Articles Posted in Non-Compete Agreement / Covenant Not to Compete

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Janitors can be seen as caretakers of a building; custodians. Their role can be either undermined or seen as part of what makes the world go around. They have also hit headlines recently when it comes to the push to have their pay raised. Their recognition has made its way into the realm of Contract Law and that trend is continuing. Janitor tests ended up setting the standard in non-compete cases and situations.

The Janitor Test and Non-Compete Agreements 

A non-compete agreement is a contract between an employee and an employer in which the employee agrees not to enter into competition with the employer during or after employment. These legal contracts prevent employees from entering into markets or professions considered to be in direct competition with the employer. Restricting covenants have had their application in the utilization of a concept that some courts and litigants refer to as the “janitor analogy” or the “janitor test,” when questioning the breadth and scope of a non-compete provision. The test has evolved over the years, which shows us that janitors and the test will stay.

The first case we can look at is Reading & Language Learning Center v. Sturgill (2016). That case arguably had an overbroad, unenforceable agreement because the agreement did not clearly define the capacity in which scope of services could be provided. The speech therapist could even be prohibited from services other than the function in which that person worked previously, including but not limited to, selling furniture, providing cleaning services or plan school functions.

This line of reasoning was also applied in Distributor Service, Inc. v. Stevenson (2014). The Court stated, “[t]he bottom line is that the plain language of the Non-Compete Provision would prohibit Mr. Stevenson from being an ‘employee’ of any entity who engages in ‘Competitive Business Activity,’ whether he is in sales, works as a janitor, or maintains the second employer’s lawn. Thus, it is overbroad and unenforceable.”

When scope was limited, a “janitor analogy” did not go far because the scope of services was limited to areas in which that person had worked previously. The confidential information could, therefore, be used.

The more recent case of Medix Staffing Solutions, Inc. v. Dumbrauf (2018) had “janitor clauses”. It just goes to show that their use is another example of why these sorts of clauses can prove costly to employers. Courts will even be reluctant to want to modify them. On its face, the clause excluded an employee from taking any position with another company that engages in the same business, without regard to whether that position is similar to the prior position held. Accordingly, it was argued that the covenant was “too restrictive” and that the “covenant bars him from taking positions with those companies extend beyond roles that were similar to those he previously held to any position whatsoever at other companies in the industry.” The argument extended so far as to say that he couldn’t even work as a janitor for another company. The question of the justification of broader restrictions vs. legitimate business interests was the main crux of in which way the court was likely to lean. Continue reading

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When entering into the employment domain, covenants are imposed on employees restricting what they can and cannot do once they leave the job. Violations and restrictions are what employers often look for when they wish to seek enforceability of a contract that was entered into when employees decide to move elsewhere. Typically, such agreements prohibit the competing with an ex-employee for a certain period after the employee has left the business, or prevents the ex-employee from soliciting or dealing with customers of the business by using knowledge of those customers gained.  This issue was again a reminder in the case of Dumrauf, where there was a covenant to be found and the Courts later deemed it to be unenforceable because it was too restrictive.

Generally speaking, a “one size fits all policy” when drafting restrictive covenants, will risk them being unenforceable. This is especially if the demand is unreasonable or not necessary to protect legitimate business interests.  In this specific case, the District Court examined the whether a covenant that an employer-employee entered into was able to prohibit any work for his new employer within 50 miles of an office pursuant to a covenant not to compete Dumrauf signed while working for his previous employer.  On its face, the clause also excluded him from taking any position with another company that engages in the same business, without regard to whether that position is similar to a position Dumrauf held. The termination was at will, as he resigned.  Majority of the work that he was now to be involved in meant dealings with a new client base, mainly in other states.  Accordingly, he argued that the covenant was “too restrictive” and that the “covenant bars him from taking positions with those companies extend beyond roles that were similar to those he previously held to any position whatsoever at other companies in the industry.”  The argument extended so far as to say that he couldn’t even work as a janitor for another company.  For such reasons, the grammar and application of the clauses in the employment agreement were carefully scrutinized. Deliberations then led to considerations of whether this would even affect the business interests.  The question of the justification of broader restrictions vs. legitimate business interests was the main crux of in which way the court was likely to lean.  This is exactly why scope, grammar, and context all matter in the phrasing of such contracts.  Courts have the power over it to modify the terms of the agreement but only where the intent of parties is made known.  Otherwise, such terms have the potential to become unenforceable, especially in unfair circumstances.  That is why the Court did not consider this case as being eligible for modification.  You can view the opinion here.

