Scheffel Financial Services, Inc. v. Heil

2014 IL App (5th) 130600, 16 N.E.3d 385

• Court: Appellate Court of Illinois
• Decided: August 22, 2014
• Docket: 5-13-0600
• Status: Unpublished

Opinion

NOTICE 2014 IL App (5th) 130600 Decision filed 08/22/14. The text of this decision may be NO. 5-13-0600 changed or corrected prior to the filing of a Petition for Rehearing or the disposition of IN THE the same.

APPELLATE COURT OF ILLINOIS

FIFTH DISTRICT ________________________________________________________________________

SCHEFFEL FINANCIAL SERVICES, INC., ) Appeal from the ) Circuit Court of Plaintiff-Appellee, ) Madison County. ) v. ) No. 13-L-1488 ) STEPHEN J. HEIL, ) Honorable ) Barbara L. Crowder, Defendant-Appellant. ) Judge, presiding. ________________________________________________________________________

PRESIDING JUSTICE WELCH delivered the judgment of the court, with opinion. Justices Cates and Schwarm concurred in the judgment and opinion.

OPINION

¶1 Stephen J. Heil (Heil) appeals from the entry against him, in favor of Scheffel

Financial Services, Inc. (Scheffel), of a preliminary injunction enforcing a nonsolicitation

clause contained in an employment agreement. The facts and the issues involved in this

case are quite complex. We will simplify them as much as possible and set them forth

only as necessary for an understanding of our disposition on appeal. The parties and the

circuit court are already intimately familiar with those facts and issues.

¶2 On August 30, 2013, Scheffel filed in the circuit court of Madison County a

three-count complaint against Heil seeking damages for breach of an employment 1 agreement, misappropriation of trade secrets, and tortious interference with contract and

business relations. The complaint alleges that Scheffel is in the business of providing

independent wealth management services, including investment management, portfolio

analysis, financial planning, and other related financial services. Heil had been employed

by Scheffel as a senior financial consultant. Prior to beginning employment with

Scheffel, Heil had signed an employment agreement which included confidentiality,

noncompetition, and nonsolicitation clauses.

¶3 On August 30, 2013, Heil left his employment with Scheffel and began similar

employment with Morgan Stanley, which Scheffel alleges is a direct market competitor

to Scheffel. When he left Scheffel, Heil took with him a list of clients he had serviced at

Scheffel and, upon starting employment with Morgan Stanley, Heil immediately solicited

these Scheffel clients to follow him to Morgan Stanley. Scheffel alleges that Heil thereby

breached his employment agreement with Scheffel, misappropriated Scheffel's trade

secrets, and tortiously interfered with Scheffel's business relationships with its clients.

The complaint seeks temporary, preliminary, and permanent injunctions against Heil's

alleged misconduct, compensatory and punitive damages, interest, and attorney fees and

costs.

¶4 After an extended hearing, the circuit court of Madison County entered a

preliminary injunction against Heil restraining him from any use or disclosure of

Scheffel's confidential information, restraining him from any direct or personal

solicitation of Scheffel's clients or customers as agreed to in his employment agreement,

and ordering him to return to Scheffel any and all client information which he is not 2 authorized to have. It is from the entry of this preliminary injunction that Heil appeals.

¶5 The following pertinent facts were adduced at the hearing on Scheffel's motion for

a preliminary injunction. Heil is a licensed financial advisor who worked at Scheffel, a

corporation whose employees, including Heil, are licensed financial advisors. These

financial advisors are registered representatives of LPL Financial (LPL), a registered

broker/dealer. As a financial advisory firm, Scheffel is not licensed to buy or sell

securities; only a registered broker/dealer can do that. Accordingly, Scheffel's

employees, including Heil, were registered representatives of LPL, the registered

broker/dealer, who traded securities on behalf of, and as directed by, Heil and the other

Scheffel financial advisors. LPL views these financial advisors/registered representatives

as independent contractors of LPL. Scheffel views them as employees of Scheffel. LPL

trades securities only at the behest of its registered representatives/financial advisors and

registered institutions and does not do so on behalf of individual investors. An individual

investor would visit one of the financial advisors at Scheffel, who would then, as a

registered representative of LPL, direct LPL to purchase or sell securities on behalf of the

individual investor. Scheffel attracted these individual investors through marketing

efforts, and through the contacts and community involvement of its financial advisors,

including Heil. LPL did not market to, or have any relationship with, these individual

investors. LPL's only relationship was with its registered representatives, the financial

advisors at Scheffel.

