Non-Compete Agreement / Covenant Not to Compete

Business Owners Beware, Make Sure Your Employment Agreements are Clearly Written and Reasonable

February 2, 2012 | Peter S. Lubin and Patrick Austermuehle

Every business has employees, and as business litigators, the attorneys at Lubin Austermuehle pride ourselves on being knowledgeable about all the areas of law that affect our clients, including employment laws. Our Orland Park business attorneys recently discovered a case that has an impact on companies who utilize employment non-competition agreements with their employees.

Reliable Fire Equipment Company v. Arredondo pits an employer against two former employees, Defendants Arredondo and Garcia, who worked as fire alarm system salesmen for Plaintiff. Each Defendant signed an employment agreement where Defendant’s would allegedly earn commissions of varying percentages of the gross profits on items or systems sold. After working for Plaintiff for several years, Defendants created Defendant High Rise Security Systems, LLC., which was allegedly a competitor to Plaintiff’s business. Plaintiff eventually became aware that Defendants were starting an alleged competitor company, and asked Defendants if in fact they had created a fire alarm business. Defendant Arredondo allegedly denied that he was starting such a business, and resigned shortly afterward, with Defendant Garcia tendering his resignation two weeks after Arredondo.

Plaintiff then filed suit alleging breach of the duty of fidelity and loyalty, conspiracy to compete against Plaintiff and misappropriation of confidential information, tortious interference of prospective economic advantage, breach of the employment agreements, and unjust enrichment. The trial court held that the employment agreements were unenforceable because of unreasonable geographic and solicitation restrictions and the fact that language of the agreements was unclear. A trial on the issues unrelated to the employment agreement ensued, and Defendants successfully moved for a directed verdict because there was insufficient evidence that Defendants competed with Plaintiffs prior to Arredondo’s resignation.

Plaintiff then appealed the trial court’s ruling that the employment agreements in question were unenforceable and the directed jury verdict. The Appellate Court affirmed the trial court’s directed verdict, stating that the lower court had properly weighed the evidence in finding a total lack of competent evidence. The Court then analyzed the restrictive covenants under the legitimate business interest test and found that the geographic restrictions were not reasonable and therefore the trial court did not err in ruling that the restrictive covenants were unenforceable.

Reliable Fire Equipment Company v. Arredondo illustrates why it is so important for business owners to keep an eye on their employees, and serves as a warning for companies wanting to sue former employees based upon non-competition agreements. Furthermore, the case shows that courts frown upon the use of vague language in such agreements, and it is always in your best interests to keep the terms of employment agreements reasonable.

Consideration in Illinois Noncompete Agreements: How Much Is Enough? LKQ Corporation v. Thrasher

October 15, 2011 | Peter S. Lubin and Patrick Austermuehle

In order to hold an employee or former employee liable under an agreement not to compete, an employer must offer the employee some form of consideration in exchange for the employee’s promise not to compete with the employer. The Northern District of Illinois tackles the difficult question of how much consideration is enough in LKQ Corporation v. Thrasher.

Plaintiff LKQ Corporation is a national automobile parts supplier. In January 2010, Plaintiff hired Defendant Corey Thrasher as a Sales Representative, handling accounts in the Northwest United States. Defendant signed a noncompete agreement shortly after he was hired, allegedly stating that he would not compete with Plaintiff nor solicit Plaintiff’s customers during his employment and for one year following the end thereof. The noncompete agreement also included a forum selection clause designating that any actions related to the contract be raised in Illinois and considered under Illinois law.

One year later, Defendant resigned from his position, effective February 2011. On the day he resigned, Defendant allegedly contacted a number of Plaintiff’s customers via email, telling them that he had taken a similar position with B&R Auto Wrecking, Inc. and that he was looking forward to continuing to work with these customers. Plaintiffs allege that Defendant has continued to solicit LKQ customers to purchase B&R merchandise and that several LKQ clients have decreased their business with LKQ as a result.

Plaintiff filed suit alleging that Defendant breached the non-compete agreement. The court denied Defendant’s motion to dismiss the action, in which he argued that the agreement lacked sufficient consideration to be enforceable. The court concluded that Plaintiff received continued employment for a “substantial period” following the execution of the agreement, which constituted adequate consideration, and therefore the agreement was enforceable.
In order for a contract to be enforceable, the promises therein must be given in exchange for consideration. Typically, consideration is anything of value received in exchange for a promise. In the employment context, however, a party seeking to enforce an noncompete agreement must prove that sufficient consideration was given in exchange for the promise not to compete because the simple benefit of continued employment is illusory: employment is at will and a person who signs a noncompete agreement can still be fired at any time. Thus, only continued employment for a “substantial period” or some other form of consideration is sufficient to support a noncompete agreement.

Northern District of Illinois Grants Motion to Dismiss in Trade Secrets Case Due to Lack of Personal Jurisdiction

May 24, 2011 | Peter S. Lubin and Patrick Austermuehle

After hiring someone, businesses expect not only that their new employee will perform his job adequately, but also that he will do no harm to the company or its ability to do business. Employers know that their expectations are not always met by those employees, which is why the use of employment contracts with non-compete clauses are quite common these days. Our Chicago restrictive covenant attorneys just discovered a recent court decision that details a dispute between an employer and an ex-employee regarding one such employment agreement.

In Zep Inc. v. First Aid Corp., Plaintiff Zep employed the individual Defendants as sales representatives for its industrial cleaning products business pursuant to an employment agreement that contained non-disclosure, non-solicitation, and non-compete provisions. During their employment, Defendants had access to Plaintiff’s customer lists, supplier lists, pricing information, and other proprietary information. Eventually, a competitor, Defendant First Aid, hired the other named Defendants away from Plaintiff and subsequently solicited Plaintiffs clients and other employees.

