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Hal Wagner Studios, Inc. v. Elliott

February 19, 2009

HAL WAGNER STUDIOS, INC., D/B/A WAGNER PORTRAIT GROUP PLAINTIFF,
v.
KRIS ELLIOTT, PAM ELLIOTT, BRAD GUTIERREZ, CINDY HARGRAVE, ROBERT BRAY, PHIL WALKER AND SHARON VANSAGHI, DEFENDANTS.



The opinion of the court was delivered by: Michael J. Reagan United States District Judge

FINDINGS OF FACT, CONCLUSIONS OF LAW SUPPLEMENTING PRELIMINARY INJUNCTION

REAGAN, District Judge

This Order is a detailed supplement to the Court's prior Order Issuing Preliminary Injunction (Doc. 46) and includes thorough findings of fact and conclusions of law. However, the terms of the preliminary injunction have not changed.

A. Background and Introduction

On January 9, 2009, Plaintiff Hal Wagner Studios, Inc. (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 Gutierrez, (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 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 Plaintiff's 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). On February 6, 2009, the Court entered its Order Issuing Preliminary Injunction (Doc. 46) and indicating therein that a subsequent Order would follow providing a more detailed explanation of the Court's findings of fact and conclusions of law, including citations to the record. Accordingly, the Court now issues its supplement to the preliminary injunction Order, including its fact and conclusions of law.

B. Findings of Fact

Wagner's Acquisition of the Elliott Territory, the Execution of an Employment Agreement with Kris Elliott, and the Compensation History Between Wagner and Elliott

1. The testimony of Wagner witnesses, Hal Wagner and Penny Wagner, shows that Wagner is in the business of supplying photography services to local schools, including services related to the taking of student photographs in the Spring and Fall seasons and the production of yearbooks for Wagner's school accounts toward the conclusion of each academic year.

2. As reflected by the testimony of Hal Wagner and Kris Elliott, in March 1994, Wagner entered into an Asset Purchase Agreement with Delmar Studios to purchase substantially all of the assets and properties used in the school photography business then known as the "Elliott Territory." (Plaintiff's Exhibit 24).

3. As reflected in the Asset Purchase Agreement, Delmar Studios acquired from Kris Elliott substantially all of the assets and properties, both tangible and intangible, then used in the school photography business of Kris Elliott, in partial consideration of certain past due finishing charges owed by Kris Elliott to Delmar Studios. (Plaintiff's Exhibit 24).

4. As testified to by Kris Elliott and Hal Wagner, as part of a global transaction in March 1994, Delmar Studios contemporaneously conveyed to Wagner substantially all of the assets and properties used in conducting the photography business of Kris Elliott with Delmar Studios and Wagner employed Kris Elliott to manage the Elliott Territory on behalf of Wagner from the same office in Edwardsville, Illinois used by Kris Elliott to manage the Elliott Territory on behalf of Delmar Studios prior to such acquisition. (Plaintiff's Exhibits 26, 27, & 28).

5. Wagner paid the sum of $245,000.00 to acquire the photography business known as the Elliott Territory. The assets and business acquired by Wagner specifically included:

(a) all photographic equipment and supplies used in the business of Kris Elliott; (b) all of the records relating to such photography business of Elliott; (c) the executory contracts and agreements, including, without limitation, school photography contracts, orders and agreements obtained by Kris Elliott from schools in the Elliott Territory; and (d) all of the customer relations and goodwill associated with the Elliott Territory and Elliott's photography business as a going concern. (Plaintiff's Exhibit 24, Asset Purchase Agreement, p. 2).

6. By letters dated February 15, 1994 and February 21, 1994, proposals on the terms of employment of Kris Elliott by Wagner were exchanged. (Plaintiff's Exhibits 26 & 27).

7. In his letter dated February 21, 1994 to Hal Wagner, Kris Elliott objected to the inclusion of a non-compete covenant in his employment agreement with Wagner "in light of the fact that I will be signing a non-compete clause with Delmar Studios, and that contract will be assigned to you." (Plaintiff's Exhibit 27, p. 2).

8. As testified to by Hal Wagner, Wagner insisted upon a covenant not to compete to protect the photography business and assets acquired by payment of $245,000.00, and a covenant not to compete was contained in the final Employment Agreement entered into between Kris Elliott and Wagner in March 1994. (Plaintiff's Exhibit 28, p. 3, ¶ 5).

