Monday, April 27, 2009

Texas Court Finally Gets a Non-Compete Issue Right (Mann Frankfort v. Fielding)

Litigating a non-compete dispute in Texas is the equivalent of wading into an intellectual abyss.

Texas has enacted a non-compete statute that provides little in the way of guidance, but contributes greatly to attorneys' level of confusion. The particular provision of the statute that has wreaked judicial havoc concerns the requirement that a non-compete covenant be "ancillary to an otherwise enforceable agreement."

Texas courts seemed to ruminate for years over what this meant. Some of the confusion disappeared a few years ago when the Supreme Court of Texas issued its decision in Alex Sheshunoff Mgmt. v. Johnson, a case that marginally made some sense but left a key issue open.

The basic issue decided in Alex Sheshunoff was that for a covenant to be ancillary to an otherwise enforceable agreement, the employer's return promise to provide confidential information to the employee need not be fulfilled at precisely the time the employee promises not to compete. Previous decisions had yielded the bizarre rule that unless there was a simultaneous disclosure of confidential information to the employee at the time the contract was signed, the covenant was void entirely.

Alex Sheshunoff basically said the employer could eventually provide confidential information to the employee, and this would satisfy the ancillarity requirement.

The issue left unresolved was whether an implied promise to provide confidential information to the employee was sufficient. In Mann Frankfort v. Fielding, the Court said yes. Prior to this decision, the appellate cases came out both ways. Some held an implied promise was enough, while others disagreed. Unless the agreement was crystal clear that an employer had an obligation to provide the employee with confidential information, the employee had more than a decent argument the non-compete was illusory.

This seems to be the final step for Texas courts to move beyond this pedantic line of cases involving ancillarity.


Court: Supreme Court of Texas
Opinion Date: 4/17/09
Cite: Mann Frankfort Stein & Lipp Advisors, Inc. v. Fielding, 289 S.W.3d 844 (Tex. 2009)
Favors: Employer
Law: Texas

Friday, April 24, 2009

Bankruptcy Court Approves Debtor's Petition to Purchase Non-Competes (In re Pilgrim's Pride)

Prior to 2005, key-employee retention plans were often endemic to a company's recovery during a Chapter 11 bankruptcy. The general thought was management needed to have a vested stake in a distressed company, and without an incentive plan, managers would resign in droves.

In October of 2005, Congress passed the Bankruptcy Abuse Prevention and Consumer Protection Act, which placed significant restrictions on such incentive plans offered to key managers. In that legislation, Congress authored key changes to Section 503(c) of the Act.

At issue in the Pilgrim's Pride bankruptcy was which provision of Section 503(c) governed the debtor's motion to essentially buy non-compete agreements from departing executives. By way of background, Section 503(c)(1) governs retention bonuses to insiders. The Trustee argued the company's petition to pay nearly $500,000 to a departed CEO and COO fell within the ambit of (c)(1). However, the court disagreed, finding that the company wanted the CEO and COO gone - not retained. Indeed, the restructuring officer testified the voluntary resignations were given under threat of termination.

The court next determined that the sought-after non-compete payments did not fall within (c)(2), which expressly applied to severance pay. Here, the executives had already been paid severance, so no logical reading of (c)(2) could apply to the debtor's petition.

Finally, the court concluded that the non-compete payments were subject to (c)(3). That provision is a catch-all clause in the Bankruptcy Code governing plans outside the ordinary course of a debtor's business not formally designed to retain insiders.

The key issue for the court was what standard to apply to the petition. Noting that some courts implemented a simple "business judgment rule" test, the court went further and held that a debtor's petition was subject to stricter scrutiny. In particular, the court founds as follows:

"Section 503(c)(3) is intended to give the judge a greater role: even if a good business reason can be articulated for a transaction, the court must still determine that the proposed transfer or obligation is justified in the case before it. The court reads this requirement as meaning that the court must make its own determination that the transaction will serve the interests of creditors and the debtor's estate. Put another way, when a transaction is proposed between a debtor and its insiders, the court cannot simply rely on the debtor's business judgment to ensure creditors and the debtor's estate are being properly cared for."

