Gemshares LLC v. Lipton et al

Filing 257

MEMORANDUM OPINION AND ORDER signed by the Honorable Matthew F. Kennelly on 7/21/2019: For the reasons stated in the accompanying Memorandum Opinion and Order, the Court grants the plaintiff's motion for a permanent injunction and for assignmen t of defendant Lipton's interest in the specified patent application [dkt. no. 193]. At tomorrow's status hearing, the Court will further discuss with counsel the preparation and submission of an appropriate form of the injunction and an order for the assignment of defendant Lipton's interest in the patent application. (mk)

IN THE UNITED STATES DISTRICT COURT
FOR THE NORTHERN DISTRICT OF ILLINOIS
EASTERN DIVISION
GEMSHARES LLC,

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Plaintiff,
vs.
ARTHUR JOSEPH LIPTON and
SECURED WORLDWIDE, LLC,
Defendants.

Case No. 17 C 6221

MEMORANDUM OPINION AND ORDER
MATTHEW F. KENNELLY, District Judge:
GemShares LLC has sued Arthur Lipton and Secured Worldwide, LLC, alleging,
among other claims, that Lipton breached a covenant not to compete by forming
Secured Worldwide to develop a product that used GemShares' intellectual property.
The Court previously ruled that Lipton is collaterally estopped from relitigating the
question of whether he breached a contractual covenant not to compete and granted
summary judgment in favor of GemShares' on Lipton's liability for breach. In light of
those rulings, GemShares has moved for equitable relief and attorney's fees.
Background
The Court assumes familiarity with its prior written decisions in this case. See
GemShares LLC v. Lipton (Motion to Dismiss Order), No. 17 C 6221, 2018 WL 827962
(N.D. Ill. Feb. 11, 2018); GemShares LLC v. Lipton (Issue Preclusion Order), No. 17 C
6221, 2019 WL 330470 (N.D. Ill. Jan. 25, 2019); GemShares LLC v. Lipton (Order on
Liability for Breach), No. 17 C 6221, 2019 WL 587392 (N.D. Ill. Feb. 13, 2019). The

following is an abridged summary of the relevant procedural history.
In June 2018, GemShares moved for partial summary judgment on count 4 of its
amended complaint, in which it alleged that Lipton breached a non-compete provision of
GemShares' operating agreement. The sole basis on which GemShares sought
summary judgment was the earlier decision of a federal district court in New York in
related litigation between Lipton and Cormac Kinney, an investor in Lipton's company
Secured Worldwide. GemShares argued that the New York court's ruling precluded
Lipton from relitigating the issue of whether he had breached the non-compete
provision.
In a written decision, the Court found that issue preclusion applied but deferred
ruling on Lipton's liability for breach of contract because neither party had adequately
addressed the other elements of the claim. Issue Preclusion Order, 2019 WL 330470,
at *5. After the parties submitted additional briefing, the Court granted summary
judgment in favor of GemShares on the claim for breach of contract. Order on Liability
for Breach, 2019 WL 587392, at *2. Lipton moved for reconsideration of that decision, a
motion the Court denied. Dkt. no. 206.
GemShares has moved for equitable relief on its breach-of-contract claim.
Specifically, it asks the Court to permanently enjoin Lipton and Secured Worldwide from
violating the non-compete provision and to assign to GemShares Lipton's interest in a
particular patent application. It has also requested an award of attorney's fees. For the
reasons stated below, the Court grants the motions for the injunction and assignment of
patent rights but declines to rule on the fee request at this stage.

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Discussion
A.

Permanent injunction
A party seeking a permanent injunction must prove four elements: "(1) that it has

suffered an irreparable injury; (2) that remedies available at law, such as monetary
damages, are inadequate to compensate for that injury; (3) that, considering the
balance of hardships between the plaintiff and defendant, a remedy in equity is
warranted; and (4) that the public interest would not be disserved by a permanent
injunction." Monsanto Co. v. Geertson Seed Farms, 561 U.S. 139, 156–57 (2010).
1.

