Tag Archives: non-compete

Ruling Provides Guidance on Restrictive Covenants

Contributed by Suzanne Newcomb, October 16, 2019

man is signing non compete agreement

Long used to prevent former employees from gaining an unfair competitive advantage, covenants not to compete are increasingly under attack. California, North Dakota and Oklahoma essentially ban employee non-competes and recent legislation in Illinois, Maine, Maryland, Massachusetts, New Hampshire, Oregon, and Washington prevents their use with lower wage employees (the definition of which varies by state). Some laws go further, in Massachusetts, for example, a non-compete cannot be enforced against an employee terminated without cause and, in many cases, the employer must pay 50% of the former employee’s salary for the duration of the covenant.

In September, a federal court in Indiana struck down a non-compete as overly broad, but in an interesting twist, ordered the employee to cease work for a competitor because of his breach of the parties’ confidentiality agreement. Like the majority of states, Indiana “disfavors” employee non-competes and will enforce them only when they are supported by adequate consideration and the restrictions imposed are “reasonable” in scope, time and geographic reach and are no greater than is necessary to protect the employer’s legitimate interests.

The covenant in the Indiana case was deemed prohibitively broad in scope because it prevented the employee from working for a competitor “in any manner.” The decision cautions employers to limit non-compete restrictions to competitive positions analogous to the work the employee actually performs. However, because the employee downloaded thousands of documents immediately before departing and shared at least some confidential information with his new employer, the court issued a preliminary injunction prohibiting the employee from continuing in his new role. His “pre-departure harvesting” of his former employer’s confidential information warranted the injunction, the court concluded, because it created an “ongoing threat of potential or actual misappropriation” of his former employer’s confidential information or trade secrets.

Restrictive covenants are tricky and one size does not fit all. So what steps can organizations take to protect themselves from unfair competition in today’s highly competitive environment?

1. Location matters. Restrictive covenants are a matter of state law. Each agreement must meet the specific requirements of the jurisdiction where that employee’s employment relationship is based. Include choice of law and forum selection clauses to streamline disputes.

2. Don’t over reach. Some positions warrant a true non-compete and for others an agreement not to solicit customers will suffice. Patent and copyright assignments are critical for some segments of the workforce but for many, the only real concern is ensuring a departing employee does not make use of confidential information or steal trade secrets. Focus on what you need to protect and tailor the agreement to meet those needs.

3. Safeguard confidential information. A company’s failure to adequately protect confidential information in its day to day operations can undercut the best confidentiality agreement.

4. Be upfront about restrictive covenants. Waiting until after an employee accepts a position undercuts the consideration component and, in some jurisdictions, can invalidate an otherwise enforceable agreement. Ask prospective employees about ongoing contractual obligations before hiring them. Remind departing employees of ongoing contractual obligations.

5. Stay current. Review your forms periodically. The law is constantly evolving in this area.

Another Federal District Court Declines To Apply Bright Line Two-Year Standard for Restrictive Covenant Consideration

Contributed by Jeff Glass

Emplyee cleaning out deskReaders of this blog know there is an intense debate in the courts over the application of Fifield v. Premier Dealer Servs., Inc., 993 N.E.2d 938, 943 (Ill.App 1st Dist. 2013). Fifield announced that restrictive covenants supported solely by an at-will employment relationship were invalid for lack of adequate consideration if the employee did not remain employed for two years after signing the contract. This applies even if the employee voluntarily terminated. The Illinois Supreme Court did not accept review of Fifield, so it is controlling law in Illinois. However, it has been controversial. While some courts have applied the two-year standard, many others have held that a more flexible approach is called for.

By opinion dated March 10, 2016, U.S. District Court Judge Robert W. Gettleman, of the Northern District of Illinois, declined to rule that a non-solicitation agreement was invalid because the former employee had not worked for the plaintiff employer for two years.

The case, R.J. O’brien & Associates, LLC v. Williamson, 2016 WL 930628, was an action by the plaintiff, a futures brokerage and clearing firm, against a former member of its  trading desk operation. The defendant was hired in April 2012. He signed contracts with a one year non-solicitation clause as to customers and employees.

