Liautaud, Jim v. Liautaud, Michael ( 2000 )

In the
United States Court of Appeals
For the Seventh Circuit
No. 99-1700
JIM LIAUTAUD, an individual
and JIMMY JOHN’S INCORPORATED,
an Illinois Corporation,
Plaintiffs-Appellants,
v.
MICHAEL LIAUTAUD, an individual,
Defendant-Appellee.
Appeal from the United States District Court
for the Central District of Illinois.
No. 95 C 2133--Harold A. Baker, Judge.
Argued January 12, 2000--Decided July 20, 2000
Before POSNER, Chief Judge, and COFFEY and RIPPLE,
Circuit Judges.
RIPPLE, Circuit Judge. Jim Liautaud, upon
request, provided his cousin, Michael Liautaud,
with the secrets behind his successful sandwich
shop business. To protect himself, he proffered
to Michael a noncompetition agreement, which
prevented Michael from expanding his new business
beyond the Madison, Wisconsin, market. Michael
agreed to the terms of the agreement; however, he
later violated it by expanding his business into
other parts of Wisconsin. This lawsuit followed.
Jurisdiction in this suit is based on diversity
of citizenship under 28 U.S.C. sec. 1332. The
amount in controversy exceeds $50,000,/1 and the
parties are of diverse citizenship./2 The
parties do not dispute that the applicable law is
Illinois state law. The district court granted
summary judgment for Michael and, for the reasons
set forth in this opinion, we affirm the judgment
of the district court.
I
BACKGROUND
A. Facts
Jim Liautaud owns and operates a chain of
gourmet submarine sandwich shops in Illinois
called Jimmy John’s, Inc. He claims that the
secret behind the success of his shops is a
combination of his style of preparing the
sandwiches and of his business strategies.
In 1988, Jim’s cousin, Michael, approached Jim
about opening his own submarine sandwich shop in
Madison, Wisconsin. Jim agreed to provide Michael
with his "secrets of success" so that Michael
could open Big Mike’s Super Subs. Pursuant to his
offer to help, Jim sent Michael a letter
outlining the agreement between the cousins. The
letter states as follows:
I want to confirm at this time exactly what we
agreed on so that it is clear and understood by
both parties.
The agreement:
1. Mike will open up a sub shop in Madison using
Jimmy John’s products and systems.
2. Mike can open up as many shops [as] he would
like in Madison only.
3. If you want to expand the sub/club business
beyond Madison you will do so using Jimmy John’s
sub shops as a partner or franchisee. This is
subject to 100% agreement on both parties. If you
don’t use Jimmy John’s Inc. you will not expand
the sub/club business beyond Madison.
4. You will not disclose to any one: recipes,
products or systems that are given to you.
(Except your managers who run your store).
I believe thats [sic] what we agreed on. If I
have made any misrepresentations of our agreement
please correct them in the margin of this letter
and return a copy to me. If I don’t receive a
copy I’ll assume this letter to be the agreement.
R.1, Ex.A. Michael returned the letter to Jim
and, in handwriting at the bottom, wrote: "Jimmy,
If I agree on all items stated above, you must
agree that you (Jimmy Johns Inc.) won’t enter the
Madison WI market." Id.
Jim then helped Michael open a sandwich shop in
Madison. In 1991, Michael opened a sandwich shop
outside Madison, in LaCrosse, Wisconsin, in
violation of the cousins’ agreement. Although the
cousins attempted to reach a franchise agreement,
it never materialized. Jim thereafter filed this
action against Michael to enforce the terms of
their agreement and for unjust enrichment.
B. Holding of the District Court
1.
The district court held that the "agreement"
between the cousins constituted a "classic
noncompetition covenant." R.65 at 3. For a
noncompetition agreement to be valid under
Illinois common law, the court explained, the
covenant must be: (1) ancillary to a valid
transaction or relationship and (2) reasonable in
scope.
The court addressed first whether the covenant
was ancillary to a valid transaction or
relationship. Although the typical noncompetition
agreement stems from an employment relationship
or from the sale of a business, the court found
that a valid relationship existed here because
Jim intended the trade secrets to be a gift and
Michael accepted them as such. The court stated
that "[a] gift certainly creates a valid
relationship imposing rights and obligations on
both parties, just as do employment relationships
and where money is paid for a business or some
part of it." Id. at 5. Therefore, according to
the court, the trade secrets that Jim provided to
Michael were a gift and not for the mere sake of
obtaining a covenant not to compete. Thus, the
court concluded that the covenant not to compete
was ancillary to the gift relationship.
