Foodcomm Internation v. Barry, Patrick J. ( 2003 )

In the
United States Court of Appeals
For the Seventh Circuit
____________
No. 02-4001
FOODCOMM INTERNATIONAL,
Plaintiff-Appellee,
v.
PATRICK JAMES BARRY, et al.,
Defendants-Appellants.
____________
Appeal from the United States District Court
for the Northern District of Illinois, Eastern Division.
No. 02 C 7268—David H. Coar, Judge.
____________
ARGUED JANUARY 22, 2003—DECIDED JANUARY 23, 2003
OPINION PUBLISHED MAY 2, 2003
____________
Before FLAUM, Chief Judge, and MANION and WILLIAMS,
Circuit Judges.
WILLIAMS, Circuit Judge. Foodcomm International
sought and received a preliminary injunction against its
former employees, Patrick Barry and Christopher Leacy,
and Outback Imports, Inc., the company Barry and Leacy
formed with Empire Beef, Inc., Foodcomm’s former cus-
tomer. The preliminary injunction prohibits Barry and
Leacy from providing any services to Outback or Empire.
In an order dated January 23, 2003, we affirmed the dis-
trict court’s granting of the preliminary injunction; this
opinion explains the basis for our earlier decision.
2 No. 02-4001
I. BACKGROUND
Foodcomm is an importer of chilled Australian beef.
Patrick Barry and Christopher Leacy were senior sales
representatives at Foodcomm and oversaw its dealings
with Empire Beef, one of Foodcomm’s largest customers.
Leacy and Barry were not executives with Foodcomm, but
were two of Foodcomm’s four highest-paid employees, and
together had exclusive control over Foodcomm’s purchas-
ing and sales of Australian chilled beef.
In 2001, Empire approached Foodcomm with a business
proposal to redistribute market fluctuation risk between
the companies (the “redistribution deal”). Although both
sides initially expressed interest in the arrangement,
negotiations broke down following a meeting between
Empire’s Scott Brubaker and Foodcomm’s Greg Bourke
in March 2002. Leacy, who had been present at the meet-
ing, asked Bourke to leave it to him (Leacy) to “smooth
things over” with Empire. During this “smoothing over”
process, Leacy learned from Brubaker how badly damaged
the Foodcomm-Empire relationship had become when
Brubaker informed Leacy that Empire would not conduct
further business with Foodcomm. Leacy did not relay this
information to anyone at Foodcomm, and Foodcomm’s
business with Empire dropped roughly 75 percent.
Meanwhile, Barry and Leacy’s relationship with
Foodcomm also took a downward turn. In May 2002, Barry
and Leacy decided to “seek alternative employment to-
gether,” and contacted Brubaker at Empire Beef to in-
quire whether it would be interested in their services.
Brubaker requested a written business plan; Barry and
Leacy used their Foodcomm computers and PDAs to
prepare a business plan for a new company (Outback
Imports) that would import Australian chilled beef for
Empire. Barry and Leacy never informed Foodcomm about
their plans with Empire and Outback, and Leacy con-
No. 02-4001 3
tinued to maintain to Foodcomm that he was “smoothing
things over” with Empire.
Outback was incorporated in July 2002, but Barry and
Leacy did not resign from Foodcomm until late August
2002. In September 2002, Outback began operating as a
division of Empire with Barry and Leacy, now Empire
employees, at its helm. Upon learning about Outback and
its ownership by Empire and operation by Barry and Leacy,
Foodcomm filed a complaint in district court seeking a
preliminary injunction enjoining Barry and Leacy’s contin-
ued employment with Empire and Outback. Following a
four-day hearing, the district court made a preliminary
finding that Barry and Leacy had usurped Foodcomm’s
corporate opportunity with respect to the redistribution
agreement and had breached their fiduciary duties to
Foodcomm when they approached Empire with a business
plan and formed a company to compete against Foodcomm.
The district court enjoined them from directly or indirectly
providing services of any kind to or for Empire or Outback
or any of their affiliates and agencies. Barry and Leacy
brought an expedited appeal. Following oral argument, we
affirmed the injunction in an unpublished order because,
as we now explain, the district court did not abuse its
discretion in granting the injunction.
