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HAY GROUP, INC. v. BASSICK

September 29, 2005.

HAY GROUP, INC., Plaintiff/Counterdefendant
v.
E. WEBB BASSICK IV; ANNA-MARIA B. TAPLING; and COMPENSATION STRATEGIES, INC. Defendants/Counterclaimants v. HAY GROUP, INC. DEFERRED COMPENSATION PLAN; and HAY GROUP, INC. DEFERRED COMPENSATION AND SUPPLEMENTAL PENSION PLAN Co-Counterdefendants.



The opinion of the court was delivered by: JOAN GOTTSCHALL, District Judge

MEMORANDUM OPINION AND ORDER

In this diversity case, plaintiff Hay Group, Inc. ("Hay") has filed an eight-count first amended complaint against defendants E. Webb Bassick, IV ("Bassick"), Anna Maria B. Tapling ("Tapling") and Compensation Strategies, Inc. ("CSI"). The first amended complaint includes counts under Illinois law for: (i) misappropriation of trade secrets (against all defendants) (count I); (ii) breach of covenant not to compete (against Bassick) (count II); (iii) breach of covenant not to compete (against Tapling) (count III); (iv) tortious interference with contract (against all defendants) (count IV); (v) tortious interference with prospective business relationships (against all defendants) (count V); (vi) breach of duty of loyalty (against Bassick) (count VI); (vii) breach of duty of loyalty (against Tapling) (count VII); and (viii) civil conspiracy (against all defendants) (count VIII). Defendants have moved for summary judgment as to each count.

Defendants have filed their own seven-count second amended counterclaims, including Illinois law counts for: (i) breach of Bassick's employment contract (count 1); (ii) violation of the Illinois Wage Payment and Collection Act, 820 ILCS 115/1, et seq. ("Wage Act") (as to Bassick) (count 2); (iii) breach of Tapling's employment contract (count 3); (iv) violation of the Wage Act (as to Tapling) (count 4); (v) ERISA violations as to deferred compensation owed to Tapling (count 5); (vi) ERISA violations related to Bassick's Supplemental Executive Retirement Plan (count 6); and (vii) wrongful denial of benefits to Bassick under ERISA (count 7). Plaintiff and co-counterdefendants pension plans have filed: (1) a motion for partial summary judgment as to several monetary claims Bassick and Tapling have made, and (2) a separate motion for partial summary judgment as to counts VI and VII of the second amended counterclaims.

  For the reasons discussed below, defendants' motion for summary judgment is granted as to counts II, III, IV, and V of the first amended complaint, and denied as to counts I, VI, VII and VIII. Counterdefendants' motion for partial summary judgment is granted as to Bassick's and Tapling's bonus counterclaims; counts 6 and 7 of the counterclaims (in their entirety); and as to amounts accrued for Tapling in the Hay SERP plan after the amendment became effective in July 2000. Hay's motion for partial summary judgment is denied as to Hay's car and investment allowance obligations to Bassick; Bassick's and Tapling's severance and Health benefits claims; and Bassick's breach of contract claims with respect to section 4.D. of the Bassick Letter.

  Facts The court offers a brief factual overview of the parties and their relationships to each other. For purposes of clarity, additional facts pertinent to a count are discussed where necessary in connection with the court's ruling on that count.

  Hay is a large human resources consulting firm operating in at least 35 countries around the world, and has 12 offices in the United States, including one in Chicago. Prior to joining Hay in April, 1996, Bassick had been employed with competing international firms since 1974. Bassick's expertise is in the area of executive compensation consulting, which is apparently a somewhat minor sub-specialty in the world of human resources consulting, and Hay hired Bassick to head its executive compensation consulting practice. Immediately after hiring Bassick, and at Bassick's request, Hay opened a new office in Lincolnshire, Illinois that was devoted to housing the executive compensation consulting practice group headed by Bassick. Bassick's title at Hay was "managing director for the executive compensation practice."

  Tapling is also an experienced executive compensation consultant. Tapling worked with Bassick at his prior firm, and Hay hired Tapling at Bassick's behest to work with Bassick in the Lincolnshire office. Neither Bassick nor Tapling were members of Hay's Board of Directors, and were not listed as officers of any of the various entities that compose Hay in a list of all officers and directors tendered to defendants by Hay during discovery. Bassick and Tapling were partners in Hay, in that they were equity holders in the Bermuda company (later transferred to an LLC) that owns Hay. Bassick reported to a Hay official named Vicky Wright, who in turn reported to the President and CEO of Hay; later in Bassick's tenure at Hay, a new President and CEO was appointed to whom Bassick was to report directly, but Bassick never spoke with the new President and CEO. Neither Bassick nor Tapling received any training from Hay; both were hired to immediately assume significant responsibilities in Hay's executive compensation practice group. Bassick and Tapling both signed covenants not to compete which are discussed more fully below.

  Hay has approximately 7,000 clients, of which Bassick and Tapling performed services for 45 during 2001 and 2002. In the autumn of 2001, the parties agree, billings in the executive compensation consulting group began to fall precipitously. Also in the autumn of 2001, without consulting Bassick and/or Tapling, Hay decided to close the Lincolnshire office and move its personnel to Hay's Chicago office. Bassick protested the Lincolnshire office's closing, but Hay continued with its plans over Bassick's protest. Worried that Bassick would leave Hay after the office closing, both Tapling and another consultant in the office, Darrell Karolyi (not a party to this suit), approached Bassick and told him that if he left, they wanted to accompany him.

  In the late autumn of 2001, Bassick, Bassick's wife, Tapling, Karolyi and another former Hay employee began the process of setting up the corporate formalities, renting office space and generally preparing for operation of a new executive compensation consulting firm, which eventually became defendant CSI. Tapling and Bassick tendered their resignations to Hay on April 2, 2002, and went to work for CSI on April 3, 2002.

  Factual issues pertinent to each count of the first amended complaint and second amended counterclaims are discussed in relation to that count. DEFENDANTS' MOTION FOR SUMMARY JUDGMENT*fn1

  Count II — Bassick Covenant Not to Compete

  In count II of the amended complaint, Hay has sued Bassick for breach of a covenant not to compete, based allegedly on Bassick: creating CSI; diverting Hay clients to CSI; soliciting and enticing Tapling and other Hay employees to leave Hay to join CSI; and misappropriating Hay's trade secrets and confidential information. The covenant not to compete at issue is attached to an April 9, 1996 letter from Hay to Bassick setting forth the terms of Bassick's employment with Hay ("Bassick Letter"). The covenant is a separate document ("Bassick Noncompete") that was signed by Bassick at the same time as the Bassick Letter.

  Defendants first argue that, as a matter of law, the Bassick Noncompete is unenforceable. It is true that "the question of whether a restrictive covenant is enforceable or not is a question of law." Lawrence and Allen, Inc. v. Cambridge Human Resource Group, Inc., 685 N.E.2d 434, 440 (Ill.App. Ct. 1997) (citing cases). However, a covenant is enforceable if its terms are reasonable and necessary to protect the employer's legitimate business interest, "a determination that necessarily turns on the facts and circumstances of each case." Id. at 441 (citing cases). "The reasonableness of a noncompetition agreement is measured by its hardship to the employee, its effect upon the general public, and the reasonableness of the time, territory and activity restrictions." Abbot-Interfast Corp. v. Harjabus, 619 N.E.2d 1337, 1341 (Ill.App. Ct. 1993) (citing cases). In addition, "[a] noncompetition agreement which restricts a specific activity, such as soliciting specific clients, is subject to a lower degree of scrutiny than an agreement which prohibits the employee from engaging in any type of competition with the employer." Id. at 1341. Unfortunately for Hay, the Bassick Noncompete prohibits Bassick from engaging in any type of competition with Hay for its entire two year term. Because of this, it is clearly unreasonable as a matter of law.

