Trade Secrets and Noncompete Blog : Non-Compete Lawyer & Attorney : Epstein Becker Green Law Firm : Trade Secrets & Confidentiality Agreements

Last April, I summarized in detail a pending bill (House No. H4607) which would amend the current law on noncompetes. (See April 13, 2010 Blog Entry).  The bill was considered a compromise bill since there was other legislation filed that sought to make all noncompetes in Massachusetts unenforceable (similar to California).  While that bill has not progressed at all, many observers thought that the “compromise bill” would have support, even though it would have made many current agreements unenforceable and would have made it more difficult for employers to protect proprietary information.

Last week, the bill died in Committee.  Obviously, the hearings that were supposed to occur this coming January will not happen.  In essence, the current law on noncompetes in Massachusetts remains intact.  However, one of the bill’s sponsors, Senator Brownsberger, stated to the press last week that he plans to introduce another bill on the same subject.

As in the past, we will continue to monitor the progress of this new legislation and keep you posted.
 

In October 2010, in Xplore Technologies Corp. v. Killion, CV10-5013459S, a Connecticut state court examined whether a non-competition clause that had no specified geographic requirement was enforceable. The Court enforced the clause and held that the geographic area was defined by the uniqueness of the product at issue and the limited potential customers for it.

The plaintiff engineers, develops and markets rugged computer tablets intended for work under extreme conditions, such as the military or outdoor work for a company such as AT&T. The plaintiff’s only competitors in the business are Panasonic, Dell and the defendant DRS Technologies, Inc. (“DRS”). A former employee, who was employed by the plaintiff for approximately six years, agreed to join DRS to promote products and services, including the rugged computer, to businesses like AT&T. When the plaintiff sought an injunction to enforce the non-competition clause, DRS argued, among other things, that the clause was unenforceable because it had no geographic limit.

The Court rejected DRS' defense and concluded that the geographic area was defined by the territory where the three competing companies marketed the rugged computer. The Court stated that with the technical advancements in Internet sales, a set of number of miles from an office is a useless measure in a non-compete agreement because in marketing a new computer product, the world is at your fingertips. The Court held that the geographic area and territory of the rugged computer is restricted only as to the three direct competitors attempting to gain the business from the same client base – Dell, Panasonic and DRS – and that the potential customers for the one product was limited to companies such as AT&T and the military. The Court held that the geographic area is based upon that market area, the unique product and the limited customers. Therefore, that no specific miles are stated in the clause is not a basis to determine that the geographic area element of a non-competition agreement was not satisfied. The Court enjoined DRS from employing Killion in violation of the non-competition clause.
 

Readers of this blog know that, in October 2009, in Sunbelt Rentals, Inc. v. Ehlers, 333 Ill.Dec. 791, 915 N.E.2d 862 (Ill. App. Ct. 2009), an Illinois appellate court reexamined and rejected over thirty years of well-established precedent regarding the enforceability of restrictive covenants. Specifically, it rejected the “legitimate business interest” test long applied as a threshold issue by Illinois courts when deciding the enforceability of a restrictive covenant (i.e., before an Illinois court will address the reasonableness of a restrictive covenant, the employer must first establish that it is supported by a “legitimate business interest” – a tall order given how that term is defined in Illinois).

Since then, we have been closely following Illinois state and federal no-compete cases to monitor the impact of Sunbelt Rentals. To date, its holding remains limited to Illinois’ Fourth District Court of Appeals (i.e., central Illinois, but not Chicago or any of its suburbs) as no court in Illinois has followed its reasoning in a published decision. (One federal district court in Indiana did apply Sunbelt Rentals, in CDW LLC et al. v. Netech Corporation, 2010 WL 2710626 at * 7 (S.D.Ind. July 7, 2010), but it did so without acknowledging or analyzing the split of authority on the issue.)

Last week, in Steam Sales Corporation v. Brian Summers, the first Illinois Appellate District other than the Fourth District re-visited the issue of whether the “legitimate business interest” still applied. While the Court in Steam Sales noted that Sunbelt Rentals’ “rejection of [the “legitimate business interest”] test does merit some consideration,” the Court did not rule on the issue because even under the “legitimate business interest” test, the restrictive covenant at issue was enforceable.