As a result, Plaintiff filed suit for breach of contract, trade secret misappropriation under the Illinois Trade Secrets Act (ITSA), and tortious interference with contract. Plaintiff contends that First Aid induced the other Defendants to breach the employment agreements they signed with Plaintiff and that the other Defendants used and disclosed Plaintiffs trade secrets. In response, Defendants filed motions to dismiss the claims, which were granted as to three of the individual defendants due to a lack of personal jurisdiction. The Court found that because three of the individual Defendants were residents of Michigan and Ohio, Plaintiff is located in Georgia, and the employment agreements were signed outside of Illinois, they did not have the requisite minimum contacts to give an Illinois court jurisdiction over the matter. Furthermore, Plaintiff had not alleged that any of Defendants’ actions were aimed at Illinois, and neither had their actions caused harm to Plaintiff in Illinois, so specific personal jurisdiction was also improper. The Court denied the remaining motions to dismiss – finding that the non-compete provisions were enforceable because the geographic limitations were reasonable and the non-solicitation clause was limited in scope to Plaintiff’s competitors for a span of one year. Plaintiff’s allegations were also found to be sufficient to support a claim under the ITSA because it had identified a list of confidential information and trade secrets in its pleadings.

Video on Illinois Covenant Not to Compete Law

May 1, 2011 | Peter S. Lubin and Patrick Austermuehle

https://www.youtube.com/watch?v=HLvhcNrJ3u8

The above video provides an excellent overview of Illinois non-compete contract law.

Our Chicago non-compete agreement attorneys have defended high level executives in covenant not to compete and trade secret lawsuits. A case in which our firm defended a former Motorola executive was covered in Crain’s Chicago business. You can view that article by clicking here.

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 Patrick Austermuehle

Lubin Austermuehle 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 Patrick Austermuehle

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 Patrick Austermuehle

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.

Enforcing Noncompetition Agreements is Tricky Business

December 8, 2010 | Peter S. Lubin and Patrick Austermuehle

Any business owner should keep abreast of laws and court rulings that can affect the way they conduct their operation and interact with employees. The law constantly evolves, and that is why our lawyers are vigilant in tracking changes that affect our clients. Citadel Investment Group v Teza Technologies is one such ruling that provides clarity regarding noncompetition agreements between employees and employers.

In this case, Defendants Malyshev and Kohlmeier worked for Plaintiff Citadel Investment Group until February of 2009, when they resigned. When Malyshev and Kohlmeier were initially hired by Citadel, they each signed a nondisclosure agreement and an employment agreement containing a noncompetition clause. The noncompetition clauses contained language giving Citadel the discretion to set the length of the restrictive period at zero, three, six, or nine months. Citadel elected for a nine month restricted period for both Malyshev and Kohlmeier upon their resignation.

Malyshev and Kohlmeier formed Defendant Teza Technologies two months after leaving Plaintiff Citadel in April of 2009. When Citadel discovered the existence of Teza and its status as an entity performing similar high frequency trading in July of 2009, the present legal proceedings began. Plaintiffs initially sought a preliminary injunction against Defendants based upon the noncompetition agreements signed by Malyshev and Kohlmeier. This injunction was granted in October 2009 for relief through November of 2009. The trial court made its decision based upon the agreed upon nine month period contained in the noncompete and calculated the time from February of 2009 when Malyshev and Kohlmeier resigned.

Citadel appealed the decision, and asked the appellate court to grant the injunction for nine months from October until July of 2010. Citadel argued that they had not received the benefit of the restricted period prior to the preliminary injunction being entered, and the Court should adjust the start date of the restricted period accordingly. The Court did not find the Plaintiff’s argument persuasive and denied the appeal because the plain language of the agreements signed by Malyshev and Kohlmeier contained no provision allowing for an extension of time or modification of the commencement date. Thus, the restrictive covenant properly ended in November as was required by the agreement signed by both parties.

Citadel Investment Group v. Teza Technologies serves as a warning to business owners who utilize noncompetition agreements and a potential boon to employees who sign them. Whether you are a business already in a dispute over a noncompetition agreement or a former employee seeking employment with a new company in the same field, you should contact a Chicago business litigation attorney to be apprised of your rights.

Video Explaining that an Employer’s Material Breach of an Employment Agreement Can Invalidate a Non-Compete Agreement

November 7, 2010 | Peter S. Lubin and Patrick Austermuehle

Our Chicago non-compete agreement attorneys have defended high level executives in covenant not to compete and trade secret lawsuits. A case in which our firm defended a former Motorola executive was covered in Crain’s Chicago business. You can view that article by clicking here.

Lubin Austermuehle handles litigation over non-compete clauses for individuals and businesses of all sizes, including small or closely held businesses for whom competition from an ex-employee can be a serious threat. Our Chicago business lawyers have substantial experience in restrictive covenant and breach of contract cases, and we are proud of our record of strong results.

DiTommas-Lubin a Chicago business law firm represent both plaintiffs and defendants in such cases, and can also help stop litigation before it starts by reviewing contracts to look for covenants and clauses that could create problems later. Based in Oakbrook Terrace and downtown Chicago, our Schaumburg noncompete clause lawyers take cases from Naperville, Keniworth, Aurora, Lake Forest, and many other cities throughout Illinois, as well as in Indiana, Wisconsin and the entire United States. To learn more or set up a free consultation, please contact us through the Internet or call toll-free at 630-333-0333 today.

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

September 11, 2010 | Peter S. Lubin and Patrick Austermuehle

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

by Richard Gonzales

NPR reports: