Restrictive Covenants

Injunctive Relief for the Breach of a Noncompete Agreement in Illinois – EBN Enterprises, Inc. v. CL Creative Images, Inc.

October 8, 2011 | Peter S. Lubin and James V. DiTommaso

A noncompete agreement typically protects a business that discloses confidential information or business practices to another business or individual from having that information later used against it in competition. Such agreements are generally enforceable and even standard in a wide variety of industries. However, just because a business can prove that someone violated a noncompete agreement does not mean that the business can prevent that person or entity from continuing to do so. In EBN Enterprises, Inc. v. CL Creative Images, Inc., the Northern District of Illinois explains the additional hoops that a party to a noncompete agreement must jump through in order to get an injunction preventing another party from continuing to breach the agreement.

Defendants owned a hair salon and operated it under a franchise agreement with Plaintiffs, the owners of the “Fantastic Sams” salon trade name and operation. The 10-year agreement allegtedly allowed Defendants to use the Fantastic Sams name and trademarks for Defendants’ salon. In return, Defendants agreed to pay a weekly royalty fee and a portion of certain costs. Defendants also agreed that they would not have any connection with a hair care business located within five miles of any Fantastic Sams salon for two years following the agreement’s termination.

The parties allegedly repudiated the agreement shortly before its termination and Defendants continued to operate a salon – now under the name “Corda’s Hair Salon” – at the same location. Plaintiffs filed suit, seeking an injunction preventing Defendants from operating a hair salon within five miles of the Fantastic Sams salon that Defendants previously operated. In order to obtain such relief, the court stated that Plaintiffs must show that: 1) they will suffer irreparable harm without a preliminary injunction; 2) traditional legal remedies will not adequately remedy the harm; and 3) their claim has some likelihood of success on the merits.

Plaintiffs made the requisite showing of success on the merits – a “greater than negligible chance of winning,” according to the court – because Defendants’ continued operation of their salon is in an alleged breach of the franchise agreement. Nevertheless, Plaintiffs failed to show that they will be irreparably harmed unless Defendants are enjoined from operating the salon. The court declined to presume such harm based solely on the breach of the agreement. Instead, it found that Plaintiffs failed to show that the injunction was necessary to prevent use of Plaintiffs’ confidential information, unfair appropriation of other proprietary or unique aspects of Plaintiffs’ business or consumer confusion or to preserve any relationships Plaintiffs would have with customers. Accordingly, the court denied Plaintiffs’ injunction request.

Illinois Noncompete Agreements 101 – Nortek Products Ltd v. FNA Group, Inc.

September 22, 2011 | Peter S. Lubin and James V. DiTommaso

The District Court for the Northern District of Illinois’ recent opinion in Nortek Products Ltd v. FNA Group, Inc. provides a basic overview of how courts consider whether to enforce the terms of a noncompete agreement.

Plaintiffs began manufacturing pressure water products for Defendants in 2003. Five years later, the parties entered into a “License Contract” under which Plaintiffs would manufacture pressure washers that included specific hoses that Defendants held a patent on and/or involved specific technology for which Defendants had applied for a patent.

They also entered into a “Nondisclosure, Noncompetition and Non-solicitation Agreement” (NDA) prohibiting Plaintiffs from the “manufacture, assembly, use, sale, marketing, after-sale service or other disposition of any Licensed Product, any related ancillary activities and any other business [Defendants] may license (or co-operate with) [Plaintiffs] or consider licensing (or co-operating with) [Plaintiffs],” for three years after the expiration of the License Contract. The NDA also included a non-solicitation provision, barring Plaintiffs from soliciting Defendants’ customers for 10 years after the Licensing Contract’s expiration. Finally, the NDA’s nondisclosure provision stated that Plaintiffs would not disclose Defendants’ trade secrets or confidential information. The NDA did not include a geographic limitation.

Plaintiffs filed suit against Defendants for breach of contract. Defendants, in turn, filed a counterclaim alleging that Plaintiffs breached the NDA by soliciting business from Defendants’ customers and engaging in unauthorized business activities using Defendants’ confidential and proprietary business information.

In denying Plaintiffs’ motion to dismiss the counter claim, the court first determined that the NDA should be considered under an employee-employer framework, rather than in the context of a sale of business. “[B]ecause the covenants in the License Contract serve to protect confidential customer information and customer relationships, they are more akin to covenants ancillary to an employment contract than to a sale of a business,” the court ruled.

