Steven Malitz

Arnstein & Lehr Chicago Partner Steven N. Malitz has written an article entitled, “Leverage and Documentation Create Business Freedom.” In this article, Mr. Malitz discusses his successful representation of a shareholder in two separate suits brought against him by a fellow shareholder and the facts and results of the litigation.

The case involved the disagreement between two shareholders who owned a business for many years, under a “hand-shake.”  Mr. Malitz’ client started an unrelated, non-competitive business in foreign country.  Claiming that Mr. Malitz’ client deserted the goods business, the other shareholder denied the client access to the business and eliminated his compensation. The other shareholder then sued to dissolve the goods business to start his own competing business and also filed a separate suit seeking an ownership interest in, and distributions from, the foreign business. Creating leverage by using substantive law, rules of procedure and business savvy, Mr. Malitz enabled his shareholder client to emerge from litigation free to pursue lucrative business interests.

Mr. Malitz reasons that cases like this could possibly be avoided by documenting business relationships instead of relying on oral agreements. He then goes on to provide valuable take-aways to prevent such litigation.

To read the article in full, click here.
 

E. Jason Tremblay

Arnstein & Lehr Partner E. Jason Tremblay authored the article, “5 ways to protect your company when a key employee departs,” which appeared in the January 23 edition of Inside Counsel. In the article, he stresses the importance for all companies to know what steps to take when an employee decides to leave, especially in circumstances where he or she leaves to work for a competitor.

Mr. Tremblay’s article appearing in Inside Counsel:

5 ways to protect your company when a key employee departs
In this competitive business world, it’s crucial to properly handle an employee’s departure, especially to a competitor

Employees frequently resign to work for competitors. This is likely to happen irrespective of whether they have signed a restrictive covenant. Therefore, in this competitive business world, it is important for all companies to know what steps to take when an employee decides to leave, especially in circumstances where he or she leaves to work for a competitor.

1. Prevent further access to company information
   Once an employee advises the company of their departure, it is critical to assume the worse and that the employee may engage in conduct that is harmful to the company. After all, there is a reason why he or she is leaving the company. The employee should be immediately relieved of any duties that would expose the employee to confidential information or the company’s customers. Passwords and email accounts should be disabled. The employee should be restricted from access to areas where confidential information is kept. The company also should request that the employee return all company-owned equipment such as laptops, cell phones or PDAs that would contain confidential business information, as well as all documents received from or generated during his or her employment.

To read the article in full, including all five steps, please click here.

Thadford A. Felton

On December 1, 2011, the Illinois Supreme Court issued an opinion in Reliable Fire Equipment Company v. Arnold Arrendondo, et al. that set forth the factors that the Illinois courts should look to in evaluating the reasonableness of non-competition agreements. The Court reaffirmed that a non-competition agreement is reasonable only if the following the following four conditions are met:

• The covenant is ancillary to a valid employment relationship;
• The covenant is no greater than is required for the protection of a legitimate business interest of the employer;
• The covenant does not impose undue hardship on the employee; and
• The covenant is not injurious to the public.

In addition, the Court clarified what factors a court should consider in evaluating the “legitimate business interest” of the employer. The court stated that “whether a legitimate business interest exists is based on the totality of the facts and circumstances of the individual case. Factors to be considered in this analysis include, but are not limited to, the near-permanence of customer relationships, the employee’s acquisition of confidential information through his employment, and time and place restrictions.” The Court went on to say that no one factor should be weighted more than any of the other factors as the importance and weight to be given to certain factors will depend on the specific facts and circumstances of the individual case. As a result, “the same identical contract and restraint may be reasonable and valid under one set of circumstances, and unreasonable and invalid under another set of circumstances.”

From a business perspective, the importance of this case is that it should be easier for businesses to enforce non-competition agreements against former employees as a court must now consider a variety of factors in determining the employer’s legitimate business interest. This will give an employer more flexibility in arguing what is its legitimate business interest that needs protection.

Please click here if you would like to view the whole opinion.

Illinois General Assembly considers Illinois Not to Compete Act

Illinois businesses should be aware that Illinois House Bill 4923 would radically alter the law regarding non-competition agreements in Illinois by creating the Illinois Not to Compete Act.  This Act would restrict the enforceability of non-competition agreements in several key respects and create numerous rebuttable presumptions in favor of employees that would make it more difficult for employers to enforce non-competition agreements in Illinois.

The Act would limit covenants not to compete to only “key” employees or independent contractors who either are informed of the non-compete two weeks before their first day of employment or who enter into a non-compete as a result of a promotion or material increase in compensation or bonus.  Further, while Illinois courts have upheld covenants not to compete that are up to three years in duration, this Act would create rebuttal preemptions that any covenant not to compete in excess of one year is void and that any geographic or service area that the contractor did not work in during the year prior to termination of employment is void.  In addition, while the Act would allow courts to modify the terms of overbroad non-competes, courts could not award any damages incurred by employers prior to the date of modification.  Finally if the non-compete contains an attorneys fee provision in favor of the employer, the Act would automatically make the attorneys fee provision mutual and allow courts the discretion to award attorneys’ fees to a prevailing employee in declaratory judgment actions.

A complete copy of House Bill 4923 can be found here.

There have been recent reports of some large companies trying to lock their in-house attorneys into non-competition, non-solicitation and other restrictive covenants.  Other companies thinking about jumping onto this bandwagon may find that they cannot treat their in-house counsel like other employees when it comes to post-employment restrictions.

