The Reading List (2017, No. 4): Sergey Aleynikov is Back in the News

Non-Compete and Trade Secrets News for the week ended January 27, 2017

***

Illinois Restrictive Covenants

Judge Amy St. Eve is among the very best of the judges on the Northern District of Illinois. In The Carlson Group, Inc. v. Davenport, she denied a preliminary injunction motion brought against former key employees on the basis that they violated non-disclosure and non-solicitation covenants. The opinion is notable for its discussion of a temporally unlimited confidentiality clause with a very broad definition of "confidential information." Since the non-solicitation covenant was tied to customers about which the employees had "confidential information," the overbreadth concerns spilled over onto that covenant as well. As usual, her opinions are very clear and informative. A copy of the injunction ruling is available here.

Aleynikov Conviction Reinstated

Sergey Aleynikov, the ex-Goldman Sachs coder who inspired Michael Lewis' Flash Boys, has had his New York state-law conviction for theft of "secret scientific material" reinstated by the Appellate Division. Aleynikov's legal troubles have been chronicled at length here and elsewhere, but this is the latest sobering chapter in multi-pronged journey through the civil and criminal justice system. After a jury convicted Aleynikov in 2015 on state-law theft charges, a State Supreme Court Justice (in New York, that means a trial court judge) threw out the conviction for failure to prove the material elements of the crime. The details of the appellate court's reasoning are somewhat murky and technical - not at all interesting like the actual back-story of this litigation.

The reinstatement means Aleynikov goes back for sentencing. However, since he already has served one year on a federal charge, which later was overturned by the Second Circuit Court of Appeals, he'll get credit for one year of time served. The state-law theft conviction is a Class E felony, with a sentencing range of 1 to 4 years. This means Aleynikov may not face additional jail time. He shouldn't. No one - no matter what they say - even understands what he took. Aleynikov's counsel, Kevin Marino, vows an appeal.

On a related matter, Goldman and Aleynikov are fighting over whether he is entitled to indemnification for defense-related fees from the invalid federal criminal conviction. The Bloomberg story concerning that separate fight is chronicled here.

Customer Lists as Trade Secrets

A very commonly alleged trade secret, particularly in the employment context, is the customer list. However, customer lists come in many different shapes and sizes so it's hard to make blanket statements about what is and isn't legally protected. A federal district court in Texas addresses this question under Ohio's trade-secret statute. The decision is illustrative in showing what level of detail may be required to vest a customer list with trade-secret status. The customer list in KeyCorp v. Holland contained only names and contact information, and the court held that wasn't enough.

***

The Fairfield County Business Journal reports on a new non-compete suit brought by Sun Products and Henkel against a former Chief Technology Officer/Senior Vice-President for Research and Development, Carlos Linares. Judge Eginton signed a temporary restraining order that bars Linares from starting his new position at Church & Dwight. It appears that the parties are set to proceed to a preliminary injunction hearing on February 9. Of interest, one of the claims is brought under the Defend Trade Secrets Act and the Connecticut Uniform Trade Secrets Act. Connecticut courts have expressed a willingness to apply the "inevitable disclosure" doctrine, which is largely disfavored under the DTSA. Given that Linares appears to have a non-compete agreement, the potential divergence of the state and federal trade secrets act might not be a central point of contention in the case. But we shall see. A copy of the Amended Complaint is available here.

In a blog post by Tarter Krinksy & Drogin, the authors note that a New York appeals court decided a "Game-Changer on Enforcement of New York Non-Compete Agreements." The post discusses Buchanan Capital Markets, LLC v. DeLucca, 144 A.D.3d 508 (1st Dep't. 2016), and remarks on the case's comment that non-competes in New York are not enforceable unless the employer demonstrates a "continued willingness to employ the party covenanting not to compete." In reality, this case isn't much of a game-changer given the limited appellate analysis. It does remind us, however, that New York courts have issued many decisions that seem to create a per se rule against enforcement in a termination-without-cause scenario. Why a company would want to enforce in that circumstance, by the way, is beyond me.

