Friday, October 30, 2009

Two Views of the Computer Fraud and Abuse Act (Brekka and Pullen)

Cases under the Computer Fraud and Abuse Act arising out of employee competition continue to head down two divergent paths.

In particular, courts are faced with a decision on whether to interpret the CFAA broadly or narrowly when an employer claims an ex-employee has acted "without authorization" or has "exceeded authorization" in accessing computer-stored information prior to termination of employment.

As I have written before, the more narrow view has gained substantial favor, illustrated by the Ninth Circuit's ruling in LVRC Holdings LLC v. Brekka. That case (originating from Nevada) arose out of a claim that an ex-employee improperly e-mailed company documents to himself prior to his resignation. Of note, the employer had no policy against this, and the documents were apparently sent to facilitate the ex-employee's potential buy-in to the company as a member. Put differently, when the deal soured - and after Brekka quit - the company had very few equities weighing in its favor. Whether that affected the Ninth Circuit's decision or not is not clear.

But the court rejected the argument that the term "authorization" was somehow linked to whether the employee acts contrary to his employer's interest or in defalcation of a fiduciary obligation of loyalty. Rather, the court looked to the plain meaning of the CFAA's terms - and the fact it is at heart a criminal statute - to find Brekka used LVRC's computer system in a manner totally consistent with the access previously granted to him as an employee.

The First Circuit, however, is less sympathetic to an employee's arguments for a narrow construction of the CFAA and reads the Act more broadly. In Guest-Tek Interactive Entertainment Inc. v. Pullen, a district court from Massachusetts denied an employee's motion to dismiss on the same grounds as raised in Brekka. While not directly adopting Judge Posner's influential opinion in the Seventh Circuit's Citrin case, the court rebuffed an employee's effort to dismiss a case after he allegedly transferred thousands of confidential files to a personal USB storage device before resignation. Unlike Brekka, the equities in this case decidedly militated in favor of the plaintiff.

The court in Pullen noted the progressive expansion of the CFAA from its relatively limited origins, as well as the fact employers are customarily using the statute to - essentially - federalize trade secrets claims. How this is at all relevant is not clear, but the court deemed it worthy of mention. The First Circuit, therefore, will interpret the CFAA in a broad fashion, analogous to how the Seventh Circuit does in the aftermath of Citrin.

Having considered the divergent views of federal courts, one issue is perfectly clear. Employers have to be out in front of this issue to eliminate difficult questions of statutory construction. Specifically, employers can be more diligent about protecting digitally stored information by formulating clear computer usage policies concerning use of company data on personal computers, migration of data to internet-based e-mail accounts, and the transfer of data for competitive purposes even while still employed. Including these policies within an employee handbook can help define the scope of authorization, regardless of what the CFAA default position is.



Court: United States Court of Appeals for the Ninth Circui
Opinion Date: 3/13/09
Cite: LVRC Holdings LLC v. Brekka, 581 F.3d 1127 (9th Cir. 2009)
Favors: Employee
Law: Federal


Court: United States District Court for the District of Massachusetts
Opinion Date: 10/19/09
Cite: Guest-Tek Interactive Entertainment Inc. v. Pullen, 2009 U.S. Dist. LEXIS 98737 (D. Mass. Oct. 19, 2009)
Favors: Employer
Law: Federal

Wednesday, October 28, 2009

Value of Non-Compete Usually Meets "Amount In Controversy" Minimum (Sarfraz v. Vohra Health Services)

If an employee challenges the validity of a non-compete in federal court on the basis of diversity jurisdiction, will the minimum amount in controversy ($75,000) be met?

Generally, the answer is yes. The value of equitable relief - as opposed to damages - is fairly difficult to determine from the face of a complaint, but courts err on the side of giving the plaintiff the benefit of the doubt. Sometimes, the analysis is easy - as it was in a decision issued by a New York federal court. In Sarfraz v. Vohra Health Services, the non-compete barred each physician from providing wound care services for a period two years within thirty miles of Long Island.

