Toolkit Cases for Employees Dealing with Restrictive Covenant Agreement Issues – Part 1

TOOLKIT CASES FOR EMPLOYEES DEALING WITH NON-COMPETE/NON-SOLICITATION ISSUES

Part 1

 

Provided below are certain cases that attorneys and non-attorneys should be aware of toward being aware of the rights of employees and protecting the rights of those employees  –  and toward having certain strategies/ additional strategies to protect those rights.

 

Atkore Int’l v. Fay, 2018 U.S.Dist. LEXIS 202415, *7-12 (N.D.Ill 2018).

One of the ways that Employers try to prevail against Employees both in litigation and in negotiations is by using their relatively much greater wealth compared to comparatively meager assets of the Employee to win by threat of a lengthy litigation.  A way to nullify that imbalance in wealth is by an Employee successfully moving to dismiss the Employer’s case in the beginning of the litigation, by and through a motion to dismiss  –  which is what I did in Atkore.

In Atkore Federal District Judge Elaine Bucklo held that a particular non-solicitation agreement within a separation agreement was unenforceable as a matter of law, with her granting my motion to dismiss those restrictive covenant claims and causes of action.

In Atkore, Judge Bucklo also rejected the Employer’s attempt to defeat the motion to dismiss the claims regarding the restrictive covenant (and the Employer’s attempt to prolong the litigation on that issue) on the basis of claiming that discovery was needed before doing a required totality of the facts and circumstances analysis (citing Reliable Fire, 2011 IL 111871, ¶12, 965 N.E.2d 393, 358 Ill. Dec. 322 (2011)), with Judge Bucklo further providing in a very practical analysis that:

  • “But even assuming that discovery in this case would confirm that Fay indeed acquired confidential information during his employment, the overbreadth of the non-solicitation clause is evident on its face: not only does it lack territorial boundaries, it bars Fay’s solicitation of “any actual or potential customers” (among other individuals and entities), Resp. at 10, thus sweeping in all customers with whom Atkore presently does business, as well as any person or entity anywhere in the world with whom Atkore could potentially do business in the future. It is difficult to see how facts uncovered in discovery could narrow the scope of this restraint.”

A further  –  and separate  –  reason to grant part of the motion to dismiss (which Judge Bucklo likewise so found in Atkore) was on the basis of “superseding language” nullifying earlier restrictive covenants.  In Atkore the Separation Agreement contained both a non-disclosure clause pertaining to confidential information and a restrictive covenant clause (specifically, a non-solicitation clause, but not a non-compete clause).  Moreover, the language within the Separation Agreement, provided that:

  • “This Agreement sets forth the entire agreement between Employee and the Company and supersedes any and all prior written or verbal discussions, agreements, or understandings between the parties pertaining to the subject matter hereof..” (emphasis supplied)

In Atkore Judge Bucklo went on to hold that “the Separation Agreement unambiguously extinguishes any claims the parties might have had under the earlier agreements and became the exclusive agreement governing the parties’ post-separation conduct” (citing Avery Dennison Corp. v. Naimo, 2006 U.S. Dist. LEXIS 84204, 2006 WL 3343762, at *2-*3 (N.D. Ill. Nov. 16, 2006).

Underpinning the above is that under Illinois law “[a] complete, valid, written contract merges and supersedes all prior and contemporaneous negotiations and agreements dealing with the same subject matter.” Oce N. Am., Inc. v. Brazeau, 2010 U.S. Dist. LEXIS 25523 *; 2010 WL 5033310 (Judge Ronald J. Guzman, NDIL), quoting Courtois v. Millard, 174 Ill. App. 3d 716, 529 N.E.2d 77, 79, 124 Ill. Dec. 360 (Ill. App. Ct. 1988); and also citing Ogle v. Hotto, 273 Ill. App. 3d 313, 652 N.E.2d 815, 819, 210 Ill. Dec. 13 (Ill. App. Ct. 1995) (same). In Oce N. Am., Inc., Judge Guzman further provided and held at *4 that:

  • “The 2005 and 2007 agreements both address defendant’s post-employment obligations, but they do so differently.  The 2005 agreement bars defendant from disclosing plaintiff’s confidential information and from selling competitors’ products in a specified area for a year after his employment with plaintiff ends. (First Am. Compl., Ex. A, 2005 Agreement PP 5, 10.)  The 2007 agreement does not expressly require defendant to maintain the confidentiality of plaintiff’s information but has an expansive non-competition clause, “to protect the confidentiality of [plaintiff’s] Confidential Information, . . . valuable customer relationships and goodwill.” (Id., Ex. B, 2007 Agreement P 2.)  Because the two agreements address the same subject matter, the 2007 agreement supersedes the 2005 agreement as a matter of law. Courtois, 529 N.E.2d at 79.”

As such, Atkore (as shown by the above) importantly provides a roadmap (for the right case) of at least two different avenues – the overbroad issue and the superseded issue  –  toward potentially nullifying the Employer’s superior wealth and quickly dismissing restrictive covenant litigation brought by the Employer.