Northern District of Illinois Federal Court Grants Motion to Strike Plaintiff’s Request for Injunctive Relief in Breach of Contract Case

April 26, 2011 | Peter S. Lubin and James V. DiTommaso

DiTommaso Lubin has successfully litigated many business disputes, and in our many years of experience we have found that contract claims are among the most contentious conflicts. Because so many of our clients deal with breach of contract issues, our Elmhurst business attorneys are always mindful of new court decisions issued in this area of the law. In fact, our lawyers just discovered one such case, Jumpfly Inc. v. Torling, in the US District Court for the Northern District of Illinois.

Jumpfly Inc. v. Torling pits a Plaintiff employer against two former employees who allegedly violated the non-compete agreements signed when they were hired by Plaintiff. Plaintiff contends that Defendant Torling started a competing pay-per-click internet advertising side-business while in Defendant’s employ, and upon discovering its employee’s side-business, fired him and sent a cease and desist letter demanding that he stop violating the non-compete. The parties eventually negotiated a settlement allowing Torling to continue his business, but the agreement prohibited him from soliciting any of Plaintiff’s employees. Torling allegedly solicited Defendant Burke — who was working for Plaintiff at the time under a similar non-compete agreement — and got him to quit his position with Plaintiff to work for Defendant Torling.

Plaintiff then filed suit against the two individuals and the new company (Windy City) that they worked for — alleging rescission of a settlement agreement, breach of contract, violations of the Lanham Act and Illinois Deceptive Trade Practices Act, and intentional interference with contract based upon non-compete agreements between the parties. Plaintiff’s requested the Court to enjoin Defendants’ competitive business conduct and for monetary damages. In response, Defendants filed a motion to strike Plaintiff’s request for injunctive relief and filed a motion to dismiss under 12(b)(6).

The Court granted the motion to strike as to the breach of contract claim because the two year term of the non-compete agreement had already expired and an injunction would result in an unreasonable restraint of trade. The Court also noted that Plaintiff’s seven-month delay — after discovery of the illicit conduct — in asking for an injunction also weighed in favor of Defendants. The Court denied the motion to strike as to the statutory claims, however, because injunctive relief is provided by both laws which rendered the motion premature.

Next, the Court granted Defendants’ motion to dismiss the breach of contract and intentional interference with contract claims due to pleading insufficient facts that Defendant Windy City induced either of the individual Defendants to breach their contracts with Plaintiff. In dismissing Plaintiffs conspiracy to interfere with contract, the Court applied the Intracorporate Conspiracy Doctrine and declined to agree with Plaintiff’s argument that Defendants’ conduct fell with in an exception to the rule. Finally, the Court denied the motion to dismiss the settlement agreement breach claim as the effect of Defendants’ breaches had yet to be determined.

Appellate Court of Illinois Orders in Camera Review of Potentially Privileged Documents in Action for Breach of Fiduciary Duty

April 12, 2011 | Peter S. Lubin and James V. DiTommaso

Business litigation is necessarily an adversarial process – the stakes are high and as such the opposing parties in most lawsuits will fight over many issues during the case. One of the most contentious segments of any case is the discovery process. Because the information obtained during discovery can make or break a case, it is important to understand the law in this area. In that vein, our Berwyn business attorneys would like to share a recent Illinois Appellate Court decision that may affect many of our clients the next time they go to court.

In Mueller Industries Inc. v. Berkman, Defendant Berkman worked for Plaintiff as president of a company owned by Plaintiff pursuant to an employment contract. During his employment, Defendant formed an investment partnership and obtained a 10% ownership interest in a company that was one of Plaintiff’s primary suppliers. Defendant’s lawyer – whose firm was also counsel for Plaintiff – advised him how to structure the investment venture so as to not run afoul of his employment contract with Plaintiff. The initial employment agreement subsequently expired, and a new open-ended agreement was consummated that contained a non-compete clause and other restrictive covenants governing outside financial interests and business opportunities. Defendant then had his attorney form a new company to compete with Plaintiff, and Defendant subsequently resigned his position with Plaintiff.

