Industrial Packaging Supplies, Inc. v. Channell et al

Filing 43

MEMORANDUM Opinion and Order. Signed by the Honorable Manish S. Shah on 6/4/2018: Defendants' motion to dismiss 18 is granted in part, denied in part. Plaintiff's DTSA and ITSA claims are dismissed without prejudice. [For further detail see attached order.] Notices mailed. (psm, )

UNITED STATES DISTRICT COURT
FOR THE NORTHERN DISTRICT OF ILLINOIS
EASTERN DIVISION
INDUSTRIAL PACKAGING SUPPLIES, INC.,
Plaintiff,

No. 18 CV 165

v.
MATTHEW CHANNELL and AXIS
PACKAGING, LLC,

Judge Manish S. Shah

Defendants.
MEMORANDUM OPINION AND ORDER
Defendant Matthew Channell worked for plaintiff Industrial Packaging
Supplies as a sales representative. After Industrial Packaging terminated his
employment, Channell went to work for a competitor, defendant Axis Packaging.
Industrial Packaging now brings claims—seeking injunctive relief and damages—
against Channell and Axis. Industrial Packaging alleges that both Channell and
Axis misappropriated its trade secrets, Channell breached his employment contract,
Axis tortuously interfered with that contract, and Channell breached his duty of
loyalty. Defendants move to dismiss. For the following reasons their motion is
granted in part, denied in part.
I.

Legal Standards
To survive a motion to dismiss under Federal Rule of Civil Procedure

12(b)(6), a complaint must contain factual allegations that plausibly suggest a right
to relief. Ashcroft v. Iqbal, 556 U.S. 662, 677–78 (2009). The court must construe all
factual allegations as true and draw all reasonable inferences in the plaintiff's

favor, but the court need not accept legal conclusions or conclusory allegations. Id.
at 678–79.
II.

Background
Industrial Packaging hired Matthew Channell as a sales representative in

Chicago in October 2016. [1] ¶¶ 3, 6.1 Throughout his employment, Industrial
Packaging provided Channell with training, support, and assistance to generate
business and service new customers. Id. ¶ 7. Channell worked closely with John
England, the Division Sales Manager, to help establish Industrial Packaging’s
presence in the Illinois market. Id. ¶¶ 38–39. Through their roles, both Channell
and England had extensive knowledge of Industrial Packaging’s business activities,
customers, and related proprietary information. Id. ¶ 40. Channell had access to
Industrial Packaging’s confidential information and trade secrets, including

its

customers’ identities, contact information, business and product needs, purchasing
history, and profit margins—as well as access to Industrial Packaging’s internal
business metrics, profit and loss responsibility, and proprietary designs. Id. ¶¶ 41,
43, 104. This information was not public, and Industrial Packaging took measures
to keep it secret, making it available only to key employees and requiring employees
to use password-protected computer systems. Id. ¶¶ 105–06.
Industrial Packaging required its employees to sign a nondisclosure,
nonsolicitation, and noncompetition agreement. Id. ¶¶ 9, 53, 56. In signing his
agreement, Channell agreed not to use or disclose Industrial Packaging’s

1

Bracketed numbers refer to entries on the district court docket.