South Florida's Daily Business Review reports on a case working its way through the Florida Court of Appeals, which concerns State Farm's efforts to protect as a trade secret certain information about where it's selling homeowners' policies. Insurers like State Farm often need to provide data about underwriting activities to state regulators. Depending on the state insurance codes' exemptions, such public disclosure of company-wide data can materially impact trade-secret claims. Insurers' obligations to disclose are similar to what we're starting to see in the fracking industry, which requires similar public disclosure of information but which also allows for certain narrow trade-secret exemptions. This will be an interesting case to watch when the Court of Appeals rules. The case is Office of Insurance Regulation v. State Farm Florida, No. 1D16-2301.

Supreme Court of Wisconsin Follows Majority Rule on Non-Compete Consideration

Wisconsin generally is known as a pro-employee state when it comes to enforcement of non-compete agreements. However, last week it gave employers a fairly significant victory in Runzheimer Int'l, Ltd. v. Friedlen, when the state supreme court held that an employer's election to refrain from firing an existing at-will employee constitutes lawful consideration for signing a non-compete agreement.

The Supreme Court of Wisconsin correctly noted that this issue has divided courts across the country, with a minority taking the opposite approach. Pennsylvania happens to be considering a similar question right now. Illinois courts are a mess when it comes to determining the adequacy of consideration for non-competes in the at-will context. In the past, Wisconsin courts had sent mixed signals and had not definitively reached the issue presented. The Court's decision - confusing in its rationale, to be sure - at least provides much-needed clarity for employers and employees moving forward.

The issue that percolates beneath the surface in cases like this is the employer's ability to fire the employee. So the reasoning goes, an employer can "trick" an employee into signing a non-compete, secure that commitment, and then fire the employee without any liability (for at-will employment is a relatively risk-free relationship). According to the Court, it's not correct to view the forbearance from firing as "illusory consideration." Rather, other contract defenses (like fraudulent inducement) provide a legitimate check against such trickery.

The other, less formal, check is that an employer which engages in these kinds of tactics will be less attractive to potential new hires. Further, when it comes time to enforcement, an employer will have a separate issue to confront wholly apart from the consideration question: whether enforcement after involuntary discharge is reasonable. Part of the reasonableness test will examine whether enforcement will present an undue hardship on the employee.

In the past, I have been an advocate for looking at this hardship factor when the employment ends at the behest of the employer, rather than the employee. It is an issue separate from the four corners of the contract, but it still relates to the reasonableness of enforcement. Courts will view attempts to enforce non-competes against terminated employees with much greater suspicion than those who leave of their own volition.

As Runzheimer suggests, we can view this issue wholly apart from the element of consideration. It may be another contract defense. It may be within the overall reasonableness inquiry. But it clearly is something, and employers always will need to factor in the equities when enforcing non-competes.

Runzheimer Int'l v. Friedlen (Wisconsin) by Ken Vanko

We've Been Down This Road Before: More on Fifield

Many thanks to all the readers who've e-mailed me or posted links to my "dissenting opinion" in Fifield v. Premier Dealer Services. I'd like all of you to know I'm in the process of recovering. Your words of support and encouragement have been, well, overwhelming.

But I'm not done yet.

I have more to say. It's part of my healing.

This is not the first time the Appellate Court has gone off the tracks on non-compete law.

It's the third.

I've written so many times about the first - the Appellate Court's wholly-created, now-defunct legitimate business interest test, and the ensuing Reliable Fire opinion - that I won't repeat it here.

The second deserves more discussion.

The Ancillarity Problem

The Fifield opinion (and I use that term in the most liberal sense) reminds me of an open wound that festered in the 1990s. For a few years, the Appellate Courts disagreed over what became known as the "ancillarity" doctrine.

In essence, the problem was this:

Must a non-compete covenant for at-will employees be ancillary to an actual employment contract, or just the relationship itself?

Courts split over this question.

One case (Creative Entertainment v. Lorenz) favored a more narrow approach as to enforceability and held that the covenant not to compete must be contained within some broader form of an employment contract. That is to say, the contract had to contain additional terms like the period of employment, termination conditions, and rate of pay.

Importantly, Creative Entertainment appeared to suggest (if not outright state) that covenants for at-will employees were "naked agreements," since there was no promise of a definite term of employment exchanged for the restrictive covenant. That, in essence, is the concern underlying Fifield. What, truly, does an employee receive in exchange for giving up some right to compete in the future?