The defendant resigned in April 2013 and joined a competitor, Wells Fargo. He solicited his co-workers to join him before he left, and continued after he left.  One of the executives he recruited joined him at Wells Fargo a few months after he started.

The plaintiff sued to enforce the contracts. Notably, it only sought damages and did not seek injunctive relief. The defendant moved for summary judgment based on Fifield, arguing that the two year requirement was not met so the covenants failed for lack of consideration. He also argued that there was no evidence that he had solicited plaintiff’s employees. The court denied the motion for summary judgment noting that while some courts have strictly applied Fifield’s two year standard, at least three federal courts in Illinois have rejected the bright line approach in favor of a more flexible approach. The court also stated that there was support in the Illinois case law for distinguishing between cases where the employee was terminated and where the employee resigned. Finally, the court stated that the consideration issue was less important where, as in the case at bar, the plaintiff only sought damages and did not seek equitable relief. Based on these factors, the court held that consideration was adequate.

O’brien is part of a trend, at least in the Northern District of Illinois, to reject the bright line interpretation of Fifield and instead, employ a fact-specific approach which is more favorable to employers and more supportive of the enforcement of restrictive covenants.  We will keep you apprised as further decisions address this topic.

Chicago Federal District Court Refuses to Apply Fifield Two Year Rule

Contributed by Jeff Glass

Readers of this update know that Illinois radically changed restrictive covenant law in Fifield v. Premier Dealer Services Inc., 2013 IL App. (1st) 120327.  In Fifield, the court required two years of at-will employment as consideration for a post-employment non-solicitation or non-compete clause entered into at the outset of employment, even if the employee voluntarily quit. The Illinois Supreme Court declined to review Fifield despite the requests of business groups and employer advocates. Since then, Fifield has remained controversial, with one appellate court and a few federal district courts declining to apply the two year rule. However, other courts have followed it and it has not been overruled, so employers ignore it at their peril.

In Traffic Tech, Inc. v. Kreiter, Case No. 14-CV-7528 (N.D. Ill. Dec. 18, 2015), the federal district court (Judge Dow) declined to grant a motion to dismiss filed on the basis of Fifield. The defendant employee had signed an employment agreement containing a non-solicitation clause when he joined the Plaintiff, but then he quit roughly a year later. Under the Fifield two year standard, the restrictive covenant should have been unenforceable. But the court denied a motion to dismiss filed on this basis, holding that “Illinois Supreme Court is not likely to adopt a two-year, bright line rule in assessing whether an employee was employed for a ‘substantial period of time’ so as to establish adequate consideration to support a post-employment restrictive covenant.” The court noted that the last time that restrictive covenants were discussed by the Illinois Supreme Court, in Reliable Fire Equip. Co. v. Arredondo, 965 N.E.2d 393, 403 (Ill. 2011), the court held that the enforceability depended on a totality of the circumstances inquiry that was inconsistent with the bright line approach established by Fifield. This view is consistent with the opinions expressed in this blog and elsewhere that were critical of the Fifield decision.

Fifield remains the law of Illinois but it is under attack. We will keep you updated in this blog.

The Ongoing Debate About Adequate Consideration in Non-Competition and Other Restrictive Covenants

Contributed by Carlos Arévalo

In late June, the appellate court for the first district reiterated that employment lasting less than two years is inadequate consideration to support enforcement of a post-employment restrictive covenant. In McInnis v. OAG Motorcycle Ventures, a motorcycle salesman filed a lawsuit seeking to have his non-competition agreement declared invalid because he resigned 18 months after signing the agreement. The employer counterclaimed seeking an injunction to enforce the restrictive covenant. The salesman won.Featured image

The court came to this conclusion after examining the 2013 first district case, Fifield v. Premier Dealer Services, Inc. That case has been criticized because of its emphasis on the duration of employment after the execution of the agreement, as opposed to reviewing the totality of the circumstances under the Illinois Supreme Court standard. The case involved an employee who was laid off when his employer was purchased by another company. The new company offered the employee a job, but required him to sign a non-competition agreement. While he signed the agreement, the employee resigned three months later. The employee and his new employer sued to invalidate the agreement. The court agreed and established a bright-line rule that employment lasting less than two years after signing a non-competition agreement would not be sufficient consideration. Before this decision, courts had maintained that employment for a “substantial” period of time would be sufficient consideration. The employer, supported by the Illinois Chamber of Commerce, appealed the Fifield decision to the Illinois Supreme Court. However, the appeal was denied.

