A federal judge in Chicago recently taught a painful lesson to an Illinois employer: even if information is sufficiently sensitive and valuable that it could qualify as a “trade secret,” it won’t unless the owner of the information took adequate steps to protect its secrecy.

In a thorough opinion issued in the case, Abrasic 90 Inc., d/b/a CGW Camel Grinding Wheels, USA v. Weldcote Metals, Inc., Joseph O’Mera and Colleen Cervencik, U.S. District Judge John J. Tharp, Jr. of the Northern District of Illinois explained that “there are two basic elements to the analysis” of whether information qualifies as a “trade secret”: (1) the information “must have been sufficiently secret to impart economic value because of its relative secrecy” and (2) the owner “must have made reasonable efforts to maintain the secrecy of the information” (internal quotation omitted).

According to Judge Sharp’s opinion in Abrasic 90 Inc., when the long-time president of grinding disc manufacturer CGW Camel Grinding Wheels (“CGW”) left CGW to start a competing business, Weldcote Metals, Inc. (“Weldcote”), he took with him a flash drive with information about CGW’s pricing, customers, and suppliers. He later hired another former CGW employee to join him at Weldcote and she, too, brought with her CGW information that she believed “might be helpful to her at Weldcote.” Some of this CGW information was uploaded to Weldcote’s computers and used “as a general reference point and a benchmark when determining some of Weldcote’s initial needs,” and some of the CGW information was shared with Weldcote sales reps, who were “instructed” to “target key CGW distributors.”

With these facts, CGW no doubt thought it had a compelling claim for trade secret misappropriation and that it was likely to receive injunctive relief. But Judge Tharp denied CGW’s request for a preliminary injunction under the federal Defend Trade Secrets Act and the Illinois Trade Secrets Act, in large part because he found that CGW had taken “almost no measures to safeguard the information that it now maintains was invaluable to its competitors.” In fact, Judge Sharp wrote that CGW’s data security “was so lacking that it is difficult to identify the most significant shortcoming.”

According to Judge Sharp, the following were among the data security measures that CGW could have taken, but did not:

  • entering into non-disclosure and confidentiality agreements with employees;
  • enacting a policy regarding the confidentiality of business information “beyond a vague, generalized admonition about not discussing CGW business outside of work”;
  • training “employees as to their obligation to keep certain categories of information confidential”;
  • asking departing employees whether they possessed any confidential company information, and if they do, instructing them to return or delete it;
  • adequately training CGW’s IT manager about data security practices;
  • restricting access to sensitive information on a need-to-know basis; and
  • as appropriate, labelling documents “proprietary” or “confidential.”

And so, the moral of this story is that if a company wants to claim that its information is a statutory trade secret, it needs to employ information security measures reasonably consistent with that claim. Companies which ignore the lesson taught by Judge Sharp do so at their own peril.

The Illinois Appellate Court recently declined to adopt a bright line rule regarding the enforceability of five year non-competes or three year non-solicits, and instead directed courts to interpret the reasonableness of any such restrictive covenants on a case-by-case basis.

In Pam’s Acad. of Dance/Forte Arts Ctr. v. Marik, 2018 IL App (3d) 170803, the plaintiff dance company sued a former employee for breaching a non-disclosure agreement and restrictive covenant by allegedly opening a dance studio within 25 miles of plaintiff and soliciting students and teachers by means of an “improperly obtained” customer list. Following a split resolution on a motion to dismiss, the trial court certified two questions for appellate review, including the one pertinent to readers of this blog: whether a post-employment non-compete lasting five years or a post-employment customer/co-worker non-solicit lasting three years is per se unenforceable as a matter of Illinois law?

Notwithstanding the facial over-length of these restrictions, the Illinois Appellate Court declined to find that three or five year restrictive covenants were de facto unenforceable. Instead, the Court reiterated the need for the trial court to consider the totality of the circumstances, explaining that “the reasonableness of the restrictive covenant at issue here requires the resolution of a number of facts” – facts to be resolved at the trial court level.