9. The Employment Agreement (hereinafter "Employment Agreement" or "contract") between Kris Elliott and Wagner 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 (sic) 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, Exhibit A, ¶ 5; Plaintiff's Exhibit 28, p. 3, ¶ 5).

10. 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 Elliott Territory also includes 16 specifically identified schools in Missouri. (Plaintiff's Exhibit 28, Schedules 2 & 3 and Plaintiff's Exhibit 29 (Doc. 18), Schedules 2 & 3).

11. The contract also includes a provision that it "may not be amended or modified unless such modification or amendment shall be in writing and signed by all parties." (Plaintiff's Exhibit 28, p.s 4-5, ¶ 9).

12. Kris Elliott's contract with Wagner provided that he would be paid an annual salary of $40,000.00. (Plaintiff's Exhibit 28, p. 2, ¶ 2A).

13. Kris Elliott's contract with Wagner provided that, in addition to the annual salary compensation, Elliott would be paid as "Additional Financial Incentive" 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. (Plaintiff's Exhibit 28, p. 2, ¶ D).

14. The contract between Kris Elliott and Wagner provided specifically that Kris Elliott "will be entitled to this Additional Financial Incentive to the extent it exceeds the total compensation paid to Employee (Kris Elliott) as set forth in ¶ 2 ("Salary") above." (Plaintiff's Exhibit 28, pp. 2-3, ¶ 2D).

15. As reflected by the testimony of Kris Elliott and Hal Wagner and documents introduced and admitted into evidence, the compensation structure between Kris Elliott and Wagner varied from the express terms of the Employment Agreement during the course of their business and employment relationship from March 1994 through Kris Elliott's resignation of employment without notice on December 31, 2008. For example, in 2000, Kris Elliott was paid an annual salary of $66,300.00. (Plaintiff Exhibit 55, p. 5).

16. In 2003, Kris Elliott's annual salary was increased to $90,000.00. (Plaintiff's Exhibit 55, p. 11; Plaintiff's Exhibit 31).

17. As reflected by the testimony of both Hal Wagner and Kris Elliott, the annual salary of Kris Elliott was increased from $90,000.00 to $92,000.00 following a discussion between Hal Wagner and Kris Elliott in July of 2005. (Plaintiff's Exhibit 33).

18. The testimony was undisputed that none of the salary increase changes from $40,000.00 per year to $92,000.00 per year were reflected by a formal amendment or modification to the Employment Agreement between Kris Elliott and Wagner.

19. Throughout the course of Kris Elliott's employment of nearly 15 years with Wagner, the bonus structure between Kris Elliott and Wagner was also modified. For example, in September 2001, the class book (yearbook) sales and finishing numbers ceased to be included in the bonus calculation figures for Kris Elliott's bonus. (Plaintiff's Exhibit 30).

20. For the bonus amount to be paid to Kris Elliott following Wagner's fiscal year ending June 30, 2004, the bonus or "Additional Financial Incentive" was calculated based upon a 20%, 10%, and 7.5% calculation of net sales, depending upon the volume of net sales. (Plaintiff's Exhibit 31).

21. In July of 2005, Hal Wagner and Kris Elliott discussed an overall compensation structure that remained in effect through December 31, 2008, on the following terms: Kris Elliott's salary was increased from $90,000.00 to $92,000.00 per year; Kris Elliott's bonus to be paid in 2005 was the same as the bonus paid the prior year; Kris Elliott's monthly gas or automobile allowance increased from $150.00 per month to $350.00 per month; and Kris Elliott would not be guaranteed a bonus thereafter. (Plaintiff's Exhibit 33).

22. Kris Elliott and Hal Wagner also discussed in July of 2005 that Wagner would hire a new salesperson to work in the Elliott Territory as part of the overall discussion on the restructuring of Kris Elliott's compensation thereafter. (Plaintiff's Exhibit 33).

23. Based upon the course and conduct of their dealings over a number of years, the changes to the bonus compensation structure for Kris Elliott were not reduced to writing in a formalized modification or amendment to the Employment Agreement, much like the increases to Kris Elliott's salary from $40,000.00 per year in 1994 to $92,000.00 in 2005 were not subject to any formalized modification or amendment to the Employment Agreement between Kris Elliott and Wagner.

