Staffing Firm’s Trade Secrets and Tortious Interference Claims Against Ex-Employees Rejected After Bench Trial (Part II of II)

Top Secret

The plaintiff staffing firm lost big in Instant Technology, LLC v. DeFazio, 2014 WL 1759184 (N.D. IL 2014).  The Northern District Court found for the defendants on the plaintiff’s non-compete counts (see prior post) as well as on its trade secrets, tortious interference and breach of fiduciary duty claims. 

Trade Secrets Analysis

The ex-employee defendants signed broad non-disclosure agreements that prevented them from divulging plaintiff’s business information to third parties.  In finding that the plaintiff failed to establish either valid trade secrets or that the defendants used the alleged secrets, the Court applied the key Illinois trade secrets rules:

–  a trade secrets plaintiff must establish (1) that it possessed trade secrets and (2) that the defendant misappropriated them;

– a trade secret is information not generally known to others.  The plaintiff must concretely identify the secret: it isn’t enough for the plaintiff to point to “broad areas of technology” and claim that something there “must be” secret;

– misappropriation means improper acquisition, unauthorized disclosure or unauthorized use.  See 765 ILCS 1065/2(b);

 – misappropriation by “improper acquisition” means theft, bribery, breach of or inducement of a breach of a confidential relationship or espionage through electronic means;

  – misappropriation by “unauthorized disclosure” or “unauthorized use” means the defendant used the alleged trade secrets or disclosed them to others for purposes other than serving the interests of the trade secrets owner;

– where information is generally known to others who could benefit from using it, the information is not a trade secret

 (*18-19).

The staffing company failed to establish a protectable trade secret.  None of the client or candidate information the plaintiff was suing on was secret.  The Court found that client names, hiring needs as well as candidate identities and qualifications were publicly available (through phone or internet searches) and information that was freely given out by plaintiff’s clients.  This is because many of the plaintiff’s clients use multiple rival staffing firms simultaneously.

The Court also held that the plaintiff failed to show misappropriation by the defendants.  The trial testimony (18 witnesses testified at the bench trial) established that the defendants were authorized to store and transport plaintiff’s documents via thumb drives and that each defendant physically returned all of plaintiff’s documents and data.

Tortious Interference Analysis

The plaintiff also lost on its tortious interference with contract and prospective economic advantage claims.  Plaintiff alleged that certain defendants tortiously interfered with plaintiff’s client and candidate relationships.

In Illinois, to show tortious interference with contract, the plaintiff must establish: (1) the existence of valid and enforceable contract between plaintiff and third party; (2) defendant’s awareness of that contract; (3) defendant’s intentional and unjustified inducement of a breach of that contract; (4) breach of the contract by the third party; and (5) damages.  Tortious interference with prospective economic advantage has identical elements except the plaintiff must specify customers who actually contemplated entering into a business relationship with the plaintiff.

Since the non-compete lacked consideration and was unreasonable, the contract was unenforceable and so plaintiff’s  tortious interference with contract claim failed.   The plaintiff’s tortious interference with prospective economic advantage count also fell short since the plaintiff couldn’t identify a specific client that didn’t materialize due to defendants’ conduct.  The Court held that proof of a past customer relationship was insufficient to prove a reasonable expectation of a future business relationship.  (¶22).

Breach of Fiduciary Duty Claim

The Court also sided with the defendants on the plaintiff’s breach of fiduciary duty claim.  An Illinois employee can form a rival corporation and outfit it for business while employed by his former employer.  And where there is no valid post-employment restrictive covenant, an employee is free to compete with his ex-employer. 

Further, only a corporate “officer” can be liable for soliciting employees for a new, competing venture.  Job title is not enough to establish corporate officer status.  Instead, the court looks to whether the defendant performs “significant managerial and supervisory responsibilities for operation of the office”.  Here, one of the individual defendants – despite being Executive Vice President of plaintiff – had no managerial authority.  As a result, this defendant wasn’t a true corporate officer and couldn’t be liable for breach of fiduciary duty in soliciting the other defendants to join her in the new staffing firm.  (¶¶ 19-20).

