Preferred Meal Systems, Inc. v. Guse

Decision Date29 May 1990
Docket NumberNo. 1-88-3335,1-88-3498,1-88-3335
Parties, 145 Ill.Dec. 736 PREFERRED MEAL SYSTEMS, INC., a corporation, and TW Services, Inc., a corporation, Plaintiffs-Appellants, v. K. Lee GUSE, James W. Singer, Delores J. Reynolds, and Excel Systems, Inc., a corporation, Defendants-Appellees.
CourtUnited States Appellate Court of Illinois

James A. Hardgrove, Kathleen C. Kauffman, Monica Rimai, Sidley & Austin, Chicago, for plaintiffs-appellants.

Eugene E. Gozdecki, Howard A. Voeks, Gozdecki & Zido, Chicago, for defendants-appellees.

Justice SCARIANO delivered the opinion of the court.

Plaintiffs, Preferred Meal Systems, Inc. (Preferred) and its parent corporation TW Services, Inc., (TWS), brought suit to obtain equitable relief and monetary damages against the three highest-ranking former officers of Preferred, defendants Guse, Singer, and Reynolds. Plaintiffs charge that the individual defendants used their corporate offices with Preferred to establish a competing corporation, defendant Excel Systems, Inc. (Excel); that Guse violated an agreement not to compete contained in his employment contract; and that all three individual defendants breached their fiduciary duties to Preferred by wrongfully appropriating and using Preferred money, property and confidential information in order to compete with it, and by successfully soliciting its employees and customers in behalf of the new company, both prior to and after their departure from Preferred.

After hearing evidence and argument of counsel, the trial court on June 21, 1988, entered a temporary restraining order (TRO) enjoining defendant Guse from engaging in competition with Preferred or consulting in any way with Excel. The TRO also enjoined all defendants from using or disclosing confidential information obtained from Preferred and from soliciting additional Preferred employees.

Upon hearing Preferred's evidence on its request for a preliminary injunction, the trial judge on October 12, 1988, declined to enjoin Singer, Reynolds and Excel from engaging in competition with Preferred, but kept in effect the order against them regarding confidential information, and continued the injunction against Guse pending further hearing. On November 16, 1988, at the close of the continued hearing, the court modified the previous order against Guse by permitting him to compete with Preferred for the business of all customers who contract pursuant to public bid. Plaintiffs appeal from the order denying full preliminary injunctive relief against Singer, Reynolds, and Excel, and from that portion of the modified injunction against Guse permitting him to compete with Preferred in instances where the award of a contract is based on competitive bidding. The case is brought here on interlocutory appeal pursuant to Supreme Court Rule 307(a)(1) (73 Ill.2d Rule 307(a)(1)), and the following issues are presented for review: (1) whether the trial court's decision to modify the injunction against Guse, permitting him to compete with Preferred for the business of all customers who contract pursuant to public bid, was against the manifest weight of the evidence and contrary to law; and (2) whether the trial court's decision to refuse to enjoin Reynolds, Singer and Excel from engaging in competition with Preferred was also in error.

The facts in this case, many of which are contained in documentary form, are essentially undisputed.

Nature of Preferred's Business.

Preferred furnishes "pre-plated" or "pre-portioned" meals to both private and public school districts, but since school consumption is limited to 175 pupil attendance days each year, Preferred has diversified its operations by catering to senior citizen nutritional programs and day care centers. With just under forty million dollars in annual sales, Preferred is not without competition in this three billion dollar market.

Plaintiffs' Confidential Information.

Plaintiffs assert that their confidential information includes food formulas, customer lists, all costing and pricing information, standard costs, operating statements, bills for materials, and information relating to gross margin and returns; that hard copies of such confidential information were required to be kept under lock and key by Preferred managers in order to safeguard the information and names; that passwords were used to control computer access; and that Preferred made this information available only to select employees on a need-to-know basis.

Defendants' positions with Preferred.