24. This Court finds specifically that any changes to the compensation terms between Wagner and Kris Elliott over a period of nearly 15 years were agreed to by and between Kris Elliott and Hal Wagner and Hal Wagner's testimony to that effect is credible and credited by this Court.

25. Kris Elliott testified that he agreed to the overall compensation changes discussed by him with Hal Wagner in July 2005, although he testified that he felt compelled to do so. However, this Court finds that Kris Elliott was not forced to accept any changes to his compensation terms during his nearly 15 year employment with Wagner as the manager of Wagner's photography business known as the Elliott Territory. Hal Wagner and Kris Elliott both testified that Kris Elliott was never threatened with employment loss throughout his entire period of employment with Wagner and that Kris Elliott never raised any complaints regarding his method of compensation after any discussions were had between Hal Wagner and Kris Elliott regarding the manner in which Kris Elliott would be compensated by Wagner.

26. In fact, Kris Elliott, on multiple occasions, documented his voluntary agreement and mutual decision with Hal Wagner regarding the compensation structure between Elliott and Wagner over the substantial number of years for which Elliott was employed by Wagner to manage Wagner's Elliott Territory from Wagner's office in Edwardsville, Illinois. On September 10, 2002, Kris Elliott prepared a letter to Hal Wagner in which he stated, "I believe we decided last year that the class book sales and finishing would not be included in my numbers." (Plaintiff's Exhibit 30).

27. On September 1, 2004, Kris Elliott prepared another letter to Wagner's accountant (Dan Lawrence) stating:

"Here are the year end numbers that I came up with, please check against your records. Hal and I decided on a new pay system for this year. It is as follows: We decidedthat my base salary would be $90,000.00. If any other money is owed, it would be calculated as a percentage of the net sales. Up to $90,000.00, the percent is 20%, from $90,001.00 to $100,000.00, the percent is 10%, and from $100,001.00 on, the percent is 7.5%. Net sales does not include any yearbook sales or costs." (Plaintiff's Exhibit 31 (emphasis added)).

28. This Court also finds, contrary to the testimony of Kris Elliott, that all salary payments made to Kris Elliott by Wagner from March 1994 through December 2008 were, in fact, payments of salary and not payments in the form of "draws against commissions." In so finding, this Court relies upon: (a) Kris Elliott's own admission that Hal Wagner never discussed with him payment of any draw against commissions. (Kris Elliott Depo., marked as Court Exhibit Plaintiff A, p. 163); (b) taxes were withheld from Kris Elliott's bi-weekly salary payments in the ordinary course of issuing payroll checks, as testified to by Kris Elliott and Leslie Elgert on behalf of Wagner and reflected in Plaintiff's Exhibit 55; (c) Kris Elliott's own written statements of "This does not include my normal salary" and "We decided that my base salary would be $90,000.00" (Plaintiff's Exhibits 30 and 31); and (d) the unambiguous language in the Employment Agreement which provides for separate compensation components of an annual Salary and an Additional Financial Incentive or bonus. (Plaintiff's Exhibit 28).

29. As attested to by Kris Elliott and Hal Wagner, from March of 1994 until the end of December 2008, Wagner paid Kris Elliott approximately $1,250,000.00 in total compensation. (Plaintiff's Exhibit 55).

The Defendants' Employment with Wagner

30. Kris Elliott served as the General Manager of Wagner's business in Central and Southern Illinois as he was employed to continue handling the photography business of the Elliott Territory as an employee of Wagner after Wagner acquired the Elliott Territory from Delmar Studios for $245,000.00. (Kris Elliott Depo., p. 19, 22).

31. As noted above, when Kris Elliott started to work for Wagner as its General Manager in Edwardsville, Illinois, the Kris Elliott territory consisted of Adams, Calhoun, Macoupin, Madison, Morgan and St. Clair Counties in Illinois, excluding certain specific accounts on Schedule 2 of the Employment Agreement. (Plaintiff's Exhibits 28 and 29).

32. Collinsville High School, one of the accounts excluded on Schedule 2 of the Employment Agreement, became part of the Elliott Territory during his employment with Wagner. (Kris Elliott Depo., pp. 38-39).