Creative Entertainment, the step-father to Fifield, had a shorter shelf life than most reality TV shows.

It took less than a year for another district of the Appellate Court of Illinois to disgree with Creative Entertainment. That district (which perhaps not coincidentally tried to eliminate the legitimate business interest test a few years ago) liberalized the ancillarity requirement. It held, in Abel v. Fox, that the restrictive covenant need only be ancillary to a valid relationship, not an employment contract. It specifically examined the Restatement of Contracts to conclude that Creative Entertainment was too rigid in its analytical framework. Put another way, an at-will relationship was "valid" for purposes of determining ancillarity. It never stated, or suggested, that an employer must continue employment for a period of time to validate the covenant.

The more liberal ancillarity approach took hold quickly. Creative Entertainment was effectively reversed just a few years later. The case is, and has been, a total afterthought. No lawyer in Illinois discusses ancillarity anymore. It's just widely assumed - rightly so - that the employment relationship itself solves the problem.

The Continued Employment Redux

All this sort of begs the question: Doesn't the rejection of the conservative ancillarity doctrine from Creative Entertainment undermine the consideration problem now identified in Fifield?

More particularly, doesn't it illustrate precisely why the continued employment rule should be confined to "afterthought" covenants - that is, those signed after the relationship started?

In these afterthought covenant cases, it is entirely proper to examine the issue of consideration and whether continued employment suffices. In my view, it is appropriate to find consideration lacking when: (a) the employer terminates the relationship without cause, and (b) the continued employment, considering the totality of the circumstances, was insubstantial. (Although I'm opposed to the arbitrary "two-year" rule Fifield endorses, in the larger scheme of things, it's not a total abomination.)

When assessing covenants signed at the start of the relationship (the Fifield problem), the ancillarity and consideration inquiries collapse into one.

The Final Question - Part 1

This leads to the penultimate problem: What happens if the employee signs the covenant at the start of the relationship but the employer terminates the relationship within a short amount of time?

This is clearly the Fifield problem simplified. I've written about this before, too. There are multiple ways to deal with this issue, which I believe in practice arises very infrequently.

First, courts can remedy this problem through the affirmative defenses of unclean hands or unconscionability. Little more need be said. They're good defenses.

Second, the court can and should consider under the Reliable Fire test the totality of the circumstances before enforcing the covenant. That test requires courts to determine the hardship to the employee that may result from enforcement. Certainly, an involuntary termination bears on the question of hardship.

Third, courts could create a rebuttal presumption against enforcement in the context of involuntary discharge, to be overcome by a showing of need under a clear and convincing evidence standard of proof. This would serve a proper balance between the typical discharge case (no enforcement needed) and one that isn't subject to categorical rules (a pretty rare case).

The Final Question - Part 2

Now, to conclude. The issue of voluntary resignation and consideration.

Right now, courts in Illinois appear not to distinguish the enforceability of covenants for employees who quit and those who get fired. In my view, this is a mistake.

For an at-will employee who signs a non-compete, and then leaves, this is not a consideration problem. The employer hasn't removed the consideration - the employment itself - in this scenario. Any mitigating circumstances from the employee's perspective are best addressed through an overall reasonableness analysis, which Reliable Fire expressly endorses.

Put simply, an employee who leaves always has the ability to argue enforceability. It is inconsistent with past precedent - both Reliable Fire itself and the ancillarity cases - to find that an at-will employee has a two-year option to revoke his or her non-compete unilaterally.

Employer Unable To Condition ERISA Severance Payments on Signing Undisclosed Non-Compete

For those of you dying to know more about ERISA, here ya go.

First, the basics. ERISA is a sweeping federal statute that governs employee health, welfare, and benefit plans. Employers often institute ERISA-based plans and within those plans provide that terminated employees are eligible to receive severance benefits under certain condictions. For instance, employees who have been discharged without cause or who worked at the company for a certain number of years may be eligible for severance pay, even if that is not contained within an employment contract.

