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Honeywell International, Inc. v. Automatic Building Controls, LLC

United States District Court, N.D. Illinois, Eastern Division

September 22, 2016

HONEYWELL INTERNATIONAL, INC. Plaintiff,
v.
AUTOMATED BUILDING CONTROLS, LLC, Defendant

          MEMORANDUM OPINION AND ORDER

          RUBEN CASTILLO CHIEF JUDGE

         Plaintiff Honeywell International, Inc. ("Honeywell"), brought this diversity action seeking a declaratory judgment that it is entitled to terminate its dealership agreement with Defendant Automated Building Controls, LLC ("ABC"), as well as damages for breach of contract and defamation. (R. 32.) Presently before the Court is ABC's motion for a preliminary injunction pursuant to Federal Rule of Civil Procedure 65. (R. 12.) For the reasons set forth below, ABC's motion is denied.

         BACKGROUND

         ABC, an Illinois limited liability company, is a dealer and provider of building control systems used in heating, ventilation, air-conditioning, and security. (R. 32 ¶ 5.) Although ABC sells products made by numerous manufacturers, the bulk of its business comes from selling systems made by Alerton, a Honeywell subsidiary. Servicing and selling Alerton systems make up the bulk of ABC's revenues, approximately 65% to 70%, with sales of Alerton's direct competitor, Distech, accounting for most of the remainder. (Tr. at 19.)

         ABC first entered into a dealership agreement with Alerton in 1986, and was the first, and for 15 years the only, Alerton dealer in the Chicago area. (R. 13 at 2.) At some point, their relationship soured and in 2003 Alerton sent ABC a notice of termination regarding their then-operative 1998 dealer agreement. (R. 30 at 2.) In subsequent litigation, the parties settled in 2004 and entered into a new dealership agreement after ABC filed a motion for a temporary restraining order and preliminary injunction. (Id.) In 2010, Alerton and ABC entered into the present dealership agreement (the "Agreement"). (Honeywell Ex. 2.) The Agreement grants ABC the non-exclusive right to sell Alerton products within a specific territory consisting of northeastern Illinois and northwestern Indiana. (Id. ¶ 1; id. at 23.) The Agreement also provides that either party may terminate the agreement "at will, with or without just cause, upon not less than thirty (30) days written notice of such termination." (Id. ¶ 8(a).)

         On May 2, 2016, Alerton sent ABC a notice of termination effective July 31, 2016. (R. 32 ¶ 11; Honeywell Ex. 8.) In this letter, Alerton alleged that ABC breached the Agreement in four ways: by failing to pay for products on time, by failing to provide requested reports and information, by pursuing sales outside of its assigned territory, and by failing to meet performance objectives. (Honeywell Ex. 8 at 1.) ABC responded to the letter by contesting the validity of the termination, including by arguing that ABC is an Alerton franchisee under the Illinois Franchise Disclosure Act (the "IDFA"), 815 ILL. Comp. Stat. 705/1 et seq. (R. 32 ¶ 15.) Several heated exchanges followed, culminating in ABC's counsel allegedly threatening to sue if the Agreement were not continued beyond July 31, 2016. (Id. ¶ 20.)

         Honeywell, Alerton's parent company, filed its action for declaratory and other relief on June 29, 2016. (R. 1.) Honeywell alleges that an actual controversy exists between the parties concerning whether Alerton was entitled to terminate the Agreement pursuant to its own termination provision and whether ABC is a franchisee under the IDFA. (Id. ¶ 28-29.) Honeywell also seeks damages for breach of contract and defamation relating to a post-termination email sent by ABC's principals. (Id. ¶¶ 36, 40.)

         On July 21, 2016, ABC filed its answer and counterclaim. (R. 10.) ABC seeks a declaratory judgment that the Agreement is a franchise under the IFDA and that Alerton's notice of termination was in violation of the IDFA and thus ineffective. (Id. ¶ 68.) Further, alleging that terminating the Agreement would result in immediate and irreparable harm to its business even if it later won declaratory judgment on the merits, ABC requested a temporary restraining order and preliminary injunction. (Id. ¶¶ 71-82.) In the alternative, if the Court does not issue injunctive relief and it later prevails on the declaratory judgment count, ABC seeks damages for wrongful termination. (Id. ¶¶ 84-87.)

         On the same day, ABC filed its motion for a temporary restraining order and preliminary injunction. (R. 12.) ABC argues that injunctive relief is appropriate because allowing Alerton to terminate the Agreement would result in immediate and irreparable harm to its business even if it later won declaratory judgment on the merits. (R. 13 at 5-8.) ABC further contends that it has a high likelihood of succeeding on the merits, arguing that the Agreement meets all the IFDA's requirements for a franchise and that the IFDA's termination provision requires a franchisee to be given an opportunity to cure before termination. (Id. at 8-14.) ABC claims that the balance of interests weighs in favor of ABC, since Alerton would suffer no irreparable harm from an extension of the Agreement and termination would harm the public interest by disrupting service to current ABC-Alerton customers. (Id. at 14-15.)

