Non-Compete Agreement / Covenant Not to Compete

Uber Files Alleged Trade Secret Theft Case Against Former Executive

January 12, 2015 | Peter S. Lubin and Patrick Austermuehle

Non-compete agreements are are commonly included in employment contracts, especially contracts for high-level executives. These agreements often require the employee to promise not to work for a competitor for a certain amount of time after leaving the company’s employment. They also usually require the employees to promise to protect the company’s trade secrets. Companies tend to be even more protective of their trade secrets when they are involved in a heated competition with another company.

One such company that has been kept on its toes is Lyft, a San Francisco-based ride-hailing company that allows customers to order a personal car using an app on their smartphone. Lyft has been in stiff competition with Uber, which provides similar products and services. The competition got tighter when Travis VanderZanden, Lyft’s former chief operation officer, left his position at the company, then went to work for Uber a mere two months later. Continue reading ›

“Non-Compete Agreements: Are they Iron Clad in Illinois?” — Our Chicago Non-Compete Agreement Attorneys Handle Defending and Prosecuting Covenant Not To Compete Lawsuits

January 2, 2015 | Peter S. Lubin and Patrick Austermuehle

Covenant Not To Compete Enforceable or Not — Factors to Consider?: Reliable Fire Equip. Co. v. Arredondo (2011 IL 111871).

“Non-Compete Agreements: Are they Iron Clad?”

In Illinois, the standard for enforcing non-compete agreements has changed in recent years. Prior to a landmark decision in 2011, Illinois courts generally enforced non-competes that were sufficiently limited in scope, duration and geography, as long as the employer seeking to enforce the agreement could show that enforcement was necessary to protect a legitimate business interest. Courts generally found that there were only two legitimate business interests in need of protection: confidential information, and near-permanent customer relationships. Continue reading ›

Can You Leave a Company and Take Employees With You? – Chicago non-compete agreement lawyers near Oak Brook and Naperville

November 14, 2014 | Peter S. Lubin and Patrick Austermuehle

“Can you leave a company, and take employees with you?”

In InsureOne, the Illinois Appellate Court for the First District upheld the trial court’s award of $7,670,210 in damages for alleged violations of non-compete and non-solicitation agreements.

Plaintiffs InsureOne Independent Insurance Agency, American Agencies General Agency, Inc., and Affirmative Insurance Holdings, Inc. purchased the assets of several insurance companies owned or controlled by James P. Hallberg, who covenanted not to compete with the Plaintiffs or to solicit any of their employees or customers for a period of time to be determined based on the circumstances of his termination. Hallberg was to run the company as its president, subject to the non-compete and non-solicitation covenants. The Plaintiffs retained several of Hallberg’s former employees, including his nephew, who also signed a covenant not to compete with, or solicit employees of the company for twelve months following termination. Continue reading ›

Missouri Appeals Court Holds that Employee Who Quits Rather Than Sign a Non-Compete Agreement Can Collect Unemployment

October 25, 2014 | Peter S. Lubin and Patrick Austermuehle

Unemployment benefits were designed to help those who lose their job through no fault of their own. As a result, most employers don’t expect former workers who resign their position to receive unemployment benefits, but a Missouri appellate court recently ruled that, in some instances, an employee who resigns can do just that.

The case that prompted the ruling was David Darr, a former life-insurance salesperson for Robertsville Marketing Group, based in Wentzville, MO. A few months after Darr began working for Robertsville, the company sent out a notice to all of the employees, telling them they would be required to sign a non-compete agreement as a condition of continued employment with the company. Continue reading ›

Big Companies are Allegedly Requiring Some Hourly Workers to Sign Non-Compete Agreements — Our Chicago Non-Compete Agreement Attorneys Prosecute and Defend Covenant Not to Compete Lawsuits

October 17, 2014 | Peter S. Lubin and Patrick Austermuehle

Non-compete agreements have been in use in the top tiers of American companies for several years now. The idea is to protect the interests of the company by making sure that executives or other employees with trade secrets and confidential information don’t take those secrets to a competitor, where they can be used against the company. Non-compete agreements began in the big tech companies, where keeping the company’s latest developments was of the utmost importance in order for the company to be able to effectively compete in the marketplace.

Non-compete agreements impose restrictions on when and where an employee can work after leaving the company. Usually, the employee cannot go to work for a direct competitor within a certain reasonable geographical radius of the company and within a certain reasonable time frame after leaving the company. This means that an employee is generally allowed to go work for a company’s competitor, only if the competitor is located in a different city or state from the company. Often, employees can work for whomever they want wherever they want within six months to a year after leaving the company. The lag time is usually sufficient to render useless any trade secrets the employee might have.

