In Lasco Foods, Inc. v. Hall and Shaw Sales, Marketing & Consulting, LLC, 600 F. Supp. 2d 1045 (E.D. Mo. 2009), the United States District Court for the Eastern District of Missouri dismissed an employer’s claim that two former employees violated the Computer Fraud & Abuse Act (“CFAA”), 18 U.S.C. § 1030, et seq., by deleting information from and refusing to return their company laptops after resigning. Lasco brought claims against former sales representatives Ronald Hall and Charles Shaw, as well as their new company, Hall and Shaw Sales, Marketing & Consulting. Included in the action were claims under the CFAA and the Stored Wire and Electronic Communications Act (“SECA”), 18 U.S.C. § 2701, et seq., as well as a number of claims under Missouri law. 

Lasco alleged that Shaw “deleted confidential and trade secret information from Lasco’s computer” and “unlawfully copied or otherwise downloaded Lasco’s Trade Secret Information for his own personal use and for the use of HSSMC.” Lasco further alleged that Hall refused to return his Lasco laptop and that Lasco anticipated that a forensic examination of Hall’s laptop would reveal that he also deleted information from the laptop.

Hall and Shaw moved to dismiss the SECA and CFAA claims. The District Court found that federal courts have found that the general purpose of these two statutes “was to create a cause of action against computer hackers (e.g., electronic trespassers),” rather than rogue employees. Accordingly, because Lasco alleged that Hall and Shaw had unrestricted access to Lasco’s information on its computers, the District Court dismissed the claims under the CFAA and SECA because Lasco had not alleged that Hall and Shaw accessed Lasco’s information without authorization.

The District Court did find that Lasco had alleged sufficiently that it had suffered damage and loss by virtue of Hall and Shaw deleting information and forcing Lasco to take remedial measures. The District Court also found that Lasco had alleged interruption of service by asserting that Hall and Shaw had delayed before returning their computers. However, because Lasco could not show that Hall and Shaw were unauthorized users, its claim under the CFAA was dismissed, leaving Lasco to pursue state law claims.

Under California Civil Procedure Code section 425.16, a defendant sued for exercising its constitutional rights may assert that the action is Strategic Litigation Against Public Participation (“SLAPP”) and move to strike the complaint on that basis. Section 425.16, also known as the “anti-SLAPP statute,” when properly invoked, can be a powerful defense tool because it imposes an automatic stay on discovery until a ruling on the motion, potentially forces the plaintiff to establish with evidence a “probability” that plaintiff will prevail on its claim, and exposes the plaintiff to a fee award if the motion is granted. The invocation of the anti-SLAPP statute in cases involving trade secrets disputes between business competitors will most likely be futile, however, as a recent decision by the California Court of Appeal indicates.

In World Financial Group, Inc. v. HBW Insurance & Financial Service, Inc. et al., 2009 WL 1019118 (Cal. App. 2d Dist. April 16, 2009), plaintiff World Financial Group, Inc. (“WFG”), a company that provides insurance, pension and financial services, sued its direct competitor, HBW Insurance & Financial Services, Inc. and a number of former WFG associates (collectively, “defendants”) for, among others, trade secret misappropriation and use of WFG’s confidential information to solicit WFG’s associates and customers. 

Defendants filed an anti-SLAPP motion, arguing that all of WFG’s claims were based on defendants’ speech and conduct in furtherance of their right of free speech in connection with a public issue. Specifically, defendants claimed that their speech and conduct involved the pursuit of lawful employment, workforce mobility, and free competition, all of which are matters of public interest and protected policy. Both the trial court and appeals court disagreed, holding that defendants failed to meet their burden of showing that WFG’s complaint arose from speech and conduct in connection with a public issue. As the Court of Appeal explained, “[A]ll of the allegedly wrongful conduct and speech that plaintiffs attribute to defendants was committed in a business capacity, and was directed at a competitor’s associates and customers for the sole purpose of promoting the competing business as a superior employer and provider of products and services.” 