The non-compete was sweeping in scope and potentially could keep each plaintiff out of the profession for two years. Given their base salary of $150,000, the court found that the jurisdictional amount was easily met since the value of prevailing on a declaratory relief claim exceeded the statutory minimum.

It is conceivable that for short-term covenants or those for relatively inexpensive employees, the jurisdictional analysis may yield a different outcome. For activity covenants (such as a no-hire or no-solicit clause), the question becomes a little more nuanced and a plaintiff seeking a declaration of his or her rights may need to plead more facts to set forth the basis for diversity jurisdiction. In regards to non-disclosure clauses, courts seem more inclined to retain jurisdiction. Though the intangible nature of confidential information is hard to quantify, a plaintiff easily could satisfy the jurisdictional minimum by alleging that it has invested more than $75,000 in developing, storing and protecting confidential business information.


Court: United States District Court for the Eastern District of New York
Opinion Date: 10/20/09
Cite: Sarfraz v. Vohra Health Services, PA, 2009 U.S. Dist. LEXIS 99413 (E.D.N.Y. Oct. 20, 2009)
Favors: N/A
Law: Federal

Tuesday, October 27, 2009

Nasty Employment Row Highlights Importance of Duty of Loyalty, Underscores Cost of Litigation (Lawlor v. North American Corp.)

The Chicago Tribune's business reporter, Ameet Sachdev, writes this morning on the hotly contested dispute between Kathleen Lawlor and North American Corp. of Illinois, a case recently tried to judgment in the Circuit Court of Cook County.

The dispute touches upon a number of hair-trigger employment law issues, including rights to privacy, unpaid commissions, theft of confidential information and threats to steal customers. It also makes an oblique reference to another issue that always underscores the difficulty of employment litigation: Lawlor's attorneys' fees have approached $1 million.

The case involves the marketing services industry, and the dispute arose right after Lawlor, a successful salesperson, left in 2005. She claimed she was owed accrued commissions, and her employer feared she would steal customers. It also had her followed by a somewhat amateur gumshoe, a fact that would later prove to be damaging to North American.

There was no hint in Sachdev's article that Lawlor was bound by a non-compete contract, so North American was left to pursue common-law remedies. It found potential smoking guns when a North American consutant swore out an affidavit that Lawlor offered to introduce him to a competitor before she quit, and when Lawlor disclosed historical sales and margin data to a competitor on a job interview.

This conduct directly implicated Lawlor's duty of loyalty to her then-employer. That duty prohibits an employee from disclosing confidential information, facilitating a mass exodus of co-workers, and diverting business opportunities away from the employer. Employees must take this duty seriously - a violation can result in salary forfeiture during a period of disloyalty, an injunction against competitive conduct (even in the absence of a non-compete agreement), and punitive damages.

At trial, the parties appeared to split their claims against one another. Lawlor ended up prevailing on her invasion of privacy claim, after North American's overzealous investigators improperly obtained Lawlor's phone records and gave them to the company. North American, on the other hand, was able to obtain some measure of compensation forfeiture, presumbably based on Lawlor's pre-termination activity with existing customers or improper disclosure of North American financial data. Despite relatively low actual damages ($78,781), the trial judge imposed punitive damages of $551,467 - a multiple of seven.

Aside from the enormous fees generated in this case, the litigation serves as a reminder that the absence of a non-compete agreement does not - by any stretch - sanitize an employee's conduct on the way out the door. Breach of the common law duty of loyalty provides for extensive legal and equitable remedies. Proving such a claim can be difficult for an employer, but if the employer is able to marshall evidence of improper pre-termination activity (often learned through a forensic examination of the ex-employee's computer), it may be able to put a halt to anti-competitive conduct and obtain significant monetary relief.


