Tait Graves Asks: Do Non-Competes Appropriately Regulate Intellectual Property?

For those of you interested in the academic side of non-compete agreements, the article I have embedded with this post is a must-read.

Tait Graves is a partner at Wilson Sonsini and has written a ton of great stuff on trade secret law. In his latest, he poses a pretty reasonable question that - to him - hasn't received a satisfactory answer:

Does it make sense to use non-compete agreements to regulate intellectual property?

I have a few observations on this article:

(1) I agree with the general proposition that when enforced non-competes can protect too much information if the asserted protectable interest is, in fact, trade secrets. I think, almost by definition, that every employee has something to offer besides access to, or knowledge of, trade secrets. So a lock-up period necessarily means that a new employer is going to lose the benefit of some skill that fails to rise to the level of a trade secret.

(2) I don't agree that trade secret law is a better (or at least as good of a) protector of intellectual property law than the non-compete. The problem with using trade secret law instead of a non-compete is that it fails to put employees and prospective new employers on notice of what is actually prohibited. More problematically, for the trade-secret holder, discovery of a misappropriation can come too late and compromise the secret altogether. A non-compete allows for a more objective way to protect the trade secret at the outset.

(3) I absolutely agree that training is a poor justification for using a non-compete. The argument Tait rejects is the Law and Economics argument that firms won't provide training if they can't count on non-competes. Or, more appropriately, that firms will pay a lower wage if non-competes are not available. This doesn't square because firms have every interest to properly train their workers anyway, and whether a non-compete is part of the equation or not, companies will need to invest in the appropriate training to stay competitive. Simply put, it's hard to see how this asserted interest is really appropriate for upholding a non-compete.

What this article does not cover - and indeed does not try to cover - is the use of activity restraints, like non-solicitation agreements, to protect other business interests typically tied to restrictive covenants.

This is an excellent, theoretical read that asks some very important questions.

Analyzing the Non-Competition Covenant as a Form of Intellectual Property Regulation by Ken Vanko

EBay Moves to Dismiss DOJ Antitrust Complaint

Last November, I posted about the Department of Justice suit against eBay for its alleged illegal hiring pact with Intuit. The DOJ contended that the eBay-Intuit agreement not to poach each other's employees violated both the rule of reason and a per se analysis under Section 1 of the Sherman Act.

Predictably, eBay struck back, filing on Tuesday a broad motion to dismiss the case. The motion sets forth a three basic problems with the DOJ theory: (1) the Complaint did nothing more than allege a conspiracy between eBay officers and directors, which is not actionable; (2) the DOJ never attempted to establish any economic harm or anticompetitive impact from the hiring pact; and (3) the pact does not meet the test for a per se Sherman Act violation.

The last point is the most relevant as it relates to non-compete law. EBay's point seems to be that traditional no-hiring pacts have to be judged by a reasonableness standard, and that there is no precedent to equate them with price-fixing or bid-rigging schemes. Essentially, eBay is saying that a no-hiring pact is akin to a non-compete arrangement (though, in fact, it's narrower and rarely subject to marketwide abuse). Non-competes are judged according to whether they're reasonable. And that should be the standard in the DOJ's case. It's pretty clear under the Complaint the DOJ is bypassing any sort of market analysis for why the hiring pact was impermissibly anticompetitive.

A copy of eBay's motion is embedded below.

EBay Motion to Dismiss Antitrust Case by

South Carolina Appellate Court: Physicians' Liquidated Damages Clauses Enforceable

I have written frequently on this blog concerning the subject of liquidated damages. A pre-determined formula or amount of damages is particularly appropriate for non-compete disputes for three primary reasons.

First, proving lost profits can be difficult and requires a company to develop a sustainable, sensible damages model (in my experience, too many plaintiffs never think about this until it's too late).

Second, it eliminates the transaction costs associated with proving lost profits. This requires company time and effort, and often the retention of an expert in the field.

And third, liquidated damages helps solve the time-tested riddle of whether pursuing non-compete litigation is an economically viable outcome for a company. By pre-setting damages, a plaintiff can eliminate some inherent risk and uncertainty surrounding a traditional damages presentation.