While the court’s ruling suggests that temporal restrictions of three or five years may, in appropriate circumstances, be permissible, practical experience and other Illinois cases indicate the need for employers to narrowly tailor restrictive covenants, including temporal restrictions. To avoid challenges to the overbreadth of a restrictive covenant, employers should adhere to the standards set forth in the Illinois Supreme Court’s seminal decision, Reliable Fire Equipment Co. v. Arrendo, in which the Court held that a restrictive covenant is only enforceable if it: (1) is no greater than required for the protection of a legitimate business interest of the employer-promisee; (2) does not impose undue hardship on the employee-promisor; and (3) is not injurious to the public.

On Monday, attorneys general in eleven states, including New York, New Jersey, Massachusetts, California, and Illinois, revealed that they are investigating several prominent fast food franchisors for their potential use of no-poaching or non-compete agreements restricting the ability of low wage workers to obtain a better-paying job with another franchise. To that end, these attorneys general have propounded document and information requests to these restaurants, returnable August 6, 2018.

In the Illinois AG’s press release, Attorney General Madigan stated that “No-poach agreements trap workers in low-wage jobs and limit their ability to seek promotion into higher-paying positions within the same chain of restaurants.” Madigan claims that at least 58 percent of major franchisors have no-poach provisions in their franchise agreements. This is not the first time that the Illinois AG has taken aim at non-compete agreements. Over two years ago, Madigan’s office sued sandwich chain Jimmy John’s for employing what it deemed “highly restrictive non-compete agreements,” ultimately reaching a $100,000 settlement with the franchisor. Ten months after Illinois passed the Freedom to Work Act, which prohibits private sector employers from requiring non-compete covenants of low-wage employees, defined as the greater of the applicable federal, state, or local minimum wage (currently $7.25 under federal law and $8.25 under Illinois state law) or $13 per hour, Madigan sued a national payday lender for requiring its employees, including workers who earn less than $13 an hour, to sign a non-compete agreement as a condition of employment.

Illinois is not the only state to pursue non-compete reform. Several other states recently have enacted legislation curbing the use of non-competes with respect to certain categories of workers, such as certified nurse practitioners and midwives (New Mexico) and workers in the broadcasting industry earning under a certain salary (Utah). Other states have proposed similar legislation. For example, New Hampshire bill SB 423 would ban non-compete agreements with “low-wage employees.” On the other end of the spectrum, Vermont House Bill 556 and Pennsylvania House Bill 1938 would ban all non-competes other than those formed in connection with the sale of an ownership interest in a business entity or the dissolution of a partnership or limited liability company. Even if these bills ultimately fail, they signal a rising trend of state-level restrictive covenant reform, which will likely gain momentum as state attorneys general step up enforcement in this area.

We non-compete lawyers often rely on an old rule of thumb when analyzing the enforceability of a non-compete: if the restriction is so broad that it would even prohibit an employee from working as a janitor for a competitor, then it is very unlikely to be enforced by a judge. And so when a federal judge expressly endorses such a rule of thumb, the urge to blog about it is simply irresistible.

In Medix Staffing Solutions Inc. v. Daniel Dumrauf, Judge Ellis of the Northern District of Illinois addressed the enforceability of a restrictive covenant which prohibited employment in any capacity at another company in the industry.  The defendant argued that this restriction was so broad that it “would bar him from even working as a janitor at another company.”  While Judge Ellis described that example as “a bit far-fetched,” she nonetheless found “no language in the Covenant that makes it an inaccurate statement of [the Covenant’s] prohibitions.”  Accordingly, she held that the restriction was unenforceable on its face and that “[t]here is no factual scenario under which it would be reasonable.”  Accordingly, she held that “[t]his is an ‘extreme case’ where dismissal at the motion to dismiss stage is permissible and appropriate.”

And while noting that courts have the power to modify overbroad restrictive covenants, Judge Ellis refused to do so here, holding that Medix must instead “live with [its] decision” not “to draft an appropriate restrictive covenant.”

So, employers, the moral of the story is this: if your non-compete really would block an employee from working as a janitor for a competitor, it is time to update your non-compete, paying due heed, of course, to issues of adequacy of consideration for any such modification and other case law and statutory developments.

Several states in recent years have enacted laws that have been designed, in varying degrees, to limit non-competes, including California, Illinois, and Nevada. Which states and cities are most likely to do the same in 2018?