Plaintiff filed suit for breach of his employment contract and breach of fiduciary duty, alleging Defendant profited personally at the expense of Mueller through his investment partnership. A discovery dispute ensued when Defendant refused to produce documents related to his investment in the supply company and his creation of the competing company. Defendant refused production based upon the 5th amendment and attorney-client privileges. Plaintiff filed a motion to compel production, which was granted by the trial court.

Defendant appealed the trial court’s grant of the motion, and reasserted that the documents were privileged. The Appellate Court reversed in part, holding that Defendant’s pre-existing relationship with his lawyer kept all communication prior to the attorney’s firm’s representation of Plaintiff privileged. However, all communications after the dual representation began were no longer so protected because Defendant no longer had any reasonable expectation of confidentiality. Finally, the Court found that Defendant had failed to demonstrate that producing the requested documents would amount to incriminating testimony, but remanded the case with orders for the lower court to perform an in camera review of the disputed documents and urged the trial court to make a detailed record of its findings.

Detroit Pistons Owner Sues Competitor and Ex Employees for Alleged Trade Secrets Theft

January 12, 2011 | Peter S. Lubin and James V. DiTommaso

Our Chicago trade secrets attorneys were interested to see a recent trade secrets lawsuit coming from the high-dollar world of professional sports. Palace Sports & Entertainment, owner of the Detroit Pistons basketball team, is suing rival venue and sports company Olympia Entertainment Inc., plus nine ex-employees who moved to Olympia, for alleged theft of its confidential trade secrets. Crain’s Detroit Business reported that the claim stems from the movement of ten Palace employees to Olympia, starting in February when Palace president Tom Wilson left to run a new venture for Olympia and its parent company, Ilitch Holdings. This venture was to look into a new venue for the Detroit Red Wings, also owned by Ilitch. Nine people followed Wilson, including two executive vice presidents. In Michigan state court, Palace accuses them of breach of contract, breach of fiduciary duty, unfair competition, conspiracy, conversion, tortious interference and misappropriation of trade secrets.

According to the complaint in Palace Sports & Entertainment Inc. v. Olympia Entertainment Inc., dated June 8, 2010, Palace is accusing the ex-employees of taking and misusing trade secrets, despite having signed different versions of a confidentiality agreement that gave them a fiduciary role in Palace’s confidential information. The contract also contained restrictive covenants not to disclose such information to people outside the company, or use it for their own or anyone else’s gain. Confidential information was defined broadly, including “any technical, economic, financial, marketing or other information, which is not common knowledge.” Palace alleges that the ex-employees misappropriated information including suite prices, customer and prospect lists and sales notes, a business plan, marketing plans, suite assignments, appointment logs, proposals, vendor lists and at least one contract. When Palace notified Olympia of the first theft, it said, Olympia provided physical documents and lists of files. But Olympia did not provide the electronic data behind those files, Palace alleged and has even put some of the data on its own computers.

Palace demanded that Olympia return all of the electronic files and physical documents; that each ex-employee swear an oath that all of the information has been returned; and that a third-party expert be allowed to comb Olympia’s computers and the ex-employees’ personal computers for the information. Olympia has not complied. In its lawsuit, Palace said this caused it immediate and irreparable harm by enabling unfair competition. Olympia said publicly that it believed Palace simply did not like losing its employees. No further court documents are freely available, but trial is set for May 27, 2011.

This case generated great interest in the Detroit press, in part because Ilitch was considering buying the Pistons from Palace. But as Illinois business lawyers, we would like to discuss the strength of Palace’s case, judging by the allegations made in its complaint. Specifically, we suspect that the defendants could consider a defense based on whether the information they are accused of stealing was actually confidential trade secrets. Under the laws of Michigan, Illinois and other states, some information is not a trade secret because it is widely available to the public and not valuable. Thus, a trade secrets lawsuit cannot survive if it is based on the use of information such as lists of businesses copied from a phone book. Even if Palace’s confidentiality agreement defines such information as confidential, employees would be under no obligation to comply. The agreement cited in the complaint may also be subject to a challenge for being overly broad or vague because its definition of confidential business information includes “any information, not known to the general public.” This could easily include information with no special economic value.

