The National Law Forum

Illinois Supreme Court Establishes A New Test To Determine Whether Non-Compete Agreements Are Enforceable

Posted in the National Law Review on December 17, 2011 an article by Eric H. Rumbaugh, Brian P. Paul and Sarah E. Flotte of Michael Best & Friedrich LLP regarding Illinois Supreme Court’s clarification whether a non-compete agreement or other restrictive c ovenant is enforceable:

In a case with favorable implications for employers, in Reliable Fire Equip. Co. v. Arredondo, 2011 IL 111871 (Ill. Dec. 1, 2011), the Illinois Supreme Court clarified the “legitimate business interest test” that Illinois courts must use to determine whether a non-compete agreement or other restrictive covenant is enforceable. BeforeArredondo, appellate courts in Illinois were divided on how to apply this test, which resulted in uncertainty and legal expense for businesses and employees. The Arredondo decision provides clarity and a reasonable rule, both of which should help employers reduce risk and uncertainty.

This dispute began in late 2009, when the Fourth District of the Illinois Appellate Court took the position that an enforceable non-compete agreement only had to be reasonable as to time and geography. In doing so, the Fourth District rejected the legitimate business interest test that required that a former employer establish either that confidential information or near-permanent customer relationships were at risk if the non-compete agreement was not enforced. The legitimate business interest test had been used consistently by Illinois Appellate courts since 1975. However, after the Fourth District’s decision, almost every Illinois appellate court district struggled with the Fourth District’s opinion and, as a result, each district developed its own standards. Thus, employers and employees had to evaluate which district their lawsuit would proceed in before either could figure out whether the non-compete agreement was enforceable.

Thus, the Illinois Supreme Court agreed to hear Reliable Fire Equip., a very typical non-compete case where Arnold Arredondo (“Arredondo”) and Rene Garcia (“Garcia”) were employed as salespersons for Reliable Fire Equipment Company (“Reliable”). Reliable sells installs and services portable fire extinguishers and related equipment. Both Arredondo and Garcia signed a non-compete agreement prohibiting them from competing with Reliable in Illinois, Indiana and Wisconsin for one year after their termination. When Arredondo and Garcia went to work for a newly formed competitor, Reliable sued to enforce the non-compete agreements.

The Trial Court ruled that the covenant was unenforceable, finding that Reliable had failed to identify a legitimate business interest that needed to be protected by the non-compete agreements. A divided panel of the Appellate Court upheld the Circuit Court’s order, but questioned whether it was applying the appropriate test for non-compete agreements.

The Illinois Supreme Court reversed and remanded the case for further proceedings. In doing so, the Court held that a valid and enforceable non-compete agreement must meet three basic components of reasonableness:

A restrictive covenant, assuming it is ancillary to a valid employment relationship, is reasonable only if the covenant: (1) is no greater than is 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.

However, the Supreme Court then went one step further. Over the last 36 years, the Appellate Court decisions that applied the legitimate business interest test had held that there were only two legitimate business interests that would justify enforcing a non-compete agreement: (1) protecting confidential information; and (2) protecting near-permanent customer relationships. The Illinois Supreme Court rejected the rigidity of this standard, holding that the Illinois Appellate Court decisions of the last 36 years are “are only nonconclusive aids in determining the promisee’s legitimate business interest.”

Under Reliable, the new standard for determining whether a legitimate business interest exists is:

[B]ased on the totality of the facts and circumstances of the individual case. Factors to be considered in this analysis include, but are not limited to, the near-permanence of customer relationships, the employee’s acquisition of confidential information through his employment, and time and place restrictions. No factor carries any more weight than any other, but rather its importance will depend on the specific facts and circumstances of the individual case.

Most carefully drafted non-compete agreements for use in Illinois proactively identify confidential information and near-permanent customer relationships as the business interests the employer is trying to protect. Given this ruling, the door is open for employers to enforce restrictive covenants in a broader range of circumstances and even perhaps for the purpose of protecting customer goodwill. Employers should reevaluate their non-compete agreements in light of the decision in Reliable Fire Equip. Co. v. Arredondo to determine whether additional business interests should be identified as protectable business interests and whether additional job positions now warrant non-compete agreements.

The Credit Mark Predicament: A Bank Recapitalization Hurdle

Recently posted in the National Law Review an article by The Financial Institutions Group of Schiff Hardin LLP regarding community banks are searching for capital:

Many community banks are searching for capital either as a cushion to cover credit losses, to meet higher capital standards set by regulatory enforcement actions, or to support balance sheet growth driven by open or closed bank acquisitions, branch purchases or organic expansion.

