Non-Compete Agreement / Covenant Not to Compete

Seventh Circuit Affirms Trial Court’s Judge That Business Failed to Prove Non-Compete Claims — Our Chicago Non-Compete Lawyers Represent Employers and Employees in Non-Compete Agreement Cases Throughout Illinois

August 24, 2013 | Peter S. Lubin and James V. DiTommaso

Healix and HHI compete in the business of infusion therapy services: administration of substances such as pharmaceuticals intravenously or by any method other than ingestion. Some medical care providers offer these services to patients in their offices. Healix and HHI provide support.

In 2007 Healix recruited the Clinic as a new customer. The Clinic had two members: Keller, a physician, and Porter, a nurse practitioner. Under their five-year contract, Healix would provide services after the Clinic built an in-office pharmacy and hired staff to work there. The Clinic was responsible for the cost of construction. Healix required Keller and Porter to execute personal guarantees and took a security interest in accounts receivable. Four months after signing the contract, the Clinic notified Healix that it would not fulfill its responsibilities.

The Clinic was in breach, but Healix did not sue. One month later, the Clinic entered into a contract with HHI. Healix learned of the new contract and sued HHI for copyright and trademark infringement and for tortious interference with a contract.

The intellectual property claims were dismissed. After a trial, the district judge rejected the tortious-interference claim. The Seventh Circuit affirmed, finding lack of causation because the evidence indicated that the Clinic would have “walked away” regardless of HHI’s actions.

The Seventh Circuit in addressing the failure to prove fact of damage from the tortious interference held:

In any event, the case can be disposed of on another ground. Keller held a majority membership interest in the Clinic. The district judge assumed that this entitled him to decisionmaking power, and Healix does not dispute this finding. Keller testified that the Clinic would have breached
the Healix contract regardless of HHI’s involvement, be-‐‑ cause securing financing for the in-‐‑office pharmacy would have been impossible. The district judge found Keller’s statements to be credible. Healix does not challenge this finding, and it is enough to dispose of Healix’s claim.

You can view the opinion here.

Federal Court Applies State Law in Finding Covenant Not to Compete Unenforceable – Fields v. QSP, Inc.

August 18, 2013 | Peter S. Lubin and James V. DiTommaso

After a woman filed suit against a fundraising company for alleged payroll violations, the company brought counterclaims against her, including a claim for alleged breach of a covenant not to compete. Fields v. QSP, Inc. (Fields 2), No. CV 12-1238 CAS (PJWx), opinion (C.D. Cal., Jun. 4, 2012). The plaintiff filed the lawsuit as a putative class action on behalf of employees subjected to employment practices that allegedly violated the federal Fair Labor Standards Act (FLSA) and various California statutes. After hearing several competing motions for summary judgment and judgment on the pleadings, the court dismissed some of the plaintiff’s employment law claims and retained others. It also ruled that the covenant not to compete in the plaintiff’s employment contract was unenforceable under California law.

The defendant, QSP, Inc., serves a nationwide clientele of youth organizations and schools. It employed the plaintiff from 1999 to 2010, primarily as a “Sales and Service Specialist.” Her job involved researching and contacting potential clients, assisting “field sales managers” (FSMs), and maintaining a database (the “QSP Database”) of current and prospective school customers. A covenant not to compete in her employment contract stated that she may not contact fundraising organizations that she “solicited or serviced during [her] employment by QSP” for a period of twelve months. Fields 2 at 12. QSP alleged that the plaintiff did not delete the QSP Database from her computer when her employment ended, and used the database to provide services to QSP’s competitors.

Illinois Appellate Court Limits Use of of Non-Compete Agreements

August 15, 2013 | Peter S. Lubin and James V. DiTommaso

Many states have been cracking down on employee non-compete agreements lately. California has recently decided that workers who are already employed by a company cannot sign a valid non-compete agreement with that company without some sort of additional compensation. Signature of a non-compete agreement as a condition of getting hired, however, is common practice in the business world. The Illinois Appellate Court though, has just made a new ruling which changes all that.