Of course, there's a downside. Liquidated damages clauses aren't easy to uphold and are frequently struck down by courts as penalties.

The Court of Appeals of South Carolina just upheld a liquidated damages provision in a physician shareholder agreement that was unlike any I've ever seen. It had several components:

If the physician violated a 20-mile non-compete tied to his or her interventional cardiology practice, then the physician:

(1) forfeited $60,000 in deferred compensation (the payment meant to provide fresh consideration for the new contract);

(2) owed 100 % of the physician's prior year's income with the medical practice;

(3) was divested of a defined share of accounts receivable owed the medical practice; and

(4) was divested of earned but unpaid salary.

If the physician paid the amounts, then he or she was free to compete.

The amounts subject to the liquidated damages clause, as might be expected for the profession, were several hundred thousand dollars per physician. But the Court of Appeals upheld the contract, reasoning that the economic impact from competing in violation of the contract was inherently difficult to calculate and further reasoning that the formulas were tied to what the practice could have expected to receive had the physicians complied with the terms of the agreement.

The kicker for the Court of Appeals seemed to be the impetus behind the non-compete in the first place. The medical practice took out a $5 million loan to finance construction of a new medical office. After the physicians left to compete, the office was not fiscally sustainable - and closed.

The lesson to be learned for corporate counsel is that it is worth considering a robust liquidated damages clause and - more importantly - developing a rationale for why the formula approximates lost profits upon competition. Well thought-out clauses can add a great deal of value to actual or threatened litigation and mitigate the risk associated with developing a damages model.

The case is Baugh v. Columbia Heart Clinic, P.A., 2013 S.C. App. LEXIS 5 (S.C. Ct. App. Jan. 16, 2013).

The BYOD Thicket: Some Basic Steps to Take for Businesses

One of the hot-button issues for business clients in 2012 was the advent of "Bring Your Own Device" policies. The idea behind BYOD in the workplace is that employees who are allowed to use their own cell phones, tablets, and other storage devices may be more productive. And, of course, it may cut down on technology and training expenses for the company as well.

How does BYOD relate to non-competes? Because a substantial amount of potentially relevant evidence can be found on these personal devices. An obvious example is the use of text messaging to contact or solicit customers.

It is not clear if BYOD is a fad. The numbers on data security are fairly alarming, and corporate-owned devices may be in vogue if business owners feel as though relinquishing control over devices is too much of a risk.

But, for now, at least, I have had several clients who want to implement BYOD. Below are some key features of the BYOD agreement I use:

1. Registering the Device. It is not enough for a company simply to allow an employee to use his own cell phone for business purposes. The company must know what it is to ensure the security settings and installed software are consistent with company practice.

2. Security Maintenance. A strong BYOD policy has at its core the specific security requirements the company deems necessary. These include, at a minimum: implementing password protection, updating the device with security patches, and prohibiting the installation of unapproved software.

3. Account for Cloud Storage. Employees increasingly want to back-up a device to a cloud-based storage program. This may be acceptable to the company, but if it is, the company must have a means and procedure to ensure data is removed from the program upon termination of employment.

4. Remember Federal Law. This can come up in three circumstances. First, the BYOD policy should ensure that the device is not used in a manner that could lead to discrimination or harassment suits. Second, the employer can't inadvertenly run afoul of the Fair Labor Standards Act. Specifically, non-exempt employees should not be permitted to use the device during non-working hours for work purposes. Third, with the National Labor Relations Board cracking down on the use of social media policies, a comprehensive BYOD should specifically provide that the policy does not preclude employees from discussing the terms of their employment, or anything else that can be described as concerted activity under the NLRA.

5. Confidentiality Policies Must Apply. Any employer policy, whether expressed in a handbook or agreement, must relate to personal devices. If a company implements BYOD, it should place the employee on notice that confidentiality and proprietary rights restrictions apply to covered devices as well.

Every BYOD is different and should be tailored to achieve company objectives. My personal feeling is that BYOD will remain hot for a while until companies decide that the policies are too much of a security risk. I doubt BYOD ever will be held to undercut a claim that a company takes reasonable steps to protect its trade secrets. But a strong, clearly worded policy would certainly help eliminate that risk.