Simple enough. But ERISA-based plans almost always contain the requirement that an employee, as a condition of receiving severance pay, execute a release. That makes perfect sense, for it would be somewhat absurd for an employer to pay out benefits and not get some assurance that a Title VII charge won't arrive in the mail months later.

Severance plan documents often attach a form release for employees to see, and from there, it's just a matter of filling in the blanks at the time the severance benefit rights accrue. But what rights does an employer have to insert in a severance document the requirement that the employee sign a non-compete?

According to one Illinois federal court, none.

The case of Pactiv Corp. v. Rupert dealt with a case where the ERISA plan simply stated that the employee's separation agreement must "be in a form acceptable to the company." The plan documents mentioned nothing about a non-compete. Though Pactiv understandably was concerned that its ex-employee was in a position to capitalize on knowledge he gained while at Pactiv, the court refused to imply a requirement into the severance plan Pactiv adopted.

The court stated: "Reserving the right to have a separation agreement in a 'form acceptable to the Company' is not notice to an ERISA beneficiary that a non-competition covenant could be required as a condition to receive benefits." ERISA plans are not subject to ad hoc amendments or interpretation.

--

Court: United States District Court for the Northern District of Illinois
Opinion Date: 11/1/12
Cite: Pactiv Corp. v. Rupert, 2012 U.S. Dist. LEXIS 158413 (N.D. Ill. Nov. 1, 2012)
Favors: Employee
Law: Federal/Illinois

In Pennsylvania, Termination Only a Factor to Consider on Enforceability (Colorcon, Inc. v. Lewis)

Several years ago, a Pennsylvania court used sweeping language to deem a non-compete unenforceable against an employee who had been terminated without cause, allegedly due to poor performance. Since that time, the courts in Pennsylvania have pared back on any hint of a per se rule and have noted that termination is only "an important factor" to be considered in the overall reasonableness analysis.

A recent case out of Pennsylvania demonstrates, though, that courts are still skeptical of enjoining employees who have been terminated involuntarily for reasons other than cause. In Colorcon, Inc. v. Lewis, the court denied an employer's effort to enforce a non-compete against a terminated salesperson. After finding that her new employment did not even place her in breach, the court proceeded to analyze the enforceability question in light of her prior termination.

The court noted a couple of key factors in this fact-intensive inquiry:

(1) While the employee signed a severance agreement, she only obtained $21,000 severance pay. The court noted that pay was for more than just reaffirming her non-compete: she also released her employer from any and all claims against it.

(2) The employee and new employer took extra precautions to make sure she was in a different line of work than her previous job, and even avoided contacting certain customers that may have been problematic under the non-compete's language.

(3) The employee had searched for other employment and could not find anything outside her industry that did not require her to either take a substantial pay cut or relocate.

My experience has been that courts are sympathetic to employees who have been laid off, particularly when the non-compete agreement is broad and includes jobs that potentially are not in line with what they previously were doing. As always, courts will assess a wide range of fact specific hardship questions as well.

--

Court: United States District Court for the Eastern District of Pennsylvania

Opinion Date: 5/31/11

Cite: Colorcon, Inc. v. Lewis, 2011 U.S. Dist. LEXIS 58637 (E.D. Pa. May 31, 2011)

Favors: Employee

Law: Pennsylvania

Federal Court In Maine Holds Involuntary Termination Can Be Considered In Enforcement of Non-Compete (OfficeMax v. County Qwick Print)

Having a federal court judge in Maine draft an opinion which discusses and analyzes, in some detail, a law review article is not all that common.

And it's certainly not very common when the author of that law review article happens to be, um, me, and when I have no involvement representing a party in the case. In a way, it's kind of like watching your own funeral.

But on with it.

I wrote an article for the DePaul Business & Commercial Law Journal about 8 years ago that canvassed the law on the enforceability of non-competes in involuntary discharge cases. The law was, and remains, a bit scattered, with courts coming down in four general categories:

(1) The non-compete is per se invalid;
(2) There is a presumption against enforceability;
(3) The circumstances of termination are a factor to consider in an overal balancing analysis; and
(4) The termination is not even a factor a court can consider.

