Tag Archives: Insureone

Another Restrictive Covenant Upheld By Applying the Reliable Fire Analysis

Contributed by Jeff Glass

Another restrictive covenant has been upheld by applying the Reliable Fire decision. On July 17, 2012, the Illinois Appellate Court for the Fourth District issued its opinion in Zabaneh Franchises, LLC v. Walker, 2012 Ill.App. Lexis 579.  This is the second published  decision of an Illinois Appellate Court in the wake of Reliable Fire Equipment Co. v. Arrendondo, 2011 Ill. 111871 (December 2011). For our analysis of the first decision on the subject, the Insureone decision, please see our firm’s prior blog post.

In Zabaneh, the defendant was a tax preparer who worked for H&R Block. Every tax season, she signed an employment agreement that included a restrictive covenant barring her for two years from doing any tax preparation work for clients she had serviced while with H&R Block. Plaintiff Zabaneh acquired the H&R Block franchise including the rights under the employment agreement. In the trial court, the plaintiff filed a motion for temporary restraining order (TRO). The trial court denied the motion for TRO and also dismissed the complaint on the grounds that the restrictive covenant was a “contract of adhesion,” i.e., one which the plaintiff was required to sign as a condition of her employment and whose terms she had no opportunity to negotiate.

On appeal the appellate court, applying the Reliable Fire analysis, held that the enforceability of the restrictive covenant should be determined under a “three dimensional rule of reason” which requires analysis of (1) whether the restriction is no greater than required to protect the employer’s legitimate business interest; (2) whether it imposes undue hardship on the employee; and (3) whether it injures the public.  All underlying facts and particular circumstances are to be considered in balancing these factors.

Applying this analysis, the court reversed the trial court and found that the two-year prohibition on competition, which was limited to clients of the company whom the defendant herself had serviced, was a reasonable restriction which did not unduly burden the employee. The court further held that the lack of a geographic scope was not problematic. The court also held that the one year restriction on hiring plaintiff’s employees was reasonable. The court then remanded the case to the trial court for a hearing on whether the plaintiff was entitled to injunctive relief. 

The Zabaneh Franchises decision, when considered with the First District’s decision in InsureOne, is a favorable development for employer-side clientele.  It further clarifies that Reliable Fire requires courts to conduct a broad fact-based inquiry into the totality of the circumstances before ruling on the enforceability of a restrictive covenant. As a practical matter, this gives the employer more “ammunition” to use, and also makes it more difficult for an employee to obtain a quick legal ruling that a restrictive covenant cannot be enforced.

Please continue to check this blog for further developments in the law of restrictive covenants and unfair competition.

Illinois Appellate Court’s Insureone Decision: Helpful to Parties Seeking to Enforce Non-Competes

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.