Maryland Legislation Would Ban Certain Non-Competes

Many of you likely have been clamoring for an update on what's happening in the Maryland legislature. So here goes...

As luck would have it, there is pending legislation relevant to non-competes! And it's yet another of example of unneeded legislative meddling, in this author's opinion.

The text of Senate Bill 51 is provided below, but the essence is pretty easy to distill. The bill was introduced last week and states that a non-compete is not enforceable if an individual is found eligible to receive unemployment insurance benefits. If passed, the law would apply prospectively so it's not of immediate concern to any employers. For now, at least, folks in Maryland can concentrate on Ravens football.

There are obvious problems, both from the face of the statutory language and the incentives it creates.

First, the Senate has not seen fit to define "noncompetition covenant", so it's unclear if the bill applies to customer or employee non-solicitation clauses, forfeiture-for-competition provisions, or other types of activity restraints that may impair, but not bar, competitive conduct.

Second, the bill encourages employers to challenge unemployment appeals by laid-off workers when they otherwise might not. Suppose an employer discharges a sales employee for not meeting sales quota. If the employee files for unemployment (which he almost certainly would), the employer would not necessarily feel compelled to challenge that determination if there were no law like SB 51. However, if the employer is faced with an automatic trigger that would invalidate the non-compete, it has every incentive to mount a challenge to an employee's rights to receive unemployment benefits.

The bill is set up to cause employers to spend unnecessary resources fighting unemployment claims they might not otherwise think to contest. That adds transaction costs and brings down wages and benefits for other employees. It also ends up hurting employees who ultimately could lose their unemployment claims if an employer mounts a successful challenge whose real purpose is to save the underlying covenant. It's hard to see how this is a win for anyone. And it's just impossible to believe that unemployment hearing officers - not normally known as the world's most sage arbiters of justice - are left with, essentially, deciding the validity of non-competes for a certain class of employees.

Courts are equipped to handle this, because they can always determine under the prevailing reasonableness test that a non-compete should not be enforced. Creating bright-line rules like SB 51 proposes undermines this well-established balancing test.

In the event this legislation goes anywhere, and it clearly shouldn't, there is one obvious fix in order for employers. They'll need to make sure their employment contracts adequately define "good cause" for termination. If they can fit a reason for termination into a specific contractual definition of "good cause" (e.g., failure to meet established sales goals), then it would seem to be much more difficult for an unemployment officer to determine eligibility.

Senate Bill 51 by Ken Vanko

Playing the California Card Doesn't Always Work

Anyone familiar with non-competes knows that California is somewhat of an outlier state. Non-compete agreements, even non-solicitation agreements, are highly disfavored and almost always unenforceable except within a narrow band of cases.

One issue that has arisen frequently over the last several years in non-compete disputes is the forum fight involving California. This usually arises when California has some, but not a complete, connection to the dispute. How does that connection arise? Usually in one of two ways:

1. The party bound by the non-compete lives or is domiciled in California.

2. The prospective business opportunity somehow bears a substantial relationship to California. An example? The new employer is based there. Or, even better, the employee's job calls for him to move to California.

Employees seeking to void non-competes have been aggressive in recent years in filing preemptive declaratory judgment actions in California courts when that state has some arguable connection to the parties' business relationship. And, in many cases, California courts have issued judgments that invalidate the contract as an illegal restraint under California's Business and Professions Code.

But the problem is more nuanced when another state also has a substantial interest in the case. For instance, a national company with a footprint in many states may use one form agreement calling for another state's choice of law, or even a forum selection clause. If an employee lives in California, the presence of choice-of-law and choice-of-forum clauses would undercut California's interest in the dispute, since another state (most likely, that where the employer maintains its nerve center) has an equal interest in regulating its out-of-state affairs on a uniform, consistent basis.

So these competing interests can lead to forum fights? What to do?