The case is Fifield v. Premier Dealer Services and it involves an employee who worked for a subsidiary of a company which spun off of the parent company and was acquired by another firm. The employee lost his job as a result of the sale, but was then offered a job if he signed an agreement stating that he would not work for a competitor for two years after leaving the company. Within a few months of accepting the job, the employee quit and went to work for a rival company.

The decision reached by the Illinois Appellate Court was related to precedents in Illinois law that govern what happens when an existing employee is required to sign a non-compete agreement. These precedents state that, in such a situation, a worker who has been employed by the company for at least two years is considered to have received sufficient compensation for entering into a non-compete agreement.

Tony Valiulis, a partner at the Chicago law firm, Much Shelist P.C., which represented the plaintiffs, Eric Fifield and his new employer, Enterprise Financial Group, Inc., successfully argued that the same precedents should apply to newly hired employees.

Despite the fact that states across the country have been growing increasingly strict when it comes to worker non-compete agreements, the new Illinois rule has elements which go beyond what has so far been seen in other states. According to the new rule, even though the non-compete agreement was a condition of getting hired and the employee quit, a minimum of two years of employment is still required in order for the non-compete agreement to be enforceable.
The unanimous decision reached by the Illinois Appellate Court is going to mean a lot of changes to labor law in the state. Many labor lawyers have begun advising their clients to reassess their work agreements and to pay some sort of bonus or additional compensation to prevent their employees going to work for rival companies. “Employers will have to get creative with what they do,” said one Chicago labor attorney. “It can be a signing bonus, a year-end bonus” or another form of compensation.

Many are convinced that such restrictions are harmful to Illinois employers. Joel Rice, a partner at a Chicago law firm, said, “It isn’t a business-friendly rule.”

Others disagree, arguing that non-compete agreements might not be as beneficial for companies as they are commonly believed to be, particularly in sectors which are growing quickly. Massachusetts legislators are currently trying to restrict the use of non-compete agreements. According to P. Andrew Torrez, an attorney in Washington, this is because “tech startups will come to an area with an educated, mobile workforce and having people in that industry tied down makes it less desirable.” It seems that companies fail to consider what they have to gain by the removal of non-compete agreements, rather than what they have to lose.

Best Buy Implements New Non Compete Agreements For its Executives — Our Chicago Non-Complete Agreement Lawyers Represent Businesses and Employees in Chicago Covenant Not to Compete Lawsuits

July 9, 2013 | Peter S. Lubin and James V. DiTommaso

Despite the fact that some state laws have been working against non-compete clauses in employee contracts, companies continue to find ways around them. While California has been the least tolerant by banning non-compete clauses altogether, other states, such as Massachusetts, have taken more moderate approaches by seeking merely to limit the scope of such contracts.

Non-compete agreements usually exist as part of a contract between an employee and her employer. The non-compete clause states that the employee will not work for one of the company’s competitors for so many months after termination of her employment with her current employer. Such clauses are usually limited by geography as well as time and the idea is to protect the trade secrets of the employer.

Non-compete clauses are usually included in an employee’s initial contract or (if she doesn’t sign an individual contract) in the employee handbook or manual. If a company wants to change its policy regarding existing employees, then it is subject to the requirement of consideration. This requirement means that both the employer and the employee must gain something from the new or altered contract in order for it to be enforceable in a court of law.

Our Chicago non-compete agreement lawyers observed that in its recent attempt to bypass these new restrictions, Best Buy Co. Inc., (which employs about 5,200 people at its corporate headquarters in Richfield, MN) has offered future stock considerations to hundreds of mid-level executives, including the vice presidents and directors.

These stock considerations are to be in exchange for the executives signing new employment contracts with Best Buy, which include a non-compete clause. The clause prohibits the employees from working for any of Best Buy’s competitors anywhere in the world for 12 months after termination of their employment with Best Buy. By offering something of value to the employees in exchange for signing the new contract, Best Buy gets around the consideration requirement.