II. ANALYSIS
We review the grant of a preliminary injunction for
an abuse of discretion. Storck v. Farley Candy Co., 14 F.3d
311, 314 (7th Cir. 1994). To prevail on a motion for a
preliminary injunction, Foodcomm must show that (1) its
case has a likelihood of success on the merits; (2) no
adequate remedy at law exists; and (3) it will suffer irrepa-
rable harm if the injunction is not granted. Prometak
Industries, Ltd. v. Equitrac Corp., 300 F.3d 808, 811 (7th
Cir. 2002); see also Abbott Labs. v. Mead Johnson & Co.,
4 No. 02-4001
971 F.2d 6, 11 (7th Cir. 1992). If these three conditions are
met, the court must balance the harm to Foodcomm if the
injunction is not issued against the harm to Barry and
Leacy if it is issued. Storck, 14 F.3d at 314. This balancing
involves a sliding scale analysis: the greater Foodcomm’s
chances of success on the merits, the less strong a showing
it must make that the balance of harm is in its favor. Id.Absent a clear error of fact or law, we defer to the district
court’s weighing of the relevant factors. Abbott Labs., 971
F.2d at 13. The parties implicitly agree that Illinois law
applies to Foodcomm’s claims.
A. Likelihood of Success on the Merits
The district court determined that Barry and Leacy’s
secret negotiations with Empire Beef to create Outback
Imports were actions against the interests of Foodcomm
and constituted a breach of Barry and Leacy’s fiduciary
duty of loyalty.1 It is a fundamental principle of agency law
that agents owe fiduciary duties of loyalty to their princi-
pals not to (1) actively exploit their positions within the
corporation for their own personal benefits; or (2) hinder the
ability of the corporation to conduct the business for which
it was developed. E.J. McKernan Co. v. Gregory, 623 N.E.2d
981, 993 (Ill. App. Ct. 1993); Veco Corp. v. Babcock, 611
N.E.2d 1054, 1059 (Ill. App. Ct. 1993). Officers and direc-
tors have been found to have breached their fiduciary duties
when, while still employed by the company, they (1) fail
to inform the company that employees are forming a
rival company or engaging in other fiduciary breaches,
1
The district court also found that Barry and Leacy’s business
plan usurped Foodcomm’s corporate opportunity in the redistribu-
tion deal. We need not consider this issue, since we find that the
preliminary injunction was properly supported by Foodcomm’s
breach of fiduciary duty theory.
No. 02-4001 5
Unichem Corp. v. Gurtler, 498 N.E.2d 724, 728 (Ill. App. Ct.
1986); (2) solicit the business of a single customer before
leaving the company, Smith-Shrader Co., Inc. v. Smith, 483
N.E.2d 283, 290 (Ill. App. Ct. 1985); (3) use the company’s
facilities or equipment to assist them in developing their
new business, ABC Trans Nat. Transport, Inc. v. Aeronau-
tics Forwarders, Inc., 379 N.E.2d 1228, 1238 (Ill. App. Ct.
1978); or (4) solicit fellow employees to join a rival busi-
ness, Unichem, 498 N.E.2d at 728.
Barry and Leacy contend that since they were not titled
as “officers” of Foodcomm, they do not owe fiduciary duties
to Foodcomm. We disagree. Barry and Leacy were two
of Foodcomm’s highest paid employees, they were compen-
sated based on the company’s net profits, together they
had exclusive charge over all of Foodcomm’s purchasing
of Australian chilled beef, and their job descriptions at
Foodcomm involved significant autonomy and discretion.
These are the hallmarks of a fiduciary, and employees, as
agents of their employer, do not fall outside the purview
of a breach of fiduciary duties. Mullaney, Wells & Co. v.
Savage, 402 N.E.2d 574, 580 (Ill. 1980). “Mullaney . . . is
a case in which defendant was neither an officer nor a
director of the plaintiff corporation. Nevertheless, the
defendant in Mullaney was found to owe a fiduciary duty
to the corporation because there was an agency relation-
ship.” Radiac Abrasives, Inc. v. Diamond Technology, Inc.,
532 N.E.2d 428, 434 (Ill. App. Ct. 1988) (internal citation
omitted).
In the present case, Leacy was privy to the collapse of
negotiations between Foodcomm and Empire regarding
the redistribution deal and offered to “smooth things over.”
