Breach of Contract

Improperly Canceled Auto Insurance Policy Means Insurer Has Duty to Defend Driver in Accident, Appeals Court Rules

November 16, 2009 | Peter S. Lubin, Patrick Austermuehle and James V. DiTommaso

In an unusual Illinois insurance fraud lawsuit, the First District Court of Appeal has ruled that two insureds are entitled to attorney fees, sanctions and other relief under section 155 of the Illinois Insurance Code. Siwek v. White, No. 1-07-2600 (Ill. 1st Feb. 27, 2009) pits drivers Christine Siweck and Jerrold Erickson against their former auto insurer, which the court found improperly canceled their insurance policy.

Siwek was in an auto accident while using Erickson’s vehicle in the summer of 2003. Erickson was insured by American Access Casualty Company, with Siweck on the policy as a co-operator. They notified the state of Illinois of the accident and named American as their insurer, but American told the state in September of that year that the policy had been canceled in May of that year. This led IDOT to certify both Siweck and Erickson as drivers who had been involved in an accident without auto insurance. At a hearing, Erickson successfully defended his license. Siweck testified at the same hearing that she had no notice of cancellation and presented paperwork showing that American had issued her a new declaration of coverage on the day after the supposed cancellation.

The state suspended Siweck’s driver’s license nonetheless. Siweck and Erickson sued for administrative review of the decision to suspend Siweck’s license and declaratory judgments against American. They sought a declaration that their policy was improperly canceled, meaning Siweck was insured at the time of the accident.

Scope of Injunctions Enforcing Restrictive Employment Covenants Must Be Clear, Fourth District Decides

November 13, 2009 | Peter S. Lubin, Patrick Austermuehle and James V. DiTommaso

Our Illinois noncompete clause attorneys recently noted an important case addressing the standards for a preliminary injunction in Illinois lawsuits over covenants not to compete. In Lifetec, Inc. v. Edwards, No. 4-07-0300 (Ill. 4th Nov. 6, 2007), Lifetec sued former salesman Peter Edwards for breach of three restrictive covenants in his employment contract. It also sued his wife, Carol Edwards, and new employer, Patterson Medical Supply Inc., for tortious interference with the contract. Trial court granted Lifetec a preliminary injunction, and Edwards filed the instant appeal.

Lifetec sells medical devices and products. When Edwards began working there as a salesman, he signed a contract agreeing not to:

Compete with Lifetec, or sell or lease the products he had been assigned during the last 18 months of his employment, or competing products, within the territory assigned to him in the last 18 months of his employment.
Directly or indirectly solicit purchase or lease of the product or competing products within the same territory.
Work as a distributor or sales representative for any manufacturer that was a client of Lifetec, or for a competitor that also handles the client’s products, within the last 12 months.

The restrictive covenant applied for 24 months after the employment agreement was terminated.

Edwards left Lifetec for Patterson, a larger competitor, after 10 years. According to the opinion, he knew the move could cause Lifetec to sue and gave Patterson a copy of the agreement, but Patterson said it would take care of him in any lawsuit. Several months later, he admitted to a former colleague that he was working for Patterson. Months later, Lifetec sued him for breach of contract and requested a preliminary injunction. At an evidentiary hearing, evidence was introduced that Edwards had solicited Lifetec customers, but he said all Lifetec customers were also Patterson customers because the bulk of Patterson’s business was from national contracts. On the basis of the evidence at this hearing, the trial court granted a preliminary injunction stopping Edwards from violating the contract.

Edwards appealed, asking only for a decision on whether there was enough evidence to support the granting of the injunction. The appeals court said there was. The question, the court wrote, was whether Edwards had used protectable confidential information gained at Lifetec for his own gain. Lifetec contended that its “open quotes” to buyers constituted protectable information, although not all open quotes necessarily resulted in sales. The court took it one step further, saying the way those quotes were calculated was the real confidential information, as the quotes themselves were not secret once submitted to customers. Edwards’ knowledge of the reasoning behind the bids could give Patterson an advantage in the competitive medical supply industry. The defendants’ arguments that Lifetec should have alleged that Edwards misappropriated its trade secrets also fail, the court wrote, since Lifetec is making no such claim. All of this is sufficient to raise fair questions of fact, the court said, so an injunction was proper until the merits of the case could be decided.