¶6 Heil began working at Scheffel in April 2002, at which time he signed an

employment agreement in which he agreed, among other things, to give two weeks' 3 notice upon voluntary termination. Nevertheless, on the Friday morning before the Labor

Day three-day weekend, Heil tendered his resignation to Scheffel, "effective

immediately." Immediately thereafter, Heil drove to the offices of Morgan Stanley and

began his employment with Morgan Stanley. On that day, he overnight-mailed a

solicitation package to former clients of Scheffel inviting them to bring their business to

him at Morgan Stanley. He admittedly did this on Friday in hopes of averting any

attempt by Scheffel to stop him with a temporary restraining order from soliciting

Scheffel's clients.

¶7 The employment agreement which Heil had signed contained a nonsolicitation

clause: "For a period of five (5) years immediately following the date he/she ceased to be

an employee he/she will not directly or indirectly *** solicit clients who were serviced by

the Company during the two (2) years immediately prior to the date of this withdrawal,

voluntary or involuntary retirement, or termination ***." It is this clause which the

circuit court sought to enforce by its preliminary injunction.

¶8 Circuit courts have substantial discretion in deciding whether to grant a

preliminary injunction, and the decision of the circuit court will not be disturbed on

appeal absent an abuse of discretion. Lifetec, Inc. v. Edwards, 377 Ill. App. 3d 260, 268

(2007). On appeal, the court examines only whether the party seeking the injunction has

demonstrated a prima facie case that there is a fair question concerning the existence of

claimed rights for which it seeks protection. Lifetec, 377 Ill. App. 3d at 268.

¶9 On appeal from an order granting or denying a preliminary injunction,

controverted facts or the merits of the case are not decided. Woods v. Patterson Law 4 Firm, P.C., 381 Ill. App. 3d 989, 993 (2008). The only question is whether there was a

sufficient showing made to the circuit court to sustain its order. Carr v. Gateway, Inc.,

395 Ill. App. 3d 1079, 1084 (2009). The appeal may not be used to determine the merits

of the case. Carr, 395 Ill. App. 3d at 1084. This is because the purpose of a preliminary

injunction is not to determine the controverted rights or decide the merits of the case, but

rather, its function is to preserve the rights of the parties or the state of affairs legally

existing just prior to the motion for a preliminary injunction until the case can be decided

on the merits. Kalbfleisch v. Columbia Community Unit School District Unit No. 4, 396

Ill. App. 3d 1105, 1112 (2009). Thus, the plaintiff need not carry the same burden of

proof that is required to support the ultimate issue. Stenstrom Petroleum Services Group,

Inc. v. Mesch, 375 Ill. App. 3d 1077, 1089 (2007). The proof required for issuance of a

preliminary injunction requires a plaintiff to show that a "fair question" exists regarding

the claimed right, and that the court should preserve the status quo until the case can be

decided on the merits. Lifetec, 377 Ill. App. 3d at 268.

¶ 10 A preliminary injunction requires a showing by a preponderance of the evidence

that the plaintiff (1) has a clearly ascertainable right needing protection, (2) will suffer

irreparable harm without protection, (3) has no adequate remedy at law, and (4) is likely

to succeed on the merits. Lifetec, 377 Ill. App. 3d at 268. The circuit court must also

consider whether the benefits of granting the injunction exceed any injury to the

defendant. Lifetec, 377 Ill. App. 3d at 268. The plaintiff need only make a prima facie

showing of evidence on the requisite elements to obtain injunctive relief. Prairie Eye

Center, Ltd. v. Butler, 305 Ill. App. 3d 442, 445 (1999). To establish that it has a clearly 5 ascertainable right in need of protection, and a likelihood of success on the merits, the

plaintiff need only raise a fair question as to the existence of the right and lead the court

to believe that it will probably be entitled to the relief requested if the proof sustains its

allegations. Stenstrom Petroleum, 375 Ill. App. 3d at 1089.

¶ 11 In determining whether to grant an injunction enforcing a restrictive covenant in

an employment agreement, courts look to whether the covenant is reasonable. Lifetec,

377 Ill. App. 3d at 269. In determining whether a restrictive covenant is enforceable,

courts must determine whether the terms of the agreement are reasonable and necessary

to protect a "legitimate business interest" of the plaintiff. Lifetec, 377 Ill. App. 3d at 269.

A legitimate business interest is found only where (1) the employee acquired confidential

information through his employment with the plaintiff and later attempted to use it for his

own gains or (2) by the nature of the plaintiff's business, its customer relationships are

near permanent and the employee would not have had contact with the customer absent

his employment. Lifetec, 377 Ill. App. 3d at 269.