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confidential, proprietary, and trade secret information, including the company’s
“methods of operation, names and contact information of customers and potential
customers, information related to customers and potential customers (including
business needs, purchasing history, costs, profit margins, etc.), price lists, profit
margins, financial information and projections, route books, personnel data, and
similar information” for eighteen months after his termination. Id. ¶ 46. Channell
also promised, in Section 2 of the agreement, to refrain from soliciting Industrial
Packaging customers for eighteen months after his termination. Id. ¶¶ 47–48; [1-1]
at 3. Section 5 of the agreement prohibited Channell from engaging in activities
that were competitive with Industrial Packaging in a similar employment capacity
anywhere in Illinois. [1] ¶ 49. Industrial Packaging fully performed its contractual
obligations to Channell. Id. ¶ 134.
Like Channell, England and his manager at Industrial Packaging, Geordy
Davidson, signed similar agreements. Id. ¶¶ 45, 53, 56. On April 17, 2017, after
resigning from Industrial Packaging but before his agreement had expired,
Davidson established DBE Solutions, which offered packaging and other similar
services. Id. ¶¶ 57–59, 61. The next day, England resigned from Industrial
Packaging and at some point thereafter began working for DBE. Id. ¶¶ 55–57. In
September, England visited one of Industrial Packaging’s California clients on
behalf of DBE. Id. ¶¶ 63, 66. Davidson had worked with this customer while he was
employed with Industrial Packaging. Id. ¶ 64. Davidson formed Axis, a commonly
owned and controlled affiliate of DBE, one month after that meeting, in October

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2017. Id. ¶¶ 61–69. Like Industrial Packaging, Axis sold industrial packaging
supplies. Id. ¶ 3. Davidson served as the president of Axis, and England was the
general manager. Id. ¶¶ 70–71. After the California-client meeting, DBE or Axis
began to sell packaging to that customer. Id. ¶ 67.
In the meantime, Channell became disengaged from his sales efforts at
Industrial Packaging, and Industrial Packaging terminated his employment on
October 13, 2017. Id. ¶¶ 14, 72. Channell began working for Axis as a sales
representative in November 2017.2 Id. ¶¶ 15, 73–75.3
III.

Analysis
Industrial Packaging brings claims for trade secret misappropriation against

both Channell and Axis and a claim for breach of duty of loyalty against Channell.
It also brings a claim for breach of contract against Channell and one for tortious
interference with contract against Axis.
Industrial Packaging both alleges that Channell began working for Axis in November
2017—citing Channell’s LinkedIn page, id. ¶ 73—and that it suspects that he may have
started working with Axis before he was terminated from Industrial Packaging. Id. ¶ 75.
Though facts are viewed in the light most favorable to the nonmoving party, Industrial
Packaging’s unsupported suspicion that Channell was working with Axis while he was
employed at Industrial Packaging need not be taken as true.
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Industrial Packaging also alleges the following upon information and belief: Axis founders
England and Davidson pursued Channell to join Axis prior to his termination and may
have directed him to remove and retain Industrial Packaging’s confidential information and
trade secrets. Id. ¶ 16. Channell misappropriated its trade secrets while he was still
employed. Id. ¶¶ 83, 110. While later working for Axis, Channell solicited Industrial
Packaging clients using Industrial Packaging’s customer lists and confidential information,
shared that information with other Axis employees, and Axis used this knowledge of
Industrial Packaging’s customers to compete unfairly in the marketplace. Id. ¶¶ 19, 82–84.
Davidson used confidential information to set up England’s meeting with Industrial
Packaging’s California customer and later used the profits from that venture to formally
establish Axis. Id. ¶¶ 65, 68. Finally, Industrial Packaging also makes the conclusory
allegation that Axis was fully aware of and condoned Channell’s misconduct. Id. ¶ 87. For
the reasons discussed below, these allegations need not be accepted as true.

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A.

Trade Secret Misappropriation

The Defend Trade Secrets Act and the Illinois Trade Secrets Act prohibit the
misappropriation of trade secrets. 18 U.S.C. § 1836(b)(3); 765 ILCS 1065/3–4.
Misappropriation includes acquisition of a trade secret by improper means and
disclosure or use of a trade secret without express or implied consent. 18 U.S.C.
§ 1839(5);

765

ILCS

1065/2(b).

