IL ANALYSIS

A. Standard of Review

The purpose of a motion to dismiss under Rule 12(b)(6) is to decide the adequacy of the
complaint, not the merits of the case. See Gibson v. City of Chicago, 910 F.2d 1510, 1520 (7th
Cir,1990). In considering a motion to dismiss, we must accept all well-pled allegations in the complaint
as true and draw all reasonable inferences in the plaintiff's favor. See MCM Partners, Inc. v. Andrews-
Bartlett & Assoc., Inc., 62 F.3d 967, 972 (7th Cir.1995), aff'd 161 F.3d 443 (71h Cir.1998), cert. denied
528 U.S. 810 (1999). Therefore, a complaint should not be dismissed "unless it appears beyond all doubt
that the plaintiff can prove no set of facts in support of his claim which would entitle him to relief."
Conley v. Gibson, 355 U.S. 41, 45-46, 78 S.Ct. 99, 102, 2 L.Ed.2d 80 (1957). Moreover, a parly
pleading facts constituting fraud or mistake must do so with particularity. See Fed.R.Civ.P. 9(b).

B, Discussion

Count I: Breach af Contract

To plead a cause of action for breach of contract, a plaintiff must allege: (1) the existence of a
contract; (2) a breach of the contract by the defendant; (3) plaintiff's performance of all conditions; and
(4) damages to plaintiff as a consequence.’ See Disk Jockey Referral Network, Ltd. v. Ameritech
Publishing of Hlinois, 230 Il. App.3d 908, 912, 172 II. Dec, 725, 596 N.E,2d 4 (1992). Shapiro-Olefsky
first alleges that the non-compete agreement constituted a contract between itself and Cohen. See Pl.
First Am. Compl. J 1, 27. Cohen counters that Shapiro-Olefsky failed to plead that the non-compete

agrcement is a reasonable restriction on trade. Shapiro-Olefsky need not plead such an element to state

*The partics apparently agrec that Illinois law governs all of the state-law claims in this casc.
Therefore, for the purposes of this motion, the court will apply Illinois state law to all of the state-
law claims.

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Count IT: Fraudulent Misrepresentation
Cohen claims that Shapiro-Olefsky has not stated a cause of action for fraudulent
misrepresentation.* To state a cause of action involving fraud in Illinois, a plaintiff must allege:
(1) a false statement of material fact; (2) the party making the statement knew or
believed it to be untrue; (3) the party to whom the statement was made hada right to rely
on the statement; (4) the partly to whom the statement was made did rely on the

statement; (5) the statement was made for the purpose of inducing the other party to act,
and (6) the reliance by the person to whom the statement was made led to that person's

injury.

Brandon Apparel Group, Inc. v. Quitman Mfg. Co., Inc., 52 F. Supp.2d 913, 921 (N.D. Ill. 1999),
(citing Siegel v. Levy Org. Dev. Co., 607 N.E.2d 194, 198 (Ill. 1992)).

Shapiro-Olefsky adequately pled each of the six clements of fraud, First, Shapiro-Olefsky’s
complaint states that Cohen affirmed that the Non-Compete Agreement was still in “full force and
effect,” which Shapiro-Olefsky claims was both material and false. See Pl, First Am. Compl. 4/35.
The representation was material, according to Shapiro-Olefsky, because it was this statement which
induced Shapiro-Olefsky to pay Cohen the $175,000.00 owed under the promissory note, See id.

The representation was false because Cohen had been performing services for Dr. Gaynor, who was
arestricted client, according to Shapiro-Olefsky. See id at §f| 18, 35.

Next, the complaint states that Shapiro-Olefsky had a right to rely on that misreprescntation.

See id. at 37. Shapiro-Olefsky points to the remedy provisions in the non-compctition agrecment as

proof of its right to rely upon the mistepresentation. Shapiro-Olefsky also alleges facts in support of

§Shapiro-Olefsky categorizes Cohen’s behavior as fraudulent misrepresentation, but Cohen
treats it as promissory fraud. For purposes of a motion to dismiss a complaint alleging any type of
fraud, we need only satisfy ourselves that Shapiro-Olefsky has adequately stated a claim with
particularity. Therefore, the distinction between fraudulent misrepresentation and promissory fraud
is irrelevant at this stage.