Next, the court questioned whether the covenant
not to compete was reasonable in its scope. The
court explained that "[t]o be deemed reasonable,
a noncompetition agreement must not be greater
than necessary to protect the seller, oppressive
to the buyer, or injurious to the public." Id. To
be enforceable, the court clarified, the
agreement must be reasonable in time, in
geographical scope, and in the activities
restricted. As the court noted, absolutely no
durational or geographical limits [other than the
restriction that Michael remain in Madison]
existed on Jim’s and Michael’s noncompetition
agreement. Also, according to the court, Jim had
not explained why such stringent limitations were
justified. Therefore, the court found that the
covenant was unreasonable because it was overly
restrictive and, thus, that it was void as
against public policy.
2.
The district court also held that Jim was not
entitled to restitution because of unjust
enrichment. First, the court determined that Jim
was not entitled to damages for unjust enrichment
for Michael’s use of Jim’s trade secrets in his
Madison shops because the trade secrets were a
gift. Next, the court discussed the availability
of damages for unjust enrichment for Michael’s
use of Jim’s trade secrets outside of Madison.
The court explained that unjust enrichment does
not apply when an agreement is unenforceable
because it is illegal or contrary to public
policy. Because it had concluded that the
noncompetition agreement was void as against
public policy, the court held that Jim could not
receive damages for Michael’s use of the trade
secrets in his shops outside Madison, Wisconsin.
II
DISCUSSION
A. Standard of Review
We review a grant of summary judgment de novo
and draw all reasonable inferences in favor of
the nonmoving party. See Hill v. American Gen.
Fin., Inc., No. 99-2682, 2000 WL 536670, *2 (7th
Cir. May 4, 2000). "Under Illinois law, when the
basic facts are not in dispute, the existence of
a contract is a question of law." Echo, Inc. v.
Whitson Co., 121 F.3d 1099, 1102 (7th Cir. 1997);
accord Burgess v. J.C. Penney Life Ins. Co., 167
F.3d 1137, 1139 (7th Cir. 1999) (explaining that
when the question on appeal is the interpretation
of the terms of a contract, it is a question of
law that is subject to plenary review). More
specifically, "[t]he question of whether a
restrictive covenant is enforceable or not is a
question of law." Lawrence & Allen, Inc. v.
Cambridge Human Resource Group, Inc., 685 N.E.2d
434, 440 (Ill. App. Ct. 1997); accord Applied
Micro, Inc. v. SJI Fulfillment, Inc., 941 F.
Supp. 750, 753 (N.D. Ill. 1996).
"A contract is to be construed strictly against
the drafter." Sharon Leasing, Inc. v. Phil Terese
Transp., Ltd., 701 N.E.2d 1150, 1157 (Ill. App.
Ct. 1998); see also Brian Properties, Inc. v.
Burley, 662 N.E.2d 522, 524 (Ill. App. Ct. 1996);
accord Advance Process Supply Co. v. Litton
Indus. Credit Corp., 745 F.2d 1076, 1079 (7th
Cir. 1984). Also, "[b]ecause Illinois courts
abhor restraints on trade, restrictive covenants
are carefully scrutinized." Prairie Eye Ctr.,
Ltd. v. Butler, 713 N.E.2d 610, 613 (Ill. App.
Ct. 1999); see also Gillespie v. Carbondale &
Marion Eye Ctrs., Ltd., 622 N.E.2d 1267, 1269
(Ill. App. Ct. 1993).
B. Validity of the Noncompetition
Agreement
1.
Under Illinois law, "[a] ’naked’ promise by one
merchant not to compete against another merchant
is against public policy because it injures the
public and the promisor, while at the same time
it serves no protectible interest of the
promisee." Abel v. Fox, 654 N.E.2d 591, 596 (Ill.
App. Ct. 1995). In order for a noncompetition
agreement to be valid, therefore, it must be
ancillary to a valid transaction, such that the
covenant not to compete is subordinate to the
main purpose of the transaction. See id. at 593.
Although noncompetition agreements typically stem
from an employment relationship or from the sale
of a business, another valid transaction may
support a covenant not to compete. The Supreme
Court of Illinois has stated that a valid
restraint on trade may be based on a purchase or
sale of a business or "any other analogous
circumstance giving one party a just right to be
protected against competition from the other."
More v. Bennett, 29 N.E. 888, 891 (Ill. 1892).
Although Jim urges that we characterize the
transaction as a franchise agreement, we believe
that the arrangement is more accurately
characterized as a gift. "A gift is a voluntary
gratuitous transfer of property from donor to
donee where the donor manifests an intent to make
such a gift and absolutely and irrevocably
delivers the property to the donee." In re Estate
of Poliquin, 617 N.E.2d 40, 42 (Ill. App. Ct.