It remains to be seen whether or not more Illinois state courts will follow the application of this decision.  The lessons we can learn from this is to always consider the grounds on which contract agreements are being drawn.  Records of discussions to make intent clear, to ensure fairness, clarity, and definition of business interests at stake are important.  The risks of losing to unenforceability are increased if the above factors are not shown and where too many restrictions with are overly broad can apply.  Continue reading

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Trendy big-city restaurants are often here today, gone tomorrow. Such is the case with Grace, a hot West Loop eatery that earned three Michelin stars, a bevy of industry awards, and was the most coveted reservation in Chicago before its owner abruptly closed the restaurant late in 2017. Now, Grace’s former star chef and manager/sommelier are suing to void their noncompete employment agreements.

Head chef Curtis D. and general manager Michael M. were allegedly working together at Avenues restaurant in Chicago’s chic Peninsula Hotel, when they met Michael O.  Curtis and Michael M. had discussed opening their own restaurant which they wanted to name Grace, and found an eager investor in Michael O., who had no experience in the culinary industry. The three went into business together in 2011.

The complaint filed February 20 in Cook County Circuit Court describes the high-priced Grace restaurant as an immediate success upon its opening in 2014 and a “culinary jewel” of the city. It was reportedly profitable within eight months, and Michael O. recouped his entire $3 million investment in the restaurant within several years.

The plaintiffs claim their employment agreements, executed in 2012, were drafted by Michael O.’s attorneys and presented to them without the advice of their own counsel. The agreements contained covenants not to compete for 18 months following termination of employment.

They claim they were led to believe they were receiving ownership rights at the time they signed, when in fact they wouldn’t have the right to share in Grace’s profits for five years. Then the pair would each begin receiving a one-third share of the restaurant’s net revenues. Continue reading

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Courts and now legislators are competing against the trend of non-compete clauses in employment agreements.

For it is Democratic leaders that have joined the bandwagon in terms of wanting to prohibit the use of covenants not to compete nationwide. Per Senator Warren’s press release, implementation of the clauses will reduce bargaining power for employees, stifle competition and innovation.  All of that combined hurts Americans and their opportunities. This will eventually, in turn, give greater power to the Department of Labor.

If legislation was in place, there will most likely be a ban through fines on employers who either fail to notify employees that non-compete agreements are illegal or who require employees to sign covenants not to compete. Such a bill would specifically enact a law to protect its trade secrets. As it stands, no legislation is in place that would not allow that to happen. Continue reading

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Some states, such as California, North Dakota, Montana and Oklahoma already ban non-compete agreements throughout the state, including agreements that were signed in other states where non-compete agreements are recognized. But now Democratic U.S. Senators are looking to expand such bans all over the country.

Elizabeth Warren, Ron Wyden, and Chris Murphy have come together to propose what they call the Workforce Mobility Act (WMA). If it makes it through Congress, the new federal law would place a nationwide ban on companies writing non-compete agreements into their employment contracts.

Non-compete agreements were first used only with high-level executives and they were designed to prevent those executives from going to work with a competitor and taking trade secrets and/or client relations with them. While such actions would clearly harm their former employer, and many businesses have successfully proven that their non-compete agreements protect only their legitimate business interests, non-compete agreements have become increasingly stringent, while at the same time more widespread, in the past decade or so, further inhibiting employment opportunities for workers.

While the first non-compete agreements included limits on both geography and time (usually six months to a year), companies have continued to extend these limitations, some going so far as to forbid even minimum-wage workers from going to work for any competitor anywhere in the world, thereby purportedly limiting those workers’ ability to find new employment.

Employee advocates have long warned about the unfairness of non-compete agreements and their effect of keeping workers chained to their employer. It inhibits a worker’s ability to grow as an individual and also gives companies more opportunities to take advantage of their workers, especially when such agreements are combined with arbitration agreements, in which any dispute between the company and their employers are required to be settled in arbitration, where the employee is at a distinct disadvantage. Continue reading

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Sometimes a stray email is all it takes to send things into a spiral.

In the case of Karen D’Onofrio and her former employer, Vacations to Go, such a stray email led D’Onofrio to sue her employer for allegedly violating her rights under the Family Medical Leave Act (FMLA). The cruise company responded by countersuing her for allegedly violating the non-compete clause of her employment contract.

The issues involved in the case go back to 2011, when D’Onofrio’s husband, Michael, was injured in a car accident. Three years later, he bought a franchise from a company that sells travel-related products and services, including cruises. As part of his application to buy the franchise, Michael included a screenshot of his wife’s sales records, although the picture in question did not include any client names.

