IT Recruiting Firm’s Non-Compete and Trade Secrets Claims Against Former Employees Fail – ND IL (Part I of II)

In Instant Technology, LLC v. DeFazio, 2014 WL 1759184, the Northern District of Illinois examines Illinois non-compete law, trade secrets rules and a slew of business torts in the context of a heated battle between rival recruiting firms and some of their key employees.  This article distills the case’s key restrictive covenant principles.  Part II of the post will summarize the court’s ruling on the plaintiff’s trade secrets, tortious interference, and civil conspiracy claims.

The plaintiff staffing firm sued several former employees and their current employer – a rival recruiter – for violating restrictive covenants contained in their employment contracts and for disclosing the plaintiff’s trade secrets in connection with their current position with the competing firm.  Plaintiff sued when it found out that the defendants had contacted some of plaintiff’s clients and job placement candidates in violation of their non-compete and non-solicitation provisions.  After a several-day bench trial and hearing testimony from almost 20 witnesses, the Court ruled in the defendants’ favor on all of the plaintiff’s claims.

Illinois Non-Compete Rules

The Court found that the defendants’ non-compete provisions were unenforceable because they lacked consideration and because the plaintiff couldn’t establish a legitimate business interest to be protected by the non-competes.  Under Illinois law, when assessing a restrictive covenant (here, a “non-compete”), the court looks to whether (1) the covenant is ancillary to a valid contract, and (2) whether it’s supported by consideration.  Consideration to support a non-compete is lacking if an employee can be fired the minute after he signs it and will only have adequate consideration only if, after signing the covenant, the employee remains employed for a substantial period of time – defined as two years or more of continued employment. See Fifield v. Premier Dealer Services, Inc. 2013 IL App (1st) 120327.

Aside from requiring at least two years of continuous employment, a valid non-compete has to be “reasonable.”  The reasonableness of a non-compete turns on whether it (1) is no greater than necessary to protect a legitimate business interest of the employer; (2) the non-compete doesn’t impose an undue hardship on the employee; and (3) it’s not injurious to the public. 

A legitimate business interest will usually exist where (a) the employee has access to the employer’s confidential trade information; and (b) the employee is tampering with the employer’s established customer relationships.  Other factors a court considers when determining whether an employer has a legitimate business interest include (i) the “near-permanence” of customer relationships; (ii) whether the employee’s acquired the employer’s confidential information; and (iii) the non-compete’s time and space restrictions.

Near-permanency (of customer relationships) depends on the nature of the business involved.   Businesses that engender customer loyalty and that offer specialized, unique services have a better chance of establishing a near-permanent client relationship than do companies whose services are more generic and disposable.   An industry marked by high turnover or one in which customers uses many vendors – like the recruiting business (or a large corporation that uses regional law firms) – will not meet the near-permanence criterion.

Under these guideposts, the Court invalidated the former employees’ non-competes.  First, several of the employees didn’t work the requisite two years to support the non-competes: they lacked consideration.  In finding the non-competes substantively unreasonable, the Court noted that the staffing industry is mercurial and subject to “massive turnover.”  The recruiting industry also uses elemental (read: not secret) sales techniques like cold calls to make sales and identify potential prospects.

And while maintaining workforce stability can be a legitimate business interest (as the plaintiff argued), where an industry is subject to rampant turnover – with frequent employee departures and terminations – the workforce stability argument fails.  The Court held that enforcing the defendants’ non-competes wasn’t likely to enhance the plaintiff’s workforce stability given the high turnover in the recruiting business and its basic, non-specialized sales techniques (cold-calling, e.g.).

Afterwords: Instant Technology is significant and instructive for its expansive analysis of Illinois non-compete principles, its validation of the two-year employment rule announced in Fifield (see http://paulporvaznik.com/fifield-case-two-years-of-continous-employment-sufficient-consideration-to-enforce-employee-restrictive-covenants/1261) and its discussion of the legitimate business interest non-compete clause prong.  The case illustrates that with a business that is historically subject to high turnover and that utilizes direct selling techniques, it will be hard for an employer to establish near-permanence with its customers ad, by extension, difficult to show a legitimate and protectable business interest.

 

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PaulP

Litigation attorney at Fisher Kanaris, P.C. representing businesses and individuals in all types of commercial disputes.