United States District Court, N.D. Illinois, Eastern Division
MEMORANDUM OPINION AND ORDER
Edmond E. Chang, United States District Judge.
Group-CI, Inc. filed this lawsuit for breach of contract
against Steven Smith and W. Dean Wallace, two founders and
former employees of TP Group's subsidiary Clinical
Innovations. In 2010, Smith and Wallace sold their
ownership stakes in Clinical Innovations to TP Group. As part
of the sale, Smith and Wallace agreed to several restrictive
covenants that imposed non-competition, non-solicitation, and
confidentiality obligations on them. TP Group alleges that,
starting in mid-2013, Smith and Wallace breached those
obligations by developing products in competition with
Clinical Innovations, soliciting Clinical Innovations'
business relations and employees, and using confidential
Clinical Innovations information to aid their competitive
endeavors. R. 1, Compl. TP Group filed this motion for
preliminary injunction against Wallace,  seeking to enjoin
him from further violating the restrictive covenants. For the
reasons discussed below, the motion is granted with regard to
certain activities of Wallace.
Innovations is a healthcare company located in Murray, Utah.
R. 37- 1, Pl's Br. at Exh. 4, McRoberts Aff. ¶ 4.
Among other things, Clinical Innovations designs and
manufactures pressure-sensing catheters. Id. It is a
wholly-owned subsidiary of Plaintiff TP Group. Id.
claims revolve around two of Clinical Innovations'
products, the Koala catheter and the TDOC catheter. Both
products function as pressure sensors and share a similar
design. R. 47-1, Pl's Br. at Exh. 5, Moon Aff. ¶ 6.
The catheters are comprised of four primary components: (1) a
piece of tubing; (2) a balloon; (3) a connector; and (4) a
re-useable monitor cable. Id. ¶ 7. The
connector is attached to one end of the tubing, the balloon
to the other. Id. When plugged into the monitor
cable, the connector pressurizes (or "charges") the
air inside the tubing and inflates the balloon. Id.
Any pressure variations in the area of the body surrounding
the balloon will partially inflate or deflate the balloon,
changing the air pressure inside the tubing. Id. The
connector converts that change in air pressure into an
electronic signal that is in turn read by the monitor.
they share the same basic design, the Koala and TDOC differ
in their application and in their role in Clinical
Innovations' business. The Koala is an intrauterine
catheter used to measure pressure in the amniotic sac during
labor and childbirth. Moon Aff. ¶ 6. Clinical
Innovations developed the Koala catheter in the mid-1990s and
has marketed it ever since. McRoberts Aff. ¶¶
11-12. It owns the intellectual property associated with the
Koala catheter. Id. The Koala generates about ___
per year for Clinical Innovations, representing ___ % of the
company's total annual revenue. Id. ¶ 11.
TDOC catheter has broader application, and can be used for
urological and gastroenterological purposes. McRoberts Aff.
¶¶ 14, 24. Although Clinical Innovations created
the TDOC catheter, the company sold its TDOC-related
intellectual property rights to Laborie Medical Technologies,
Corp. (a company that plays a central role in this lawsuit)
in April 2014. See Id. ¶¶ 14-17; R. 38-1,
Pl's Br. at Exh. 4-F, TDOC Arbitration Award; R. 39-1,
Pl's Br. at Exh. 4-H, Asset Purchase Agreement. Following
the sale, Laborie retained Clinical Innovations as a
nonexclusive contract manufacturer of the TDOC catheter,
McRoberts Aff. ¶ 17; R. 40- 1, Pl's Br. at Exh. 4-J,
Supply Agreement, and pays Clinical Innovations roughly ___
per year for its services, McRoberts Aff. ¶ 19.
Restrictive Covenants and Confidentiality Provision
founded Clinical Innovations in 1993 with co-defendant Smith
and Christopher Cutler (who is not a party to this action).
McRoberts Aff. ¶ 5; R. 69-1, Wallace Aff. ¶ 3. On
December 10, 2010, TP Group purchased Clinical Innovations
from its then-owners, including Wallace and Smith.
See R. 1-6, Compl. at Exh. E, Stock Purchase
Agreement. Under the terms of the Stock Purchase Agreement,
Wallace took home ___ and Smith ___ in exchange for their
respective ownership stakes. R. 34-1, Pl's Br. at Exh.