A few months after Michael bought the franchise, D’Onofrio asked for leave from work under the FMLA so she could take care of her husband. She was given the option of taking unpaid leaving or working from home a few days out of each week and she decided to go with the latter. Then she allegedly attended a training session for her husband’s franchise while she was on leave and did not respond to messages from clients of Vacations to Go. When a manager sent an email incorrectly stating that D’Onofrio no longer worked for the cruise company, D’Onofrio assumed she had been fired. She was wrong, but she still sued Vacations to Go for violating her rights under the FMLA. Continue reading

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When a staffing company hires professional recruiters, they probably don’t anticipate that they’ll recruit the company’s own employees to a competing staffing company, but that’s allegedly what a former director for Randstad did.

Randstad, a leader in the world of industry staffing and recruiting, recently filed a lawsuit against four former employees who allegedly left their positions at Randstad, without notice, to allegedly set up a competing staffing company just down the street from Randstad. The lawsuit alleges that the former director took his entire team, including two executive recruiters and the company’s office administrator, with him to work at the new staffing company he had just set up.

According to the complaint, Randstad’s former director knew that the two executive recruiters he was taking with him had signed confidentiality and non-compete agreements that prevented them from working for a competing company in the same geographic area for at least one year after their employment with Randstad had been terminated. The agreements also allegedly prohibited them from taking either clients or employees away from Randstad.

The complaint does not yet allege that the former employees stole customers away from Randstad, but it alleges that the fact that they started another staffing firm not far from Randstad’s offices should be sufficient to prove they posed a risk to Randstad’s business. Continue reading

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Non-compete agreements generally exist to protect a company’s legitimate business interests in the event an employee decides to leave to work for a competitor, but what if the employee is laid off through no fault of their own? Should a non-compete agreement still keep them from obtaining employment if their former position no longer exists? This is the question Dr. Crocker asked after he was laid off from his position at Greater Colorado Anesthesia (GCA) as the result of a merger.

When Crocker got another job with a similar company in the same geographic area, GCA sued him for breach of contract. The company pointed to the non-compete clause in Crocker’s employment contract, but Crocker responded by suing his former employer, saying the non-compete agreement was overly burdensome by preventing him from obtaining valid employment as a doctor. Continue reading

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Running a nation-wide business here in the U.S. is almost as complicated as running an international business. With varying laws and restrictions between each city, county, and state, businesses need to make sure each of their locations is working in accordance with all the relevant business and labor laws governing that location.

But according to a recent lawsuit filed against Brown & Saenger, Inc., the South Dakota-based company allegedly tried to get around the need to abide by other states’ labor laws by specifying that all legal disputes were to be handled in South Dakota state court, under South Dakota law. The problem with that turned out to be North Dakota’s laws prohibiting non-compete and non-solicitation clauses in employment contracts.

The lawsuit involved a sales representative who worked for Brown & Saenger in their Fargo, North Dakota location and whose employment contract included both a non-compete agreement and a non-solicitation agreement in violation of North Dakota law. The contract also specified that it was to be held liable under South Dakota law, and in the event of a dispute over the contract, the parties would argue their cases in South Dakota court. Continue reading

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Non-competition clauses are common in the technology industry and have recently made headlines again.  IBM filed a suit against its ex-executive with allegations that her new position violates a year-long non-compete agreement.  This has allowed for the company to implement similar efforts, in order to increase diversity.

The executive that worked for IBM for a period of greater than two decades, is now being sued on the basis of violating a non-compete agreement. She was said to have “abruptly resigned” making it all seem more like a ploy.  Being a senior, she had knowledge of sensitive material and secrets that included recruitment strategies, plans, and initiatives.  It is alleged that this information will be also utilized in her work performed for Microsoft and is, therefore, a violation of terms. IBM complained that, whether intentional or not, using and disclosing, its confidential and sensitive information would place the company at a competitive disadvantage. According to them, it is “inevitable” that she will not be able to do so.  They further went on to state that she possesses “non-public diversity data, strategies, and initiatives — can cause real and immediate competitive harm.”

IBM sued in their filing, within a New York Federal Court, and succeeded in getting a restraining order preventing their ex-employee, who led diversity efforts from joining Microsoft.  The conditions which IBM wish to impose are rather broad. It included a temporary restraining order, preliminary injunction to prevent her from working for a year, in any position, anywhere in the world and for any company that is a competitor to IBM.

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