A federal court in Maine, in OfficeMax Inc v. County Qwick Print, acknowledged no decision in that state had considered the impact of involuntary termination on a non-compete. After summarizing my law review article, it determined that "the safer approach is to consider the circumstances of [the defendant]'s termination as a factor in balancing the relative equities between the parties." In so deciding, the court exercised some restraint by not attempting to create a new rule of substantive law for the state of Maine. Put differently, the court examined this factor under its procedural injunction rules rather than as a question of state substantive law.

This is an understandably cautious approach, but consistent with what I suggested courts adopt as far as considering the impact of termination. In my article, I recommended that the most sound analysis was option (3), the balancing inquiry. Stated another way, courts should scrutinize under the rubric of "reasonableness" how an employee's tenure ended. This would not bind courts to bright-line rules and would allow for some needed flexibility, rather than having the case turn into a collateral after-the-fact job performance inquiry, something totally ill-suited to emergency, expedited proceedings.

In this regard, I still believe that how employment ended is highly relevant to the question of reasonableness of a post-employment restraint. It is at least as important of whether third-parties or the public will encounter some hardship through enforcement.

Anecdotally, I know judges are sympathetic to employees who have been terminated for reasons other than cause and are more troubled by sudden, abrupt resignations that leave an employer in the lurch with a key account or at an important juncture of a project. Though courts may not voice every single factor that comes into play in their decision, I think it's reasonable to assume that a terminated employee stands a better chance of prevailing in a close case.

--

Court: United States District Court for the District of Maine
Opinion Date: 11/8/10
Cite: OfficeMax Inc. v. County Qwick Print, Inc., 2010 U.S. Dist. LEXIS 119070 (D. Me. Nov. 8, 2010)
Favors: Employer
Law: Maine

Another Illinois Court Fails to Cite to Sunbelt Rentals (Peckham v. Metal Management, Inc.)

Perhaps the Sunbelt Rentals case will not have the impact in Illinois that many lawyers think.

As many readers know by now, one district of the Illinois Appellate Court last year tried to work a sweeping change to the way non-compete contracts are scrutinized by courts. Prior to last year's decision in Sunbelt Rentals v. Ehlers, courts in Illinois generally followed the majority of jurisdictions in looking at two primary factors to determine whether a non-compete contract was enforceable:

(1) Is it reasonable in terms of time, territory and scope restrictions?

and

(2) Does the covenant support, or protect, a legitimate business interest?

In Sunbelt Rentals, the Fourth District Appellate Court held there was no binding Supreme Court precedent allowing the second inquiry to proceed. Accordingly, in one division of the Illinois Appellate Courts, a non-compete contract is judged solely under the reasonableness criteria.

However, the ruling has not had much impact outside the Fourth District. In several cases, both state and federal, courts have either discounted Sunbelt Rentals as an outlier case of little value, or have ignored it altogether.

And so it happened again.

This time, the case arose in Southern Illinois in a dispute between Robert Peckham and Sims Metal Management. When Peckham was fired from SMM in 2010, he sued to declare his non-compete contract unenforceable. SMM countersued and sought preliminary injunctive relief. In denying the injunction, the court examined whether the non-compete covenant supported a legitimate business interest in customer contacts or access to proprietary information.

Not only did the court not cite Sunbelt Rentals, it relied on the case Sunbelt Rentals purported to overrule when finding that the non-compete supported no legitimate business interest.

Also of consequence, the court found no consideration to support the non-compete agreement. The court believed that a six-month term of employment with no payment for the covenant itself rendered the agreement unenforceable. It is not clear whether Peckham worked at SMM prior to signing the covenant or whether it was signed at the inception of his employment. If it was the latter, the court's finding almost certainly would be erroneous.

The court had to be persuaded by the fact that Peckham was terminated involuntarily. This case is another example of a court ruling in favor of the employee wearing the white-hat. It was clear SMM went after Peckham when he posed no real threat to it, and when there was no evidence Peckham competed unfairly with SMM by using misappropriated information. Particularly given the involuntary termination, SMM was swimming upstream from the start on this one.

