's termination; customers, customer names, price lists, sales invoices, names of customers' personnel in defendant's trade area were plaintiff's customers, had great value, and were confidential; defendant would return such information at the time of his termination; customer information defendant learned while employed by plaintiff was confidential and would not be disclosed by defendant either during employment or after termination; if defendant breached the agreement, monetary damages would be inadequate and plaintiff could seek equitable relief, and; the terms in paragraph seven survive the termination of the agreement.

Robert Taylor, a branch manager for plaintiff, testified that during an exit interview defendant stated that he did not intend to compete with plaintiff and indicated that he might go into his friends' restaurant business. Taylor also asked defendant to return all "customer files," but defendant replied that he had none. Actually, defendant had retained his customer list, which showed sales, costs, profit, and margin pricing, and his customer usage reports, which he later returned to plaintiff through his attorney. Shorr testified that such information is confidential. Tedesco testified that margin pricing information is confidential. Larry Stein, a sales representative with a competitor of plaintiff's, testified that customer usage reports are confidential.

Defendant testified that he left plaintiff's employ after plaintiff changed his compensation from 100% commission to salary plus a small percentage of commission. Defendant stated that he met with plaintiff's plant manager, Robert Taylor, after he resigned and that he gave Taylor a box of material relating to plaintiff's business. Months later, defendant returned additional material he had discovered in his possession. Defendant stated that he did not use these forgotten materials in his new position at Stamar.

Plaintiff learned of defendant's activities after defendant left plaintiff's employ. After first sending defendant a cease and desist letter, plaintiff filed a complaint against defendant seeking injunctive relief. On August 21, 2002, plaintiff requested a preliminary injunction. Plaintiff requested that defendant be enjoined for one year from soliciting, selling to, or servicing those customers or prospective ...

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