Callahan v. LG BALFOUR

534 N.E.2d 565, 179 Ill. App. 3d 372, 128 Ill. Dec. 383, 1989 Ill. App. LEXIS 113

• Court: Appellate Court of Illinois
• Decided: February 3, 1989
• Docket: 86-2138
• Status: Published

Opinions

JUSTICE PINCHAM

delivered the opinion of the court:

Plaintiff, Bernard Callahan (Callahan), brought this action against defendant, L.G. Balfour company (Balfour), for breach of contract and fraud. Balfour filed a counterclaim against Callahan for breach of contract. The trial court granted Balfour summary judgment on Callahan’s breach of contract claim against Balfour. Callahan’s claim against Balfour for fraud and Balfour’s counterclaim against Callahan for breach of contract were jointly tried before a jury. The jury rendered a verdict against Callahan on his fraud claim and a verdict on behalf of Balfour on its counterclaim against Callahan for breach of contract. The trial court denied Callahan’s motions for judgment notwithstanding the verdict and a new trial. Callahan appeals. We reverse.

Callahan’s breach of contract claim against Balfour alleged that Balfour, a manufacturer of high school rings, diplomas and other school items, wrongfully terminated Callahan’s employment with Balfour as a sales representative and that Balfour owed Callahan $186,686 in commissions and equity payments that Callahan earned as a sales representative. Balfour defended on the grounds that Calla-ban’s employment contract was terminable at will, that Callahan accepted employment with Balfour’s competitors within two years after he was discharged from Balfour, that a covenant not to compete in Callahan’s employment contract prohibited him from doing so, and that a clause in the covenant not to compete allowed Balfour to retain Callahan’s commissions and equity payments as liquidated damages for Callahan’s breach of his employment contract.

Callahan’s fraud claim against Balfour alleged that Balfour induced Callahan to continue working as a Balfour sales representative by promising Callahan that none of his accounts would be reassigned to other salesmen without his consent when Balfour knew at that time it made the promise to Callahan that Balfour had already reassigned three of Callahan’s major accounts to two new sales representatives.

Balfour’s breach of contract counterclaim against Callahan alleged that Callahan owed Balfour $36,431 for school rings and other school items which were advanced to Callahan by. Balfour.

The trial court granted summary judgment on behalf of Balfour on Callahan’s breach of contract claim based on the covenant not to compete in Callahan’s employment contract.

The pertinent facts adduced at trial on Callahan’s fraud claim against Balfour and Balfour’s breach of contract counterclaim against Callahan follow. In 1955, Callahan began working as a regional sales representative in Chicago for Balfour. In 1979, Balfour negotiated tentative employment contracts with prospective regional representatives Thomas Young and James Coleman. As a condition of accepting employment at Balfour, Young required the assignment to him of two accounts, the Morton East and Morton West High Schools, which were then assigned to Callahan. As a condition of accepting employment at Balfour, Coleman insisted that the Carl Sandberg High School account, which was also then assigned to Callahan, be assigned to him.

Balfour maintained at all times that it would not seek to reassign any of Callahan’s active accounts or the inactive accounts upon which Callahan was “aggressively calling.” On July 16, 1979, and September 15, 1979, and numerous other occasions, Balfour assured Callahan that none of his accounts would be reassigned without his consent. However, prior to September 15, 1979, Balfour reassigned Callahan’s Morton East and Morton West accounts to Young and Callahan’s Sandberg account to Coleman. Callahan had constantly called upon these schools in recent years, but had lost bids to sell rings to them. Balfour complained that Callahan’s coverage of these schools was inadequate, but only after Balfour terminated Callahan’s employment in March 1980. Within two years of his discharge from Balfour, Callahan worked for two of Balfour’s competitors.

I

Callahan first contends on appeal that the trial court erred in granting summary judgment on behalf of Balfour on counts II through V of Callahan’s complaint. Counts II through V stated a claim of breach of the employment contract and sought damages totalling $186,686, which Callahan alleged he earned in commissions and equity payments. Balfour argued that Balfour was not liable to Callahan for the commissions and equity payments because Callahan breached a covenant in his employment contract not to compete by working for two of Balfour’s competitors within two years after his discharge from Balfour, and therefore, by reason of a liquidated damages provision contained in the covenant not to compete, Balfour contended that Callahan forfeited his commissions and equity payments.

The covenant not to compete in Callahan’s employment contract states:

“In the event of the termination of this Contract for any reason, the Regional Representative agrees that for a period of two (2) years after such termination, he will not directly or indirectly, for himself, or as an agent of, or in behalf of, or in conjunction with any person, firm association, or corporation, sell or solicit orders for any other merchandise of the kind or character manufactured, or sold by Balfour within the territory that had been assigned to the Regional Representative. In addition to any equitable remedies to which Balfour may be entitled, Balfour may withhold as liquidated damages any sums that may be due from Balfour to the Regional Representative.”

