(photo credit: www.glogster.com)
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.