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28, 1996 signing of the non-compete agreement and the April 18, 1998 amendment to the non-compete.
Shapiro-Olefsky alleges that Cohen’s work during this time period violated the non-competition
agreement. Third, Shapiro-Olefsky claims Cohen continued to perform services for Dr. Gaynor after the
execution of the amendment.’

The amendment specifically allowed Cohen to perform accounting services for certain
individuals and entities for whom Cohen had previously been prohibited from servicing.’ Despite this
change, the amendment provided that the non-compete agreement would remain in “full force and
effect.” On May 1, 1998, Shapiro-Olefsky, belicving that Cohen’s signature on the amendment
represented his continued adherence to the terms of the non-compete agreement, paid Cohen the amount
due under the note, as amended. Shapiro-Olefsky claims that it “secently discovered evidence that
Cohen violated the terms of the non-compete agreement prior to its expiration and prior to the execution
ofthe amendment.” Pl. First Am. Compl. 4] 17. Shapiro-Olefsky filed suit against Cohen alleging breach

of contract and fraudulent misrepresentations.

This would have been a continuing violation, barring an exception within the terms of the
Amendment. The time period at issue in this case, however, is the second time period.

4The Amendment, like the Non-Compete Agreement, did not specify which individuals
Cohen could now perform services for, thus it is unclear if Dr. Gaynor was still subject to the
original agreement after the Amendment. Whether Dr. Gaynor had been removed from the restricted
clients list, however, is not important at this stage because Shapiro-Olefsky adequately pled a breach
of the Non-Compete Agrecment at the second time period.

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aclaim for breach of contract®, Indeed, Cohen's argument addresses the merits of the complaint rather
than whether the complaint states a claim. As such, we find that Shapiro-Olefsky has pled the first
element of a breach of contract claim.

Shapiro-Olefsky next alleges that Cohen breached the non-compete agreement. See PI. First Am.
Compl. ¥ 1, 17-18, 22-24, 29-31. Cohen asserts that Shapiro-Olefsky failed to identify to whom Cohen
provided services so as to breach the non-compete agreement, We disagree. According to Shapiro-
Olefsky's complaint, the non-compete agreement prohibited Cohen from providing services those entities
or individuals who were clients of either the Cohen Group or Shapiro-Olefsky in the threc years prior
to the execution of the agreement. See Pl. Compl. at ff 1, 10-12 Shapiro-Olefsky states that Cohen
provided services to Dr, Gaynor, an individual who was subject to the non-compete agrecment, after the
agreement's execution. See Pl. Compl. at 18, 21-22. It is clear that Shapiro-Olefsky's complaint
identifies Dr. Gaynor as an individual for whom Cohen provided services in violation of the non-
compete agreement.

Third, Shapiro-Olefsky alleges that it performed its obligations under the non-compete
agreement. See Pl. Compl. at ff 1, 8, 25, 28, 34, Cohen does not dispute that Shapiro-Olefsky
complied with the terms of the agrecment. Shapiro Olefsky also alleges the fourth element ofabreach
of contract claim: that it was damaged by Cohen's breach, See Pl. Compl. at {ff 1, 25, 32, 35, 37-38.
Shapiro-Olefsky states that it paid Cohen $175,000 based on his representation when the amendment
was executed that the non-compete agreement was still in full force and cffect. See Pl. Compl. at if] 1,

17,35. Cohen made this representation despite having provided services to Dr. Gaynor, an individual

*Although Shapiro-Olefsky need not plead that the Non-Compete Agrecment was a
reasonable restriction on trade, Cohen agreed, in executing and signing the Non-Compete
Agrecment, that the duration and geographical scope of the Agreement were fair and reasonable. See
PL.[’s] First Am. Compl. Ex. C 1d.

5-



the fourth element ofits fraudulent inducement claim; Shapiro-Olefsky’s payment of $175,000 indicates
that it relied on Cohen’s representations. See Pl. First Am. Compl. 37.

Fifth, the complaint states that Cohen intended for Shapiro-Olefsky to rely and act on the
misrepresentation. See id. at { 36, Shapiro-Olefsky claims that Cohen’s misrepresentations about his
compliance with the terms of the non-compete were intended to induced Shapiro-Olefsky into paying
Cohen the $175,000 duc under the promissory note. See id. Finally, Shapiro-Olefsky sufficiently alleged
that Cohen’s misrepresentations led to Shapiro-Olefsky’s damages.” See id, at 4] 37. Under the non-
compete agreement, Shapiro-Olefsky had no duty to pay Cohen the sum due under the promissory note
in the event of a breach by Cohen. Had Shapiro-Olefsky becn forthcoming about his services for Dr.
Gaynor, Shapiro-Olefsky would not have madc payment under the promissory note.

