Fiduciary Duties To Employers And Non-Competes

A recent Northern District of Illinois decision, Instant Tech., LLC v. DeFazio, 12 C 491, 2014 WL 1759184 (N.D. Ill. May 2, 2014), has shed some light on the applicability of non-solicitation, non-recruitment and non-disclosure covenants in Employment Agreements.  In Instant Tech, the court held that these types of restrictive covenants were unenforceable in certain situations.

 

While the ruling discussed below provides clear precedent for staffing agencies (namely that most restrictive covenants are unenforceable), it is important to remember that each situation and each agreement is different.  The following can provide guideposts when deciding if there is a valid claim.

 

1. Has the employee worked for less than two years?

 

First the court explained that, although courts do not typically engage in weighing whether consideration is adequate, the adequacy of consideration is one of two elements necessary for enforcing a restrictive covenant in Illinois, the other being that the covenant was ancillary to a valid contract. Id. at *14. The Instant Tech court then addressed what qualifies as “adequate consideration.” Id. the court cited to numerous Illinois cases consistently adhering to a bright-line rule that two or more years of continuous employment is “adequate consideration” for the purposes of enforcing a restrictive covenant. Id.

 

In light of this clear-cut rule, the Instant Tech court held that plaintiff could not enforce its covenant against any defendant who had worked there for less than two years since there was inadequate consideration. Id. On the other hand, there was no issue of adequate consideration as to the defendants who had worked for plaintiff over two years. Id. The court did note, however, that the plaintiff employer never argued that the defendant employees who had been there less than two years received additional consideration, such as increased pay, in exchange for the restrictive covenants, so the court did not address whether such evidence would make the covenants enforceable against them as well. Id.

 

2. What is the nature of the business involved?

Illinois Courts have found that the application of a “three-dimensional rule of reason” is necessary before enforcing a covenant of non-solicitation.  Specifically, Under this rule, a covenant is only enforceable if it “(1) is no greater than is required for the protection of a legitimate business interest of the employer-promissee; (2) does not impose undue hardship on the employee-promisor, and (3) is not injurious to the public.” Reliable Fire Equip. Co. v. Arredondo, 358 Ill. Dec. 322 (Ill. 2011).

The Instant Tech court focused its attention on the extent of plaintiff’s legitimate business interest underlying the Non-Solicitation Covenant – restricting an employee from appropriating its confidential information and/or customer relationships. Instant Tech at *15. The court explained that the relevant factors include, but are not limited to, “the near permanence of customer relationships, the employee’s acquisition of confidential information through his employment, and time and place restrictions.” Id. quoting Reliable, 358 Ill. Dec. at 332. The court elaborated that a customer relationship’s “near permanency” hinges in large part on the nature of the business involved. Instant Tech at *15. Therefore, if the nature of plaintiff’s business does not engender customer loyalty by offering unique products or services, and customers utilize multiple suppliers simultaneously, then no “near-permanent” relationship exists. Id.

Applying these rules and principles to the staffing agency business, the court held that the non-solicitation covenants were inoperable because plaintiff did not enjoy “near-permanent” relationships with its clients. Id. Indeed, the evidence at trial clearly showed that companies utilizing staffing agencies would select whichever agency provided it with the best candidate the quickest. Id. Even a Master Services Agreement between the employer and staffing agency did not guarantee any business or revenue. Id. In the absence of such a relationship, the court reasoned, plaintiff’s non-solicitation covenant was unreasonable and thus unenforceable. Id.

3. Did the Non-Disclosure attempt to cover non-confidential information?

The Court did not consider plaintiff’s client information as “confidential” because, in the staffing agency business, both corporate, employee-seeking clients as well as job-seeking candidates publicly post their information in order to fill their respective needs. Id. at *16; see also Lawrence & Allen, Inc. v. Cambridge Human Res. Grp., Inc., 292 Ill.App.3d 131 (2nd Dist. 1997); Office Mates 5, North Shore v. Hazen, 234 Ill.App.3d 557 (1st Dist. 1992) (both holding same in staffing agency context).

4. What is the turn-over rate of the business or company at issue?

The Instant Tech court turned to whether defendants had violated their Non-Recruitment Covenants by soliciting plaintiff’s former and current employees. Instant Tech at *16. The Non-Recruitment Covenants at issue in Instant Tech were blanket restrictions on persuading any of plaintiff’s current or former employees to leave or breach their employment agreement, and the purported reason was to maintain plaintiff’s workforce stability. Id. at *17. The court explained that, while workforce stability can be a legitimate interest underlying a restrictive covenant, the restrictions imposed, like any other covenant, must be no greater than necessary to protect that interest. Id. citing Reliable Fire, 358 Ill. Dec at 325. Furthermore, blanket restrictions are rarely necessary or reasonable, and the underlying interest must be real – not merely aspirational. Instant Tech at *17.

The court held the Non-Recruitment Covenants unreasonable and thereby unenforceable. Id. The court reasoned that, in “direct sales industries” like the staffing agency business, employers often experience “massive” turnover rendering non-recruitment covenants ineffective and therefore unnecessary. Id. The Instant Tech plaintiff was no exception, and the trial record showed that it did experience massive turnover thereby rendering any claimed interest of “workforce stability” illusory. Id. Finally, the court also noted that the Non-Recruitment Covenant lacked any place or time limitations on its enforceability, which contributed to its unreasonableness. Id. 

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