Defendant Guse was president and a director of Preferred. Defendants Singer and Reynolds were Vice-President in charge of sales and Vice-President of administration respectively. As Sales Vice-president, Singer was responsible for obtaining and maintaining clients. As Administration Vice-president, Reynolds had primary responsibility for Preferred's financial operations, including the preparation of all major bids and contract renewals. The three individual defendants, together with Michael Alagna, Operations Vice-president, had almost total control over Preferred's operations, had complete access to all of Preferred's confidential financial and customer information, and knew Preferred's customers, costs and bidding strategies. Together they operated Preferred on their own, without detailed direction from Canteen Company (Canteen), the division of plaintiff TWS responsible for Preferred. Defendant Excel is the corporation which defendants formed to compete with Preferred; Guse, Reynolds & Singer own all of its stock.

Guse's Employment Contract.

In his contract of employment with Canteen, Guse greed that he would not at any time, either while employed or thereafter, disclose any of Preferred's confidential information or trade secrets. The contract further provided that, for a period of one year after his termination, Guse would not:

"directly or indirectly, as an officer, director, stockholder, partner, associate, employee, consultant, owner-agent, creditor, co-venturer or otherwise, become or be interested in or be associated with any other corporation, firm or business engaged in any geographical area in which [Preferred] or any of its subsidiaries, affiliates or licensees is so engaged, in the same or any similar or competitive business with that of [Preferred] or any subsidiary, affiliate or licensee."

The events complained of.

In January and February of 1987, Guse, Reynolds & Singer met with the accounting firm of McGladrey, Hendricksen & Pullen (McGladrey) to seek advice about the possibility of doing a leveraged buyout (LBO) of Preferred, the purpose of which was to make Preferred a minority business enterprise (MBE). At this time, defendants furnished certain information which included balance sheets, costs and margins for Preferred's top twenty accounts, to McGladrey. Defendants did not further pursue the concept of a LBO until December, 1987, at which time they solicited Michael Alagna and Jose Seijo to join their management group, but they declined and chose to stay with Preferred. When defendants became concerned about the possibility of being discharged for their having suggested a LBO to plaintiffs, they developed a contingency plan under which they would form their own company should that event transpire; accordingly, they began planning for the new company while still employed by Preferred, using Preferred's data and computers. Guse admits working on the contingency plan to start a new company in late January or early February of 1988, but maintains that it was shelved between mid-January 1988, when the Harris Bank declined to finance the new company, and May 18, 1988, when defendants began to leave Preferred. Certain versions of plans for a start-up company were found on Preferred computers with file generation or last revision dates of March 23, 1988, and May 17, 1988.

In January and February of 1988, Guse formalized an offer to his superiors at Canteen regarding a LBO of Preferred, making his initial presentation to the president of Canteen on February 11, 1988. In response to the proposal, Canteen sought a 40% equity ownership in the new company. However, Guse's professional advisors expressed concern that such a percentage of ownership might result in the company's not receiving MBE status in light of the fact that Canteen owned Preferred previous to the proposed buyout.

Defendants then made two offers, both of which were rejected as being too low and also because they failed to give Canteen any equity ownership. Soon after the second offer was rejected, defendants solicited certain of Preferred's key managers on behalf of the new company. Michael Alagna was contacted for a second time, on May 6, 1988, by Guse and Singer, who told him that they planned on forming a company which would compete with Preferred, and that they wanted him to join them. Reynolds contacted Pat Costello, one of three regional sales managers and offered him a position with Excel. Guse contacted Jerry Feddor, a plant manager; Jose Seijo, plant engineer (the second such contact); and Nick Lindheim, a regional sales manager, offering each employment with the new corporation. Guse also offered other less prominent employees positions with the new company, including technical services director Fischer, senior nutritions program head Lykke, and material manager Steffens. In addition, the following employees left Preferred within days of defendants' departures and became employees of Excel without any prior notice to Preferred: client service manager Rose, regional manager Williams, administrative assistant Schar, product development manager Reigler, and client service representative Reitz.

Defendants Guse and Singer left Preferred on May 18, 1988; on May 19, 1988, they began looking at temporary office space; on May 20, 1988 Singer made a deposit on a two room office with secretarial services in Itasca, Illinois. In...

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