For executives or employees who are working with trade secrets, helping to develop new products for the company, etc., it may makes sense that the company would want to protect their investment by preventing those employees from going to work for a competitor. It does not make sense for companies to require hourly employees making sandwiches to sign a non-compete agreement, yet that is allegedly the case for certain Jimmy John’s employees.

It is hard to believe that the people making sandwiches, on the bottom rung of the proverbial ladder, have any valuable trade secrets that Jimmy John’s would not want shared. Other cases of hourly, minimum-wage employees have been reported, but it is rare for a company to enforce the non-compete agreements of these employees. Jimmy John’s, on the other hand, according to the New York Times has allegedly taken steps to actively restrict the alternate employment options of its sandwich makers. The Time’s blog does say that there is no reported case of Jimmy John’s actually seeking to enforce this provision.

Non-Compete Agreements May Stifle Competition; Businesses Argue to the Contrary, They Protect Trade Secrets and Investment

July 10, 2014 | Peter S. Lubin and Patrick Austermuehle

Non-compete clauses have been included in employee contracts for decades now. These provisions ensure that employees do not walk off with valuable trade secrets or client lists and take them to a competitor. Putting such a clause in employee contracts makes sense, but only up to a point. A standards noncompete contract will prohibit an employee from working for a competitor within a certain geographical radius for a specified period of time. Six months to a year is pretty standard, but that time limit has been growing lately.

Non-compete agreements were first used largely by technology companies who need to guard their developments very closely. If an employee left to work for a competitor and took everything they knew about their former employer with them, the new employer would have an unfair competitive advantage. It therefore makes sense that companies would try to protect their business interests by preventing employees from going directly to work for a competitor.

The problem that employees have been facing lately is that non-compete agreements have spread beyond just those working in tech and sales. Now, everyone from camp counselors to hair stylists are being required to sign non-compete clauses. Hourly workers in these kinds of positions cannot afford to give up a year or two of work to wait for their non-compete agreement to expire and they have started to speak out against the restrictions that their employers are placing on them.

California and North Dakota already ban non-compete agreements. Now it looks like Massachusetts may be joining their ranks. Governor Deval Patrick has proposed legislation banning noncompete agreements except in a few situations. A committee in the Massachusetts House has already passed a bill incorporating the governor’s proposals, but the new law isn’t in the clear yet and supports and opponents of the bill are fighting furiously over the new measures it would impose. Continue reading ›

Court Rejects Claims that Compaq Violated Confidentiality Agreement

December 12, 2013 | Peter S. Lubin and Patrick Austermuehle

Non-disclosure agreements exist so that companies can safely have discussions about developing ideas of technology without worrying about one company stealing the trade secrets of another. However, the language involved in the non-disclosure agreement is crucial. The line between what information is confidential and what information is not confidential must be clearly defined. When a company lays out the parameters for confidential information in their non-disclosure agreement, it is advisable that the company then be sure to work within the parameters which they have set.

One company that ran into trouble with the definition of confidential information as laid out in their own non-disclosure agreement is Convolve. Beginning in the late 1990’s, Convolve and Compaq Computers began doing business together using non-disclosure agreements. Those agreements specified that confidential information was to be defined as any information which was marked as confidential at the time that it was disclosed. If it was unmarked, or if the information was disclosed in a presentation, then it had to be designated as confidential in a written memorandum following the disclosure.

In late 1999, Convolve made certain presentations to Compaq regarding computer hard-drive technology, but the two companies never reached a licensing agreement for the technology. When Company then went on to use some of the information which they had gleaned from those presentations, Convolve sued Compaq for breach of contract. However, the presentations at issue were never followed by written memos to confirm that the information presented was confidential. The lower court ruled that, without the necessary memos, as laid out in the non-disclosure agreement, the agreement did not apply to any information which was disclosed in those presentations. The court decided that the non-disclosure agreements “do not appear reasonably susceptible to the interpretation Convolve urges.”

Convolve appealed the decision, arguing that, despite the lack of written memos, Compaq had understood that all of their disclosures were confidential. The appellate court rejected this argument, pointing out that it contradicted the terms of the non-disclosure agreement.
Convolve then tried to argue that, regardless of the non-disclosure agreement, state confidentiality law still applied. The appellate court also rejected that argument, stating that a non-disclosure agreement replaced any implied duty of confidentiality which might have existed between the two companies under the law. According to the Court, Convolve could not force their business partners to abide by one set of rules as laid out in their non-disclosure agreement while simultaneously forcing them to abide by a different set of rules under the law. The Court stated that “One party should not be able to circumvent its contractual obligations or impose new ones over the other via some implied duty of confidentiality.”