Enforceability

Lipton first argues that the non-compete provision of the GemShares operating
agreement is unenforceable because it is overly broad. The provision states:
[A]ll Interest Holders shall not, until the dissolution of the Company or until
the first anniversary of the effective date of termination of their respective
status as an Interest Holder, engage in, acquire or own any interest in, or
assist any person who or which, directly or indirectly through any other
person, engages in any business, enterprise, trade, profession or
employment that is competitive with the Company and is related to any
Gemstone Financial Product, as defined herein. For purposes hereof, a
business, enterprise, trade, profession or employment is competitive with
the Company if it pursues and conducts, in whole or substantial part, the
same purpose and business as the Company . . . .
GemShares Operating Agreement, Ex. A to Chaban Decl., dkt. no. 84-2, § 3.02(a).
Although Illinois law generally disfavors restrictive covenants in employment
agreements, this policy "is best understood as resting on a concern that employees can
be tricked into making promises that seem of small detriment but later prove to be
disabling." Hess Newmark Owens Wolf, Inc. v. Owens, 415 F.3d 630, 634 (7th Cir.
2005). For this reason, Illinois "is quite willing to enforce covenants executed by
entrepreneurs in order to form or sell a business." Id. Because GemShares alleges
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that Lipton breached the non-compete clause through his entrepreneurial activities,
GemShares must show that it has a "protectable business interest which has been
injured" by Lipton's breach and that the restraint on competition "is reasonable as to
time, geographical area and scope of prohibit[ed] business activities." Cent. Water
Works Supply, Inc. v. Fisher, 240 Ill. App. 3d 952, 958, 608 N.E.2d 618, 622–23 (1993).
Lipton first argues that GemShares does not have a protectable interest. He
contends that GemShares "does not have any actual business; it has never had any
revenue, does not have any customers and has never established or created" any
financial or commercial products. Lipton's Resp. Br., dkt. no. 202, at 9. But Lipton does
not cite any authority suggesting that protectable interests can exist only if a business
has brought a product to market. Rather than turning on such a bright-line rule,
"whether a legitimate business interest exists is based on the totality of the facts and
circumstances of the individual case." Reliable Fire Equip. Co. v. Arredondo, 2011 IL
111871, ¶ 43, 965 N.E.2d 393, 403. GemShares has pointed to evidence that Lipton's
competition interferes with its ability to recruit investors and business partners. And, as
the district court in the Kinney case found, Lipton intended to use GemShares' patented
processes for creating baskets of diamonds to develop his competing product. See
Secured Worldwide, LLC v. Kinney, No. 15 Civ. 1761, ¶ 62 (S.D.N.Y. Dec. 15, 2016).
Under these circumstances, GemShares has a protectable interest in the enforcement
of the non-compete clause.
Next, Lipton contends that the non-compete provision is unenforceable because
it does not contain a geographic limitation. "Although a lack of geographic limits is not
per se unreasonable, the complete bar on competition needs to be reasonably related

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to the promisee's interest in protecting his own business." Liautaud v. Liautaud, 221
F.3d 981, 987 (7th Cir. 2000). GemShares has pointed to evidence that its business
plan involves global financial markets, and any breach of the non-compete clause—no
matter where it occurs—therefore risks injury to the company. The lack of a geographic
limitation thus does not render the non-compete provision unenforceable.
Lipton also argues that although the non-compete provision lasts only for one
year after a member's withdrawal, GemShares artificially extended that timeline by
making him a passive member. He contends that this caused the non-compete
agreement to extend indefinitely. But Lipton does not explain why he could not simply
withdraw of his own accord, and the Court therefore concludes that the non-compete
clause is not unreasonable with respect to its duration. See Zabaneh Franchises, LLC
v. Walker, 2012 IL App (4th) 110215, ¶¶ 21, 23, 972 N.E.2d 344, 350–51 (finding
reasonable a non-compete provision that for lasted two years after the cessation of
employment).
2.

