Court Opinion

ID: 769792
Source: CourtListenerOpinion
Date Created: 2012-04-18 10:16:02+00
Date Added: 2024-06-11T17:55:45.754324
License: Public Domain

221 F.3d 981 (7th Cir. 2000)
JIM LIAUTAUD, an individual and JIMMY JOHN'S INCORPORATED, an Illinois Corporation, Plaintiffs-Appellants,v.MICHAEL LIAUTAUD, an individual, Defendant-Appellee.
No. 99-1700
In the United States Court of Appeals  For the Seventh Circuit
Argued January 12, 2000Decided July 20, 2000

[Copyrighted Material Omitted][Copyrighted Material Omitted]
Before POSNER, Chief Judge, and COFFEY and RIPPLE,  Circuit Judges.
RIPPLE, Circuit Judge.

1
Jim Liautaud, upon  request, provided his cousin, Michael Liautaud,  with the secrets behind his successful sandwich  shop business. To protect himself, he proffered  to Michael a noncompetition agreement, which  prevented Michael from expanding his new business  beyond the Madison, Wisconsin, market. Michael  agreed to the terms of the agreement; however, he  later violated it by expanding his business into  other parts of Wisconsin. This lawsuit followed.

2
Jurisdiction in this suit is based on diversity  of citizenship under 28 U.S.C. sec. 1332. The  amount in controversy exceeds $50,000,1 and the  parties are of diverse citizenship.2 The  parties do not dispute that the applicable law is  Illinois state law. The district court granted  summary judgment for Michael and, for the reasons  set forth in this opinion, we affirm the judgment  of the district court.

3
* BACKGROUND

A.  Facts

4
Jim Liautaud owns and operates a chain of  gourmet submarine sandwich shops in Illinois  called Jimmy John's, Inc. He claims that the  secret behind the success of his shops is a  combination of his style of preparing the  sandwiches and of his business strategies.

5
In 1988, Jim's cousin, Michael, approached Jim  about opening his own submarine sandwich shop in  Madison, Wisconsin. Jim agreed to provide Michael  with his "secrets of success" so that Michael  could open Big Mike's Super Subs. Pursuant to his  offer to help, Jim sent Michael a letter  outlining the agreement between the cousins. The  letter states as follows

6
I want to confirm at this time exactly what we  agreed on so that it is clear and understood by  both parties.

The agreement:

7
1. Mike will open up a sub shop in Madison using  Jimmy John's products and systems.

8
2. Mike can open up as many shops [as] he would  like in Madison only.

9
3. If you want to expand the sub/club business  beyond Madison you will do so using Jimmy John's  sub shops as a partner or franchisee. This is  subject to 100% agreement on both parties. If you  don't use Jimmy John's Inc. you will not expand  the sub/club business beyond Madison.

10
4. You will not disclose to any one recipes,  products or systems that are given to you.  (Except your managers who run your store).

11
I believe thats [sic] what we agreed on. If I  have made any misrepresentations of our agreement  please correct them in the margin of this letter  and return a copy to me. If I don't receive a  copy I'll assume this letter to be the agreement.

12
R.1, Ex.A. Michael returned the letter to Jim  and, in handwriting at the bottom, wrote: "Jimmy,  If I agree on all items stated above, you must  agree that you (Jimmy Johns Inc.) won't enter the  Madison WI market." Id.

13
Jim then helped Michael open a sandwich shop in  Madison. In 1991, Michael opened a sandwich shop  outside Madison, in LaCrosse, Wisconsin, in  violation of the cousins' agreement. Although the  cousins attempted to reach a franchise agreement,  it never materialized. Jim thereafter filed this  action against Michael to enforce the terms of  their agreement and for unjust enrichment.

B.  Holding of the District Court
1.

14
The district court held that the "agreement"  between the cousins constituted a "classic  noncompetition covenant." R.65 at 3. For a  noncompetition agreement to be valid under  Illinois common law, the court explained, the  covenant must be (1) ancillary to a valid  transaction or relationship and (2) reasonable in  scope.

15
The court addressed first whether the covenant  was ancillary to a valid transaction or  relationship. Although the typical noncompetition  agreement stems from an employment relationship  or from the sale of a business, the court found  that a valid relationship existed here because  Jim intended the trade secrets to be a gift and  Michael accepted them as such. The court stated  that "[a] gift certainly creates a valid  relationship imposing rights and obligations on  both parties, just as do employment relationships  and where money is paid for a business or some  part of it." Id. at 5. Therefore, according to  the court, the trade secrets that Jim provided to  Michael were a gift and not for the mere sake of  obtaining a covenant not to compete. Thus, the  court concluded that the covenant not to compete  was ancillary to the gift relationship.