The Court therefore ruled in favor of Compaq, having decided that “Convolve did not follow the procedures set forth in the NDA to protect the shared information, so no duty ever arose to maintain secrecy of that information.”

The lesson learned here is that, if you are going to specifically define confidential information in your non-disclosure agreement, you should be careful to abide by all the terms of your own contract if you wish for your information to remain safe.

Alternatives to Non-Compete Agreements Become Popular With Employers

December 11, 2013 | Peter S. Lubin and Patrick Austermuehle

As this blog has discussed, non-compete agreements have become increasingly prevalent in recent years. However, they have also grown in severity in some companies, such that they frequently impose undue hardship on an employee’s search for future employment. As a result, courts in some states have grown increasingly unfavorable towards non-compete agreements. California courts, for example, are hard pressed to enforce any non-compete agreements.

If an employee breaches a non-compete agreement, the former employer can take the employee to court for breach of contract, but these lawsuits can be long and costly. While employees often rely on the allegation that the non-compete agreement imposed undue hardship, many courts rely on a three-pronged system to determine the validity of a non-compete agreement, of which undue hardship is only one consideration.

Completing the test of validity therefore requires the court to consider all the facts of the case. This can lead to very lengthy discovery, making the lawsuit even more costly. After all that, there is never a guarantee that a court will rule in the company’s favor, and even if they do, a customer lost is unlikely to come back.

For these reasons, alternatives to non-compete agreements have been proposed, although they still have yet to achieve the same popularity in American businesses. The first alternative is garden leave contracts. In these agreements, the employee agrees to give the employer notice of a certain amount of time before leaving the company. This is what is known as the garden leave period, but the employer continues the pay the employee a salary during this period. Garden leave contracts have two advantages over non-compete agreements:

1) If an employee fails to abide by the agreement it would not only prove breach of contract but also break the common law of duty of loyalty. In this case, an employer would not only be able to collect on salary paid during this period, but might be able to recover punitive damages as well.

2) It undercuts one of the main defenses that employees use when they breach their non-compete agreements: undue hardship. When an employee is still receiving a salary, undue hardship becomes significantly more difficult to prove.

As with non-compete agreements, the length of the garden leave period must be reasonable. Also, while it might be tempting for employers to reduce garden leave pay to a percentage of the employee’s normal salary, such a reduction risks inviting a court to apply higher scrutiny to the clause, which leads to the possibility of the court dismissing the agreement as invalid.

Another option is to replace the non-compete agreement with a safety net payment. Safety net payments are similar to garden leave agreements with the main difference of applying after the employee and employer have broken off all relations with one another. Once payment is made, the employee agrees to refrain from certain competitive actions, such as contacting specified customers. In this case, the safety net payment does the same thing as the garden leave payment does as far as ensuring that an employee cannot claim that the contract imposes undue hardship in their search for new employment.

Some companies have chosen to make payments like this staggered over a certain period of time, such as six months or one year. If the employee breaches the contract, the employer can then stop future installments of the safety net pay. However, employers must be careful to specify in the contract that a breach on the part of the employee will result in termination of all future payments. Otherwise, the cessation of installments could result in the employer getting taken to court for breach of contract.

The third and final alternative to non-compete agreements is client purchase agreements. These agreements do not expressly prohibit competition, but they do enact punishment in the event that the competition happens. In these arrangements, an employee agrees to pay the employer if she chooses to participate in certain competitive behaviors, such as by working with specified customers.

Overly Broad Non-Compete Agreements are Not Enforceable

December 4, 2013 | Peter S. Lubin and Patrick Austermuehle

As the popularity of covenants not to compete increases, the competitive practices which are prohibited by those agreements also seem to grow. However, there are laws in place which ensure that covenants not to compete that are deemed too stringent cannot be upheld in a court of law. One of the most common limitations on covenants not to compete is the one which states that the agreement must be broad enough only to cover the company’s legitimate business interests and no more.

Another very common limitation that courts consider is whether or not the agreement poses undue hardship on an employee. When cases of disputed covenants not to compete reach a court, it is the court’s duty to balance the needs of the business to protect their legitimate business interests with the needs of the employee to find work. If a covenant not to compete is too broad, it may make it inordinately difficult for an employee to find any work at all after her employment with the company comes to an end.

