Non-Compete Agreement / Covenant Not to Compete

Court Grants Preliminary Injunction in Non-Compete Case, Grants equitable Extension of Non-Compete Covenant’s Duration – Travelhost v. Modglin

January 10, 2013 | Peter S. Lubin and James V. DiTommaso

A Texas federal court, after initially dismissing a motion for preliminary injunction as moot, granted the plaintiff’s motion for reconsideration in Travelhost, Inc. v. Modglin. The court ruled that, although the two-year time period of the non-compete agreement had already expired, the plaintiff was entitled to a preliminary injunction and an equitable extension of the non-compete agreement for an additional two years. The court based its reversal of its prior ruling on evidence subsequently obtained from the defendant through discovery, which suggested that the defendant had engaged in an ongoing pattern of behavior in violation of the non-compete agreement.

The plaintiff, Travelhost, publishes print and online materials related to travel. It entered into a contract with the defendants, The Real Chicago Publishing LLC (RCP) and Trent Modglin, in 2007, in which RCP would distribute Travelhost’s Chicago magazine and sell advertising in the downtown Chicago area. The contract included a two-year covenant not to compete with Travelhost within the Chicago area. Modglin is RCP’s sole member, and he reportedly agreed to be individually bound by the non-compete agreement.

RCP distributed eight issues of the magazine between 2007 and late 2009. According to Travelhost, RCP began distributing and selling advertising for a competing magazine, “The REAL Chicago,” sometime after November 2009. Travelhost sued RCP and Modglin in March 2011, requesting preliminary and permanent injunctions. RCP never filed an answer to the suit, so the court entered a default preliminary injunction and default judgment against it. The suit proceeded against Modglin alone.

Georgia Federal Court Enjoins Enforcement of Covenant Not to Compete Against Former Employee

December 27, 2012 | Peter S. Lubin and James V. DiTommaso

In a dispute over the enforcement of two restrictive covenants in an employment contract, a federal court in Georgia granted a preliminary injunction preventing their enforcement. The plaintiff in Moorad v. Affordable Interior Systems, LLC filed a declaratory judgment action against his former employer to have the restrictive covenants declared unenforceable under Georgia law. The court considered the plaintiff’s request for an injunction and the defendant’s motion to dismiss for lack of subject matter jurisdiction, and ruled for the plaintiff on both.

The plaintiff, David Moorad, worked for the defendant, Affordable Interior Systems (AIS), from 2004 to May 2011 as the Vice President of Sales for Government Services Administration (GSA). Moorad’s employer asked him to sign an amended contract containing two restrictive covenants, a non-competition agreement and a non-solicitation agreement. According to the court’s ruling, the defendant implied that Moorad could lose his job if he refused to sign the new contract. The non-competition covenant stated that, upon termination or departure from AIS, Moorad could not work, for a period of twenty-four months, in office furniture sales or manufacturing. The clause explicitly described the geographic scope of the restriction as the entire United States. The non-solicitation clause purported to prohibit Moorad from soliciting any customers of AIS within the same twenty-four month period, including anyone who had been a customer in the prior twelve months.

Court Enforces Covenant Not to Compete Against Former Franchisee of Pizza Restaurant – Singas Famous Pizza Brands v. New York Advertising

December 13, 2012 | Peter S. Lubin and James V. DiTommaso

A former franchisee of a regional pizza restaurant chain were barred from operating pizza restaurants within certain geographic areas, according to the Second Circuit Court of Appeals in New York City. In Singas Famous Pizza Brands Corp., et al v. New York Advertising, the plaintiffs sought to enjoin the defendant from opening two new pizza restaurants shortly after the termination of the defendant’s franchise agreement with the plaintiffs. The franchise agreement included a covenant not to compete, stating that the franchisee could not operate similar pizza restaurants within a specified geographic area. The defendant challenged the enforceability of the geographic restriction. The district court ruled for the plaintiffs, and the appeals court affirmed the ruling.

The plaintiffs, Singas Famous Pizza Brand Corp. and Singas Famous Pizza & Restaurant Corp., collectively referred to as “Singas,” operate or franchise multiple pizza restaurants in the New York City metropolitan area. Each restaurant uses Singas’ unique branding and menu. The defendants operated two pizza restaurants, a former Singas franchise in the East Village, Manhattan, and a new restaurant in Jackson Heights, Queens. Singas obtained a preliminary injunction that barred the defendant from operating both restaurants. The defendant appealed only as to the Jackson Heights restaurant, arguing that the ten-mile geographic restriction was unduly broad.