Unclean hands

Lipton argues that even if the non-compete provision is reasonable, GemShares
is barred from enforcing it under the doctrine of unclean hands. "The doctrine applies if
the party seeking equitable relief is guilty of misconduct, fraud or bad faith toward the
party against whom relief is sought if that misconduct is connected with the transaction
at issue." Coexist Found., Inc. v. Fehrenbacher, 865 F.3d 901, 908 (7th Cir. 2017)
(quoting Long v. Kemper Life Ins. Co., 196 Ill. App. 3d 216, 219, 553 N.E.2d 439, 441
(1990)). Lipton contends that GemShares acted in bad faith by waiting to move for an
injunction until after he had already invested significant time and energy in developing

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his commercial product. This bad-faith delay, he argues, precludes granting equitable
relief.
Lipton has not shown that GemShares engaged in the kind of affirmative
misconduct that would prevent it from obtaining a permanent injunction. GemShares
submitted letters it sent to Lipton in 2014 and 2017, as well as deposition testimony
from Lipton and others, that reflect long-term efforts to negotiate an agreement short of
litigation. Nothing other than Lipton's speculation suggests that these efforts were
undertaken in less than good faith. The Court concludes that Lipton has failed to meet
his burden to prove unclean hands. See Brown v. Ryan, 338 Ill. App. 3d 864, 875, 788
N.E.2d 1183, 1192 (2003) ("The party making the contention must prove that the other
party is, in fact, guilty of fraud or bad faith toward those making the contention.").
3.

Irreparable harm

Lipton next argues that GemShares cannot establish that it has been irreparably
harmed. "To say that an injury is irreparable means that the methods of repair
(remedies at law) are inadequate." Fleet Wholesale Supply Co. v. Remington Arms
Co., 846 F.2d 1095, 1098 (7th Cir. 1988). And a remedy at law is inadequate if "it is not
practicable to calculate damages to remedy" the kind of harm that the plaintiff has
suffered. Foodcomm Int'l v. Barry, 328 F.3d 300, 304 (7th Cir. 2003).
GemShares points to section 12.03 of the operating agreement, which states,
It is expressly stipulated and agreed that the payment of damages will not
in all cases fully compensate the Company against further losses and
damages in the event of breach or violation of . . . Sections 3.02, 3.03 and
3.04 of Article III . . . which shall render the Company without an adequate
remedy at law. Therefore, the aforesaid provisions may be enforced by
the Company by negative or affirmative injunctive relief, whether
permanent, preliminary, or both, granted by any court of competent
jurisdiction . . . .
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GemShares Operating Agreement, Ex. A to Chaban Decl., dkt. no. 84-2, § 12.03. The
Seventh Circuit has held that parties may stipulate to the adequacy of particular
remedies if there is "no reason to doubt either the propriety or adequacy of the remedial
measures" to which the parties agreed. Kowalski v. Chi. Tribune Co., 854 F.2d 168,
171 (7th Cir. 1988); cf. Owens, 415 F.3d at 634 ("An agreement ex ante among the
entrepreneurs that these [non-compete] covenants do fit their needs . . . is the sort of
exchange that any jurisdiction must enforce if it wants to promote the formation and
success of new businesses.").
GemShares also argues that monetary relief is inadequate in the particular
context of Lipton's breach. It relies on the declaration of Daniel Gramza, one of five
members of GemShares, who attests that Lipton's violations have affected the
company's "ability to conduct and grow its business." Gramza Decl., dkt. no. 196–1,
¶ 8. In particular, Gramza states that Lipton's competitive conduct prevents GemShares
from recruiting potential investors and business partners, and that the existence of a
competing product creates market confusion and interferes with the efforts to create
interchangeable financial and commercial products. Because there is no practicable
way to calculate the financial harm caused by this competition, GemShares has
sufficiently established that a remedy at law is inadequate. See, e.g., Girl Scouts of
Manitou Council, Inc. v. Girl Scouts of USA, Inc., 549 F.3d 1079, 1095 (7th Cir. 2008)
(noting that one "circumstance leading to an inadequate legal remedy is when the
nature of the loss incurred by the plaintiff makes it difficult to calculate damages").
Lipton's counterarguments are unavailing. First, he contends that GemShares'
delay in moving for injunctive relief belies its claim of irreparable harm—in other words,