Any community bank that intends to raise capital has to deal with investor skepticism over the bank’s credit quality. That skepticism gets addressed in most cases by a third-party credit review performed at the direction of the bank, with the results later confirmed by the investor’s own review firm. Because third-party credit reviews have become a gating issue to raising capital, management teams are making decisions about what firm to hire for the work, the scope of the review and how to strategically manage the risks inherent in these reviews.

Many of the risks and strategic approaches for managing third-party credit reviews may not be obvious to bank management, which is for the first time retaining a firm to perform this type of review with the very specific purpose of inducing investors to invest. Likewise, management may not be fully informed as to how the portfolio review will be used by potential investors to evaluate the merits of their investment.

It is hard to over-emphasize the importance of management being careful and strategically thoughtful in: the selection of its third-party credit review firm; the timing of the review in relation to an impending regulatory exam, year-end audit or capital-raising transaction; the scope and methodology of the review; and the use of the results of the review once completed. There are nuances galore in this process and the very survival of the bank can rest in the balance if the process is mishandled.

The attached article surveys the key issues management should consider before retaining a third-party credit review firm, and explains how these reports are used by potential investors in making determinations about investing in a particular bank. In addition, the article reviews common mistakes made in retaining third-party credit review firms.

In assessing a particular third-party credit review firm for hire, the following are ten key questions:

Are the bank’s files and documentation in good shape before the third-party credit review begins? If questionable, will several days of advance “triage” of the portfolio be useful in assessing whether the bank will show well based on the order of its documents, all in an effort to avoid judgmental credit downgrades based on file quality?
Does the firm have a senior project manager with strong verbal communication skills that will facilitate discussion of the review results with the board of directors and any potential investors?
Will the firm commit to remaining engaged and active throughout the recapitalization process, to serve in a rebuttal capacity with third-party credit review firms retained by potential investors, and to update its work if necessary as the recapitalization process progresses?
Will the firm provide value to the bank solely by providing a credit valuation, or would the bank benefit from a firm that has not only valuation experience but also skills and capabilities to provide post-valuation loan workout services, including assisting in developing recovery strategies on an individual NPA basis?
Should the firm provide a verbal conclusion on its credit mark before committing its conclusions to writing?
Should the firm be retained by the bank’s legal counsel as opposed to directly by the bank?
Should the firm review and value only the NPA portfolio, or should the review extend to the performing portfolio as well, and, accordingly, assess migration risk of the performing book?
Is the bank seeking capital from institutional investors that will insist on a brand name credit review firm in order to give the review results credibility?
Will the firm review only “paper” in the files or will it spend time with both the bank’s chief credit officer and other credit professionals in reaching valuation determinations?
Finally, will the bank’s personnel have the time and capacity to respond to the document calls by the third-party credit review firm given the other demands on management’s time, recognizing the burden these reviews place on management?

Cherchez les Catalogues Raisonné

Posted in the National Law Review an article by Art Law Practice of Sheppard Mullin Richter & Hampton LLP regarding Art and the legal system:

The success of the art market depends largely on confidence in the authenticity of artists’ works. Traditionally, a work in an artist’s “catalogue raisonné” has been key to confirming the authenticity, and thus value. To that point, a recent lawsuit filed in the U.S. District Court for the Southern District of New York (“S.D.N.Y.”) regarding a purported Jackson Pollock work underscores the importance of the catalogue raisonné in pre-purchase due diligence, and shows that omission from the catalogue could be potentially disastrous to the value of a work. See Lagrange v. Knoedler Gallery, LLC, 11-cv-8757 (S.D.N.Y.) (filed Dec. 1, 2011).

A catalogue raisonné is designed to be a comprehensive compilation of artist works, describing the works in a way that may be reliably identified by third parties. As scholarly compilations of an artist’s body of work,catalogues raisonnés are critical tools for researching the attribution and provenance of artwork. In a catalogue raisonné, the works are arranged in chronological order, and each entry describes the individual work’s dimensions, materials, exhibition history, citation history and ownership information. Typically, a catalogue raisonné is written by the leading experts on an artist over the course of many years’ research. In evaluating a work, such experts examine the work’s overall visual appearance, technical execution, historical context, and even resort to forensics in the quest to confirm or deny whether a work is by the artist’s hand. While historically catalogues raisonnés have been published as books, there has been a recent movement toward digital versions of such catalogs, such as the online catalogue raisonné of artist Isamu Noguchi, recently launched by the Noguchi Museum.

