Hecny Transportation v. Chu, George ( 2005 )

In the
United States Court of Appeals
For the Seventh Circuit
____________
Nos. 05-1273 & 05-1399
HECNY TRANSPORTATION, INC.,
Plaintiff-Appellant,
Cross-Appellee,
v.
GEORGE CHU,
Defendant-Appellee,
Cross-Appellant,
and
DAISY CHU, PLATINUM INTERNATIONAL
LOGISTICS, INC., and WILFREDO JAMILOSA,
Defendants-Appellees.
____________
Appeals from the United States District Court for the
Northern District of Illinois, Eastern Division.
No. 98 C 7335—Samuel Der-Yeghiayan, Judge.
____________
ARGUED SEPTEMBER 20, 2005—DECIDED OCTOBER 31, 2005
____________
Before EASTERBROOK, MANION, and SYKES, Circuit
Judges.
EASTERBROOK, Circuit Judge. Hecny Transportation,
based in Hong Kong, operates a worldwide shipping
2 Nos. 05-1273 & 05-1399
network. Between 1989 and 1998 George Chu was the
manager of Hecny’s operations in Chicago. Hecny conducted
an audit after he left and concluded that he had used
Hecny’s assets and personnel to operate his own ventures
out of the Chicago station. This suit under the diversity
jurisdiction charges George Chu with a breach of his
fiduciary obligations and several related torts, plus breach
of contract. To simplify the exposition we ignore
the additional defendants.
Hecny’s complaint charges Chu with diverting its assets
(its physical plant, its employees’ time, and its informa-
tion such as customer lists) to competing businesses, which
Chu allowed to operate from Hecny’s premises. These
activities may be classified as the diversion of corporate
opportunities, as fiduciary defalcations, and as outright
theft. (Hecny adds that when Chu left he took files, comput-
ers, software, and other office equipment with him, adding
theft of physical assets to theft of business.) Chu denied
these allegations and filed a counterclaim, seeking a return
of his investment in the business plus bonuses and profit
overrides that he contends were due him by contract; he
accuses Hecny of jiggering the accounting numbers to avoid
paying him what he had coming. The district court granted
judgment for Chu on Hecny’s claims. Although the judge
called this summary judgment, he did not mention any
evidence of record. Instead he deemed Hecny’s complaint
self-defeating. 2005 U.S. Dist. LEXIS 5417 (N.D. Ill. Mar. 30,
2005). The court granted judgment in Hecny’s favor on
Chu’s counterclaims, again without considering any evi-
dence.
Section 8(a) of the Illinois Trade Secrets Act, 765 ILCS
1065/8(a), is the basis on which the district judge resolved
most of the case. This statute abolishes claims other than
those based on contract arising from misappropriated trade
secrets, replacing them with claims under the Act itself.
Hecny accused Chu of misusing customer information,
Nos. 05-1273 & 05-1399 3
which Hecny calls a trade secret. The district judge thought
that this knocked out all of Hecny’s other claims. As for
Hecny’s trade-secret claims (based on both contracts with
Chu and the statute): the judge ruled that the identity of
Hecny’s customers is not a trade secret in the first place, so
Chu prevailed on this theory too. This part of the disposi-
tion, at least, is correct. Hecny does not contend that its
customers’ identities were confidential information; they
were (it concedes) widely known in the trade, and it did not
take any steps (such as encryption or restricted-access
rooms) to maintain their confidentiality. 765 ILCS
1065/2(d)(2). But the absence of trade secrets does not doom
Hecny’s other contentions.
Section 8(a) says that “this Act is intended to displace
conflicting tort, restitutionary, unfair competition, and
other laws of this State providing civil remedies for misap-
propriation of a trade secret.” Misappropriation of a trade
secret differs from other kinds of fiduciary defalcations,
which the statute therefore does not affect. If Hecny had
put its customer list on its web site for the world to ogle,
that would not have permitted its managers to go into
covert competition using Hecny’s own depot and staff, or to
walk off with computers and fax machines, as Hecny alleges
Chu did. Trade secrets just have nothing to do with Hecny’s
principal claims.
Illinois courts have had very little to say about the ef-
fect of §8(a), perhaps because it is unimaginable that
someone who steals property, business opportunities, and
the labor of the firm’s staff would get a free pass just
because none of what he filched is a trade secret. Both sides
have cited decisions by federal district judges interpreting
Illinois law, but no pertinent decisions by the state judi-
ciary. Decisions of federal district courts on issues of state
law have neither authoritative nor precedential force, see,
e.g., Old Republic Ins. Co. v. Chukah & Tecson, P.C., 84
F.3d 998, 1003-04 (7th Cir. 1996); Anderson v. Romero,
4 Nos. 05-1273 & 05-1399
72 F.3d 518, 525 (7th Cir. 1995), so we need not analyze
them.
