Hess Newmark Owens Wolf, Inc. v. Owens

• Decision Date: 11 July 2005
• Docket Number: No. 04-4293.,04-4293.
• Citation: 415 F.3d 630
• Parties: HESS NEWMARK OWENS WOLF, INC., Plaintiff-Appellant, v. Doris OWENS and Owens Group, Inc., Defendants-Appellees.
• Court: U.S. Court of Appeals — Seventh Circuit

415 F.3d 630

HESS NEWMARK OWENS WOLF, INC., Plaintiff-Appellant, v. Doris OWENS and Owens Group, Inc., Defendants-Appellees.

No. 04-4293.

United States Court of Appeals, Seventh Circuit.

Argued May 13, 2005.

Decided July 11, 2005.

Shelly B. Kulwin (argued), Kulwin & Associates, Chicago, IL, for Plaintiff-Appellant.

David L. Miller (argued), Dykema Gossett, Chicago, IL, for Defendants-Appellees.

Before CUDAHY, EASTERBROOK, and KANNE, Circuit Judges.

EASTERBROOK, Circuit Judge.

In 1998 four veterans of the motion-picture promotion business — Mary Hess, Barry Newmark, Doris Owens, and Stuart Wolf — decided to pool their efforts. They formed Hess Newmark Owens Wolf, Inc., or HNOW, to provide advertising, public relations, and promotional services to studios. Each of the four held 22.5% of the stock (a fifth investor received 10%). Each had operated an independent agency. Three of the four closed as part of HNOW's formation; the exception was Owens Group, Inc. (OGI), which offered promotional services from its base in Cincinnati. The principals of the new venture agreed that OGI could remain in business, with Owens as its leader, provided that it confined its activities to Ohio, Kentucky, and the Indianapolis area. All four agreed on restrictive covenants that would limit their work in the movie-promotion business to HNOW for as long as he or she owned stock in HNOW and three years thereafter, in any part of the country where HNOW did business-again with the exception of the territory in which OGI held grandfather rights.

That promise made it easier for the three principals who burned their bridges behind them to devote full energies to HNOW. But for the restrictive covenant, each of the three would face not only the business risks endemic to the venture but also the risk that one or more of the other principals would bolt and leave the others with neither a viable business at HNOW nor another business to go back to. See Gary S. Becker, Human Capital 45-57 (3d ed.1993). Keeping a personal-services business together can be difficult without the sort of trust and confidence engendered by promises to stick with the firm rather than strike off on one's own at the first opportunity. Owens had more of a cushion, for she not only received the promises of the other three but also retained her business at OGI. She was expected to be the principal rainmaker and used this to fortify her position. The opportunity to do business without sharing any of the profits with Hess, Newmark, and Wolf proved irresistible, however, and by 2003 Owens was using OGI to sell consulting services to Terry Hines Associates (THA), one of HNOW's business rivals. Owens helped THA set up new offices on the east coast (outside the states to which OGI was supposed to be limited), hire staff, and secure business there. Owens could have helped HNOW set up outposts, but she assisted its rival instead — and did not tell anyone at HNOW that she was doing this. When Hess found out, he told Owens in good movie-speak: "You are so fired!"

The board backed Hess up, and HNOW filed this suit under the diversity jurisdiction seeking an injunction against Owens's work for anyone else in the movie-promotion business, except through OGI in the reserved locations. (The plaintiff is HNOW rather than HNW because Owens retains her investment interest, and the firm has not changed its name — perhaps hoping that if it wins the case Owens will return to the fold and it can consummate a merger that was put on hold when the prospective partner discovered that Owens was a double agent.) The parties consented to final decision by a magistrate judge, see 28 U.S.C. § 636(c), who concluded after a five-day evidentiary hearing that Owens probably has violated her duty of loyalty as a director by appropriating a corporate opportunity (as she could have performed the same consulting work through HNOW). Moreover, the judge concluded, Owens has violated the restrictive covenant by performing work in the movie-promotion business. The covenant, which specifically includes consulting work as well as other services, runs as far as the area in which HNOW competes, and as it is trying to become a national agency that territory is the nation. Nonetheless, the court held, HNOW is not entitled to injunctive relief because it failed to establish that it lost any particular account to THA as a result of Owens's efforts on its behalf. Hess Newmark Owens Wolf Inc. v. Owens, 2004 WL 2980603, 2004 U.S. Dist. LEXIS 25636 (N.D.Ill.2004). Inability to establish lost business meant lack of irreparable injury, and there can be no injunction without irreparable injury.

The decision is wrong on its own terms, because HNOW did show a loss. HNOW sells consulting as well as advertising services. It could have sold THA the very services that Owens did through OGI; indeed, Owens could and should have billed these services through HNOW. That is why the magistrate judge deemed HNOW likely to prevail on its contention that Owens diverted a corporate opportunity to herself, in breach of her fiduciary duty. For a substantial period during 2003 and 2004, Owens devoted 100% of her time to THA. What is more, Owens is continuing to provide services to THA to assist the newly opened offices to flourish. The income from that endeavor is (or should be) one of HNOW's assets, since the THA offices are located outside Ohio, Kentucky, and Indianapolis. An injunction could put a stop to that ongoing diversion.

The district court's decision has a deeper problem, however: a legal rule that irreparable injury can be established only by a concrete demonstration along the lines of "we lost the Philadelphia advertising business of Warner Bros. to THA as a result of Owens's work for our rival" would make injunctions useless as a practical matter. If proof of particular injuries could be supplied, then the injury would be reparable by damages; it is precisely the difficulty of pinning down what business has been or will be lost that makes an injury "irreparable." See Hilton v. Braunskill, 481 U.S. 770, 776, 107 S.Ct. 2113, 95 L.Ed.2d 724 (1987). Competition changes probabilities: a THA with stronger east-coast offices may improve by 5% or 10% the chance of receiving particular business from a particular studio. Over many years with hundreds of movies being promoted in 50 or more major metropolitan areas, a 5% swing can represent a lot of business — but HNOW will not be able to identify which contracts slipped from its grasp.

Illinois recognizes this. (The parties agree that its law governs.) It treats ongoing competition itself as a sufficient basis for relief. See, e.g., Gold v. Ziff Communications Co., 196 Ill.App.3d 425, 434, 142 Ill.Dec. 890, 553 N.E.2d 404, 410 (Ill.App. 1 Dist.1989) ("The...