I am probably in the minority on this, but I happen to feel that the New York court got it right in the Aon Risk Services v. Cusack decision this past week when it refused to dismiss a suit on venue grounds in favor of a pending California case. Even though the defendant, Peter Arkley, was a California resident working for an Aon subsidiary principally in California, Illinois law governed his employment agreement (it contained a narrow, 2-year non-solicitation covenant). And Aon commenced injunction proceedings in Illinois (and later New York state court) right after Arkley's preemptive strike suit in California. Arkley was enjoyed in Illinois and in New York, despite the presence of his California action.

Fights over venue when there is a California connection are not easy to resolve, and courts have to be respectful of litigation in other states. But in my opinion, courts should take a pragmatic approach and decline to override choice-of-law provisions in all but a narrow set of cases. It makes little sense why a New York entity can't have one state's laws govern all of its contracts, unless that choice is completely arbitrary.

There's also an easy fix to this. If a state decides that choice-of-law clauses over its residents' non-compete agreements should not be enforced, then it can pass a law making this established public policy. I happen to think that venue and choice-of-law fights are unfortunate, expensive distractions in cases demanding a quick resolution. This is one of many reasons that the presence of choice-of-law and choice-of-forum clauses ought to command great deference.

Industry Custom May Be Basis for Establishing Secrecy Measures Under Trade Secrets Act

Trade secrets claims are highly dependent on the plaintiff's ability to prove one essential fact: that it used reasonable efforts to keep confidential its identified trade secrets.

Over the past 20 years or so, the concept of "security measures" has changed drastically in the workplace. Early trade secrets cases often discussed whether file cabinets were kept under lock and key, who had access to certain file rooms, and whether a building or office had a requirement that visitors acknowledge confidentiality restrictions for site access.

Now, the focus of trade secrets disputes has shifted. We now look at computer passwords and other digital security protection efforts, including whether personal devices are inventoried and scrubbed at the time of termination.

But let's not lose sight of Old Economy business practices just yet. A federal district court in Illinois ruled last week that a business may establish it used reasonable security measures to protect its company secrets by introducing testimony of knowledgeable people that there was an unwritten custom and practice within the industry to keep certain data technical data confidential, even if there was no binding agreement between the customer and vendor.

The case is von Holdt v. A-1 Tool Corp., No. 04 C 04123 (N.D. Ill.), and Judge Chang looked at declaration testimony concerning "industry custom" to conclude that the plaintiff could show it exercised reasonable security measures over molds used to produce plastic buckets and lids. The testimony became essential because the plaintiff could not establish that it had confidentiality agreements with its customers concerning the technical mold information the plaintiff claimed to be a trade secret.

There are a few important takeaways from Judge Chang's summary judgment opinion.

First, the concept of what's reasonable in terms of security measures is very fact-specific. What may be reasonable for a high-tech business dependent on the exchange of digital information may be irrelevant for an Old Economy business like a tool-and-die manufacturer. In the same vein, a large sophisticated company will be expected to implement broader protections than a small mom-and-pop store. For those large companies, the marginal cost of adding security measures is relatively low.

Second, business ethics are worth something. Most judges are fairly pragmatic. It is awfully difficult for a court to reason that the existence of a formal agreement is a precondition to showing that a party tried to protect its data. If the industry custom suggests that there is a gentleman's understanding that you don't disclose certain data to others, that should carry some weight.

And, in the real world outside the courtroom, vendors don't like presenting customers with formal agreements because that may imperil the entire relationship. There's no reason why industry practice can't trump the formalities of a contract in certain cases.

The case perhaps has limited significance, but it does emphasize the need for a plaintiff to consider every possible security measure when pursuing a trade secrets claim - even if those security measures aren't the type of Digital Age precautions we're used to seeing.

Let's Start Year 5: Amazon.Com Loses Preliminary Fight Over Non-Compete Agreement

So 2013 starts, and what better way to kick off Year 5 of this blog than discussing Amazon.com's effort to enforce a non-compete against an executive who left for Google.

In mid-2012, Daniel Powers was terminated from his position with Amazon.com as a vice-president in Amazon Web Services. This is not the Amazon.com we all know and love. It was a segment that the retail consumer does not see and dealt with Amazon's effort to sell cloud computing services to businesses.