The Third District Court also adopted the two-year rule. In the 2014 case of Prairie Rheumatology Associates, S.C. v. Francis, the court held that a physician, who left the practice after 19 months, was not bound by her non-competition agreement. Some federal court judges, however, have expressed skepticism that the Illinois Supreme Court would adopt the two-year rule. In February, Judge J.B. McDade of the Central District noted that the two-year rule in Fifield is “overprotective of employees, and risks making post-employment restrictive covenants illusory for employers subject completely to the whimsy of the employee as to the length of his employment.”

This ongoing debate is by no means settled. In fact, Justice David Ellis disagreed with the majority of the court in the McInnis decision. In his dissent, Justice Ellis stated that he does not believe that a per se rule exists in Illinois nor that a bright-line, two-year rule is warranted.  We will have to wait and see what happens.

Until the issue is settled by the Illinois Supreme Court, employers should review their existing restrictive covenants to ensure that there is sufficient consideration in light of these court decisions and should carefully analyze what consideration is being offered in agreements currently being negotiated. This additional consideration can take the form of added bonuses, additional benefits such as more sick or vacation time, or other incentives particular to the individual business and employees.

Non-Compete Issues for the New Year

Contributed by Jeff Glass

At the beginning of the year it is not uncommon for employees to jump ship.  We often find our employer clients either dealing with employees who have left, or considering hiring employees who may be under non-compete agreements with their former employers.

Here are a few things to keep in mind:

If you are an employer who has an employee leave, make sure that his or her work station, laptop, or other electronic storage device is not “wiped” or put back in service until you are comfortable that the employee is not taking information or engaged in conduct that violates his or her non-compete.  Obtain any physical copies of documents or information, thumb drives, etc. before the employee leaves.  Have them affirm in writing that all information has been returned.

If you think the employee is engaged or about to engage in conduct that violates the non-compete, have your counsel send the employee and any prospective new employer a letter that encloses a copy of the restrictive covenant and puts them on notice that you are monitoring their conduct and that you stand ready to take any legally appropriate action.

Don’t assume that the employee or the new employer will honor the non-compete.  There are various reasons for this.  The employee might think that non-competes are unenforceable – an erroneous but widespread misconception.  Or, the employee might think that the employer does not really intend to enforce it.  Some employees even forget they have agreements.  In other cases, the employee does not tell the new employer that he has a non-compete.

If you are considering hiring someone, ask during the interview if they are under any kind of restrictive covenant, non-disclosure agreement, or other contract that would potentially be breached by their employment with your company. If you hire them, require them to sign a statement confirming that they have not been asked for, nor have they disclosed, any confidential or proprietary information.  Experienced counsel will have forms of this type of agreement.

Finally, some employers roll out new restrictive covenant agreements at the beginning of a calendar year.  If your company is considering doing this, please be aware that the law is developing and some states now require some type of consideration (besides the job or continued employment) to new or existing employees in exchange for the non-compete.  There are different ways to meet this requirement, so check with counsel experienced in this area of the law.  Your non-compete agreements probably will need to be updated if they are more than a year old.

Employee Who Quits Rather Than Sign Non-Compete Is Entitled to Unemployment Benefits

Contributed by Bill Clark

The Missouri Court of Appeals for the Eastern District recently determined that an employee who refuses to sign a proffered non-compete agreement, which was required as a condition of employment, and voluntarily leaves employment was entitled to unemployment benefits.  The court determined that “good cause” existed and warranted entitlement.