Court: Circuit Court of Cook County, Chancery Division (Transferred to Law)
Opinion Date: N/A
Cite: Lawlor v. North American Corp. of Illinois, 2005 CH 13876
Favors: N/A
Law: Illinois

Monday, October 26, 2009

Breach of Non-Compete Agreement Can Occur Before Blue-Pencil Order (Astro-Med v. Nihon Kohden America)

In a hard-fought non-compete case originating in Rhode Island, the First Circuit Court of Appeals rejected an employee's unique defense under the blue-pencil rule. Specifically, the defendant did not argue that the district court failed to narrow the non-competition covenant properly, but rather contended that the court could not find that he "breached" a covenant which was only made reasonable by virtue of the blue-pencil rule.

The court rejected the defendant's position and held that it would "give the promisor in a non-competition agreement one free breach requiring a prior judicial order before the provision could be said to have been violated." A contrary result would have yielded a clear result the court was unwilling to sanction: for all but the most narrowly tailored non-compete agreements, an injunction may be the only effective remedy to protect the employer. Allowing a prior breach to fall within a broad safe-harbor would leave many employers without redress, even in the most egregious situations, and would deprive the employer of the benefit of his bargain even if it could show actual damages.

There is some limited support, however, for the opposite view. In Texas - generally an employer-friendly state - the governing non-compete statute provides that damages cannot be awarded before an order of reformation. Of course, Texas has a public policy that overbroad covenants must be reformed to make them reasonable, and apparently the legislature determined that a limitation on damages was a proper trade-off in favor of the employee. It is notable that the First Circuit did not even cite the Texas statute.

The First Circuit's decision confirms that such an unprecedented interpretation of a non-compete agreement is not something a court should decide. In the absence of a specific statute or contract clause, a prior breach of a modified non-compete is still a "breach" - and can support a damages award.


Court: United States Court of Appeals for the First Circuit
Opinion Date: 10/22/09
Cite: Astro-Med, Inc. v. Nihon Kohden America, Inc., 2009 U.S. App. LEXIS 23298 (1st Cir. Oct. 22, 2009)
Favors: Employee
Law: Rhode Island

Thursday, October 22, 2009

Defection At Citadel's High-Frequency Trading Unit Warrants Injunction - To A Degree (Citadel Investment Group v. Teza Tech.)

One of the most high-profile non-compete disputes in the Chicago area has resulted in a victory for Citadel Investment Group and a set-back for two executives who defected to start their own high-frequency trading firm.

In a 36-page memorandum opinion and order Judge Mary K. Rochford enjoined Mikhail Malyshev and Jace Kohlmeier from violating non-compete restrictions contained in their Citadel employment agreements for the balance of the nine-month term. Effectively, this means that both Malyshev and Kohlmeier may be free to compete as soon as February of 2010, since the court refused to extend the non-compete term on an equitable basis for the period in which the defendants were in breach.

The case involves a shadowy, but highly profitable business known as high-frequency trading (HFT). In essence, HFT relies on powerful computers to enter trade orders (often without human intervention), with algorithms deciding on specific aspects of the trade such as how much to buy, when, and at what price. HFT is a relatively new phenomenon, but it yields enormous profits. A disproportionate amount of equity trading volume is conducted by HFT firms.

Citadel itself invested heavily in HFT. It paid off - Citadel's HFT unit reaped earnings of $1.15 billion in 2008. Malyshev and Kohlmeier were instrumental, key employees for Citadel's HFT group. Neither had HFT experience prior to joining Citadel. For quite some time, each considered leaving to start his own proprietary trading firm. And each had a non-compete agreement, barring employment with a "Competitive Enterprise" for a period to be selected by Citadel upon departure, ranging from 0 to 9 months.

Upon their departure, Citadel elected the maximum 9-month period and paid Malyshev and Kohlmeier to sit on the sidelines. No surprise, there, given their access to proprietary information and involvement in recruiting R&D talent to Citadel. However, both ex-employees formed Teza Technologies and hired 15 employees, essentially daring Citadel to file suit.

