Post-Employment Restrictive Covenants – Illinois Law Basics

In Northwest Podiatry Center, Ltd. v. Ochwat (2013 IL App (1st) 120458), the First District reversed key elements of a trial court’s preliminary injunction order in a lawsuit filed by a podiatry center against two former doctor employees.  The plaintiffs – the podiatry firm and its founder – sued two former podiatrists who left to form a competing firm and who took some employees with them and tampered with an exclusive contract between plaintiffs and one of their key referral sources.

The trial court granted the plaintiff’s preliminary injunction petition and enforced the non-competes against the two doctor defendants. ¶¶ 13-14.  The doctors appealed.

The First District gutted much of the trial court’s injunction. In doing so, the Court applied the main rules that control when a post-employment non-compete is enforceable:

– A restrictive covenant must be reasonable and necessary to protect a legitimate employer business;


– The factors considered include: (a) hardship to employee; (b) effect on general public; (c) geographic (distance) and temporal (duration) scope and (d) activities restricted;


– Non-compete provisions are strictly construed and any ambiguities are resolved in the employee’s favor;


– A restrictive covenant ancillary to an employment contract must be reasonable;


– A non-compete is reasonable where (i) its scope is no greater than necessary to protect the employer’s interest; (ii) it doesn’t impose an undue hardship on the employee; and (iii) the non-compete is not injurious to the public;


– the party seeking to enforce a restrictive covenant must show the restriction is necessary to protect its business needs;


– restrictive covenants should be narrowly tailored to only curtail employee conduct that threatens the employer’s interests;


– a court can “blue pencil” a restrictive covenant: if the restriction is too broad, the court can narrow it.
¶¶ 38-39, 46, 56.

Applying these rules, the First District held: (1) the trial court’s “privileges restriction” injunction (requiring one doctor to cede many of his hospital privileges) was overbroad as it lacked any temporal limit; (2) the injunction activity restriction was too broad because it enjoined defendants from conduct that was never agreed to in the employment contracts; and (3) the trial court properly enjoined  defendants from doing business with plaintiffs’ main referral source since Plaintiff had an issue exclusive contractual relationship with it and defendants clearly tampered with that arrangement.

The Court also weighed in on what a departing employee can and can’t do in connection with laying the ground-work to outfit and join a competitor.  Employees can plan, form and equip a competing corporation while working for their employment, but may not begin competition.

Employees can also freely compete with a former employer and solicit former customers of the employer as long as they wait until after they’ve stopped working for the employer and don’t violate a valid non-compete or steal a customer list. ¶ 60.  Corporate officers, though, are held to a higher standard: they owe fiduciary duties of loyalty to their employer and can be held liable for transactions that began, or for information learned while the officer was still with the employer.

The Court upheld the trial court’s finding that one of the defendants breached his fiduciary duties by actively exploiting the maniaged care firm (plaintiffs’ exclusive referral partner) for his personal gain by undercutting plaintiffs’ pricing. ¶¶ 61-62.

Conclusion:

As employment law practitioners know well, careful drafting of employment contract restrictive covenants is paramount.  Non-compete provisions should be reasonable in terms of time and space, and non-disclosure and non-solicitation clauses should be specific and clear.  Northwest Podiatry provides a good summary of Illinois law governing injunctions, the enforceability of employment restrictive covenants, and a corporate officer’s fiduciary duties to a former corporate employer.

Recovering Your Attorneys Fees In Litigation: Illinois’ 8 Factored Test

A recent Illinois Fourth District case provides a quick summary of  the factors a court considers when determining prevailing party attorneys’ fees under the Illinois Consumer Fraud Act (CFA) and spotlights the “mere continuation” exception to the rule governing corporate successor liability.

In Clayton v. Planet Travel Holdings, 2013 IL App (4th) 120717, the plaintiffs sued a travel agency, a successor agency and the principal of both agencies for consumer fraud and breach of contract based on a botched vacation package.