  The introductory section of the Bassick Noncompete reads:
Covenant Not to Compete. During his employment and for two (2) years thereafter, the Executive shall not directly or indirectly, own, manage, operate, control, be employed by or participate in the ownership, management, operation or control of, or be connected in any manner with any business of the type and character engaged in and competitive with that conducted by Employer and the other members of the Affiliated Group.
In addition to this general prohibition, the Bassick Noncompete purports to contain a series of specific activity limitations:
As used below, "Employer" shall mean the Employer and the other members of the Affiliated Group. Without limiting in any way the generality of the foregoing, the Executive, during such period, specifically shall not, directly or indirectly:
(a) persuade or attempt to persuade any client of the Employer to cease doing business with the Employer, or to reduce the amount of business it does with the Employer;
. . . .
(f) engage in any business which is competitive with, in whole or in part, th business of the Employer.
Even a cursory reading of these provisions makes it clear that the effect of the Bassick Noncompete is to prohibit Bassick from engaging in any sort of competition with Hay. The introductory paragraph prohibits Bassick from being "connected in any manner" with "any business of the type and character engaged in" by Hay or its affiliates. The next paragraph clearly says that the listed activity restrictions are not intended to limit "in any way the generality of the foregoing"; in other words, the activity restrictions are a subset of the general prohibition on competition, and are not in lieu of the general prohibition. Finally, if there were any question as to the overarching generality of the prohibition on Bassick's inability to engage in any business in competition with any business activity conducted by Hay, the final "activity restriction" states that Bassick may not "engage in any business which is competitive with, in whole or in part, the business of the Employer" (emphases added). This noncompete effectively precludes Bassick from engaging in his occupation of providing executive compensation consulting (which both parties agree is an aspect of Hay's business) in any part of the world (because the Bassick Noncompete does not contain a geographic limitation). For this reason, the Bassick Noncompete is an unreasonable restraint on trade and is invalid. Dryvit System, Inc. v. Rushing, 477 N.E.2d 35, 37 (Ill.App. Ct. 1985) (noncompetition agreement prohibiting employee from competing in any manner, without geographic limitation, ruled unreasonable); Lee/O'Keefe Ins. Agency, Inc. v. Ferega, 516 N.E.2d 1313, 1318-19 (Ill.App. Ct. 1987) (noncompetition agreement effectively prohibiting former employee from practicing his occupation unreasonable as a matter of law); Lawrence and Allen, Inc., 685 N.E.2d at 443 (same).
  The Bassick Noncompete contains a severability clause, which Hay contends saves the Bassick Noncompete from being completely unenforceable. The severability clause reads:
It is the desire and intent of the parties that the provisions of this Covenant Not to Compete shall be enforced to the fullest extent permissible under the laws and public policies applied in each jurisdiction in which enforcement is sought. If any particular provisions or portion of this Covenant Not to Compete shall be adjudicated to be invalid or unenforceable, this Covenant Not to Compete shall be deemed amended to delete therefrom such provision or portion adjudicated to be invalid or unenforceable, such amendment to apply only with respect to the operation of this paragraph in the particular jurisdiction in which such adjudication is made.
  Specifically, Hay argues that the court should implement this clause to strike any sections of the Bassick Noncompete that are unenforceable. The court does not accept this argument. While a court applying Illinois law may "make slight modifications to effectuate the intent of the parties . . . the degree of unreasonableness of the original restraint" is a significant factor in guiding the court's modification. Eichmann v. Nat'l Hospital and Health Care Servs., Inc., 719 N.E.2d 1141, 1149 (Ill.App. Ct. 1999). Where, as here, the restraint is patently "unfair because of its overbreadth," courts will refuse to modify the agreement, even in the presence of a severability clause. Id. The court finds that the Bassick Noncompete is sufficiently overbroad that any modifications would amount to the court rewriting the agreement. Dryvit System, 477 N.E.2d at 39 (refusing to modify covenant not to compete because of its "very broad geographic scope which is clearly unreasonable"); Eichmann, 719 N.E.2d at 1149 (refusing to modify unreasonable restrictive covenant despite presence of clause requesting judicial modification) (citing House of Vision, Inc. v. Hiyane, 225 N.E.2d 21 (1967)); Lawrence & Allen, Inc., 685 N.E.2d 434 (Ill.App. Ct. 1997); Lee/O'Keefe Insurance Agency, 516 N.E.2d 1313 (Ill.App. Ct. 1987). The Bassick Noncompete is unenforceable in its entirety, and Bassick's motion for summary judgment is granted as to count II of the first amended complaint.