A special concurrence filed by Presiding Justice Robert Steigmann agreed with the outcome, but said the court was incorrect to use the “legitimate business interests” test. This test is three decades old, the justice wrote, but the Illinois Supreme Court had never embraced it and in fact failed to use it at all in its 2006 decision in Mohanty v. St. John Heart Clinic, S.C., 225 Ill. 2d 52, 866 N.E.2d 85 (2006). Because of this, he wrote, the court should have stopped its analysis after finding that the time and territory restraints in the covenant were reasonable. The majority noted, however, that the parties made no argument on this basis.

First District Says Delaware Law Controls Dispute Over Returning Overpayments From Trust Fund

November 11, 2009 | Peter S. Lubin, Patrick Austermuehle and James V. DiTommaso

As Illinois limited partnership litigation attorneys, we were pleased to note a recent ruling clearing up a potential conflict between Illinois and Delaware limited partnership law. Delaware law time-bars claims in a limited partnership dispute even though Illinois law typically controls statute of limitation issues, the First District Court of Appeal ruled. Freeman v. Williamson, No. 1-07-2058 (Ill. 1st Dist. June 24, 2008). The case is a victory for members of the Freeman family, who are former investors in a fund set up as a Delaware limited partnership. The plaintiffs invested in the Lipper Fixed Income Fund in 1993 and withdrew in 1999.

In 2002, the fund’s general partner realized that a former manager had overstated its returns, leading to overpayments to partners. It liquidated the partnership and appointed Richard Williamson as the trustee of the fund. In 2006, Williamson demanded that the Freemans return those overpayments. In response, the Freemans filed a lawsuit in Illinois, asking for a declaratory judgment that they were not obligated to repay the overpayments because Delaware law time-barred any claim by Williamson. They also argued that the partnership agreement for the fund specifically said partners had no obligation to restore a negative balance in the fund’s capital account. Williamson countersued for unjust enrichment, conversion and money had and received.

The trial court granted the declaratory judgment and dismissed all of Williamson’s claims with prejudice, all on summary judgment. It agreed that the Delaware Revised Uniform Limited Partnership Act applied to both the partnership agreement and Williamson’s counterclaims, and that its three-year limit for bringing claims had already expired. Williamson appealed to the First District on all of the claims but conversion.

On appeal, the court started by noting that the sole issue at stake was whether the Delaware Act applies to the dispute. Williamson argued that it did not, but the First District found this unpersuasive. The partnership agreement expressly incorporates a relevant section of the Delaware Act, the court said, and also explicitly says the same law governs the partnership aspects of the agreement. Under the Delaware Act, partners are liable for knowingly accepting payments that make the partnership unable to meet its obligations to creditors — but if they innocently accept such payments, they are not liable. Furthermore, the law applies a three-year limit to any liability “under this chapter or other applicable law” for receiving such payments, regardless of whether it was received knowingly. Thus, the court said, the three-year period applies as long as the time limitation in the Delaware Act applies to the payments the plaintiffs received.

The court rejected Williamson’s argument that Illinois law, which would not time-bar his claims, applies because the relevant part of the Delaware Act is a statute of limitations. Using Belleville Toyota, Inc. v. Toyota Motor Sales, U.S.A., Inc., 199 Ill. 2d 325, 770 N.E.2d 177 (2002), the trustee argued that the Illinois law applies when a statute of limitations is at issue because a statute of limitations is procedural rather than substantive. The plaintiffs argued that the provision is actually a statute of repose, a substantive issue that places the matter under Delaware law through the limited partnership agreement. The court agreed, saying that the Delaware Act extinguishes liability regardless of whether plaintiffs know their cause of action, making it an issue of substantive rights.

