Non-Compete Agreement / Covenant Not to Compete

Illinois Supreme Court Allows for More Type of Circumstances to Determine That Non-Compete Agreement is Enforceable in Reliable Fire Equipment Case — Our Chicago Business Lawyers Handle Non-Compete Lawsuits Throughout the Chicago Area

April 2, 2013 | Peter S. Lubin and Patrick Austermuehle

When determining the legitimacy of restrictive covenants, it is important for judges to consider all requirements of legitimacy and to do so consistently.

In a recent case, two former employees of Reliable Fire Equipment, a company which sells, installs, and services portable fire extinguishers and fire suppression and alarm systems, allegedly violated the non-competition agreement they had signed with their employer. Rene Garcia had been hired by Reliable in 1992 as a systems technician and was later promoted to sales. In 1998, Arnold Arredondo was hired by Reliable as a salesperson. Both signed non-competition agreements in which they promised not to compete with Reliable, either during their employment or for one year after ceasing to be employed by Reliable.

In early 2004, while still employed by Reliable, Arredondo began forming a company which would supply engineered fire alarm and related auxiliary systems throughout the Chicago area. The new company was christened High Rise Security Systems, LLC and Arredondo and Garcia signed an operating agreement for the company in August of that year.

That same month, Reliable’s founder and chairman heard of the two employees’ movements and confronted them. They both denied it. Arredondo resigned in September and, on October 1, Garcia was fired on suspicion of competition. In December, Reliable filed a complaint against Arredondo, Garcia, and High Rise, alleging that they had violated their non-competition agreements.

Arredondo and Garcia filed a counterclaim, alleging that the restrictive covenant was unenforceable. The court ruled that Reliable had failed to prove the existence of a legitimate business interest to justify the enforcement of the non-competition agreements and therefore ruled for Arredondo and Garcia on their counterclaim. The appellate court upheld that decision and Reliable appealed, sending the case to the Illinois Supreme Court.

The Illinois Supreme Court has said that non-competition clauses in employment contracts are enforceable so long as consideration supports the agreements and the restraints are reasonable. To determine whether the restraints are reasonable, the court uses a three-pronged test: the restraint must be necessary to protect the legitimate business interest of the promisee; it must not impose undue hardship on the promisor or the public; and the scope of the restraint must be otherwise reasonable.

In putting forth this opinion, the Court corrected two recent opinions of the appellate court which did not require a test for legitimate business interest. In Sunbelt Rentals, Inc v. Ehlers, the 4th District Court of Appeals claimed that a court needed only to consider time and territory restrictions when determining for reasonableness in a restrictive covenant. It claimed that the Illinois Supreme Court had never accepted the legitimate business interest test but the Supreme Court said that was a mistaken assumption and that the appellate court had misinterpreted the Supreme Court’s opinion in Mohanty v. St. John Heart Clinic as well as other cases.

Having rejected the reasoning in Sunbelt, the Court clarified the proper standard for conducting the legitimate business interest test. According to the Court in Nationwide Advertising Service Inc v. Kolar, an employer will be considered to have a legitimate business interest subject to protection through non-competition employment agreements if two factors are present: the employees must have gained confidential information through their employment; and customer relationships must be near permanent as a result of the nature of the business.

The Illinois Supreme Court though, overturned the Kolar decision and instead put forth that, while those, as well as other factors might be helpful in determining the question of reasonableness and enforceability, any attempt to file a complete list of factors would be futile or would immediately become obsolete. Rather, the court maintained that determining the existence of a legitimate business interest will depend upon the totality of the circumstances of the individual case.

An employment attorney who represents management, said the decision is good for employers because it actually broadened the enforceability of non-competition agreements. Under the broader standard of considering “the totality of the facts and circumstances of the individual case”, employers could argue that the company’s reputation or goodwill are worth protecting with restrictive covenants.

Lubin Austermuehle’s Oak Brook and Chicago Attorney Peter Lubin Named 2013 Illinois Super Lawyer as Class-Action, Business Litigation and Consumer Rights Attorneys

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

Super Lawyers named Chicago and Oak Brook business trial attorney Peter Lubin a Super Lawyer in the Categories of Class Action, Business Litigation and Consumer Rights Litigation. Lubin Austermuehle’s Oak Brook and Chicago business trial lawyers have over thirty years experience litigating complex class action, consumer rights and business and commercial litigation disputes. We handle emergency business lawsuits involving injunctions, and TROS, covenant not to compete, franchise, distributor and dealer wrongful termination and trade secret lawsuits and many different kinds of business disputes involving shareholders, partnerships, closely held businesses and employee breaches of fiduciary duty. We also assist businesses and business owners who are victims of fraud.

Peter S. Lubin

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Literal Reading of Non-Compete Agreement Applied to Veterinary Practice – Heiderich v. Florida Equine Veterinary Services

January 24, 2013 | Peter S. Lubin and Patrick Austermuehle

An appeals court reversed a trial court’s temporary injunction, which had prohibited a veterinarian from practicing within a thirty-mile radius of her former employer. The dispute in Heiderich, et al v. Florida Equine Veterinary Services, Inc. involved a veterinarian who, after termination of her employment by the plaintiff, established a veterinary practice located outside the restricted area established by a non-compete agreement. However, she served clients within that area, which the plaintiff contended violated the non-compete agreement. The trial court agreed with the plaintiff and granted a temporary injunction, but the appeals court, with one dissent, reversed.

Dr. Heather Heiderich Farmer, a veterinarian, signed a one-year employment contract in August 2009 with Florida Equine Veterinary Services (FEVS) in Clermont, Florida. The contract included a two-year covenant not to compete. The non-compete agreement specifically prohibited Dr. Farmer’s involvement with any “general equine practice located” (emphasis added) within thirty miles of FEVS’ Clermont location.

FEVS terminated Dr. Farmer’s employment when the one-year contract expired. Dr. Farmer subsequently opened a veterinary practice outside of the thirty-mile radius, providing veterinary services for horses. She occasionally practiced within the restricted area, however, because some FEVS clients located within that area requested her services.

FEVS sued Dr. Farmer, alleging that her practice of veterinary medicine within the restricted area violated the non-compete agreement, regardless of her office’s physical location, because the non-compete agreement prohibited practicing veterinary medicine within that area. The trial court agreed and granted an injunction against Dr. Farmer, noting that it did not believe the parties intended for Dr. Farmer to locate a practice outside the restricted area in order to treat clients within that area. Dr. Farmer appealed to the Florida Second District Court of Appeals.

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 Patrick Austermuehle

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 Patrick Austermuehle

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 Patrick Austermuehle

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 Patrick Austermuehle

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 Patrick Austermuehle

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 Lubin Austermuehle. 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 Patrick Austermuehle

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

April 19, 2012 | Peter S. Lubin and Patrick Austermuehle

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.