16
Next, the court questioned whether the covenant  not to compete was reasonable in its scope. The  court explained that "[t]o be deemed reasonable,  a noncompetition agreement must not be greater  than necessary to protect the seller, oppressive  to the buyer, or injurious to the public." Id. To  be enforceable, the court clarified, the  agreement must be reasonable in time, in  geographical scope, and in the activities  restricted. As the court noted, absolutely no  durational or geographical limits [other than the  restriction that Michael remain in Madison]  existed on Jim's and Michael's noncompetition  agreement. Also, according to the court, Jim had  not explained why such stringent limitations were  justified. Therefore, the court found that the  covenant was unreasonable because it was overly  restrictive and, thus, that it was void as  against public policy.

2.

17
The district court also held that Jim was not  entitled to restitution because of unjust  enrichment. First, the court determined that Jim  was not entitled to damages for unjust enrichment  for Michael's use of Jim's trade secrets in his  Madison shops because the trade secrets were a  gift. Next, the court discussed the availability  of damages for unjust enrichment for Michael's  use of Jim's trade secrets outside of Madison.  The court explained that unjust enrichment does  not apply when an agreement is unenforceable  because it is illegal or contrary to public  policy. Because it had concluded that the  noncompetition agreement was void as against  public policy, the court held that Jim could not  receive damages for Michael's use of the trade  secrets in his shops outside Madison, Wisconsin.

II
DISCUSSION
A.  Standard of Review

18
We review a grant of summary judgment de novo  and draw all reasonable inferences in favor of  the nonmoving party. See Hill v. American Gen.  Fin., Inc., 218 F.3d 639, 642 (7th  Cir.2000). "Under Illinois law, when the  basic facts are not in dispute, the existence of  a contract is a question of law." Echo, Inc. v.  Whitson Co., 121 F.3d 1099, 1102 (7th Cir. 1997); accord Burgess v. J.C. Penney Life Ins. Co., 167  F.3d 1137, 1139 (7th Cir. 1999) (explaining that  when the question on appeal is the interpretation  of the terms of a contract, it is a question of  law that is subject to plenary review). More  specifically, "[t]he question of whether a  restrictive covenant is enforceable or not is a  question of law." Lawrence & Allen, Inc. v.  Cambridge Human Resource Group, Inc., 685 N.E.2d  434, 440 (Ill. App. Ct. 1997); accord Applied  Micro, Inc. v. SJI Fulfillment, Inc., 941 F.  Supp. 750, 753 (N.D. Ill. 1996).

19
"A contract is to be construed strictly against  the drafter." Sharon Leasing, Inc. v. Phil Terese  Transp., Ltd., 701 N.E.2d 1150, 1157 (Ill. App.  Ct. 1998); see also Brian Properties, Inc. v.  Burley, 662 N.E.2d 522, 524 (Ill. App. Ct. 1996);  accord Advance Process Supply Co. v. Litton  Indus. Credit Corp., 745 F.2d 1076, 1079 (7th  Cir. 1984). Also, "[b]ecause Illinois courts  abhor restraints on trade, restrictive covenants  are carefully scrutinized." Prairie Eye Ctr.,  Ltd. v. Butler, 713 N.E.2d 610, 613 (Ill. App.  Ct. 1999); see also Gillespie v. Carbondale &  Marion Eye Ctrs., Ltd., 622 N.E.2d 1267, 1269  (Ill. App. Ct. 1993).

20
B.  Validity of the Noncompetition  Agreement

1.

21
Under Illinois law, "[a] 'naked' promise by one  merchant not to compete against another merchant  is against public policy because it injures the  public and the promisor, while at the same time  it serves no protectible interest of the  promisee." Abel v. Fox, 654 N.E.2d 591, 596 (Ill.  App. Ct. 1995). In order for a noncompetition  agreement to be valid, therefore, it must be  ancillary to a valid transaction, such that the  covenant not to compete is subordinate to the  main purpose of the transaction. See id. at 593.  Although noncompetition agreements typically stem  from an employment relationship or from the sale  of a business, another valid transaction may  support a covenant not to compete. The Supreme  Court of Illinois has stated that a valid  restraint on trade may be based on a purchase or  sale of a business or "any other analogous  circumstance giving one party a just right to be  protected against competition from the other."  More v. Bennett, 29 N.E. 888, 891 (Ill. 1892).

