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TP Group-CI, Inc. v. Smith

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

October 12, 2016

TP GROUP-CI, INC., Plaintiff,
v.
STEVEN R. SMITH AND WILLIAM DEAN WALLACE, Defendants.

          MEMORANDUM OPINION AND ORDER

          Hon. Edmond E. Chang, United States District Judge.

         TP 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.[1] 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.[2] TP Group filed this motion for preliminary injunction against Wallace, [3] 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.

         I. Background

         A. Clinical Innovations

         Clinical 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. ¶ 3.

         Plaintiffs 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. Id.

         Though 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.

         The 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.

         B. The Restrictive Covenants and Confidentiality Provision

         Wallace 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 Rollover Sellers.

         Importantly, 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).

         Section 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 gastroenterology." Id.

         Section 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:

         directly or indirectly,

(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).

         Wallace 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. § 7.1(f).

         On the 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 construed:

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).

         Unlike 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).

         C. Breach of the Restrictive Covenants

         Although 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.)

         After 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 next-p-pripratinn TDOC! r.athptpr: C£\ tlip Prpmn r.athpt.pr: and CX\ T/ip-pr MpHiral

         1. Next-Generation TDOC

         In 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.

         But 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 Laborie.[4] Id.

         Smith's 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.[5] Id. at 172:07-24.

         At the 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.

         Smith 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.

         In 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.

         But 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.

         But 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.

         Only 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.

         With 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.

         2. Premo

         The 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.

         The 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 ¶¶ 43-44 (Wallarp for his nart claims that he had no involvement with the Premo catheter at all and first heard ...


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