Fed. Court ‘Blue Pencils’ Telecom Employer’s Overbroad Nonsolicitation Term – IL ND

In Call One, Inc. v. Anzine, 2018 WL 2735089 (N.D.Ill. 2018), the Northern District of Illinois provides a useful gloss on Illinois restrictive covenant law in the context of a trade secrets action filed by a call center employer against a long-time employee.

The defendant worked for the plaintiff as a sales representative for 15 years. About a decade into her employment tenure, the defendant signed a non-compete agreement which, among other things, prevented her from soliciting plaintiff’s “prospective customers” for a 12-month post-employment period.

After talks for defendant to become an independent distributor of the plaintiff broke down and defendant quit her job, plaintiff sued when it learned defendant altered a Customer Report and e-mailed it to her personal email account. The defendant countersued for a declaration that the non-solicitation clause was overbroad.

Granting summary judgment for the ex-employee on her counterclaim, the Northern District judge set forth applicable Illinois law on restrictive covenants.

  • Restrictive covenants are scrutinized carefully since they are restraints of trade. The key inquiry is whether a given restriction is reasonable and necessary to protect a legitimate business interest of the employer.
  • A post-employment restrictive covenant is reasonable only where (1) it is no greater than necessary for the protection of a legitimate business interest of an employer, (2) does not impose an undue hardship on the employee, and (3) is not injurious to the public.
  • When determining whether an employer has met the legitimate business interest test – prong (1) above – the court considers whether an employer enjoys near-permanent relationships with its customers, whether the employee acquired confidential information during her employment and time and place restrictions contained in the subject covenant.
  • Courts are reluctant to prohibit former employee’s from servicing customers they never had contact with while working for an employer.

Applying these factors, the court found that the non-solicitation term excessive. It specifically viewed the restriction broader than necessary to protect Plaintiff’s ongoing client relationships.

According to the court, to prevent defendant from soliciting anyone who was ever a customer of plaintiff over the past 15 years was facially overbroad and not necessary to protect plaintiff’s current customer relationships. Another reason the court found the non-solicitation provision too expansive was it prevented defendant from contacting plaintiff’s clients with whom she never had any direct contact and didn’t even know about.

The agreement also contained a severability or “blue pencil” provision. Such a provision allows a court to modify an overbroad restrictive covenant in some settings.

Here, because the 12-month non-solicitation provision was chronologically reasonable in scope, the Court reformed the covenant to only prevent defendant from contacting any entity (a) who was a current and prospective customer of plaintiff as of defendant’s January 2018 termination date and (b) for which defendant had responsibility at the time of her separation.

The Court also granted summary judgment for the defendant on plaintiff’s claim premised on the Defend Trade Secrets Act of 2016, the statute that gives a trade secrets plaintiff access to Federal courts. To prove a Federal trade secrets act claim, the plaintiff must establish (a) the existence of a trade secret, and (b) misappropriation.

Misappropriation includes unauthorized disclosure of a trade secret by a person who used improper means to acquire knowledge of the trade secret and unauthorized disclosure of a trade secret by a person who knew or had reason to know that knowledge of the trade secret was “acquired under circumstances giving rise to a duty to maintain the secrecy of the trade secret.” 18 U.S.C. ss. 1839(5)(B)(i)-(ii).

Plaintiff failed to adduce evidence that defendant owed a duty to protect the confidentiality of the Customer Report when it was never labelled as confidential.  As a result, no reasonable jury could find defendant acquired the Report through improper means by breaching a duty to maintain its secrecy.

Afterwords:

An employer suing a former employee for violating a restrictive covenant must demonstrate the existence of near-permanent customer relationships or confidential information. As long as the time and space limitation is objectively reasonable, a court can edit and contract the scope of a post-employment restriction.

Where an employer cannot demonstrate that an employee had a duty to maintain the secrecy of the information the employer is trying to protect, it likely can’t establish Federal trade secrets misappropriation.

The plaintiff’s elaborate information security policies worked against it here. By failing to label the subject Report as confidential (which was required per the employee handbook), the Court refused to find the Report sufficiently confidential to impose a duty on the defendant to keep it secret.

Illinois Court Examines Trade Secrets Act and Inevitable Disclosure Doctrine In Suit Over Employee Wellness Health Program

The plaintiff workplace wellness program developer sued under the Illinois Trade Secrets Act in Destiny Health, Inc. v. Cigna Corporation, 2015 IL App (1st) 142530, alleging a prospective business partner pilfered its confidential data.

Affirming summary judgment for the defendants, the First District appeals court asked and answered some prevalent trade secrets litigation questions.

The impetus for the suit was the plaintiff’s hoped-for joint venture with Cigna, a global health insurance firm.  After the parties signed a confidentiality agreement, they spent a day together planning their future business partnership.  The plaintiff provided some secret actuarial and marketing data to Cigna to entice the firm to partner with plaintiff.  Cigna ultimately declined plaintiff’s overtures and instead teamed up with IncentOne – one of plaintiff’s competitors.  The plaintiff sued and claimed that Cigna incorporated many of plaintiff’s program elements into Cigna’s current arrangement with IncentOne.  The trial court granted Cigna’s motion for summary judgment and plaintiff appealed.