In Donow v. Board of Trustees (1974), 21 Ill. App. 3d 139, 314 N.E.2d 704, the court considered whether the defendant was entitled to withhold plaintiff’s paychecks as liquidated damages. The defendant argued that the money withheld from the plaintiff’s paychecks was liquidated damages. The defendant argued that the money withheld from plaintiff’s paychecks represented a penalty for the plaintiff’s violations of the university’s traffic rules. The court stated:

“First, there is no sum certain stipulated for specific offenses. *** Liquidated damages must generally be for a sum certain for a specified breach. [Citation.] Secondly, liquidated damages are usually considered to be paid in lieu of performance and are not specifically intended to secure performance of the provisions. ***

Under the circumstances *** the assessments section is the equivalent to a penalty clause. The courts of Illinois lean toward this construction of provisions of this sort *** and rather treat such clauses as penalties which will not be enforced, the aggrieved party being able to recover actual damages only.” Donow v. Board of Directors (1974), 21 Ill. App. 3d 139, 148, 314 N.E.2d 704.

The aforementioned covenant not to compete in the case at bar provides that Balfour “may withhold as liquidated damages any sums that may be due” to Balfour if the regional representative, Callahan, breaches the covenant. Callahan earned commissions on orders for rings which he sold for Balfour. Callahan also earned equity payments under a program which provided for the orderly transfer of territory from a retiring regional representative to a new regional representative with a percentage of the successor representative’s commissions credited to the retiring representative’s commissions. The commissions and equity payments could vary significantly depending on the number of orders the regional representative placed and the date the accounts were reassigned. Thus, the liquidated damages provision failed to state a sum certain to be forfeited. Additionally, the liquidated damages were not assessed in lieu of Callahan’s performance, but were specifically intended to prevent Callahan from accepting employment with Balfour’s competitors.

For a liquidated damages provision of a covenant not to compete to be enforceable, the damages resulting from breach of the covenant not to compete must be difficult to calculate and the amount of the fixed damages must be a reasonable forecast of the damage likely to occur. Both elements must be present. Otherwise, the provision will be construed as a penalty. Bauer v. Sawyer (1956), 8 Ill. 2d 351, 359.

The amount of commissions and equity payments Balfour owed to Callahan varied with the number of orders Callahan and his successor placed, rendering the damages difficult to determine. However, for the liquidated damages provision of the covenant not to compete to be enforceable, the amount of fixed damages which Balfour set forth in the covenant not to compete must also be a reasonable forecast of the damages likely to occur from Callahan’s employment with Balfour’s competitors.

In Bauer, the partnership agreement provided that when a physician left the partnership the remaining partners would purchase the departing physician’s interest at a certain rate, which rate would vary according to whether the physician’s departure was voluntary or involuntary. The agreement further provided that a physician who breached the covenant not to compete would forfeit, as liquidated damages, any forthcoming sums due him. The court held that this liquidated damages provision was a penalty and therefore unenforceable. The medical partnership was required to remit to the departing physician his remaining interest in the partnership.

Likewise, in the instant case the variation in the amount of commission and equity payments which could enure to Balfour as damages rendered the liquidated damages provision ineffective as a reasonable forecast of the actual damages Balfour would suffer from Callahan’s breach of the covenant not to compete.

Illinois courts encourage fair competition in business and abhor restraints on trade, and covenants in employment contracts not to compete are carefully scrutinized. A restrictive covenant may be held enforceable if the time limit and geographical scope are reasonable, if confidential information or trade secrets are involved, and if the restriction is reasonably necessary for the protection of a legitimate business interest. (Image Supplies, Inc. v. Hilmert (1979), 71 Ill. App. 3d 710, 713, 390 N.E.2d 68.) Only two such business interests have been recognized by the courts, a near permanent customer relationship and confidential information. Lincoln Towers Insurance Agency v. Farrell (1981), 99 Ill. App. 3d 353, 425 N.E.2d 1034.

Neither interest is present in the instant case. The evidence established that many salesmen competed to sell rings to schools that were assigned to Callahan and that a salesman who won at a school one year could lose the bid to a competitor at that school the next year. Balfour, therefore, cannot persuasively claim that it enjoyed a near permanent customer relationship with any school that was assigned to Callahan.