Take-away: The case again illustrates the high evidence burden for a plaintiff to show the existence of a trade secret and its misappropriation.  It also underscores how difficult it is for a plaintiff to prove tortious interference without specifically pinpointing lost contracts or hoped-for business relationships.  The case also construes Illinois law to subject only a corporate officer – with management authority – to breach of fiduciary duty claims where that officer solicits employees of a corporation to join the officer in a competing venture.

IT Recruiting Firm’s Non-Compete and Trade Secrets Claims Against Former Employees Fail – ND IL (Part I of II)

In Instant Technology, LLC v. DeFazio, 2014 WL 1759184, the Northern District of Illinois examines Illinois non-compete law, trade secrets rules and a slew of business torts in the context of a heated battle between rival recruiting firms and some of their key employees.  This article distills the case’s key restrictive covenant principles.  Part II of the post will summarize the court’s ruling on the plaintiff’s trade secrets, tortious interference, and civil conspiracy claims.

The plaintiff staffing firm sued several former employees and their current employer – a rival recruiter – for violating restrictive covenants contained in their employment contracts and for disclosing the plaintiff’s trade secrets in connection with their current position with the competing firm.  Plaintiff sued when it found out that the defendants had contacted some of plaintiff’s clients and job placement candidates in violation of their non-compete and non-solicitation provisions.  After a several-day bench trial and hearing testimony from almost 20 witnesses, the Court ruled in the defendants’ favor on all of the plaintiff’s claims.

Illinois Non-Compete Rules

The Court found that the defendants’ non-compete provisions were unenforceable because they lacked consideration and because the plaintiff couldn’t establish a legitimate business interest to be protected by the non-competes.  Under Illinois law, when assessing a restrictive covenant (here, a “non-compete”), the court looks to whether (1) the covenant is ancillary to a valid contract, and (2) whether it’s supported by consideration.  Consideration to support a non-compete is lacking if an employee can be fired the minute after he signs it and will only have adequate consideration only if, after signing the covenant, the employee remains employed for a substantial period of time – defined as two years or more of continued employment. See Fifield v. Premier Dealer Services, Inc. 2013 IL App (1st) 120327.

Aside from requiring at least two years of continuous employment, a valid non-compete has to be “reasonable.”  The reasonableness of a non-compete turns on whether it (1) is no greater than necessary to protect a legitimate business interest of the employer; (2) the non-compete doesn’t impose an undue hardship on the employee; and (3) it’s not injurious to the public. 

A legitimate business interest will usually exist where (a) the employee has access to the employer’s confidential trade information; and (b) the employee is tampering with the employer’s established customer relationships.  Other factors a court considers when determining whether an employer has a legitimate business interest include (i) the “near-permanence” of customer relationships; (ii) whether the employee’s acquired the employer’s confidential information; and (iii) the non-compete’s time and space restrictions.

Near-permanency (of customer relationships) depends on the nature of the business involved.   Businesses that engender customer loyalty and that offer specialized, unique services have a better chance of establishing a near-permanent client relationship than do companies whose services are more generic and disposable.   An industry marked by high turnover or one in which customers uses many vendors – like the recruiting business (or a large corporation that uses regional law firms) – will not meet the near-permanence criterion.

Under these guideposts, the Court invalidated the former employees’ non-competes.  First, several of the employees didn’t work the requisite two years to support the non-competes: they lacked consideration.  In finding the non-competes substantively unreasonable, the Court noted that the staffing industry is mercurial and subject to “massive turnover.”  The recruiting industry also uses elemental (read: not secret) sales techniques like cold calls to make sales and identify potential prospects.

And while maintaining workforce stability can be a legitimate business interest (as the plaintiff argued), where an industry is subject to rampant turnover – with frequent employee departures and terminations – the workforce stability argument fails.  The Court held that enforcing the defendants’ non-competes wasn’t likely to enhance the plaintiff’s workforce stability given the high turnover in the recruiting business and its basic, non-specialized sales techniques (cold-calling, e.g.).

