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 truc 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 (7th 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 y. Gibson, 355 U.S. 41, 45-46, 78 S.Ct. 99, 102, 2 L.Ed.2d 80 (1957). Moreover, a party
pleading facts constituting fraud or mistake must do so with particularity. See Fed.R,Civ.P. 9(b).

B. Discussion

Count I: Breach of 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. vy. Ameritech
Publishing of Illinois, 230 MI.App.3d 908, 912, 172 Ill.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, 4 1,27. Cohen counters that Shapiro-Olefsky failed to plead that the non-compete

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

°The parties apparently agree that Illinois law governs all of the state-law claims in this case.
Therefore, for the purposes of this motion, the court will apply Illinois state law to all of the state-
law claims.

4.



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 Ilinois, 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 had a right to rely

on the statement; (4) the party 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 (II. 1992)).

Shapiro-Olefsky adequatcly pled cach of the six elements 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. { 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
a restricted client, according to Shapiro-Olefsky, See id at J] 18, 35.

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

See id, at $37. Shapiro-Olefsky points to the remedy provisions in the non-competition agreement as

proof of its right to rely upon the misrepresentation. 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 nced 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.

-7-



28, 1996 signing of the non-compete agreement and the April 18, 1998 amendment to the non-compete.
Shapiro-Olcfsky 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 tha 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 adhcrence to the terms of the non-compete agrcement, paid Cohen the amount
due under the note, as amended. Shapiro-Olefsky claims that it “recently discovered evidence that
Cohen violated the terms of the non-compete agrecment prior to its expiration and prior to the exccution
of the amendment.” Pl. First Am. Compl. 17. Shapiro-Olefsky filed suit against Cohen alleging breach

of contract and fraudulent misrepresentations.

3This would have becn 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.

*The 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 Agreement at the second time period.

3+



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 Pl, First Am.
Compl. 4 1, 17-18, 22-24, 29-31. Cohen asserts that Shapiro-Oletsky failed to identify to whom Cohen
provided services so as to breach the non-compete agreement. We disagree, According to Shapiro-
Olefsky's complaint, ihe 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 three years prior
to the execution of the agrcement. See PJ. Compl. at ff 1, 10-12. Shapiro-Olefsky states that Cohen
provided services to Dr. Gaynor, an individual who was subject to the non-compcte agreement, after the
agreement's execution. See Pi. Compl. at 418, 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 {J 1, 8, 25, 28, 34. Cohen does not dispute that Shapiro-Olefsky
complied with the terms of the agreement. Shapiro Olefsky also alleges the fourth element of a breach
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 stil] in full force and effect. See Pl, Compl. at ff 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 Agreement was a
reasonable restriction on trade, Cohen agreed, in executing and signing the Non-Compete
Agreement, that the duration and geographical scope of the Agreement were fair and reasonable. See
Pl.[’s] First Am, Compl. Ex. C ¥ 1d.

-6-


the fourth element of its 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
mistepresentation. See id. at 36. Shapiro-Olefsky claims that Cohen’s misrepresentations about his
compliance with the terms of the non-compete were intended to induce Shapiro-Oletsky into paying
Cohen the $175,000 due under the promissory note. See id. Finally, Shapiro-Olefsky sufficiently
alleged that Cohen’s misrepresentations led to Shapiro-Olefsky’s damages.” See id, at 37. Under the
non-compete agreement, Shapiro-Olefsky had no duty to pay Cohen the sum due under the promissory
note in the event ofa breach by Cohen. Had Cohen been forthcoming about his services for Dr. Gaynor,
Shapiro-Olefsky would not have made payment under the promissory note.

Il. CONCLUSION

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

ry ¢ ¥ Rema
ran
MARVINE. ASPEN
United States District Judge

Dated Ufo: 2%

°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 the
$175,000.00 remedy from amounts paid under the Note.

