Contributed by Jeff Glass
On June 27, 2012 the Illinois Appellate Court for the First District issued its opinion in Insureone Independent Agency, LLC, et al. v. Hallberg, et al. The case is the first published appellate opinion interpreting Reliable Fire Equipment Co. v. Arredono, 358Ill. Dec. 322 (Ill. 2011).
Insureone arose from the plaintiff’s purchase of several “non-standard” auto insurance companies owned by defendant James Hallberg. “Non-standard” auto insurance refers to low value policies purchased to comply with state law. In connection with the acquisition, Hallberg and his associates signed non-competition and non-solicitation agreements that barred them from competing with the plaintiff for five years. Hallberg also agreed to serve as president of the company formed post-acquisition.
Hallberg and the purchasers found it impossible to work together. The plaintiffs alleged that, after leaving, Hallberg and his colleagues formed competing businesses and solicited the plaintiffs’ sales agents. Hallberg denied breaching his obligations, and claimed he was excused from performing because the plaintiff did not pay him sums due under the acquisition contract.
After a lengthy bench trial, the trial court ruled that Hallberg and the other defendants intentionally violated the restrictive covenants, and awarded the plaintiffs $7.6 million in damages.
On appeal, Hallberg argued that non-standard auto policy holders are not long-term customers, and therefore, the plaintiff could not demonstrate a “protectable interest” required to enforce a restrictive covenant. The First District rejected this argument, stating that Reliable Fire requires the consideration of all the circumstances. The court held that, even if there were not “near-permanent” customer relationships, the covenant was still enforceable because Hallberg obtained and used the plaintiffs’ confidential information – – a sales production report that provided precise information about the plaintiffs’ sales agents’ production numbers, which allowed the defendants to “ramp up” the competitive process.
The court rejected Hallberg’s argument that the plaintiff’s failure to pay him all amounts due under the asset purchase agreement excused him from performing. The court held that, even if there had been some degree of underpayment, it was not substantial and therefore did not excuse performance.
The Insureone decision is a positive development for employer-side clientele. There has been uncertainty as to whether Reliable Fire made it more or less difficult to enforce restrictive covenants. Insureone supports the view that Reliable Fire requires consideration of a broad range of factors, a test that helps the party seeking enforcement. Insureone also is helpful to companies that operate in industries with a high-turnover customer base. The decision provides ammunition for an argument that, even if the customers are not long term, a restrictive covenant can be enforced if the defendant has information that will help it compete for them. A wide range of information arguably can meet that standard. Finally, the case confirms that the “prior breach” doctrine does not excuse compliance unless it is a substantial breach.
Keep checking this blog for developments in the law of restrictive covenants and unfair competition.