One such case in which a court found that the covenant not to compete was overly broad is the case of Orca Communications Unlimited LLC v. Ann J. Noder et al. In this case, Orca Communications, a public relations firm located in Arizona, hired Noder to be its President. Prior to taking this job, Noder had had no experience with public relations. She learned everything about the business while working for Orca.

Noder signed a Confidentiality, Customer and Employee Non-Solicitation, and Non-Competition Agreement which prevented her from advertising, or soliciting or providing conflicting services for any company which competes with Orca. After Noder left Orca to start her own public relations firm, Orca sued her for breach of contract.

The Agreement further prevented Noder from convincing any former or current or prospective customer of Orca to end its relationship with Orca. This was one of the main areas of Agreement with which the court took issue. To prevent Noder from enticing away from Orca a current Orca customer is to protect Orca’s legitimate business interests. However, to prevent Noder from doing so with companies which have never had any business dealings with Orca, the court found to be overly broad and imposed undue hardship on Noder in her efforts to find gainful employment after her time at Orca.
The Agreement also contained a confidentiality provision which prohibited Noder from using or disclosing any of Orca’s confidential information without Orca’s consent. “Confidential Information” was defined as knowledge or information which is not generally known to the public or to the public relations industry or was “readily accessible to the public in a written publication.” However, the Agreement did cover information which was only available through “substantial searching of published literature” or that had been “pieced together” from a number of different publications and sources.

This provision of the Agreement the court also found to be too broad. To protect company trade secrets is well within the limitations of protecting a company’s legitimate business interests. However, even if one has to conduct substantial research to gain knowledge, that knowledge is still considered to be in the public domain and therefore cannot be covered under a confidentiality agreement.

The trial court found that the Agreement was overly broad and dismissed the case. Orca appealed and the Arizona Court of Appeals upheld the ruling of the lower court and dismissed the case.

Covenants Not to Compete Used to Tie College Football Coaches to a School

October 26, 2013 | Peter S. Lubin and Patrick Austermuehle

As of late, employers have been using non-compete provisions in their contracts with their employees with increasing frequency. A non-compete provision is part of a contract which prohibits a worker from going to work for a competitor of the employer after they leave the company’s employment. These provisions usually include a geographic radius and a time frame after termination of employment. Such provisions were initially used most often in tech companies, such as Apple and Google, who were afraid of employees taking trade secrets to their competitors. However, non-compete provisions have spread throughout the job market to include more and more positions in more and more companies.

Most recently, a college football coach, Bret Bielma, signed an employment contract with the University of Arkansas which included a Covenant Not to Compete. Having had a long and very successful career as the football coach at the University of Wisconsin, many people in the industry were surprised to see Bielma leave Wisconsin for Arkansas. However, college sports are becoming increasingly similar to their professional counterparts in the way that they compete for coaches and athletes. No doubt, the multi-million dollar contract that Arkansas offered Bielma played a role in his decision to change employers.

What was unusual about Bielma’s contract with the University of Arkansas was the Covenant Not to Compete which was included. It states that Bielma is not to coach another football team in the Southeastern Conference (SEC), in which Arkansas competes. The time limit on the non-compete is only as long as the coach’s contract with the University of Arkansas lasts: from December 4, 2012 to December 31, 2018. After that date, Bielma is free to coach any football team that he wants.

The contract points out that the University of Arkansas has a vested interest in Bielma’s coaching and that its legitimate business interests would be in jeopardy without this provision in Bielma’s contract. The agreement states, “The parties … agree that the competitiveness and success of the University’s football program affects the overall financial health and welfare of the Athletic Department and that the University maintains a vested interest in sustaining and protecting the well-being of its football program”. The contract further states that, “Coach understands and agrees that without such protection, the University’s interests would be irreparably harmed.”

The non-compete provision also gives Bielma relief from its restrictions in the event that his contract is prematurely terminated. According to the contract, “This covenant not to compete, however, shall not apply if the University exercises its right to terminate the Agreement for convenience or if the Coach terminates this Agreement for cause based upon the University’s material breach of this Agreement.”

The inclusion of a covenant not to compete illustrates the further broadening of non-compete contracts into a variety of industries. The University of Arkansas, like many other institutions, is trying to protect the substantial investment it has made in its football coach. This non-compete agreement provides the University of Alabama with preventive measures from Bielma abandoning them to coach a competing football team, as well as substantial leverage against any other university in the SEC that might want to lure Bielma away from Arkansas.