Despite taking a de novo look at the petition for non-compete payments, the court approved them over the trustee's objection. The court noted the payments were not insubstantial, but that the threat of competition from two departed executives outweighed any cost borne by the estate. The court specifically found each executive had extensive knowledge about the debtor's customers and could divert large accounts, potentially costing the company millions of dollars. The court did not comment why the executives were not subject to pre-existing non-compete obligations, either as part of an executive employment agreement or severance package.


Court: United States Bankruptcy Court for the Northern District of Texas
Opinion Date: 2/26/09
Cite: In re Pilgrim's Pride, 401 B.R. 229 (N.D. Tex. 2009)
Favors: N/A
Law: Federal

Wednesday, April 22, 2009

Appellate Court of Illinois Overturns Final Judgment on Trade Secrets Claim (System Development Services v. Haarman)

The recent decision in System Development Services v. Haarman, arising out of a final judgment rendered in Effingham County, Illinois, reads like an all too-familiar script. Indeed, this presents a fact pattern I probably see more often than not when counseling corporate clients or individuals seeking to join a competing organization or start their own venture.

And though the fact pattern may vary slightly from case to case, it always seems to involve these elements:

(1) The employee has no non-compete or customer non-solicitation agreement.
(2) The employee has left to form or join a competitor.
(3) The employee has key customer relationships and intimate knowledge of vital business information, including contact names, pricing history, customer requirements, and anticipated future buying needs.
(4) There is little or no evidence the employee actually took documents or downloaded information such as a customer list.
(5) The ex-employer suspects the employee might have used some information in his or her new position.
(6) The customers systematically have left to follow the new employee at his or her new venture.

In the absence of a non-compete agreement, the employer generally is left with two potential avenues of relief: breach of fiduciary duty or trade secrets theft. The former is awfully difficult to prove in the absence of demonstrable, actual competition prior to the date of resignation. The latter is a much more fact-intensive, amorphous inquiry, and the very nature of trade secrets law gives a lawyer room for creative argument.

But here is the rub. That lawyer representing the company ought to be darn careful when bringing such a claim; courts have long cautioned against using trade secrets claims to impose upon an employee an ex post facto non-compete.

The Haarman case is not that unique, but its procedural posture was and the ruling will make it more difficult for companies trying to prevent competition by ex-employees under vague claims of trade secrets theft.

The industry involved is one where non-competes are fairly common: computer network consulting. System Development Services (SDS) catered to businesses around Effingham, Illinois, and the technicians employed by SDS had substantial customer contact. They were often on-site at a customer location and had intimate knowledge of customer needs.

When several of SDS' employees left to form a new company, SDS filed suit and claimed trade secrets theft. At trial, two trade secrets were at issue: a customer list and customer requirements (i.e., knowledge of customers' computer systems). The trial court founds that the defendants misappropriated both and entered a two-year injunction against the employees which barred them from marketing to any actual or potential customer in SDS' database. The court further awarded judgment against the employees in the amount of $481,892, exemplary damages of $20,000 and a fee award of $260,695.99. In short, the trial court put the defendants out of business and fined them nearly three-quarters of a million dollars.

The defendants appealed and had to overcome a daunting standard of review; in essence, they had to argue that the evidence could never support judgment against them. They prevailed.

The court held the customer list was not a trade secret. In particular, the list at issue contained only the names, addresses and phone numbers of potential clients in the general geographic area where SDS was located. The employees testified this could be gleaned from commonly used public sources, such as the internet and telephone books. The court further noted each employee was a resident of the area with a large family and network of personal contacts. The injunction prevented them from working with a number of potential clients they already knew and which clearly required no reference to any secret list. Importantly, the court stated "the evidence established that the defendants were able to lure...customers away from SDS...because of those personal relationships, not because of SDS' client list."