Balfour’s claim that Callahan possessed confidential information for which Balfour required the protection of a restrictive covenant is fallacious. The names and addresses of Balfour’s high school customers were generally known and readily ascertainable by Balfour’s competitors and therefore certainly were not confidential. Neither were Balfour’s prices confidential, since they were determined by the regional representative and could be obtained by anyone who contacted and asked the schools.

Neither can Balfour be said to have a protectable business interest in Callahan’s familiarity with the high schools assigned to Callahan. A salesman’s knowledge of or familiarity with customers is very similar to his personal skills and therefore cannot be considered the property or protectable interest of his employer. Lincoln Towers Insurance Agency v. Farrell (1981), 99 Ill. App. 3d 353, 425 N.E.2d 1034.

Callahan contends that the covenant not to compete is overly restrictive and unduly burdensome. We agree. The geographic scope of the covenant, Chicago and seven surrounding counties, if enforced, would force Callahan to find a new home beyond the geographical area or forfeit his commissions in order to continue in the only profession he has known for 30 years. Such a result does not involve a minor inconvenience for Callahan, especially when balanced against the minuscule benefit attendant to Balfour. McCormick v. Empire Accounts Service, Inc. (1977), 49 Ill. App. 3d 415, 364 N.E.2d 420.

For the foregoing reasons, we conclude that the trial court erred in granting Balfour summary judgment on Callahan's breach of contract claim on the basis of the covenant not to compete in the employment contract. We therefore reverse the summary judgment.

II

Callahan next contends that the jury’s verdict against Callahan on Balfour’s counterclaim must be reversed because it is not supported by the evidence. We agree.

Generally, a jury verdict is entitled to great weight. A jury verdict must be reversed, however, if it is not supported by the evidence or if it is against the manifest weight of the evidence. (Smith v. Chicago Limousine Service, Inc. (1982), 109 Ill. App. 3d 755, 441 N.E.2d 81.) Moreover, when the facts are not controverted, they do not present an issue for the jury, and therefore, such a verdict is not conclusive. (France v. Citizens Casualty Co. (1948), 400 Ill. 55, 59.) If the jury verdict is based on a mistake or a failure to understand the evidence, then it must be reversed. Illinois Building Authority v. Dembinsky (1968), 101 Ill. App. 2d 59, 68, 242 N.E.2d 67.

Count II of Balfour’s counterclaim alleged that Callahan owed Balfour $36,431 for rings and other items which Balfour advanced to Callahan. However, the record indicates that Balfour owed Callahan $17,561 in commissions. David Schlothauer, a witness for Balfour, testified that Callahan’s accounts were designated “paid” for income tax reasons only and had been written off. Schlothauer did not work in Balfour’s accounting department, however, and could not personally testify whether Callahan had not paid Balfour for allegedly outstanding invoices. Callahan’s emphatic claim that he paid Balfour for all his invoices was undisputed and wholly supported by the evidence. We conclude that the jury verdict in favor of Balfour on its counterclaim against Callahan was against the manifest weight of the evidence, and the judgment entered thereon is therefore reversed.

Ill

Callahan lastly contends that the jury verdict on his claim of fraud against Balfour was also against the manifest weight of the evidence. We agree.

The elements necessary to prove a claim of fraud are a false representation of a material fact made by the defendant when he knew that the representation was false and reliance on the misrepresentation by the plaintiff. (Duhl v. Nash Realty Inc. (1981), 102 Ill. App. 3d 483, 429 N.E.2d 1267.) The record reveals that Balfour represented to Callahan that Callahan would not have to give up any of his accounts without his consent. On July 16, 1979, Balfour told Callahan that he could retain all of his active accounts and all of his inactive accounts upon which he was “aggressively calling.” Callahan confirmed his understanding of this agreement by certified mail. Balfour did not dispute this evidence. These representations made by Balfour to Callahan were material and Callahan relied on them. Callahan reassigned a number of his accounts to other representatives, but retained Morton East, Morton West and Sandberg, all large accounts. Callahan testified that he would not have continued in Balfour’s employ if he could not retain these three schools. The importance of these three accounts was further established by the testimony of Coleman and Young that they would not have accepted employment at Balfour if these accounts were not assigned to them.

The record reveals that Balfour knew that it had already reassigned Morton East, Morton West and Sandberg to Coleman and Young at the time that it promised not to reassign Callahan’s accounts without his consent. Coleman testified that he received the Sandberg reassignment in the summer of 1979. Young testified that he negotiated an employment contract with Balfour in May or June 1979. Young also testified that he attempted to sell rings to Morton East and Morton West in early September 1979. On September 15, 1979, Young refused to sign an agreement which stated that no other accounts would be taken from Callahan because Young knew that he had been promised the reassignment of Callahan’s Morton East and Morton West accounts. Balfour offered no evidence to contradict these facts, but instead defended on the ground that it had the right to reassign Callahan’s inactive accounts upon which he was not “aggressively calling.” The evidence clearly showed, however, that Callahan had aggressively called on Morton East, Morton West and Sand-berg and submitted bids annually in their ring competitions.

