CLIENT ALERT: Restrictive Covenants

Nov 12, 2015

Employers’ lessons from latest Illinois court decision invalidating broad restrictive covenants

Illinois employers searching for answers on how to draft enforceable restrictive covenants received fresh, albeit difficult to swallow, guidance from an Illinois Appellate Court decision issued October 26, 2015. InAssuredPartners, Inc. v. Schmitt, 2015 IL App (1st) 141863 (Ill. App. 1st Dist. 2015), the court refused to enforce noncompetition, nonsolicitation, and confidentiality provisions contained in an employment agreement, finding each covenant overbroad. The court also refused to “blue pencil” the agreement so as to narrow the scope of the covenants to comport with Illinois law.  The case reminds employers that restrictive covenants must be drafted narrowly to satisfy judicial scrutiny.

Facts of the case

William Schmitt was a wholesale insurance broker who began working in the insurance industry in the early 1990s.  Since 2003, his specialty was lawyers’ professional liability insurance (LPLI).  As a wholesale broker, he served as an intermediary between a retail broker and an insurance carrier.  For a previous employer, Schmitt built a sizeable book of wholesale LPLI business and developed extensive contacts with LPLI retail brokers and insurers.

In 2006, Schmitt changed firms to start working for ProAccess.  Because his new employer had not been a significant player in the wholesale insurance brokerage business, Schmitt negotiated a special carve-out for his LPLI accounts in the restrictive covenants he signed with ProAccess.

In 2011, the plaintiff AssuredPartners acquired ProAccess.  Schmitt’s new employment agreement included restrictive covenants that prohibited him from (a) rendering services for a competing business for one year; (b) soliciting customers or potential customers for one year; and (c) disclosing the company’s business information.  Unlike Schmitt’s previous agreement, this one contained no exclusions from the restrictions.

In 2013 Schmitt resigned and soon thereafter began brokering wholesale LPLI for another company.  He began soliciting business from customers he serviced at ProAccess.  ProAccess and its parent company AssuredPartners sued to enforce the restrictive covenants contained in Schmitt’s agreement, as well as claims for tortious interference and prospective economic advantage.

Court rulings

In the Circuit Court of Cook County, the judge found the restrictive covenants were unreasonable and entered summary judgment in favor of Schmitt on the companies’ claims for breach of contract and injunctive relief.  The employer appealed.

In the Illinois Appellate Court the key questions were whether the noncompetition, nonsolicitation, and confidentiality provisions were enforceable.  Under the Illinois Supreme Court’s 2011 decision in Reliable Fire Equipment Co. v. Arredondo,  the “rule of reasonableness” test provides that a restrictive covenant may be enforceable only if it (1) is no greater than required to protect a legitimate business interest of the employer; (2) does not impose an undue hardship on the employee; and (3) is not injurious to the public.

Noncompetition agreement
AssuredPartners argued it had a legitimate protectable interest in its customer expiration list, which it claimed Schmitt stole and used to solicit business after he resigned.  However, the court held the noncompetition provision overbroad because it was not confined to prohibiting Schmitt from only those activities “related to the specific kind of professional liability insurance practice he developed during his employment.”  Instead, the noncompetition clause had a blanket prohibition banning Schmitt from working with all types of professional liability insurance, not just his specialty of LPLI. Moreover, the geographical scope of the covenant, which covered the entire U.S., exceeded what was necessary to protect ProAccess, and was unfair to Schmitt.  Finally, the 28-month length of the restriction was too long, said the court, in view of Schmitt’s 20 months of employment.

Nonsolicitation agreement
As for the post-employment nonsolicitation provision, the court likewise held it was overbroad and therefore unenforceable.  Applying the same test of reasonableness under Reliable Fire, the court faulted the ProAccess nonsolicitation clause because it precluded Schmitt from soliciting business from not only existing customers, but also potential customers, and regardless of whether Schmitt actually interacted with them.

Confidentiality agreement
Remarkably, even the nondisclosure provisions of ProAccess’s agreement with Schmitt were unenforceable.  The agreement read much like many employers’ NDAs, and broadly defined confidential information to include trade secrets and other business information obtained by the employee during his employment.  The appellate court, however, found this provision overbroad because it covered almost all information Schmitt became aware of during his time with ProAccess, regardless of whether the information was confidential or proprietary in nature, or even whether he obtained the information from a source other than his work (such as customer and other information that Schmitt established before working at ProAccess).  The court also rejected the company’s claim that the clause was saved because by its terms information that “becomes generally known to and available for use by the public” was excluded from coverage.  Much information is generally not known to the public, yet not all of it merits protection, said the court.

No “blue pencil”
Finally, despite an explicit clause in the agreement that “consented to judicial modification” in the event any provision was deemed overbroad, the appellate court refused to substitute reasonable restrictions to allow the covenants to be enforced.  The court found the deficiencies “too great to permit modification.”

Takeaways

The AssuredPartners case is a clarion call to Illinois employers to draft restrictive covenants so they are narrowly tailored to protect legitimate interests.  Noncompetition, nonsolicitation, and even nondisclosure agreements must be carefully crafted.  Less is more.  One size does not fit all.  Savings clauses may not be saviors after all.  If you have questions or would like to discuss your company’s restrictive covenants, please contact the Fox Swibel attorney with whom you usually work.


This article was written by Steven L. Brenneman who is the Chair of the Employment Law Group at Fox, Swibel, Levin & Carroll, LLP, and an editor of the Illinois Employment Law Letter. He can be reached at sbrenneman@fslc.com.