Powers, like most Amazon.com employees, signed a broad non-competition agreement that contained a number of restrictions. When Google hired him several months after his departure, it limited his job role to avoid any potential problems with Amazon.com. Nonetheless, it seems clear he was providing cloud computing services to Google, even if the parties disputed whether Google's products actually competed with those offered by Amazon.com.

After Amazon.com filed a preliminary injunction motion, a federal judge in Washington granted it very limited relief to enforce only that part of the contract that forbade Powers from working with Amazon.com's business customers. It did not enforce a broader non-compete restriction and found that Amazon.com had not submitted evidence to support an "inevitable disclosure" of trade secrets theory.

From my perspective, there are two interesting elements to this opinion.

First, the court specifically found that there was no evidence that Powers had intended to violate the customer non-solicitation covenant. Yet, it enforced it anyway by way of injunctive relief. This was a mistake. It is unclear to me how Amazon.com could establish a likelihood of success on this claim if there is no evidence of breach. The court's rationale was that Powers resisted the preliminary injunction motion, which suggests he might want to solicit his former business customers. But this proves too much, because any party could then go into court and base its request for an injunction solely on the fact that its opponent contests the motion.

Second, the court seemed to suggest that this non-solicitation covenant gave Amazon.com the protection it needed, and that a further ban on employment (the non-compete covenant) was not necessary. This is best summed up in the following passage:

"[Amazon's] ban on working with former customers serves to protect the goodwill it has built up with specific businesses. A general ban on Mr. Powers' competing against Amazon for other cloud computing customers is not a ban on unfair competition, it is a ban on competition generally."

When a business aims to protect customer goodwill, often times a general non-compete stretches too far. As the Powers court recognized, a customer non-solicitation is often the right fit to protect this interest.

The case is Amazon.com, Inc. v. Powers, C12-1911 (W.D. Wash.). A copy of the Order and Opinion on Amazon.com's preliminary injunction motion is contained below.

Amazon.com v. Powers - Order

2012: Year-End Review and Top 10 List

And so concludes my fourth full year of writing non-competes.com.

I've now written over 400 articles on this site. I strive to provide fresh, interesting commentary on a range of practical, legal, and economic issues relating to non-compete and trade secrets law.

What was new to this site in 2012? Three major changes.

First, while I had intended at the start of the year to provide everyone with a weekly "Reading List", I discovered Twitter along the way. I had long avoided Twitter, for fear that the last thing my life needed was one more informational tool. Boy, was I wrong about Twitter. This is where I am increasingly getting the best content, and I encourage my viewers to follow me on Twitter to see what I am reading and who I'm following.

Second, I have started embedding files into certain posts, so that my readers can read and downloand important opinions or filings (such as the U.S. v. EBay, Inc. Complaint). I have a couple of bar journal (i.e., "old" media" publications) coming out in 2013 and look forward to sharing those files on this site as well.

Third, I waded into the world of legal podcasting with Non-Compete Radio. All of those podcasts are available on iTunes and can be accessed here as well. More on podcasting in the next few weeks...

My year-end column is my favorite because it gives me an opportunity to look at what I've read and written about for the past 52 weeks and figure out what this year really was like in my corner of the legal universe.

So here are my Top 10 Developments for 2012:

10. New Hampshire Enacts "Notice Period" for Non-Competes. Effective July of 2012, New Hampshire state law now requires employers to give two weeks prior notice when an employer asks an employee to sign a non-compete or non-solicit agreement. The law is full of potential loopholes. My earlier post on this legislation is found here.

9. Texas Courts Largely Silent in 2012. The most active state supreme court on non-compete law over the past several years has been Texas. It has completely redefined the concept of acceptable consideration, an issue that befuddled courts and lawyers for a number of years. But 2012 was notable in one respect: not much happened. While I have written often about developments under Texas' Covenants Not to Compete Act, I only had one Texas-related post this year. I am predicting 2013 to be a lot different.

8. New Jersey Enacts Uniform Trade Secrets Act. At the beginning of 2012, New Jersey became the latest state to adopt a version of the UTSA. The Act is only slightly different than what most states have enacted, and it provides a broader set of remedies for employers looking to combat trade secret theft. At this point, only Texas, Massachusetts, and New York have yet to enact the UTSA. My earlier post on this legislation is found here.

