‘Helpful’ Client List Not Secret Enough to Merit Trade Secret Injunction – IL Court

Customer lists are common topics of trade secrets litigation.  A typical fact pattern: Company A sues Ex-employee B who joined or started a competitor and is contacting company A’s clients.  Company A argues that its customer list is secret and only known by Ex-employee B through his prior association with Company A.

Whether such a claim has legal legs depends mainly on whether A’s customer list qualifies for trade secret protection and secondarily on whether the sued employee signed a noncompete or nondisclosure contract. (In my experience, that’s usually the case.)  If the court deems the list secret enough, the claim may win.  If the court says the opposite, the trade secrets claim loses.

Novamed v. Universal Quality Solutions, 2016 IL App (1st) 152673-U, is a recent Illinois case addressing the quality and quantity of proof a trade secrets plaintiff must offer at an injunction hearing to prevent a former employee from using his ex-employer’s customer data to compete with the employer.

The plaintiff pipette (a syringe used in medical labs) company sued to stop two former sales agents who joined one of plaintiff’s rivals.  Both salesmen signed restrictive covenants that prevented them from competing with plaintiff or contacting plaintiff’s customers for a 2.5 year period and that geographically spanned much of the Midwest.  The trial court denied plaintiff’s application for injunctive relief on the basis that the plaintiff failed to establish a protectable interest in its clients.

Result: Trial court’s judgment affirmed.  While plaintiff’s customer list is “helpful” in marketing plaintiff’s services, it does not rise to the level of a protectable trade secret.

Rules/Reasoning:

Despite offering testimony that its customer list was the culmination of over two-decades of arduous development, the court still decided in the ex-sales employees’ favor.  For a court to issue a preliminary injunction, Illinois requires the plaintiff to show: (1) it possesses a clear right or interest that needs protection; (2) no adequate remedy at law exists, (3) irreparable harm will result if the injunction is not granted, and (4) there is a likelihood of success on the merits of the case (plaintiff is likely to win, i.e.)

A restrictive covenant – be it a noncompete, nondisclosure or nonsolicitation clause – will be upheld if is a “reasonable restraint” and is supported by consideration.  To determine whether a restrictive covenant is enforceable, it must (1) be no greater than is required to protect a legitimate business interest of the employer, (2) not impose undue hardship on the employee, and (3) not be injurious to the public.  (¶ 35)

The legitimate business interest question (element (1) above) distills to a fact-based inquiry where the court looks at (a) whether the employee tried to use confidential information for his own benefit and (b) whether the employer has near-permanent relationships with its customers.

Here, there was no near-permanent relationship between the plaintiff and its clients.  Both defendants testified that many of plaintiff’s customers simultaneously use competing pipette vendors.  The court also noted that plaintiff did not have any contracts with its customers and had to continually solicit clients to do business with it.

The court then pointed out that a customer list generally is not considered confidential where it can be duplicated or pieced together by cross-referencing telephone directories, the Internet, where the customers use competitors at the same time and customer names are generally known in a given industry.  According to the Court, “[i]f the information can be [obtained] by calling the company and asking, it is not protectable confidential information.” (¶ 40)

Since the injunction hearing evidence showed that plaintiff’s pipettes were typically used by universities, hospitals and research labs, the universe of plaintiff’s existing and prospective customers was well-defined and known to competitors.

Next, the court rejected plaintiff’s argument that it had a protectable interest because of the training it invested into the defendants; making them highly skilled workers. The court credited evidence at the hearing that it only takes a few days to teach someone how to clean a pipette and all pipette businesses use the same servicing method.  These factors weighed against trade secret protection attaching to the plaintiff’s customers.

Lastly, the court found that regardless of whether defendants were highly skilled workers, preventing defendants from working would be an undue hardship in that they would have to move out of the Midwest to earn a livelihood in their chosen field.

Afterwords:

This case provides a useful summary of what a plaintiff must show to establish a protectable business interest in its clients.  If the plaintiff cannot show that the customer identities are near-permanent, that they invested time and money in highly skilled workers or that customer names are not discoverable through basic research efforts (phone directories, Google search, etc.), a trade secrets claim based on ex-employee’s use of plaintiff’s customer list will fail.

The Fifield Case: Two Years of Continuous Employment = Sufficient Consideration to Enforce Restrictive Covenants

In Fifield v. Premier Dealer Services, Inc. 2013 IL App (1st) 120327, http://www.state.il.us/court/Opinions/AppellateCourt/2013/1stDistrict/1120327.pdf the Court squarely held that two years of continued employment is required to uphold a noncompetition or nonsolicitation provision.

 Facts and Procedural History

Plaintiff resigned about three months after starting his job as an insurance salesman and went to work for a competing firm.  He preemptively sued his former employer seeking a declaration that the noncompete he signed wasn’t enforceable. employment contract were unenforceable.  The trial court agreed and granted summary judgment   for the plaintiff.  The employer appealed.

Held: Affirmed. 

Rules/Reasoning:

Court rejected the employer’s two main arguments: that (1) the two-year consideration rule didn’t apply because the Plaintiff signed the restrictive covenants before he was hired (and so this wasn’t really a post-employment restriction at all); and (2) the offer of employment itself was sufficient consideration to support the noncompete and nonsolicitation provisions – since Plaintiff was free to refuse to sign the employment contract and go work somewhere else. 

The Court held it didn’t matter whether Plaintiff signed the covenants before or after he was hired since at-will employment can constitute an “illusory benefit” as the employer can fire (and the employee can quit) at any time for any reason.

The Court also held that the two years of continued employment consideration rule applies even where an employee resigns on his own (like Plaintiff).  Fifield, ¶ 19.  And since Plaintiff was only employed for a little more than 3 months after he signed the noncompete, this fell far chronologically short of the requisite two-year period.  Fifield, ¶ 19.  In addition, the “first-year provision” (Plaintiff’s firing without cause during first employment year nullifies restrictive covenants) didn’t affect the Court’s analysis: “at most, [Plaintiff’s] employment was only protected for one year, which is still inadequate under Illinois law.”  Id.

 Take-away: Fifield could spell trouble for employers because it seems to open the door for employees to breach restrictive covenants with impunity – so long as they resign within two years of their start date.  The case also shows that courts may view at-will employment as “illusory benefit” and deem such employment insufficient consideration to enforce post-employment restrictions.  In addition, based on the Court’s discussion of the “first year provision”, employers may be well-served by providing that restrictive covenants won’t bind the employee if he’s fired without cause within two years of his start date.  This would seem to make it easier for an employer to argue that post-employment restrictions are enforceable.