Finally, the court rejected Williamson’s argument that the partnership agreement does not apply. It agreed that the plaintiffs are also wrong to argue that the sections on partners’ obligations apply to them, because they are former partners and the agreement clearly differs between former and current partners. However, the court said there was no question that the distributions the plaintiffs received were made pursuant to the terms of the agreement. And again, the agreement specifically says the Delaware Act applies. Thus, First District said the Delaware Act applies even though the plaintiffs are now former partners. It affirmed the summary judgment rulings by the trial court.

First District Rules Plaintiff Not Entitled to Punitives in Noncompete Clause Lawsuit

November 6, 2009 | Peter S. Lubin, Patrick Austermuehle and James V. DiTommaso

An interesting case involving enforcement of an employment contract’s restrictive covenant was recently noted by our Illinois covenant not to compete attorneys. Cambridge Engineering Inc. v. Mercury Partners 90 BI, Inc., No. 1-06-0798 (Ill. 1st Dec. 7, 2007). The suit stems from an earlier lawsuit concluded in Missouri in 2001, in which Cambridge Engineering Inc. successfully sued former employee Gregory Degar and his new employer, Brucker Company (legally Mercury Partners 90 BI), to enforce a covenant not to compete signed by Degar. Cambridge then filed this suit against Brucker to recover punitive damages and attorney fees. Cambridge and Brucker compete in the residential and business heating market in the Midwest.

Degar worked at Cambridge as a sales representative starting in 1996, and signed a contract including noncompete and nonsolicitation covenants. The contract restricted him from competing in any way with Cambridge, or soliciting its employees or customers, anywhere in the United States or Canada, for 24 months after leaving. He was terminated in 2001 and was hired by Brucker about a month later as an inside support person rather than a salesperson. Nonetheless, he admitted to using customer contacts developed at Cambridge. Cambridge sued Deger, but not Brucker, in St. Louis and was granted a permanent injunction enforcing the noncompete clause. (At that time, Brucker fired Degar.)

Cambridge then sued Brucker in Illinois for compensatory and punitive damages, for tortious interference with contract. The parties stipulated to limit compensatory damages to attorney fees but said nothing about the punitive damages. The trial court directed a verdict against Cambridge on punitive damages, saying Cambridge hadn’t proven that Brucker’s actions were so outrageous that punitive damages were appropriate. At trial, the president of Cambridge testified that the company believed the contract would prevent Degar from holding any job, even a janitorial position, with any competitor, including in areas where Cambridge does not do business. The jury found for Cambridge on compensatory damages in the amount of $50,000, but Brucker successfully moved for judgment notwithstanding the verdict on the basis that the noncompetition clause was overly broad and unenforceable. Cambridge appealed both judgments against it.

The analysis by the First started by noting that the dispute centered around whether the covenant not to compete was unenforceable under Illinois law. Cambridge argued that the covenant was reasonable on both geographic and activity (despite testimony disputing this), and that the trial court improperly excluded testimony that would show this reasonableness. The court disagreed on all counts. The geographic scope was unreasonable, the court wrote, because it restricted Degar from taking a job with a competitor anywhere in Canada even though Cambridge only had a small amount of business in Canada. This restriction did nothing to protect Cambridge from competitors gaining unfair advantage at its expense, the court wrote. And the evidence Cambridge said was incorrectly excluded would not have changed the court’s decision. Thus, the scope of the covenant was indeed unreasonable.

It next examined the question of the activities prohibited by the noncompete clause, which turned on the interpretation of the contract. However, the court found that the plain language of the contract supports Brucker’s assertion that the contract was overly broad: that Degar may not “engage in any activity for or on behalf of Employer’s competitors,” a phrase that could theoretically bar Degar from taking a job filing papers for a competitor. Furthermore, testimony from Cambridge’s president at trial confirmed this interpretation; he “agreed with counsel’s contention that the St. Louis action was brought to prevent Degar from working for a competitor in any capacity.” Thus, the clause was overly broad and not reasonable, and the trial court’s decision on that issue was also correct.