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the fact that it did not immediately seek to enjoin Lipton proves that its business
interests were not at risk. In particular, he emphasizes that GemShares did not file a
motion for a preliminary injunction at the outset of the case. But during that time period,
GemShares continually negotiated with Lipton in an effort to resolve their dispute. As
the Second Circuit has noted, "the plaintiff's decision to try to bring a speedy resolution
to the entire matter rather than expend its resources on temporary relief does not mean
that the plaintiff had no interest in a speedy resolution of its claims against the
defendants." Louis Vuitton Malletier S.A. v. LY USA, Inc., 676 F.3d 83, 104 n.20 (2d
Cir. 2012). As in Louis Vuitton, GemShares' decision not to immediately file suit and
move for a preliminary injunction and to instead attempt to negotiate a compromise
does not disprove irreparable harm.
Second, Lipton contends that his breach of the non-compete clause has not
caused GemShares to lose any potential investors or business partners. He points to
text messages allegedly sent by an individual who was attempting to broker a deal
between GemShares and the Singapore Diamond Investment Exchange. Those text
messages, Lipton argues, show that GemShares' own reticence about Lipton's ongoing
breach—not any concerns on the part of Singapore Diamond—was the reason the deal
fell through. But even if the Court credited this evidence, it shows only that the failure of
one particular deal was not directly attributable to Lipton's breach. It does not suffice to
refute the more general contention that Lipton's competitive activities make it more
difficult for GemShares to secure investors and partners for its business.
Third, Lipton argues that GemShares is not harmed by his competitive activities
because it does not make (and has no plans to make) a commercial product like the

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one marketed by Lipton through Secured Worldwide. He points to promotional
materials produced by GemShares that make no mention of a commercial product. But
the fact that GemShares did not publicize its intent to create a commercial product does
not show that it does not intend to so. This evidence is insufficient to refute the sworn
statements by Daniel Gramza and the deposition testimony of GemShares member
Victor Feldman that developing financial and commercial products in tandem was
central to GemShares' business plan from the beginning.
For these reasons, the Court concludes that GemShares has satisfied the
requirements of irreparable harm and inadequacy of legal remedies. Although Lipton
does not contest the remaining factors that apply to a motion for a permanent injunction,
the Court finds that they are satisfied as well. GemShares has shown that the balance
of hardships tips in its favor in light of the risk to its business development and Lipton's
ability to find other employment as long as he does not compete directly with
GemShares. And entering a permanent injunction in this case would serve the public's
interest in enforcing covenants that "promote the formation and success of new
businesses." Owens, 415 F.3d at 634. GemShares has thus met its burden to show
that a permanent injunction is appropriate.
4.

Applicability to Secured Worldwide

Lipton argues that the Court may not enjoin Secured Worldwide because the
company is not a party to GemShares' breach-of-contract claim. But Federal Rule of
Civil Procedure 65(d)(2)(C) authorizes the Court to enjoin any "persons who are in
active concert or participation with" the parties or the parties' officers, agents, servants,
employees, and attorneys. It is undisputed that Lipton owns and operates Secured

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Worldwide. The permanent injunction will therefore bar Secured Worldwide from
breaching the non-compete clause to the same extent that it bars Lipton from doing so,
and the fact that Secured Worldwide is not a party to the suit does not pose an obstacle
to the requested injunction.
B.

Assignment of rights in patent application
In addition to the permanent injunction, GemShares requests that the Court

assign it Lipton's rights in a patent application entitled "Secure Diamond Smart Cards
and Exchange Systems Therefor." See U.S. Patent Application No. 14/619,633,
Publication No. 2015/0223580 (published Aug. 13, 2015). GemShares relies on section
3.04(b)(1) of the operating agreement, which requires Lipton to assign to GemShares
his "right, title and interest in and to any and all Creations . . . including, but not limited
to, assignment as an inventor with respect to any patent or application for a patent."
GemShares Operating Agreement, Ex. A to Chaban Decl., dkt. no. 84-2, § 3.04(b)(1). A
remedy of specific performance of this provision is appropriate "only when damages
constitute an inadequate remedy." TAS Distrib. Co. v. Cummins Engine Co., 491 F.3d
625, 637 (7th Cir. 2007).
Lipton points out that that the operating agreement requires him to assign his
interest in his creations only during his "active involvement period," and he argues that
the agreement is ambiguous in defining when that period begins. He cites section
3.04(b)(3), which indicates that the period lasts "during and within two years after the
withdrawal from the Company." GemShares Operating Agreement, Ex. A to Chaban
Decl., dkt. no. 84-2, § 3.04(b)(3). Lipton contends that this provision can be reasonably
interpreted to mean that the active involvement period starts only upon withdrawal. But

