Central Water Works Supply, Inc. v. Fisher

• Decision Date: 04 February 1993
• Docket Number: No. 4-92-0460,4-92-0460
• Citation: 608 N.E.2d 618,240 Ill.App.3d 952,181 Ill.Dec. 545
• Parties: , 181 Ill.Dec. 545 CENTRAL WATER WORKS SUPPLY, INC., Plaintiff-Appellee, v. William FISHER and Water Products Company of Illinois, Inc., Defendants-Appellants.
• Court: United States Appellate Court of Illinois

Page 618

608 N.E.2d 618

240 Ill.App.3d 952, 181 Ill.Dec. 545

CENTRAL WATER WORKS SUPPLY, INC., Plaintiff-Appellee, v. William FISHER and Water Products Company of Illinois, Inc.,

Defendants-Appellants.

No. 4-92-0460.

Appellate Court of Illinois,

Fourth District.

Feb. 4, 1993.

George L. Chesley, Chesley & Wilson, Bloomington, for defendants-appellants.

James P. Ginzkey, Hayes, Schneider, Hammer, Miles & Cox, Bloomington, for plaintiff-appellee.

Justice McCULLOUGH delivered the opinion of the court:

Plaintiff Central Water Works Supply, Inc., was granted a preliminary injunction against defendant William Fisher. Defendant was enjoined from soliciting, contacting customers of plaintiff, or selling products similar to products sold by plaintiff, or in any manner competing with plaintiff in a specific geographical area pursuant to a covenant not to compete contained in plaintiff's shareholder's agreement. Defendant brings this interlocutory appeal pursuant to Supreme Court Rule 307(a)(1) (134 Ill.2d R. 307(a)(1)), contending the circuit court erred in granting the preliminary injunction because (1) plaintiff has no protectable interest and (2) the geographical scope of the preliminary injunction is overbroad. Defendant also contends the circuit court erred in excusing plaintiff from posting bond in this matter. We affirm.

Plaintiff, a wholesale distributor of water and sewer supplies, was formed in August 1990 by John Delich, defendant, Stan Schroedor, and Steven Mehnke. Plaintiff supplies over 100 products to municipalities, underground utility contractors, private industry, developers, subdivisions, city and State projects. Prior to forming plaintiff, Delich and defendant were employed by Water Products Company, a direct competitor of plaintiff. Delich was general manager of Water Products and defendant was the sales representative. Both men had become unhappy with Water Products and they decided to either attempt to purchase the Bloomington branch of that company or form their own company to compete with Water Products. Water Products has a branch in Bloomington but its corporate office, which covers the Chicago metropolitan area, is located in Aurora.

When their bid to purchase the Bloomington branch was unsuccessful, these four individuals formed plaintiff. These four men were the initial shareholders and directors of the company and Delich was president. As of the time of the hearing, defendant was still a shareholder and director of plaintiff. However, defendant took no active part in the management of plaintiff. Delich and defendant contributed $100,000 cash and signed off on a Small Business Administration (SBA) loan for $300,000. Each gave their personal residences and possessions as collateral for the SBA loan. In February 1991, plaintiff secured another SBA loan for $150,000 with a $50,000 cash contribution by Delich and defendant. In total, plaintiff has an outstanding debt of approximately $400,000.

In order to secure the SBA loan, the men were required to provide personal financial information and work history of the initial shareholders. Moreover, they had to submit a proposed budget for the first three years as well as sales and gross profit forecasts. The initial budget was $3 million and defendant's share in the sales forecast was 50% of the budget.

The shareholders entered into a shareholder's agreement which listed the following breakdown of shares issued: John Delich, 55 shares; William Fisher, 25 shares; Stan Schroedor, 10 shares; and Steve Mehnke, 10 shares. Paragraph 15 of the shareholders' agreement stated:

"COVENANT NOT TO COMPETE. The parties hereto are all employees of the Company and each is important to the success of the new enterprise. The parties agree that if they should terminate their employment with the Company, that they will not compete with the Company in the geographical area in which the Company is then doing business for a period of three years after the termination of employment."

This agreement was executed by all four shareholders on February 21, 1991. Delich testified that the purpose of the covenant not to compete was "to basically demonstrate on paper the commitment and the loyalty of the initial parties involved in starting the company." This showing of commitment was for the benefit of the bank issuing the SBA loan as well as to evidence the shareholders' commitment to each other and to the company.

In September 1991, defendant ended his employment with plaintiff. On April 7, 1992, defendant began working again for Water Products as a salesman in the same geographical area as he did for plaintiff with many of the same customers. Defendant was in the midst of divorce proceedings in which he was forced to sell his home. In order to complete the sale of his home, defendant was released from his pledge of his home as security for the SBA loan. Defendant remained personally obligated on the SBA loans.