Promissory Note Holders May Sue Estate to Collect on Debts Due After Death, Appeals Court Rules

November 4, 2009 | Peter S. Lubin, Patrick Austermuehle and James V. DiTommaso

Our Illinois partnership dispute attorneys noted with interest a recent case addressing the obligations of deceased partners’ estates to honor a debt not yet due before the death. In In re Estate of Gallagher, No. 1-07-1744 (Ill. 1st Dist. June 30, 2008), the First District Court of Appeal ruled that a trial court should not have dismissed the creditors’ claim against the estate of Robert E. Gallagher. Gallagher was managing partner for several companies — referred to collectively as G&H Entities in the opinion — and the petitioners are former partners, shareholders and members of G&H Entities.

Gallagher issued promissory notes to the petitioners are part of a settlement of underlying litigation, in which he agreed to buy out their share of the companies. As part of this settlement, petitioners released Gallagher from all liability except “any claims arising out of or related to the rights and obligations reflected in this Agreement or documents created in connection with it.” Gallagher died May 13, 2005, before the promissory notes were fully paid. His estate continued to make payments, which the petitioners accepted. However, they also filed suit against the estate to get the balance of the payments owed. The trial court dismissed their claim, believing it was barred by Sec. 2-619 of the Illinois Code of Civil Procedure.

On appeal, Gallagher’s estate argued that the promissory notes were not yet due and thus, the estate had not yet defaulted on them. That makes the claims contingent, it said, which violates the rule of law that claims not yet due cannot be contingent. However, the First District quickly dismissed that argument. It pointed out that In re Estate of Mackey, 139 Ill. App. 3d 126, 128, 487 N.E.2d 81 (1985) held that a contingent claim depends on “the uncertain occurrence of a future event… which is not under the control of either party” That was not the case here, the court said — liability on the notes was not contingent on a future event.

The court moved on to considering whether Gallagher’s estate can be held liable on the claims. The petitioners argued that Illinois law makes Gallagher jointly liable for the companies’ debts as a partner in G&H Entities, which makes the estate liable. To address that, the court turned to the Illinois Supreme Court’s ruling in Sternberg Dredging Co. v. Estate of Sternberg, 10 Ill. 2d 328, 140 N.E.2d 125 (1957), a similar case except that the promissory notes were already due. In Sternberg, the state Supreme Court held that creditors may make their claims against deceased partners for debts owed by the partnership. This makes it clear, the First District said, that Gallagher’s estate can be held liable for the promissory notes. Furthermore, it said, Illinois partnership law backs it up by holding that the death of a partner dissolves the partnership, that dissolution does not discharge partners’ liability, and that a deceased partner’s individual property is liable for partnership obligations.

The appeals court then dismissed the estate’s claim that the release Gallagher and the petitioners signed took away Gallagher’s individual liability. As already noted, the court said, Illinois partnership law holds partners jointly liable for debts taken on by the partnership — so claims that Gallagher cannot be held individually liable are not valid. Furthermore, the court said, the release plainly carves out an exception for claims arising out of the promissory note agreement. It is undisputed that the instant claim arises out of that agreement, the court wrote, and thus Gallagher must be liable.

Finally, the court dismissed the estate’s argument that the petitioners impliedly discharged the debt when they accepted partial payment from the estate. It cited a 115-year-old case, Hayward v. Burke, 151 Ill. 121 (1894), in which a partner in a bank died before debts on a certificate of deposit came due. As in this case, the creditor accepted partial payments from the living partners’ new firm. The estate of the deceased partner argued that this impliedly agreed that the new firm was liable for the debt. The court disagreed, holding that the mere fact that a creditor accepted payments was not enough to absolve the deceased partner from his responsibilities.