Though it did not say so, this is the sina qua non of a non-compete agreement. If an employee has access to, and is able to influence customer decisions, a non-compete may be appropriate. Without one, imposing an injunction on vague, conclusory allegations of trade secrets theft smacks of unfairness.

The second trade secret at issue was even less concrete, and it is questionable whether the plaintiff even bothered identifying it. The secret involved the concept of "customer requirements", that is, buying preferences and knowledge of what a customer owns and might need in the future. Citing a litany of cases, the court had little trouble discarding the trial court's conclusion that this catch-all basket of information constituted a protectable trade secret. The court never discussed the definitional problem, and instead relied on two facts clearly established by the testimony: (a) the information was the customer's, not that of SDS; and (b) such information is the product of an employee's general skill and knowledge, not any trade secret of his employer.

Haarman does not establish any groundbreaking new precedent under trade secrets law when something less tangible and concrete is at issue. There are plenty of cases just like it, including the influential Fleming Sales decision written by Judge Shadur many years ago. Cases involving misappropriated source code or an engineering drawing are far easier to grasp analytically than something like what was presented in Haarman.

The case also demonstrates a few other things that I think are critical:

(1) An attorney must remember that a trade secret is nothing more than information that derives its value from being secret. Regardless of the factors that are used to analyze a trade secret claim, this is the most important inquiry.

(2) These disputes are frequently mishandled by the trial court - as evidenced by the judgment entered in Haarman.

(3) Litigation through trial can be awfully expensive, as evidenced by the plaintiff's fee petition (now since reversed) of more than $260,000.

(4) Identifying what the claimed trade secret is continues to be a major irritant.


Court: Appellate Court of Illinois, Fifth District
Opinion Date: 4/13/09
Cite: System Development Services, Inc. v. Haarman, 2009 Ill. App. LEXIS 218 (Ill. App. Ct. Apr. 13, 2009)
Favors: Employee
Law: Illinois

Tuesday, April 21, 2009

Minnesota Court Addresses Validity of Consideration In Companion Non-Compete Cases (Softchoice v. Schmidt)

In a consolidated appeal, the Court of Appeals of Minnesota addressed the validity of consideration allegedly granted to two separate employees for non-compete covenants given by them to their employer, Softchoice. The issue of consideration is frequently litigated in "after-thought" covenant cases, where the employer asserts continued employment constitutes sufficient consideration for a non-compete.

In both Softchoice v. Schmidt and Softchoice v. Johnson, the court had occasion to address two novel consideration arguments, including one of first impression.

Softchoice v. Schmidt

The first appeal involved a non-compete clause granted in connection with an employee retention plan. Schmidt had been an employee of Software Plus when it was acquired by Softchoice. Prior to the acquisition, Schmidt was given the chance to participate in an employee retention plan into which Softchoice retained the discretion to deposit credits into a trust account.

The first covenant was contained within the plan document itself and provided that Schmidt had to forfeit any deposited retention credits if he left to compete with Softchoice anywhere in the State of Minnesota. The second covenant was a stand-alone covenant that barred Schmidt from competing with Softchoice in Minnesota following his termination. The only issue on appeal concerned the second covenant. It was not disputed the forfeiture provision in the plan itself was a valid provision. But Schmidt contended the stand-alone covenant lacked consideration, and the court agreed.

Of particular importance was the fact Softchoice retained absolute discretion to deposit retention credits in Schmidt's trust account. Nothing obligated Softchoice to do anything for Schmidt's benefit, though it ultimately did deposit $25,000 into the plan. The court agreed with Schmidt that the relevant point in time for analysis was at the time of contracting, and when the stand-alone covenant was signed, Softchoice had no binding return obligation with respect to the retention plan. As such, Schmidt's participation in the plan could not serve as valid consideration for the non-compete.

Softchoice v. Johnson

The Johnson case involved a promotion. Johnson was a sales representative who eventually was promoted to branch manager in early 2007. Johnson learned of the promotion before he signed a customer non-solicitation agreement, and the promotion was announced prior to the time the ink was dry on the contract. Eventually, Johnson signed the agreement and received a retroactive pay increase. The agreement provided Johnson's promotion was contingent on accepting the new terms and conditions of his employment.

