Trade Secrets & Employee Mobility

A bill recently introduced in the Illinois House of Representatives, the "Illinois Covenants Not To Compete Act," would substantially alter the law regarding non-competition agreements in Illinois. In most respects, it would limit the enforceability of no-competes and make them easier for individuals to challenge. However, in certain respects, the bill would make no-competes easier to enforce.

An article recently published in the New York Law Journal explores an employee's duty of loyalty and the permissible steps that employee may take, prior to termination of employment, in preparing to compete with the employer.

On January 29, 2010, in an unpublished opinion, Majestic Marketing, Inc. v. Nay, No. E047085 (Fourth District, Division Two), at least one California Court of Appeal appears to have recognized the viability of the trade secret exception to California Business & Professions Code ¶16600 prohibition of employee non-competition agreements.

In Zambelli Fireworks Manufacturing Co., Inc. v. Wood, the U.S. Court of Appeals for the Third Circuit recently held that a stock sale did not invalidate an employee's non-compete agreement.

In Baker v. Tremco Incorporated, a case applying Ohio law, the Indiana Supreme Court recently held that, for purposes of a non-competition agreement, competition with a subsidiary corporation also constituted competition with the parent.

As noted in a blog post in October 2009, in Sunbelt Rentals, Inc. v. Ehlers, 333 Ill.Dec. 791, 915 N.E.2d 862 (Ill. App. Ct. 2009), an Illinois appellate court reexamined and rejected over thirty years of well-established precedent regarding the enforceability of restrictive covenants. To date only one published decision, Aspen Marketing Services, Inc. v. Russell, No. 09 C 2864, 2009 WL 4674061 (N.D. Ill. Dec. 3, 2009), has cited Sunbelt. In that case, the Court noted its awareness of Sunbelt and its rejection of the legitimate business interest test, but applied that test anyway.

A recent decision from the California Court of Appeal questioned the viability of the trade secrets exception to California's broad prohibition against noncompete covenants.

A recent decision from the First Circuit Court of Appeals, Astro-Med, Inc. v. Nihon Kohden America, Inc. and Kevin Plant, which affirmed a jury verdict granting the plaintiff more than $1 million, illustrates that it is important for employers to be familiar with applicable state law with respect to their employees' continuing obligations to previous employers arising from restrictive covenants in employment agreements.

A trial court in Chicago recently held that because a restrictive covenant did not contain a provision extending the restricted period during any time of breach, there was no basis to re-write the contract to extend the restricted period. The court also declined to extend the restricted period on any equitable basis.

The Second Circuit Court of Appeals has rejected applications by IBM to prevent a former employee, David L. Johnson, from continuing to work at rival Dell Inc. IBM sought to enforce a non-compete agreement which Johnson intentionally signed in the wrong place.

From the mid-1970s until a few weeks ago, Illinois law on enforceability of restrictive covenants was clear: employers seeking to enforce a restrictive covenant first had to establish that the covenant was necessary to protect either confidential information or a near permanent customer relationship - the two recognized "legitimate business interests" sufficient to support a restrictive covenant under Illinois law.

In late September 2009, the Illinois Fourth District Court of Appeal, in Sunbelt Rentals, Inc. v. Ehlers, determined that the "legitimate business interest" test was not supported by any decision of the Illinois Supreme Court. Accordingly, the Sunbelt court held that, in determining whether a restrictive covenant is enforceable under Illinois law, a court should evaluate only the time-and-territory restrictions contained therein. In doing so, the Fourth District Court of Appeals departed from the clearly established case law of all appellate courts in Illinois (and also previous decisions of the Fourth District).

A federal judge in Illinois recently held that a contractual requirement that a professional race car driver pay post-employment royalties to his former employer is unenforceable.

A federal judge in Chicago recently held that continued employment for less than one year was not sufficient consideration for a post-employment restrictive covenant.

With pending legislation in Massachusetts seeking to do away with non-compete agreements, both sides are struggling to find the solution to the problem. The question is: How can Massachusetts make itself more attractive to the tech community? Is the answer to do away with non-compete agreements or to simply modify them and restrict their duration and scope?