         Honeywell responded to ABC's pending motion for a preliminary injunction on August 11, 2016. (R. 30.) Honeywell argues that ABC's representations in a post-termination email to its employees-that it could continue its business with minimal disruption-demonstrates that ABC would suffer no irreparable harm if the motion is denied. (Id. at 5-6.) Honeywell further disputes that legal remedies would not suffice as "ABC can surely determine the value of its business." (Id. at 6-7.) Regarding ABC's likelihood of success on the merits, Honeywell maintains that the Agreement does not qualify as a franchise under the IFDA.[1] (Id. at 8-12.) Even if it does, Honeywell maintains that it had good cause to terminate under section 19(c)(4) of the IFDA, which provides that a franchisor need not provide pre-termination notice and an opportunity to cure when the franchisee repeatedly breaches the contract. (Id. at 12-14.) It further suggests that an injunction is inappropriate as it would require antagonistic parties to continue their business relationship. (Id. at 14-15.)

         On September 12 and 13, 2016, the Court held a preliminary injunction hearing on ABC's motion, taking testimony from Mark Bevill, ABC's executive vice president, Grant Bevill, ABC's president, Scott Pinder, Alerton's regional sales manager ("Pinder"), and Joshua Cales, Alerton's general manager. (See R. 47; R. 48.) The Court summarizes the relevant testimony below.

         I. Failure to Pay on Time

         All parties agreed that, throughout the term of the Agreement, ABC has consistently taken paid its invoices 15-18 days late, (Tr. at 173, 231, 338), and paid late "every month just about, " (Tr. at 123). Grant Bevill attributed this practice to "cash flow." (Tr. at 346.) Pinder testified that due to late payments, Alerton had repeatedly placed a "soft" hold on ABC's account leading to delayed product shipments. (Tr. at 232-33.) Alerton's accounting department regularly communicated with ABC's accounting department regarding these overdue payments and holds, but ABC still failed to bring its accounts current. (Tr. at 294-98.) In November 2015, Alerton placed a "hard" credit hold on ABC's account, meaning that no shipments would go out until the account was made current. (Tr. at 232-33.) After Pinder directly contacted Grant Bevill regarding this hard hold, ABC paid its past-due balance and Alerton resumed shipments. (Tr. at 234-35.) After the hard hold was removed, ABC again returned to paying late. (Tr. at 327.) At no point in this history of late payments did Alerton threaten to terminate the Agreement unless timely payments were made, until the issuance of the termination letter. (Tr. at 235.)

         Mark Bevill testified that he did not recall being made aware of any particular defaults or being informed about any credit holds placed on ABC by Alerton. (Tr. at 123-24.) Grant Bevill similarly testified that he has only a "cursory" involvement with the day-to-day accounts payable department and does not get involved unless there is an unresolved issue. (Tr. at 330.) Further, the November hard hold was the only time that Pinder informed him of a hold on ABC's account until the May 2016 termination. (Tr. at 330.) He testified that Alerton has since returned ABC to normal payment terms and that ABC is now paying in a timely manner because he has "made it mandatory." (Tr. at 331.)

         II. Reports and Information

         Regarding business plans and reports, Mark Bevill stated that he created a business plan for the Totus Group, LLC ("Totus"), in 2014 that included business plans for ABC, FIX Consulting, and Commercial Building Controls Supply, all of which were owned by Totus. (Tr. at 136.) ABC had been negotiating with Alerton for months or years about becoming Alerton's exclusive Chicago dealer again, and the 2014 plan was created to show how this exclusivity would affect ABC's business. (Tr. at 130.) Other than this 2014 plan, ABC never created another business plan. (Tr. at 126-27, 337.)

         Beginning in May 2015, Alerton began requesting more information about ABC's business. Pinder testified that, "I literally cannot do my job without having good, solid reports and business plans." (Tr. at 310.) On May 7, 2015, he sent an email to Grant Bevill requesting detailed growth plans, market information, customer reports, and other information about ABC's operations. (Tr. at 300-01.) According to Mark Bevill, ABC would need more information from Alerton to respond to this request, including how many dealers it intended to install in the Chicago area. (Tr. at 159-60.) ABC never provided the requested plan. (Tr. at 160, 302.) Pinder sent a second email to Grant Bevill on June 3, 2015, noting that he had not received a response to his previous email and reiterating his need for more information. (Tr. at 304; see also Honeywell Ex. 7.) Pinder testified that he never received the information he requested. (Tr. at 304.) On December 2, 2015, Pinder sent another email to ABC requesting information about its Alerton controls backlog, how much of that backlog it would digest in December, and its complete sales pipeline. (Tr. at 239-40; ABC Ex. RR.) About two weeks later, ABC responded with some information about its sales. (Tr. at 239-40; ABC Ex. RR.) Pinder never communicated to ABC that its response was inadequate. (Tr. at 240.) Finally, in April 2016, Pinder requested an updated sales pipeline and Alerton backlog report from Grant Bevill. (Tr. at 306-07.) Grant Bevill testified that he never provided this information in the remaining month before the Agreement was terminated, as he was waiting for input from other ABC partners. (Tr. at 336-37.)