The First District took its cue from Hayward in the instant case, holding that Gallagher’s estate was not released from liability just because the petitioners accepted partial payment. Thus, the court reversed the dismissal of the case and remanded it back to trial court for consideration of the reinstated claims.

Hardship to Former Employee Should Be Considered Outside Motion to Dismiss, First District Rules

October 30, 2009 | Peter S. Lubin, Patrick Austermuehle and James V. DiTommaso

A First District Court of Appeal ruling had an interesting lesson for our Chicago noncompete clause attorneys. In Baird and Warner Residential Sales Inc. v. Mazzone, No. 1-07-2179 (Aug. 15, 2008), the First ruled that a trial court needed more evidence in a dispute about a covenant not to compete before it could correctly grant a motion to dismiss. The case arose when Baird & Warner Residential Sales sued former employee Patricia Mazzone and her new employer, Midwest Realty Ventures (doing business as Prudential Preferred Properties). Both real estate companies have multiple branches and more than 1,000 employees in the Chicagoland area.

Mazzone was office manager for B&W’s Lincoln Park office for about 11 years before leaving for Prudential. During that time, she signed a contract that included a covenant not to solicit services from any B&W employees or independent contractors, or people who had left those jobs within the last six months, for up to a year after leaving. This contract contained a severability clause, and the “preface” to the contract specified that it applied “regarding the Lincoln Park office,” although the restrictive covenant referred to “Company.” In 2007, Mazzone resigned from her job and took another running Prudential’s Michigan Avenue office. About a month later, B&W sued for a temporary restraining order and injunction seeking to enforce the covenant and keep Mazzone and Prudential from soliciting B&W employees, alleging breach of contract by Mazzone, tortious interference with contract by Prudential, and tortious interference with prospective economic advantage by both parties.

After an injunction and expedited discovery, defendants moved to dismiss because the covenant was overly broad, alleging that it would keep any Prudential employee from soliciting any B&W employee or contractor from any office. B&W contended that the preface restricted the covenant to the Lincoln Park office and affirmatively stated that it did not seek to enforce it beyond that office. In the alternative, they argued that the severability clause should allow that portion to be separated from the rest of the agreement. The trial court granted the motion to dismiss, saying the contract’s plain language related to all of B&W’s offices. Plaintiffs appealed this ruling.

The appeals court started its opinion by considering B&W’s claim that the nonsolicitation contract was not improper under the law. It noted that motions to dismiss are not necessarily appropriate in fact-intensive situations like this one, since the rules limit courts to consideration of facts in the complaint. It then turned to the controversy over whether the contract applied to all offices or just the Lincoln Park office and found that there was insufficient evidence. The record does not show enough evidence to determine whether the contract, as written, is overly broad and poses an undue hardship on Mazzone, the court wrote, or negative effects on the public from the restraint of trade. It also disagreed that enforcing the contract would “render Mazzone unemployable,” since she would be free to solicit employees of non-B&W brokers, even within the limited one-year period specified. Thus, the trial court should not have dismissed it without hearing more evidence, the court wrote. It reversed and remanded the case for more proceedings.

Illinois Plaintiffs Can Recover Under Promissory Estoppel, Illinois Supreme Court Rules

October 26, 2009 | Peter S. Lubin, Patrick Austermuehle and James V. DiTommaso

Promissory estoppel is an affirmative cause of action in Illinois, the Illinois Supreme Court decided April 2. Newton Tractor Sales v. Kubota Tractor Corporation, Ill. Sup. Co. No. 106798, (April 2, 2009). In this Illinois business lawsuit, the court allowed plaintiff Newton Tractor Sales to continue its lawsuit against defendants Kubota Tractor Corporation and Michael Jacobson for allegedly reneging on a promise to make Newton an authorized dealer of Kubota farm equipment.

