Business Records Corp. v. Lueth

• Decision Date: 14 December 1992
• Docket Number: No. 92-1429,92-1429
• Citation: 981 F.2d 957
• Parties: BUSINESS RECORDS CORPORATION, a Texas Corporation, Plaintiff-Appellee, v. Carl D. LUETH, Defendant-Appellant.
• Court: U.S. Court of Appeals — Seventh Circuit

Page 957

981 F.2d 957

BUSINESS RECORDS CORPORATION, a Texas Corporation, Plaintiff-Appellee, v. Carl D. LUETH, Defendant-Appellant.

No. 92-1429.

United States Court of Appeals Seventh Circuit.

Argued July 7, 1992.

Decided Dec. 14, 1992.

Gregory S. Gallopoulos (argued), Bradford P. Lyerla, Patricia A. Bronte, Jenner & Block, Chicago, IL, for plaintiff-appellee.

Eric N. Macey (argued), P. Andrew Fleming, Michael J. Kennedy, Novack & Macey, Chicago, IL, Randall Ray, Sebat, Swanson, Banks, Garman & Townsley, Danville, IL, for defendant-appellant.

Before CUDAHY, COFFEY, and EASTERBROOK, Circuit Judges.

CUDAHY, Circuit Judge.

As a public servant, many years ago, Carl Lueth served as deputy chief of the Kankakee County Clerk's Office, Clerk of Kankakee Township and Treasurer of Kankakee County. Over the course of these earlier years Lueth became an expert on state election laws and mastered the ins and outs of election administration. In 1970 Lueth moved to the private sector, bringing with him his expertise and the contacts he had made among Illinois election administrators. Lueth became a prominent success with Illinois Office Supply Company (IOS), where he served as a vice-president who sold election equipment to state and local governments. Hard work keyed Lueth's success: he participated in all the meetings attended by county officials responsible for running elections, he kept his contacts alive by regular visits to their offices and he personally assisted officials with the administration of elections. Lueth had contact with virtually every county official in the state of Illinois. The Illinois legislature acknowledged Lueth's success by appointing him to the statewide committee charged with advising the legislature on revisions to the state's election laws.

In 1980 Richard McKay convinced Lueth to come work for him. McKay owned Frank Thornber Company, an IOS competitor. Shortly thereafter Thornber acquired IOS, thus consolidating 87 of the 111 Illinois counties and election commissions as customers of Thornber. Not long after Lueth joined Thornber, a rival company, Fidlar & Chambers, began to make inroads into Thornber's market share. By 1985 Thornber's power in the election equipment market had decreased markedly. At that time Business Records Election Systems purchased Thornber. (Business Records Election Systems is now Business Records Corporation (BRC).) BRC is a Texas corporation that operates nationwide. In the Illinois market BRC deals only with local governments. Thornber and BRC signed an Asset Purchase Agreement, which was dated March 22, 1985. The Agreement included a covenant by Thornber to BRC that Lueth, among others, would sign a noncompetition agreement; the Agreement also made Lueth's signing of the noncompetition agreement a condition precedent to BRC's purchase of Thornber. The covenant contained in the Agreement was designed to be in effect until "the later of (i) the third anniversary of the date of this Agreement or (ii) the second anniversary of the Employee's termination as an employee of [BRC]." Lueth signed the agreement, dated March 22, 1985, and received as consideration an option to purchase 3750 shares of BRC's parent's common stock.

Lueth became president of Thornber after the sale, and when BRC stopped using the name Thornber he was dubbed a vice-president of BRC. In 1989 Lueth's responsibilities were reduced to that of manager of sales in Illinois, excluding Cook County. In 1990 he became a BRC sales representative for sales and service of election equipment in central Illinois. Nothing indicates that these moves were demotions. In early 1991 Lueth began talking with Richard McKay about the two of them reuniting. McKay had just started Governmental Business Systems (GBS), an election equipment sales company established to compete with BRC. Lueth signed a written proposal for employment with McKay and GBS on March 23, 1991, but he did not tell BRC about his arrangement with GBS until April 19, 1991. Since Lueth began working for GBS he has contacted election officials throughout the state from Aurora to Massac.

