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Hal Wagner Studios, Inc. v. Elliott

February 6, 2009


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


A. Background and Introduction

On January 9, 2009, Plaintiff Hal Wagner Studios (hereinafter "Wagner") filed this action against Defendants alleging ten counts (Doc. 2), including: (1) a claim for injunctive relief to enforce the non-compete agreement against Kris Elliott, (2) breach of contract claim against Kris Elliott, (3) a claim under the Computer Fraud and Abuse Act against Kris Elliott, Pam Elliott, and Brad Guitierrez, (4) a claim for replevin against all Defendants, (5) a claim for conversion against all Defendants, (6) a breach of the duty of loyalty claim against all Defendants, (7) a breach of fiduciary duty claim against Kris and Pam Elliott, (8) a tortious interference with business and contractual relationships/expectancy claim against Kris and Pam Elliott, (9) a civil conspiracy claim against all Defendants, and (10) a claim for unfair competition against all Defendants. Along with its verified complaint, Wagner filed a motion for a temporary restraining order (Doc. 5).

Specifically, Wagner asked the Court to (1) require Defendants to return any and all documents or items belonging to Wagner that they took upon their resignations, and (2) enjoin Kris Elliott from soliciting Wagner clients pursuant to a covenant not to compete in his contract.

On January 13, 2009, the Court held a hearing on the motion for temporary restraining order (Doc. 26). That day, the Court entered a "preliminary temporary restraining order" granting in part Plaintiffs' motion (Doc. 27). Therein, the Court noted that a more detailed order would follow as soon as practicable. On January 15, 2009, the Court entered a more detailed TRO requiring the Defendants to return all files and items belonging to Wagner that were taken from the office upon their departure (Doc. 32). However, the Court denied temporary injunctive relief as to the covenant not to compete, as Kris Elliott and Wagner agreed that certain modifications had been made to the contract, despite the fact that the contract required that any modification be by signed writing only. Elliott claimed that such modifications constituted a breach of his contract, such that the covenant not to compete was no longer enforceable. Given the lack of clarity and available evidence regarding this issue, the Court declined to enjoin Kris Elliott from soliciting Wagner clients, preferring instead to let the parties conduct accelerated discovery and develop the issue more thoroughly at the preliminary injunction stage.

On February 2--4, 2009, the Court held a hearing on Wagner's motion for a preliminary injunction (Doc. 37). Having fully considered the live testimony of all witnesses, as well as all of the evidence provided by the parties, the Court hereby GRANTS Wagner's motion for preliminary injunction, subject to the terms and conditions provided below. However, because time is of the essence, and that the parties have provided the Court with thousands of documents for consideration, a subsequent order that provides a more detailed explanation of the Court's findings of fact, including citations to the record, will follow.

B. Factual Background

Wagner is in the business of supplying photography services to local schools, including services related to the production of yearbooks. In March 1994, Wagner purchased all of the assets of the Elliotts' school photography business, in what was known as the "Elliott Territory." On March 1, 1994, Kris Elliott entered into an employment agreement with Wagner (Doc. 5, Exh. A). That agreement contained a covenant not to compete, which provides that Elliott cannot directly or indirectly, (for or on behalf of himself or any other person or entity) for a period of 18 months for the date of termination of this Agreement:

A. Solicit or sell school photography accounts which were accounts in the Elliott Territory or were accounts produced by Elliott during the term of this Agreement;

B. Disclose the list of the above-described school photography accounts or any part thereof, to anyone without the prior written consent of Employer;

C. Otherwise engage in competition in any respect, with Employer for any of the above-described school photography accounts. (Doc. 5, Exh. A, ¶ 5). The contract provides that the Elliott Territory includes the Illinois counties of Adams, Calhoun, Macoupin, Madison, Morgan, Pike, and St. Clair, excluding 21 specifically identified schools. The territory also includes 16 specifically identified schools in Missouri (Doc. 2, Exh. A, Schedules 2 & 3). The contract also included a provision that it "may not be amended or modified unless such modification or amendment shall be in writing and signed by all parties."