  Count III — Tapling Covenant Not to Compete

  In count III, Hay claims that Tapling breached her separate contractual obligation not to compete ("Tapling Noncompete") with Hay subsequent to her employment. Tapling's alleged breaches include her employment as CSI's vice president, her solicitation of Hay clients, her soliciting Hay employees to leave Hay for CSI, her misappropriation and use of Hay's trade secrets (through her unauthorized use of Hay's confidential information). Unlike Bassick's essentially limitless agreement, the Tapling Noncompete is considerably more restricted, and focuses on two activity restrictions. It reads in full:
Non-Competition. In any circumstances, you recognize that you will need to remain available and cooperate with Hay Group, Inc. to effect an orderly transition of your client responsibilities so that all of Hay Group, Inc.'s clients will be retained by Hay Group, Inc. You also agree for a period of one (1) year after the termination by either party of your employment with the Hay Group, Inc. for any reason whatsoever to refrain from: (i) soliciting or otherwise directly or indirectly attempting to induce any employee of Hay Group, Inc. or its affiliates to terminate his or her employment; and (ii) soliciting or doing business directly or indirectly with any person or entity that was a client of Hay Group, Inc. or its affiliates on the date of your termination of employment with Hay Group, Inc. "Client," for purposes of this paragraph, means any person or entity that has retained the services of Hay Group, Inc. or its affiliates at any time during the two (2) year period immediately prior to the date of your termination of employment.
  Of course, the test for enforceability of the Tapling Noncompete is the same as for the Bassick Noncompete. Accordingly, to win on summary judgment, Tapling needs to show that the Tapling Noncompete is not reasonably necessary for the protection of the employer's business from unfair or improper competition. Lawrence and Allen, Inc., 685 N.E.2d at 440. In order to enforce the Tapling Noncompete, Hay must also have an interest subject to protection, a requirement the court did not discuss with respect to the Bassick Noncompete because it was patently unreasonable. Arpac Corp. v. Murray, 589 N.E.2d 640, 648 (Ill.App. Ct. 1992). Tapling argues that Hay has no protectable business interest in its clients, and thus no legitimate interest subject to protection by enforcement of the Tapling Noncompete.

  Ordinarily, an employer does not have proprietary interest in its clients sufficient to constitute an interest protectable by enforcement of a noncompetition agreement. Corroon & Black, Inc. v. Magner, 494 N.E.2d 785, 792 (Ill.App. Ct. 1986). Nevertheless, Illinois courts have held that there are two general situations where a court could find such an interest to exist for purposes of enforcing a covenant not to compete: "(1) the employer has a `near permanent' relationship with its customers and but for the employment, the employee would not have had contact with the customers, or (2) the employee obtained trade secrets or other confidential information while in plaintiff's employ, and subsequently attempted to use it for his or her own benefit."*fn2 Lyle R. Jaeger Agency, Inc. v. Steward, 325 N.E.2d 397, 400 (Ill.App. Ct. 1993). Hay argues that the nature of the executive compensation consulting business (which focuses on providing professional services) indicates that Hay has a near-permanent relationship with its clients. Springfield Rare Coin Galleries, Inc. v. Mileham, 620 N.E.2d 479, 488 (Ill.App. Ct. 1993) ("A near-permanent relationship with clients is inherent in the provision of professional services.")

  Hay has also produced evidence that it has a strong brand-name and strong customer loyalty. In addition, it is clear from the record that Hay paid Tapling (and Bassick) significant amounts specifically to assist it in acquiring and serving clients, for the benefit of Hay, indicating the difficulty (and worth) of developing and maintaining a client base. All of these factors indicate that Hay has a near-permanent relationship with its clients for purposes of establishing a proprietary interest enforceable in a covenant not to compete. See also Trailer Leasing Co. v. Associates Commercial Corp., No. 96 C 2305, 1996 WL 392135, at *2 n. 2 (N.D. Ill. July 10, 1996) (noting use of "nature of business" test to determine near-permanency of client relationships).

