Hess Newmark Owens v. Owens, Doris

In the
United States Court of Appeals
For the Seventh Circuit
____________
No. 04-4293
HESS NEWMARK OWENS WOLF, INC.,
Plaintiff-Appellant,
v.
DORIS OWENS and OWENS GROUP, INC.,
Defendants-Appellees.
____________
Appeal from the United States District Court for
the Northern District of Illinois, Eastern Division.
No. 04 C 4821—Michael T. Mason, Magistrate Judge.
____________
ARGUED MAY 13, 2005—DECIDED JULY 11, 2005
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Before CUDAHY, EASTERBROOK, and KANNE, Circuit
Judges.
EASTERBROOK, Circuit Judge. In 1998 four veterans of
the motion-picture promotion business—Mary Hess, Barry
Newmark, Doris Owens, and Stuart Wolf—decided to pool
their efforts. They formed Hess Newmark Owens Wolf, Inc.,
or HNOW, to provide advertising, public relations, and
promotional services to studios. Each of the four held 22.5%
of the stock (a fifth investor received 10%). Each had
operated an independent agency. Three of the four closed as
part of HNOW’s formation; the exception was Owens Group,
2 No. 04-4293
Inc. (OGI), which offered promotional services from its base
in Cincinnati. The principals of the new venture agreed that
OGI could remain in business, with Owens as its leader,
provided that it confined its activities to Ohio, Kentucky,
and the Indianapolis area. All four agreed on restrictive
covenants that would limit their work in the
movie-promotion business to HNOW for as long as he or she
owned stock in HNOW and three years thereafter, in any
part of the country where HNOW did business—again with
the exception of the territory in which OGI held grandfather
rights.
That promise made it easier for the three principals
who burned their bridges behind them to devote full ener-
gies to HNOW. But for the restrictive covenant, each of the
three would face not only the business risks endemic to the
venture but also the risk that one or more of the other
principals would bolt and leave the others with neither a
viable business at HNOW nor another business to go back to.
See Gary S. Becker, Human Capital 45-57 (3d ed. 1993).
Keeping a personal-services business together can be diffi-
cult without the sort of trust and confidence engendered by
promises to stick with the firm rather than strike off on
one’s own at the first opportunity. Owens had more of a
cushion, for she not only received the promises of the other
three but also retained her business at OGI. She was ex-
pected to be the principal rainmaker and used this to fortify
her position. The opportunity to do business without
sharing any of the profits with Hess, Newmark, and Wolf
proved irresistible, however, and by 2003 Owens was using
OGI to sell consulting services to Terry Hines Associates
(THA), one of HNOW’s business rivals. Owens helped THA set
up new offices on the east coast (outside the states to which
OGI was supposed to be limited), hire staff, and secure busi-
ness there. Owens could have helped HNOW set up outposts,
but she assisted its rival instead—and did not tell anyone
at HNOW that she was doing this. When Hess found out, he
told Owens in good movie-speak: “You are so fired!”
No. 04-4293 3
The board backed Hess up, and HNOW filed this suit under
the diversity jurisdiction seeking an injunction against
Owens’s work for anyone else in the movie-promotion
business, except through OGI in the reserved locations. (The
plaintiff is HNOW rather than HNW because Owens retains
her investment interest, and the firm has not changed its
name—perhaps hoping that if it wins the case Owens will
return to the fold and it can consummate a merger that was
put on hold when the prospective partner discovered that
Owens was a double agent.) The parties consented to final
decision by a magistrate judge, see 28 U.S.C. §636(c), who
concluded after a five-day evidentiary hearing that Owens
probably has violated her duty of loyalty as a director by
appropriating a corporate opportunity (as she could have
performed the same consulting work through HNOW).
Moreover, the judge concluded, Owens has violated the
restrictive covenant by performing work in the
movie-promotion business. The covenant, which specifically
includes consulting work as well as other services, runs as
far as the area in which HNOW competes, and as it is trying
to become a national agency that territory is the nation.