7. Sergei Aleynikov's Wild Journey Continues. Many of us in the blogging community have written extensively about the travails of one Sergei Aleynikov, the ex-Goldman Sachs trader who misappropriated GS's trading source code before departing for Teza Technologies. Aleynikov's legal journey has taken him to: the Illinois Appellate Court, a conviction in New York federal court under the Economic Espionage Act, a reversal by the Second Circuit, subsequent state law criminal charges (for which he's pled not guilty), and a federal civil case in New Jersey against Goldman Sachs in which he has sought indemnification for all of his legal fees - which he just might win. Oh, and in the meantime, he's almost single-handedly responsible for getting Congress to pass the Theft of Trade Secrets Clarification Act that will effectively prevent another result like that in his Second Circuit case from occurring in the future.

6. Illinois Appellate Courts Active in Wake of Reliable Fire. I have written throughout the year about what has occurred in my home state - Illinois - since the Supreme Court's important decision last Fall in Reliable Fire Equipment v. Arredondo. Unfortunately, the results have been mixed at best. The judgments from our appellate court have been published as "non-binding" orders and seem to have conflated and confused what Reliable Fire really meant. This lack of clarity does not serve clients or lawyers well at all.

5. The Loparex Disaster. This is Aleynikov-lite. His joyride through the legal system may be somewhat of an aberration (and for that reason, his ranking on my year-end list is lower). But the nightmare litigation of Loparex, LLC v. MPI Release Technologies, LLC is a stark reminder of a trade secrets suit gone horribly wrong. The suit started in federal district court in Illinois, where Loparex took a dismissal when the court (Judge Lefkow) told Loparex it was not identifying its trade secrets correctly. Loparex then refiled in Indiana federal district court and lost the suit on the merits, along with a bad-faith sanctions award against it and its lawyer to the tune of nearly $500,000. The basis for the award: failure to even identify a misappropriated trade secret, and the complete lack of damages. And along the way, the suit made a detour to the Supreme Court of Indiana, which reversed a decades-old line of cases discussing Indiana's Blacklisting statute. Ultimately, that pro-plaintiff ruling did not impact the defendants' ability to obtain fees given the frivolous nature of the suit.

4. DuPont's Judgment Against Kolon Industries. In one the most important trade secrets cases to go to jury verdict in recent memory, E.I. DuPont prevailed in its claim against Kolon Industries to the tune of over $1 billion in compensatory and punitive damages and a 30-year permanent injunction. The technology related to DuPont's trade secrets - 149 of them - related to the manufacture of Kevlar. My colleague, John Marsh, has written extensively about this case on his blog.

3. The Computer Fraud and Abuse Act Circuit Split Deepens. We had two important decisions this year under my least favorite statute, the Computer Fraud and Abuse Act. In U.S. v. Nosal, the Ninth Circuit limited a CFAA claim premised on an employee who "exceeds authorized access" of a protected computer to "access", not "use." And in the Fourth Circuit, the court followed Nosal and took a narrow view of the CFAA, widening an already deep circuit split. In that case, WEC Carolina Energy Solutions v. Miller, the plaintiff has filed a cert petition in the U.S. Supreme Court to resolve the split among the circuits. Will the Court take the case? It might, and this will be an interesting case to follow in 2013.

2. The Ohio Supreme Court Decides Two Important Competition Cases. The Ohio Supreme Court's decisions in American Chemical Society v. Leadscope and Acordia of Ohio v. Fishel were vitally important. In Leadscope, the Court held that malicious litigation can support a common law unfair competition claim. In the process, it upheld a $26.5 million verdict in favor of Leadscope, another result demonstrating that the court (mis)use of legal process can redound very badly to plaintiffs who underestimate how aggressive of a defense their adversaries will muster. In Fishel, the Court reversed itself and held that non-compete contracts are automatically assignable in the course of statutory mergers. The Court had held in an earlier opinion in the same case that the plain language of covenants concerning assignability would control over statutory law.

