Chicago Federal Court Holds That A Contractual Limitation On A Corporation's Ability To Compete Should Not Be Analyzed Like An Employer/Employee Non-Compete

A federal judge in Chicago recently held that when a corporation enters into a contract with another corporation under which it agrees not to engage in certain competitive activities, that agreement not to compete should not be analyzed like an employer/employee non-compete. Owens Trophies, Inc. f/k/a R.S. Owens and Company, Inc. v. Bluestone Designs & Creations, Inc. and Society Awards (N.D. Ill. January 14, 2014). Rather, the Court held that because there is no imbalance of power between the parties in that situation, the enforceability of the contract should be analyzed like any other arms-length transaction, and the employer-employee restrictive covenant framework is inapplicable.

According to the decision, the plaintiff Owens Trophies had entered into a contract with defendant Bluestone, under which Bluestone agreed not to provide the products which it manufactured for Owens Trophies (Emmy Awards) to any other person or entity. Notwithstanding that agreement, Bluestone allegedly produced Emmy Awards for a competitor of Owens Trophies.

After learning about Bluestone’s alleged actions, Owens Trophies sued Bluestone under various theories, including violation of the non-compete. In defense, Bluestone asserted that the non-compete was unenforceable because it was not supported by a legitimate business interest. The Court held that because the employer-employee restrictive covenant framework was inapplicable, Owens Trophies need not show that the restriction was supported by a legitimate business interest. Nevertheless, the Court further held that even if Owens Trophies was in fact required to show a legitimate business interest, it did so because it allegedly provided Bluestone with confidential information that was material to the production of Emmy Awards.

While any restrictive covenant should be drafted with caution, corporation-corporation restrictions such as this one are likely to be reviewed with much greater judicial deference than an employer-employee restriction.