United States: Federal Court Split On Consideration Needed To Enforce A Restrictive Covenant In Illinois Remains Unresolved

On July 14, 2015, the U.S. Court of Appeals for the Seventh Circuit decided Instant Technology, LLC v. DeFazio.1 The decision was widely expected to address the current split in the Northern District of Illinois on whether two years or more of continued employment is required to enforce a restrictive covenant, absent additional consideration, as opined by the Illinois Appellate Court in Fifield v. Premier Dealer Services, Inc,2  However, the Seventh Circuit did not address this issue and instead ruled that the district court did not abuse its discretion in finding the restrictive covenants in controversy were unenforceable under the facts of that case. 

Background

Instant Technology, LLC ("Plaintiff" or "Instant") is an information technology staffing firm where employees either recruit qualified candidates or pitch the candidates to the firm's clients.  As a condition of employment, Instant's employees signed agreements not to solicit business from the firm's clients, recruit the firm's candidates or employees for other jobs, or disclose the firm's confidential information to third parties.  The named defendant was employed as Vice President for Sales and Operations ("vice president") until Instant terminated her employment in January 2012.  One month later, the former vice president and several of her former co-workers started a new tech staffing firm and successfully solicited business from several of Instant's clients.  Three of the defendants had been employed by Instant for less than two years before they left to form the new company.

Instant filed a lawsuit in the Northern District of Illinois against the former vice president and the four other former Instant employees ("the defendants") with whom she formed the tech staffing company, alleging that – among other things – they breached the restrictive covenants in their employment agreements.  In response, the former vice president filed a breach of contract counter claim alleging Instant failed to pay her the remainder of a performance bonus that she had earned. 

Before trial, the defendants argued that the restrictive covenants were not enforceable against three of the former employees because they were employed by Instant for less than two years.  The district court agreed, and limited its analysis to the enforceability of the restrictive covenants against the former vice president and one other former employee, both of whom worked for Instant for more than two years. In so holding, the district court relied on Fifield as creating a bright-line test, a conclusion challenged by two subsequent decisions in the Northern District of Illinois and one decision in the Central District of Illinois.3

After a bench trial, the district court ruled that the non-solicitation covenant and non-recruitment covenant in the former employees' employment agreements were invalid and unenforceable.  The district court also held that the former vice president had failed to prove she was entitled to the remainder of her purportedly earned bonus.  The parties filed cross appeals.

The Seventh Circuit's Analysis

The Seventh Circuit affirmed both of the district court's holdings.  The court did so in a way that limits its broad-based applicability, finding that it was not an abuse of discretion for the district court to find that the Plaintiff had failed to establish that a legitimate protectable interest supported enforcement under the facts before the court.  The court accepted as reasonable the district court's determinations that: Plaintiff did not demonstrate a protectable interest in its clients because the industry is not characterized by client loyalty; Plaintiff did not demonstrate that its candidate lists are valuable due to the information being accessible by other means and having a "short shelf life" of value; and Plaintiff did not demonstrate a protectable interest in a "stable workforce" to justify the nonrecruitment provisions, because its workforce was not stable.

The Seventh Circuit rejected the Plaintiff's argument that the district court erred in only considering these particular protectable interests, rather than the "totality of the circumstances" analysis set forth by the Illinois Supreme Court in Reliable Fire Equipment v. Arredonodo4 for two reasons.  First, Plaintiff did not point to any circumstances that the district court "should have considered but didn't."  Second, the totality of the circumstances analysis does not require a court to consider all of the circumstances underlying a restrictive covenant. Rather, the district court may limit its discussion to those it deems most material, a determination that will be upheld absent an abuse of discretion.  The Seventh Circuit went on to lament that such a broad grant of discretion creates tremendous uncertainty as to which covenants courts will enforce, and identified perceived problems that such uncertainty creates.  However, the court then commented, "Reforming that law, or trying to undermine it, is beyond our remit."5

Takeaway for Employers

Because the Seventh Circuit upheld the finding that the restrictive covenants at issue in Instant Technology were invalid due to a lack of a protectable interest, it did not need to address the question of whether the covenants could be dismissed for a lack of consideration enforced against those employees who had worked for Instant for less than two years, leaving the current split on this issue in the Northern District of Illinois unresolved.  However, the Seventh Circuit's opinion provides insight into the application of the totality of the circumstances analysis used to determine the viability of a restrictive covenant in Illinois.  The case also provides a roadmap to avoid the evidentiary shortcomings that the court determined were fatal to the Plaintiff's claims.

Footnotes

1. Case Nos. 14-2132 and 14-2243 (7th Cir. July 14, 2015).

2. 2013 IL App (1st) 120327. See also McInnis v. OAG Motorcycle Ventures, Inc., 2015 IL App (1st) 130097 (June 25, 2015).

3. See Bankers Life v. Miller, No. 14cv3165, 2015 WL 515965, at *4 (N.D. Ill. Feb. 6, 2015) (Shah, J.) (rejecting Fifield's holding that absent material consideration, two years of continued employment is "required" before enforcing a post-employment restrictive covenant); Montel Aetnastak, Inc. v. Miessen, No. 13c3801, 2014 WL 702322, at *716 (N.D. Ill. Jan. 28, 2014) (Castillo, J.) (rejecting "mechanical" application of Fifield's two-year rule and instead favoring a fact-specific approach that focuses on whether the plaintiff was employed for a "substantial period"); and see Cumulus Radio Corp v. Olson, No. 15cv1067, 2015 WL 643345, at *5-6 (C.D. Ill. Feb. 13, 2015) (McDade, J.) (rejecting Fifield's bright-line rule and applying a "totality of the circumstances" approach)). 

4. 2011 IL 111871.

5. The Seventh Circuit also upheld the district court's rejection of the counterclaim, finding that the language upon which the counter-plaintiff relied was not susceptible to any reasonable interpretation, and therefore could not support the counterclaim.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
In association with
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration
Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:
  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.
  • Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.
    If you do not want us to provide your name and email address you may opt out by clicking here
    If you do not wish to receive any future announcements of products and services offered by Mondaq you may opt out by clicking here

    Terms & Conditions and Privacy Statement

    Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

    Use of www.mondaq.com

    You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.

    Disclaimer

    Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

    The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.

    Registration

    Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

    • To allow you to personalize the Mondaq websites you are visiting.
    • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
    • To produce demographic feedback for our information providers who provide information free for your use.

    Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

    Information Collection and Use

    We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

    We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

    Mondaq News Alerts

    In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.

    Cookies

    A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

    Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

    Log Files

    We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.

    Links

    This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

    Surveys & Contests

    From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.

    Mail-A-Friend

    If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.

    Emails

    From time to time Mondaq may send you emails promoting Mondaq services including new services. You may opt out of receiving such emails by clicking below.

    *** If you do not wish to receive any future announcements of services offered by Mondaq you may opt out by clicking here .

    Security

    This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

    Correcting/Updating Personal Information

    If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

    Notification of Changes

    If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

    How to contact Mondaq

    You can contact us with comments or queries at enquiries@mondaq.com.

    If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.

    By clicking Register you state you have read and agree to our Terms and Conditions