91. Additionally, in their capacity as Rollover Sellers,
Smith and Wallace were paid a further ___ (between them and
granted stock in the post-acquisition entity, TP Group-CI,
Inc. Stock Purchase Agreement at 11 (definition of
"Rollover Sellers" and "Rollover
Amount"); R. 26-8, Pl's Br. at Exh. 95, Schedule of
the Stock Purchase Agreement contained Non-Competition and
Non-Solicitation Agreements (together referred to as the
Restrictive Covenants) that limited Wallace's and
Smith's ability to conduct business for five years after
the Closing Date of the Agreement (so, from December 10, 2010
until December 9, 2015, inclusive-this Opinion will refer to
this time as the Restricted Period). The Restrictive
Covenants constrained not just Smith and Wallace as
individuals, but also any of their
"Affiliates"-defined as "any Person that
directly or indirectly controls, is controlled by[, ] or is
under common control with" Wallace or Smith.
See Stock Purchase Agreement at 2 (definition of
"Affiliates"), § 7.1(a)-(b).
7.1(a), the Non-Competition Agreement, prohibited Wallace and
Smith from "engaging] (whether as an owner, operator,
manager, employee, officer, director, consultant, advisor,
representative or otherwise), directly or indirectly in the
Restricted Business in the United States of America ...
." Stock Purchase Agreement § 7.1(a). The Agreement
defined Restricted Business as "the business conducted
and proposed to be conducted by [Clinical Innovations] ... as
of the Closing, which shall include the design and
manufacture of medical devices used in the fields of
women's and infants' health, urology and
7.1(b), the Non-Solicitation Agreement, barred Wallace and
Smith from, generally speaking, soliciting employees or
customers of Clinical Innovations. Wallace and Smith promised
they would not:
(i) contact, approach or solicit for the purpose of offering
employment to or hiring (whether as an employee, consultant,
agent, independent contractor or otherwise) or actually hire
any person employed by the Company [Clinical Innovations] or
any of its Subsidiaries at any time during the three month
period immediately prior to the Closing Date ...
(ii) induce, solicit or otherwise encourage, or attempt to
induce, solicit or otherwise encourage any customer,
end-user, client, licensor, licensee, supplier, manufacturer,
distributor, master distributor, group purchasing
organization, strategic partner, or other business relation
of the Company or any of its Subsidiaries (collectively,
"Business Relations"), (A) to cease doing business
with the Company or any of its Subsidiaries, (B) to enter
into any business relationship (involving the Restricted
Business) with such Person or such Person's Affiliates or
any Person other than the Company, its Subsidiaries and/or
its Affiliates to the detriment of the Company of any of its
Subsidiaries, or (C) to interfere in any way with the
relationship between any such customer, client or other
Business Relation and the Company or any of its Subsidiaries
(including making any negative or disparaging statements or
communications regarding the Company, its Subsidiaries or its
Affiliates or their respective officers, directors,
employees, principals, partners, members, managers, attorney
and representatives); or
(iii) engage in any business activity with any Business
Relation in competition with the Company.
Stock Purchase Agreement § 7.1(b).
and Smith also agreed that, "in the event of a breach
... of the [Restrictive Covenants] monetary damages shall not
constitute a sufficient remedy, " and TP Group would be
entitled to injunctive relief. Stock Purchase Agreement
§ 7.1(d). The Stock Purchase Agreement further provided
that the Restricted Period would be tolled "until such
breach or violation has been duly cured." Id.