The New Hampshire and New York City legislatures have introduced bills that seek to prohibit the use of non-compete agreements with regard to low-wage employees. Under New Hampshire’s Bill (SB 423), a “low-wage employee” is defined as one who earns $15.00 per hour or less.  The New Hampshire Bill was introduced on January 24, 2018 and is scheduled for a hearing in February.  Under New York City’s bill (Introduction 1663), a “low-wage employee” means all employees except for manual workers, railroad workers, commission salesmen, and workers employed in a bona fide executive, administrative, or professional capacity whose earnings are in excess of $900 dollars a week. In addition, the New York City Bill would prohibit employers from “requir[ing] a potential employee who is not a low-wage worker to enter into a covenant not to compete, unless, at the beginning of the process for hiring [the employee], [the] employer disclos[es] in writing that [the employee] may be subject to such a covenant.”  The New York City Bill was introduced by the City Council on July 20, 2017 and filed on December 31, 2017.

Other more sweeping proposals to restrict the use of all non-compete agreements have been introduced in Pennsylvania and Vermont.  The scope of Vermont’s Bill (HB 556) appears to be broader than Pennsylvania’s and prohibits, with exceptions, any agreement “not to compete or any other agreement that restrains an individual from engaging in a lawful profession, trade, or business.” HB 556 was introduced on January 3, 2018 and is currently in Committee.  Pennsylvania’s Bill (HB1938) prohibits (also subject to some exceptions), an agreement between an employer and employee that “is designed to impede the ability of the employee to seek employment with another employer.” The Bill includes provisions that would award attorneys’ fees and damages (including punitive damages) to those employees who prevail in litigation against an employer concerning the non-compete. HB 1938 also would require that any litigation involving a resident of Pennsylvania be decided in a Pennsylvania state court under Pennsylvania law.  The Pennsylvania Bill was introduced and referred to Committee on November 27, 2017.

Massachusetts and Washington have also introduced legislation that would add requirements for employers seeking to use non-compete agreements. In Massachusetts, six separate bills have been introduced, three of which (HB 2371, SB 840, and SB 1017) would require employers to include a “garden leave clause” (or “other mutually agreed upon consideration”) in the non-compete agreements.  The garden leave clause would require employers to pay former employees, on a pro rata basis, either 50 percent (under HB 2371) or 100 percent (under SB 840 and SB1017) of their earnings for the duration of the restricted period.  The Massachusetts Bills were introduced and referred to Committee on January 23, 2017.  In Washington, lawmakers recently introduced a bill (HB 1967) which would require employers to “disclose the terms of the [non-compete] agreement in writing to the prospective employee no later than the time of the acceptance of the offer of employment or, if the agreement is entered into after the commencement of employment, the employer must provide independent consideration for the agreement.”  Additionally, HB 1967 would allow an employer to recover actual damages, statutory damages of $5,000, and attorneys’ fees and costs if an employer requires an employee to sign a non-compete agreement that contains provisions that the “employer knows are unenforceable.”  The Washington Bill was introduced in the House on February 2, 2017 and now is in Committee in the Senate.

At this point it is too early and difficult to predict whether the proposed laws will garner enough support to clear the necessary legislative and executive hurdles to be enacted. Sometimes state bills seeking to restrict the use of non-competes fail to gain enough traction.  Indeed, in 2017 both Maryland’s HB 506 and New Jersey’s SB 3518 died in their respective legislative houses soon after being introduced; Massachusetts especially has a track record of introducing bills intended to limit the use of non-compete agreements that fail to become laws.  Of the bills still in play, the Washington bill is furthest along and seems like it may get passed, though it too may die in Committee.  In any event, employers across all states (and in these states especially) should stay tuned and continue to draft narrowly tailored and enforceable non-competes.

Earlier this week, Illinois Attorney General Lisa Madigan sued payday loan company Check Into Cash of Illinois, LLC for allegedly requiring that all of its employees in Illinois, regardless of position or pay, sign a standard non-compete agreement which broadly limits their employment mobility for one year post-termination.

According to the Complaint, Check Into Cash’s standard non-compete agreement effectively precludes employment with any entity that offers any “consumer lending service,” regardless of whether the entity is an actual competitor; it applies within a 15 mile radius of any of Check In To Cash’s more than 1,000 stores – regardless of the location where the employee actually worked; all employees are required to sign it; and employees receive no consideration for signing the agreement, other than the prospect of at-will employment.

