Category Archives: Employment Law Updates

First District Court of Appeals Teaches Employers Who Over-Reach with Post-Employment Restrictions on Competition and Solicitation a Hard Lesson.

Yesterday, the Illinois Appellate Court in the case of Assured Partners, Inc., et al v. Schmitt, 2015 IL App (1st) 141863 refused to: (1) enforce as written an employment agreement containing overly broad non-competition, non-solicitation and confidentiality provisions; or (2) modify the restrictions to bring them within the confines of the law (called “blue penciling”). Assured Partners stands as a cautionary tale to Illinois employers and arguably reflects a continuing trend on the part of the First District Appellate Court (which encompasses Cook County and Chicago) against the enforcement of restrictive covenants — notwithstanding the 2011 Illinois Supreme Court decision ofReliable Fire Equipment v. Arredondo, which suggested that the kinds of legitimate business interests that employers might use to justify such restrictions were not limited to near-permanent customer relationships and confidential information.

The facts of Assured Partners warrant some discussion. The case involved a former employee, Schmitt, who had worked for a wholesale insurance brokerage, ProAccess (a subsidiary of Assured). ProAccess specialized in professional liability insurance for lawyers, accountants and healthcare professionals, while Schmitt’s business for it “centered” on lawyer’s professional liability insurance (“LPLI”). Although Schmitt worked for ProAccess more than 7 years, he quit only one year after signing a new 2012 employment contract that contained the restrictions at issue. Previously an at-will employee, Schmitt’s new contract with ProAccess guaranteed him four years of employment and a base salary of $240,000. After a dispute over compensation, Schmitt quit, began brokering wholesale LPLI for a competitor and solicited his former customers using a policy expiration list that ProAccess claimed he had taken from it.

ProAccess sued Schmitt and his new employer for breach of contract and intentional interference with business relations, and Schmitt countersued to declare the provisions of his ProAccess employment agreement unenforceable. At the trial court level, the court granted Schmitt summary judgment, holding that:

Schmitt’s noncompete was overbroad because it prevented him from engaging in any business relating to professional liability insurance, not just LPLI;

Schmitt’s nonsolicit was overbroad because it not only kept him from soliciting his old ProAccess’ customers, but also the customers of more than 30 affiliated brokerages in the U.S. and U.K. (and prospective customers of ProAccess and its affiliates); and

Schmitt’s confidentiality provision was overbroad because it applied to all of the information, observations and data he obtained during his ProAccess employment and which was related to its business or affairs.

On appeal, the First District effectively agreed with the trial court, finding that the noncompete was unreasonable as a matter of law because it kept Schmitt from engaging in the brokerage of wholesale professional liability insurance anywhere in the country, when that was not necessary to protect ProAccess’ legitimate business interests. As Schmitt had only specialized in LPLI while employed, the court suggested that ProAccess only had a legitimate interest in protecting that business, and the noncompete was not narrowly tailored to do that. (The court also stated that the noncompete was overly broad relative to ProAccess’ alleged interests in its confidential policy expiration list).

As for the nonsolicitation clause, the First District found it similarly unreasonable because it applied not only to those actual customers Schmitt developed during his employment, but also to customers and potential customers of ProAccess and its affiliates, whether he had contact with them or not by virtue of his employment. The nonsolicit was thus far broader than necessary to protect ProAccess’ interests in the specific client relationships Schmitt had built up while employed.

Notably, when ProAccess asked the appellate court to enforce the nonsolicit only as to those customers Schmitt serviced while employed, it declined, stating: “We decline to rescue a drafter from the risks of crafting a restrictive covenant that is patently overbroad.”

Finally, the First District found the confidentiality provisions of the ProAccess agreement overbroad as well, because they:

applied to all information, observations and data of which he became aware during the time he was employed by ProAccess, regardless of whether it was truly confidential and whether or not he became aware of by virtue of his work with ProAccess; and

prohibited not only Schmitt’s disclosure of such information but its use. According to the court, the latter prohibition would effectively limit his ability to work in the insurance industry.

Notably, the limiting language of the confidentiality clause (stating that it did not apply to information that “becomes generally known to and available for use by the public”) did not save it, because the general public’s ignorance of information is still not enough to render that information truly confidential.

At end then, ProAccess seemingly caught Schmitt red-handed: he was competing in the very LPLI space in which he worked while at ProAccess; he was soliciting his former ProAccess customers; and he was allegedly using a confidential ProAccess document, the policy expiration list, to do so. And although the First District suggested in many cases that ProAccess had a legitimate interest in protecting these customer relationships and this particular information, it awarded ProAccess absolutely nothing because it had overreached in its agreement.