It did.

Citadel pursued each aggressively and sought preliminary injunctive relief. The court dispatched with a number of the arguments raised by the defense. Given that one of the defendants deleted a fair amount of Citadel information (despite a court order not to do so), the court really did not have to address whether a legitimate business interest supported the non-compete. The adverse inference it could draw about the document deletion was more than enough to demonstrate the defendants had access to and attempted to use Citadel's confidential information.

The defendants also seemed to challenge the non-compete due to the fact that they really weren't actively trading, but merely preparing the firm's trading infrastructure to compete eventually. However, nothing in the non-compete allowed the defendants to wash their hands of liability based on this "preparing to compete" theory, and the theory itself ignored the fact that HFT firms depend heavily on building infrastructure. By getting a headstart in developing a trading platform, the defendants were essentially entering the market much faster than they agreed to under their employment contracts.

The most important feature of the decision, though, concerned the length of the injunction. And it is here where the defendants probably were able to take some solace in defeat. The court refused to extend, or equitably toll, the non-compete period for the time in which the defendants were in breach. The court looked at the Second District Appellate Court's decision from two years ago to hold that, under Illinois law, a contract must specifically provide for an equitable tolling, or extension, remedy. Otherwise, the court will not imply the term under the contract.

This, of course, does nothing to mitigate the defendants' damages during the non-compete period. But it does serve as a cautionary tale for counsel in drafting non-compete clauses. Unless an equitable tolling remedy is clearly contained in the contract, the court will not agree to extend it even if the defendants were in breach leading up to the injunction order.

UPDATE X1: Both parties have filed a notice of appeal with the Circuit Court.


Court: Circuit Court of Cook County, Chancery Division
Opinion Date: 10/16/09
Cite: Citadel Investment Group, LLC v. Teza Technologies, LLC, 09 CH 22478 (Cook Cty. 2009)
Favors: Employer
Law: Illinois

Friday, October 16, 2009

Court Declines to Award Attorneys' Fees Against Employer Who Aided Breach of Restrictive Covenant (Bauer v. Dilib, Inc.)

Florida contains a highly favorable body of law that favors employers attempting to enforce non-compete agreements.

The statute, Section 542.335, significantly altered Florida law with regards to non-competes entered on or after July 1, 1996. Some of the significant changes included a fairly wide range of interests that can be protected by a non-compete, a presumption of reasonableness for non-competes lasting six months or less, a repeal of contract construction rules favoring narrow construction of a non-compete, and discretionary attorneys' fees awards even in the absence of a contractual provision.

At issue in the Fourth District's case of Bauer v. Dilib, Inc. was a novel issue pertaining to the statutory provision concerning attorneys' fees. Specifically, the court addressed the question of whether a third-party new employer could be held liable for attorneys' fees for aiding and abetting a breach of a non-compete. In this particular case, the circuit court in Broward County held the statute should be construed to permit recovery against the employer who interfered with the non-compete contract.

On appeal, the court reversed and held that Section 542.335(1)(k) could not be construed to permit such a recovery. According to the court, the employer was not a party to the non-compete agreement, and the only reasonable construction of the entire statute was that the plaintiff ex-employer could not enforce the non-compete against the new employer. Because of this, a discretionary grant of fees under the statute was inappropriate. The court rejected a number of arguments advanced by the plaintiff, ultimately reasoning that statutory fee-shifting provisions must be narrowly construed because they are in derogation of the common law.

Courts have always retained the ability to enjoin parties who are non-signatories from aiding or abetting a breach of a non-compete agreement. Statutes governing injunction procedure almost always provide for this specifically. Further, to fashion complete equitable relief, an injunction order logically must extend beyond mere contract parties. However, this does not mean other facets of relief will automatically be available to third-parties. In this case, the ex-employer's remedy for tortious interference could conceivably encapsulate claims for attorneys' fees as part of a punitive damage award. But the ex-employer has no statutory remedy for fees separate and apart from other relief.


