Tag: adequate remedy at law

Federal TRO Practice – The Legitimate Interest, Near-Permanence and Balance of Harms Test: Cumulus v. Olson – Part II of III

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Cumulus Radio v. Olson, 2015 WL 643345 also discusses the legitimate business interest test, what constitutes an adequate remedy at law and the balance of harm elements of injunctive relief under Illinois law.

To determine whether a given restrictive covenant is reasonable, the court examines whether (1) the plaintiff has shown a legitimate business interest, (2) the restrictive covenant imposes an undue hardship on the employee; (3) the restriction injures the public, and (4) the time (how long?) and territory (how far?) limits of the restriction.  Illinois courts recognize that radio stations have a valid business interest in its customers given the highly competitive nature of broadcasting.  *7.

In assessing prong (1) – a legitimate business interest – the court considers whether a business has a “near permanent” relationship with its customers and advertisers who fund the broadcast by buying radio ads.  

The near-permanence inquiry distills to seven factors: (1) permanence of the relationship, (2) the amount of money invested to acquire clients, (3) the degree of difficulty in acquiring clients, (4) the extent of personal customer contacts by the employee, (5) the extent of the employer’s knowledge of its clients, (6) the duration of the customer’s activities with the employer; and (7) the intent to retain the employer-customer relationship.

The court examined these factors and found that the plaintiff radio station showed a near permanent relationship with its customers.  Illinois law recognizes that radio stations have a protectable interest in the near permanence of their customers as the plaintiff offered evidence that showed how time-consuming, expensive and arduous it is to cultivate clients.  

The plaintiff’s testimony that the radio industry is largely relationship-driven and that many of plaintiff’s clients were long-time customers also swayed the court.

The plaintiff also showed an inadequate remedy at law; meaning, money damages wouldn’t fix the defendant’s mon-compete breach.  Where a plaintiff can pinpoint specific lost accounts, money damages are the proper remedy; or “adequate.”  Here, though, plaintiff had difficulty identifying which contracts the plaintiff lost to the competing station.  This made it impossible to quantify plaintiff’s damages.

The closest call was the balance of harm element – the harm resulting from the injunction weighed against its benefit.  The harm here to the defendants was palpable and severe.  The sales executive was enjoined from working for the competing station in his chosen profession for a period of six months (from the entry of the injunction) and within a 60 mile radius.  He was also forbidden from soliciting any of plaintiff’s customers with whom he had contact for a 12 month period.  

The radio station defendant suffered harm, too.  It lost the benefit of a $250K/year salesman’s services for the duration of the non-compete term.

But the court found the benefit to the plaintiff outweighed the harm to the individual defendant.  It noted that if it denied plaintiff’s injunction request, the employment contract signed by the defendant would be meaningless and the plaintiff would face the prospect of untold lost clients due to the defendant’s clear breach of the non-compete provision.

Takeaways:

– The more time, effort and money a plaintiff can show goes into developing clients, the better his chances of showing near permanence and getting injunctive relief;

– money damages won’t properly compensate a plaintiff who can’t specify lost accounts flowing from a non-compete violation;

– upholding the clear language of a contract can trump an employee’s right to earn a living if the violation is blatant and the restrictions are reasonable. 

 

Court Can Shorten Overly Broad Non-Compete In Recruiting Business Dispute – IL Court (Applying Md. Law)

blue pencilIn TEKsystems, Inc. v. Lajiness, 2013 WL 3389062 (N.D.Ill. 2013), the Northern District of Illinois, applying Maryland law (due to a contractual choice of law provision), upheld a 50 mile/18 month restrictive covenant in a recruiter’s employment contract. 

The plaintiff employer sued one of its former recruiters for violating a non-compete provision contained in a written employment contract when the recruiter went to work for a competitor.  The employment contract provided that Maryland law would govern (Maryland was where plaintiff was headquartered), and precluded the defendant from competing with plaintiff in the job placement business for a period of 18 months and within a 50-mile radius post-employment. 

The contract contained some drafting precision: it only prevented the recruiter defendant from working for a competitor who engages in any aspect of plaintiff’s business for which defendant specifically performed services or about which defendant obtained confidential information.  2013 WL 3389062, *4.   In other words, the restriction didn’t entirely ban the defendant from working in any capacity for a competitor. If the recruiter’s job duties while at the plaintiff employer differed qualitatively from his duties at the competitor, this wouldn’t violate the non-compete. 

The defendant filed a 12(b)(6) motion to dismiss on the basis that the restrictive covenant was facially overbroad.  The Northern District denied the motion and held that the restrictive covenant was reasonable in terms of time and space under Maryland law.

Q: Why?

A: The Court first validated the Maryland choice of law provision since, under Illinois conflicts of law principles, Maryland had a definite connection to the lawsuit since plaintiff was headquartered there.  There were also no public policy concerns triggered by applying Maryland law.

The Court then applied Maryland restrictive covenant law.  In Maryland, restrictive covenants spanning 50 miles and more than 18 months had been upheld and that this particular non-compete was narrowly drawn only to prevent defendant from competing on matters “about which [he] gained specialized or confidential knowledge while employed at [TEKsystems].”  2013 WL 3389062, *4-5.  The court also stated that even if the plaintiff’s non-compete clause was overbroad, Maryland courts routinely “blue-pencil” such non-compete clauses, paring them down to shorter time and space limits.  Id. at * 5.

In finding that TEKsystems stated a colorable breach of contract claim, the Court found that it sufficiently alleged defendant had access to and contact with plaintiff’s confidential information and customers and was now working in a similar position for a competitor.  Accordingly, for purposes of a 12(b)(6) motion – which accepts as true all facts alleged in a complaint -plaintiff sufficiently stated a breach of contract claim premised on defendant’s violation of the non-compete provision in the TEKsystems employment agreement.

The Court did dismiss plaintiff’s equitable accounting claim on the basis that plaintiff had an adequate remedy at law.  Maryland equitable accounting law (like Illinois) posits that an adequate legal remedy (i.e., a breach of contract claim) will defeat an equitable accounting claim.  Here, since the employment contract contained detailed formulas to compute plaintiff’s lost profits and sales in the event an employee breached the contract, this was a clear legal remedy (i.e., a breach of contract suit) for the plaintiff.

Take-away:  Definitely a pro-employer case.  It upholds a 18 month/50-mile restrictive covenant and makes clear that even if the restriction was too broad, a Maryland court (and likely an Illinois court, too), could simply edit and narrow down the scope of the non-compete. This ability to adjust the non-compete’s reach strikes a balance between the two competing interests that lie at the heart of non-compete and trade secrets cases: protecting the employer’s legitimate business interests while at the same time allowing an employee to earn a living in his chosen field.