Florida law, specifically section 542.335, Florida statutes, which generally authorizes courts to enforce non-compete and other post-employment restrictive covenants if reasonable, leaves a number of issues unaddressed. Several of those issues are addressed in an opinion issued recently by the Eleventh Circuit Court of Appeals in Proudfoot Consulting Co. v. Gordon (11th Cir., July 30, 2009). The Eleventh Circuit affirmed the district court's injunction, but reversed the $1.66 million damages award to the former employer.

Not many lawsuits under the Employee Retirement Income Security Act (“ERISA”) turn on whether an employer legitimately insisted that an employee sign a no-compete agreement in order to receive benefits, but a federal court lawsuit currently pending in Chicago presents that very scenario.

Specifically, in a case brought by a former Bank of America employee against Bank of America and others, Charles Corbisiero alleges that he was lured into continuing to work for Bank of America by a promise of certain allegedly vested bonuses and other benefits, only to be told upon his ...

A high-profile no-compete case currently pending in Chicago may turn on whether merely "preparing to compete" constitutes "engaging in" contractually prohibited business activities.

A recent decision of the United States District Court, Southern District of New York, illustrates the importance for employers of making sure non-competition agreements are correctly executed by employees.

A recent article in Lawyer USA discusses how litigation over noncompetition and nonsolicitation agreements has been on the rise in recent years.

In EMC Corp. v. David A. Donatelli, case number 09-1727-BLS2 in the Suffolk County Superior Court in Massachusetts, the Court modified the preliminary injunction it had issued against Donatelli by allowing him to start working for HP in California. The Court issued a narrow order tied to the protectable interest of EMC while at the same time, not depriving Donatelli his opportunity to pursue his livelihood in a competitive business.

On May 4, the Superior Court in Massachusetts ruled that EMC, a Massachusetts corporation, could obtain injunctive relief preventing Mr. Donatelli, who had been President of one of EMC's major divisions, from starting a job at HP in California even though California has a statutory prohibition on covenants not to compete. The Court made some important findings in its decision.

An executive's resignation and intention to begin work for a competitor of his former employer has resulted in a bicoastal battle of lawsuits over the terms of a noncompete clause in his employment agreement.

States vary widely in their willingness to enforce noncompetition agreements. Illinois, for example, will enforce a noncompetition agreement, but only after fairly rigorous judicial scrutiny. Notwithstanding such scrutiny, Illinois employers can draft enforceable noncompetition agreements.

Penthouse Club, the adult nightclub chain, filed a suit seeking a temporary restraining order and other injunctive relief against a former director for violating a noncompete and nondisclosure agreement.

In a recent case, Florida's Third District Court of Appeals reversed the issuance of a temporary injunction because it failed to specify with reasonable particularity the conduct being enjoined.

As the enforcement of non-competition agreements becomes more crucial than ever, some employers are including provisions that require or promise payments to the former employees during the post-employment period of non-competition. If properly crafted, such a payment may act as the additional consideration needed for the promise not to compete and may dissipate the former employee's argument of undue hardship during the non-competition period. Employers promising to make such payments must be prepared to follow through with their promises, as the Eighth Circuit recently held.

The Florida Second District Court of Appeals' recent decision in Fiberglass Coatings v. Interstate Chemical, Inc., Case No. 2DO8-1847 (Fla. 2d DCA, February 27, 2009), illustrates an interesting defense to a tortious interference claim. Absent evidence that the new employer induced the former employee to violate his non-compete agreement, merely hiring an employee whom the employer knows to be in violation of a non-compete agreement may not be sufficient to sustain a tortious interference claim under Florida law.

A Florida trial court should not have entered a temporary injunction enforcing a non-compete agreement against a former employee on an ex parte basis, i.e., without notice to the employee, according to Florida's Fourth District Court of Appeals in a recent decision, Bookall v. Sunbelt Rentals, Case No. 08-26291 (Fla. 4th DCA, December 3, 2008).

Under Florida law, where an employment contract expires by its terms and the parties continue to perform as before, an implication arises that they have mutually assented to a new contract containing the same provisions as the old. But this principle does not apply to non-competes and other restrictive covenants contained in employment contracts, as illustrated by a recent decision by the Third District Court of Appeal, Zupnik v. All Florida Paper, Inc., Case No. 3D08-1371 (Fla. 3d DCA, Dec. 31, 2008).