same day that they entered into the Stock Purchase Agreement,
Wallace and Smith also executed a Stockholders Agreement as
owners of the post-acquisition TP Group-CI, Inc. See
R. 1-7, Compl. at Exh. F, Stockholders Agreement. The
Agreement contained a Confidentiality Provision in which
Wallace and Smith agreed to not "disclose to any
unauthorized person or use for any Person's account
(other than the Company's or its Subsidiary's
account) such Confidential Information without the
Board's prior written consent." Id. §
16(a). The Agreement defined Confidential Information as
"all information, observations, and data (including
trade secrets) obtained by" Smith and Wallace during
their employment at Clinical Innovations, and stressed that
the term Confidential Information should be expansively
Confidential Information will be interpreted as broadly as
possible to include all confidential information of any sort
(whether merely remembered or embodied in a tangible or
intangible form) that is related to the Company's or its
Subsidiaries' or Affiliates' current or planned
business, or their predecessors' or assignors'
businesses. Confidential Information includes, without
specific limitation, the confidential information,
observations and data obtained by such Executive during such
Executive's employment concerning the business and
affairs of the Company and its Subsidiaries and Affiliates
and their predecessors and assignors, information concerning
acquisition opportunities in or reasonably related to the
Company's or its Subsidiaries' or Affiliates'
business or industry, the Persons that are current, former or
prospective suppliers, customers, distributors, sales
representatives, manufacturers, referral sources, end-users
or independent contractors of any one or more of them, as
well as development, transition and transformation plans,
methodologies and methods of doing business, strategic,
marketing and expansion plans, including plans or lists
regarding planned and potential sales or acquisitions,
financial and business plans, employee lists and telephone
numbers, locations of sales representatives, new and existing
programs and services, prices and terms, customer service,
integration processes, requirements and costs of providing
service, support and equipment.
Id. Wallace's and Smith's confidentiality
obligations also extended to Third-Party Information, defined
as "confidential or proprietary information"
received by Clinical Innovations from third parties and
"subject to a duty on the part of the Company ... to
maintain the confidentiality of such information and to use
it only for certain limited purposes." Id.
§ 16(b). The Agreement further prohibited the use of any
Third-Party Information "except in connection with
[Wallace's and Smith's] work for the Company ...
unless expressly authorized by a member of the Board in
writing." Id. The Stockholders Agreement also
provided for injunctive relief in the event of a breach, and
stipulated that any breach would "cause substantial and
irreparable harm to the non-breaching party."
Id. § 20(b).
the Restrictive Covenants, the Confidentiality Provision in
the Stockholders Agreement has no expiration date. So Wallace
and Smith must abide by their confidentiality obligations
indefinitely, unless the relevant information becomes public
or they are required to disclose the information by law or
court order. Stockholders Agreement § 16(a).
Breach of the Restrictive Covenants
TP Group has settled the case with Smith, his conduct is
still pertinent to TP Group's case against Wallace. Smith
left Clinical Innovations in September 2011. R. 64-1,
Smith's Resp. Br. at Exh. 1, Smith Aff ¶ 6. Before
resigning, he had served as the company's Director of
Engineering. Id. ¶ 5. (Wallace remained as Vice
President of Research and Development until he was fired in
July 2016 for the alleged breaches that gave rise to this
lawsuit. Wallace Aff. ¶ 15.)
Smith resigned, he went on a mission trip to Africa for
eighteen months. Smith Aff. ¶ 7. TP Group does not
allege that Smith or Wallace committed any breaches while
Smith was in Africa. Smith returned to Utah in March 2013.
Smith Aff. ¶ 7. Not long after, TP Group alleges, Smith
reentered the catheter business with gusto, developing
products and soliciting business with Wallace's
assistance and encouragement, and with the aid of
confidential Clinical Innovations information provided by
Wallace. R. 26, Pl's Br. at 11-12. The Complaint and
Plaintiffs brief identify three of Smith and Wallace's
projects that TP Group claims violated the Restrictive
Covenants and Confidentiality Provision: (1) the
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2013, Wallace and Smith were unhappy with the status quo of
the TDOC catheter. Though it had been invented by Clinical
Innovations, the TDOC catheter had been marketed and
distributed exclusively by a third-party company (the
"TDOC Company") since its inception. McRoberts Aff.
¶ 14. But in 2011, a dispute over the distribution
agreement led to an arbitration that ultimately awarded TDOC
Company a full and exclusive license to the technology and
know-how associated with the TDOC catheter. See TDOC
Arbitration Award; R. 38-1, Pl's Br. at Exh. 4-F. Wallace
in particular felt that the outcome was unjust, and wanted
Clinical Innovations to develop a new next-generation TDOC
catheter in response. 9/9/16 Tr. at 221:23-222:10. Wallace
was disappointed when the Clinical Innovations leadership
decided not to do so. Id. at 269:06-10.
