Tag: non-compete

STAFFING FIRM’S NON-COMPETE AGREEMENTS HELD UNENFORCEABLE

The Seventh Circuit affirmed that a Chicago-based information technology staffing firm’s non-compete agreements were unenforceable.  The Company, Instant Technology LLC, sued four former employees and its former Vice President for Sales and Operations, Elizabeth DeFazio, for joining a competitor firm, Connect Search LLC, which she was co-founding.  Connect Search also won business from Instant Technology’s recent clients.

  Instant Technology brought suit against these former employees for poaching employees, soliciting clients and divulging proprietary information to Connect Search.  The district court found that there was no evidence showing that defendants misused proprietary information.  Although the Defendants admitted breaching the covenants not to solicit and not to recruit, the district court held that those provisions in Instant Technology’s agreement were unreasonable and unenforceable under the Illinois Supreme Court case, Reliable Fire Equipment v. Arredondo, which held that a restrictive covenant is only valid if it serves a legitimate business interest.  The district court ruled that the covenants did not service a legitimate business interest because Instant Technology did not have permanent relationships with its customers and the former employees did not acquire confidential information during their employment.

Instant Technology argued before the Seventh Circuit that the district court used the wrong analysis, and that a “totality of circumstances” analysis should have been used to determine whether the covenants were unreasonable.  However, the Seventh Circuit rejected that argument.  The Court reasoned, “[Instant Technology] thinks “totality of the circumstances” means “all of the circumstances”…That’s an understandable reading given the slippery formulation, but it cannot be correct. ‘All’ circumstances is a lot of circumstances—indeed, infinitely many. Few matter to the question whether a restrictive covenant is reasonable, and even fewer matter enough that it would be a reversible error for the district court to omit them from its findings. The court didn’t discuss the price of eggs in Guatemala, but that does not require a remand.”

The Court further stated that if the validity of restrictive covenants, like non-compete agreements, depended on the “totality of the circumstances” then it would be hard to predict what covenants would be enforceable, which in turn, may cause both employers and employees to be worse off.

The full decision can be read here.

IS YOUR NON-COMPETE OR NON-SOLICITATION AGREEMENT ENFORCEABLE?

Non-compete and non-solicitation agreements may be contained in employment contracts or may be a separate agreement between an employee and employer.  Each state has its own distinct laws about whether such types of agreements are enforceable.  New Jersey, along with many other states, have a strong public policy in support of an individual’s right to pursue one’s profession or livelihood, so courts will generally look to the reasonableness of the agreement to determine whether or not the agreement should be given effect.

A non-compete agreement is typically executed to protect an employer’s trade-secrets or to restrict an employee from working in a certain geographic area for a certain number of years after his/her employer has ended.  The trade secret protection is usually enforced against former employees who had access to sensitive business information. 

A trade secret is information that gives an employer a competitive advantage in the marketplace because it is not generally known to the public and cannot be readily learned by others.  A trade secret comes in many forms—it can be a formula, pattern, program, device, method, technique or process that an employer has created and kept a secret.  Thus, when an employee quits or is terminated, an employer may be concerned that they will use the information that they have learned at work at another job and may seek to enforce the non-compete agreement.

The work restriction protection of a non-compete agreement usually prevents an employee from working for a competitor in a certain geographic space for a period of time.  The geographic restriction typically concerns a range of miles, and the time restriction can range from as short as 6 months to as long as a few years.  If you are an IT consultant or another professional, such as a physician, for example, you should be mindful of the existence of a non-compete agreement which may be in place when you are transitioning to a new job because your employer may seek to stop you from taking the job.

Although a non-compete and a non-solicitation agreement are similar in that both types of agreements place restrictions on a former employee for a certain period of time, a non-solicitation agreement restrains an ex-employee from soliciting customers or employees of his or her former employer after employment has ended.   For example, if you are a high-grossing sales agent at Company X and have accepted a job offer from Company X’s competitor, Company Y, Company X may be able to take legal action against you if you e-mail, call or otherwise contact your old clients from Company X for business.

A non-compete and non-solicitation agreement will be enforced if it is reasonable. It may be held to be unreasonable, and therefore invalid, if it lasts for too long of a time, covers too large of a geographic area, is too broad in scope, does not cover information that requires legal protection (i.e., a trade secret), or causes an undue hardship on the worker.

If such an agreement is reasonable and a former employer seeks to enforce it, a court may order the employee to cease working at a particular job and the employee may be liable for monetary damages.  As such, it is important to seek the advice of an employment law attorney when entering into an employment contract containing such restrictions as well as when you are terminated or quit a job.