The Court of Appeal also rejected defendants’ strategy of couching their argument in terms of society’s general interest in the subject matter of the dispute—lawful employment, free competition and employee mobility—rather than focusing on the specific speech or conduct at issue in the complaint. “The focus of the anti-SLAPP statute must be on the specific nature of the speech rather than on generalities that might be abstracted from it.” Applying the statute in the general manner defendants proposed, the Court of Appeal observed, would mean that “every case alleging breach of a noncompetition agreement or the related misappropriation of trade secrets would be categorically subject to the anti-SLAPP statute,” effectively eviscerating the unfair business practices laws.

Finally, even if defendants had argued that the specific speech and conduct at issue was protected, that argument would still be unavailing because the statements by which defendants attempted to solicit employees and customers were not of public interest, were irrelevant to WFG’s claims, and were merely incidental to the conduct upon which the complaint is based.

If defendants’ immediate goal was to delay discovery, then the use of the anti-SLAPP statute essentially accomplished that objective—for the short term.  Beyond that, use of the anti-SLAPP statute to strike garden-variety misappropriation and non-solicitation claims, as confirmed in the World Financial Group decision, will likely be unsuccessful.

The Seyfarth Trade Secrets, Computer Fraud & Non-Competes practice group attorneys congratulate their colleagues, Brian Ashe, Erik von Zeipel, Daniel Sable, Kurt Kappes, and Timothy Nelson, who represented WFG at the trial and appellate levels!

The Texas Supreme Court has once again ruled in favor of enforcing non-competition agreements. On April 17, 2009, the Court held that “if the nature of the employment for which the employee is hired will reasonably require the employer to provide confidential information to the employee for the employee to accomplish the contemplated job duties, then the employer impliedly promises to provide confidential information and the covenant is enforceable so long as the other components of the Covenant Not to Compete Act are satisfied.” Mann Frankfort Stein & Lipp Advisors, Inc. v. Fielding, No. 07-0490, 2009 WL 1028051, *1 (April 17, 2009). The other components of the Act involve whether the agreement’s terms are reasonable.   

In Light v. Centel Cellular Co. of Tex., the Court interpreted the Act to require employers to promise to provide and actually to provide confidential information or trade secrets to employees “at the time the agreement is made.” 883 S.W.2d 642, 644-45 (Tex. 1994). This almost never happened and thus non-competes were difficult to enforce. 

In 2006, the Court modified Light and held that the employer’s promise to provide confidential information or trade secrets is enforceable as long as the employer provides the information at some point during employment. Alex Sheshunoff Mgmt. Servs., L.P. v. Johnson, 209 S.W.3d 644, 651 (Tex. 2006). Thus, non-competes became easier to enforce. 

The Court has now gone further and held that the employer’s promise to provide confidential information or trade secrets within the non-compete need not be express; it may be implied. Fielding at *1. Thus, as long as a covenant not to compete is “ancillary to or part of an otherwise enforceable agreement,” (i.e., an employee’s non-disclosure agreement) and the nature of the contemplated employment will reasonably require the employer to furnish the employee with confidential information, then the employer impliedly promises to provide the information and the contract is enforceable. In such a situation, the only remaining issue is the reasonableness of the terms, i.e., whether the restrictions are reasonable in length of time, geography, and scope of activity restrained by the agreement. This ruling makes it more difficult for an employee to challenge the formation of a covenant not to compete under the Act. 

It is also important to note that the Court held “confidential information” may include client-specific information that a client provides to the employer such as the “clients’ names, billing information, and pertinent tax and financial information.” Id. at *6. 

In Decision Insights, Inc. v. Sentia Group, Inc., No. 07-1596, 2009 WL 367585 (4th Cir. Feb. 4, 2009), the Fourth Circuit Court of Appeals grappled with the distinction between a claim that elements of a software program are trade secrets and a claim that the program is a trade secret as a total compilation. The Court of Appeals determined that the district court considered the former, but not the latter, and reversed the district court’s grant of summary judgment.

