The Wage Act

The sales representative had this dilemma: He had an offer of new employment that would soon expire. But to collect commissions on sales made in the current year he had to remain with his current employer until April 1st of the next year.

The question was whether he had any tools available, other than his own powers of persuasion, to obtain the commission immediately.

Answer: Probably.

The Illinois Wage Payment and Collection Act ("Wage Act" or "Act"), 820 ILCS 115/1 et seq., classifies earned commission as final compensation for purposes of paying "separated" employees. The commission in this case was, in fact, earned. The sales had been closed. The goods had been received and paid for.

Section 5 of the Act states that the employer "shall pay" the final compensation of a separated employee at the time of separation if possible but in no case later than the next pay day. And there is no except-for language in case the agreement of the parties calls for payment on some other basis. Moreover, an agreement in Illinois incorporates and includes the law of Illinois in effect at the time when the agreement was made unless the agreement clearly excludes such incorporation. The agreement under examination here did not contain that exclusion. Hence, there was a conflict between the agreement that required presence on the payroll until April 1st of the year to come and the Act, and the agreement had to yield to the Act.

That would seem to put the employee in a solid position to accept the new offer of employment and demand his commissions. So why is the answer to the question posed above just "probably"? Because the Act applies only to "Illinois employers." It was far from clear whether there was an "Illinois employer" in this case.

The company was organized under the laws of a state other than Illinois. It had its principal place of business in a state other than Illinois. Its presence in Illinois was largely confined to the presence of its sales representative, an Illinois resident who conducted business from a location in Illinois. Most of the decisional law that bears upon this question is something less than "controlling legal authority." For it comes from the federal trial courts in Chicago and it analyzes the "Illinois employer" question on a case-by-case basis.

We recently made an inroad of sorts on this point before the Illinois Appellate Court. It began with a six-figure money judgment against an out-of-state business executive who was found personally liable for the severance pay of a former employee on the grounds that he had knowingly permitted the true employer to violate the Act by withholding the pay. (Under section 13 of the Act company officers who knowingly permit an employer to violate the Wage Act are deemed to be the employer and are personally liable for the pay.)

There was no question that the true employer in the case was an "Illinois employer": It was a limited liability company organized under Illinois law and it had its only business office in Illinois. The executive contended that he could not be personally liable unless he, too, was as an "Illinois employer," and he could not be an "Illinois employer" because he lived and worked outside Illinois and had virtually no physical contact with Illinois.

The Illinois Appellate Court rejected that contention and affirmed the judgment on the grounds, among others, that his duties as an officer of an Illinois company were sufficient to confer personal jurisdiction over him under our "long-arm" statute and bring him to trial on the question whether he knowingly permitted the true employer to violate the Wage Act.

The upshot is: In order for the Wage Act to apply at all, the true employer (or the employer-in-fact) must be an "Illinois employer," but only the employer-in-fact need be an "Illinois employer."

Doing Business Without a Well Drawn Contract

by David McCarthy

Many are the stories of successful businesses that began with a contract drawn on a cocktail napkin. Contracts don't much matter when everything is going well.

Contracts matter when things go wrong.

One of our clients is now in litigation over a bare bones contract made with a rascal and without the benefit of counsel. The decision to save on expenses on the front end by skipping the lawyers and banging out a crude one-page agreement with the other party has proven to be a false economy.

IT IS BECOMING EVER EASIER TO ENFORCE NON-COMPETE AGREEMENTS.

by David McCarthy

It has long been my position that an attorney preoccupied with his/ her win-loss record would rather oppose a non-competition agreement than attempt to enforce it. They have been difficult to enforce in Illinois, and for good reason: They are a restraint on trade.

But the worm is turning. First, the "blue pencil rule" has gained some traction in Illinois. There was a time when our courts would withhold enforcement of a non-competition agreement if they determined that it was unduly broad in time or area, even if the agreement included a "blue pencil" clause.

The "blue pencil" clause, a staple of non-competition agreements, authorizes a court-ordered narrowing of time and area limitations if those which the agreement recites are deemed too broad. Illinois was slow to accept the "blue pencil rule" on the theory that it amounted to re-making the agreement of the parties. And this spared employers from a sordid temptation to overreach on the front end. After all, why not shoot for the moon -- write in outrageous time and area restrictions -- if, worst case, the court can be counted on to apply the "blue pencil rule" and pare back the time and area restrictions? Nonetheless, over time, the "blue pencil rule" has gained some favor in Illinois.