BRC sued Lueth to enjoin him from acting in violation of the noncompetition agreement. BRC brought the suit in federal court under the diversity jurisdiction, 28 U.S.C. § 1332(a)(1), and the law of Illinois governs. The district court granted the injunction based on its reading of state law; therefore, this court must review de novo the district court's legal conclusions. Salve Regina College v. Russell, --- U.S. ----, ----, 111 S.Ct. 1217, 1221, 113 L.Ed.2d 190 (1991). To the extent that the legal determinations turn on questions of fact--for example whether a restrictive covenant was reasonable in scope, see Williston on Contracts § 1638, at 108 (3d ed. 1972)--the court must accept the district court's findings unless those findings are clearly erroneous. Mucha v. King, 792 F.2d 602, 605-06 (7th Cir.1986); Fed.R.Civ.P. 52(a).

The threshold issue in this case is whether the noncompetition agreement is properly characterized as a "covenant to a purchaser," which is a covenant made ancillary to the sale of a business, or a "covenant to an employer," which is a covenant made ancillary to an employment contract. The distinction is crucial because "courts are less likely to declare [a covenant to a purchaser] invalid." Hamer Holding Group, Inc. v. Elmore, 202 Ill.App.3d 994, 1008, 148 Ill.Dec. 310, 319, 560 N.E.2d 907, 916 (1990); Restatement (Second) of Contracts § 188 cmt. b (1979). The distinction is rooted in the differences "in the nature of the interests sought to be protected in the case of an employer on the one hand [and] the case of a buyer on the other." O'Sullivan v. Conrad, 44 Ill.App.3d 752, 755, 3 Ill.Dec. 383, 386, 358 N.E.2d 926, 929 (1976). A covenant to a purchaser serves to preserve the value of what the purchaser has bought, while a covenant to an employer serves to protect information or relationships that the employee might acquire by virtue of the fact that the employer hired him. Restatement (Second) of Contracts § 188 cmt. b; Blake, Employee Agreements Not to Compete, 73 Harv.L.Rev. 625, 646-47 (1960). The purchaser of a business has an interest in preserving the goodwill that he purchases (which may include clientele in some cases), particularly in a service industry. Note, Validity of Covenants Not to Compete: Common Law Rules and Illinois Law, 1978 Ill.L.Forum 249, 253. A covenant to a purchaser also poses a lesser threat of restraining trade or competition because the seller has bargaining power that a typical incoming at-will employee would not be expected to have. Indeed, covenants to a purchaser were the first restrictive covenants allowed at common law, in recognition of the catalytic role such covenants play in promoting the transferability of property, thus enhancing trade and competition. See Mitchel v. Reynolds, 1 P.Wms. 181, 24 Eng.Rep. 347 (K.B. 1711); Sarnoff v. American Home Prods. Corp., 798 F.2d 1075, 1083 (7th Cir.1986).

Though there is no established litany of requirements, Illinois courts consider several factors when determining if a restrictive covenant is to a purchaser or to an employer. The courts generally consider "facts bearing on the intent of the parties to protect the integrity of the sale." Hamer Holding, 202 Ill.App.3d at 1008, 148 Ill.Dec. at 319, 560 N.E.2d at 916. Such facts may include: whether the covenant was a condition precedent to the sale, id.; whether the covenant was incorporated into the sale agreement, id.; and the time that the parties signed the covenant in relation to the time they signed the sales agreement, O'Sullivan, 44 Ill.App.3d at 756, 3 Ill.Dec. at 386, 358 N.E.2d at 929.

Lueth argues that he was not a seller or owner of Thornber so he should not be subject to the readier recognition courts give to covenants to purchasers. This argument might prevail if Lueth executed the covenant as a result of circumstances apart from the dealings between McKay and BRC. But that is not what happened. The covenant to the purchaser that Lueth signed was part of the sales agreement. It was placed in the agreement in part at least to prevent Thornber from selling its business to BRC and then letting the employees "walk away from the sale with the company's customers and goodwill, leaving [the purchaser] with an acquisition that turns out to be only chimerical." Hamer Holding, 202 Ill.App.3d at 1008, 148 Ill.Dec. at 319, 560...