Decision Insights brought claims against Sentia and a number of former Decision Insights employees, alleging that the former employees used Decision Insights’ trade secrets and confidential information when they formed Sentia to develop a competing software application. Included in Decision Insights’ complaint were claims for breach of restrictive covenants and for misappropriation of trade secrets. Decision Insights alleged that the former employees used their knowledge of its software code to develop a competing product in “record time” that produced the same results as Decision Insights’ software.

After a discovery dispute regarding Decision Insights’ identification of its trade secrets and confidential information, Sentia moved for summary judgment. The district court granted the motion, holding that Decision Insights had not shown the existence of trade secrets or confidential information. The district court also found that the non-compete provision signed by one employee was unenforceable under Virginia law and that there was no evidence that any of the employees had breached their non-disclosure provisions.

The Court of Appeals reversed the district court’s grant of summary judgment. In its ruling, the Court of Appeals drew a distinction between Decision Insights’ two trade secret claims. The Court of Appeals affirmed the trial court’s conclusion that Decision Insights did not properly describe the 12 processes within its software that it claimed were trade secrets. The Court of Appeals agreed with Sentia’s expert that Decision Insights’ description of the trade secrets was “incomplete and fragmented,” thus preventing a meaningful evaluation of the trade secrets.

However, the Court of Appeals held that the trial court erred by concluding that Decision Insights had not shown, as a matter of law, that the software program as a total compilation was a trade secret. Decision Insights produced its entire source code, as well as a flow chart and narrative explaining its software program as a whole. The Court of Appeals held that the district court did not consider whether the software could collectively constitute a trade secret. Thus, the Court of Appeals remanded the matter to the district court with instructions to determine whether: (1) Decision Insights adequately identified its software compilation as a trade secret; and, if so, (2) whether Decision Insights had established a triable issue of fact as to the existence of a trade secret. 

Based on the Court of Appeals’ finding that the district court did not properly consider whether the software program as a total compilation constituted a trade secret, it also reversed the dismissal of Decision Insights’ claims for breach of contract against the former employees. The trial court had concluded that Decision Insights presented no evidence that the former employees had breached their non-disclosure of confidential information agreements. Once the Court of Appeals found that the trial court had not considered Decision Insights’ trade secret claim in totality, it also concluded that the district court did not properly consider whether the former employees breached their agreements.

The Court of Appeals similarly found that the district court erred in concluding that a non-compete provision in one of the former employees’ employment agreements was unenforceable. The district court found that Decision Insights did not show a legitimate business interest supporting the provision. The Court of Appeals reversed, stating that the district court’s conclusion on the non-compete provision was tainted by its failure to properly address Decision Insights’ trade secret claim.

Emigra Group, LLC v. Fragomen, Del Rey, Bernsen & Loewy LLP, et al., No. 07 Civ. 10688 (LAK) (S.D.N.Y. Mar. 31, 2009).

In a decision that should be considerable reassurance to employers in general and law firms in particular, a district judge in New York has rejected an antitrust claim brought by a consulting firm against its former employer, an attorney who returned to his former law firm. 

Emigra, an immigration consulting firm, sued its former vice president of operations, Ryan Freel, and the law firm that was his prior and subsequent employer after Freel resigned from Emigra and returned to practicing law at Fragomen, Del Rey, Bernsen & Loewy, an international immigration law firm headquartered in New York. Emigra alleged that Freel took confidential and trade secret information that he had obtained while employed by Emigra, including strategies, customer lists, pricing information, and profit and loss data; disclosed this information to Fragomen; and used it to contact Emigra’s customers on Fragomen’s behalf.

However, the court noted that while Emigra filed “the usual state law claims for misappropriation of trade secrets, unfair competition, and the like,…it did not seek a preliminary injunction.” Instead, Emigra asserted a number of antitrust claims and, the court noted, there is reason to believe that it did so in order to “gain access through pretrial discovery to precisely the sort of competitively sensitive information about Fragomen’s business that Emigra claims Freel improperly disclosed to Fragomen about Emigra’s business.”  

