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.
The court further found that that there was not currently enough evidence to determine whether the NDA’s terms were reasonable and necessary.
A restrictive covenant is enforceable if the terms of the agreement are “reasonable and necessary to protect a legitimate business interest of the employer,” a determination that turns on the facts and circumstances of each case. A restrictive covenant’s reasonableness is measured by its hardship on the employee, its affect upon the general public and the reasonableness of the time, territory and activity restrictions.
Although Defendants alleged a legitimate business interest in trade secrets and confidential information, the court held that to judge the reasonableness of the NDA’s time restrictions and geographic scope “requires the Court to make a fact-based determination that is not appropriate at the motion to dismiss stage.” That determination includes an assessment of whether Defendants in fact have a protectable interest, as well as the hardship to Plaintiffs, the hardship to the public and whether Defendants need a non-solicitation clause to protect confidential information even though the NDA already includes a nondisclosure clause. As a result, the court denied the motion to allow for further development of the factual record.
Noncompete agreements in both employment and business sale contexts often raise complex issues for all parties involved. At Lubin Austermuehle, our Chicago business attorneys represent businesses in a wide variety of matters, including noncompete agreement litigation. Our Chicago litigation lawyers can help stop litigation before it starts by reviewing contracts to look for covenants and clauses that could create problems later and we can represent businesses – both plaintiffs and defendants – in the event that a noncompete issue later arises. You can contact us for a free consultation through our internet site or by calling our toll free number (833) 306-4933.
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