Assured Partners thus stands as a stark reminder of two critical points to bear in mind when drafting restrictive covenants: (1) noncompetes, nonsolicits and nondisclosure agreements must be tied to an employer’s legitimate (and narrowly defined) business interests and the restrictions must be tailored as narrowly as possible to only promote those legitimate interests; and (2) having a “blue penciling” clause in agreement, which typically directs a court to reduce overbroad restrictions and enforce them to the greatest extent permitted by law, is not a surefire way to save otherwise overbroad agreements. Contrary to the Leo Burnett adage then, “reaching for the stars” can indeed have dire consequences, as it did in this case.

In its Quicken Loans, Inc. decision (attached), the NRLB held that  a non-disparagement clause in Quicken Loans’ Mortgage Banker Employment Practice Agreement constituted an unfair labor practice per the National Labor Relations Act (NLRA), because it would substantially hinder employees’ exercise of rights under Section 7 of the NLRA.  Section 7 gives employees to engage in “concerted activity,” i.e. the right to  act together to try to improve  pay and/or working terms and conditions  – even if they aren’t in a union.   Section 7 therefore gives employees the right, with certain limitations, to criticize an employer during such an effort, so long as the help or involvement of other employees is sought.   (You may recall our past advisories, which alerted you to the NLRB striking down various social media policies on the same grounds).  Notably and perhaps of even more concern, the NLRB also held that the same agreement’s confidentiality provisions constituted an unfair labor practice, because employees effectively had a Section 7 right to disclose and discuss even non-public information about the company amongst themselves.

In a recent lawsuit initiated by the EEOC in the U.S. District Court for the Northern District of Illinois, EEOC v. Baker & Taylor, Inc. (also attached), the Commission alleged that one employer’s non-disparagement clause also unlawfully prevented workers from cooperating in administrative investigations, a right guaranteed to them by Title VII.  This was true even though the non-disparagement clause at issue contained an exception for employees who truthfully responded to a subpoena or “[complied] with a government investigation.”   The case was resolved two weeks ago via a Consent Decree in which Baker & Taylor agreed to change its severance agreement.

In sum, these recent developments yet again demonstrate just how difficult it is to effectively draft enforceable provisions in employment agreements, severance agreements and employee handbooks, including but not limited to non-disparagement clauses, waivers of employee rights and claims, and confidentiality undertakings.  In fact, the panoply of provisos and exceptions to such agreements (e.g. the ever-expanding list of claims that may not be waived in an employee release even after settlement) caused one client to wonder aloud recently what, if anything, it was getting in exchange for making severance payments to terminated employees.  While I would not go that far just yet, I certainly appreciate the sentiment.

View Decision Documents

Click to View Baker & Taylor Waiver and Release
Click to View EEOC v. Baker & Taylor, Inc. Complaint
Click to View NLRB Decision Quicken Loans, Inc.

LOWIS & GELLEN LLP EMPLOYMENT UPDATE

Recently,  the Illinois First District Appellate Court (which covers Chicago) issued the attached decision in Fifield v. Premier Dealer Services, Inc.  In this extremely important decision, the appellate court effectively ruled that – in the absence of any other legally sufficient consideration (e.g. money, employment for a fixed term) – an employer has to give a new or existing employee at least two years of continued  employment to support a restrictive covenant ( a promise not to compete, solicit, disclose confidential information).

Prior to the Fifield decision, the  law in Illinois had been that when an employer asked an existing (as opposed to new) employee to sign a new restrictive covenant,  it had  to provide something additional of value to the employee in exchange for the new restrictions.  Under the old law, continuing employment of anywhere between 8 months and 24 months or months after that demand for a restriction could possibly suffice as that something of value.  The rule did not apply to new employees, as the initial employment relationship was deemed to be adequate consideration for the employee’s promise not to compete, etc.  The First District Court of Appeals has now expanded these concepts  to new employees who are required to sign restrictions at the onset of employment, and seems to have made the 24 month rule a bright-line minimum.  Furthermore, the Fifield court applied this consideration rule in a case where the employee had chosen to resign early on during the employment relationship, and not just to cases where the employer fired the restricted employee.  Consequently, the Fifield decision arguably gives employees  a means (i.e. resignation) to unilaterally control the enforceability of the post-termination restrictions on solicitation and competition to which they are subject.

At end, this decision might be seen as another bellwether change in Illinois law on restrictive covenants — one that comes only a year after the Illinois Supreme Court had issued its  decision in Reliable Fire Equipment v. Arredondo, which arguably made it easier for Illinois employers to enforce restrictive covenants  Although it is not certain that Fifield will be upheld by the Illinois Supreme Court, it is currently the state of the law and strongly suggests that employers at least consider giving key employees with less than two years of employment some additional  consideration (e.g. a payment or employment for a term).  It also means that companies  that acquire the assets of another company and then offer key employees of the target new employment  must carefully consider whether the business of the target may be adequately continued post-acquisition through such employees.

For more information about the Fifield decision, or Lowis & Gellen LLP’s employment law practice, please contact partner Rob Smeltzer at (312) 456-7952 or rsmeltzer@lowis-gellen.com.

Click here to view Fifield pdf

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