Nonetheless, the court held, HNOW is not entitled to injunc-
tive relief because it failed to establish that it lost any
particular account to THA as a result of Owens’s efforts on
its behalf. 2004 U.S. Dist. LEXIS 25636 (N.D. Ill. Dec. 15,
2004). Inability to establish lost business meant lack of
irreparable injury, and there can be no injunction without
irreparable injury.
The decision is wrong on its own terms, because HNOW did
show a loss. HNOW sells consulting as well as advertising
services. It could have sold THA the very services that
Owens did through OGI; indeed, Owens could and should
have billed these services through HNOW. That is why the
magistrate judge deemed HNOW likely to prevail on its con-
tention that Owens diverted a corporate opportunity to her-
self, in breach of her fiduciary duty. For a substantial
4 No. 04-4293
period during 2003 and 2004, Owens devoted 100% of her
time to THA. What is more, Owens is continuing to provide
services to THA to assist the newly opened offices to flourish.
The income from that endeavor is (or should be) one of
HNOW’s assets, since the THA offices are located outside
Ohio, Kentucky, and Indianapolis. An injunction could put
a stop to that ongoing diversion.
The district court’s decision has a deeper problem, how-
ever: a legal rule that irreparable injury can be established
only by a concrete demonstration along the lines of “we lost
the Philadelphia advertising business of Warner Bros. to
THA as a result of Owens’s work for our rival” would make
injunctions useless as a practical matter. If proof of par-
ticular injuries could be supplied, then the injury would
be reparable by damages; it is precisely the difficulty of
pinning down what business has been or will be lost that
makes an injury “irreparable.” See Hilton v. Braunskill, 481
U.S. 770, 776 (1987). Competition changes probabilities: a
THA with stronger east-coast offices may improve by 5% or
10% the chance of receiving particular business from a
particular studio. Over many years with hundreds of movies
being promoted in 50 or more major metropolitan areas, a
5% swing can represent a lot of business—but HNOW will
not be able to identify which contracts slipped from its
grasp.
Illinois recognizes this. (The parties agree that its law
governs.) It treats ongoing competition itself as a sufficient
basis for relief. See, e.g., Gold v. Ziff Communications Co.,
196 Ill. App. 3d 425, 434, 553 N.E.2d 404, 410 (1st Dist.
1989) (“The failure of plaintiff to show an actual loss is not
dispositive”); U-Haul Co. v. Hindahl, 90 Ill. App. 3d 572,
577, 413 N.E.2d 187, 192 (3d Dist. 1980) (“It is not neces-
sary that a party seeking an injunction show an actual loss
of sales before relief will be granted”). Owens is engaged in
ongoing competition against HNOW; it is not as if she had
retired or become an architect. HNOW’s inability to show
No. 04-4293 5
that particular business has been lost therefore does not
foreclose equitable relief. Federal courts apply the same
rule to claims under the federal-question jurisdiction. See
Northeastern Florida Chapter, Associated General
Contractors of America v. Jacksonville, 508 U.S. 656 (1993)
(reduction in the probability of obtaining business is enough
to support an injunction); In re Aimster Copyright
Litigation, 334 F.3d 643 (7th Cir. 2003) (to obtain an
injunction the plaintiff must show a legal wrong and likely
injury but not specific financial loss).
Owens contends that the judgment should be affirmed
nevertheless because the covenants are unreasonable. Her
principal contention is that Illinois would not enforce a
nationwide prohibition. (She also contends that the scope of
covered activities is too broad; we need not discuss this
separately.) A national ban is not, however, what the cove-
nants provide. They define the “restricted territory” as the
place where HNOW markets its services or plans to do so
in the three years during which the restrictions continue. If,
as Owens insists, HNOW is a regional rather than a national
agency, a wish to grow does not enlarge the “restricted
territory.” The precise scope of “restricted territory” is for
the district court to pin down on remand. No matter what
HNOW’s plans, moreover, Owens is entitled to do business in
the reserved territory: Ohio, Kentucky, and Indianapolis.