Court: Court of Appeal of Florida, Fourth District
Opinion Date: 9/16/09
Cite: Bauer v. Dilib, Inc., 16 So. 3d 318 (Fla. Dist. Ct. App. 2009)
Favors: N/A
Law: Florida

Thursday, October 15, 2009

Failure to Produce Non-Compete Agreement at Trial Not Fatal to Employer's Case (CBM Geosolutions, Inc. v. Gas Sensing Technology)

The Supreme Court of Wyoming affirmed the issuance of a preliminary injunction in a non-compete case filed against two former employees. The case involved the business of measuring coal bed methane gas. Two employees, Bret Noecker and Brian LaReau, had been employees of Gas Sensing Technology's predecessor, WellDog. A few months after they departed, WellDog sold substantially of its assets to Gas Sensing Technology.

On one of the schedules to the asset purchase agreement, Noecker's August 2004 non-compete agreement was listed as a purchased asset. At trial, however, the plaintiff did not produce the agreement. On appeal, Noecker contended the plaintiff's failure to produce a written non-compete violated the statute of frauds, which prohibits contracts that cannot be performed in less than a year unless the same are in writing. The Court rejected Noecker's argument, reasoning that there was enough evidence produced to demonstrate Noecker in fact signed such an agreement.

I have dealt with a number of situations when an employer cannot produce a non-compete, either because the record-keeping is poor, an employee is suspected of taking the agreement, or (as in this case) an acquisition has complicated the process of locating old agreements. My experience is that too much is made of this particular issue, and if there is a reasonable amount of evidence that an employee actually signed an agreement, the fact it's missing usually is irrelevant. The existence and content of the agreement can be proven with secondary evidence. With the advent of the digital workplace, there is no reason anymore why employers should not scan in and save non-competes or other key contracts on its information technology system.


Court: Supreme Court of Wyoming
Opinion Date: 9/14/09
Cite: CBM Geosolutions, Inc. v. Gas Sensing Technology Corp., 215 P.3d 1054 (Wyo. 2009)
Favors: Employer
Law: Wyoming

Thursday, October 8, 2009

Supreme Court of Wisconsin Rules on Several Important Restrictive Covenant Issues (Star Direct v. Dal Pra)

Wisconsin has long been known as an employee-friendly state when it comes to interpreting non-compete agreements. One of the primary reasons involved a previous construction of that state's governing statute, which leaned heavily against enforcement of any part of a non-compete clause if even one part was deemed unreasonable or overbroad. Without the ability to sever part of a non-compete covenant, employers often lost the balance of their case because of the strict rule on divisibility.

That will now change, given the Supreme Court of Wisconsin's decision in Star Direct v. Dal Pra. The case arose out of dispute between Star Direct, a seller of novelties and sundries to gas stations and convenience stores, and one of its former route salesmen, Eugene Dal Pra. As is often the case, Dal Pra began looking for other employment opportunities when his former employer was sold. In this case, Star Direct took over the business from CB Distributors. Eventually, Dal Pra went off and started his own business, exploiting many relationships he had developed as a CB Distributors (and later Star Direct) employee.

Dal Pra won in the circuit court, successfully challenging three separate restrictive covenants - an industry non-compete extending 50 miles from Rockford, Illinois; a customer non-solicitation clause; and a confidentiality clause. The court of appeals affirmed. In the Supreme Court, Dal Pra did not achieve the same success.

The Court concluded the industry-wide non-compete was invalid, but upheld the other two covenants. Most interestingly, the Court discussed the overbreadth of the non-compete clause, as well as Wisconsin's severability rule.