22
Although Jim urges that we characterize the  transaction as a franchise agreement, we believe  that the arrangement is more accurately  characterized as a gift. "A gift is a voluntary  gratuitous transfer of property from donor to  donee where the donor manifests an intent to make  such a gift and absolutely and irrevocably  delivers the property to the donee." In re Estate  of Poliquin, 617 N.E.2d 40, 42 (Ill. App. Ct.  1993). We believe that there is no question that  Jim intended to provide Michael with the gift of  the "secrets of his success." Also, the parties  do not dispute that Jim delivered his gift to  Michael and that Michael accepted Jim's gift.  Thus, the parties entered a valid gift  relationship. The donor in a gift relationship,  when the gift is trade secrets, is providing the  donee with valuable advice for free. The donor  may wish to protect both his generosity and his  business interests from exploitation; therefore,  he may desire to impose a covenant not to compete  on his donee. See More, 29 N.E. at 891. Here, the  covenant not to compete was ancillary to the gift  transaction between Jim and Michael: The gift  from Jim to Michael was the essential element of  the transaction, and the noncompetition agreement  was subordinate to the main purpose of that  transaction. Thus, because the gift relationship  is a valid relationship or transaction and the  noncompetition agreement is subordinate to that  relationship, the noncompetition agreement meets  the first requirement that it be ancillary to a  valid relationship or transaction.

2.

23
The next question is whether the scope of the  noncompetition agreement is reasonable, a  determination which is based on the facts and  circumstances of the particular case. See  Eichmann v. National Hosp. & Health Care Servs.,  Inc., 719 N.E.2d 1141, 1143 (Ill. App. Ct. 1999);  Lawrence & Allen, 685 N.E.2d at 441; Weitekamp v.  Lane, 620 N.E.2d 454, 462 (Ill. App. Ct. 1993).  For this restrictive covenant to be reasonable,  its terms (1) must not be greater than necessary  to protect Jim, (2) must not be oppressive to  Michael, and (3) must not be injurious to the  general public. See Decker, Berta & Co. v. Berta,  587 N.E.2d 72, 76 (Ill. App. Ct. 1992); see also  Lawrence & Allen, 685 N.E.2d at 441; Abel, 654  N.E.2d at 593; Weitekamp, 620 N.E.2d at 462;  Howard Johnson & Co. v. Feinstein, 609 N.E.2d  930, 934 (Ill. App. Ct. 1993); accord Applied  Micro, 941 F. Supp. at 753.

24
Jim asserts first that, given the nature of his  business and the trade secrets involved, the  restraint on Michael's expansion was necessary to  protect his business interests. He explains that  his trade secrets are the fundamental elements of  his business success and that providing Michael  with access to these secrets, without  compensation for Jim, is fundamentally unfair.  Next, Jim argues that the restrictions were not  oppressive to Michael because (1) he provided the  trade secrets to Michael for free, (2) Michael  could expand outside Madison in any business  other than the submarine sandwich business, and  (3) Michael could expand his submarine sandwich  business outside Madison, as long as he used  Jimmy John's, Inc. as a partner. Finally, Jim  asserts that not enforcing the covenant would be  injurious to the public because it would restrict  the freedom of parties to contract.

25
Conversely, Michael submits that the  noncompetition agreement was unreasonable.  According to Michael, Jim does not have a  legitimate business interest in preventing  Michael from establishing submarine sandwich  shops where Jim is not located. Also, the  geographical restriction is not reasonable,  Michael claims, because the restriction prevents  Michael from expanding anywhere in the world  besides Madison, Wisconsin.

26
In our view, under Illinois common law  principles, the covenant here is overly broad  because there is an unnecessarily stringent  geographic restriction on the promisor, Michael,  and no temporal restriction whatsoever. These  restrictions are not necessary to protect Jim's  business interest, are oppressive to Michael, and  are injurious to the public. Generally, in a  covenant not to compete, the agreement restricts  competition within a certain town or city or  within a defined radius from the promisee's own  business. See, e.g., Prairie Eye Ctr., 713 N.E.2d  at 612 (upholding an agreement which restricted  the promisor from competing within specified  cities as well as within a 10-mile radius from  certain other cities); Gillespie, 622 N.E.2d at  1270 (enforcing a 50-mile radius restriction on  competition with a medical practice); Weitekamp,  620 N.E.2d at 462 (allowing an agreement with a  300-mile radius limit); Decker, Berta & Co., 587  N.E.2d at 76 (sanctioning a covenant with a 35-  mile radius restriction). Although a lack of  geographic limits is not per se unreasonable, the  complete bar on competition needs to be  reasonably related to the promisee's interest in  protecting his own business. See Eichmann, 710  N.E.2d at 1147; Lawrence & Allen, 685 N.E.2d at  441.