In a lengthy 63-page opinion, the district judge granted the defendants’ summary judgment motion. Among other findings, the court concluded that Emigra had offered no evidence of price control, exclusion of competition, or monopoly power in violation of the antitrust laws, and that “a contrary conclusion would turn many disputes over the hiring by one competitor of an employee of another, the stuff of everyday commercial tort claims, into monopolization or attempted monopolization cases.” The court further noted that Emigra cannot avoid summary judgment through “gamesmanship” by withholding its own evidence while insisting that its competitor reveal its competitively sensitive information. For these and other reasons, the court dismissed the federal antitrust claims on the merits with prejudice, and declined to exercise supplemental jurisdiction over the remaining state-law trade secret and unfair competition claims. The decision serves as a warning to litigants who might consider pursuing questionable antitrust claims in federal court as a means for obtaining discovery that would not otherwise be available to them in a state court proceeding.

The Massachusetts House of Representatives has before it two competing bills relating to non-competition clauses to consider this Spring.  Representative Lori Erlich has sponsored House Bill No. 1799, which sets forth the standards by which a non-compete provision could be measured for enforceability.  The proposed statute includes (i) a ban on non-competes all together for any employee earning less than $100,000 in compensation, (ii) a mandate that any non-competition agreement entered into after employment must be based on consideration other than continued employment (presumably cash, although it is unclear), and (iii) the requirement that the employer must give the employee at least two weeks’ notice of the agreement before it can become effective. 

In addition, and this is perhaps the most rigorous demand — a non-compete agreement may be enforceable only if the the employer pays to the employee "for the full restricted period and without offset for any income the employee may receive from other noncompetitive activities, a minimum of the greater of:  (1) compensation equal to fifty percent of the employee’s annual gross base salary and commissions at the time of the employee’s termination or (2) $100,000." The proposed statute does not affect employee or customer non-solicitation agreements and expressly excludes the rights of companies to act to protect trade secrets and confidential information from misappropriation by way of an injunction. 

The other statute, House Bill No. 1794 submitted by Representative Will Brownsberger, proposes to ban non-compete and non-solicitation agreements in their entirety.  This bill reportedly is gaining support by those who believe that Massachusetts high-tech corridor has not been competitive with California’s Silicon Valley because Massachusetts allows non-compete provisions and California does not.  

Although both statutes apply only prospectively by their terms, if either is passed, they clearly would affect all future contracts with employees governed by Massachusetts’ law. 

In just a matter of weeks, we have a second case (see Consulting Engineers Corp. v. Geometric, Ltd.) in which plaintiffs sought to use a choice of law clause as a forum selection clause. In this case as well, the plaintiffs were unsuccessful. 

A Delaware Court of Chancery recently held that it lacked jurisdiction over a non-resident against whom enforcement of a non-competition agreement was sought. See Mobile Diagnostic Group Holdings v. Suer, __ A.2d __, Case No. 4298, 2009 WL 763405 (Del. Ch. Mar. 24, 2009).

The Plaintiffs were a series of related entities largely organized in the State of Delaware. The Defendant, Robert Suer, was a sales professional and a resident of the State of California. Plaintiffs claimed that Suer had negotiated and executed a non-competition provision with the Plaintiffs as part of the Purchase Agreement concerning Plaintiffs’ acquisition of the company for which Suer worked, and they sought to enforce its provisions against him in Delaware Chancery Court. In turn, Suer moved to dismiss the complaint for lack of personal jurisdiction, pointing out that he had never resided in or even been to Delaware and had undertaken no acts or negotiations in Delaware.

The Chancery Court considered two arguments by the Plaintiffs for why Suer was subject to jurisdiction in Delaware. First, the Plaintiffs argued that he had consented to jurisdiction because, in the Purchase Agreement, the parties had agreed that Delaware law controlled service of process. The Chancery Court rejected that argument, noting that such a clause only indicates the choice of law for evaluating service, it does not establish jurisdiction. Furthermore, another clause in the Purchase Agreement concerning equitable remedies contemplated jurisdiction “in any court of the United States or any state thereof,” but did not demand it in any particular location.

