Toolkit Cases for Employees Dealing with Restrictive Covenant Agreement Issues – Part 2

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

Part 2

 

Provided below are certain additional 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.

 

Fifield v. Premier Dealer Services, 993 N.E.2d 938, 943 (1st Dist. 2013).

Of critical note for employees is that in Illinois in order for a non-compete agreement to be enforceable, among other things, there must be “sufficient consideration”.  This requirement of “sufficient consideration” is more stringent than requiring merely that there be “consideration” for a contract.

  • By way of explaining the difference, generally for contracts to be enforceable there just needs to be “consideration”, which can be something very minimal (such as a “peppercorn” or a nominal sum such as one dollar).
  • But the requirement of “sufficient consideration” is a higher requirement.  In this regard, several Illinois appellate courts (such as the lead case of Fifield v. Premier Dealer Services) have ruled that for there to be “sufficient consideration” an employee must be employed for at least 2 years before a non-compete is enforceable against the employee (even if the employee chooses to voluntarily resign before 2 years). 
  • Note though that while most all Illinois state courts follow Fifield on this issue, there are several federal court decisions that do not follow Fifield (although some federal court decisions do follow Fifield).
  • Moreover, a fact intensive and legally intensive analysis is needed (with Employers sometimes using something called “garden leave” to potentially enable the Employer to get around the 2-year requirement  –  which itself is a double-edged sword for the Employer and the Employee).

 

Reliable Fire Equip. Co. v. Arredondo, 2011 IL 111871, ¶12, 965 N.E.2d 393, 358 Ill. Dec. 322 (2011).

The Illinois Supreme court, in the 2011 decision Reliable Fire Equip. Co. v. Arredondo, established what it called a “rule of reasonableness test” to determine the enforceability of a restrictive covenant, with the Court providing therein that a restraint on trade is reasonable only if it:

(1)     is no greater than is required to protect a legitimate business interest of the employer;

(2)     does not impose undue hardship on the employee;  and

(3)     is not injurious to the public.

Furthermore, the activity, time, and geographic restrictions must be reasonable in order to be enforceable.

Generally speaking, in Illinois there are two categories of potentially protectable “legitimate business interests” that can support an Employer’s attempted enforcement (against a former employee) of a restrictive covenant in an employment agreement.  In this regard, such a legitimate business interest can exist:

(a) where former employees acquired confidential information through employment and subsequently attempted to use it for their own benefit;  or

(b) where the employer has near-permanent customer relationships and where, but for their employment, former employees would not have had contact with the customers in question.

The Illinois Supreme Court  –  which surprisingly has rarely ruled in restrictive covenant cases  –  held in Reliable Fire that “[W]hether a legitimate business interest exists is based on the totality of the facts and circumstances of the individual case.”  Factors that it advised were to be considered relevant to this analysis “include, but are not limited to, the near-permanence of customer relationships, the employee’s acquisition of confidential information through his employment, and time and place restrictions.”  Importantly it also held that no single factor bears greater value in the Court’s assessment, and the Court must weigh each factor depending upon “the specific facts and circumstances of the individual case”.

 

Cambridge Engineering, Inc. v. Mercury Partners 90 BI, Inc., , 378 Ill. App. 3d 437; 879 N.E.2d 512; 2007 Ill. App. LEXIS 1276 (1st Dist. 2007).

Illinois courts have fortunately for Employees routinely stricken restrictive covenants that did not advance the legitimate business interests of the Employer, and in this regard the 2007 decision in Cambridge Engineering is instructive.

In Cambridge Engineering the Court held that “[r]estrictions on activities ‘should be narrowly tailored to protect only against activities that threaten the employer’s interest.’ ” (quoting Lawrence & Allen, Inc. v. Cambridge Human Resource Group, Inc.).  The Court further held that a restrictive covenant is not valid if it is broader than necessary to protect the employer’s legitimate business interests.  Id.  Restrictions on competing will be narrowly construed to protect against only the activities that threaten the Employer’s interests, and will be balanced against the hardship to the Employee. Id.

Likewise, the Court in Cambridge Engineering held that a non-solicitation clause is only valid if it is “reasonably related to the employer’s interest in protecting customer relations that its employees developed while working for the employer . . . As a result, courts are reluctant to enforce provisions that prohibit former employees from servicing customers that they never had contact with while working for their original employer.” (quoting Lawrence & Allen).