Il. CONCLUSION

For the foregoing reasons, we deny Defendant’s motion. It is so ordered.

{
MARVIN E. ASPEN pe
United States District Judge

Dated holo 4
7? 7

°As stated above, the liquidated damages clause is not unreasonable and therefore does not
bar Shapiro-Olefsky from recovery. Also, the liquidated damages clause was separate from ihe
$175,000.00 remedy from amounts paid under the Note.

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Minute Order Ferra (08/97)

United States District Court, Northern District of Iinois

—

"ae of eae de Marvin Aspen sig de te

CASE NUMBER 02 € 9499 DATE 7/10/2003

CASE Shapiro Olefsky & Co. vs. Stanley Cohen

TITLE

{In the fullowing box (a) indicate the purty filing the motion, e.g., plaintiff, defendant, 3td party plaintiff, and (b) state briefly the nature
MOTION: of the motion being presented. ]
—

DOCKET ENTRY;
qy Q Filed motion of [ use listing in “Motion” box above.]
(2) i) Brief in support of motion due
(3) a Answer brief to motion due_____. Reply to answer bricfdue___.
(4) a Ruling/Hearingon set fora
(5) 0 Status hearing(held/continued to] (set for/re-set for)on set ffor_— at
(6) oO Pretrial conference[held/continued to] [set for/re-set for]on___—ssetfor at.
(7) oO Trialfsct for/re-set forJon_—-_at__
(8) o [Bench/Jury trial] [Hearing] held/continued to at | _
(9) oO This case is dismissed [with/without] prejudice and without costs[by/agrecment/pursuant to}

OFRCP4(m) [Local Rule 41.1. OOFRCP41(aX(1) [ FRCP41(a)(2).

qo [Other docket entry] Enter Memorandum Opinion and Order: Defendant’s motion to dismiss (6-1
& 13-1) plaintiff's complaint is denied.

apy @ [For further detail see order attached to the original minute order.]

No notices requited, advised in open court.

‘Document
Number

No notices required. umber of meee

| Notices maited by judge’s stuff.

pat
Notified counsel by telephone. JUL I 1 2863

dats docke

Docketing to mail notices. C
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Mail AO 450 form: 2 sonfebut

Copy to judge/magisirate judge.

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courtroom s sate led atic
GL deputy's vy hk on
initials eral B
Gi" Duteltime received in
gontral Clerk's Office ‘mailing depunry initial



subject to the non-compete agreement. See Pi. Compl. at fff 18-21, 35. Furthermore, Shapiro-Olefsky
notes that, under the liquidated damages clause of the non-compete agreement, it is entitled to 200% of
Cohen's annual billings. See Pl. Compl. at {{f 14, 32.

Cohen argues that Shapiro-Olefsky is barred from recovering under the liquidated damages
clause. We disagree. A liquidated damages clause is valid under Illinois law if the damages from a
breach are difficult to calculate and the amount of the fixcd damages are a reasonable forccast of the
damage likely to occur. See Bauer v. Sawyer, 134 N.E.2d 329, 333 (Ill. 1956). A provision that does
not meet each requirement will be construed as a penalty. See id. Cohen has the burden of proving that
the liquidated damages provision to which he knowingly consented was actually a penalty clause, See
First Nat'l Bank af Chicago v. Tele-Network Co., 946 F.2d 516, 521 (7th Cir. 1991). It is unclear
whether Cohen disputes that it was difficult to calculate the damages from a breach at the time the
parties entered into the non-compete agreement. It is also unclear whether Cohen disputes that the fixed
damages were a reasonable forecast of the damage likely to occur. Instead, Cohen argues that his
consent to the non-compete agrecment gencrally, and to the liquidated damages clause specifically, does
not make the clause enforceable per se. Cohen therefore has failed to mect his burden of identifying any
aspect of the liquidated damages clause which makcs it either unreasonable or unenforceable. We
therefore reject Cohen's argument that Shapiro-Olefsky is barred from recovering under the liquidated

damages clause’ and hold that Shapiro-Olefsky has stated a claim for breach of contract.