We conclude that the facts adduced at trial on Callahan’s claim of fraud against Balfour entitled Callahan to a verdict and that the trial court erred in denying Callahan’s motion for judgment notwithstanding the verdict.

Balfour contended in its breach of contract counterclaim that Callahan owed Balfour $36,431. The jury, although finding in favor of Balfour on its counterclaim, awarded Balfour only $1,692. This fraction of the damages sought by Balfour indicates that the jury allowed Callahan a setoff for the money that Callahan alleged Balfour owed him. If a setoff was allowed, as is indicated by the amount of the award, then the jury apparently found for Callahan on his complaint. These contradictory and ambiguous findings by the jury indicate that the verdict was based on an error or mistake by the jury, and we therefore reverse the judgment entered thereon.

The appellee, Balfour, in this court asserts that the appellant, Callahan, has deliberately fabricated exhibits in the record on appeal. These assertions by the appellee are without substance.

After the record on appeal and Callahan’s brief were filed in this court, Balfour filed an extensive motion to “strike plaintiff’s fabricated exhibits” and to “correct the record on appeal.” Callahan responded to Balfour’s motion and stated, inter alia, that Callahan’s present appellate counsel was not Callahan’s trial attorney; that Callahan’s appellate counsel had been hired to represent Callahan on appeal; that the exhibits which Callahan’s appellate counsel incorporated into the record on appeal were furnished by Callahan’s trial counsel; that Callahan’s appellate counsel had no knowledge that the 80 exhibits which were furnished by trial counsel were not numbered the same as those exhibits which were introduced at trial; and that Callahan’s appellate counsel emphatically denied any intent to deceive and apologized for the misunderstanding. Callahan’s appellate counsel added that he made no objections to Balfour’s motion to strike the inaccurate exhibits from the record on appeal since, with the exception of exhibit No. 73, he did not refer to them or rely on them in his brief on appeal. Callahan’s appellate counsel explained that he mistakenly referred to an erroneously labeled exhibit No. 73 in Callahan’s appellate brief and was therefore withdrawing all reference to it on appeal; and that exhibit No. 76, to which Callahan referred in his brief and which Balfour alleged was fabricated, is the true and accurate exhibit No. 76 used at trial, which Balfour’s counsel did not dispute.

Appended hereto are the pertinent portions of the oral arguments of this cause during which Callahan’s appellate counsel again explained the mistake of the misnumbered exhibits and reiterated that Callahan was not in any way relying for reversal upon any of these misnumbered exhibits.

The briefs and oral arguments centered on 15 exhibits, No. 52, No. 53 and No. 75 through No. 85. Although appellee’s counsel urged that they were made part of the record on appeal, they were never actually admitted at trial. Appellant’s counsel acknowledged during oral argument that the problem arose because he accepted the word of trial counsel that the exhibits had been properly admitted. As a consequence, we have carefully reviewed the complete record on appeal and the record’s index (volume II, page 1), which shows when each exhibit was tendered and received. Accordingly, we have been able to sort out those exhibits properly before us.

Exhibits No. 52 and No. 53 were never received into evidence. Exhibits No. 73 through No. 76 were admitted and no complaint has been made that these documents were not genuine or properly a part of the record on appeal. It would appear that they are properly included in the record on appeal. Exhibit No. 76 was the last exhibit received into evidence as an exhibit of the plaintiff. There is no confusion as to exhibits No. 77 through No. 85 because they were not made part of the record.

For the foregoing reasons, it is apparent that Balfour’s assertions that Callahan fabricated the exhibits upon which he relies on this appeal are utterly without merit.

For the reasons above stated we reverse the summary judgment in favor of Balfour and against Callahan on Callahan’s breach of contract claim against Balfour and remand the cause for a new trial or other proceedings thereon. We reverse the judgment on the jury’s verdict in favor of Balfour and against Callahan on Balfour’s breach of contract claim against Callahan and remand with directions to the trial court to enter judgment on Balfour’s breach of contract claim against Callahan in favor of Callahan notwithstanding the verdict. We reverse the judgment on the jury’s verdict in favor of Balfour and against Callahan on Callahan’s fraud claim against Balfour and remand Callahan’s fraud claim against Balfour for a new trial and other proceedings thereon.

Reversed and remanded.