Because the Illinois Trade Secrets Act is based on the
Uniform Trade Secrets Act of 1985, we can check our
intuition about its preemptive force by asking how other
states have understood its scope. The dominant view is that
claims are foreclosed only when they rest on the conduct
that is said to misappropriate trade secrets. R.K. Enter-
prises, L.L.C. v. Pro-Comp Management, Inc., 356 Ark. 565,
158 S.W.3d 685 (2004); Savor, Inc. v. FMR Corp., 812 A.2d
894 (Del. 2002); Weins v. Spordleder, 605 N.W.2d 488 (S.D.
2000). The Uniform Law Commissioners’ comment to the
model act supports this approach, stating: “The [provision]
does not apply to duties imposed by law that are not
dependent upon the existence of competitively significant
secret information, like an agent’s duty of loyalty to his or
her principal.” We would be shocked if the Supreme Court
of Illinois were to disagree; nothing in its jurisprudence
suggests that it would. This is not a close question. An
assertion of trade secret in a customer list does not wipe out
claims of theft, fraud, and breach of the duty of loyalty that
would be sound even if the customer list were a public
record.
Hecny wants not only damages but also an injunction
enforcing Chu’s covenant not to compete. The district court
denied this request on the ground that the lack of trade
secrets or “protectable interests” such as long-term cus-
tomers vitiates the covenant. Illinois law recognizes an
exception to this principle for covenants given by entrepre-
neurs as part of a joint venture. See Hess Newmark Owens
Wolf, Inc. v. Owens, 415 F.3d 630 (7th Cir. 2005) (discussing
Illinois law). Hecny says that Chu was a joint venturer
because he invested in the Chicago depot and received a
portion of its profits; he responds that his investment
was so small (about $10,000) that he should be treated as
an employee rather than an entrepreneur. The dispute need
Nos. 05-1273 & 05-1399 5
not be resolved, because Chu’s covenant expired long ago:
The district court allowed this suit to linger on its docket for
seven years before decision, even though a request for an
injunction to enforce a restrictive covenant should be
adjudicated with dispatch. (Judge Der-Yeghiayan, who was
assigned to this litigation following his appointment in
2003, does not bear responsibility for the court’s failure to
act before the covenant expired.) Today only damages are
available, and as it seems unlikely that they could be
established given the lack of trade secrets the litigation may
be simplified by confining attention on remand to the events
while Chu was the Chicago station’s manager and any
injury they may have caused.
We have so far treated Hecny’s allegations as the truth,
as is essential when a case is resolved on the pleadings.
This is also the required standard for evaluating a counter-
claim dismissed on the pleadings, so now we must turn the
tables and assume (as Chu alleges) that everything
Hechy says about him is a lie, and that he has been cheated
out of his investment and profits. The district judge dis-
missed Chu’s effort to state a claim against Hecny Trans-
portation Ltd. (a Hong Kong corporation and parent of the
U.S. subsidiary that is the plaintiff in this suit) on the
ground that the parent is not a party to the joint venture
agreement between Chu and the subsidiary. That’s a
sensible disposition; Illinois does not hold parent corpora-
tions answerable for the legal wrongs of their subsidiaries,
unless (as Chu does not allege) the subsidiary deceived its
trading partner into thinking that it was dealing with the
parent directly or committed an equivalent fraud about
relations within the corporate family. See, e.g., Hystro
Products, Inc. v. MNP Corp., 18 F.3d 1384 (7th Cir. 1994)
(Illinois law); Sea-Land Services, Inc. v. Pepper Source, 941
F.2d 519 (1991); Pederson v. Paragon Pool Enterprises, 214
Ill. App. 3d 815, 822, 574 N.E.2d 165 (1st Dist. 1991).
6 Nos. 05-1273 & 05-1399
Illinois does not treat instructions given to a subsidiary
corporation as actionable against a parent that did not itself
commit a wrong directly against the complaining party. See
Forsythe v. Clark USA, Inc., 2005 Ill. LEXIS 960 (1st Dist.
2005); cf. Esmark, Inc. v. NLRB, 887 F.2d 739, 756 (7th Cir.
1989). As this subsidiary is solvent, it is unnecessary to
decide whether Illinois might ever treat a parent as respon-
sible for aiding and abetting a subsidiary’s acts. But what
of Chu’s claims against Hecny Transportation, Inc., the U.S.
subsidiary? The district judge did not mention them, and it
is impossible to see how the decision dismissing them can
be sustained. Hecny U.S. is no more entitled to steal from
Chu than Chu is to steal from his ex-employer. Who cheated
whom is something that must be resolved at trial rather
than on the complaints.
The judgment is affirmed to the extent that it dismisses
the counterclaim against Hecny Hong Kong and all of
Hecny U.S.’s claims based on misappropriation of trade
secrets. The decision not to issue an injunction enforcing
the covenant not to compete also is affirmed. The judgment
otherwise is vacated, and the case is remanded for deci-
sion on the merits. Circuit Rule 36 will apply on remand.
A true Copy:
Teste:
________________________________
Clerk of the United States Court of
Appeals for the Seventh Circuit
USCA-02-C-0072—10-31-05