He, like Schmidt, left in December of 2007. Johnson argued that the promotion could not serve as valid consideration for his non-compete since he signed it after the promotion was announced. The court had little trouble dismissing this argument, though it noted the issue was one of first impression. In particular, the court held that "a promotion serves as consideration for a non-compete agreement at the time when the terms of the promotion have been defined and the promotion has been formally offered and accepted in writing."


Court: Court of Appeals of Minnesota
Opinion Date: 4/7/09
Cite: Softchoice, Inc. v. Schmidt, 763 N.W. 2d 660 (Minn. Ct. App. 2009)
Favors: Schmidt case - Employee; Johnson case - Employer
Law: Schmidt case - Missouri; Johnson case - Minnesota

Monday, April 20, 2009

Notice Provisions Can Impact Non-Compete Agreement's Enforceability (ZVUE v. Bauman)

Contract provisions detailing notice requirements for how a relationship is to be terminated run the gamut from non-existent to vague to overly detailed. Frequently, notice provisions are found in sale of business contracts and specify precisely how an employment or consulting contract will be terminated and whether a party has an opportunity to cure a claimed breach or performance issue. Notice provisions are less prevalent in run-of-the-mill employment contracts, but they sometimes still govern how an employee must be notified of his discharge and whether he is entitled to severance pay or disclosure of the reasons why he has been fired.

The case of ZVUE v. Bauman addresses the importance of complying with contract notice provisions when trying to enforce, or break, a non-compete clause. Though the case deals with myriad business and intellectual property issues arising out of the sale of entertainment websites, one particular issue dealt with the applicability of a customer non-compete. The clause did not apply if either party terminated the employment agreement "without cause." However, for the employee to avail himself of this right, he had to give notice of his intent to terminate to the company detailing the breach of the underlying asset purchase agreement and granting the company 10 days to cure the breach.

He failed to give the proper written notice and therefore was unable to claim his resignation was a termination "without cause." One can envision a number of circumstances in how a notice provision will impact the rights of either side. For instance, if an employment agreement provides an employee is entitled to written notice of his termination, and that notice is not provided, the employee has an argument the employer failed to abide by the terms of the agreement. The notice provision also may be tied directly to the non-compete. Though this often requires a careful parsing of the agreement and its several provisions, the employee will generally get the benefit of any contract ambiguity or drafting errors.

The Bauman case is just an example of how employers and their attorneys must think through each contract provision. Using standard contract terms may not work particularly well in non-competes, as they can have unintended consequences for employers.

Court: Supreme Court of New York, New York County
Opinion Date: 4/15/09
Cite: ZVUE Corp. v. Bauman, 2009 N.Y. Misc. LEXIS 861 (N.Y. Sup. Ct. Apr. 15, 2009)
Favors: N/A
Law: New York

Wednesday, April 15, 2009

Louisiana Court: No-Hire Covenants Do Not Fall Within Non-Compete Statute (CDI v. Hough)

Though frequently a target of derision, the Louisiana courts actually have churned out some interesting non-compete decisions of late. The latest construed a fairly typical no-hire clause, a covenant generally barring employees from soliciting co-workers for a period of time after termination. Courts have been all over the map with respect to these types of covenants. One example is Missouri, where an appellate court held that such covenants were invalid as a matter of law because they did not support a recognized business interest, namely that of maintaining a stable workforce. The legislature acted expeditiously to overturn that decision. Illinois, by way of example, is all over the board on these types of covenants.

In CDI v. Hough, the Court of Appeal had occasion to apply a no-hire clause to an amended statute of general applicability governing non-compete agreements. The employee contended it was an invalid restraint under the statute; the employer felt the statute was not applicable by its terms to a no-hire clause.

The employer came out ahead and was able to enforce the covenant.