¶ 12 On appeal, Heil first argues that the circuit court erred in finding that Scheffel had

a clearly ascertainable right in need of protection because Scheffel had no "legitimate

business interest" in the individual investors or their "client information" because these

investors were never "clients" of Scheffel. Heil argues that, because only LPL could

legally trade securities, the individual investors were actually "clients" of LPL, and not of

Scheffel. Heil argues that the client information actually belonged to LPL, not to

Scheffel, and that any customer relationships were between LPL and the investors, and

not between Scheffel and the investors. Heil argues that, because Scheffel actually had 6 no clients, it can claim no "legitimate business interest" in any client information or any

customer relationships. Because Scheffel has no "legitimate business interest" in the

client information or customer relationships, it has no clearly ascertainable right in need

of protection through a preliminary injunction.

¶ 13 In its order, entered December 17, 2013, the circuit court found that it was not

prepared to rule, at the preliminary injunction stage, on the merits of Heil's argument.

The court found that the evidence was sufficient at the preliminary injunction stage of the

proceeding to allow Scheffel to proceed as the plaintiff and attempt to enforce its

employment agreement with Heil. The court concluded that Scheffel's client information

which Heil had taken with him to Morgan Stanley did constitute trade secrets. The court

also concluded that Scheffel had a near permanent relationship with its individual

investors and that Heil would not have had any contact with those individual investors

absent his employment with Scheffel such that Scheffel had a protectable interest in

enforcing the nonsolicitation clause of the employment agreement.

¶ 14 We cannot conclude that the circuit court abused its discretion in so finding. As

we have stated, the standard of review for a preliminary injunction is whether the circuit

court abused its discretion in determining that the plaintiff provided prima facie evidence

to support its claim. Delta Medical Systems v. Mid-America Medical Systems, Inc., 331

Ill. App. 3d 777, 789 (2002). The question before this court on review is whether there

was a sufficient showing to sustain the circuit court's order. Delta Medical, 331 Ill. App.

3d at 789. Instead of deciding controverted facts on the merits of the case, the reviewing

court determines only whether the plaintiff has demonstrated that there is a fair question 7 as to the existence of the claimed rights, that the circumstances lead to a reasonable belief

that the plaintiff will probably be entitled to the relief sought, and that the status quo

should be preserved until the case can be decided on the merits. Delta Medical, 331 Ill.

App. 3d at 789. The circuit court did not abuse its discretion in finding that Scheffel had

demonstrated that there is a fair question as to the existence of its claimed rights.

¶ 15 Heil next argues that the circuit court erred in holding that the "Protocol for

Broker Recruiting" (the Protocol) did not prohibit Scheffel from enforcing the

nonsolicitation clause in its employment agreement. The Protocol is a voluntary

agreement entered into by registered broker/dealers which allows registered

representatives of those broker/dealers to move between firms that have adopted the

Protocol, and be free from litigation by the former firm to enforce any restrictive

covenant in an employment agreement. While LPL, as a registered broker/dealer, was a

signatory to the Protocol, Scheffel was not. Under the Protocol to which LPL was a

signatory, when a registered representative left LPL to join another firm that was a

signatory to the Protocol, the registered representative could take a list of clients to his

new firm and use that list to solicit those clients on behalf of the new firm.

¶ 16 Heil argues that, prior to his resignation from Scheffel, Heil had obtained from

LPL a list of the clients he serviced, and it is from this client list that Heil sought to solicit

former clients of Scheffel. On appeal, Heil argues that Scheffel is barred by the Protocol

from enforcing the restrictive covenant in his employment agreement because it did not

own the client information which Heil obtained from LPL.

¶ 17 In its order, the circuit court held that Scheffel had raised a fair question, for 8 purposes of a preliminary injunction, that the Protocol did not bar enforcement of the

restrictive covenant contained in the employment agreement between Heil and Scheffel

because Scheffel was not, and could not be, a signatory to the Protocol. The court

pointed out that even the Financial Industry Regulatory Authority (FINRA) recognizes

the enforceability of restrictive covenants in employment contracts involving

nonsignatories to the Protocol. See Fidelity Brokerage Services LLC v. Morgan Stanley

Smith Barney LLC, FINRA No. 11-03937 (2012) (Kinsellagh, Arb.). Indeed, Heil's

expert witness testified that nothing in the Protocol prohibits employers like Scheffel

from having nonsolicitation covenants in their employment agreements.

¶ 18 Heil repeats his argument that because Scheffel was not a registered broker/dealer

it could not provide financial services and did not have clients which Heil could solicit,

nor could it own client information. Heil argues that as the registered broker/dealer, only

LPL could have clients and own client information. Because LPL was a signatory to the

Protocol, Heil was free to take his client list with him when he left and to solicit those

clients on behalf of his new employer.

¶ 19 As we have already pointed out, the circuit court held that it was not prepared to

decide this issue at the preliminary injunction stage, a point in the proceedings at which it

is not appropriate to determined controverted facts or decide the merits of the case. The

circuit court found that the evidence was sufficient to allow Scheffel to proceed on the

preliminary injunction. The circuit court did not abuse its discretion in so deciding.