Second, the Chancery Court considered Plaintiffs’ argument that Suer’s negotiations had opened him up to specific jurisdiction because their claim arose out of a “specific jurisdictional act.” The Chancery Court rejected this argument as well because the mere execution of a contract with a Delaware entity does not subject a party to jurisdiction in Delaware, and Suer had done no more than that. In this regard, the Chancery Court considered the case of General Motors (Hughes) Shareholder Litigation, Case No. 20269, 2005 WL 1098021 (Del Ch. May 4, 2005), where specific jurisdiction premised on a complex, negotiated agreement ultimately did result in jurisdiction, but it concluded that too many distinctions existed to apply it as Plaintiffs had requested. Most critically, unlike in General Motors, Suer did not participate in the selection of Delaware as a forum, even though Plaintiffs had created Delaware entities to consummate the Purchase Agreement.

This decision demonstrates again the need for companies entering into restrictive covenants either to bring actions in a forum in which there is no doubt as to jurisdiction or to ensure the proper forum selection and jurisdictional waiver clauses exist in the agreements themselves.

April 02, 2009
Daily Journal   Reprinted and/or posted with the permission of Daily Journal Corp. (2009).

By Robert Milligan and Nicholas Waddles

The California Supreme Court’s decision in Edwards v. Arthur Andersen LLP, 44 Cal.4th 937 (2008), reaffirmed that employee non-competition agreements are void in California unless they fall within narrow exceptions to Business and Professions Code Section 16600.

Notwithstanding the Edwards decision, it may be possible for employers to enforce non-competition forfeiture provisions in California by including them in retirement plans subject to the Employee Retirement Income Security Act of 1974. ERISA is a federal statute that governs most employee benefit plans (except those provided by government entities and churches), including retirement plans. ERISA plans are protected by a well-formed pre-emption doctrine that applies to most state laws except those regulating insurance, banking or securities matters.

In a series of cases dating back as early as 1980, the 9th Circuit has examined the inclusion of non-competition forfeiture provisions in ERISA plans and has determined that such clauses are permissible under ERISA, with some limitation, and state law is pre-empted on this issue.

It is important to point out that a non-competition forfeiture provision in an ERISA plan cannot apply to any amount an employee voluntarily contributes to a plan because such amounts are always automatically 100 percent vested and not otherwise subject to forfeiture. Similarly, a forfeiture provision added to an ERISA plan could not apply to benefits earned prior to the adoption of the amendment.

Also, ERISA’s vesting rules generally establish a maximum time period over which employer contributions to a plan must vest. At the time most of the relevant 9th Circuit cases were decided, ERISA permitted employers to choose between one of two vesting schedules for employer contributions. One schedule was a 10-year "cliff vesting" schedule whereby an employee was zero percent vested until he or she worked for the employer for 10 years, at which time the employee became 100 percent vested. The other schedule provided for a graduated vesting schedule that allowed an employee to vest in incremental percentages (usually 10-20 percent) over time, but not to exceed 15 years.

These vesting rules have been amended a number of times over the years, and currently, employer contributions to profit-sharing and 401(k) plans must vest under either a three-year cliff vesting schedule or a six-year graduated schedule at the rate of 20 percent, beginning with the second year of service.

Accordingly, including a forfeiture provision in a profit-sharing or 401(k) plan may not be as effective as it was when the relevant cases were decided. Now, however, it may be more effective to include non-competition forfeiture provisions in top-hat or other executive compensation plans (which are generally ERISA plans that are exempt from the vesting rules). And there are others commentators who have suggested adding forfeiture provisions to ERISA-covered severance plans as another way of achieving this goal. No 9th Circuit cases have examined whether a forfeiture provision could be included in a top-hat or ERISA-covered severance plan but the arguments in favor of ERISA pre-emption should be the same as in the relevant cases. Instructively, the 2nd Circuit has held that state law was pre-empted by ERISA in the context of a top-hat plan containing a non-competition forfeiture clause and found that the forfeiture provision was valid. One of the earliest cases to examine the inclusion of a non-competition forfeiture provision was the pre-ERISA case of Muggill v. The Reuben H. Donnelley Corporation, 62 Cal. 2d 239 (1965). In Muggill, the California Supreme Court analyzed the validity of a provision in a pension plan that provided that an employee’s right to receive payments from the plan would be terminated if he went to work for a competitor. The court held that the pension plan became part of the employment contract and, therefore, the forfeiture provision was invalid under Section 16600 – "[e]xcept as provided in this chapter, every contract by which anyone is restrained from engaging in a lawful profession, trade, or business of any kind is to that extent void."