As a general rule, in most states, an employment agreement with a general counsel or in-house lawyer (or any attorney for that matter) which attempts to prohibit the lawyer from joining a competitor as a lawyer is probably unenforceable.  However, the answer is less clear when it comes to a restrictive covenant that tries to prevent an attorney from working for a competitor in a non-lawyer capacity.  Lawyer agreements that prevent the disclosure of confidential information or the solicitation of customers have been upheld in some instances.  Even attorney agreements that try to deter post-employment competition through the use financial disincentives, such as the threat of losing retirement benefits, may also pass muster.  The bottom line is that companies trying to prevent the loss of legal talent to competitors may have to tread carefully, but they are not without options.

The Rule Against Lawyer Non-Competes.

In Illinois, it is clear that Rule 5.6 of the Illinois Rules of Professional Conduct effectively prohibits restrictions on the rights of a lawyer to practice after termination of an employment or partnership relationship. 134 Ill.2d R. 5.6(a)(providing: “A lawyer shall not participate in offering or making: (a) a partnership or employment agreement that restricts the rights of a lawyer to practice after termination of the relationship, except an agreement concerning benefits upon retirement . . .”);  Dowd & Dowd, Ltd. v. Gleason, 181 Ill.2d 460, 481, 693 N.E.2d 358 (1998)(holding that non-compete agreements are unenforceable as to attorneys based on Rule 5.6 of the Rules of Professional Conduct because it prohibits attorneys from entering into non-compete agreements based on the “public policy” that clients should have the freedom to choose their attorneys).

The American Bar Association and bar associations in other states, such as New Jersey, have also rejected the use of agreements that try to restrict who a corporate counsel may represent after leaving the company. ABA, Comm. Prof. Ethics, Informal Op. No. 1301 (Mar. 25, 1975); N.J. Advisory Comm. on Prof’l Ethics, Op. 708 (reported in N.J.L.J. July 3, 2006)(striking down a non-compete for an in-house attorney and stating that Illinois and other states have done the same). In ABA Formal Opinion 94-381 (1994), the ABA Committee on Ethics and Professional Responsibility interpreted Model Rule 5.6 declared that a provision in an employment agreement between a corporation and its in-house counsel, which restricted the attorney from representing any party against the corporation in the future, was an impermissible restraint on the attorney’s right to engage in the legal profession, even though the attorney may not have been involved in the specific matter during his or her employment with the corporation.

In-House Counsel Non-Disclosure/Non-Solicitation Agreements.

The law is not so clear when it comes to other types of restrictive covenants.  The Illinois State Bar Association (ISBA), has indicated that attorney non-disclosure/non-solicitation agreements may be enforceable.  In ISBA Advisory Opinion on Professional Conduct No.  92-14, 1993 WL 836947 (ISBA January 22, 1993) which involved an attorney who was the co-owner and general counsel of a retail collection agency, when he decided to sell his share in the business, he was asked to enter into a  2-year agreement which would have: (a) restricted his use of the information acquired while an officer of the company; and (b) prohibited him from contacting the company’s customers.  The ISBA found no professional impropriety in the attorney entering into the agreement because “any supposed encroachment on the attorney’s practice is at best indirect….”  Id. at *1.  However, an earlier opinion, Illinois Ethics Opinion 91-12 (1991) rejected a restrictive covenant that prevented lawyers from contacting or representing a firm’s clients for three years after departure.

Financial Disincentives to Deter Attorney Departures.

Can companies use the threat of losing financial benefits to deter in-house counsel from jumping ship?  Some Illinois courts say they can. In Hoff v. Mayer, Brown & Platt, 331 Ill.App.3d 732, 772 N.E.2d 263 (1st Dist. 2002), an attorney who had been with Mayer, Brown & Platt (“MBP”) for 36 years resigned and became a founding partner of a new firm. MBP refused to pay his retirement income in excess of $93,000 per year, plus additional cost-of-living adjustments, pursuant to MBP’s Restated Partnership Agreement, Retirement, Disability & Death Benefit Program (“Plan”), claiming that his resignation was not a “retirement” as defined by the Plan, because he continued to practice law after he left and therefore he forfeited his retirement income. The former partner sued alleging that the denial of his retirement income  was in violation of Illinois Rule of Professional Conduct 5.6, as the Plan was basically a restrictive covenant.  However, the First District affirmed the dismissal of his claim because: (1) that the Plan was a bona fide retirement plan that could deny benefits to a retiring member who continued to practice law, and (2) Rule 5.6 contained an exception that provides: “A lawyer shall not participate in offering or making: (a) a partnership or employment agreement that restricts the rights of a lawyer to practice after termination of the relationship, except an agreement concerning benefits upon retirement . . .” (emphasis added). The First District determined that the exception applied and the provision in MBP’s retirement plan causing the forfeiture of more than $93,000 in retirement benefits per year should the departing attorney practice law anywhere following his resignation was not an onerous condition that unduly restricted his ability to practice law.

More recently, in Hoffman v. Levstik, 369 Ill.App.3d 144, 860 N.E.2d 551, 307 Ill.Dec. 897 (1st Dist. 2006), the Illinois Appellate Court for the First District refused to invalidate a law firm’s partnership agreement as against public policy, even though it also contained financial disincentives for leaving.