Plaintiff sought to recover the $11,000-plus deposit plaintiffs made when the travel agency failed to timely book a group trip.  After a bench trial, the court awarded the plaintiffs just under $6,000 in compensatory damages and attorneys’ fees and costs of over $30,000.  All three defendants – the predecessor and successor agencies and the corporate principal appealed.

Held: Affirmed.

Attorneys’ Fees Factors

The Appellate Court affirmed the trial court’s damage and fee awards noting that the CFA allows the winning party to recover its reasonable attorneys’ fees.  815 ILCS 505/10a(c); Clayton, ¶ 24.

The factors a court considers when determining what is a reasonable fee are: (1) the skill and standing of the attorney; (2) nature of the case; (3) novelty or difficulty of the issues and work involved; (4) importance of the matter; (5) degree of responsibility required; (6) the usual and customary charges for comparable services; (7) benefit accruing to the client; and (8) whether the was a reasonable connection between the fees charged and amount involved in the litigation. ( ¶ 25)

A trial court is able to use its own knowledge, experience and case familiarity in examining the fee question and its award is reviewed under an abuse of discretion standard.  (¶ 25).  The Appellate Court found that the plaintiffs properly documented their fees and costs and claimed fees of over $30,000 was reasonable for over four years of work.  Id., ¶ 30.

Mere Continuation Exception

The Fourth District also affirmed the trial court’s money judgment against the agencies’ principal.  He operated the predecessor agency for several years, sold its assets to himself for $1, later dissolved it and then formed a “new” agency with an almost identical name.

However, in the 13-month interim period between the dissolution of the first company and formation of the second one, The principal continued to operate the travel agency business as a sole proprietorship. (¶¶ 36, 41)

The “mere continuation” rule is an exception to the general rule that a successor corporation is not liable for the transferor’s debts. The exception applies where “the purchasing corporation is merely a continuation or reincarnation of the selling corporation” or where the new corporation maintains the same or similar management and ownership, but “merely wears different clothes”.  ¶ 40.  In any mere continuation calculus, the key element is identity of ownership.

Held: Corporate officer is personally liable for the judgment under the mere continuation rule.

Reason: After the dispute with plaintiffs had already crystallized, the corporate principal engineered the sale of the predecessor agency to himself for a dollar and continued to operate the business as a sole proprietorship. (¶ 41).

Some 13 months later, the principal formed the similarly named successor agency.  During that time span, the principal operated the sole proprietorship from the same address and used the same checking accounts as the prior corporation.  He also filed tax returns on behalf of both Agencies entities and generally operated the travel business without interruption.  Id.

Based on these factors, the Court found that all three same-sounding travel businesses shared a common ownership. ¶ 41. The Court held that  the principal  couldn’t escape personal liability for the corporate debts because he continued the travel business as a sole proprietorship after the former agency dissolved.  ( ¶ 42)

Conclusion: Clayton is instructive on the factors an Illinois court considers when passing on an attorney fee petition and in discussing the mere continuation rule for corporate successor liability.  The case’s main lesson is that if a corporate agent  dissolves a corporation and later forms a separate company – but continues to run the business as a “dba” or sole proprietorship in the interim – that agent can be personally responsible for any obligations arising before the new corporation is formed.

 

The Illinois Wage Payment and Collection Act: Some Basics

time clockThere seems to be an almost palpable out-of-sight, out-of-mind dynamic at play when an employee is either fired or quits.  This often results in the employer not compensating the departed employee for pre-departure/firing services. This post attempts to provide some basics on the Illinois Wage Payment and Collection Act, 820 ILCS 115/1 et seq. (the Wage Payment Act), a powerful tool for former employees who want to get paid.  For a more detailed treatment of the Wage Payment Act in the context of  departing corporate executives and managerial employees, please see the Novack and Macey firm’s excellent article at: http://www.novackmacey.com/departing-executives-and-the-wage-payment-act.