1993). We believe that there is no question that
Jim intended to provide Michael with the gift of
the "secrets of his success." Also, the parties
do not dispute that Jim delivered his gift to
Michael and that Michael accepted Jim’s gift.
Thus, the parties entered a valid gift
relationship. The donor in a gift relationship,
when the gift is trade secrets, is providing the
donee with valuable advice for free. The donor
may wish to protect both his generosity and his
business interests from exploitation; therefore,
he may desire to impose a covenant not to compete
on his donee. See More, 29 N.E. at 891. Here, the
covenant not to compete was ancillary to the gift
transaction between Jim and Michael: The gift
from Jim to Michael was the essential element of
the transaction, and the noncompetition agreement
was subordinate to the main purpose of that
transaction. Thus, because the gift relationship
is a valid relationship or transaction and the
noncompetition agreement is subordinate to that
relationship, the noncompetition agreement meets
the first requirement that it be ancillary to a
valid relationship or transaction.
2.
The next question is whether the scope of the
noncompetition agreement is reasonable, a
determination which is based on the facts and
circumstances of the particular case. See
Eichmann v. National Hosp. & Health Care Servs.,
Inc., 719 N.E.2d 1141, 1143 (Ill. App. Ct. 1999);
Lawrence & Allen, 685 N.E.2d at 441; Weitekamp v.
Lane, 620 N.E.2d 454, 462 (Ill. App. Ct. 1993).
For this restrictive covenant to be reasonable,
its terms (1) must not be greater than necessary
to protect Jim, (2) must not be oppressive to
Michael, and (3) must not be injurious to the
general public. See Decker, Berta & Co. v. Berta,
587 N.E.2d 72, 76 (Ill. App. Ct. 1992); see also
Lawrence & Allen, 685 N.E.2d at 441; Abel, 654
N.E.2d at 593; Weitekamp, 620 N.E.2d at 462;
Howard Johnson & Co. v. Feinstein, 609 N.E.2d
930, 934 (Ill. App. Ct. 1993); accord Applied
Micro, 941 F. Supp. at 753.
Jim asserts first that, given the nature of his
business and the trade secrets involved, the
restraint on Michael’s expansion was necessary to
protect his business interests. He explains that
his trade secrets are the fundamental elements of
his business success and that providing Michael
with access to these secrets, without
compensation for Jim, is fundamentally unfair.
Next, Jim argues that the restrictions were not
oppressive to Michael because (1) he provided the
trade secrets to Michael for free, (2) Michael
could expand outside Madison in any business
other than the submarine sandwich business, and
(3) Michael could expand his submarine sandwich
business outside Madison, as long as he used
Jimmy John’s, Inc. as a partner. Finally, Jim
asserts that not enforcing the covenant would be
injurious to the public because it would restrict
the freedom of parties to contract.
Conversely, Michael submits that the
noncompetition agreement was unreasonable.
According to Michael, Jim does not have a
legitimate business interest in preventing
Michael from establishing submarine sandwich
shops where Jim is not located. Also, the
geographical restriction is not reasonable,
Michael claims, because the restriction prevents
Michael from expanding anywhere in the world
besides Madison, Wisconsin.
In our view, under Illinois common law
principles, the covenant here is overly broad
because there is an unnecessarily stringent
geographic restriction on the promisor, Michael,
and no temporal restriction whatsoever. These
restrictions are not necessary to protect Jim’s
business interest, are oppressive to Michael, and
are injurious to the public. Generally, in a
covenant not to compete, the agreement restricts
competition within a certain town or city or
within a defined radius from the promisee’s own
business. See, e.g., Prairie Eye Ctr., 713 N.E.2d
at 612 (upholding an agreement which restricted
the promisor from competing within specified
cities as well as within a 10-mile radius from
certain other cities); Gillespie, 622 N.E.2d at
1270 (enforcing a 50-mile radius restriction on
competition with a medical practice); Weitekamp,
620 N.E.2d at 462 (allowing an agreement with a
300-mile radius limit); Decker, Berta & Co., 587
N.E.2d at 76 (sanctioning a covenant with a 35-
mile radius restriction). Although a lack of
geographic limits is not per se unreasonable, the
complete bar on competition needs to be
reasonably related to the promisee’s interest in
protecting his own business. See Eichmann, 710
N.E.2d at 1147; Lawrence & Allen, 685 N.E.2d at
441.
Here, Michael is prevented from expanding
anywhere in the world outside of Madison.