--

Court: United States District Court for the Southern District of Illinois
Opinion Date: 5/5/10
Cite: Peckham v. Metal Management, Inc., 2010 U.S. Dist. LEXIS 43784 (S.D. Ill. May 5, 2010)
Favors: Employee
Law: Illinois

Massachusetts Legislative Update

Though Illinois has legislation introduced in the House of Representatives, the state most likely to pass a new law reforming non-compete agreements is Massachusetts. Rep. Will Brownberger has been instrumental in driving reform, based primarily on the view among some in Massachusetts' high-tech community that a significant brain drain is occurring.

The new draft of the Massachusetts bill can be found by clicking here. It is employee-friendly as one would expect and takes bits and pieces of other legislative schemes across the country. It does not touch forfeiture-for-competition provisions, garden-leave clauses or non-solicitation (customer or employee) contracts. Some of the more notable features are a gross income requirement for validity ($75,000 annualized income), consideration of at least 10 percent of compensation for "afterthought" covenants, pre-hire notice that a non-compete must be signed, and explicit rejection of the inevitable disclosure doctrine. The attorneys-fee provisions are also favorable, even providing for payment of fees as part of an interlocutory order.

The bill, however, is silent on enforceability in the event of involuntary termination. Last July, the Boston Globe wrote an editorial about the need for reform, and emphasized that the bill concerning non-competes ought to deal with involuntary termination.

Termination of At-Will Employment Does Not Invalidate Non-Compete (Drummond American, LLC v. Share Corp.)

Most lawyers and judges would agree that involuntary termination of employment makes it harder to enforce a restrictive covenant. I wrote a law review on this subject some years ago, outlining different approaches courts across the country have taken on this issue. The law is not uniform by any means, and the cases are hard to reconcile.

In a recent federal district court case from (surprise!) Texas, the court held involuntary termination did not invalidate a non-compete clause. The court did not seem to graft onto this rule any particular standard of good faith (which other courts have done), instead holding that the method by which employment ended was simply not relevant. Remember: this is Texas we're talking about...

My advice to clients is that involuntary termination (without cause, of course) usually won't affect the validity of an activity restraint concerning solicitation of customers, recruitment of fellow employees, or use of proprietary information. It may, however, cause a court to rethink the equities of enforcing a general non-compete clause. Prohibiting someone from working in his or her line of work is fundamentally different than dictating what accounts he or she can solicit.

--

Court: United States District Court for the Eastern District of Texas
Opinion Date: 3/8/10
Cite: Drummond American, LLC v. Share Corporation, 2010 U.S. Dist. LEXIS 20582 (E.D. Tex. Mar. 8, 2010)
Favors: Employer
Law: Texas

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

Termination of Employment Will Not Constitute "Abandonment" of Non-Compete (EBI Holdings v. Butler)

The impact of involuntary termination of employment on the enforceability of a non-compete is not amenable to a quick summary. I wrote an article in the DePaul Business & Commercial Law Journal in 2002 canvassing the law on this subject, and it took me over 40 pages of dense analysis to opine that there is no real clear-cut answer. In Illinois, a 1994 case seems to hold that a non-compete agreement cannot be enforced if an employee is discharged without cause. But since that time, no cases have explained this holding or if it in fact means what it says.

In EBI Holdings v. Butler, an Illinois federal district court this week got close to addressing the issue, but ultimately declined. Since the employee's non-compete agreement was governed by New Jersey law, perhaps Butler is not a good test case on the interpretation of an Illinois case now 15 years old.

However, the plaintiff - a discharged medical products salesman - made an interesting argument. He claimed that his termination from a distributor amounted to abandonment of a post-employment covenant. The court struck his affirmative defense and noted that the agreement contemplated termination of his employment, so that abandonment under New Jersey law could not be a viable defense. It's not clear the employee raised a defense that the non-compete was unenforceable by reason of his discharge.

The case also did not address a circumstance where a discharge was inconsistent with the terms of the employment agreement. In such a case, an employee may have a viable claim that the non-compete is not enforceable because his termination was not valid or proper under the governing contract.

In a separate opinion, the court in Butler clarified the preemption doctrine in a trade secrets case. Often times, an employer will include common law claims arising out of the same operative facts as trade secrets misappropriation, such as conversion, unjust enrichment, tortious interference with contract, or civil conspiracy. The court clarified that the Seventh Circuit's decision in Hecny Transp., Inc. v. Chu limits the preemption theory to claims which rest on trade secrets theft. The test is "whether the plaintiff's claim would lie if the information at issue were non-confidential." Old district court cases taking a much broader view of preemption, and dismissing a lot of common law claims, are no longer reliable precedents.