Louisiana's statute generally prohibits contracts "by which anyone is restrained from exercising a lawful profession, trade or business of any kind." There are exceptions for reasonable non-competes, but those aren't relevant here. The italicized language is the key to analyzing a no-hire.

According to the court, a no-hire clause does not prevent anyone from exercising a lawful profession. It merely places a restriction on who that individual can solicit to join him. Though the dissent disagreed, the wording of the statute seemingly does not apply at all to no-hire clauses, which are generally the least troubling type of employment covenant (according to most courts, at least).


Court: Court of Appeal of Louisiana, First Circuit
Opinion Date: 3/27/09
Cite: CDI Corp. v. Hough, 2009 La. App. LEXIS 457 (La. Ct. App. Mar. 27, 2009)
Favors: Employer
Law: Louisiana

Tuesday, April 14, 2009

Will Statutory Amendments Apply Retroactively to Non-Compete Agreements? It Depends. (Hixson Autoplex v. Lewis)

As of this writing, 16 states have statutes of general applicability concerning non-compete agreements. Several other states have much more limited statutory provisions which address, among other things, no-hire covenants (Missouri), non-disclosure agreements (Washington), and profession-specific non-competes (Delaware, Illinois, New York, Massachusetts, and others).

Legislation in this area is increasing, particularly as the economy flattens and employees conduct business across state lines. Idaho and Oregon have enacted major changes to non-compete law by statute in the last year or two, while Georgia is on the cusp of major reform. Though a bill was filed in the Illinois House of Representatives concerning non-compete agreements, that legislation did not make it past a first reading and the deadline has passed for it to be introduced and called for a vote during Regular Session.

Given the expectation that legislative activity will only proliferate in this field of law, a logical question is whether a statute should be applied prospectively or retroactively. Even then, the question arises as to what prospective application means to a contract that is intended to apply at a future point in time.

The Court of Appeal of Louisiana had occasion to consider this question in Hixson Autoplex of Alexandria v. Lewis. In that case, the employee, a car salesman, signed an industry non-compete with his dealership in 2005. A year later, the Louisiana legislature carved out car salesmen from the statute permitting narrowly tailored non-competes. (Parenthetically, this appears to be the only state granting a non-compete exemption to car salesmen. It is unknown why this lobby has enough influence in Louisiana to get such a law passed). In 2008, Lewis was terminated and accepted employment with another dealership in a prohibited territory under his contract.

The court held that the change to the non-compete law substantive, not procedural, and as a default rule, substantive changes in the law apply prospectively only. The dissent rightfully points out that the relevant inquiry could be considered the time of termination, not the time the contract was entered into. After all, the covenant only takes effect upon termination, and the sina qua non of a covenant is to protect the employer after the employee is gone. By the time Lewis was fired, the statute had been changed. Neither side had anything to gain by the contract prior to this date.

Generally speaking, a legislature's expressed intent will govern. A statute may very well provide that it is intended to apply to agreements entered into on or before a date certain, and that type of clause will govern. Absent such an expression, the substantive change in the law applies prospectively. But Hixson Autoplex, and in particular the dissent, notes the inquiry regarding prospective application of a statutory amendment is not as simple in non-competes as it is in other business transactions.


Court: Court of Appeal of Louisiana, Third Circuit
Opinion Date: 4/1/09
Cite: Hixson Autoplex of Alexandria, Inc. v. Lewis, 2009 La. App. LEXIS 509 (La. Ct. App. Apr. 1, 2009)
Favors: Employer
Law: Louisiana

Friday, April 10, 2009

Wisconsin Court Approves 2-Year "Look-Back" Provision In Customer Non-Compete (Techworks v. Wille)

The old rules pertaining to non-compete agreements always focused on geographic territory as an indispensable element of reasonableness. Along with a time restriction, courts frequently scrutinized whether a geographic boundary was reasonably tailored to protect an employer.

However, customer-based restrictions can serve as legitimate proxies for a geographic term, and courts appear to consider them as much more favorable (and fair) substitutes. When drafting customer non-compete clauses, attorneys still must be careful to make them reasonable. A sweeping restriction barring an employee from contacting or working with any customer (past, present or future) is sure to be struck down as overbroad.

