Tag: Non-compete

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.

Florida Series III: Parent Company’s Merger Doesn’t Impact Subsidiary’s Noncompete with M.D.

Collier HMA v. Menichello a medical noncompete dispute, considers whether a third party can enforce a noncompete after a merger.  Jettisoning the “changed corporate culture and mode of operation” test, the Florida appeals court applied basic principles of corporate law to determine whether a parent company’s merger necessarily meant its subsidiary merged too and couldn’t enforce a noncompete involving one of its staff doctors.

Halfway through a three-year employment contract between the plaintiff and doctor defendant, the plaintiff’s corporate parent was acquired by another entity.  The plaintiff-doctor employment contract contained a 12-month noncompete and specifically said it was not enforceable by third parties, successors or assignees of the parties.

After the acquisition, the doctor defendant quit and went to work for one of plaintiff’s competitors.  The plaintiff sued the doctor for violating the 12-month noncompete. The doctor defended by stating that the parent company’s merger with another entity made the plaintiff a successor under the law that could not enforce the restrictive covenant.  The trial court agreed and entered summary judgment for the doctor.  The employer appealed.

Held: Reversed.  Plaintiff employer can enforce the doctor’s noncompete.

Reasons:

Under Florida law, S. 542.335(1)(f), Florida Statutes (2012),  an employment contractual provision that authorizes a third-party beneficiary, assignee or successor to enforce a restrictive covenant is valid.

The statute is silent on the meaning of “successor” but case law defines it to mean “a corporation that, through amalgamation, consolidation or other assumption of interests, is vested with the rights and duties of an earlier corporation.”

Here, the plaintiff employer’s status did not change after its parent company’s merger.  Under the law, a parent corporation is a separate and distinct legal entity from its wholly-owned subsidiary.  As a corollary, a parent company cannot exercise rights of its subsidiary.

The subsidiary plaintiff here continued its existence after the merger as the same single member LLC and didn’t sell or transfer its assets to another entity.  Any change in company ownership several tiers up the corporate chain simply didn’t impact the doctor’s employment contract since plaintiff continued to operate and to employ the doctor.  As the lone signer of the employment contract that contained the noncompete, plaintiff could enforce it.

Afterwords:

The Court refused to apply the nebulous “culture and mode of operation” test which looks to the parties’ post-merger conduct (i.e., did the parties act as though the acquiring company was dictating the acquired company subsidiary’s actions?) to decide whether a third-party can enforce a noncompete.  Instead, the Court considered whether the plaintiff continued its operations (it did) in the wake of the parent company’s merger.

Under black-letter corporate law principles, the Court found that the plaintiff’s parent company’s merger had no impact on the plaintiff as “no other entity emerged from the transaction as a successor to [plaintiff].”  Summary judgment for the plaintiff reversed.

 

Third Party Enforcement of A Non-Compete and Trade Secret Pre-emption – IL Law

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In Cronimet Holdings v. Keywell Metals, LLC, 2014 WL 580414 (N.D.Ill. 2014), the Northern District of Illinois considers whether a non-compete contract is enforceable by a stranger to that contract as well as trade secret pre-emption of other claims.

Facts and Procedural History

Plaintiff, who previously signed a non-disclosure agreement with a defunct metal company (the “Target Company”) it was considering buying, filed a declaratory action against a competitor (“Competitor”) requesting a ruling that the non-disclosure agreement and separate non-competes signed by the Target Company’s employees were not enforceable by the competitor who bought  the Target Company’s assets. The NDA and non-competes spanned 24 months.

The plaintiff moved to dismiss eight of the ten counterclaims filed by the Competitor.  It argued the Competitor lacked standing to enforce the non-competes and that its trade secrets counterclaim (based on the Illinois Trade Secrets Act, 765 ILCS 1065/1 (“ITSA”)) pre-empted several of the tort counterclaims.

In gutting most (8 out of 10) of the counterclaims, the court applied the operative rules governing when non-competes can be enforced by third parties:

– Illinois would likely permit the assignment of a non-compete to a third party;

– Enforcing a non-compete presupposes a legitimate business interest to be protected;

– A legitimate business interest is a fact-based inquiry that focuses on whether there is (i) a “near-permanence” in a customer relationship, (ii) the company’s interest in a stable work force , (iii) whether a former employee acquired confidential information and (iv) whether a given non-compete has valid time and space restrictions;

– A successor corporation can enforce confidentiality agreements signed by a predecessor (acquired) corporation where the acquired corporation merges into the acquiring one;

– A successor in interest is one who follows an original owner in control of property and who retains the same rights as the original owner;

– The ITSA pre-empts (displaces) conflicting or redundant tort claims that are based on a defendant’s misappropriation of trade secrets;

– Claims for unjust enrichment, quasi-contract relief or unfair competition are displaced by the ITSA where the claims essentially allege a trade secrets violation;

– The ITSA supplants claims that involve information that doesn’t rise to the level of a trade secret (e.g. not known to others and kept under ‘lock-and-key’);

(**4-5).

The court found that since a bankruptcy court (in the Target Company’s bankruptcy) previously ruled that the Competitor didn’t purchase the non-competes, and wasn’t the Target Company’s successor, the Competitor lacked standing to enforce the non-competes.

The Court also held that once the Target Company stopped doing business, its non-competes automatically lapsed since it no longer had any secret data or customers to protect.

The Court also agreed that the Company’s ITSA claim pre-empted its claims that asserted plaintiff was wrongfully using the Target Company’s secret data.  The court even applied ITSA pre-emption to non-trade secret information.  It held that so long as the information sought to be protected in a claim was allegedly secret, any non-ITSA claims based on that information were pre-empted.

Afterwords:

(1) A non-compete can likely be assigned to a third party;

(2) Where the party assigning a non-compete goes out of business, the assignor no longer has a legitimate business interest to protect; making it hard for the assignee to enforce the non-compete;

(3) ITSA, the Illinois trade secrets statute, will displace (pre-empt) causes of action or equitable remedies (unjust enrichment, unfair competition, etc.) that are based on a defendant’s improper use of confidential information – even where that information  doesn’t rise to the level of a trade secret.