Restrictive Covenant Update: Don’t Forget to Establish Your Legitimate Business Interest!
Let’s consider the following scenario. Executive is hired by an employer and signs a standard restrictive covenant agreement. Executive is later terminated and, thereafter, immediately opens up a competing business, begins to solicit and hire her former co-workers and commences soliciting her former employer’s customers. Normally, you would think this would be a straightforward restrictive covenant case and that the departing executive would be enjoined from engaging in such conduct. However, the Seventh Circuit Court of Appeals in Instant Technology LLC v. DeFazio, Case Nos. 14-2132 and 14-2243 (7th Cir. July 1, 2015) felt otherwise, holding that, while the departing executive violated her restrictive covenant agreement, the covenants failed to protect any legitimate business interests of the employer. As discussed below, this recent case should serve as a stark warning to all Illinois employers to ensure they have evidence to support all the elements of a breach of restrictive covenant claim before filing suit against departed employees.
Instant Technology is a company engaged in the business of placing information technology professionals at companies in need of such workers. DeFazio, who executed a standard restrictive covenant agreement as a condition of her employment, served as a vice president of sales and operations for Instant Technology. After she was terminated, she opened a competing business, solicited away several of her former co-workers, began soliciting candidates with whom she had contact at Instant Technology and began competing with Instant Technology by attempting to place those candidates at clients with whom Instant Technology conducted business. Interestingly, DeFazio did not dispute, and in fact admitted, she had violated her restrictive covenant agreement. However, she denied that the restrictions were enforceable, as Instant Technology did not have a legitimate business interest in need of protection.
At trial, Instant Technology argued that it had three legitimate business interests sufficient to support the restrictions: confidential information, client relationships and workforce stability. However, the trial court disagreed (and the appellate court affirmed) that those were not legitimate interests as they applied to Instant Technology. First, the Court reiterated that there was no confidential information at issue, as DeFazio appeared to have obtained information about the candidates and customers from public sources. Second, the evidence at trial revealed that protecting client relationships was not valid because Instant Technology’s clients were not necessarily loyal to it. In fact, the evidence revealed that many clients who hired Instant Technology also hired between 5-10 other staffing agencies at the same time in order to secure candidates. In short, there were no exclusive or long-term arrangements between Instant Technology and its customers sufficient to establish legally protectable client relationships. Third, Instant Technology’s argument that it had a protectable interest in the stability of its workforce was likewise rejected, since the evidence at trial revealed that over 75% of Instant Technology’s employees had left or been terminated during the course of the litigation.
In sum, this case establishes that it is crucial for employers to fully evaluate and obtain evidence to support that a legitimate business interest exists before filing a lawsuit against a departing employee, even a former employee that is brazen enough to openly poach employees and solicit clients. Otherwise, as Instant Technology learned the hard way, prematurely filing a lawsuit without a protectable interest could prove to be unsuccessful, as well as very costly.
Should you have any questions regarding this case or its impact on your company, please do not hesitate to contact E. Jason Tremblay or your designated Arnstein & Lehr LLP attorney.