If an employee were to dispute this new non-compete clause, most state courts would consider the benefit of the clause to the employer as far as protecting intellectual property, confidential business practices, etc. against the employee’s interests in pursuing other employment. The balance struck between these two will, ideally, result in a determination of the clause’s “reasonableness”. There are two key factors which are normally used to determine reasonableness: time and geography.

While some courts have upheld non-compete clauses which extend for a year or more, Best Buy’s geographical limitation prevents the employee from working for any of Best Buy’s competitors anywhere in the world. This may not meet the requirements for reasonableness as it inordinately benefits Best Buy over the employee.

Another argument an employee could use to challenge the clause is to question whether Best Buy has anything of value to protect. As a retailer, Best Buy does not create anything of its own; it merely resells products made by other companies. Even the services that Best Buy offers, such as installation and repair, are not the kinds of services which typically consist of any kind of confidential information recognized by the courts.

This is just one instance of a company’s response to the changes in law regarding non-compete clauses. No doubt we will see many more before long.

Covenant Not to Compete Ruled Unenforceable for Failing to Comply With State Law – Elite Coil Tubing Solutions v. Guillory

May 31, 2013 | Peter S. Lubin and James V. DiTommaso

An appellate court in Louisiana affirmed an order granting partial summary judgment to the defendants in a lawsuit over a purported covenant not to compete. The court held in Elite Coil Tubing Solutions v. Guillory that the plaintiff company failed to meet its evidentiary burden to enforce a non-compete agreement under Louisiana law, which generally disfavors such agreements. In addition to failing to identify specific parishes in which the non-compete agreement should apply, the court held that the plaintiff failed to provide sufficient evidence regarding the nature of the business prohibited by the non-compete agreement.

The plaintiff, Elite Coil Tubing Solutions, LLC, provides oilfield services, with a principal business location in Caddo Parish, Louisiana. The company employed the defendant, Weldon Guillory, as Manager of Operations from June 15, 2006 until Guillory’s resignation on October 15, 2010. It also employed defendant Bobby Gill from July 15, 2008 until his resignation on December 18, 2010.

Guillory signed an employment contract with Elite in 2006, which included a non-compete agreement. That part of the contract provided that, while employed by Elite and for a period of two years afterwards, Guillory would not own or accept employment with a business in direct competition with Elite anywhere within two hundred miles of any of Elite’s business locations. It also provided that, in the event of breach or threatened breach by Guillory, Elite could obtain a temporary injunction without a bond, and that it would be entitled to liquidated damages of $250,000. Gill did not sign an employment contract when he began working for Elite.

Court Limits Preliminary Injunction in Non-Compete Case Based on Indefinite Contractual Term – EXFO America, Inc. v. Herman

April 24, 2013 | Peter S. Lubin and James V. DiTommaso

A communications company sought to enjoin a former employee from working for a competitor or divulging any trade secrets, pursuant to a non-competition agreement signed by the parties. The employee contended that the agreement was unenforceable because it failed to define a key term. The U.S. District Court for the Eastern District of Texas, in EXFO America, Inc. v. Herman, granted a limited preliminary injunction against the employee, finding the non-competition agreement to be indefinite, but still enforceable.

The plaintiff, EXFO America, Inc., manufactures and sells products under the brand name NetHawk. The company formerly employed the defendant, Dan Herman, under a contract that included a non-competition agreement. The court’s opinion does not describe the circumstances of Herman’s departure from EXFO, but Herman subsequently took a job with Spirent Communications, a competitor of EXFO. EXFO filed a complaint in federal court in April 2012 and requested a preliminary injunction prohibiting Herman from working for Spirent for a six-month period, and prohibiting him from revealing any trade secrets or other confidential information belonging to EXFO for at least five years, beginning on his termination date.

The non-competition agreement between EXFO and Herman purported to prohibit Herman, upon the termination of his employment with EXFO, from working or participating in any way in the “Business” for a period of six months anywhere within the United States. Where a definition of the term “Business” would normally appear, however, the clause merely contained the form language “{describe products or attach a list as an exhibit}.” Herman argued to the court that this lack of definition of a clearly essential term rendered the non-competition agreement unenforceable.