ERISA was enacted in 1974 and, thereafter, the 9th Circuit’s first occasion to analyze a non-competition forfeiture provision in an ERISA plan was in Hummell v. S.E. Rykoff & Co., 634 F.2d 446 (9th Cir. 1980). In Hummell, the court examined a plan provision that provided for the forfeiture of a percentage of the competing former employee’s retirement benefits derived from employer contributions. The plan stated that the forfeiture provision only applied to former employees with less than 15 years of experience with the company who competed with the company (those with more than 15 years were fully vested, regardless of competitive activity).

In examining an issue of first impression, the court held that ERISA does not prohibit limited non-competition provisions that apply to amounts in excess of the minimum vesting requirements in ERISA. Ultimately, the court held that the forfeiture provision in the plan was invalid as to the plaintiff because he had more than the minimum years of service required to be 100 percent vested under that plan. Thus, the forfeiture provision was valid but it could not be applied by the company.

In Lojek v. Thomas, 716 F.2d 675 (9th Cir. 1983), the court examined a non-competition forfeiture provision contained in an ERISA-governed profit sharing plan sponsored by a law firm. The provision called for the forfeiture of all employer contributions made on behalf of an attorney who left the firm before completing 10 years of employment and engaged in competitive employment within two years of leaving within a five-county area.

The trial court granted partial summary judgment on a number of issues including that ERISA pre-empts Idaho state law on vesting and forfeiture of pension plan rights and non-competition forfeiture clauses are valid under ERISA. Lojek appealed arguing, inter alia, that Idaho common law on non-competition clauses should control and invalidated the provision. The court disagreed and held that the district court properly decided that ERISA pre-empted Idaho law and federal law governed the validity of the plan.

The plan at issue contained a vesting schedule more liberal than required by ERISA. It allowed attorneys to fully vest after completing five years of employment (the cliff vesting provision under ERISA at the time was 10 years). If an attorney worked for at least 10 years, the non-competition provision did not apply. As a result, the court held that the vesting schedule was valid.

 

Similarly, in Clark v. Lauren Young Tire Center Profit Sharing Trust, 816 F. 2nd 480 (9th Cir. 1987), the plaintiff argued that a forfeiture clause in an ERISA plan violated Oregon law and the plaintiff urged to the court to incorporate that law and invalidate the provision. In rejecting the plaintiff’s argument, the court held that the reasoning in Lojek applied and that state law played "no part in assessing the validity of [a non-competition forfeiture provision] in an ERISA plan."

The court in Clark further held that non-competition forfeiture clauses in ERISA plans are valid so long as the plan provides that benefits earned after 10 years of service cannot be forfeited. Because ERISA’s vesting requirements have been reduced, it is likely that a court reviewing facts similar to Clark today would require that the plan provide that benefits earned after three years of service cannot be forfeited (assuming the court followed the ERISA preemption authority).

Finally, in Weinfurther v. Source Services Corporation Employees Profit Sharing Plan and Trust, 759 F.Supp. 599 (N.D. Cal. 1991), the court reiterated that non-competition forfeiture clauses in the Ninth Circuit are valid (citing Lojek and Clark with approval).

Accordingly, based on the 9th Circuit authorities discussed above, employers have a plausible argument that non-competition forfeiture provisions included in ERISA plans should be analyzed under ERISA and are not subject to Business and Professions Code Section 16600. Employers should considering including ERISA plan provisions providing that an employee forfeits employer contributions exceeding ERISA’s minimum vesting rules if the employee violates a non-competition provision included in the plan. The non-competition forfeiture provisions should be limited in scope and duration to the extent necessary to protect legitimate business interests.