Improper

means

includes

“theft,

bribery,

misrepresentation, breach or inducement of a breach of a duty to maintain secrecy,
or espionage through electronic or other means.” 18 U.S.C. § 1839(6); see also 765
ILCS 1065/2(a) (using a similar definition).
Channell and Axis argue that Industrial Packaging has not alleged that they
improperly acquired its trade secrets or that they have used or disclosed any of its
trade secrets. I agree. Though it makes conclusory allegations and assertions
prefaced with “upon information and belief,” Industrial Packaging has not alleged
any facts to support its contention that defendants misappropriated its trade
secrets. A complaint may make allegations upon information and belief where the
facts are inaccessible to the plaintiff, but it must also plead reasonable grounds for
its suspicions. Bankers Trust Co. v. Old Republic Ins. Co., 959 F.2d 677, 683–84 (7th
Cir. 1992). Industrial Packaging alleges, on information and belief, that Axis
pursued Channell prior to his termination, that it may have directed him to remove
its trade secrets and confidential information, that Channell did so, and that he
then used that information while working at Axis to attract customers. But
Industrial Packaging does not explain why this information is unavailable to it, nor

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does it plead reasonable grounds for its suspicions. Industrial Packaging has alleged
that Channell and other Axis employees used to work at Industrial Packaging,
where they had access to its trade secrets and that Axis offers the same services and
targets the same clients as Industrial Packaging. But this is not enough to justify
its otherwise unsupported suspicions that the defendants used or disclosed the
information they had access to while working for Industrial Packaging.4
Industrial Packaging has also failed to allege that defendants improperly
acquired its trade secrets. Although Industrial Packaging repeatedly asserts that
Channell had access to its trade secrets in the course of his employment, it argues
in its response brief that Channell acquired its trade secrets through improper
means. Industrial Packaging alleges in its complaint that Channell inexplicably lost
interest in his work in the time leading up to his termination and that it suspects
this was because Channell was already planning to join Axis. As support, Industrial
Packaging points to the fact that Channell had worked with England in the past
and reached out to him to get a job at Axis after his termination. This, Industrial
Packaging argues, shows that even though Channell was lawfully employed by
Industrial Packaging when he acquired the trade secrets, he was secretly working
for Axis and so actually obtained the trade secrets through improper means. But the
complaint, as it is currently pled, does not support this contention. Instead, it

Industrial Packaging’s allegation that England, on behalf of DBE, met with one of
Industrial Packaging’s customers—and that Davidson used Industrial Packaging’s trade
secret to set up that meeting—is not attributable to Channell or Axis. Indeed, Axis did not
exist at that time. [1] ¶¶ 63, 68–69.

4

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clearly alleges that Industrial Packaging intentionally provided Channell with
access to its trade secrets because they were necessary for him to do his job.
Industrial Packaging’s suspicion that Channell had ulterior motives need not be
accepted as true. And its allegations that Channell knew England and lost interest
in his work toward the end of his employment do not mean that Channell acquired
secrets improperly, because Industrial Packaging still authorized Channell’s
employment.
In addition to wrongful acquisition or use of a trade secret, both the DTSA
and ITSA also prohibit threatened misappropriation. 18 U.S.C. § 1836(b)(3)(A); 765
ILCS 1065/3(a). Defendants have not moved to dismiss Industrial Packaging’s
claims for threatened misappropriation, but a district court may dismiss a claim sua
sponte so long as there is a sufficient basis for the court’s action apparent from the
pleadings. Shockley v. Jones, 823 F.2d 1068, 1072 (7th Cir. 1987); Diedrich v. Ocwen
Loan Servicing, LLC, 839 F.3d 583, 588 n. 3. (7th Cir. 2016).
A plaintiff can state a claim for threatened misappropriation by alleging that
the defendant in fact threatened to use plaintiff’s trade secret or by alleging that he
will inevitably use them by virtue of his new position. PepsiCo, Inc. v. Redmond, 54
F.3d 1262, 1268 (7th Cir. 1995). Industrial Packaging does not allege that either
Axis or Channell explicitly threatened to use its trade secrets. Nor does it allege
facts that would support a claim based on inevitable disclosure. “[T]he mere fact
that a person assumed a similar position at a competitor does not, without more,
make it ‘inevitable that he will use or disclose . . . trade secret information.’” Id. at

