Seventh Circuit Strikes Down Employer’s Claim for Permanent Injunctive Relief in Non-Compete Case

Earlier this month, in Tradesman International, Inc. v. Black, et al., 2013 WL 3949020 (7th Cir. 2013), the Seventh Circuit affirmed summary judgment against a plaintiff construction staffing firm that sued four former employees for violating restrictive covenants they signed while employed by plaintiff. 

The Plaintiff sought to enforce 18-month long and (effectively) nation-wide restrictive covenants (“non-competes”) that prevented defendants from (a) ever disclosing plaintiff’s proprietary information and (b) from soliciting construction staffing business within 100 miles of a Tradesman field office and within 25 miles of any Tradesman customer location.  2013 WL 3949020 at *2. 

The District Court granted summary judgment for the defendants on all claims because plaintiff failed to prove compensable damages and therefore could not show irreparable harm: a required permanent injunction element.

Disposition: The Seventh Circuit affirms District Court on summary judgment ruling; reverses on denial of defendants’ attorneys’ fees under Illinois Trade Secrets Act claim. 

Grounds: (1) Plaintiff employer failed to show irreparable harm; and (2) Plaintiff’s restrictive covenants (the “non-competes”) were unreasonable – both in terms of content and geographic scope.

Reasoning:  Plaintiff showed no harm, much less irreparable harm.  Irreparable harm means damages that are ongoing and difficult to quantify.  The Court held that since plaintiff failed to seek preliminary injunctive relief (as opposed to permanent injunctive relief), this undermined its irreparable harm claim (in other words, why didn’t the plaintiff move for preliminary injunctive relief if its damages were so dire?). 

The Court noted that a permanent injunction would be too “costly” as it would require defendants to reverse several years worth of efforts in building up their competing staffing firm.  Tradesman, at *7-8.

The Seventh Circuit also found the non-competes signed by the defendants unreasonable under Ohio law.  A contractual choice-of-law clause provided that Ohio law would govern (The plaintiff was an Ohio corporation.)

Ohio considers a restrictive covenant’s time and space limitations, whether trade secrets or confidential information are/is involved, whether the employer seeks to stifle ordinary competition, and the detrimental impact on the employee’s livelihood.  Id. at *9.

Applying the factors, the Tradesman Court found that the proprietary information which plaintiff sought to protect was unreasonable.  The Court noted that the information plaintiff was suing on – worker’s compensation and manager compensation rates, marketing materials and Dun & Bradstreet reports – was either publicly available, generally known or was information that the plaintiff didn’t try to keep secret.  *8-9. 

A plaintiff generally has to show that it tried to keep information confidential (under “lock and key”) for that information to qualify as a trade secret.

The Court also found the non-competes’ geographic restrictions unreasonable.  They were so expansive, they were basically nation-wide restraints.  To comply with the non-competes as  written, the defendants really couldn’t work anywhere in the U.S.  *9-10.

Lessons:

1/ publicly available or generally known information will not qualify for proprietary or trade secret information protection;

2/ restrictive covenants that don’t involve true trade secrets or proprietary information and that have nation-wide reach (“you can’t work anywhere in the U.S.”, e.g.) will not be enforced; and

3/ the party that loses a trade secrets case may have to pay the winning party’s fees even if the party had good faith belief in its claim when it filed the lawsuit – but later learns that its claim lacks merit (and still presses forward with the case).

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.