¶ 20 Heil next argues that the circuit court erred in finding that the issuance of the

preliminary injunction did not impose an undue hardship on Heil. Heil correctly points 9 out that in order to be entitled to a preliminary injunction, the circuit court must conclude

that the balance of the hardships to the parties supports the injunctive relief requested.

Delta Medical Systems v. Mid-America Medical Systems, Inc., 331 Ill. App. 3d 777, 789

(2002). Heil testified at the hearing on the motion for a preliminary injunction that the

entry of the preliminary injunction would permanently damage his career, with the

possibility that he could lose millions of dollars in compensation.

¶ 21 In its order granting the preliminary injunction, the circuit court found that the

potential economic harm Heil might suffer is not so large as to prevent enforcement of

the restrictive covenant in the employment agreement. The injunction would not

preclude Heil from earning a living and providing for his family during the pendency of

the action. The injunction did not prevent Heil from working; it only prevented him from

soliciting clients of Scheffel. The court pointed out that the injunction was only in effect

pending the ultimate outcome of the case.

¶ 22 We find the preliminary injunction to be carefully drafted so as to limit any

hardship on Heil. It prevents Heil only from using or disclosing any of Scheffel's

confidential information and from having any direct contact or personal solicitation of

Scheffel's clients or customers. Heil can continue to work as a financial advisor within

the same geographical area as Scheffel, and may continue to service existing clients and

solicit new ones (other than those belonging to Scheffel). We cannot conclude that the

circuit court abused its discretion in balancing the hardships on the parties and finding

that they supported the injunctive relief requested.

¶ 23 Finally, Heil argues that the circuit court erred in finding that Scheffel had no 10 adequate remedy at law and would suffer irreparable harm if the preliminary injunction

were not granted. He asserts that Scheffel presented no evidence that its business would

be harmed due to Heil's actions, that it could not finance a lawsuit against Heil, that it

could not obtain damages from Heil, or that the amount of its damages was difficult to

calculate. Furthermore, he argues, the employment agreement contained a liquidated

damages clause, showing that Scheffel has an adequate remedy at law and that any harm

to be suffered is not irreparable.

¶ 24 Given Scheffel's protectable interest in its clients, with whom it apparently had

established near permanent relationships, irreparable injury caused by Heil's solicitation

of those clients is presumed. See Clifton, Gunderson & Co. v. Richter, 158 Ill. App. 3d

789, 792 (1987). Furthermore, where with each passing day Heil's solicitation of

Scheffel's clients further erodes Scheffel's client base and profit, the injury is ongoing and

great. Richter, 158 Ill. App. 3d at 792-93. The liquidated damages provision in the

employment agreement is not a bar to injunctive enforcement of the nonsolicitation

clause; the employment agreement contemplates injunctive relief to prevent ongoing

violations as well as damages for past violations. Richter, 158 Ill. App. 3d at 793.

¶ 25 The circuit court did not abuse its discretion in determining that Scheffel had no

adequate remedy at law and would suffer irreparable harm in the absence of a preliminary

injunction.

¶ 26 For the foregoing reasons, we affirm the preliminary injunction order entered by

the circuit court of Madison County.

11 ¶ 27 Affirmed.

12 2014 IL App (5th) 130600

NO. 5-13-0600

IN THE

FIFTH DISTRICT __________________________________________________________________________

SCHEFFEL FINANCIAL SERVICES, INC., ) Appeal from the ) Circuit Court of Plaintiff-Appellee, ) Madison County. ) v. ) No. 13-L-1488 ) STEPHEN J. HEIL, ) Honorable ) Barbara L. Crowder, Defendant-Appellant. ) Judge, presiding. __________________________________________________________________________

Opinion Filed: August 22, 2014 __________________________________________________________________________

Justices: Honorable Thomas M. Welch, P.J.

Honorable Judy L. Cates, J., and Honorable S. Gene Schwarm, J., Concur __________________________________________________________________________

Attorneys Craig L. Unrath, Heyl, Royster, Voelker & Allen, Bank One Building, for Suite 600, 124 S.W. Adams Street, Peoria, IL 61602; Douglas R. Heise, Appellant Heyl, Royster, Voelker & Allen, 105 West Vandalia, Suite 100, Edwardsville, IL 62025; Joseph B. Alonso, Daniel H. Wirth, Gregory, Doyle, Calhoun & Rogers, LLC, 49 Atlanta Street, Marietta, GA 30060 __________________________________________________________________________

Attorneys A. Courtney Cox, Thomas E. Berry, Sandberg, Phoenix & for von Gontard, P.C., 2015 West Main Street, Suite 111, Carbondale, Appellee IL 62901 __________________________________________________________________________