Fifth District Allows Non-Compete Lawsuit by Madison County Doctors to Go Forward

November 11, 2010 | Peter S. Lubin and James V. DiTommaso

Our Illinois covenant not to compete attorneys were interested to see a ruling in a long-running contract dispute between three Madison County doctors. The Fifth District Court of Appeals has given a green light to a lawsuit over a covenant not to compete. The Madison St. Clair Record reported July 1 that the court allowed Dr. Tina Gingrich to pursue a non-compete lawsuit against her former business partner, Dr. Christina Midkiff. At issue is a covenant in the stock purchase agreement of their former corporation, Tina M. F. Gingrich, M.D., P.C., doing business as Maryville Women’s Center, an ob-gyn practice. The covenant said Midkiff and a third partner, Dr. Marlene Freeman, were not permitted to open a competing ob-gyn practice within 20 miles of Maryville Women’s Center for five years.

The underlying facts are complicated. Midkiff and Freeman joined Gingrich’s practice in the late 1990s, entering into a stock purchase agreement that gave them one-third of the shares each. That agreement also contained the covenant not to compete at issue here, as well as a provision giving Gingrich veto power. The three doctors later disagreed over issues not specified, and in 2002, Midkiff and Freeman sued Gingrich for several causes of action, including shareholder relief and a declaratory judgment that the covenant not to compete was unenforceable. Gingrich countersued and later filed a notice of stock sale offering to buy out the shares owned by the other two. That offer used a formula rather than a dollar amount to determine what she would pay for the shares. For that reason, the trial court granted a motion to strike her notice.

Gingrich filed an interlocutory appeal, and the resulting 2005 Fifth District opinion established that a formula is a valid way to offer to buy stock under the Business Corporations Act. The case was sent back to trial court, but before the court could complete its bench trial, Midkiff and Freeman sold Gingrich their shares. Midkiff started her own practice in Maryville on the first day of 2007, bringing her staff from the Maryville Women’s Center. Later that January, the trial court determined how much Gingrich should pay for Midkiff’s shares. It also refused to enforce the covenant not to compete against Midkiff, as to work she had done at a local hospital. Shortly afterward, Gingrich filed the instant lawsuit, seeking to enforce the covenant not to compete as to both the hospital and Midkiff’s new office in Maryville. The trial court dismissed the case, saying the issue had already been decided, and Gingrich appealed to the Fifth District again.

According to the Record, the Fifth District reversed that trial court ruling in June. For the majority, Justice Wexstten wrote that Gingrich’s breach of contract claim had not been decided in the prior suit, which he said had to do with the valuation of the stock shares Gingrich was trying to purchase. The decision did not enforce the non-compete clause, and in fact, the justices specifically said they made no ruling as to whether the clause was reasonable. Instead, their ruling sends the case back down to the trial court for a decision.

Federal Lawsuit Asks Judge to Rule That Social Media Contact Violates Non-Compete Clause

October 27, 2010 | Peter S. Lubin and James V. DiTommaso

The U.S. District Court for Minnesota is hearing a test case for how restrictive covenants are affected by social media. Our Chicago restrictive covenant litigation lawyers were extremely interested to read about TEKSystems, Inc. v. Hammernick in a June 15 ComputerWorld article. According to the article, information technology staffing firm TEKSystems is suing a former employee who once helped recruit IT professionals for the company to place at other businesses. That former employee, Brelyn Hammernick, is accused of violating her non-solicitation, non-compete and non-disclosure agreements with TEKSystems through her use of the social media website LinkedIn. The company claims Hammernick violated her agreements by connecting with at least 20 TEKSystems contract employees, among other things. Other defendants are Horizontal Integration, Hammernick’s new company, and two colleagues who moved there from TEKSystems, Quinn VanGorden and Michael Hoolihan.

According to the federal complaint, Hammernick signed an agreement not to work for a competitor of TEKSystems for 18 months after leaving her job there and within a 50-mile radius of the company’s Edina, Minnesota office. The agreement also restricted her from recruiting employees and clients of TEKSystems for the same 18-month period, including people who had been contract employees for up to two years beforehand, and from revealing the company’s confidential information. The complaint accuses Hammernick of violating all three provisions after moving to Horizontal Integration, a direct competitor. In addition to connecting with former colleagues on LinkedIn, the company accuses her and her two colleagues of using their knowledge of TEKSystems’ clients to solicit them for Horizontal Integration and soliciting several contract employees to move to Horizontal Integration. TEKSystems asked for substantial financial damages as well as injunctions enforcing the restrictive covenants.

