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

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Where dance academy and employee had an employment contract that specified non-compete provision lasting “not less than five years,” the provision meant five years under Illinois law, and the reasonableness of the restriction was a fact-based question requiring more evidence to determine.

In April 2017, Pam’s Academy of Dance/Forte Arts Center sued Callie Marik, a former employee, seeking monetary damages and injunctive relief. The complaint alleged breach of contract and violation of the Illinois Trade Secrets Act. Pam’s Academy alleged that Marik breached the parties’ non-disclosure and restrictive covenant agreement by opening a dance studio within 25 miles of Pam’s Academy and soliciting students and/or teachers from an improperly obtained customer list.

Marik moved to dismiss the complaint, arguing that all of Pam’s Academy’s claims were defective because the provisions of the contract were invalid and unenforceable under Illinois law, and the complaint failed to allege a plausible basis for the allegation that Marik misappropriated a customer list. After a hearing, the trial court struck paragraph 7 of the original agreement, which banned Marik from soliciting, interfering with, diverting, or otherwise communicating with any customers or employees of the academy for purposes of providing similar services as the academy. The court found that this restriction, having no time limitation, was overly broad. The court then certified two questions for interlocutory review seeking an answer as to whether employment-based restrictive covenants with time periods of not less than five years and not less than three years were enforceable under Illinois law, and whether, in the context of employment-based restrictive covenants, whether the terms “not less than five years” and “not less than three years” meant five and three years, respectively. The Illinois Appellate Court, Third District authorized the appeal. Continue reading

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When non-compete agreements can and cannot be used?

One of outgoing attorney general Lisa Madigan’s final acts was to settle a lawsuit the Attorney General’s office had brought against one of the nation’s largest payday lenders Check Into Cash alleging that the lender’s use of non-compete agreements ran afoul of Illinois law.

Illinois is one of a growing number of states cracking down on the widespread, indiscriminate use of non-compete agreements, particularly with low-skill or low-wage employees. Many employers who use non-compete agreement do not use them for their intended purpose–to protect an employer’s proprietary and valuable information–but instead, use them to prevent employees from leaving and to reduce the available workforce for competitors. It is this practice many states are seeking to curb.

States are also targeting another group of employers: those who attempt to use non-competition agreements for their intended purpose but do so using overly broad, poorly worded agreements. Courts have grown increasingly hostile to such agreements, opting to throw out the entire agreements rather than reign in or rework them (sometimes called blue penciling).

Three things are certain in the area of non-compete agreements (also referred to as restrictive covenants): (1) the agreement must be narrowly tailored so that it protects the employer’s legitimate business interest but does not unnecessarily go beyond that; (2) a poorly worded non-compete agreement is worse than no agreement as it provides a false sense of security but will likely not be enforced by a court (a fact an employer will learn only after lengthy, costly litigation); and (3) a non-compete agreement is not the type of agreement you can set and forget.

Non-compete law, perhaps more than any other area of law, is constantly changing and evolving. A do-it-yourself non-compete agreement or one drafted years ago likely will not hold up in court today. It is wise to have an attorney experienced in non-compete agreement law review and update your non-compete agreement every few years. The money spent now will more than pay off later when you are relying on that agreement to prevent an employee from walking out the door and taking your valuable, proprietary information to a competitor.

What non-compete agreements are and are not.

A non-compete agreement is a contract (or a provision in a contract) between an employer and an employee that prohibits the employee from performing certain activities within a specified geographic area for a set amount of time. The purpose of non-compete agreements is to protect an employer’s proprietary and valuable information. An employer who invests time and money in training an employee and discloses valuable information that the employer has developed at great expense wants protection from that employee leaving and using that information to directly compete with the employer. Examples of the type of information an employer might want to protect include customer lists, vendor lists, pricing lists, methods and procedures, and client renewal dates (for insurance brokers). Employers often use non-compete agreements in conjunction with non-solicitation agreements to further protect them from the impact of losing an employee.