--

Court: United States District Court for the Central District of Illinois
Opinion Date: 2/17/09
Cite: EBI Holdings, Inc. v. Butler, 2009 U.S. Dist. LEXIS 11558 (C.D. Ill. Feb. 17, 2009) and EBI Holdings, Inc. v. Butler, 2009 U.S. Dist. LEXIS 11535 (C.D. Ill. Feb. 17, 2009)
Favors: Employer
Law: New Jersey, Illinois

Kansas Court Enforces 2-Year, 250-Mile Non-Compete Agreement (Chem-Trol v. Christensen)

Often times, when a court enforces a non-compete agreement, the restraining order or injunction won't match up with the language of the covenant. This usually is the result of the blue-pencil or judicial reformation doctrine. In a previous post, I outlined where each of the 50 states stands on the ability of courts to pare back, or sever, overbroad non-compete covenants.

However, on other occasions, a court will issue an injunction where a non-compete is modified but there is no discussion of the blue-pencil doctrine whatsoever. And that's what happened in Chem-Trol v. Christensen. In that case, Chem-Trol was engaged in the vegetation management services business, servicing utilities and rural electric cooperatives in maintaining right-of-ways and utility easements.

The plaintiff, Lyle Christensen, was clearly a key employee for Chem-Trol, serving as Area Manager for the Iowa facility. He was discharged in August of 2008, and after a few months, began servicing his former customers, doing business as Midwest Spray Team & Sales, Inc. Chem-Trol filed suit, seeking preliminary injunctive relief.

The non-compete agreement at issue prohibited Christensen for two years from going "into business alone or in conjunction with one or more others, or in the employ of any other person or legal entity where the business of such employment shall be the same or similar to that of [Chem-Trol], within a 250 mile radius of Hamlin, Iowa."

The court enforced the covenant, finding it reasonable and supportive of a legitimate business interest. The latter issue was easy to resolve: Christensen had long relationships with key accounts, and he himself was Chem-Trol's face in Iowa. Moreover, the scope of the non-compete did not appear unreasonable under the facts: the 250-mile radius - though wide - was reasonable because the nature of vegetation management services frequently stretched hundreds of miles per job. The two-year term also did not appear problematic since Christensen testified that it takes one to two years to form solid customer relationships in his business.

(Parenthetically, the fact Christensen was terminated involuntarily did not matter in this case - Kansas precedent (which the court did not cite) makes no distinction in cases where an employee is terminated and faces a non-compete obligation. Other states, like New York and Illinois, view that issue differently.)

What was odd, though, was the court's conflation of the non-compete terms with a separate non-solicitation of customers covenant. The injunction order only prevented Christensen from soliciting or providing services to Christensen's Chem-Trol accounts (which was not, apparently, disputed), as long as those accounts were within 250 miles of Hamlin, Iowa.

However, the non-solicitation clause - on which the court remarked - had no 250-mile restriction on it. It was a separate paragraph in the agreement, and its scope was very broad; it barred Christensen from contacting any Chem-Trol account, not just his own. Also, the non-compete clause containing the geographic limit purported to bar Christensen from working for any entity or providing any competitive services, whether those activities concerned Chem-Trol accounts or not. In other words, it seems as if the court lost track of two separate covenants it was analyzing.

That said, the ruling makes some sense. Chem-Trol, for its part, did not appear hell-bent on putting Christensen out of work in the industry as long as he avoided his accounts. Given his key role in the company, that seemed to be a reasonable position to take. The end result was the non-compete was not really enforced, and the non-solicitation clause was enforced, but under the geographic scope written into the non-compete clause.

If that makes sense...

--

Court: United States District Court for the District of Kansas
Opinion Date: 2/10/09
Cite: Chem-Trol, Inc. v. Christensen, 2009 U.S. Dist. LEXIS 9894 (D. Kan. Feb. 10, 2009)
Favors: Employer
Law: Kansas