David Darr began working for Roberts Marketing Group in October of 2012, selling final expense life insurance.  Shortly thereafter, on January 24, 2013, the employer announced that it was implementing a new non-compete agreement for all employees to sign.  Among the terms, the non-compete prohibited the employees from engaging in any business competing directly or indirectly with the employer for a period of thirty-six (36) months.  The geographic reach of the agreement extended to the entire United States, including Alaska and Hawaii, and all U.S. territories.  It also required that the employee represent that the non-compete as written does not impose a financial hardship and does not prevent the employee from being gainfully employed.  It required the employees to waive any defenses in future litigation.  Finally, the non-compete contained a tolling provision that stated that should the employee breach the agreement, the non-compete would be extended an additional thirty-six (36) months from the date the employee ceased violating the terms of the non-compete.

On January 29, 2013, a company-wide meeting was held, at which time employees were permitted to ask questions.  The employer required that, as a condition of employment, all employees execute the non-compete by February 1, 2013.  There was no evidence that the employees were allowed to negotiate the terms of the non-compete or consult an attorney.  Darr refused to sign the agreement and eventually voluntarily resigned.  The Missouri Labor and Industrial Relations Commission determined that Darr had voluntarily left his employment without good cause attributable to the employer and thus denied his claim.

The appeals court reversed the commission and focused its analysis on the terms of the non-compete.  The court determined that the non-compete had been presented to Darr with an ultimatum that it be signed within a very short period of time, which hindered any meaningful review of the agreement and any counsel from an attorney.  Additionally, the court determined that the agreement would also place restrictions on future employment that were not in place at the time of Darr’s hire.  The court noted that the terms of the non-compete were not minor or trifling and that any acceptance of the agreement would have constituted a substantial change in Darr’s working conditions.  As such, Darr had established “good cause” attributable to his employer for his voluntary departure.

What does this mean for employers in Missouri—and, perhaps, Illinois and other states that also allow employees to collect unemployment benefits when they voluntarily quit “with good reason attributable to the employer”?  In most states, employers may impose non-competes as a condition of continued employment.  However, the employer must be cognizant that if the agreement is so onerous as to detrimentally change the employee’s working conditions, especially if employees have no meaningful opportunity to review the agreement prior to signing, then employees may quit (in lieu of signing) and still collect unemployment benefits.  In this case, while not specifically adjudicating the enforceability of the non-compete, the court noted that this agreement might not withstand judicial scrutiny.


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.

Chicago Federal Case Underscores Importance of Confidentiality Agreements

Contributed by Jeff Glass

Many employers use confidentiality agreements with their employees or business partners.  Most have confidentiality clauses in their employee handbooks. Yet, when faced with unfair competition, companies often mistakenly think that, if they do not also have non-compete agreements, they cannot protect themselves. A recent federal court decision from Chicago highlights why this view is mistaken.  Nortek Products (Taicang) Ltd., et al. v. FNA Group, Inc., 2012 U.S. Dist. LEXIS 4943 (N.D. Ill. Jan. 17, 2012).

The plaintiff in Nortek was a manufacturer that contracted with the defendants to make pressure washers for distribution. The defendants failed to pay for $3 million of product. The plaintiff sued.  The defendants counterclaimed for breach of a confidentiality agreement. The agreement barred the plaintiff’s managing director from using “confidential information” for any purpose other than the joint venture. It applied to drawings, analyses, formulas, data, technology, “know-how,” and other information provided by the defendants.  The defendants claimed that the plaintiff previously knew nothing about pressure washers and that, after they provided information for the joint project, the plaintiff used the information to start a competing venture.  

The plaintiff moved to dismiss, arguing that the agreement was overbroad and failed to specify what information was “confidential.”  The court denied the motion. It reasoned that the agreement listed categories of information that are generally deemed proprietary, and that certain information was specifically identified as “confidential” at the time of disclosure.  The plaintiff’s managing director also agreed to the definition of “confidential information” when she signed the agreement.  The court held that, to prevail on the merits, the defendants would need to show that the information was in fact kept confidential.  The court noted, however, that they did not need to show that the information rose to the level of a “trade secret.” 

Nortek Products demonstrates the benefits of a well-drafted confidentiality agreement.  Although the case involved a motion to dismiss rather than a trial on the merits, often that is a distinction without a difference.  Discovery is expensive.  Litigants often come to the settlement table when faced with that cost, even if they think they could win at trial.