United States: Non-Compete Found So Overbroad As To Be Unenforceable And Unfixable

Last Updated: June 26 2018
Article by Lisa A. Dreishmire

Recently, a former employer sought injunctive relief against a former executive whom it claimed had violated his Employee Confidentiality/Non-Compete Agreement by accepting employment with a direct competitor and supposedly failing to return its confidential information. The Court denied the motion for temporary restraining order and refused to set a preliminary injunction hearing. The Court later granted the former employee’s motion to dismiss for failure to state a claim, finding the non-compete to be unenforceable and not subject to “blue penciling.” In short, the Court held that even a non-compete which is reasonable in time and geographic scope will be unenforceable if it prohibits work in any capacity for a company in the same business, and that Illinois courts may not rewrite a non-compete which is “patently unfair” in scope of activity. Medix Staffing Solutions, Inc. v. Daniel Dumrauf, No. 17-CV-6648, 2018 U.S. Dist. LEXIS 64813, 2018 WL 1859039 (N.D. Ill. Apr. 17, 2018).

After beginning his employment with Medix (a staffing and recruiting firm), Dumrauf signed a new non-compete which provided, among other things, that during and for 18 months after his employment, he would not, within a radius of 50 miles from any Medix office in which he worked:

… directly or indirectly, own, manage, operate, control, be employed by, participate in or be connected in any manner with the ownership, management, operation, or control of, any business that either: (1) offers a product or services in actual competition with Medix; or (ii) [sic] which may be engaged directly or indirectly in the Business of Medix.

The agreement provided in boldface type in its “Severability” section:

If any restriction or limitation in this Agreement is deemed to be unreasonable, onerous and unduly restrictive by a court of competent jurisdiction, it shall not be stricken, [sic] in its entirety and held totally void and unenforceable, but rather shall be deemed re-written and shall remain effective to the maximum extent permissible within reasonable bounds.

Unusually for these types of cases, after informing Medix he was leaving the company, Dumrauf told Medix management that he had accepted a new role with a new employer, identified the employer, and described his new job duties and territory before explaining he did not wish to “compete in any form” and had discussed with the new employer “the importance of [his] non-compete.” (More frequently, the former employer only learns at a later date of the former employee’s plans.) Medix responded four days later, told Dumrauf that Medix saw his new position as being in direct competition and a “direct violation of your non-compete agreement,” and threatened to “exhaust all legal remedies we have at our disposal.”

Five weeks after learning of Dumrauf’s departure for an alleged competitor, Medix sued him on the following theories: (1) breach of contract; (2) the Illinois Trade Secrets Act; and (3) the federal Defend Trade Secrets Act. Dumrauf opposed the request for injunctive relief, arguing, among other things, that he had no confidential information and that the non-compete was “overbroad and unenforceable under Illinois law because it contains no activity restriction.” Specifically, he claimed, the agreement would prohibit him from working in any capacity—including the roles of “a custodian, an accountant, a lawyer, or an IT professional”—for a Medix competitor in the 50-mile radius. In a Minute Order, Judge Sara L. Ellis denied the motion for temporary restraining order. She also declined to grant expedited discovery or to set a date for a preliminary injunction hearing.

Medix then amended its Complaint to drop the Illinois and federal trade secrets claims, relying solely on a breach of contract theory. Dumrauf moved to dismiss the Complaint for failure to state a claim. In her Order granting Dumrauf’s motion, Judge Ellis reasoned, “Without some connection to the work he did at Medix, this restriction cannot possibly serve to protect a legitimate business interest of Medix and is in essence an impermissible restriction on competition per se. Thus, the Covenant is so broad that it is unreasonable on its face and unenforceable.” The Court refused to blue pencil the agreement, recognizing that while Illinois law permits modifying an overly broad geographic scope to “accomplish the purpose of the covenant,” it prohibits “rewriting the activity scope of a restrictive covenant to make it enforceable … when the scope is so broad as to be patently unfair.” The Court dismissed the case with prejudice.

Takeaways: First, it is a risky strategy to use a non-compete agreement you know to be potentially overbroad and count on a court to rewrite it later. Second, “one size fits all” is not true in the world of non-compete agreements. To have a chance at enforceability, a non-compete should be tailored to the particular activity, geographic area and customers of the employee’s position, so as to demonstrate a legitimate basis for the restriction. Third, it may have enhanced Dumrauf’s position and credibility with the Court for him to be so transparent with Medix about his new employment. Fourth, as a company hiring an employee with a non-compete agreement, Dumrauf’s new employer engaged in two “best practices” by tailoring his role to avoid the territory at issue in his non-compete and by requiring him to sign a “Reminder re Expectations.” In that “Reminder,” the company reiterated that it did not believe Medix’s agreement to be enforceable and understood Dumrauf had none of Medix’s confidential information, but stated it neither has nor wants any Medix confidential information, that Dumrauf should promptly ensure he has returned to Medix any such information in his possession, and should neither use nor disclose such information to his new employer. Although the new employer was not sued in this case, these “best practices” may help tip the balance of equities in favor of a former employee.

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 Topics
 
Related Articles
 
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 (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

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 or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq 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 of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

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