In September of 2009 one of our Illinois Appellate Courts took an even more dramatic step in favor of the enforceability of non-competition agreements. The Fourth District Appellate Court (central Illinois, including Springfield) held that the "legitimate business interest" prong of the analysis was irrelevant. For ages, the proponent of a non-competition agreement was obliged to establish (i) the reasonableness of the time and area restrictions and (ii) that enforcement (an injunction) was necessary to protect a "legitimate business interest" of the employer (e.g., an interest in preserving confidential information or a "near-permanent" relationship with customers). In today's Fourth District, the proponent need only show that the time and area restrictions are reasonable (and the "blue pencil rule" is often available in aid of that showing).

Does this matter in the real world? You bet it does. Some time ago, we successfully opposed an action to enforce a non-competition agreement on the grounds that the former employer did not have the "legitimate business interest" that was necessary to obtain an injunction. Our client spent all his time at the office of the customer, and the only "confidential information" accessible to him was the customer's information, not the employer's information. Additionally, the customer relied on its own personnel and a number of other outside organizations for the same sorts of services which the employer provided. Finally, despite allegations that "vast sums" had been expended to cultivate the customer, the evidence was to the contrary: All advertising was generic. No advertising was customer-specific. And beyond that the "vast sums" spent to woo the customer consisted of $130.00 doled out to buy lunch on a number of occasions.

All that would be irrelevant in today's Fourth District. Whether the law of the Fourth District will become the law elsewhere in Illinois remains to be seen. There is now a conflict among the districts, and one of the chief functions of the Illinois Supreme Court is to resolve conflicts among the Appellate Courts. Stay tuned.

PAY ME NOW OR PAY ME LATER

By David McCarthy

You don't need a well-written contract when everyone is performing as agreed. You need it when things change for the worse. Everything is always changing, of course, and all too often changing for the worse.

A number of matters that have come into the office lately have driven those points home. In one case, a client dealing with a known rascal preferred to sign off on an agreement that was virtually drawn on a cocktail napkin than to pay an attorney a few bucks to "rascal-proof" the agreement. It was only a matter of time before the rascal did what rascals do. The client has paid far more to keep the rascal in check and the effectiveness of those efforts is much harder to measure than would be so had a well-written contract been drawn at the start of the relationship between rascal and client.


In another case a group of would-be partners had the good sense to commission a well-drawn contract on the front end. Their objective was to share gains and losses equally.

That seems simple enough, doesn't it?

Imagine several boys with paper routes who meet in their tree house and deposit their collections in a coffee can. At the end of the month, they count out the money in the can and divide it equally.

What could go wrong with that?

Not much if they are all delivering the same newspaper to the same number of customers, achieving the same rate of collection, depositing every dime they agreed to deposit; and if no third parties have any claim on the money in the coffee can (e. g., the Internal Revenue Service, the Illinois Department of Revenue, the Illinois Department of Employment Security, spouses, children, dependents, and all the rest of it).

Since the would-be partners are grown men with lives and obligations that are a bit more complicated than those of boys with paper routes in a tree house, putting down on paper an agreement that meets the needs of all is of utmost importance and demands care and attention.

DILETTANTE BUILDER FORCED TO BUY BACK HOUSE

We went to trial against a first-time homebuilder and got a judgment that required him to refund the full purchase price to our client ($280,000.00) and take back a deed to the house. The defendant asserted that he was a "casual seller" on the grounds that he had lived in the house after he built, and therefore he was liable, if at all, only for damages (e.g., costs of repair).

Cross examination of him at the end of trial showed that he was a "builder-vendor" and as such liable to take back the house and refund the purchase price. A snapshot of the house and its front lawn clearly showed a "for sale" sign from one of the national real estate agencies. Under it was a little white sign that could not be read with the naked eye. But a magnifying glass showed that the sign said the house had been built by the defendant's home-building company.

The snapshot was shown to the defendant, who said the white sign was too small to read. The magnifying glass was pulled out and handed to him. "Try this." The defendant pushed aside the glass and the photo, looked the judge in the eye, and told him the sign said the house had been built by his company.