 

Lawrence & Allen, Inc. v. Cambridge Human Resource Group, Inc., 292 Ill. App. 3d 131, 685 N.E.2d 434 (2d Dist. 1997).

This case, mentioned above, addresses the issue of near-permanent customer relationships as a requirement for being able to enforce non-solicitation clauses, and within this case are cited several other important cases.

Before Reliable Fire there had been a makeshift seven-factor test that had been used by the Courts to determine whether or not there were permanent/ near permanent customer relationships.  The Illinois Supreme Court in Reliable Fire did away with that somewhat regimented test  –  yet those factors are still instructive.  Those seven factors are therefore listed as follows:  (1) the number of years required to develop the customers; (2) the amount of money invested to acquire the customers; (3) the degree of difficulty in acquiring customers; (4) the extent of personal contact by the employee; (5) the extent of the employer’s knowledge of its customers; (6) the duration of the customers’ association with the employer; and (7) the continuity of the employer-customer relationships.

In determining whether a near-permanent customer relationship exists such that it could support warranting a restrictive covenant, Illinois Courts in particular look to the “nature of the plaintiff’s business” to determine whether it is the type of business that provides unique products or services that engender customer loyalty.  See, e.g., Millard Maintenance Service Co. v. Berrero, 207 Ill. App. 3d 736, 566 N.E.2d 379 (1st Dist. 1990).

In this regard, if the business is in a highly competitive industry that engages in common business or sales techniques, the court is unlikely to find near-permanent customer relationships.  See, e.g., Office Mates 5, North Shore, Inc. v. Hazen, 234 Ill. App. 3d 557, 599 N.E.2d 1072 (1st Dist. 1992).

In Lawrence & Allen the court went on to hold that the Employer did not have near-permanent customer relationships because the employee outplacement business is highly competitive, clients tend to use several out placement firms, contracts are generally awarded through a bidding process, and the identities of clients are easily ascertainable.

 

Giffney Perret, Inc. v. Matthews, 2009 U.S. Dist. LEXIS 23531(N.D.Ill 2009).

This case addresses the issue of scope and enforceability of Confidentiality clauses.  With regard to Confidentiality clauses, while certainly some information is legitimately confidential and deserving of protection (e.g. – the formula for Coke), Employers frequently make the overbroad claim that everything that an employee heard/saw during their employment (including also the color of the kitchen sink) is confidential.  This is oftentimes claimed by an Employer as a back-door way of attempting to prevent an Employee for working for a competitor  –  which, by its nature, is a restraint on trade.  One such phrase that Employers sometimes use in this regard is “inevitable disclosure” (which is an easy phrase for an Employer to throw out there, but not so easy a claim for the Employer to succeed on).

There is a great deal of information that is not “generally” known to the public;  yet not all of it merits protection under a confidentiality provision.  See the 2012 decision in Rubloff Development Group, Inc. v. SuperValu, Inc., 863 F. Supp. 2d 732, 749 (N.D. Ill. 2012) citing Reliable Fire, for the general observation that:

  • “Illinois views post-employment restrictive covenants that insist on absolute secrecy of any and all information as unreasonable and unenforceable because a person is allowed to make a living, and cannot possibly not utilize any information from his past job”.

Indeed, the general rule is that companies have a legitimate business interest in “confidential particularized information disclosed to [the employee] during the time the employer-employee relationship existed which are unknown to others in the industry and which give the employer advantage over his competitors.”  Giffney Perret.

Confidential information need not rise to the level of a trade secret in order for it to support a restrictive covenant.  With regard to claimed confidential pricing information, Illinois courts have held that pricing information can qualify as confidential where both the employer attempts to keep it secret and competitors could use the information to undercut the employer.

Yet Illinois courts have likewise held that claimed confidential information cannot qualify as confidential if it is “readily available to competitors through normal competitive means.”  Moreover, in assessing the totality of the facts toward determining whether customer information will constitute confidential information Illinois Courts look closely to whether the information has been developed by the employer over a number of years at great expense, and whether or not such information was kept under tight security.

Lastly, on the issue of claimed misuse of confidential information,  Giffney Perret and other courts have held that under Illinois law an Employer must produce evidence not only that it had confidential information but also that the accused employee took the information and attempted to use it for his/her own benefit.

 

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