Delich and defendant met informally in March 1992. At that meeting, they discussed the possibility that defendant would begin working for a competitor of plaintiff. Defendant testified Delich did not offer him a job but that was only because he had already stated he could not return to work for plaintiff at the salary he had when he originally left plaintiff. Defendant testified that Delich stated that his going to work for Water Products would have a serious negative impact on plaintiff.

On April 13, 1992, plaintiff filed its petition for preliminary injunction seeking to enforce the covenant not to compete contained in the shareholder's agreement. Following a hearing on this matter, on May 6, 1992, the circuit court granted the preliminary injunction. This interlocutory appeal followed.

A preliminary injunction is a provisional remedy granted to preserve the status quo. (Ron Smith Trucking, Inc. v. Jackson (1990), 196 Ill.App.3d 59, 63, 142 Ill.Dec. 530, 534, 552 N.E.2d 1271, 1275.) The four factors which must be established before an injunction will be granted are that (1) a clearly ascertained right in need of protection exists; (2) irreparable harm will occur without the injunction; (3) there is no adequate remedy at law for the injury; and (4) success on the merits is likely. (Hartlein v. Illinois Power Co. (1992), 151 Ill.2d 142, 156, 176 Ill.Dec. 22, 28-29, 601 N.E.2d 720, 726-27.) In addition to consideration of the above criteria, the trial court must conclude that the benefits of granting the injunction outweigh the possible injury which defendant might suffer as a result thereof. (Lee/O'Keefe Insurance Agency, Inc. v. Ferega (1987), 163 Ill.App.3d 997, 1003, 114 Ill.Dec. 919, 923, 516 N.E.2d 1313, 1317.) The sole question before us on appeal is whether the trial court abused its discretion in granting the preliminary injunction. We will not disturb the trial court's findings unless they are against the manifest weight of the evidence. Decker, Berta & Co., Ltd. v. Berta (1992), 225 Ill.App.3d 24, 27-28, 167 Ill.Dec. 190, 192, 587 N.E.2d 72, 74.

The propriety of injunctive relief in the present case depends upon the enforceability of the restrictive covenant at issue. Because such covenant operates at least as a partial restraint of trade, it is scrutinized carefully by the courts to ensure that its intended effect is not the prevention of competition per se. Lee/O'Keefe, 163 Ill.App.3d at 1003, 114 Ill.Dec. at 923, 516 N.E.2d at 1317.

Restrictive covenants often appear in employment contracts and contracts for the sale of a business. Courts evaluate these restrictive covenants differently because of the difference in the nature of the interests sought to be protected. Courts impose a more stringent test of reasonableness on restrictive covenants in employment contracts than they do under restrictive covenants ancillary to the sale of a business. The basis for the distinction rests upon the fact that a purchaser in the sale of a business context holds more bargaining power than an ordinary employee in an employment context. Decker, Berta & Co., Ltd., 225 Ill.App.3d at 28, 167 Ill.Dec. at 192, 587 N.E.2d at 74.

If the covenant is ancillary to the sale of a business by the covenantor to the covenantee, then all the covenantee must show is that the restriction is reasonable as to time, geographical area and scope of prohibited business activity. If, however, the covenant is ancillary only to an employment agreement, the covenantee must show additional special circumstances, such as a near-permanent relationship with his employee's customers and that, but for his association with the employer, the former employee would not have had contact with the customers, or the existence of customer lists, trade secrets or other confidential information. (Hamer Holding Group, Inc. v. Elmore (1990), 202 Ill.App.3d 994, 1007, 148 Ill.Dec. 310, 318-19, 560 N.E.2d 907, 915-16.) A covenant ancillary to an employment contract shields the employer from the possibility of losing his clientele to an employee who appropriates proprietary customer information for his own benefit, and also shields him from the possibility of losing customers with whom he enjoys a near-permanent relationship. A covenant ancillary to the sale of a business ensures the buyer that the former owner will not walk away from the sale with the company's customers and good will, leaving the buyer with an acquisition that turns out to be only chimerical. Hamer, 202 Ill.App.3d at 1007, 148 Ill.Dec. at 319, 560 N.E.2d at 916.

In the sale of a business, the interest to be protected is the value of the goodwill that is purchased. In protecting the goodwill sold, the courts consider the fact that the bargaining position is not uneven as it is generally in an employer-employee relationship and that the courts are less likely to declare the sale of a business post-employment restraint invalid. (Stamatakis Industries, Inc. v. King (1987), 165 Ill.App.3d 879, 888, 117 Ill.Dec. 419, 425, ...