Court Rules that Parent Company, After Acquiring a Subsidiary, May Not Sue to Enforce the Subsidiary’s Employment Agreement – CDW, LLC, et al v. NETech Corporation

November 29, 2012 | Peter S. Lubin and James V. DiTommaso

An Indiana federal district court ruled, in CDW, LLC, et al v. NETech Corporation, that neither a parent company nor one of its subsidiaries may sue to enforce the employment contracts of another of its subsidiaries, when one subsidiary is clearly the party to the agreement. The dispute involved covenants of noncompetition in a company’s employment contract and a claim for tortious interference with a business contract.

Berbee Information Networks Corporation employed several individuals as sales executives. These three individuals signed employment contracts that included a paragraph stating that they agreed, upon termination of their employment with Berbee, not to accept employment in direct competition with Berbee for up to twelve months. “Competition” included solicitation of Berbee employees or clients and use of Berbee’s proprietary business information. In September 2006, Berbee became a subsidiary of CDW, LLC when CDW purchased it and merged it with another subsidiary. Berbee, all parties to the eventual lawsuit agreed, was the surviving corporation of the merger.

CDW operated several subsidiaries that, like Berbee, engaged in the business of technology sales. Each subsidiary served a different market, such as commercial businesses, nonprofits, or government agencies. CDW transferred the three Berbee employees at the center of the dispute to another subsidiary, CDW Direct, between 2008 and 2009. These employees all left CDW Direct at different times to work for NETech Corporation. They each received letters after commencing work at NETech from an attorney for CDW alleging that they were in violation of their noncompetition agreement, demanding that they cease work for NETech and return all confidential materials obtained from Berbee or CDW.

Business Planning — Non-Compete Agreements

October 15, 2012 | Peter S. Lubin and James V. DiTommaso

https://www.youtube.com/watch?v=Ozu72S9wzYA

Non-compete agreements are increasingly more common in today’s competitive business environment.

Non-compete agreements, confidentiality and other restrictive covenants are a great tool for protecting trade secrets, customer lists, and other sensitive information, but only if the agreement is enforceable in a court of law. The issue of enforceability of non-compete agreements is a complex legal question that is the subject of much business litigation. If you are party to a non-compete or confidentiality agreement – whether as an employee or employer – it is helpful to consult with a knowledgeable business litigation attorney like the Hinsdale business litigation attorneys at DiTommaso Lubin. We have represented employees and employers throughout DuPage, Cook, Kane and Lake Counties in non-compete litigation including representing large public corporations and high level executives in lawsuits arising from non-compete agreements. We also draft non-compete and confidentiality agreements for our corporate clients.

Non-Competition Agreements — We represent employees and businesses in the Chicago Area Including in DuPage, Cook and Kane Counties in Non-Compete Agreement Lawsuits

July 24, 2012 | Peter S. Lubin and James V. DiTommaso

Non-Compete Agreements 101: Consideration and Undue Hardship – PolyOne Corp. v. Barnett

April 19, 2012 | Peter S. Lubin and James V. DiTommaso

In PolyOne Corp. v. Barnett, the district court for the Northern District of Ohio explains that just because both an employer and employee have signed a non-compete agreement doesn’t mean the agreement is necessarily enforceable. Among other requirements, the agreement must not be overly burdensome and must be executed in exchange for adequate consideration.

Plaintiff PolyOne Corporation provides polymer services and materials around the world. Defendant April Barnett worked at PolyOne’s Seabrook, Texas facility since 1992. In 2007, PolyOne began requiring certain high-level employees, including Barnett, to sign non-compete and confidentiality agreements in exchange for enrollment in the company’s long-term incentives program. Barnett signed an agreement in April of that year in which she agreed both to not compete with PolyOne for a period of one year after the termination of her employment and to protect PolyOne’s confidential and trade secret information and return such information upon termination of her employment.