The Complaint was brought pursuant to the recently enacted Illinois Freedom to Work Act (which bars non-competes for Illinois employees earning $13/hour or less), Illinois common law, and the Illinois Consumer Fraud and Deceptive Business Practices Act.

Although this lawsuit was filed in Illinois, there is similar political (and judicial) hostility to non-competes for low-wage workers across the country.  Given this climate, employers everywhere should take a moment to review any non-competes for low level or low wage employees and, if needed, take pro-active remedial action.

In this age of social media, a frequently asked question is whether social media activity can violate a non-compete or non-solicit.   Although the case law is evolving, courts which have addressed the issue have focused on the content of the communication, rather than the medium used to convey it.  In so doing, they have distinguished between mere passive social media activity (e.g., posting an update about a new job) as opposed to more targeted, active actions (e.g., not merely posting about a new job, but also actively recruiting former co-workers or clients).

A “LinkedIn” case recently decided by the Illinois Appellate Court, Bankers Life v. American Senior Benefits, involved conduct which fell between these two extremes: an individual, Gregory P. Gelineau, who was contractually barred from soliciting former co-workers, sent three former co-workers  generic requests to become “connections” via LinkedIn.  The requests did not go further than that, but they were not purely passive in that they sent to specific individuals.  Gelineau’s former employer, Bankers Life, filed suit, accusing him of breaching his non-solicitation obligation.

After surveying decisions from around the country involving various forms of social media activity, the Court explained that the different results reached in these decisions “can be reconciled when looking at the content and the substance of the communications.” Here, the Court noted that the LinkedIn requests sent by Gelineau did not discuss Bankers Life or Gelineau’s new employer, did not suggest that the recipient view Gelineau’s new job description, and did not encourage the recipient to leave Bankers Life and join Gelineau’s new employer.  Rather, they were bare requests to become “connections” on LinkedIn.

The Court held that such bare requests were not the sort of direct, active efforts to recruit which would have been a breach of Gelineau’s contractual non-solicitation clause.

While the facts of Bankers Life fall in between the two extremes of social media activity addressed by other courts, the case ultimately turned on an evaluation of the content of the activity, as opposed to the medium.  This approach is consistent with that taken by courts whenever they are tasked with determining whether particular conduct constitutes an unlawful “solicitation.”

Featured on Employment Law This Week: An employer cannot waive its own non-compete agreement to avoid payment, unless the agreement specifically grants it the right to do so.

An employee of a financial services firm in Illinois signed an agreement that required a six-month post-employment non-competition period in exchange for $1 million from his employer. When the worker resigned, the employer sent a notice waiving the agreement and telling the employee that it would not pay him the $1 million. After waiting out the six months, the employee filed suit against his former employer. The Illinois Court of Appeals found that there was no provision in the agreement that allowed the employer to change the terms without consent from the worker, and because the employee upheld his end of the contract, the employer must pay him what is due.

Watch the segment below and see our previous post on this topic.

Our colleagues Peter Steinmeyer and Scarlett Freeman of Epstein Becker Green authored an article in Workforce Magazine titled “Courts Take Closer Look at Noncompete Clauses.”

Following is an excerpt:

In the past few years, courts have been re-examining what constitutes adequate consideration for a restrictive covenant. In 2013, the Illinois Court of Appeals held, contrary to longstanding precedent, that in the absence of other considerations, mere employment constitutes adequate consideration for a restrictive covenant only if the employee remains employed for at least two years after signing the restrictive covenant.

This two-year rule applies regardless of whether the employee signed the restrictive covenant as a new or existing employee and regardless of whether the employee voluntarily resigned or was fired. Notably, multiple federal district courts in Illinois subsequently declined to apply the bright-line rule, instead considering other factors such as compensation, raises and bonuses, and the terms of the employee’s termination. …

As courts increasingly address challenges to the adequacy of consideration in restrictive covenants, employers can take measures to ensure that a restrictive covenant will be enforced. By simply remaining aware of fluctuating state laws, employers can structure employment agreements to incorporate adequate consideration under applicable state law.

Read the full article here.