  While Hay has shown some indicia of a near-permanent relationship with its clients, it has not shown that "but for" her employment there, Tapling would not have come into contact with the clients with whom Hay alleges she has breached the Tapling Noncompete by serving at CSI. For Hay to have a protectable interest, Tapling must also be shown to have gained contact with the clients she works with at CSI because of her affiliation with Hay: "but for the employment, the employee would not have had contact with the customers." Lyle R. Jaeger Agency, 325 N.E.2d at 400. Defendants' L.R. 56.1 statement and Hay's response to it reveal that of the 11 clients (13 according to Hay) CSI has served that were also served by defendants during their tenure at Hay, at least 8 of them are undisputed to have been in contact with Tapling, and/or other CSI employees, independently rather than to have been introduced to Tapling by Hay. At least one additional shared client started using Hay's services after Tapling and Bassick left to work for CSI. As to the other shared clients, Bassick and/or Tapling have produced affidavit and/or deposition testimony evidencing that they had contact with these clients or client representatives prior to their association with Hay. Hay has not rebutted this evidence. Thus, Hay has failed to provide sufficient evidence that it has a protectable interest in the clients at issue to survive summary judgment.

  Even if Hay had a protectable interest in the clients at issue, the Tapling Noncompete would also fail because it is unreasonable. Hay points out that restrictive covenants that restrict only specific activities are scrutinized less closely than those containing general restrictions on an employee's ability to work in his chosen field. Abbot-Interfast Corp., 619 N.E.2d at 1341 (citing cases). It is also true, however, that a noncompetition agreement "which prohibits an employee from soliciting any of the employer's clients is less likely to be upheld as a reasonable restraint on trade than a noncompetition agreement which prohibits an employee only from soliciting clients with which the employee has had contact while he or she was employed with the employer." Id. at 1342 (citing cases). In addition, a prohibition on solicitation alone is more likely to be upheld than one prohibiting a former employee from doing any business at all (even at the client's behest) with the employer's clients, as that prohibition would restrict the rights of the client without its consent. Id. Section (ii) of the Tapling Noncompete includes a restriction on solicitation and also an unqualified restriction on "doing business directly or indirectly" with any Hay client, and contains no geographic limitation. It is undisputed that Hay has over 7,000 clients, and a worldwide business. Tapling points out that she and Bassick provided services to only 45 of these clients during the year preceding her departure for CSI.*fn3 Under these facts, it is unreasonable for Hay to preclude Tapling from serving Hay's 6,955 clients with whom she has had no contact during the applicable period. McRand, Inc. v. Van Beelen, 486 N.E.2d 1306, 1315 (Ill. App. Ct. 1985) (covenant not to compete unreasonably overbroad where it encompasses entire customer base of employer instead of subset of customers actually served by former employee). Hay requests the court to "blue-pencil" the Tapling Noncompete in an attempt to render it enforceable. The court declines to do so, both because to do so would require substantial revision, and would eliminate any incentive for employers to compose their restrictive covenants in compliance with the law. Trailer Leasing Co., 1996 WL 392135, at *4 (citing Telxon Corp. v. Hoffman, 720 F. Supp. 657 (N.D. Ill. 1989)).

  In addition, section (i) of the Tapling Noncompete is a nonsolicitation of employees agreement, purporting to prevent Tapling from "soliciting or otherwise directly or indirectly attempting to induce any employee of Hay Group, Inc. or its affiliates to terminate his or her employment." The parties spend little effort discussing the enforceability of this provision. The court notes, however, that section (i) is extremely broad, prohibiting the solicitation of "any" employees of Hay or its worldwide affiliates (including, presumably, Hay's janitorial staff), without any connection being shown between such a broad restriction and a legitimate business interest of Hay. As with any restrictive covenant, under Illinois law employee nonsolicitation agreements are scrutinized carefully and must be narrowly tailored. Pactiv Corp. v. Menasha Corp., 261 F. Supp. 2d 1009, 1014-17 (N.D. Ill. 2003). This restriction is a blanket prohibition on soliciting any Hay employee, and as such ...


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