ILLINOIS SUPREME COURT OPINES ON LAW OF COVENANT NOT TO COMPETE

Illinois Supreme Court

Justice Charles E. Freeman

On December 1, 2011, the Illinois Supreme Court handed down a decision on covenants not to compete (Reliable Fire Equipment Company v. Arnold Arredondo et al.). Justice Charles E. Freeman wrote the judicial opinion.  This decision generated a lot of discussion not only among legal commentators but also by business reporters in Crain’s Chicago Business and the Chicago Tribune.

Covenants not to compete are permissible in Illinois and many employers use them in employment contracts, separation/severance agreements or in agreements for the sale of a business.  The business community certainly has an obvious interest in the topic and we employment attorneys scrutinize a new case to see how it affects the law of non-competes and its application to our clients’ situations whether they be the promisee or promisor, employer or employee, or selling entity or purchasing entity.

What is all the fuss about?  The court simply sought to re-settle Illinois law after the issuance of couple decisions by appellate courts that muddled it.

Here is what you need to know. The court has reaffirmed the longstanding three-prong inquiry into the   reasonableness of  a restraint on competition: 1) whether enforcement  be will be injurious to the public; 2) whether enforcement will cause undue hardship to the promisor; and 3) whether the restraint imposed is greater than is necessary to protect the promisee,  namely,  the “legitimate business interest” of the promisee. The court stated “we continue to recognize the legitimate business interest of the promisee as a long-established component in the three-prong rule of reason.”

The other major pronouncement of the court is that “whether a legitimate business interest exists is based on the totality of the facts and circumstances of the individual case.”  Courts can still consider such non-exclusive, non-exhaustive factors such as near-permanent customer relationships, employee’s obtaining employer’s confidential information, and time and geography of restrictions.  However, the court makes clear each factor is of equal weight and will be determined by the facts of a particular case.

Accordingly, the decision may give a party more opportunities to argue whether a particular non-compete clause is enforceable.  A party’s having more grounds to argue does not necessarily translate into increased odds of prevailing.  I concur with the school of thought that the decision does not give any particular advantage to a party.

Nevertheless, as I and others have noted, the Court’s holding “whether a legitimate business interest exists is based on the totality of the facts and circumstances of the individual case” will likely result in more parties being willing to roll their dice and litigate, assuming they have the financial wherewithal to do so.

Copyright © 2012 by G. A. Finch, All rights reserved.

SUGGESTED NEW YEAR’S RESOLUTIONS ON NON-COMPETES, CONFIDENTIALITY AGREEMENTS, AND SOCIAL MEDIA

It is the beginning of the year.  The time for New Year’s Resolutions.  My little son reminded me on New Year’s Eve for us to make our New Year’s “Revolutions.”  His revolution was to do 40 minutes of guitar practice per day (up from 20 minutes).  He had carefully written it down and happily wadded it into a ball to throw into the fireplace.  As the flame consumed his promise to himself, I complimented him on his lofty ambition. Resolutions are indeed personal intentions of revolutions directed at ourselves.  My son’s malapropism has some relevant meaning.

It got me to thinking about appropriate resolutions for executives.  There are many I could conjure up, but three seemed like an easy number to digest and remember.

Resolution # 1: Look Before You Leap

At this time of new possibilities and opportunities, an executive who is considering moving to another company should carefully scrutinize his non-compete, non-solicitation, and confidentiality agreements he has with his current employer to ascertain whether he would be in violation.  The executive should not try to do this without the assistance of legal counsel.  Employers have gotten more aggressive in seeking enforcement of these agreements as evidenced by the many court cases around the country.

Resolution #2: It’s Not Secret If Everyone Knows Or Employees Don’t Know It’s A Secret

Confidentiality Agreements are meant to protect the proprietary information and trade secrets of a business.  If the executive leadership has not instituted safeguards, controls, and notices of confidentiality for its important business information, then do not expect a court readily to treat it as confidential information.

An employee confidentiality agreement is a good start.  Physical and technological protections of business information along with legal protection of intellectual property through copyrights and patents are a good finish.   Think locked filing cabinets, password protected computer files, documents marked “confidential,” and so forth.  The New Year is a good time to establish protocols for safeguarding trade secrets, etc.

Resolution #3: Know How To Use Social Media But Don’t Lose The Personal Touch

If you are an executive or professional, no matter what your age, you are committing business development and networking malpractice by not understanding and utilizing social media whether it is LinkedIn, Facebook, Twitter, blogs, etc.  Whether you realize it or not, you, your business, or your profession are affected by social media and will continue to be at an accelerated rate.

You don’t have to be a “techy” to join LinkedIn or pen a blog – I am living proof of that.  You must do something or you will be increasingly on the margins of access to information sharing.  After some skepticism, I recently signed up for Twitter and I will let you know how it goes.  Older executives must adapt and be continuous learners.

Despite the rise of social media, it is still not a substitute for meeting with people in the flesh, having conversations on the telephone, and sending thank you notes and condolence cards.  Being there and showing up still counts for a lot.  Younger executives should cultivate old fashion pressing the flesh.

Senior executives and the twenty-something young Turks can learn from each other.  To borrow a phrase from my son, that would be a nice “revolution.”