Court Denies Preliminary Injunction for Alleged Violation of a Covenant Not to Compete – Matter of Richard Manno & Co., Inc. v. Manno

April 5, 2013 | Peter S. Lubin and James V. DiTommaso

A business sought to enforce a covenant not to compete against a former employee in Matter of Richard Manno & Co., Inc. v. Manno, requesting a preliminary injunction from the Supreme Court of Suffolk County, New York pending the outcome of arbitration. The agreement between the parties was part of the former employee’s severance agreement rather than a condition of his employment. The court denied the application, finding that a preliminary injunction was not an available remedy under the parties’ agreement.

The petitioner, Richard Manno & Co., Inc. manufactures and distributes steel fasteners and machined parts, with a market covering much of the United States. The respondent, Anthony Manno, was an employee of the petitioner until the two entered into a severance agreement in October 2010, in which the petitioner agreed to make various lump sum payments to the respondent in exchange for his resignation and other consideration. The agreement also included provisions for forfeiture of future payments from the petitioner upon certain acts deemed, in the sole discretion of the petitioner, to be in direct competition with the petitioner’s business. The respondent could not work with a domestic company that directly competed with the petitioner, nor could he solicit any person or business that he knew the petitioner was employing or soliciting.

The respondent allegedly formed his own business, Anthony Manno & Co., Inc., in January 2011 to engage in the same business as the petitioner. The petitioner alleges that this new company violated the non-compete agreement by engaging in direct competition in the U.S. market. It also alleged that the respondent’s new business, through such direct competition, interfered with its business relationships with its clients.

Illinois Supreme Court Allows for More Type of Circumstances to Determine That Non-Compete Agreement is Enforceable in Reliable Fire Equipment Case — Our Chicago Business Lawyers Handle Non-Compete Lawsuits Throughout the Chicago Area

April 2, 2013 | Peter S. Lubin and James V. DiTommaso

When determining the legitimacy of restrictive covenants, it is important for judges to consider all requirements of legitimacy and to do so consistently.

In a recent case, two former employees of Reliable Fire Equipment, a company which sells, installs, and services portable fire extinguishers and fire suppression and alarm systems, allegedly violated the non-competition agreement they had signed with their employer. Rene Garcia had been hired by Reliable in 1992 as a systems technician and was later promoted to sales. In 1998, Arnold Arredondo was hired by Reliable as a salesperson. Both signed non-competition agreements in which they promised not to compete with Reliable, either during their employment or for one year after ceasing to be employed by Reliable.

In early 2004, while still employed by Reliable, Arredondo began forming a company which would supply engineered fire alarm and related auxiliary systems throughout the Chicago area. The new company was christened High Rise Security Systems, LLC and Arredondo and Garcia signed an operating agreement for the company in August of that year.

That same month, Reliable’s founder and chairman heard of the two employees’ movements and confronted them. They both denied it. Arredondo resigned in September and, on October 1, Garcia was fired on suspicion of competition. In December, Reliable filed a complaint against Arredondo, Garcia, and High Rise, alleging that they had violated their non-competition agreements.

Arredondo and Garcia filed a counterclaim, alleging that the restrictive covenant was unenforceable. The court ruled that Reliable had failed to prove the existence of a legitimate business interest to justify the enforcement of the non-competition agreements and therefore ruled for Arredondo and Garcia on their counterclaim. The appellate court upheld that decision and Reliable appealed, sending the case to the Illinois Supreme Court.

The Illinois Supreme Court has said that non-competition clauses in employment contracts are enforceable so long as consideration supports the agreements and the restraints are reasonable. To determine whether the restraints are reasonable, the court uses a three-pronged test: the restraint must be necessary to protect the legitimate business interest of the promisee; it must not impose undue hardship on the promisor or the public; and the scope of the restraint must be otherwise reasonable.

In putting forth this opinion, the Court corrected two recent opinions of the appellate court which did not require a test for legitimate business interest. In Sunbelt Rentals, Inc v. Ehlers, the 4th District Court of Appeals claimed that a court needed only to consider time and territory restrictions when determining for reasonableness in a restrictive covenant. It claimed that the Illinois Supreme Court had never accepted the legitimate business interest test but the Supreme Court said that was a mistaken assumption and that the appellate court had misinterpreted the Supreme Court’s opinion in Mohanty v. St. John Heart Clinic as well as other cases.