         III. Territory Restrictions

         Although ABC's territory under the Agreement was limited to Illinois and Indiana, it did perform some business outside of this territory. Mark Bevill stated that he did not keep track of what ABC did in Wisconsin. (Tr. at 190.) However, he testified that ABC had a Wisconsin branch run by Jeff Sokol, an ABC employee. (Tr. at 161.) ABC's policy, when performing work on Alerton systems in Wisconsin, was to buy any Alerton components from local dealers. (Tr. at 191.) Mark Bevill confirmed that ABC had signed an agreement for this purpose with ESI, a Wisconsin dealer, but he could not confirm whether it had actually bought any Alerton products from ESI. (Tr. at 189-90.) He acknowledged that ABC bought Alerton products from Masters, another Wisconsin dealer, although it had not entered into a written agreement with them. (Tr. at 191-93.) However, he testified that there was an oral agreement to buy product through Masters, arrived at in a meeting that Pinder attended. (Tr. at 191-92.) ABC used Masters's product to perform a job with Raymond School, as well as jobs upgrading the Kenosha Public Library and the Potawatomi software upgrade. (Tr. at 193-94.) In June 2014, Mark Bevill wrote a letter to Alerton in which he informed it that ABC had a "policy to buy any Alerton components from local distribution including Masters and/or ESI or any other source other than Automatic Building Controls, LLC." (Tr. at 191; ABC Ex. VV.) This letter responded to Alerton's letter of May 23, 2014, warning that it had learned that ABC had been distributing outside of its authorized territory and threatening termination. (Tr. at 109; Honeywell Ex. 13.) Mark Bevill also acknowledged receiving notice that Alerton was concerned about extraterritorial sales in April and June 2015. (Tr. at 107, 109-110.)

         Pinder testified that he had been informed by local Wisconsin dealers that ABC was inappropriately operating outside of its territory. (Tr. at 224-25.) Cales claimed that Masters had notified him of ABC working in Wisconsin, while Climatec informed him of ABC working in California. (Tr. at 370, 375.) However, Pinder testified that he was without firsthand knowledge of any of ABC's alleged Wisconsin projects. (Tr. at 225.) He confirmed being present at ABC's meeting with Masters, but denied that this meeting resulted in any sort of agreement, oral or written. (Tr. at 226, 229.) Although Pinder was not with Alerton when ABC expressed its policy of buying from local Wisconsin dealers, he testified that he viewed it upon joining Alerton. (Tr. at 228.) He also confirmed that he did not take any action in response to this policy despite the concern it caused him regarding ABC working outside of its territory. (Tr. at 230.)

         IV. Failure to Meet Performance Objectives

         Finally, all parties agreed that ABC and Alerton never mutually agreed on any sales goals or performance objectives. (Tr. at 195, 209, 335.) Pinder testified that he regularly sent sales goals to ABC, characterizing these goals as "a target, " "optimistic, " and "aspirational to some degree." (Tr. at 213.) Although ABC typically did not respond to these sales goals either to accept, negotiate, or reject them, (Tr. at 306-07), Mark Bevill did testify that in June 2014 he explicitly rejected Alerton's sales goal, writing, "Your letter makes it sound as if, though, the $800, 000 goal was presented and agreed to by Automatic Building Controls. This was never the case, and we never agreed to that number[.]" (Tr. at 196; ABC Ex. VV.)

         LEGAL STANDARD

         In order to prevail on a motion for a preliminary injunction under Rule 65, "the moving party must make an initial showing that (1) it will suffer irreparable harm in the period before final resolution of its claims; (2) traditional legal remedies are inadequate; and (3) the claim has some likelihood of success on the merits." BBL, Inc. v. City of Angola, 809 F.3d 317, 323-24 (7th Cir. 2015). If this is shown, "the court weighs the factors against one another, assessing whether the balance of harms favors the moving party or whether the harm to other parties or the public is sufficiently weighty that the injunction should be denied. Id. at 325.

         ANALYSIS

         The first two prongs of the threshold preliminary injunction showings are straightforward in this case. As explained below, the Court finds that ABC has sufficiently shown that it will suffer irreparable harm for which legal ...


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