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1269 (quoting AMP Inc. v. Fleischhacker, 823 F.2d 1199, 1207 (7th Cir. 1987)).
Nothing in Industrial Packaging’s complaint regarding the nature of the trade
secrets or the level of competition between the two companies indicates that
Channell’s employment with Axis would inevitably lead him to disclose its trade
secrets. Channell could avoid using Industrial Packaging’s trade secrets by simply
not targeting Industrial Packaging clients and not using its proprietary designs,
products, or processes. See PepsiCo, 54 F.3d at 1269 (finding inevitable use where
an employee would need “an uncanny ability to compartmentalize information” to
avoid using his old employer’s trade secrets). Additionally, since Industrial
Packaging filed its complaint, Axis and Channell have informed the court that
Channell is no longer employed at Axis, further minimizing the likelihood that
Channell will inevitably use Industrial Packaging’s trade secrets in the future.
Because dismissal is without prejudice and Industrial Packaging has the
opportunity to cure any deficiencies with an amended complaint, dismissing its
claims for threatened misappropriation sua sponte at this stage is appropriate.
B.

Breach of Contract

In Illinois, the elements for a breach of contract claim are: (1) a valid and
enforceable contract, (2) substantial performance by the plaintiff, (3) breach of
contract by the defendant, and (4) resultant damages to the plaintiff. W.W. Vincent
and Co. v. First Colony Life Ins. Co., 351 Ill.App.3d 752, 759 (1st Dist. 2004).
Channell moves to dismiss Industrial Packaging’s breach of contract claim, arguing
that it has failed to allege a valid and enforceable contract because the agreement

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was not supported by adequate consideration. Though courts generally refuse to
evaluate the adequacy of consideration, because an at-will employer can terminate
the employment relationship at any time, they depart from this rule in cases
dealing with restrictive employment covenants. Curtis 1000, Inc. v. Suess, 24 F.3d
941, 945–46 (7th Cir. 1994). In those cases, there is “an irrebuttable presumption
that if the employee was fired shortly after he signed the covenant the consideration
for the covenant was illusory,” rendering the contract unenforceable. Id. at 946.
Defendants argue that Illinois courts apply a bright-line rule that employment for
less than two years is inadequate consideration. Because Industrial Packaging fired
Channell after one year of employment, defendants argue, the agreement is invalid.
Illinois appellate courts have suggested that two years of employment is
sufficient consideration and have begun to apply a two-year bright-line
requirement—at least where no additional consideration (such as bonuses or other
benefits) is alleged. See e.g. McInnis v. OAG Motorcycle Ventures, Inc., 2015 IL App
(1st) 142644, ¶¶ 23, 32, 35, 38. The Illinois Supreme Court, however, has not
embraced this bright-line rule. A federal court sitting in diversity must apply state
substantive law as it believes the state Supreme Court would if it were hearing the
issue, giving great weight to state appellate courts unless there are persuasive
reasons to believe the highest court would rule differently. State Farm Mut. Auto.
Ins. Co. v. Pate, 275 F.3d 666, 669 (7th Cir. 2001).
My prediction is that the Illinois Supreme Court would reject the bright-line
two-year rule in favor of a fact-specific approach. See Bankers Life and Casualty Co.

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v. Miller, 2015 WL 515965, 14-cv-3165, *3–4 (N.D. Ill. Feb. 6, 2015); see also Apex
Physical Therapy, LLC v. Ball, 2017 WL 3130241, 17-cv-00119-JPG-DGW, *2 (S.D.
Ill. July 24, 2017) (collecting cases); Stericycle, Inc. v. Simota, 2017 WL 4742197, 16cv-4782, *4–5 (N.D. Ill. Oct. 20, 2017). Though the Illinois Supreme Court has not
decided this particular issue, it has stressed the importance of using a fact-specific
approach in a similar context. In Reliable Fire Equip. Co. v. Arredondo, the Court
rejected the rigid tests developed by the appellate courts to determine whether an
employer has a legitimate business interest in imposing a restrictive covenant—an
inquiry necessary to determine whether the covenant is reasonable. 2011 IL 111871
¶¶ 40–43. While the factors the lower courts had used were relevant to the inquiry,
the Court stressed the importance of considering “the specific facts and
circumstances of the individual case.” Id. ¶ 43. Because the Illinois appellate courts
that have applied the two-year bright-line rule have not provided any persuasive
reason to depart from this general principle, nor any justification as to why two
years is a logical cutoff, it is doubtful that the Illinois Supreme Court would adopt
their reasoning. Because defendants make no other argument concerning the
validity of the agreement, at this stage, Industrial Packaging’s allegations are
sufficient to state a claim.
C.