1. Supreme Court Rules on Scope of Arbitration Clauses. And in the year's most talked-about non-compete case, the Supreme Court of the United States reversed a decision of the Oklahoma Supreme Court and held that an arbitrator, not a state court, must determine the enforceability of a non-compete agreement if the underlying contract contains an arbitration clause. The case leaves open the possibility that an employee can still petition a court to determine that the underlying arbitration clause is invalid. My discussion of Nitro-Lift Techs. v. Howard is found here.

So that's 2012 for ya'. Thanks again to all my readers for the great feedback and to my fellow blogging colleagues.

I'll be back in a few days to start Year 5!

The Year In Illinois Non-Competes Fittingly Concludes With Another Rule 23 Order

A few months ago, I wrote a post about a problem that I perceive with the way our appellate court of Illinois has been handling non-compete cases.

In short, the court can issue non-precedential Rule 23 orders, which constitute judgments rather than opinions. And they're not to be cited as precedent in future cases.

I have no problem with the concept of Rule 23 orders. They're meant to reduce the court's burden to crank out opinions that can later be cited back to them by lawyers as precedential and binding within an appellate district.

But in truth, they should be limited to two classes of cases: (1) review of criminal convictions; and (2) review of civil cases where there is a highly deferential standard of review. For instance, appellate review over a jury verdict under a manifest weight of the evidence standard is an ideal case for a limited, non-precedential opinion. Cases like that almost never announce some rule that future courts will point to as precedential.

But the non-compete cases that have come before the Appellate Court do not fall within these categories and address important issues of law, or interpretations of law, in the wake of the Supreme Court's Reliable Fire case late last year. My September post describes some of these rulings.

And so, with 2012 coming to a close, it seems only appropriate that our appellate court has done it again - issuing a Rule 23 order on a fairly significant question in a non-compete case.

The case of Saddlers Row, LLC v. Dainton (opinion contained below) arose out of a fairly common set of facts. The employee had a two-year, 75-mile general non-compete agreement, which he breached by going to work for a direct competitor a mere seven miles from his prior place of work. The employer acknowledged that customer relationships, not trade secrets, were the protectable interest. But the evidence showed that most of its customers were located within 40 miles of the employer's place of business - and that 75 miles stretched further than was necessary to protect the vast majority of its customer base.

The circuit court refused to impose an order of preliminary injunctive relief, finding the 75-mile scope overbroad. It then refused to blue-pencil the agreement and pare back the geographic scope by 25 or so miles.

The appellate court agreed that the geographic scope was unreasonable, but held that the circuit court abused its discretion by refusing to modify the covenant to make it enforceable.

The court looked at two critical factors in determining that circuit court should have modified the covenant:

1. The covenant's geographic scope, while overbroad, was close to reasonable. Since most of the employer's customers were within 40 miles or so of its place of business, a 75-mile restriction was hardly a major overreach. In fact, since the employer had customers out of state (apparently, very few), any line-drawing would be arbitrary. Put another way, the employer clearly made a good-faith effort at trying to draw a reasonable restriction.

2. The employee directly competed in close proximity to the employer. The court emphasized that this was not a case where the employee tried, in good faith, to compete in an area outside the employer's sweet spot, such that any competition would be minimal. This was an "in-your-face" breach. And because equitable considerations are paramount in any blue-penciling analysis, the appellate court deemed it important that the employee knew he was in blatant breach of the covenant.

The decision is obviously pro-employer, and it's rare to find cases like this where an appellate court finds that a refusal to blue-pencil is an abuse of the trial court's discretion. Off-hand, I can't think of many in Illinois like this. This demonstrates why the case should never have been a Rule 23 order. The court emphasized very specific considerations that come into play when determining whether blue-penciling is appropriate.

Of further interest is the court's omission of any analysis concerning why a customer non-solicitation covenant wasn't the proper type of contract to use in this case. When an employer is not trying to protect trade secrets, its need for a general non-compete is diminished. And in Saddlers Row, the employer admitted it wasn't trying to protect trade secrets. Its interest was in securing customers, and the more appropriate fit for that type of protectable interest would appear to be a common non-solicitation covenant. But this was not even discussed.


Saddlers Row v. Dainton