Kris's contract provided that he would be paid an annual salary of $40,000, supplemented by a bonus consisting of "twenty percent (20%) of the gross margin earned for all school photography accounts in the Elliott Territory and all new school photography accounts produced by [Kris Elliott]" (Doc. 2, Exh. A). This arrangement worked until approximately 2001, when Wagner no longer paid Elliott a bonus for yearbook sales. Then, in 2004, a new pay system was employed, whereby Elliott's bonus decreased, though Wagner's weekly payments to him increased. Elliott claims that he received no consideration for either of these changes and only acquiesced to them because he felt intimidated by the company's owner, Hal Wagner, and felt that his job would be in danger if he did not go along with the changes. Hal Wagner, on the other hand, testified that each change was accompanied by an increase in Elliott's base salary. Elliott claims that the "increased salary" was in fact his $40,000 salary, as provided for in his 1994 contract, supplemented by weekly advances on his year-end bonus.

Starting in 1994, Kris Elliott served as the General Manager of Wagner's business in Central and Southern Illinois from an office located in Edwardsville, IL. Pam Elliott, Kris's wife, was employed as the office manager and reported to Kris. All other Defendants worked in various capacities under the Elliotts' direction. On December 31, 2008, all Defendants submitted letters of resignation without notice, effective on January 1, 2009, leaving only two employees in the Edwardsville office. The Elliotts and Sharon Vansaghi each took jobs with Wagner's competitor, Herff Jones.

Upon receipt of the resignations, Wagner's vice-president inspected the Edwardsville office and determined that a large number of business documents were missing. These included customer lists, pending contracts, photography schedules, over 100 production orders, notebooks containing notes about customer needs, and entire customer files. Additionally, electronic files, including photographic images from each school serviced by the Edwardsville office, appeared to have been recently deleted. In addition, seven senior wall composites printed by Wagner were missing. Wagner reported other documents and items as missing and listed them in detail in the complaint. Wagner claims that these files and items are critical to its business, such that the office cannot function without them.

Actions taken by the Elliotts on their final days of employment raised Wagner's suspicions that they and the other employees who abruptly resigned were responsible for taking these items. Wagner analyzed its Printer Job Log from its corporate headquarters in St. Louis, Missouri and determined that Pam Elliott (as user "pelliott") spent December 30, 2008 printing 110 production orders (Doc. 2, Exh. J). Wagner claimed that it was no longer able to gain access to any of these production orders electronically. Pam Elliott and other defendants also printed a variety of other business documents between December 9 and December 31 that could not be located on the computers in the Edwardsville office upon their resignation. Wagner then hired a company specializing in electronic data retrieval and was able to obtain copies of some, but not all, of the files.

Wagner soon learned that prior to their resignations, Kris and Pam Elliott sent "Publisher CDs" to certain schools. These CDs contain all of the high resolution photographs taken by Wagner at those schools, which are necessary to publish yearbooks. For instance, Greenfield Elementary received a CD accompanied by a letter informing it that the CDs would be used to print their yearbook. The letter was dated December 30, 2008 (the day before Defendants resigned), and the identified sender was "Wagner Portrait Group" (Doc. 2, Exhs. K & L). On January 2, 2009, Defendants Kris and Pam Elliott sent a solicitation letter to Greenfield Elementary on Herff Jones letterhead (Doc. 2, Exh. M). The letter announces the Defendants' change in employment and solicits the school's business. Wagner also alleges that on January 8, 2009, one of the Defendants contacted the school and stated that they were coming to pick up the "Publisher CD" so as to begin work on the yearbook (presumably converting the Wagner client into a Herff Jones customer). Wagner has since learned that the Elliotts followed the same course of conduct at other schools.

Wagner also had trouble even determining which schools it had existing contracts with due to the lack of documentation remaining in the Edwardsville office. Additionally, it learned that Pam Elliott had solicited some of Wagner's clients in early January and convinced 21 such schools to sign contracts with Herff Jones. In fact, her signature is present on each of these contracts as a representative of Herff Jones. The time-periods involved in these contracts overlap with terms for which the schools already have contracts with Wagner. The Elliotts admit that Pam visited these schools and signed these contracts rather than Kris in an attempt to ensure that he did not personally violate his covenant not to compete with Wagner.