Smith was interested in the project. When he returned from
his mission, Smith told Wallace of his desire to create a
next-generation TDOC catheter. Smith Aff. ¶ 12; Wallace
Aff. ¶ 17. Wallace directed Smith towards potential
development partners, suggesting in an email that Smith call
MMS, Mediwatch, and Laborie to "access [sic] their
interest in having a company you are involved with to make
urodynamic catheters for them." R. 40-1, Pl's Br. at
Exh. 4-M. Smith reached out to Mediwatch and
contact with Laborie quickly bore fruit and a meeting was set
for June 26, 2013 at the Toronto office of Audax Management,
Laborie's parent company. Smith Aff. ¶ 14. Two days
before the meeting, Wallace e-mailed Smith more than 800
pages of Clinical Innovations documents concerning the TDOC
catheter. 9/7/16 Tr. at 169:21-170:3. The documents contained
information regarding TDOC risk analyses, manufacturing
methods, test reports, labeling and instructions for use,
sterilization, and validation, as well as photographs of the
machines used to manufacture the catheter. Id. at
meeting, Smith learned that Laborie wanted to introduce a new
urodynamic catheter that improved upon and would compete with
the TDOC catheter. Smith Aff. ¶¶ 14-15. Smith and
Laborie executives discussed working together to develop a
next-generation TDOC catheter and expand Laborie's line
of gastroenterological products. Id. In a follow-up
email, Laborie emphasized that its goal was to
"successfully launch a new product and replace TDoc in
the market." R. 31-1, Pl's Br. at Exh. 68 at ¶
0000075. Smith forwarded this email to Wallace, who
responded, "Great, let[']s get moving. Let me know
when you want to talk." Id. Smith met with
Laborie again in July and August 2013. Smith Aff ¶¶
20, 22. At the August meeting, Laborie asked Smith to build a
proof-of-concept for the next-generation TDOC, and Smith
agreed. Id. ¶ 22.
worked on the proof-of-concept for several months. The
process was not limited to designing and building the
catheter itself; Smith also had to fabricate the machines
needed to manufacture the catheter. See Smith Aff.
¶ 24. To that end, he recruited Mike Criddle, an
engineer who worked for Wallace's company, Liger Medical,
to help construct a ___ machine. Id. Smith also
purchased a number of custom-built fixtures from Ivan
Vetecnik, a Clinical Innovations employee whom Smith had
initially approached at Wallace's suggestion.
See R. 49-1, Pl's Br. at Exhs. 5-S, 5-T. 5-U,
5-W, 5-X; Smith Aff. ¶¶ 16, 27, 31; R. 65,
Smith's Resp. Br. at Exh. 1-A. Smith paid Vetecnik a
total of $23, 983 for the fixtures. See Smith's
Resp. Br. at Exh. 1-A. By February 2014, Smith had created a
prototype catheter that was capable of measuring pressure.
Smith Aff. ¶ 25. Despite spending six months and
thousands of dollars on the project, Smith claims he never
showed Laborie the 2014 prototype and never completed the
proof-of-concept. 9/7/16 Tr. at 166:20-167:13.
April 2014, Laborie acquired TDOC Company (which, remember,
had been awarded a full and exclusive license to TDOC
technology by an arbitration panel in 2011). McRoberts Aff.
¶ 17. In connection with the acquisition, Laborie also
outright purchased the intellectual property rights to TDOC
from Clinical Innovations. Id.; see also Asset
Purchase Agreement. But Laborie continued to employ Clinical
Innovations, just as TDOC Company, to manufacture the TDOC
catheter. McRoberts Aff. ¶ 17; Supply Agreement.
while Laborie was making moves with TDOC Company,
Laborie's relationship with Smith had stagnated. Smith
Aff. ¶ 30. So Smith began reaching out to manufacturing
facilities, believing that he could revitalize the
next-generation TDOC project by bringing Laborie a ready
development and production facility. Smith Aff. ¶ 32. He
decided that a company called Biomerics, which employed one
of Smith's sons, would be a good fit. Id.