Having rejected the reasoning in Sunbelt, the Court clarified the proper standard for conducting the legitimate business interest test. According to the Court in Nationwide Advertising Service Inc v. Kolar, an employer will be considered to have a legitimate business interest subject to protection through non-competition employment agreements if two factors are present: the employees must have gained confidential information through their employment; and customer relationships must be near permanent as a result of the nature of the business.

The Illinois Supreme Court though, overturned the Kolar decision and instead put forth that, while those, as well as other factors might be helpful in determining the question of reasonableness and enforceability, any attempt to file a complete list of factors would be futile or would immediately become obsolete. Rather, the court maintained that determining the existence of a legitimate business interest will depend upon the totality of the circumstances of the individual case.

An employment attorney who represents management, said the decision is good for employers because it actually broadened the enforceability of non-competition agreements. Under the broader standard of considering “the totality of the facts and circumstances of the individual case”, employers could argue that the company’s reputation or goodwill are worth protecting with restrictive covenants.

DiTommaso Lubin’s Oak Brook and Chicago Attorney Peter Lubin Named 2013 Illinois Super Lawyer as Class-Action, Business Litigation and Consumer Rights Attorneys

January 26, 2013 | Peter S. Lubin and James V. DiTommaso

Super Lawyers named Chicago and Oak Brook business trial attorney Peter Lubin a Super Lawyer in the Categories of Class Action, Business Litigation and Consumer Rights Litigation. DiTommaso Lubin’s Oak Brook and Chicago business trial lawyers have over thirty years experience litigating complex class action, consumer rights and business and commercial litigation disputes. We handle emergency business lawsuits involving injunctions, and TROS, covenant not to compete, franchise, distributor and dealer wrongful termination and trade secret lawsuits and many different kinds of business disputes involving shareholders, partnerships, closely held businesses and employee breaches of fiduciary duty. We also assist businesses and business owners who are victims of fraud.

Peter S. Lubin

online at

Literal Reading of Non-Compete Agreement Applied to Veterinary Practice – Heiderich v. Florida Equine Veterinary Services

January 24, 2013 | Peter S. Lubin and James V. DiTommaso

An appeals court reversed a trial court’s temporary injunction, which had prohibited a veterinarian from practicing within a thirty-mile radius of her former employer. The dispute in Heiderich, et al v. Florida Equine Veterinary Services, Inc. involved a veterinarian who, after termination of her employment by the plaintiff, established a veterinary practice located outside the restricted area established by a non-compete agreement. However, she served clients within that area, which the plaintiff contended violated the non-compete agreement. The trial court agreed with the plaintiff and granted a temporary injunction, but the appeals court, with one dissent, reversed.

Dr. Heather Heiderich Farmer, a veterinarian, signed a one-year employment contract in August 2009 with Florida Equine Veterinary Services (FEVS) in Clermont, Florida. The contract included a two-year covenant not to compete. The non-compete agreement specifically prohibited Dr. Farmer’s involvement with any “general equine practice located” (emphasis added) within thirty miles of FEVS’ Clermont location.

FEVS terminated Dr. Farmer’s employment when the one-year contract expired. Dr. Farmer subsequently opened a veterinary practice outside of the thirty-mile radius, providing veterinary services for horses. She occasionally practiced within the restricted area, however, because some FEVS clients located within that area requested her services.

FEVS sued Dr. Farmer, alleging that her practice of veterinary medicine within the restricted area violated the non-compete agreement, regardless of her office’s physical location, because the non-compete agreement prohibited practicing veterinary medicine within that area. The trial court agreed and granted an injunction against Dr. Farmer, noting that it did not believe the parties intended for Dr. Farmer to locate a practice outside the restricted area in order to treat clients within that area. Dr. Farmer appealed to the Florida Second District Court of Appeals.