First, the Court found that the non-compete was too broad since it prohibited Dal Pra from engaging in any business "which is substantially similar to or in competition with the business of the Employer." The phrase "substantially similar to" ultimately invalidated the provision. The Court held that, by definition, the clause extended to businesses not in competition with Star Direct, because to hold otherwise would virtually ignore the terms "substantially similar to." The only logical interpretation was that Star Direct intended the capture more than just competitors, and a clause this broad served no protectable interest. Because of Wisconsin's statutory prohibition, the Court could not blue-pencil or strike the offending words, and the entire clause was invalid as an overbroad restraint of trade.

The second issue is related to this last point. Previous cases sanctioned a broad interpretation of Wisconsin's statute and suggested that contract provisions were indivisible if they governed similar types of activities. In practice, this would mean that a customer non-solicitation clause in another paragraph often would fall if the industry non-compete were held invalid. Additionally, confidentiality agreements met a similar fate, despite the fact they are not true restraints of trade. The end result is that employers who ended up drafting an enforceable agreement in all but one respect lost the entire benefit of the bargain.

The Court has now changed that rule. The contract in Dal Pra contained separate paragraphs governing the non-compete, non-solicit and non-disclosure clauses. They were not textually linked in any way and could operate independently of one another. So for instance, if the non-compete were simply taken out entirely, the non-solicit could stand on its own without any cross-reference or dependence on the non-compete clause. In view of this, the Court found the otherwise valid confidentiality and customer non-solicitation covenants could stand.

For practitioners in Wisconsin, covenants should be separately labeled and contained in different paragraphs. Defined terms, such as "Competing Business" or "Restricted Territory", should be in their own contract section and not contained in the same paragraph as any restrictive covenant. Failure to separate these terms out could jeopardize otherwise enforceable restrictions.

The decision in Dal Pra, at least pertaining to severability, injects some common sense into Wisconsin law. Business attorneys can at least draft agreements with some modicum of confidence that they will be upheld and not struck down on a technicality.


Court: Supreme Court of Wisconsin
Opinion Date: 7/14/09
Cite: Star Direct, Inc. v. Dal Pra, 767 N.W.2d 898 (Wis. 2009)
Favors: Neutral
Law: Wisconsin

Wednesday, October 7, 2009

Anti-Raiding Clause Narrowly Interpreted Following Stock Sale (Cenveo Corp. v. Diversapack, LLC)

In 2007, Cenveo purchased the outstanding stock of Commercial Envelope Manufacturing from the Kristel family for roughly $230 million. As is customary in business sale transactions, the sellers had to agree to certain restrictions on competitive activity. The agreements signed by the Kristel shareholders restricted them from recruiting or hiring away employees for a period of five years.

About a year later, the Kristels purchased an equity interest in Diversapack and hired at least 12 Cenveo employees. Cenveo sued, seeking to enjoin Diversapack from hiring its employees given the anti-raiding provisions contained in the stock sale documents.

But the court noted a basic problem with Cenveo's case: Diversapack is not a competitor of Cenveo. The anti-raiding provisions provided the selling shareholders could not recruit away employees to work for a competing business. Cenveo appeared to make a half-hearted attempt to bring Diversapack within the agreements' definition of competing business by alleging that Diversapack planned to install some specialized equipment that was similar to that used by the Kristel family in the business it sold to Cenveo. In addition to being vague, this allegation was hardly convincing.

Cenveo also had another problem: New York courts construe anti-raiding (also called "no-hire") clauses under the same standards as a non-compete agreement, meaning they are considered restraints of trade and are examined under a reasonableness test. The court found that, not only did the sale agreements not prohibit the hiring at all, but also that no legitimate business interest could support the anti-raiding covenants. Hiring ex-Cenveo employees did not threaten the disclosure of confidential information since Diversapack was not a competitor. And nothing indicated that the employees offered "unique services" to Cenveo, an interest recognized by New York courts.