Smith's efforts were brought to a halt when, in April
2015, he received a cease-and-desist letter from Brian
Ellacott, Laborie's President and CEO. R. 31-3, Pl's
Br. at Exh. 78. Ellacott claimed that Laborie was a
"beneficiary" of the Restrictive Covenants and
demanded that Smith "immediately cease development of
the competing catheter [i.e., the next-generation TDOC] and
any other activities constituting a breach of [Smith's]
obligations under the Stock Purchase Agreement."
Id. In reply, Smith expressed his surprise that
Ellacott would make such a demand after having known of
Smith's involvement with the next-generation TDOC project
for over a year, but nevertheless agreed to stop development.
R. 31-3, Pl's Br. at Exh. 79.
days later, another Laborie executive named Russ Lalli
invited Smith to the company's facilities in Toronto.
Smith Aff. ¶ 39. There, Ellacott made an about-face and
asked Smith for a proposal as to a number of "key
catheter projects" in urology and gastroenterology.
Smith Aff. ¶ 40; R. 29-3, Pl's Br. at Exh. 14 at
LAB00000006. When Smith expressed his concern that submitting
such a proposal would constitute solicitation under the
Restrictive Covenants, R. 31-3, Pl's Br. at Exh. 80 at
LAB00000117, Ellacott assured him that, as beneficiary of the
Restrictive Covenants, Laborie would "waive the
restrictive covenants to the extent necessary solely to
clarify that we will not deem your discussions with us
regarding a potential relationship with us to constitute a
breach of the restrictive covenants, " id. at
LAB00000116; see also Smith Aff. ¶ 40.
Laborie's assurance in hand-but without checking
with TP Group for its view of the covenants-Smith
re-committed himself to the project and put together the
requested proposal. R. 31-1, Pl's Br. at Exh. 81. But
Smith claims that a dispute over the degree of his
involvement-Laborie would only hire him as a consultant,
while Smith wanted a bigger role-caused him to abandon the
Laborie project in December 2015 and refer Laborie to
Biomerics for further development work. Smith Aff.
¶¶ 41-42; Pl's Br. at Exh. 81 at SMITH0003407.
Smith also sold his entire interest in the next-generation
TDOC-including intellectual property, existing prototypes,
and machines and fixtures-to Biomerics, in exchange for $250,
000 and a cross-license allowing Smith to use whatever
intellectual property he needed to develop his other project,
the Premo catheter. See Smith Aff. ¶ 45; 9/7/16
Tr. at 197:02-05. Smith also agreed to consult with Biomerics
on the next-generation TDOC project. Smith Aff. ¶ 45.
Biomerics and Laborie then proceeded together on the
next-generation TDOC project without (at least according to
Smith) Smith's involvement. See R. 31-3,
Pl's Br. at Exh. 84, Development, Manufacturing Services
and Supply Agreement. In addition to jointly developing the
next-generation TDOC-for which Biomerics would be
Laborie's exclusive supplier- Laborie and Biomerics
agreed that Biomerics would take over part of the
manufacturing volume for the existing TDOC catheter. See
Id. After executing the Biomerics deal, Ellacott called
his counterpart at Clinical Innovations to inform him that
some of Clinical Innovations' TDOC manufacturing volume
would be transferred to Biomerics and signaled that Clinical
Innovations' future as a TDOC manufacturer was uncertain.
McRoberts Aff. ¶ 22.
second project that TP Group alleges violated the Restrictive
Covenants is the Premo catheter. The Premo is an intrauterine
catheter that is marketed as a lower-cost, higher-accuracy
competitor to the Koala catheter. See R. 30-4,
Pl's Br. at Exh. 52 at SMITH001410, Exh. 54 at
SMITH003647, Exh. 55, Exh. 56 at SMITH 004453, Exh. 57 at
SMITH004441; Smith Aff. ¶ 43.
development timeline of the Premo is in dispute. TP Group
claims that Smith began working on the Premo during the
Restricted Period, Pl's Br. at 23, while Smith maintains
that he took "no significant steps ... toward the
development of thp Prpmn until Dpppmbpr 10 2015
Smith Aff Â¶Â¶ 43-44 (Wallarp for his nart claims that he had
no involvement with the Premo catheter at all and first heard