Tortious Interference with Contract and Breach of the Duty of
Loyalty

In Illinois, the elements of tortious interference with contract are: “(1) the
existence of a valid and enforceable contract between the plaintiff and another; (2)
the defendant’s awareness of this contractual relation; (3) the defendant’s
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intentional and unjustified inducement of a breach of the contract; (4) a subsequent
breach by the other, caused by the defendant’s wrongful conduct; and (5)
damages.” Melrose Commons LLC v. Selective Imports, Inc., 2016 IL App (1st)
143110-U, ¶ 72. To state a claim for breach of fiduciary duty of loyalty a plaintiff
must allege: (1) that a fiduciary duty exists; (2) that it was breached; and (3) that
the breach proximately caused the plaintiff’s injury. Lawlor v. N. Am. Corp. of Ill.,
2012 IL 112530, ¶ 69. In Illinois, employees owe fiduciary duties to their employers
while they are employed, id., but there is no post-employment duty that prevents an
employee from competing with his former employer post-employment. Composite
Marine Propellers, Inc. v. Van Der Woude, 962 F.2d 1263, 1265 (7th Cir. 1992); Veco
Corp. v. Babcock, 243 Ill.App.3d 153, 160 (1st Dist. 1993). Contractual obligations,
however, may extend an employee’s duties post-termination. See Composite Marine
Propellers, 962 F.3d at 1265; see also Integrated Genomics, Inc. v. Kyrpides, 2008
WL 630605, 06-cv-6706, *10 (N.D. Ill. Mar. 4, 2008). In those cases, claims based on
“breach of fiduciary duty stand or fall with those based on contract.” Composite
Marine Propellers, 962 F.2d at 1265.
Defendants’ only arguments for dismissing Industrial Packaging’s tortious
interference and breach of loyalty claims are that because Channell was not subject
to a valid contract, Industrial Packaging has failed to allege both claims. Because
Industrial Packaging has adequately alleged the existence of a valid contract,
defendants are not entitled to dismissal of either claim on these grounds.

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D.

Preliminary Injunction

Finally, defendants move to dismiss Industrial Packaging’s claim for a
preliminary injunction. Though Industrial Packaging may be entitled to an
injunction as a remedy should it prevail, an injunction is a not an independent
cause of action. See LaSalle Nat’l Bank v. Metro. Life Ins. Co., 18 F.3d 1371, 1376
(7th Cir. 1994). The “claim” for a preliminary injunction is dismissed, and
understood instead to be a requested remedy.5
IV.

Conclusion
Defendants’ motion to dismiss [18] is granted in part, denied in part.

Plaintiff’s DTSA and ITSA claims are dismissed without prejudice.6

ENTER:
___________________________
Manish S. Shah
United States District Judge
Date: June 4, 2018

5

I denied Industrial Packaging’s separate motion for a preliminary injunction. See [35].

It is not immediately apparent from the complaint whether there is complete diversity of
the parties to support federal jurisdiction should plaintiff be unable to allege a claim under
the DTSA. Assuming that any of Axis Packaging’s member shareholders is, like Industrial
Packaging, a citizen of South Carolina for diversity purposes, the supplemental state-law
claims will be dismissed without prejudice to be pursued in state court.
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