1st District Rules Insurance Broker’s Non-Compete Clause Overbroad and Unenforceable

February 25, 2016

A state appeals panel in the 1st District recently ruled, in Assured Partners, et. al. v. Schmitt, that several provisions in an insurance broker’s non-compete clause were too broad and unreasonable, and therefore unenforceable. The ruling provides another reminder to employers that, since the Illinois Supreme Court’s holding in Reliable Fire Equip. v. Arredondo, in 2011, courts are performing a more exhaustive review of restrictive covenants in employment agreements and often finding them to be unenforceable as a matter of law.

By way of background, in 2013, employers AssuredPartners, Inc. and ProAccess LLC filed suit against their former employee, alleging breach of contract and tortious interference with a contract. The employee had worked for ProAccess, beginning in 2006, as an insurance broker specializing in lawyers’ professional liability insurance. In 2011, ProAccess was acquired by AssuredPartners, and the employee subsequently entered into a new agreement that guaranteed him a base salary of $240,000 and four years of employment, in exchange for adhering to non-compete provisions that ultimately became the subject of the lawsuit.

A few days after employee resigned in May of 2012, he sent his personal contact information to ProAccess customers that were named in a valuable customer data list, which he had serviced during his employment. Soon after his resignation, the employee began working for another company where he again specialized in professional liability insurance. In the complaint, AssuredPartners and ProAccess alleged these post-resignation actions by the employee violated multiple restrictive covenant provisions of his employment agreement. However, the Cook County Circuit Court ruled in favor of the employee on the breach of contract claim and held that the restrictive covenants were overly broad and unreasonable.

On appeal, the panel agreed with the circuit court, finding “the restrictive covenant that plaintiffs seek to enforce acts as a blanket prohibition intended to bar [employee] from working as a broker, in any capacity, within the entire universe of professional liability insurance business anywhere in the country,” and was therefore “overbroad and unenforceable as a matter of law.” The restrictive covenants prevented the employee from contacting any potential customers of ProAccess and from using any information he acquired while working there in the future, even if that information was considered common knowledge in his profession. Thus, the panel determined, even if the agreement had only applied to lawyers’ professional liability insurance, it would still fail the “reasonableness test” because both “the geographical scope of the agreement and the scope of activities it seeks to suppress clearly exceeds that which is necessary to protect [the plaintiffs] from threats against its business interests.”

The panel’s decision is consistent with the new standard for reviewing restrictive covenants that was established by the Illinois Supreme Court’s ruling in Reliable Fire Equip v. Arredondo. Prior to Reliable Fire, to enforce a restrictive covenant, an employer would need only demonstrate it was protecting a legitimate business interest and that the activity, time and geographic restrictions in its covenant were reasonable. In Reliable Fire, however, the Supreme Court directed lower courts to also consider the “totality of the circumstances” surrounding the employment agreement and alleged breach. By also laying out a broader host of factors for the court to consider, the Illinois Supreme Court’s decision provided circuit court judges with greater discretion in determining the enforceability of restrictive covenants on a case-by-case basis. As a result, it has become more difficult to determine whether restrictive covenants will hold up in court. Given the uncertainty, employers should be careful when drafting non-compete provisions of their employment agreements, and seek legal counsel if necessary.