Tag Archives: unfair competition

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 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.