 

AssuredPartners, Inc. v. Schmitt, 2015 IL App (1st) 141863; 2015 Ill. App. LEXIS 813. 

Employers frequently attempt to rely on a “savings” clause” (in legal jargon it is called a “blue pencil” clause) to make enforceable an otherwise overbroad non-compete clause.  Such a blue pencil clause is an invitation by the Court to not throw out an otherwise overbroad and unenforceable restrictive covenant, and instead either disregard the part of the clause that makes it overbroad, or instead even re-write the clause to make it enforceable.

This potential of blue penciling by the court encourages Employers to write restrictive covenants that are overbroad and overly restrictive of employees, with the eye on the courts “saving” the Employer to make the clause enforceable against the Employee.  As a result, this can make it even more difficult (for individuals as well as lawyers) to analyze and attempt to determine in advance (when an Employee is considering leaving an Employer, or has just done so) whether or not a non-compete clause would be held to be enforceable (in whole or even in part) by the Courts  –  which would potentially guide an Employee in making career and business decisions.

Fortunately, a positive development for employees is that a relatively recent decision (AssuredPartners, Inc. v. Schmitt, IL Appellate Court, Oct. 27, 2015) held that non-compete agreements that are built to scare (e.g. – grossly overbroad) may be entirely unenforceable, and may not be saved by a blue pencil clause.  In this regard:

  • In AssuredPartners the Employer sought to prevent the now-former employee (an insurance executive) from working anywhere in the United States within particular segments of the insurance industry that he had worked in during his entire career (professional liability insurance).  The Court found that such clause was overbroad, and that the agreement was “not a candidate for judicial reformation” despite the existence of a blue pencil clause.  The Court went on to importantly hold that blue-penciling is only appropriate when the over-reaching language of the non-compete was minor.  As a result, the now-former employee was not bound by the non-compete agreement.

 

Mohanty v. St. John Heart Clinic, S.C., 225 Ill.2d 52, 70-75, 310 Ill.Dec. 274, 866 N.E.2d 85 (2006).

In Mohanty the Illinois Supreme Court held that an Employer’s material breach of the terms of an Employee’s compensation agreement is a complete defense to the Employer’s attempt to enforce restrictive covenants.  See also Virendra S. Bisla, M.D., Ltd. v. Parvaiz, 379 Ill.App.3d 567, 572, 318 Ill.Dec. 822 (1st Dist. 2008); Francorp, Inc. v. Siebert, 126 F.Supp.2d 543, 547 (N.D. Ill. 2000); Zahl v. Krupa, 365 Ill.App.3d 653, 658, 850 N.E.2d 304, 302 Ill.Dec. 867 (2d Dist. 2006).

Accordingly, such a breach by the Employer can be an area to explore in defending and defeating an Employer’s claim against an Employee for breach of a restrictive covenant agreement.

 

Pampered Chef v. Alexian, 2011 U.S. Dist LEXIS 75752 (N.D. Ill 2011).

Employers almost always use a broad brush when providing restrictive covenants prohibiting Employees from soliciting the Employer’s own employee, with such clauses almost never differentiating between the types of employees who can and cannot legally be solicited away from the Employer under such restrictive covenant.

Fortunately in Pampered Chef the Court (by Magistrate Judge Jeffrey N. Cole) explained in a detailed analysis how employee non-solicitation clauses may very well not be enforceable depending on a number of factors (in particular the high or low level of the employees and whether or not the employer has a stable workforce or employees frequently leave).  Surprisingly, there are very few court decisions that address this issue.

In Pampered Chef the Court quoted the Illinois Supreme Court case of Arpac Corp. v. Murray, 226 Ill.App.3d 65, 76, 589 N.E.2d 640, 649-650, 168 Ill. Dec. 240 (1st Dist. 1992), and provided that:

  • “Enforceability of a restrictive covenant in an employment contract is dependent on whether, given the particular facts of the case, the restraints imposed thereby are reasonably necessary for the protection of the employer’s business from unfair or improper competition.” 226 Ill.App.3d at 75, 589 N.E.2d at 649. In Arpac, the critical facts related to the employees’ specialized skills, strong relationships with long-time customers, and the very limited number of competitors in a highly specialized and competitive market. 226 Ill.App.3d at 74, 589 N.E.2d. at 648.

The Court in Pampered Chef went on to rule that in the particular facts of the case in front of it that the Plaintiff Employer was not entitled to a preliminary injunction because it had not made a clear showing that it had some likelihood of succeeding on the merits with regard to the validity of its employee non-solicitation clause.

In this regard see also Instant Tech, LLC v. DeFazio, 793 F.3d 748 (7th Cir. 2015).  In Instant Tech the Court addressed the issue of now-former employees who left together in the tech-staffing field, who had non-solicitation of employee and customer clauses, holding that those employees were not liable to the Employer.

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