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this suggested interpretation defies common sense and the contractual language.
Although the phrasing of section 3.04(b)(3) is not as transparent is it might have been,
the term "active involvement period" clearly includes the period of Lipton's active
membership. And the word "during" in the phrase "during and within two years" must be
interpreted to refer to the period of membership because Lipton's contrary interpretation
would make "during" redundant with the word "within." See J.B. Esker & Sons, Inc. v.
Cle-Pa's P'ship, 325 Ill. App. 3d 276, 285, 757 N.E.2d 1271, 1279 (2001) ("Contract
terms and clauses should not be disregarded as surplusage, as it is presumed that
language is not employed idly.").
Lipton next argues that GemShares' requested relief is barred by laches. He
contends that GemShares waited four years to file suit and refused to move for a
preliminary injunction to allow Lipton to continue developing his commercial product,
only to later reap the benefits of his investment. Lipton argues that this delay reflects a
lack of diligence that prevents GemShares from seeking specific performance of the
contract. See In re Jamari R., 2017 IL App (1st) 160850, ¶ 60, 82 N.E.3d 109, 126
("The existence of laches depends on whether, under all circumstances of a particular
case, a plaintiff is chargeable with want of due diligence in failing to institute
proceedings before he did." (internal quotation marks omitted)). But Lipton has not
shown that GemShares was insufficiently diligent in asserting its rights. As the Court
previously noted, GemShares sought to negotiate its dispute with Lipton over a period
of years, and it contends that it filed suit only after those negotiations fully broke down.
The Court concludes that the remedy of specific performance of Lipton's promise to
assign his rights in his patent application is appropriate. For the reasons the Court

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previously mentioned, there is no adequate remedy at law for Lipton's ongoing breach
of contract. Because his application for the patent is part of the conduct that violates
the non-compete provision, the damages associated with that conduct are difficult to
calculate and specific performance is therefore warranted. See TAS Distrib. Co., 491
F.3d at 637.
Finally, Lipton argues that if the Court decides to order him to assign his interests
in the patent application to GemShares, it should also order GemShares to compensate
him for the value of his investments that produced the patent. Lipton relies on the
Illinois Supreme Court's decision in Fitzpatrick v. Allied Contracting Co., 24 Ill. 2d 448,
182 N.E.2d 183 (1962), in which the court conditioned its award of specific performance
on the plaintiff's payment of the value of improvements that the defendant had made.
But Fitzpatrick does not support the claim that such a condition is appropriate in
this case. First, Fitzpatrick was based on common-law rules of equity relating to
improvements of real property. Lipton points to no comparable equitable principles
governing the intellectual property interests at issue in this case. Second, the court in
Fitzpatrick explained that compensation for specific performance is appropriate "where
improvements of a permanent character are made in good faith by one in possession,
believing himself to be a bona fide purchaser . . . and under circumstances justifying
such a belief . . . ." Id. at 456, 182 N.E.2d at 187. Here, Lipton signed an operating
agreement that expressly required him to assign his interest in the patent application to
GemShares. He had no reasonable basis to believe that he was free to invest his
money in the development of a competing product and keep the resulting intellectual
property. The Court therefore declines to impose the requested condition on its order of

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specific performance.
C.

Attorney's fees
Finally, GemShares has moved for attorney's fees under section 14.04 of the

operating agreement. Because the parties have not yet litigated GemShares' remaining
claims, the Court will address this request at the conclusion of the litigation.
Conclusion
For the foregoing reasons, the Court grants the plaintiff's motion for a permanent
injunction and for assignment of defendant Lipton's interest in the specified patent
application [dkt. no. 193]. At tomorrow's status hearing, the Court will further discuss
with counsel the preparation and submission of an appropriate form of the injunction
and an order for the assignment of defendant Lipton's interest in the patent application.

________________________________
MATTHEW F. KENNELLY
United States District Judge
Date: July 21, 2019

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