Afterwords: Instant Technology is significant and instructive for its expansive analysis of Illinois non-compete principles, its validation of the two-year employment rule announced in Fifield (see http://paulporvaznik.com/fifield-case-two-years-of-continous-employment-sufficient-consideration-to-enforce-employee-restrictive-covenants/1261) and its discussion of the legitimate business interest non-compete clause prong.  The case illustrates that with a business that is historically subject to high turnover and that utilizes direct selling techniques, it will be hard for an employer to establish near-permanence with its customers ad, by extension, difficult to show a legitimate and protectable business interest.

 

Illinois Court Gives Agency Law Tutorial In Commercial Lease Fight

Three agency law issues that I regularly encounter in commercial litigation practice are (1) authority, (2) ratification and (3) a contract that doesn’t identify a valid entity.

The authority question posed is whether an individual – typically a company employee or independent contractor – can bind the company by the individual’s conduct.

Ratification applies where a corporate principal accepts the benefits of an agent’s unauthorized conduct.

The third, “unclear party” issue arises where a contract is signed by an individual on behalf of an unsueable entity such as a street address (i.e. “Tenant: 15 S. Wacker Drive”) or a generic business name with no “Inc.”, “Ltd.” or “LLC” designation.

Cove Management v. AFLAC, Inc. 2013 IL.App (1st) 120884, features all of these in a commercial lease dispute involving a large insurance company.

The lease designated the company as “tenant” but was signed by an independent  (non employee) sales agent.  After a lease default, the plaintiff landlord sued the company to recover rent damages.

The trial court dismissed the suit, buying the company’s argument that the agent who signed the lease wasn’t authorized to sign on the company’s behalf.  The landlord appealed.

Held: Affirmed.

Rules/Reasoning:

Even though the agent used business cards, envelopes and stationery submitted that bore the company colors and logo, it wasn’t enough to saddle the company with lease liability.

The Court rejected this argument as it laid out the operative Illinois agency rules:

– An agent’s authority to bind a principal can be actual or apparent;

– Actual authority can be express or implied;

– Express authority is authority explicitly granted to the an agent by the principal, while implied authority is proven circumstantially based on the nature of the agent’s position;

– Apparent authority is authority imposed by law – regardless of whether there is actual (express or implied) authority – based on a principal holding out an agent as having authority to bind the principal;

– Apparent authority must be based on words or conduct of the principal; not of the agent;

– If there is no showing of detrimental reliance by a third party on the agent’s authority; there can be no finding of apparent authority;

– A third party dealing with an agent has a duty to inquire into an agent’s supposed authority and can’t blindly rely on an agent’s claim that he has authority to enter contracts on behalf of his corporate principal;

– Ratification applies where a principal learns of an unauthorized action (taken by a supposed agent) but retains the benefits of the transaction;

– Ratification requires the principal- with full knowledge of an agent’s unauthorized act – to manifest the intention to accept the benefits of the unauthorized act or to acquiesce in the transaction

¶¶ 9-14.

The Court found that there was no actual authority since the agent’s independent contractor agreement specifically provided that the agent could not sign contracts for the company.

There was also no apparent authority since plaintiff pointed to no conduct by the company that clothed the agent with authority to execute leases in the company’s name.

All of plaintiff’s apparent authority arguments were based on conduct of the agent; not the company.

The Court also found the lessor failed to show the company ratified the agent’s conduct.  All rent payments that were made came from the agent and there was  no evidence the company even knew the lease existed before suit was filed.

The corporate lack of lease knowledge also doomed the lessor’s alternative unjust enrichment/quantum meruit counts.  Since the company didn’t know about the lease, the plaintiff couldn’t show it conferred a benefit on the insurance company based on the sales agent renting the office space.  (¶¶ 34-35). (Quantum meruit requires plaintiff to prove that the defendant benefitted from plaintiff’s services.)

Take-aways: This case demonstrates the paramount importance of precision in lease drafting.  The insurance company defendant probably should have vetted all independent agent leases to ensure that the leases don’t designate the company as tenant.

Procedurally, the case shows how important it is to file counter-affidavits in response to a section 2-619 or summary judgment motion.  Since the landlord didn’t file a counter-affidavit in response to the company’s own affidavit, the Court had to accept the company’s version of events as true.  This spelled defeat for the landlord.