Let us suppose that HNOW has active plans to market
in states outside the territory where OGI is entitled to do
business. Would that make the covenants unreasonably
broad? Owens says yes, relying on Illinois’ hostility toward
restrictive covenants. But when she formed HNOW she
expressed a different view. Paragraph 7(F) of the sharehold-
ers’ agreement provides: “Each Shareholder represents that
he or she is familiar with the covenants not to compete and
not to solicit contained herein and is fully aware of his
obligations hereunder and agrees that the length of time,
scope and geographic coverage of these covenants
6 No. 04-4293
is reasonable given the benefits received by him or her
hereunder.” The “benefits [Owens] received . . . hereunder”
include, as we have mentioned, the commitment of the
other three principals to give up their own businesses and
join her in HNOW, which was expected to be stable in part
because the covenants would make it hard for any of the
four to jump ship later. We see no reason to ignore Owens’s
representation to her colleagues—a representation that
induced the other founders to join HNOW—that she would
not challenge the covenants’ reasonableness later. This sort
of representation made in court would bind Owens; why
should it be less effective because made out of court? Cf.
Newton v. Rumery, 480 U.S. 386 (1987) (enforcing a cove-
nant not to sue); Rissman v. Rissman, 213 F.3d 381 (7th
Cir. 2000) (treating as binding an investor’s representation,
made as part of a stock transaction, that he had not relied
on any of the buyer’s oral statements). No third parties are
adversely affected; plenty of competition remains to protect
movie studios and their customers.
The state’s grudging attitude toward restrictive covenants
is best understood as resting on a concern that employees
can be tricked into making promises that seem of small
detriment but later prove to be disabling. See generally the
discussion in Outsource International, Inc. v. Barton, 192
F.3d 662, 669-71 (7th Cir. 1999) (Posner, J., dissenting). But
Owens was an entrepreneur, not an ordinary employee; and
what she gained by these covenants was not only a salary
but also the opportunity to create a new business and
secure the loyalty of her co-venturers. She is an intelligent
adult and had the benefit of legal counsel in the transac-
tion.
Illinois may be skeptical about covenants executed by
salesmen and other employees, but it is quite willing to
enforce covenants executed by entrepreneurs in order to
form or sell a business. See, e.g., Central Water Works
Supply, Inc. v. Fisher, 240 Ill. App. 3d 952, 956-58, 608
No. 04-4293 7
N.E.2d 618, 621-22 (4th Dist. 1993). This implies not simply
a willingness to permit the entrepreneurs to bind them-
selves (through covenants) to the new venture but also a
willingness to enforce provisions such as ¶7(F) that forestall
litigation about the covenants’ reasonableness. If a covenant
were independently forbidden by some other rule of
law—for example, a covenant to forfeit a pound of
flesh—then a representation that the covenant was “reason-
able” would be empty. But Illinois does not forbid restrictive
covenants; it permits those that are matched reasonably
well to the business objectives and risks at stake. One
decision approved language that is all but identical to the
text Owens signed. Health Professionals, Ltd. v. Johnson,
339 Ill. App. 3d 1021, 791 N.E.2d 1179 (3d Dist. 2003). See
also Fister/Warren v. Basins, Inc., 217 Ill. App. 3d 958, 964-
65, 578 N.E.2d 37, 41-42 (1st Dist. 1991) (enforcing a
five-year, nationwide covenant by entrepreneurs ancillary
to the sale of a business). An agreement ex ante among the
entrepreneurs that these covenants do fit their needs, and
that they have received sufficient benefits in exchange for
the restraints, is the sort of exchange that any jurisdiction
must enforce if it wants to promote the formation and
success of new businesses. Illinois has given no indication
that it would refuse to enforce an entrepreneur’s acknowl-
edgment that a given covenant is reasonable.
The judgment of the district court is reversed, and the
case is remanded with instructions to issue an injunction
enforcing Owens’s covenants, after first resolving any dis-
pute about the extent of the “restricted territory” defined by
the parties’ agreement.
8 No. 04-4293
A true Copy:
Teste:
________________________________
Clerk of the United States Court of
Appeals for the Seventh Circuit
USCA-02-C-0072—7-11-05