Result: Instead of a judgment for damages, which would have meant that our client had to keep the house, there was a judgment for rescission: The defendant took back the house and refunded the purchase price.

COVENANTS NOT TO COMPETE AND CONSIDERATION

by David McCarthy

Enforceable covenants not to compete are, like giant pandas, few and far between.

Why?

Because they are restraints on trade.

The law abhors restraints on trade, and therefore covenants not to compete will be scrutinized with care to ascertain whether they do or do not prevent competition per se. One object of this scrutiny is an element that is always indispensable to formation of a contract but usually a matter of indifference: consideration, or what might be more easily understood as quid pro quo, though the scholars cringe when the terms are used interchangeably. Consideration is the "great divide" of contracts, the element which separates promises that will be enforced from those that will not.

When the contract under examination is a covenant not to compete, the law will take pains to examine consideration for its presence and for its adequacy.

Often enough the consideration for a covenant not to compete is cast in terms of continued employment. Is that consideration? Yes but only when the employment continues for a "substantial" period of time following formation of the agreement. What is a "substantial" period of time? There are decisions holding that employment for more than two years following formation of the agreement qualifies as "substantial."

One way to eliminate the uncertainty as to whether the continued employment is or is not "substantial" is to offer a different form of consideration, namely, a definite and substantial sum of money that is over and above what would otherwise be the employee's due, e.g., $250.00.

Consideration is a necessary but not sufficient condition. Its absence is fatal to the existence of a contract but its presence does not, in and of itself, make the agreement enforceable. There would be further scrutiny to ascertain whether a legitimate and protectible business interest of the plaintiff-employer is at stake and whether the restrictions in the agreement in question exceed what is reasonably required to protect those business interests.

DO-IT-YOURSELF IN SMALL CLAIMS COURT

by David McCarthy

Small claims court is a good place to be a plaintiff, if you must be a plaintiff at all.

It is a fast, simple, low-cost way to get a decision on a claim for money only that does not exceed $5,000, exclusive of interest and costs. Simplified pleading is permitted, discovery is prohibited except by court order, and generally there will be a trial on the date due for the defendant to respond to the summons.

The advantages are so great that it is worth considering ways to cope with some of the restrictions and requirements of the procedure.

One, a corporation which is a plaintiff must be represented by an attorney no matter how small its claim my be, but individuals may represent themselves no matter how great their claims may be. So a corporation might consider selling and assigning its claim to an individual, who can elect to proceed with or without counsel. The assignment should be in writing.

Two, when one plaintiff has claims against one defendant that aggregate more than $5,000.00, it is well to consider filing the claims in separate counts or even in separate suits.

Three, for those claims in excess of $5,000.00 that cannot be separated into counts there is no law against praying for the $5,000.00 maximum and waiving the right to the excess.

FIRM NEWS

• $70,000.00 settlement in case with truck company for injuries to motorist who needed no hospitalization and had medical bills under $6,000.00.

• Six years of litigation culminated in settlement for client-contractor who rebuilt flood-damaged mansion. Our client got every dime of the insurance proceeds at stake. The homeowner, our opponent, was represented by a 22-lawyer Chicago firm that is nationally known for representing "victims" of "toxic mold."

• $25,000 settlement for snowboarding injuries suffered in a header off a “rail” at local ski hill.

• The Illinois Tollway Authority demanded $30,000 from our client for unpaid tolls and penalties. Our defense: mistaken identity. One telephone call and one letter resolved the matter. Fines and penalties paid by client: zero.


• We bested the largest law firm in Oak Brook when we successfully defended a young computer consultant from overseas who was sued for violation of a non-compete agreement, unfair competition, and misappropriation of trade secrets by his former employer, a national consulting company. Their application for a preliminary injunction was denied after an evidentiary hearing of several days, which established, among other things, that the "vast sums" allegedly expended to cultivate the pertinent customer amounted to less than $130.00 for a few lunches. They appealed. The trial judge was affirmed. The opponent then threw in the towel and dropped the case.


• We won a trial against a high-brow Chicago firm in the U.S. Bankruptcy Court in Chicago. Our client was the trustee of a $40 million debtor's estate. The defendant-opponent faced a "preference" liability of nearly $400,000.00 and had only one defense worth talking about, i.e., that the trustee had blown the statute of limitations. We established at trial that the trustee's personnel got the suit papers to the courthouse on time, and it was an employee of the court clerk's office who delayed in processing them.