-8-


Minute Order Form (06097)

United States District Court, Northern District of Illinois

Name of Assigned Judy i Sitting Judge if Other
ange Magistrate Judge Marvin Aspen than Assigned Judge
CASE NUMBER 02 C 9499 DATE 7/29/2003
CASE Shapiro Olefsky & Co. vs. Stanley Cohen
TITLE
{In the following box (a) indicate the party filing the motion, ¢.g,, plaintiff, defendant, 3rd party plaintiff, and (h) state briefly the nature
MOTION: of the motion being presented. ]
DOCKET ENTRY:
(1) Oo Filed motion of [ use listing in “Motion” box above.]
(2) ao Brief in support of motiondue
(3) oO Answer brief to motion due____-_ Reply to answer brief due. :
(4) a Ruling/Hearing on __set for __..at
(5) (a) Status hearing[held/continued to] [sct for/re-set for] on set for __ at
(6) oO Pretrial conference[held/continued to] [set for/re-sct for) on __. Set for at
(7) oOo Trial(set for/re-set for] on at
(8) Oo [Bench/Jury trial] [Hearing] held/continued to at
(9) o This case is dismissed [with/without] prejudice and without costs[by/agreement/pursuant to]
ORRcP4(m) OLocalRule 41.1 CIERCP41(ay(1) CFRCP41(a)(2).
qo [Other docket cntry] The last line of paragraph 1 on Page 8 of this Court’s Memorandum Opinion
and Order entered on 7/10/03 is amended as follows: Had Cohen been forthcoming about his services for
Dr. Gaynor, Shapiro-Olefsky would not have made payment under the promissory note. All other aspects
of the Opinion to stand.
(1) of [For further detail sec order attached to the original minute order.]
No notices required, advised in wpen court, Dostinent -
No notices required Mabmber
a | Notices maited by judue's staff.

Notified counsel by telephone,
Docketing to mail notices.

Mail AO 450 form.

Copy to judge/magistrate judge. aia)
arwau0s
; date mailed not
courtroom
- I
GL depoty's ou
initials

Date/time received in
central Clerk's Office

ailing deputy ints



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

Cohen argues that Shapiro-Olefsky is barred from recovering under the liquidated damages
clause. We disagrec. A liquidated damages clause is valid under Illinois law if the damages from a
breach are difficult to calculate and the amount of the fixed damages are a reasonable forecast of the
damage likely to occur. See Bauer v. Sawyer, 134 N.E.2d 329, 333 (Ill. 1956). A provision that does
not meet cach 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 of 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 agreement generally, 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 makes it either unrcasonable 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 moncy due under the Note, He claims that the sum is invariant becausc
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 varics
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 parmership,

Plaintiff,

ite

v. Case No. 02 C 9499
STANLEY COHEN, an individual,

Defendants.

we SS SE SE ED

MEMORANDUM OPINION AND ORDER

MARVIN E. ASPEN, District Judge:

Plaintiff Shapiro, Olefsky & Company (“Shapiro-Olefsky”) filed a two-count complaint against
Defendant Stanley Cohen (“Cohen”), alleging breach of contractual obligations arising from a covenant
not to compete (Count I), and fraudulent misrepresentations relating to that covenant (Count II).
Presently before us is Cohen’s motion to dismiss Shapiro-Olefsky’s complaint. For the reasons sct forth
below, we deny Defendant’s motion.

IL BACKGROUND"

On October 28, 1996, Cohen agreed to sell his accounting practice, the Cohen Group (“Cohen
Group”), in an Asset Purchase Agreement to Shapiro-Olefsky, Shapiro-Olefsky purchased certain client
lists, work papers, and goodwill from the Cohen Group. Shapiro-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. y. Bartlett Assoc., Inc., 62 F.3d 967, 972 (7th Cir.
1995).

\


as compensation to Cohen for his adherence to the covenant not to compete and non-solicitation
agreement (“non-compete agrcement” or “agrcement”). 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 etitity for whom Shapiro-Olefsky or the Cohen Group had
performed services in the three years immediately preceding October 28, 1996.? 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 ihe event ofa 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 agreement were fair and
reasonable in the accounting field at that time. He also agreed that the agreement 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 Noveinber 1, 1997. On April 18, 1998, the partics executed 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 three
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 Agreement extended to or any subsidiary, affiliate, spouse, issue or sibling of any such
person or entity.

-2-