This case contains numerous more conventional restrictive covenant issues, but our Illinois non-compete litigation attorneys are also very interested in the novel issue of whether social media contact is in itself a violation of a non-solicitation clause. Without knowing more about the situation, we suspect that the district court will not accept this argument. In itself, connecting with someone on LinkedIn or another social networking site does nothing more than give both people access to each other’s contact information. This could be considered an “electronic Rolodex,” and no court would uphold a non-solicitation agreement that requires an ex-employee to discard her Rolodex. In fact, the language of the agreement, as laid out in the complaint, prohibits contact with TEKSystems employees only for the purpose of soliciting them away from the company. For this reason, we think TEKSystems will have an uphill battle on that claim.

NRP Reports: “HP Sues Ex-CEO Hurd Over Oracle’s Job Offer”

September 11, 2010 | Peter S. Lubin and James V. DiTommaso

HP Sues Ex-CEO Hurd Over Oracle’s Job Offer

by Richard Gonzales

NPR reports:

The Wall Street Journal Reports: H-P Sues to Stop Ex-Chief’s Job

September 11, 2010 | Peter S. Lubin and James V. DiTommaso

H-P Sues to Stop Ex-Chief’s Job
By ROBERT A. GUTH, BEN WORTHEN And JOANN S. LUBLIN .

The Wall Street Jornal Reports:

Hewlett-Packard Co. sued to block its former chief executive from joining rival Oracle Corp. as a senior executive, alleging Mark Hurd’s hiring breaches his exit agreement and will inevitably lead to a transfer of its trade secrets to a competitor. …
While it isn’t unusual for companies to sue departing executives to enforce exit agreements, H-P’s suit Tuesday against Mr. Hurd is atypical in that former CEOs are rarely subject to such legal actions, experts said.

H-P’s suit focuses on a confidentiality agreement, which restricts Mr. Hurd from disclosing sensitive information about his former employer.

Clothing Retailer Sues Competitor and Former Employees Alleging They Stole Secret Designs

August 26, 2010 | Peter S. Lubin and James V. DiTommaso

As Illinois trade secrets litigation attorneys, we were interested to see a trade secrets lawsuit arise out of the time-sensitive and competitive world of women’s fashion. As the Naples Daily News reported in July, Florida clothing company Chico’s FAS Inc. has sued competitor Cache Inc. and two former employees who moved to Cache, Rabia Farhang and Christine Board. Chico’s alleges that Farhang and Board shared designs from Chico’s White House/Black Market line with Cache, resulting in nearly identical spring and summer collections from the two brands. The lawsuit’s complaint includes exhibits of pictures of both collections. It accuses the women of breach of their nondisclosure agreements and legal duties, and Cache of inducing them to breach those agreements, and all defendants of tortious interference with contractual relations, misappropriation of trade secrets, unfair competition, theft, unjust enrichment and civil conspiracy.

According to the complaint in the case (PDF), which was filed in New York state court, Cache has not been financially successful in the past four or five years, during which time Chico’s White House/Black Market line has done well. Chico’s alleges that Cache tried to fix this by inducing Farhang and Board to leave Chico’s in the fall of 2009, taking their knowledge of design plans for 2010 clothing lines along with other trade secrets and confidential information. At Chico’s, Farhang and Board both participated in the designs of the 2010 lines, Farhang as a senior officer. Using the allegedly stolen designs, the complaint says, Cache saw an increase in sales in spring of 2010, and Chico’s alleges that Cache will use stolen designs in its fall line as well. Because of this, it requested preliminary and permanent injunctions stopping Cache from selling clothes from its spring, summer and fall lines, as well as a recall of the spring and summer lines. It also asked for financial damages and court orders protecting its trade secrets and confidential information.

Our Chicago business emergency lawyers believe this case is a good example of a situation in which swift action is necessary. If the allegations by Chico’s are true, its intellectual property and brand have already been somewhat diluted by Cache’s use of very similar designs in its spring and summer lines. This would be ongoing damage to the company that includes difficult-to-measure non-financial harm to its identity and customer loyalty, as well as actual financial damages from infringement. Furthermore, the tight schedules of fashion and retail companies mean that they bring out their fall lines in mid-summer, which means the court must take quick action on the July 29 lawsuit to stop the infringing on the fall line. This also means that Cache’s fiscal health could be in serious trouble if the count chooses to grant the injunction against the fall line and the recall order for the spring and summer lines. For both sides, this claim represents a legal emergency requiring quick action to protect their business.