Non-compete agreements are not a mechanism for retaining employees by eliminating all alternative employment opportunities. They also are not a mechanism for preventing competitors from being able to find workers for open positions. If there is evidence that an employer has used non-compete agreements for these prohibited purposes, a court will not enforce the agreement.

The first thing an employer must understand is when a non-compete (or non-solicitation) agreement can and cannot be used. As the Check Into Cash lawsuit demonstrates, non-compete agreements are not appropriate for all employees. The Illinois Freedom to Work Act, 820 ILCS 90/1 et seq., prohibits the use of non-compete agreements for employees whose earnings do not exceed the greater of minimum wage or $13 per hour. Continue reading

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A complaint alleging breach of a non-disclosure agreement and misappropriation of trade secrets was successfully dismissed for lack of jurisdiction where the defendant was not alleged to have sold a competing product within the state in which the action was filed.

Brad Diedrich worked from May 2003 through September 2017 for Mitek Corporation, an Illinois manufacturer of audio equipment. Diedrich worked as a Senior Engineering Manager for most of his time at the company. Through his work, Diedrich learned trade secrets and confidential information at Mitek. In 2016, Diedrich signed a non-disclosure agreement. The agreement also contained non-competition and non-solicitation clauses.

In April 2017, Diedrich went with Mitek’s President and CEO, John Ivey, to a Hong Kong electronics fair. At the fair, one of Mitek’s business partners, EVR, proposed to sell Mitek a digital signal processing amplifier. Ivey asked the company to send information regarding the proposal to Diedrich, but Diedrich failed to follow up on the proposal. Soon after, EVR agreed to work with a division of MTX to develop the new product. After executing a confidentiality agreement, EVR sent a prototype to MTX, which Diedrich viewed and examined. Continue reading

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A free market requires a free labor market, and yet many of the politicians who claim a free market as a central component of our democracy actively work against the formation and maintenance of a free labor market.

A free labor market means workers are free to work for the companies they want to work for, doing the kind of work they want to do, but many companies have been using things like non-compete agreements and anti-poaching restrictions to keep workers from leaving to work for competitors.

The problem with such restrictions is that a labor market in which employees have more options is a more competitive labor market. When employees have the option to leave to work for another company that’s offering them more money, they have the opportunity to either leave their current employer in favor of higher wages or to stay and negotiate higher wages with their current employer. More freedom means more bargaining power, but companies have been actively working to restrict that freedom – and by extension, that bargaining power.

Anti-poaching restrictions have become the latest method companies have used to try to keep employees right where they want them. Fast food restaurants, in particular, have been using anti-poaching clauses in their contracts with franchisees in order to make sure franchisees don’t poach employees from each other. Such clauses usually forbid franchisees from hiring applicants who are current or recent employees of the parent company or any of its other franchisees without the express permission of the current or previous employer. Continue reading

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The Non-Compete

All contracts are subject to scrutiny before the law, especially when a dispute arises, including employment ones.  The importance of fair and just contracts always comes up in the media spotlight and the courts.  If a contract is too much in favor of one party who has far more bargaining power over the other party, it may violate the law. Employers should take this into consideration when drafting terms and have them reviewed by attorneys who are familiar with restrictive covenants within the scope of employment law.

One Clause Cannot Fit All Employees

A “one size fits all policy” when drafting restrictive covenants, will risk the clause being unenforceable. This is especially true if the demand is unreasonable or not necessary to protect legitimate business interests. 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 a reminder in the case of Dumrauf, where the Courts later deemed teh non-compete agreement to be unenforceable because it was too restrictive.