In accordance with the terms of the TRO previously entered by this Court, the Defendants have returned a large number of documents and items that were in their possession. Additionally, the Defendants returned one of the missing senior class composites, but stated that the other six had been delivered to the appropriate schools. Finally, by directly contacting the schools in the Elliott territory on its own, Wagner was able to obtain copies of many of its existing contracts, copies of which were not located in the office.

Wagner seeks a preliminary injunction ordering Kris and Pam Elliott, and anyone acting in concert with them, from soliciting Wagner accounts in the Elliott Territory or engaging in competition with Wagner as required by the terms of the covenant not to compete. Additionally, Wagner seeks a standing order requiring the return of all missing documents and items that may still be in the control of Defendants.

C. Analysis

1. General Standards Governing Preliminary Injunctions

In order to obtain a preliminary injunction, the movant must make an initial showing that (1) its case has a likelihood of success on the merits, (2) no adequate remedy at law exists, and (3) it will suffer irreparable harm if injunctive relief is not granted. See, e.g., Hodgkins ex rel. Hodgkins v. Peterson, 355 F.3d 1048, 1054-55 (7th Cir. 2004). If the movant meets its burden on these three requirements, then the Court considers two additional criteria: (4) whether the harm to the plaintiff if the injunction is wrongly denied outweighs the harm to the defendant if the injunction is wrongly granted, and (5) the public interest. Cooper v. Salazar, 196 F.3d 809, 813 (7th Cir. 1999).

The Court is faced with two generic issues here. The first issue is whether the Court should require Defendants to return any items from the Edwardsville office that remain in their possession. The second issue is whether Kris and Pam Elliott, and anyone acting in concert with them, should be enjoined from competing against Wagner with respect to those schools and counties identified in the covenant not to compete.

2. Missing Documents and Items

Wagner first seeks a standard order requiring the return of its documents and office items. As noted above, the Defendants have in fact returned many documents and items that were taken from the office. However, Wagner's concern is that more Wagner property may remain in some Defendants' possession, whether they are currently aware of it or not. As such, Wagner seeks that this Court enter a preliminary injunction requiring the Defendants to return any Wagner property they still possess.

The Court's analysis with respect to the missing documents and items remains virtually unchanged, as the evidence offered at the preliminary injunction hearing supported Wagner's general claim that the Elliotts took Wagner property, including copies of vital business documents, with them upon their resignations. The Elliotts do not deny that they took some of the items at issue, though Pam Elliott stated that she inadvertently took certain documents, including a Rolodex with many of Wagner's business contacts in it. Indeed, the Elliotts appear to have made a good faith effort to return all Wagner property. However, the evidence before the Court does indicate that Wagner has met the requirements for the issuance of a preliminary injunction as to any documents or items taken from the Edwardsville office that remain in the Defendants' possession.

As a federal court exercising diversity jurisdiction, this Court applies federal law in resolving procedural and evidentiary issues, and Illinois law with respect to substantive law. Bevolo v. Carter, 447 F.3d 979, 982 (7th Cir. 2006) (citing Colip v. Clare, 26 F.3d 712, 714 (7th Cir. 1994)). As such, the Court applies Illinois's choice-of-law rules to determine the applicable substantive law. See Hinc v. Lime-O-Sol Company, 382 F.3d 716, 719 (7th Cir. 2004); Kohler v. Leslie Hindman, Inc., 80 F.3d 1181, 1184 (7th Cir. 1996). Illinois follows the RESTATEMENT (SECOND) OF CONFLICT OF LAWS in making such decisions. Midwest Grain Products of Illinois, Inc. v. Productization, Inc., 228 F.3d 784, 787 (7th Cir. 2000).

In determining which state's law applies to Wagner's tort claims, the Court "select[s] the law of the jurisdiction that has the 'most significant relationship' to the events out of which the suit arose, and to the parties." Carris v. Marriott International Inc., 466 F.3d 558, 560 (7th Cir. 2006) (citing Esser v. McIntyre, 661 N.E.2d 1138, 1141 (Ill. 1996)). The law of the place where the injury occurred is presumed to apply unless another state has a more significant relationship to the occurrence or parties. Id.; Spinozzi v. ITT Sheraton Corp., 174 F.3d 842, 844 (7th Cir. 1999). Here, the injury occurred in Illinois, as Edwardsville, Illinois is the site of the Defendants' sudden resignations, and is the location from which the documents ...

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