33. Kris Elliott remained in charge of the Wagner Edwardsville office from March 1994 until his resignation without notice on December 31, 2008. (Kris Elliott Depo., p. 40).

34. Defendant Pam Elliott worked in the office of Delmar Studios with her husband, Kris Elliott, from 1987 until March of 1994. (Pam Elliott Depo., marked as Plaintiff's Exhibit B, p. 14).

35. In March of 1994, Pam Elliott started working for Wagner in the same capacity and office where she previously worked with her husband on behalf of Delmar Studios. (Pam Elliott Depo., pp. 15-16).

36. As reflected by the testimony, throughout their employment with Wagner, Defendants Brad Gutierrez, Cindy Hargrave, Robert Bray, and Phil Walker worked under the direction and control of the Elliotts in Wagner's Edwardsville office.

37. Throughout her employment with Wagner, Defendant Sharon Vansaghi worked out of Wagner's Marion, Illinois office. (Kris Elliott Depo., p. 203-04).

Defendants' Resignations and Employment by Competitor Herff Jones

38. On December 31, 2008, all Defendants mailed letters of employment resignation without notice to Wagner's corporate office in St. Louis, Missouri. (Plaintiff's Exhibits 37-46).

39. Kris Elliott prepared the resignation letters for Pam Elliott, Phil Walker, Cindy Hargrave, and himself, which he mailed to Wagner. (Kris Elliott Depo., p. 193-96).

40. Wagner received the notices of resignation from Defendants on Friday, January 2, 2009. (Plaintiff's Exhibits 44-46).

41. As testified to by Wagner's Vice President Penny Wagner, the Edwardsville, Illinois office of Wagner was left without any management and only two short term employees remained following the collective resignations of the Defendants.

42. Upon resigning from Wagner, Kris Elliott and Pam Elliott commenced employment immediately with Herff Jones, Inc. (hereinafter "Herff Jones"), a direct competitor of Wagner in the photography business. (Plaintiff's Exhibit 61).

43. The testimony of Kris Elliott and Sharon Vansaghi established that Defendant Vansaghi also commenced employment with Herff Jones immediately following her resignation of employment from Wagner and that Vansaghi is currently employed in a sales/office coordinator position in Marion, Illinois for Herff Jones, where she reports directly to Kris Elliott as the Territory Manager for Herff Jones. (Kris Elliott Depo., pp. 182-183).

44. As reflected by the Elliotts' testimony, Pam Elliott reports directly to Kris Elliott in a two person operation of a new Herff Jones territory in Central and Southern Illinois under the direction of Kris Elliott.

45. The Central and Southern Illinois territory under the direction of Kris Elliott for Herff Jones is larger in geographic scope than the Elliott Territory managed by Kris Elliott on behalf of Wagner through Wagner's Edwardsville, Illinois office, but encompasses every county contained in the non-competition agreement between Wagner and Kris Elliott. (Kris Elliott Depo., p. 180).

46. Kris Elliott's compensation plan with Herff Jones provides him with a guaranteed salary of $75,000.00 plus a commission of 10% of the revenue on all school contracts obtained by himself, Pam Elliott, Sharon Vansaghi, or anyone else in the new Illinois territory of which he is Territory Manager for Herff Jones, to the extent yearly gross margin of sales exceeds $75,000.00 in Mr. Elliott's new territory. (Kris Elliott Depo., pp. 175-176, 179-188).

47. Pam Elliott let her husband, Kris Elliott, handle the new business opportunity for both of the Elliotts at Herff Jones. (Pam Elliott Depo., p. 151).

48. To the extent anyone recruited Pam Elliott to become employed at Herff Jones, she was recruited by her husband to join him at Herff Jones. (Pam Elliott Depo., p. 207).

49. Pam Elliott never told any current employee of Herff Jones that she was accepting an offer to work for Herff Jones and only communicated that decision to Kris Elliott when they made a joint final decision to agree to go work for Herff Jones. (Pam Elliott Depo., pp. 208-09).

50. Defendant Sharon Vansaghi learned of the opportunity to leave Wagner's employment and to become employed at Herff Jones from Kris Elliott. (Kris Elliott Depo., pp. 183-85).

51. Kris Elliott coordinated the timing of his resignation from Wagner with the timing of Sharon Vansaghi's resignation from Wagner to become employed at ...


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