Held: Affirmed.

Rules/Reasons:

On summary judgment, the “put up or shut up” moment in the lawsuit, the non-moving party must offer more than speculation or conjecture to beat the motion.  He must point to evidence in the record that support each element of the pled cause of action.  In deciding a summary judgment motion, the trial court does not decide a question of fact.  Instead, the court decides whether a question of fact exists for trial.  The court does not make credibility determinations or weigh the evidence in deciding a summary judgment motion.

The Illinois Trade Secrets Act (765 ILCS 1065/1 et seq.) provides dual remedies: injunctive relief and actual (as well as punitive) damages for misappropriation of trade secrets.  To make out a trade secrets violation, a plaintiff must show (1) existence of a trade secret, (2) misappropriation through improper acquisition, disclosure or use, and (3) damage to the trade secrets owner resulting from the misappropriation. (¶ 26)

To show misappropriation, the plaintiff must prove the defendant used the plaintiff’s trade secret.  This can be done by a plaintiff offering direct (e.g., “smoking gun” evidence) or circumstantial (indirect) evidence.  To establish a circumstantial trade secrets case, the plaintiff must show (1) the defendant had access to the trade secret, and (2) the trade secret and the defendant’s competing product share similar features.  (¶ 32)

Another avenue for trade secrets relief is where the plaintiff pursues his claim under the inevitable disclosure doctrine.  Under this theory, the plaintiff claims that because the defendant had such intimate access to plaintiff’s trade secrets, the defendant can’t help but (or “inevitably” will) rely on those trade secrets in its current position.  However, courts have made clear that the mere sharing of exploratory information or “preliminary negotiations” doesn’t go far enough to show inevitable disclosure.

Here, there was no direct or circumstantial evidence that defendant misappropriated plaintiff’s actuarial or financial data.  While the plaintiff proved that defendant had access to its wellness program components, there were simply too many conceptual and operational differences between the competing wellness programs to support a trade secrets violation.  These differences were too stark for the court to find misappropriation. (¶ 35)

Plaintiff also failed to prove misappropriation via inevitable disclosure.  The court held that “[a]bsent some evidence that Cigna [defendant] could not have developed its [own] program without the use of [Plaintiff’s] trade secrets,” defendant’s access to plaintiff’s data alone was not sufficient to demonstrate that defendant’s use of plaintiff’s trade secrets was inevitable.  (¶¶ 40-42).

Afterwords:

A viable trade secrets claim requires direct or indirect evidence of use, disclosure or wrongful acquisition of a plaintiff’s trade secrets;

Access to a trade secret alone isn’t enough to satisfy the inevitable disclosure rule.  It must be impossible for a defendant not to use plaintiff’s trade secrets in his competing position for inevitable disclosure to hold weight;

Preliminary negotiations between two businesses that involve an exchange of sensitive data likely won’t give rise to an inevitable disclosure trade secrets claim where the companies aren’t competitors and there’s no proof of misappropriation.  To hold otherwise would stifle businesses’ attempts to form economically beneficial partnerships.

 

Preliminary Injunctions and The Illinois Trade Secrets Act

Trade secrets cases provide fertile grounds for preliminary injunctions and temporary restraining orders.  Here are the black-letter basics:

– A preliminary injunction plaintiff must show: (1) irreparable harm, (2) likelihood of success on the merits, (3) the harm the plaintiff would suffer if the injunction is denied is greater than the harm inflicted on the defendants and (4) the injunction is in the public interest;

– To win a trade secrets case, the plaintiff must establish (1) that the information at issue is a trade secret, and (2) that the information was misappropriated and used in the defendant’s business;

– A trade secret is broadly defined as “information” that is (a) sufficiently secret to derive monetary value from not being generally known to others (who can obtain monetary value from its use); and (b) subject of efforts to maintain the information’s secrecy or confidentiality. See Illinois Trade Secrets Act, 760 ILCS 1065/2 (the ITSA);

– Six common-law trade secrets factors include

(1) extent to which the information is known outside of plaintiff’s business,

(2) extent to which the information is known by employees and others involved in plaintiff’s business;

(3) extent of measures taken by plaintiff to guard the information’s secrecy;

(4) value of the information to the plaintiff’s business and its competitors;

(5) the amount of time, effort and money expended by the plaintiff in developing the information; and

(6) the ease or difficulty with which the information could be properly acquired or duplicated by others;

– Misappropriation means acquisition or discovery by improper means or use of the secret;

– There is a presumption of irreparable harm in trade secrets misappropriation cases;

– Irreparable injury means harm that is difficult to quantify;

– The purpose of a preliminary injunction (in the trade secrets context) is not to punish; but to eliminate a litigant’s unfair advantage over another.