In many states, courts will require some nexus between the employee and the customer, often times by requiring that the non-compete only extend to those customers with whom the employee had substantial contact during the course of his or her employment. A commonly-disputed type of customer non-compete, though, involves a "look-back" provision. This type of provision was at issue in the recent Wisconsin case of Techworks, LLC v. Wille.

Generally speaking, a look-back covenant bars an employee from contacting customers with whom he dealt during a certain period of time prior to the end of his employment. Companies generally draft look-back provisions in one of two ways.

The first, and more problematic, provides that an employee cannot work with any customer with whom he developed a relationship during the course of his employment. For long-term employees, this could include customers who have not done business with the company in many years. In that type of case, the covenant really protects no legitimate business interest, but rather competition per se. Needless to say, those are tough to justify for employers.

The second, which was at issue in Techworks, involves a specific look-back period of time. In the employee's covenant, the look-back period was two years, such that the covenant barred him from working with any customer with whom he dealt as an employee two years before his departure. The Court of Appeals of Wisconsin, in a surprising decision, found this reasonable. Wisconsin is a notoriously pro-employee state on non-compete agreements.

A dissenting opinion noted that the three customers at issue had actually ceased doing business with the ex-employer several months prior to the defendant's resignation. This raised the issue of what possible legitimate interest the employer had to protect by enforcing the covenant. Still, the majority glossed over the fact and entered summary judgment on the validity of the covenant. The issue of breach was reserved for trial.

Despite the holding, employers must be careful in arbitrarily selecting look-back dates. They must be able to articulate why the time-frame was chosen and what interest is being protected. For instance, evidence demonstrating that other customers frequently come back after a period of time may help establish reasonableness, but it is easy to see an argument like that offered by the dissent in Techworks prevailing in another court.


Court: Court of Appeals of Wisconsin, District One
Opinion Date: 3/31/09
Cite: Techworks, LLC v. Wille, 770 N.W.2d 727 (Wis. Ct. App. 2009)
Favors: Employer
Law: Wisconsin

Tuesday, April 7, 2009

Arizona Follows Majority Rule on Assignment of Restrictive Covenants (Sogeti USA v. Scariano)

One of the most common defenses raised by employees who try to break a non-compete is based on standing. Frequently, this arises when an employee signs a non-compete with one employer, who is later acquired by a successor entity. If the employer departs and competes, the successor entity will often try to enforce an agreement it never signed. Many times, the non-compete is silent as to whether the rights, duties and obligations are assignable to the successor.

In Sogeti USA v. Scariano, a federal district court addressed this issue as one of first impression under Arizona law. The court followed the majority of jurisdictions which hold that assignments of non-compete agreements are permissible even if: (a) the contract is silent regarding assignment; and (b) there has been no affirmative consent to the assignment by the employee.

Other jurisdictions following this rule include Illinois, New Jersey, and Kansas. States which hold otherwise, and require an assignability clause or consent by the employee, include Pennsylvania and Nevada. In these minority of states, courts focus on the "personal services" element to the contract and the employer's ability to write an assignment clause into the contract.

A couple of important caveats should be mentioned. First, an employee may impliedly consent to the assignment if he knows of it and continues in his employment for a significant period of time. Second, the rules on assignment are different if the business transaction is a merger rather than an acquisition. Business corporation statutes, not contract law, will govern the contractual obligations of the merged entity.


Court: United States District Court for the District of Arizona
Opinion Date: 3/27/09
Cite: Sogeti USA, LLC v. Scariano, 2009 U.S. Dist. LEXIS 25658 (D. Ariz. Mar. 27, 2009)
Favors: Employer
Law: Arizona

Friday, April 3, 2009

Senate Bill 2149 Still Without Vote on Third Reading

As previously reported, Senate Bill 2149 proposes significant procedural amendments to the Illinois Trade Secrets Act. Today is the last day for the State Senate to take up a vote on the Third Reading of a bill. In legislative parlance, each bill requires three readings (the third calls for passage of a bill), but since the Senate elected not to go in session today, the deadline has passed for bills to be voted on during this regular session.