27
Here, Michael is prevented from expanding  anywhere in the world outside of Madison.  Although this may seem to be an exaggeration of  what the parties expected in reality, we can only  read the plain language of the agreement, and in  its terms the covenant not to compete does not  contain any geographic limitations. Jim's  articulated legitimate business interest,  protection of his trade secrets, does not show  why Michael should not be able to expand to  locations other than Madison, even when Jim is  not in those locations. Jim has not indicated  that he plans to expand into the markets where  Michael is located. Also, Michael has not  suggested that he plans to expand to places where  Jim already is located. Generally, courts will  uphold a restriction on competition that is  coextensive with the area where the promisee is  doing business. See Lawrence & Allen, 685 N.E.2d  at 442. Jim has not demonstrated why expansion by  Michael in cities and states where Jim is not  located would injure Jim.

28
Moreover, the agreement is oppressive to Michael  because it restricts him from expanding his  sandwich business, regardless of whether he  continues to use Jim's trade secrets. According  to the terms of the agreement, Michael could not  open any kind of sandwich shop outside Madison  without Jim's approval. Finally, the complete ban  on expansion is injurious to the public because  it completely restricts competition. Although it  seems "fair" that Jim should receive some  compensation for Michael's use of Jim's trade  secrets, this noncompetition agreement, without  any geographic limitations, is not the reasonable  means of accomplishing that end.

29
The agreement also fails to provide any limits  on time. Instead, the agreement, as written,  merely states that Michael may not expand his  business. Read literally, this means that Michael  may not expand his business beyond Madison for  the rest of his life. Illinois courts generally  have refused to enforce noncompetition agreements  that do not limit the duration of the  restriction. See Eichmann, 719 N.E.2d at 1148;  but see Storer v. Brock, 184 N.E. 868 (Ill. 1933)  (allowing an activity restriction for all time  within Chicago on retired physician because  physician received valuable consideration for  contract and could practice anywhere outside the  city). The length of time for the restriction  must be reasonably related to the needs of the  promisee's business. See Eichmann, 719 N.E.2d at  1148; Lawrence & Allen, 685 N.E.2d at 442. For  example, in a business where client development  takes over a year, a restriction on competition  for one to two years is reasonable because of the  time it takes to cultivate a client. See, e.g.,  Prairie Eye Ctr., 713 N.E.2d at 612 (upholding a  two-year restriction because of the time needed  to cultivate patients); Gillespie, 622 N.E.2d at  1270 (enforcing a two-year restriction on  competition with a medical practice).

30
Jim has not produced any reason for perpetually  restricting Michael's ability to expand beyond  Madison. Even though it may take time to  establish a sandwich shop business and to attract  a sufficient customer base to make the venture  profitable, the time to accomplish this is not in  perpetuity. Jim has not shown that he needs to  prevent Michael from ever expanding beyond  Madison in order to protect his business  interests. Also, as stated above, under the  agreement, Michael is prevented from ever  expanding his shops, even if he develops his own  recipes and business strategies. Finally, this  infinite agreement injures the public because it  stifles competition. We conclude that, in light  of the severe and unnecessary restrictions on  Michael, this covenant not to compete is  unreasonable and is, therefore, void as against  public policy.

C.  Unjust Enrichment

31
Jim also asserts that he has a claim of unjust  enrichment against Michael for the use of his  trade secrets in (1) Michael's Madison shops and  (2) Michael's shops outside of Madison. However,  the district court correctly held that a party  may not recover damages for unjust enrichment  pursuant to a gift relationship. See generally  Hartman v. Townsend, 523 N.E.2d 199,202-03 (Ill.  App. Ct. 1988). Thus, Jim may not recover damages  for Michael's use of the trade secrets in his  Madison shops.

32
We also agree with the district court that  Illinois law does not allow a claim for unjust  enrichment when the underlying contract has been  held to be void as against public policy. See  First Nat'l Bank v. Malpractice Research, Inc.,  688 N.E.2d 1179, 1186 (Ill. 1997); see also  Juneau Academy v. Chicago Bd. of Educ., 461  N.E.2d 597, 601 (Ill. App. Ct. 1984). Because the  noncompetition agreement is void as against  public policy, we cannot award Jim damages for  unjust enrichment under it. Thus, Jim cannot  receive damages for Michael's use of his trade  secrets in Michael's Madison shops or in his  shops outside Madison.

Conclusion

33
For the foregoing reasons, we affirm the  judgment of the district court.

AFFIRMED

Notes:

1
 The amount in controversy under 28 U.S.C. sec.  1332, since Jim filed his lawsuit, has changed  from in excess of $50,000 to in excess of  $75,000. This amendment does not apply  retroactively.

2
 Jim is a citizen of Illinois, and Jimmy John's,  Inc. is incorporated in Illinois with its  principal place of business in Illinois. Michael  is a citizen of Wisconsin.