The Illinois Attorney General, Lisa Madigan, required WeWork Inc. to end its use of an overly broad clause for almost all of its employers. Overall, over 1,800 employees agreements were altered to become a less restrictive version and 1,400 agreements were rendered too restrictive voided.  The agreement went so far as to prohibit all employees from taking jobs with competitors, including cleaners, assistants, baristas and others who earn close to minimum wage.  It was viewed as being a career obstacle which did not allow people to make better decisions with their lives. The clause appeared to be one set for all employees and barred them for working with competitors after they left.  It also prohibited a worker from working anywhere where WeWork did.  That is a cost that WeWork had to bear as a social stigma in society, legally and will have a negative image in the minds of future employees as well.  Building back trust and rapport will be difficult. Continue reading

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While it’s always a good idea to put agreements in writing, taking that step isn’t always enough to guarantee that everyone involved will continue to abide by the terms of the contract, even if they all sign their names to it. When one or more parties violates the agreed-upon terms, you can sue them for breach of contract and get the court to issue an injunction requiring them to abide by the terms of the contract, but sometimes even that isn’t enough. Below are just a few examples of what can happen when people insisted on having it their own way.

A Salesman’s Gotta Sell

John Osborne worked as a salesman selling business forms for Uarco, Inc. The employment agreement he signed with the company included a non-compete clause that said Osborne would not sell business forms for any of Uarco’s competitors. After Osborne’s employment with Uarco ended, he went to work selling similar business forms for one of Uarco’s competitors. Uarco sued him for breach of contract and succeeded in obtaining an injunction from the court that, in part, forbade Osborne from reaching out to certain customers of Uarco for a period of two years. But the injunction had a loophole that let Osborne sell to a customer of Uarco if the customer expressed a desire to purchase business forms in an open bid situation (meaning different vendors submit a request for proposal and the customer goes with the lowest price).

Uarco then accused Osborne of being in contempt of court by violating the injunction when he contacted Uarco customers. When the court looked into the accusations, it found that Osborne had violated the terms of the injunction more than 100 times. Osborne admitted to contempt on two counts but claimed the rest of the customers did not fall within the limitations of the court’s injunction against him. The court disagreed and imposed further injunctions of an additional 190 days against him, as well as monetary sanctions.

Osborne appealed that decision and the case went before the Supreme Court of Kansas, which upheld the lower court’s ruling of the extended injunction and also awarded Uarco almost $10,000 to cover their legal costs in filing the lawsuit and arguing their case and an additional $10,000 fine. 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 competing with an former employer 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.

Non compete clauses are in often in place for businesses to protect their investments in business and to not have employees turn around and share information that may be valuable in another employment setting.  That is why the wording of non compete agreements is important.  However, more and more businesses are now laying off employees.

It could be speculated that since more and more businesses are now laying off employees, that this is one of the reasons as to why Massachusetts legislature passed a bill that would require companies in the state to give employees some kind of compensation for up to a year after leaving if they decide to enforce a non-compete agreement.  Another reason is that workers could also end up for months without a paycheck from either a previous employer and by not being able to work for a competitor.  At least now, there is some form of relief and compensation until enforceability of the non-compete agreement is made.

When it comes to Massachusetts, the clause known as a “garden leave clause” provides pay for of at least 50% of the employee’s highest base salary over the prior two years, or other mutually-agreed upon consideration. Though the law does give some room for “other mutually-agreed upon consideration” leaving some level of flexibility.

As it stands, Massachusetts has become one of the first states to offer this kind of relief for employees.  This change may encourage others states to enact reforms. Another change of note is allowing employees to review the agreements prior to signature and relieving laid off employees from the non-compete’s restrictions.

An agreement can be deemed null and void or certain provisions within can be.  This is pretty much the same as it was before.  It’s impact and affect is yet to be tested.

https://www.bostonglobe.com/business/2018/01/15/compromise-may-near-restricting-noncompetes-mass/GWjyz1NOpnZbGA3YXCbWxL/story.html

http://www.mondaq.com/unitedstates/x/725264/Contract+of+Employment/Massachusetts+Legislature+Passes+LongAwaited+NonCompete+Law

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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