Additionally, employers may consider trying to extend the ERISA approach to top-hat plans and ERISA severance plans (with structured payouts over time).

These approaches are not without risk and counsel should be consulted before including any non-competition forfeiture provisions as there is always a possibility that notwithstanding ERISA preemption that a court may find that it does not apply based on the strong public policy of Section 16600.

###

As discussed in our March 9th  and 17th postings, Illinois Senate Bill SB 2149 seeks to dramatically alter the landscape of trade secret enforcement and litigation in Illinois by, among other things, (a) requiring disclosure of trade secrets before a party issues written or oral discovery; (b) awarding attorneys’ fees to the prevailing party in a trade secrets case; and (c) mandating that a court enter an attorneys’ fees award against any party that subsequently amends its initial trade secret disclosure. Apparently not to be outdone, the Illinois House of Representatives is considering whether to enact a statute that would dramatically limit an employer’s ability to enforce non-competition agreements, and change the way restrictive covenant cases are handled in Illinois.

Currently, non-competition/restrictive covenant enforcement is governed by Illinois case, as opposed to statutory, law. Illinois case law does not limit the type or category of employee who can be subject to a restrictive covenant. Instead, the court examines the covenant to determine if the covenant is reasonably written (i.e. reasonable in both temporal and geographic scope) to protect a “legitimate business interest.”  A “legitimate business interest” exists if the employer demonstrates (1) near-permanent customer relationships that the employee would not know about but for his employment or (2) that the employee acquired trade secrets or other confidential information during his employment and subsequently tried to use the trade secrets for his own benefit. Lawrence & Allen, Inc. v. Cambridge Human Resource Group, Inc., 226 Ill. Dec. 331, 340, 685 N.E. 2d 434, 443 (2nd Dist. 1997). 

In contrast, House Bill HB 4040 limits non-compete enforcement to employees or independent contractors who:

•                     have substantial involvement in the executive management of the employer’s business;

•                     have direct and substantial contact with the employer’s customers;

•                     possess knowledge of the employer’s trade secrets and/or proprietary information;

•                     possess such unique skills that they have achieved “a high degree of public or industry notoriety, fame, or reputation as a representative of the employer,” or

•                     are among the highest paid 5% of the employer’s work force for the year immediately preceding the separation.

HB 4040 also changes Illinois law so that an employer loses the right to enforce a non-competition covenant if the employer fails to notify the new employee two weeks prior to the first day of his employment that a covenant not to compete is required, or if the covenant is not accompanied by a “material” advancement, promotion, bonus or compensation increase. In addition, HB 4040 alters the court’s ability to determine whether a non-competition covenant is reasonable in temporal and geographic scope (an analysis that is done on a case-by-case basis) by creating a rebuttable presumption that a non-competition covenant is invalid if:

•                     the covenant exceeds one year;

•                     the geographic restrictions in the covenant cover areas beyond which the former employee provided services “during the one year preceding his termination;”

•                     the covenant concerns personal services activities that the employee did not perform during the “one year preceding termination of the employment.”

One of the few similarities between HB 4040 and Illinois case law is that HB 4040 does allow the court to modify a non-competition covenant to “make the covenant reasonable under the circumstances.”   However, HB 4040 goes on to state that, if a court chooses to modify the covenant, then the court cannot impose a damages award for the employee’s original breach of the covenant. Instead, the court can award damages only for conduct that occurs after the modification. Finally, HB 4040 instructs a court to interpret any attorneys’ fees provision found in a non-competition covenant as allowing either the employer or the employee to recover their attorneys’ fees; and further empowers the court to award attorneys’ fees to the employee if, through a declaratory judgment action brought by the employee, the court declares the non-competition covenant unenforceable.

We will continue to monitor HB 4040’s progress through the Illinois House of Representatives.