In view of all that, the court had little trouble concluding that Cenveo was unlikely to succeed on enforcing the anti-raiding provisions. Aside from the rather obvious question of why Cenveo filed suit in the first place, the case demonstrates that no-hire provisions must be drafted and examined carefully. Not all states treat them as classic restraints of trade (probably because they aren't). But some states like New York will look at them under the same test - meaning counsel must tailor them narrowly to protect an employer's business interest.


Court: United States District Court for the Southern District of New York
Opinion Date: 10/1/09
Cite: Cenveo Corp. v. Diversapack, LLC, 2009 U.S. Dist. LEXIS 91535 (S.D.N.Y. Oct. 1, 2009)
Favors: Employee
Law: New York

Friday, October 2, 2009

Fourth District in Illinois Rejects "Legitimate Business Interest" Test for Non-Compete Cases (Sunbelt Rentals, Inc. v. Ehlers)

The Fourth District Appellate Court of Illinois may have just made it substantially more difficult for employees to break their non-compete agreements - at least in some parts of the state.

Justice Steigmann authored an opinion that built upon his special concurrence two years ago in Lifetec, Inc. v. Edwards, a case where he called into question the applicability of the so-called "legitimate business interest" test used by Illinois courts to analyze restrictive covenants. This time around, Steigmann succeeded in convincing his robed colleagues to abandon the test altogether, overturning a number of Fourth District cases in the process. The decision does nothing to alter the test in other districts, and each of those still uses the test which is widely believed to be employee friendly.

By way of brief background, Illinois courts have essentially used a two-part analysis to determine whether a non-compete agreement is valid. First, it must be reasonable in scope. Second, it must protect a legitimate business interest. The second part of the test demanded an employer show that it had an interest in misuse of confidential information or near-permanent customer relationships acquired through the employee's association with the employer. This is not a marked departure from what other states require, though some would argue Illinois is fairly narrow in not recognizing other types of business interests, such as special training. However, Justice Steigmann could not find Illinois Supreme Court authority for part two of the test.

By reviewing Supreme Court precedent, Steigmann is correct in that the Court never formally adopted the test which has been used for years by all five district appellate courts. He casually neglects to mention that in the past 60 years, the Court has taken on a grand total of six non-compete cases, and several of those looked at covenants outside the employment context. His analysis is not entirely accurate because his discussion also neglects to confront one of the Court's leading precedents, House of Vision v. Hiyane. That case was authored by Justice Schaefer, probably Illinois' most famous jurist.

In House of Vision, the Court specifically discussed at length the interest of a business in protecting customer relationships. It even distinguished prior precedents (also cited by Justice Steigmann) where the Court noted that in a sale-of-business non-compete, the legitimate interest to be protected concerned intangible goodwill. Covenants ancillary to a sale of a business are always easier to uphold, and it may well be true that a legitimate business interest is virtually presumed in such circumstances. But it seems illogical that the Court would discuss a legitimate business interest in connection with a sale-of-business covenant, and then deem the test inapplicable to more problematic employment covenants. Steigmann has assured us the Court will have to take an employment non-compete case soon to resolve the tension between the Fourth District and the rest of the state's appellate courts.

Justice Steigmann's analysis defaults to the reasonablenes test he cites from what he considers binding precedent: an employer must show that the covenant is no greater than is necessary for its protection. As applied to the facts involving Sunbelt Rentals and Neil Ehlers, the court concluded the 50-mile non-compete was reasonable even though the employment agreement also contained a well-drafted client non-solicitation clause.

It's hard to see, though, how a court can determine whether a covenant is "no greater than is necessary for its protection" without analyzing what business interest it seeks to protect in the first place. The legitimate business interest test fills that vacuum and allows a court to fashion an appropriate restraint, or strike one entirely if the employer can't articulate the need for a restriction.


Court: Appellate Court of Illinois, Fourth District
Opinion Date: 9/23/09
Cite: Sunbelt Rentals, Inc. v. Ehlers, 394 Ill. App. 3d 421 (4th Dist. 2009)
Favors: Employer
Law: Illinois