Notwithstanding its failure to address the crux of Sunbelt Rentals, certain aspects of Steam Sales may signal a thawing of judicial attitudes in Illinois toward no-competes.

First, the Court held that the reason why the employer had a legitimate business interest sufficient to support the no-compete was because it has “near permanent customer relationships.” Showing that an employer has “near permanent customer relationships” is one of the two established means in Illinois of establishing a legitimate business interest, but it “is generally absent from businesses engaged in sales.” Lawrence and Allen, Inc. v. Cambridge Human Resource Group, Inc., 292 Ill.App.3d 131, 142 (Ill. App. Ct. 1997). Rather, “near permanent customer relationships” are more typically found in professional services businesses. The employer in Steam Sales sold and maintained boilers. Because boilers are a long-term investment and because long-standing relationships are required to service the equipment and sell new equipment, the Court held that even though the employer was engaged in sales, it had “near permanent customer relationships” and therefore had a legitimate business interest sufficient to support the no-compete at issue.

Second, in Steam Sales, the Court upheld a two-year no-compete. While there is precedent to support a no-compete of such length, many employers today shy away from two-year restrictions out of concern that a Court will find them too long.

Finally, while Illinois courts have sometimes been seen as somewhat hostile to no-competes in employment contracts, the Steam Sales opinion is notably unsympathetic to the employee. Indeed, the Court stated that “[r]egardless of which party initiated the agreement, [the employee] had the option of either not signing it or asking [the employer] to modify the terms of the restrictive covenant. . . . As in Sunbelt Rentals, [the employee] risked the enforcement of the restrictive covenant after he chose to sign it.”

Hence, while Steam Sales did not follow the holding of Sunbelt Rentals with respect to the continuing validity of the “legitimate business interest test,” it nevertheless may signal a thaw in judicial attitudes toward no-competes in Illinois.

As for the long-term impact of Sunbelt Rentals . . . stay tuned.
 

* Co-Authored by Christie O. Tate.

When drafting employee confidentiality agreements, there is a tendency to think that no restriction can be too tight. However, a recent decision by the Illinois Appellate Court, The Town of Cicero v. Wayne A. Johnson, held that a confidentiality provision in a separation agreement was so onerous that the entire provision was unenforceable.

Wayne A. Johnson served as the Inspector General and Superintendent of Police for the Town of Cicero, Illinois from February 2003 to April 2005. On April 12, 2005, Johnson and Cicero entered into a “Confidential Severance Agreement and General Release,” which was drafted by a Cicero attorney. Under the confidentiality provision of that agreement, Johnson agreed that, in addition to keeping the terms of the agreement confidential, “neither he nor his agents will disclose anything relating to his employment” to Cicero’s “remaining employees, former or prospective employees, people doing business with [Cicero], and to the media” (emphasis added).

After Johnson later made public statements to the media regarding his employment with Cicero, Cicero sued him for breaching the confidentiality provision of the agreement. Johnson defended himself by asserting that the agreement was so overbroad as to be unenforceable.

The court sided with Johnson, holding that while Cicero was free to enjoin Johnson from disclosing the terms of the agreement, Cicero could not prevent Johnson from disclosing “anything relating to his employment.” According to the court, such a broad prohibition was harmful to the public, which is entitled to hear from a public official who was charged with investigating allegations of corruption within Cicero’s police community during his tenure with Cicero. But even if Johnson was not a public official, the court found that the provision would cause him undue hardship during his future job-seeking efforts since he would have to be sure none of his conversations about his former position with Cicero included any former Cicero employees, prospective Cicero employees, “people doing business with” Cicero, or any members of the media.

Moreover, the court also found that Cicero had imposed a greater-than-necessary restriction to protect its legitimate interests. It would have been sufficient to require Johnson to keep the terms of the agreement confidential.

Thus, Cicero’s failure to narrowly tailor the confidentiality clause was fatal, as the court found it was overbroad and therefore unenforceable in all respects.