Although this may seem to be an exaggeration of
what the parties expected in reality, we can only
read the plain language of the agreement, and in
its terms the covenant not to compete does not
contain any geographic limitations. Jim’s
articulated legitimate business interest,
protection of his trade secrets, does not show
why Michael should not be able to expand to
locations other than Madison, even when Jim is
not in those locations. Jim has not indicated
that he plans to expand into the markets where
Michael is located. Also, Michael has not
suggested that he plans to expand to places where
Jim already is located. Generally, courts will
uphold a restriction on competition that is
coextensive with the area where the promisee is
doing business. See Lawrence & Allen, 685 N.E.2d
at 442. Jim has not demonstrated why expansion by
Michael in cities and states where Jim is not
located would injure Jim.
Moreover, the agreement is oppressive to Michael
because it restricts him from expanding his
sandwich business, regardless of whether he
continues to use Jim’s trade secrets. According
to the terms of the agreement, Michael could not
open any kind of sandwich shop outside Madison
without Jim’s approval. Finally, the complete ban
on expansion is injurious to the public because
it completely restricts competition. Although it
seems "fair" that Jim should receive some
compensation for Michael’s use of Jim’s trade
secrets, this noncompetition agreement, without
any geographic limitations, is not the reasonable
means of accomplishing that end.
The agreement also fails to provide any limits
on time. Instead, the agreement, as written,
merely states that Michael may not expand his
business. Read literally, this means that Michael
may not expand his business beyond Madison for
the rest of his life. Illinois courts generally
have refused to enforce noncompetition agreements
that do not limit the duration of the
restriction. See Eichmann, 719 N.E.2d at 1148;
but see Storer v. Brock, 184 N.E. 868 (Ill. 1933)
(allowing an activity restriction for all time
within Chicago on retired physician because
physician received valuable consideration for
contract and could practice anywhere outside the
city). The length of time for the restriction
must be reasonably related to the needs of the
promisee’s business. See Eichmann, 719 N.E.2d at
1148; Lawrence & Allen, 685 N.E.2d at 442. For
example, in a business where client development
takes over a year, a restriction on competition
for one to two years is reasonable because of the
time it takes to cultivate a client. See, e.g.,
Prairie Eye Ctr., 713 N.E.2d at 612 (upholding a
two-year restriction because of the time needed
to cultivate patients); Gillespie, 622 N.E.2d at
1270 (enforcing a two-year restriction on
competition with a medical practice).
Jim has not produced any reason for perpetually
restricting Michael’s ability to expand beyond
Madison. Even though it may take time to
establish a sandwich shop business and to attract
a sufficient customer base to make the venture
profitable, the time to accomplish this is not in
perpetuity. Jim has not shown that he needs to
prevent Michael from ever expanding beyond
Madison in order to protect his business
interests. Also, as stated above, under the
agreement, Michael is prevented from ever
expanding his shops, even if he develops his own
recipes and business strategies. Finally, this
infinite agreement injures the public because it
stifles competition. We conclude that, in light
of the severe and unnecessary restrictions on
Michael, this covenant not to compete is
unreasonable and is, therefore, void as against
public policy.
C. Unjust Enrichment
Jim also asserts that he has a claim of unjust
enrichment against Michael for the use of his
trade secrets in (1) Michael’s Madison shops and
(2) Michael’s shops outside of Madison. However,
the district court correctly held that a party
may not recover damages for unjust enrichment
pursuant to a gift relationship. See generally
Hartman v. Townsend, 523 N.E.2d 199, 202-03 (Ill.
App. Ct. 1988). Thus, Jim may not recover damages
for Michael’s use of the trade secrets in his
Madison shops.
We also agree with the district court that
Illinois law does not allow a claim for unjust
enrichment when the underlying contract has been
held to be void as against public policy. See
First Nat’l Bank v. Malpractice Research, Inc.,
688 N.E.2d 1179, 1186 (Ill. 1997); see also
Juneau Academy v. Chicago Bd. of Educ., 461
N.E.2d 597, 601 (Ill. App. Ct. 1984). Because the
noncompetition agreement is void as against
public policy, we cannot award Jim damages for
unjust enrichment under it. Thus, Jim cannot
receive damages for Michael’s use of his trade
secrets in Michael’s Madison shops or in his
shops outside Madison.
Conclusion
For the foregoing reasons, we affirm the
judgment of the district court.
AFFIRMED
/1 The amount in controversy under 28 U.S.C. sec.
1332, since Jim filed his lawsuit, has changed
from in excess of $50,000 to in excess of
$75,000. This amendment does not apply
retroactively.
/2 Jim is a citizen of Illinois, and Jimmy John’s,
Inc. is incorporated in Illinois with its
principal place of business in Illinois. Michael
is a citizen of Wisconsin.