The Wage Payment Act requires every employer to pay full and “final compensation” to separated employees no later than the next regularly scheduled payday. 820 ILCS 115/5. “Final compensation” broadly includes wages, salaries, earned commissions and bonuses and the monetary equivalent of earned but unused vacation and any other compensation owed pursuant to an employment contract or agreement between the 2 parties. 820 ILCS 115/2.

To establish a Wage Payment Act claim, a plaintiff must show (1) that the defendant was an “employer” under the Act; (2) the parties entered into an “employment contract or agreement”; and (3) the plaintiff was due “final compensation”. Catania v. Local 4250/5050 of the Communications Workers of America, 359 Ill.App.3d 718 (1st Dist 2005).

The Wage Payment Act defines “employer” and “employee” broadly.  820 ILCS 115/2.  “Employer” includes any person or business entity, including employment placement agencies.  “Employee” means an individual “permitted to work by an employer in an occupation”.  Id.  Caselaw extends the Act’s coverage to executives and corporate management personnel.

 Independent contractors are generally not covered by the Wage Payment Act.  820 ILCS 115/2.  The Act specifically states that “employee” does not include an individual: (1) who is free from employer direction and control; (2) who physically works outside the confines of the employer’s office location(s) or performs work outside the usual course of employer’s business; and (3) who is in an independently established trade, occupation, profession or business.  Id. 

In Illinois, an independent contractor is defined by the level of control over the manner of work. Horwitz v. Holabird & Root, 212 Ill.2d 1, 11 (2004); Petrovich v. Share Health Plan of Illinois, Inc., 188 Ill.2d 17, 31 (1999)(independent contractor factors).

Both State and Federal Illinois cases have held that an “employment agreement” under the Wage Payment Act is broader than a formal contract.  Practically speaking, this means the contract or agreement being sued upon doesn’t have to be in writing or even have valid consideration: all that’s required is “mutual assent” between the parties.  See Landers-Scelfo v. Corporate Office Sys. Inc., 356 Ill.App.3d 1060, 1067 (2nd Dist. 2005); Wharton v. Comcast, N.D.Ill., 12 C 1157 (December 6, 2012).

In Wharton, a class action filed by Comcast employees, the Northern District denied Comcast’s 12(b)(6) motion to dismiss plaintiffs’ Wage Payment Act claims.  The plaintiffs alleged that Comcast failed to pay overtime and for pre-shift and post-shift work as required by Federal law and Comcast’s employee handbook.  The Court held that even though Comcast’s employee handbook had multiple disclaimers (to paraphrase: “this is not a contract”) and gave Comcast the unilateral right to discontinue or change the handbook at its pleasure, the plaintiffs still pled evidence of “mutual assent” to the handbook’s terms.  Wharton, p. 8.

As a consequence, the Northern District held that Comcast’s employee handbook – despite its disclaimers – vested the plaintiffs with enforceable Wage Payment Act rights (at least enough to survive a motion to dismiss).  Id.

Other key Wage Payment Act provisions include (1) corporate officers or agents who “knowingly permit” a violation of the Act, are subject to personal liability (820 ILCS 115/13); (2) employee damages include unpaid compensation plus 2% of unpaid amount per month and attorneys’ fees.  820 ILCS 115/14; and (3) the employee can – instead of filing suit – lodge a clam with the Illinois Dept. of Labor.  820 ILCS 115/11.  In the latter scenario, the claimant must file within one year after the wages or final compensation are due.  Id.  This does not preclude the employee from later pursuing a civil suit in the Circuit Court in the County where the Act violation occurred.

Other than the 1 year reference in Section 11 for asserting a Dept. of Labor Claim, the Wage Payment Act is silent on a limitations period.  Code Section 13-206 provides for a 10 year limitations period for claims based on the Act.  735 ILCS 5/13-206.

Conclusion

The Wage Payment Act is a powerful enforcement tool for departed employees who are owed money by their erstwhile employers.  The Act broadly applies to all types of compensation agreements and provides for recovery of the employee’s attorneys’ fees.  Commercial litigators should have a working knowledge of the Act’s contours, exceptions and key terms.