SB 2149 was placed on the calendar for third reading over a week ago but it did not come up for a vote last evening when the Senate adjourned at nearly 10:00 p.m. The chief sponsor of the bill has requested of the Senate President an extension of time to call for a third reading of SB 2149 so it still is possible the bill will be presented for a full vote during this regular session of the General Assembly. The Senate is back in session on April 21.

Pallmeyer's Opinion Portends Fight Over Key Issue Regarding Illinois Non-Competes (Giffney Perret v. Matthews)

Judge Rebecca Pallmeyer's recent opinion in Giffney Perret v. Matthews serves as a primer on Illinois non-compete law. As has become the custom, the opinion focuses on whether the language of a restrictive covenant was too broad (it was), whether it should be modified (it wasn't), and whether the employer could satisfy the rigorous "legitimate business interest" test (it did...sort of). The case is a crisp read through all the rules and standards non-compete lawyers must consider when advising their clients about the enforceability of a basic employment non-compete.

But the real nub of the opinion, for me at least, sits in Footnote 16, and it's a point I've been waiting for a court to address.

The problem in Illinois is that there is a gaping disconnect between the types of legitimate business interests a non-compete can protect and the breadth of restrictions sanctioned by courts. As most lawyers have become accustomed to, non-competes can only be used to protect the following business interests:

(1) "near-permanent" customer relationships the employee would not have developed but for his or her association with the employer; and

(2) access to confidential business information the employee has tried to use for his or her benefit following the termination of employment.

To be sure, other states recognize a wider range of protectable interests (e.g., goodwill, ordinary customer relationships, special training), but Illinois is rigorous in requiring the employer to meet one of the two cited above. Even the customer relationships test is exacting - it requires an employer to prove those relationships are "near-permanent", and courts have two different tests interpreting what this even means.

Judge Pallmeyer starts to hint in Footnote 16 at a bigger problem with the business interest test. In the context of the case, the court found that the plaintiff (Giffney Perret) had no protectable interest in its customer relationships. Its printing business was primarily engaged in ordinary sales, and the relationships with its clients were somewhat fleeting; it put printing jobs out to bid with competitors such that customers multi-sourced with regularity. In Illinois, this ordinary sales type of business won't cut it as far as the near-permanency test goes.

But read what Pallmeyer says about this:

"Moreover, even looking past the unreasonable terms in the non-solicitation clause, [Plaintiff's] covenant did not need a non-solicitation privision in order to protect any legitimate business interest established here. Because the covenant has a non-disclosure clause to protect [its] interest in confidential information, a non-solicitation provision was really only necessary if it were to protect relationships with near-permanent customers. As discussed above, [Plaintiff] had no protectable interest in near-permanent customers, so the non-solicitation provision as a whole was not 'necessary to protect the promisee.'"

Under this reasoning, it is hard to imagine how industry non-compete agreements (barring employment, not just solicitation of customers) would be valid in Illinois against employees. Put another way, if the interest an employer is limited to protecting through a covenant extends only to near-permanent customers or confidential information, then a general industry non-compete is by definition overbroad. Only activity restraints against solicitation of customers and disclosure of confidential information should be enforced.

Will we see anything more from courts on this point? It's hard to say, since the rules are well-established and there are a litany of cases enforcing industry-wide bans on employment with a competitor. But counsel should be aware of this opinion if a general non-compete is at issue. Arguably, the presence of a non-solicitation and non-disclosure clause makes the non-compete duplicative and not tied to any protectable business interest.


Court: United States District Court of Illinois
Opinion Date: 3/24/09
Cite: Giffney Perret, Inc. v. Matthews, 2009 U.S. Dist. LEXIS 23531 (N.D. Ill. Mar. 24, 2009)
Favors: Employee
Law: Illinois