In 2010, PolyOne allegedly demoted Barnett from her position as Marketing Director and removed her from the company’s long-term incentives plan. In March 2011, she informed the company that she was resigning to take a job with Bayshore Industrial, a competitor. PolyONE sued, claiming that Barnett would breach the non-compete and confidentiality agreements by accepting the Bayshore job and asked the court to issue a temporary restraining order (TRO) preventing Barnett from working for Bayshore or otherwise violating the agreements.

Following a hearing on the matter, the court denied the TRO request, finding that PolyOne cannot show it is likely to succeed on the merits of its case. In order to enforce a restrictive covenant – a contract that prevents a person or entity from doing certain things – the party seeking to enforce it must first prove that the covenant is valid. According to the court, PolyOne is unable to show that the non-compete agreement is valid because its interpretation of the terms – asserting that it prohibits Barnett from working for any competitor in any capacity – would impose an undue hardship on Barnett because she has spent the majority of her adult life working in the polymers industry and would have to find work in another industry.

Furthermore, the court held that the agreement was not based on adequate consideration. In order for a contract to be valid, each party must exchange something of value. In this case, PolyOne enrolled Barnett in the company’s long-term incentives plan in exchange for signing the non-compete and confidentiality agreements. However, PolyOne later withdrew this consideration when it demoted Barnett. Since, according to the Court, “it is far from certain whether the court would enforce a non-compete agreement for which the consideration has been removed,” it found that Barnett’s likelihood of success in enforcing the agreement was not sufficient to justify issuing the requested TRO.

Illinois Court Shoots Down Unreasonable Noncompete Agreement – Peerless Industries, Inc. v. Crimson AV, LLC.

March 22, 2012 | Peter S. Lubin and James V. DiTommaso

In Peerless Industries, Inc. v. Crimson AV, Llc., the Northern District of Illinois makes clear that while noncompete agreements may be valid and enforceable in Illinois, the terms of an agreement must nevertheless be reasonable.

Plaintiff Peerless Industries Inc. is an audio-visual mount equipment manufacturer that does business around the world. The plaintiff sells its products to distributors who then install them in stadiums, schools and airports, among other structures. In 2007, The plaintiff entered into a supply contract with Chinese manufacturer Sycamore Manufacturing Co., Ltd. The agreement included a noncompete provision, which provided that Sycamore would not make or distribute “Peerless Products”: those designed by the plaintiff or normally sold by the plaintiff under any of its trademarks. The agreement further prohibited Sycamore from selling a “similar product” – one that “in [the plaintiff’s] reasonable judgment, has substantially the same appearance as or reflects or contains any part of the design of any Peerless Product” – for the length of the agreement and one year thereafter.

The agreement terminated in March, 2010. The following May, Defendant Crimson AV, LLC incorporated in Illinois. According to the court, Sycamore pays the salaries of the defendant’s executives as well as their expenses. Defendant Vladimir Gleyzer, Crimson’s managing director, is a former Peerless employee. Later that summer, the plaintiff filed the present action, alleging that the defendants tortuously interfered with the plaintiff’s contract with Sycamore by purchasing “similar products” from Sycamore and offering them for sale on Crimson’s website. Plaintiff sought a preliminary injunction to enjoin the defendants from selling or offering to sell products received in breach of the supply agreement.

Following a hearing on the matter, the court denied the plaintiff’s injunction request, finding that the “similar products” provision of the supply agreement with Sycamore was overly broad and beyond that necessary to protect the plaintiff’s legitimate business interests. In Illinois, the court noted, a noncompete agreement is valid only to the extent that is reasonable. That is, the agreement’s terms must not: (1) be greater than necessary to protect the business; (2) be oppressive to the entity restricted; nor (3) injure the general public.

In this case, however, the agreement at issue barred Sycamore from selling certain equipment, even if the feature of the plaintiff’s product that appears in the similar product is not aesthetically or functionally significant to either the plaintiff’s product or the similar product. The agreement also applies even where it is unlikely that one product could not be distinguished from the other in the marketplace.

Business Owners Beware, Make Sure Your Employment Agreements are Clearly Written and Reasonable

February 2, 2012 | Peter S. Lubin and James V. DiTommaso

Every business has employees, and as business litigators, the attorneys at DiTommaso Lubin pride ourselves on being knowledgeable about all the areas of law that affect our clients, including employment laws. Our Orland Park business attorneys recently discovered a case that has an impact on companies who utilize employment non-competition agreements with their employees.

