Vendo Company v. Stoner
58 Ill.2d 289, 321 N.E.2d 1 (1974)
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Rule of Law:
A corporate director or officer who breaches their fiduciary duty of loyalty by secretly developing a competing business opportunity is liable for damages equivalent to the profits the corporation would have reasonably earned had it been the owner of that opportunity. This liability exists independently of any breach of a contractual covenant not to compete.
Facts:
- In April 1959, The Vendo Company acquired the assets of Stoner Manufacturing Corporation, a candy-vending machine maker owned by Harry B. Stoner.
- As part of the sale, Stoner signed an employment contract with Vendo, becoming a director and consultant, and both he and his former company signed covenants not to compete with Vendo.
- While employed by Vendo, beginning in late 1960 or early 1961, Stoner secretly provided substantial financial support (interest-free loans, a rent-free building, and salaries) through his company, Stoner Investments, Inc., to Rod Phillips, a former employee, to develop a new, superior vending machine called the Lektro-Vend.
- This new machine was designed to compete directly with Vendo's products.
- In late 1962, Stoner, without disclosing his financial involvement, asked Vendo to release him from his contract so he could invest in the Lektro-Vend machine; Vendo refused.
- At Vendo's request, Stoner then acted as an intermediary in Vendo's attempt to purchase the Lektro-Vend design, but the negotiations failed after Stoner told Vendo the asking price was $1.5 million, a price Vendo considered too high.
- After Stoner's employment with Vendo ended on June 1, 1964, he and Stoner Investments acquired stock in the Lektro-Vend Corporation and Stoner used his reputation to promote the new machine's sales.
Procedural Posture:
- The Vendo Company filed a complaint in the circuit court of Kane County (trial court) against Harry B. Stoner and Stoner Investments, Inc. for breach of non-compete covenants, later amending it to include theft of a trade secret.
- The trial court entered a judgment against Stoner for $250,000 and against both defendants for $1,100,000.
- Defendants (appellants) appealed to the Appellate Court for the Second District (intermediate appellate court).
- The appellate court reversed the $1,100,000 award but affirmed the salary forfeiture, remanding the case to the trial court for a new hearing on damages for lost profits from the covenant breach.
- On remand, the trial court entered a judgment against Stoner for $170,835 and against both defendants for $7,345,500.
- Defendants (appellants) appealed again to the appellate court, which affirmed the individual judgment against Stoner but reversed the joint judgment and remanded for another damages hearing.
- Both parties' petitions for leave to appeal were granted by the Supreme Court of Illinois (highest court).
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Issue:
Is a corporation, whose officer and director breached his fiduciary duty by secretly developing a competing business opportunity, entitled to recover damages measured by the profits the corporation would have earned had it been the owner of that opportunity?
Opinions:
Majority - Justice Schaefer
Yes. A corporate officer who breaches his fiduciary duty by usurping a corporate opportunity is liable for damages that compensate the corporation for the loss of that opportunity, which can be measured by the profits the corporation would have earned had it owned the competing venture. Stoner's liability arises not merely from the breach of his non-compete covenant, but more fundamentally from the breach of his fiduciary duties as a director and officer of Vendo. He failed to disclose a conflict of interest and usurped a business opportunity that Vendo should have been offered. Limiting recovery to only profits lost from direct competition would allow a fiduciary to violate his duty without significant risk, as the only penalty would be to return the profits gained, effectively restoring him to the position he would have been in had he been loyal.
Analysis:
This decision solidifies the stringent nature of a corporate officer's fiduciary duty of loyalty and the corporate opportunity doctrine in Illinois. By endorsing a broad, expectation-based measure of damages ('what if the plaintiff owned the opportunity'), the court created a powerful deterrent against officer and director misconduct. The ruling clarifies that a contractual non-compete covenant does not define or limit the scope of an officer's pre-existing fiduciary duties. This precedent allows corporations to seek damages that compensate them for the full value of a lost opportunity, not just the direct competitive harm suffered or the profits the disloyal fiduciary gained.
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