Successor Corporation Can’t Enforce Expired Restrictive Covenants

 

Stericycle, Inc. v. Carney, 2013 WL 3671288 (N.D.Ill. 2013) is post-worthy for its useful  gloss on the enforceability of restrictive covenants, Federal pleading requirements and a purchasing corporation’s standing to assert the restrictive covenant rights of its predecessor.

Facts:  In 2007 and 2008, defendant signed employment agreements (the “SEI Agreements”) with SEI, his former employer.  The SEI Agreements contained 2-year non-disclosure and non-solicitation provisions. Plaintiff Stericycle acquired SEI in 2009 as part of a stock purchase. 

Defendant later signed separate employment agreements (the “Stericycle Agreements”) in 2009 and 2011.  In late 2011, defendant resigned and within a month went to work for a competitor in the waste management business. Plaintiff then filed suit to enforce the SEI Agreements and the Stericycle Agreements.

Disposition: Plaintiff’s claims dismissed.  The Court granted the defendants’ 12(b)(6) motion to dismiss plaintiff breach of contract claims based on the SEI Agreements with prejudice (claims can’t be refiled) and the Stericycle Agreements without prejudice (claims can be refiled).

Reasoning: The Court dismissed the SEI Agreements because there the two-year restrictive covenants contained in them expired by their terms.  The record demonstrated that that defendant stopped working for SEI in January 2009 and didn’t begin working for his current employer, an SEI competitor, until October 2011 – well past the two-year restrictive period. 

But putting aside the expiration of the contractual two-year restrictions, the Court did hold that the plaintiff – the successor entity – had standing to enforce the SEI Agreements.  That’s because they expressly provided that their restrictive covenants were enforceable by SEI’s successors and assigns.  And since plaintiff was a successor to SEI, plaintiff had standing to sue on the SEI Agreements. 

 The Court also struck plaintiff’s claims which alleged defendant’s breach of the Stericycle Agreements.  The Court found plaintiff’s allegations too conclusory – even under Federal notice pleading rules – to allege that defendant breached the Stericycle Agreements’ non-disclosure terms.  

Plaintiff pled no facts to plausibly suggest that  defendant violated the non-disclosure provisions. The Court also held that to adequately plead breach of a non-compete covenant, the plaintiff must do more than simply say that defendant’s current position is similar to his former position at plaintiff. 

On the issue of whether the Stericycle Agreements’ were enforceable, the Northern Disrtrict stated it couldn’t decide this based only on the complaint’s allegations. 

It cited basic Illinois rules on restrictive covenants: (1) a restrictive covenant will be upheld if it’s a reasonable restraint and supported by consideration; and (2) will be found reasonable only where (a) it’s no greater than necessary to protect the employer’s legitimate business interest; (b) it doesn’t impose an undue hardship on the employee; and (c) the restriction doesn’t injure the public.  

The Court found there were too many fact questions – such as the covenants’ geographic reach and what business interest plaintiff was trying to protect – that couldn’t be resolved on a  bare complaint (i.e. without any discovery) and declined to find the Stericycle Agreements’ restrictions unreasonable.  

 Take-aways:

(1) The Federal notice pleading standard has some teeth: Plaintiff must do more than regurgitate a cause of action’s elements and must also allege specific facts in support of a given claim;

(2) A successor corporation can enforce a restrictive covenant contained in a predecessor’s employment contract where that contract provides that it’s enforceable by a successor or assignee; and

(3) whether a restrictive covenant is reasonable (and enforceability) will most likely not be decided only on a complaint before discovery is taken. 

 

 

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PaulP

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

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