Newton, a farm equipment dealership in Fayette County, purchased competitor Vandalia Tractor & Equipment (VTE) in July of 2003. As a condition of that sale, the contract specified that the deal could be canceled if Newton did not get permission to sell several makes of equipment, including Kubota. Kubota asked Newton to apply to their local representative, defendant Michael Jacobson. Jacobson required VTE to first cancel its relationship with Kubota, which it agreed to do only if it was assured that Newton would be authorized to sell Kubota products. Jacobson said it would, and both dealerships relied on that statement in signing those papers. Newton further relied on it when it began selling and servicing Kubota products.’

Unfortunately, Kubota’s corporate office denied Newton’s application, as well as a later appeal for reconsideration. Newton sued Kubota for promissory estoppel, common-law fraud and negligent misrepresentation. A Fayette County court granted Kubota summary judgment on all three counts, and after an appeal, the appellate court affirmed that judgment. On the promissory estoppel count, both courts found that Illinois appellate decisions said promissory estoppel is not a recognized cause of action in Illinois. Newton appealed as to the promissory estoppel claim to the Illinois Supreme Court.

Appeals Court Upholds Injunction Enforcing Salesman’s Covenant Not to Compete

October 16, 2009 | Peter S. Lubin, Patrick Austermuehle and James V. DiTommaso

A recent decision by the Fourth District Court of Appeal caught the eyes of our Illinois non-compete agreement attorneys because it created a split with other Courts of Appeal that only the Illinois Supreme Court can resolve. In September, the Fourth ruled that a trial court was correct to grant a preliminary injunction to a company suing over a covenant not to compete. Sunbelt Rentals Inc. v. Neil N. Ehlers III and Midwest Aerials & Equipment, Inc., No. 4-09-0290 (Ill. 4th Sept. 23, 2009). Sunbelt sued former sales employee Neil Ehlers and his new employer, Midwest, alleging Ehlers violated restrictive covenants when he took the new job, and Midwest tortiously interfered with the agreement when it hired him.

Sunbelt sells and rents industrial equipment for business and individual use. Ehlers was a salesman there responsible for maintaining a customer base and relationships. When he took the job in 2003, he signed a contract agreeing that he would not, for a year after leaving the job, provide services or solicit business from customers that had used Sunbelt in the preceding 12 months, or customers with whom he had had “contact, responsibility or access to confidential information.” It also forbade him from joining or starting a business “substantially similar” to Sunbelt’s. Both clauses were restricted to designated geographic areas. The contract specifically said Sunbelt would be entitled to an injunction against any breach or threatened breach of the restrictive covenants.

Ehlers quit at Sunbelt in January of 2009 to join Midwest, which rents and sells aerial platforms to construction and industry. Four days after Ehlers left, Sunbelt sent him and Midwest a “cease and desist” letter alleging that Ehlers had breached his agreement. The next month, Sunbelt sued for breach of the covenant and tortuous interference and asked for a preliminary injunction to keep Ehlers from working for Midwest. Finding that the time and geographic scope of the agreement was reasonable, the trial court granted the injunction. Ehlers and Midwest appealed, arguing that Sunbelt had not shown that it had a legitimate business interest test first set forth in Nationwide Advertising Service, Inc. v. Kolar, 28 Ill. App. 3d 671, 673, 329 N.E.2d 300, 301-02 (1975), and thus failed to follow precedent.

The Fourth District disagreed. It started by examining the question of whether the “legitimate business interests” test was valid under Illinois Supreme Court precedent, particularly the recent Mohanty v. St. John Heart Clinic, S.C., 225 Ill. 2d 52, 866 N.E.2d 85 (2006). Although every Illinois appellate court has embraced the test, the Fourth District wrote, its analysis was flawed and the Illinois Supreme Court had never embraced it. In fact, in Mohanty and several other decisions, that court never actually used the test. Instead, the Fourth said, precedent says the validity of a covenant not to compete should be based only on time and territory restrictions in the contract.