The evidence adduced at the hearing supports the finding
that instead of “smoothing things over,” Leacy conspired
with Barry to present Empire with a business plan to create
an Empire-owned entity that would provide the same
services as were already being provided by Foodcomm, and
6 No. 02-4001
directly compete with Foodcomm. Such efforts to actively
exploit their positions within Foodcomm for their own
personal benefits, and to hinder Foodcomm’s ability to
conduct its business with Empire, if proved at trial, consti-
tute a breach of fiduciary duty. Gregory, 623 N.E.2d at 993.
The evidence likewise supports a finding that Barry and
Leacy also failed to inform Foodcomm of each other’s plan
to join Empire and form Outback, a rival company to
Foodcomm; they solicited Empire’s participation in their
business plan while keeping their negotiations hidden from
Foodcomm; and they used Foodcomm resources to draft
and communicate the business plan to Empire. These
actions, if proved at trial, also constitute breaches of their
fiduciary duties. Unichem, 498 N.E.2d at 728; Smith-
Shrader, 483 N.E.2d at 290; ABC Trans-Nat’l Transport,
379 N.E.2d at 1238.
B. Inadequate Remedy and Irreparable Injury
To obtain a preliminary injunction, Foodcomm must
show that it has no adequate remedy at law and, as a
result, that it will suffer irreparable harm if the injunc-
tion is not issued. Roland Machinery Co. v. Dresser Indus-
tries, 749 F.2d 380, 386 (7th Cir. 1985). Inadequate remedy
at law does not mean wholly ineffectual; rather, the remedy
must be seriously deficient as compared to the harm
suffered. Id. The finding of irreparable harm to the plain-
tiff if the injunction is denied is a threshold requirement
for granting a preliminary injunction. Id.In this case, Foodcomm asserts that it has been and
will continue to be irreparably injured by Barry and
Leacy’s actions, the most important injuries of which are
its inability to attempt to maintain its relationship with
Empire and its complete loss of that relationship. Be-
cause it is not practicable to calculate damages to remedy
this kind of harm, no remedy at law can adequately com-
No. 02-4001 7
pensate Foodcomm for its injury. Roland Machinery, 749
F.2d at 386; see also Cross Wood Products, Inc. v. Suter, 422
N.E.2d 953, 957 (Ill. 1981); Preferred Meal Systems, Inc. v.
Guse, 557 N.E.2d 506, 516-17 (Ill. Ct. App. 1990). Further-
more, Barry and Leacy have no significant assets in the
United States and Outback is a start-up business with
no assets. See Roland Machinery, 749 F.2d at 386. Because
Foodcomm’s irreparable harm was caused by and is main-
tained by Barry and Leacy’s actions, an injunction is ap-
propriate to prevent this harm from continuing.
C. Balancing the Harms
In balancing the harms, the court must weigh the error
of denying a preliminary injunction to the party who
would win the case on the merits against the error of
granting an injunction to the party who would lose. Roland,
749 F.2d at 387-88. In this case, the district court stated
that the harm to Barry and Leacy from an injunction was
that they could not work for Empire or Outback in the
interim. Barry and Leacy argue that they also are irrepara-
bly harmed because the injunction jeopardizes their abil-
ity to earn a living and could subject them to deportation.2
We disagree. The district court specifically stated they
could work for another company in the industry and seek
transfer of their visa status to that company. Therefore,
they risked no irreparable injury with respect to their
visa status and ability to earn a livelihood. Moreover, the
district court was entitled to conclude that any irreparable
harms were outweighed by the harm to Foodcomm in the
form of its lost ability to maintain and pursue a relation-
ship with Empire Beef, one of its major customers. See
2
Barry and Leacy are Australian citizens who live and work in
the United States under work visas.
8 No. 02-4001
Roland Machinery, 749 F.2d at 387; Preferred Meal Sys-
tems, 557 N.E.2d at 516-17.
III. CONCLUSION
For the foregoing reasons, we AFFIRM the district
court’s grant of a preliminary injunction.
A true Copy:
Teste:
________________________________
Clerk of the United States Court of
Appeals for the Seventh Circuit
USCA-02-C-0072—5-2-03