Reliable Fire Equipment Company v. Arredondo pits an employer against two former employees, Defendants Arredondo and Garcia, who worked as fire alarm system salesmen for Plaintiff. Each Defendant signed an employment agreement where Defendant’s would allegedly earn commissions of varying percentages of the gross profits on items or systems sold. After working for Plaintiff for several years, Defendants created Defendant High Rise Security Systems, LLC., which was allegedly a competitor to Plaintiff’s business. Plaintiff eventually became aware that Defendants were starting an alleged competitor company, and asked Defendants if in fact they had created a fire alarm business. Defendant Arredondo allegedly denied that he was starting such a business, and resigned shortly afterward, with Defendant Garcia tendering his resignation two weeks after Arredondo.

Plaintiff then filed suit alleging breach of the duty of fidelity and loyalty, conspiracy to compete against Plaintiff and misappropriation of confidential information, tortious interference of prospective economic advantage, breach of the employment agreements, and unjust enrichment. The trial court held that the employment agreements were unenforceable because of unreasonable geographic and solicitation restrictions and the fact that language of the agreements was unclear. A trial on the issues unrelated to the employment agreement ensued, and Defendants successfully moved for a directed verdict because there was insufficient evidence that Defendants competed with Plaintiffs prior to Arredondo’s resignation.

Plaintiff then appealed the trial court’s ruling that the employment agreements in question were unenforceable and the directed jury verdict. The Appellate Court affirmed the trial court’s directed verdict, stating that the lower court had properly weighed the evidence in finding a total lack of competent evidence. The Court then analyzed the restrictive covenants under the legitimate business interest test and found that the geographic restrictions were not reasonable and therefore the trial court did not err in ruling that the restrictive covenants were unenforceable.

Reliable Fire Equipment Company v. Arredondo illustrates why it is so important for business owners to keep an eye on their employees, and serves as a warning for companies wanting to sue former employees based upon non-competition agreements. Furthermore, the case shows that courts frown upon the use of vague language in such agreements, and it is always in your best interests to keep the terms of employment agreements reasonable.

Consideration in Illinois Noncompete Agreements: How Much Is Enough? LKQ Corporation v. Thrasher

October 15, 2011 | Peter S. Lubin and James V. DiTommaso

In order to hold an employee or former employee liable under an agreement not to compete, an employer must offer the employee some form of consideration in exchange for the employee’s promise not to compete with the employer. The Northern District of Illinois tackles the difficult question of how much consideration is enough in LKQ Corporation v. Thrasher.

Plaintiff LKQ Corporation is a national automobile parts supplier. In January 2010, Plaintiff hired Defendant Corey Thrasher as a Sales Representative, handling accounts in the Northwest United States. Defendant signed a noncompete agreement shortly after he was hired, allegedly stating that he would not compete with Plaintiff nor solicit Plaintiff’s customers during his employment and for one year following the end thereof. The noncompete agreement also included a forum selection clause designating that any actions related to the contract be raised in Illinois and considered under Illinois law.

One year later, Defendant resigned from his position, effective February 2011. On the day he resigned, Defendant allegedly contacted a number of Plaintiff’s customers via email, telling them that he had taken a similar position with B&R Auto Wrecking, Inc. and that he was looking forward to continuing to work with these customers. Plaintiffs allege that Defendant has continued to solicit LKQ customers to purchase B&R merchandise and that several LKQ clients have decreased their business with LKQ as a result.

Plaintiff filed suit alleging that Defendant breached the non-compete agreement. The court denied Defendant’s motion to dismiss the action, in which he argued that the agreement lacked sufficient consideration to be enforceable. The court concluded that Plaintiff received continued employment for a “substantial period” following the execution of the agreement, which constituted adequate consideration, and therefore the agreement was enforceable.
In order for a contract to be enforceable, the promises therein must be given in exchange for consideration. Typically, consideration is anything of value received in exchange for a promise. In the employment context, however, a party seeking to enforce an noncompete agreement must prove that sufficient consideration was given in exchange for the promise not to compete because the simple benefit of continued employment is illusory: employment is at will and a person who signs a noncompete agreement can still be fired at any time. Thus, only continued employment for a “substantial period” or some other form of consideration is sufficient to support a noncompete agreement.