7Cohen also argues that the liquidated damages clause is invariant and therefore
unreasonable. Cohen lumps together the remedy that calls for 200% of annual billings and the
remedy of voiding unpaid money due under the Note, He claims that the sum is invariant because
Shapiro-Olefsky asks for $175,000.00 either way. However, Cohen misinterprets the terms of the
Agreement. The two damage remedies appear in two separate, clearly identifiable subsections of the
Non-Compete Agreement. The 200% of annual billings is the only liquidated damages remedy. ‘The
$175,000.00 is not part of the liquidated damages. Because the liquidated damages clause varies
according to Cohen’s annual billings, it is not unreasonable.

6-



UNITED STATES DISTRICT COURT
NORTHERN DISTRICT OF ILLINOIS

EASTERN DIVISION
SHAPIRO, OLEFSKY & COMPANY, )
an Illinois partnership, ) JUL % i 2003
Plaintiff, }
v. } Case No. 02 C 9499
STANLEY COHEN, an individual, }
Defendants.

MEMORANDUM OPINION AND. ORDER
MARVIN E. ASPEN, District Judge:

Plaintiff Shapiro, Olefsky & Company (“Shapito-Olefsky”) filed a two-count complaint against
Defendant Stanley Cohen (“Cohen”), alleging breach of contractual obligations arising from a covenant
fot to compete (Count J), and fraudulent misrepresentations relating to that covenant (Count Tl).
Presently before us is Cohen’s motion to dismiss Shapiro-Olefsky’s complaint. For the reasons sct forth
below, we deny Defendant's motion.

1 BACKGROUND!

On October 28, 1996, Cohen agrecd to sell his accounting practice, the Cohcn Group (“Cohen
Group”), inan Asset Purchase Agreement to Shapiro-Olefsky. Shapiro-Olefsky purchased certain clicnt
lists, work papers, and goodwill from the Coben Group. Shapito-Olefsky paid Cohen $175,000 for the
assets on October 28, 1996. The parties also exccuted a Promissory Note (‘“‘note” or “promissory note”)

for an additional $241,000, plus interest, payable to Cohen on May 1, 1998. The promissory note served

‘The following facts are taken from Plaintiff's complaint and are deemed true for the
purposes of this motion. See MCM Partners, Inc. v. Bartlett Assoc., Inc., 62 F.3d 967, 972 (7th Cir.

ms n

OO TT



as compensation to Cohen for his adherence to the covenant not to compete and non-solicitation
agreement (“non-compete agreement” or “agreement”). The non-compete agreement prohibited Cohen
from servicing his former clients and certain Shapiro-Olefsky clients for the next three years, Under the
agreement, a “client” was any person or entity for whom Shapiro-Olefsky or the Cohen Group had
performed services in the three years immediately preceding October 28, 1996.2 The non-compete
agreement contained a liquidated damages clause, which required Cohen to pay Shapiro-Olefsky two
hundred percent (200%) of his annual billings in the event of a breach. The agreement also stated that
any breach by Cohen would cause the amount then unpaid under the promissory note to become null and
void. Further, Cohen stipulated that the duration and geographical scope of the agrcement were fair and
reasonable in the accounting field at that time. He also agreed that the agrecment did not deprive him
of the ability to support himself or his family.

The promissory note provided for a recalculation of the principal and revision of the restricted
client list on November 1, 1997. On April 18, 1998, the parties executcd an amendment to the
promissory note (the “amendment ’), which stated that the principal amount of the promissory note had
been reduced from $241,000 to $175,000 as of November 1, 1997.

Shapiro-Olefsky claims that between October 1996 and April 1998 Cohen provided accounting
services for numerous individuals in violation of the terms of the non-compete agreement. Specifically,
Shapiro-Olefsky alleges that Cohen performed services for Dr. Michael Gaynor (“Dr. Gaynor”) at thtce
important time intervals. First, Cohen had performed services for Dr. Gaynor immediately preceding
the signing of the non-compete agreement on October 28, 1996, which places Dr. Gaynor within the list

of restricted clients. Second, Cohen allegedly performed services for Dr. Gaynor between the October

The Agrcement extended to or any subsidiary, affiliate, spouse, issue or sibling of any such
person or entity.

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