OF HOOTERS, FAXES AND CHERRY PICKER'S HEAVEN

By David McCarthy

The cost of sending an unsolicited advertisement by fax starts at $500.00. Just ask Hooters, the restaurant people. A client of ours was recently sued in another state for $1,500.00 under the Telephone Consumer Protection Act, 47 U.S.C. 277.

The misconduct?

Its marketing firm faxed an unsolicited one-page flyer to the wife of an attorney who built his practice out of suing small businesses that have not heard what happened to Hooters last year: a Hooters franchise in Georgia was forced into bankruptcy by a $12 million judgment in a class action lawsuit for unsolicited faxes advertising lunch specials.

The statute authorizes an individual to sue for minimum statutory damages of $500.00 (or for actual damages in the most unlikely event that they exceed statutory damages). The statute provides for strict liability, that is, if the recipient did not consent to the solicitation, the advertiser is liable for $500.00. The statute authorizes treble damages -- $1,500.00 for one page -- if the defendant "willfully or knowingly" violated the act.

Such phrases usually mean the plaintiff must demonstrate that the defendant was motivated by actual malice or ill will. But as for the statute in question, a case for a willful and knowing violation may be made simply by showing that the transmittal was not a matter of dialing a wrong number.

Nor may the advertiser defend on the grounds that a thrid-party vendor provided or dialed the fax number. Hooters learned that the hard way, too. It was no defense that it had acquired the relevant fax numbers from a third-party vendor. (The vendor, incidentally, was a former "Hooter's girl" who answered to the name "Bambi," and who took off for points unknown when the litigation began.) The rationale for the stiff damages imposed by the statute is that fax advertising is done at the expense of the prospective customer.


But still, fifteen hundred dollars for one page sent to the fax of a person who got up on the wrong side of the bed?

It seems a bit heavy-handed.

Until one recognizes that there are a lot of rascals out there who have developed a host of amusing, if not legally effective, dodges (e.g., the use of fax machines that do not leave "fax tracks," sending advertisements to a former occupant of the building).

Our favorite?

The bold ones announcing, in boilerplate, that this advertisement is being sent to you because you asked for it, but if you didn't ask for it, please accept our apology and call the following number to have your name removed from our list.

ANATOMY OF A LAWSUIT

By David McCarthy

All lawsuits have three phases: pleading, discovery and trial. In small claims court pleading is simplified, discovery is available only by permission of the court, and the rules of evidence are applied laxly if at all.

Pleadings. Lawsuits start with a plaintiff's complaint, a brief description of the acts and omissions imputed to the defendant and of the injury or damage allegedly caused thereby (e.g., personal injury, property damage, monetary loss).


The defendant will file an answer that admits and denies the various allegations of the complaint, thereby identifying the "triable issues" of the case, the contested questions of fact whose resolution is the purpose of a trial. Sometimes the answer will be accompanied by affirmative defenses or a counterclaim or both, to which the plaintiff will respond in like fashion, i.e., by admissions and denials. Cases can be dismissed on motion at the pleadings phase but that occurs about as often as the Cubs play in the World Series.


Discovery. In the discovery phase the facts that appear in skeleton form in the pleadings are fleshed out. Of the many tools available for this task, three are standard: requests for documents; interrogatories, written questions answered in writing on oath; and deposition, oral questions answered orally on oath. (President Clinton's impeachment woes started with interrogatories in the sexual discrimination lawsuit of Paula Jones that inquired whether other government employees had been subjected to conduct of the kind Ms. Jones complained of.)

Trial. The facts that emerge from the process above described may be lopsided enough to invite a trial avoidance procedure known as a motion for summary judgment. It proposes that trial is not needed because the important facts are undisputed and the judge need only apply the relevant law to the uncontested facts and enter judgment. This tool is used more often by defendants than by plaintiffs because plaintiffs must prove all elements of their prima facie case whereas defendants will prevail if any one element is obviated.

If summary judgment fails (and it often does because the standard of proof is exacting), and if the lawsuit cannot be settled, and if the plaintiff will not voluntarily withdraw it, then what is left is a trial. The office of a trial is to resolve questions of fact, that are still in dispute by the time the case reaches the trial phase. The facts of a case may be tried to a jury or tried to judge. But the law is always determined by a judge and never by a jury.