The court next took up the argument by Ehlers that the restrictive covenant should be declared invalid because it is overly broad. Ehlers argued that the restrictions were so broad that he is precluded from working for any competitor in a Midwestern city, causing him undue hardship. The court interpreted the language of the contract differently; it said the restriction meant Ehlers could not work for a competitor within 50 miles of a branch of Sunbelt where Ehlers had worked, for a year after leaving. This is consistent with previous time-and-territory decisions on restrictive covenants, the court said. Thus, the contract was valid, meaning that the trial court’s decision to issue an injunction was not unreasonable.

First District Strikes Verdict Against Partners But Leaves Firm Liable in Partnership Dispute

August 9, 2009 | Peter S. Lubin, Patrick Austermuehle and James V. DiTommaso

In a partnership dispute and breach of fiduciary duty claim, the First District Court of Appeal has ruled that an attorney may sue his former firm, but not his former partners. In Kehoe v. Harrold, Wildman, Allen & Dixon, No. 1-07-0435 (Ill. 1st Dec. 23, 2008), Robert Kehoe, a former partner in the firm, sued after partners voted to change him from equity partner to nonequity partner. That is, they voted to end his part ownership of the firm and make him a salaried employee.

In 1995, after Kehoe had been a partner in Harrold Wildman for sixteen years, the firm renegotiated its financing with its bank, a deal that required every equity partner to execute a personal guaranty acceptable to the bank. Kehoe objected to the proposed guaranty and was unable to find a compromise, despite offers to draft his own version. The bank allowed the firm to take out its loan anyway. Later, the firm amended its loan agreement with the bank to eliminate the guaranty requirement but specify that partners without a guaranty are personally liable for the full amount of the debt. A few months later, partner Eisel approached Kehoe about his lack of a guaranty, and Kehoe replied that the amendment made it unnecessary.

The firm’s management committee then met and adopted a resolution allowing a two-thirds vote of partners to change the status of any partner who failed to execute a guaranty. Kehoe was present and objected, and rebuffed later advice to sign the guaranty. The partners later voted to remove his equity status per the resolution. Over the next two days, Kehoe moved his clients to a law firm of his own; he also requested his equity be paid out and was denied. He sued individual partners, claiming they breached their fiduciary duty by advocating the resolution, and the firm as a whole for breaching their obligation to pay his equity share.

Continued Employment for a Short Time Is Not Adequate Consideration for Post-Employment Restrictive Covenant, Appeals Court Decides

July 29, 2009 | Peter S. Lubin, Patrick Austermuehle and James V. DiTommaso

Lubin Austermuehle’s Illinois breach of contract litigation attorneys were pleased to see a split Illinois Third District Court of Appeal decision clarifying the circumstances under which a post-employment restrictive covenant is valid. The decision came in Brown & Brown v. Patrick Mudron, No. 03-CH-1363 (Ill. 3rd March 11, 2008), in which a Florida insurance company sued a former employee for breaching a restrictive covenant in her employment agreement.

Diane Gunderson, the employee, worked for a Joilet, Ill. company that was taken over by Brown & Brown. Brown asked Gunderson to sign a new employment agreement with them, and in fact, fired an employee who refused to do so. The agreement said Gunderson’s employment could be terminated any time for any reason and prohibited her from soliciting or servicing any of Brown’s employees for two years after ending her employment with the company. She signed the agreement, but resigned seven months later and went to work for a competitor. Brown sued, alleging that Gunderson had breached the restrictive covenant at her new job. The trial court granted summary judgment in favor of Gunderson because it couldn’t find any evidence that she had breached the covenant, and Brown appealed.

The majority started by disposing of a “choice of law” provision in the contract requiring all disputes to be resolved in Brown’s home state of Florida. Illinois law applies anyway, the court wrote, because Illinois has a greater interest in the case and moving it to Florida would be against Illinois public policy interests. International Surplus Lines Insurance Co. v. Pioneer Life Insurance Co. of Illinois , 209 Ill. App. 3d (1990).