In the recently filed New York lawsuit, Pierre Lagrange, a London hedge-fund executive, and the trust of which he is principal beneficiary, sued the Knoedler Gallery and its former director and president, Ann Freedman, over the sale of a painting advertised as Untitled, 1950 by Jackson Pollock. The complaint for breach of warranties, fraud, and unjust enrichment alleges that the plaintiffs relied on the defendants’ representations in purchasing the purported Pollock painting for $17 million. The plaintiffs add that an unnamed consulting company hired by Lagrange concluded in a report last month that the painting was a fake. The plaintiffs contend that the defendants’ misrepresentations included verbal assurances (supported by allegedly false printed materials) on the authenticity of the work, although the painting was not included in the Jackson Pollock catalogue raisonné. The plaintiffs claim that auction houses Christie’s and Sotheby’s refused to sell the work principally because it is omitted from the Pollock catalogue raisonné, and therefore questions surrounding authenticity, because of that omission, would have doomed any future resale of the work. Additionally, the plaintiffs allege that because the defendants were aware that this omission from the catalogue raisonné would effectively render the work unsalable, the defendants falsely represented that the Pollock catalogue raisonné was in the process of being updated and that the revised version would include the work.

Authors of catalogue raisonné operate under threat of lawsuits because excluding a work from a work from an artist’s catalogue raisonné can so greatly affect its market value. Owners of questionable works may be under great pressure to have those works included in the catalogue, and have turned to the courts on various theories, including antitrust, disparagement and the like. Similarly, as we noted in our last posting, the Andy Warhol Art Authentication Board will dissolve in early 2012, citing substantial legal fees incurred in defense of its authentication activities. And it should be noted that Knoedler reacted to the suit by shuttering its doors after 165 years in business.

Whatever the eventual findings of fact and outcome of the case may be, this lawsuit highlights the critical importance of the catalogue raisonné on the value of a work. Omission from an artist’s catalogue raisonné indeed can prove fatal to any potential resale of a work, notwithstanding any proof the owner may offer to support authenticity. Thus, potential art buyers should exercise due diligence in investigating the authenticity of a work, and should likely seek the advice of impartial third parties in evaluating the genuineness and potential value of a work not included in an artist’s catalogue raisonné.

Beware of Online Applications and Background Check Authorizations

Posted in the National Law Review on December 15, 2011 an article by Luis E. Avila, Nancy L. Farnam, Richard D. Fries, Jeffrey T. Gray, Jr., Richard A. Hooker and David E. Khorey of Varnum LLP regarding class actions against employers’ conducting background checks:

An increasing number of employers have been recipients of proposed class actions alleging that the way they conduct background checks on prospective employees violates the Fair Credit Reporting Act 15 U.S.C. §1681 (“FCRA”).

A recent example is a claim filed in Virginia, which focuses on the employer’s online job application. The process asks potential employees whether they are willing to allow the company to obtain a consumer report or criminal background check on them. Applicants must then click a button labeled either “Accept” or “Decline.” The claim alleges that for purposes of the FCRA, an electronic disclosure is not one made “in writing” and that an electronic signature (Accept/Decline) does not satisfy the requirements of the act.

As it relates to employers conducting background checks on prospective employees, the FCRA requires that a person may not procure a consumer report for employment purposes with respect to any consumer, unless (1) a clear and conspicuous disclosure has been made in writing to the applicant at any time before the report is procured, in a document that consists solely of the disclosure that a consumer report may be obtained for employment purposes; and (2) the consumer has authorized in writing the procurement of the report by that person.

Electronic disclosures of this sort have traditionally been viewed as falling under the Electronic Signatures in Global and National Commerce Act (“E-Sign”). However, this claim challenges this understanding of E-Sign by alleging that the law does not apply to job applicants, but instead only to consumers, which it defines as an individual who obtains products or services.

Under the FCRA, employers may be liable to each class member for up to $1,000.00 or actual damages, plus punitive damages and attorneys’ fees and costs. So far this year, two companies have agreed to multimillion-dollar settlements in similar cases.

We strongly recommend that employers review their online job application process to ensure that it does not run afoul of the FCRA and obtain competent labor counsel to address any concerns

10 Tips for Conducting an Internal Investigation

Recently posted in the National Law Review an article by Catherine Salmen Wright of Dinsmore & Shohl LLP regarding conducting an internal investigation:

The recent news involving Penn State highlights how high the stakes can be when conducting an internal investigation. In fact, Penn State has hired former FBI director Louis Freeh to lead its internal investigation into alleged criminal conduct by a former employee. But while most employers do not face circumstances this challenging, the reality is that employers are presented with circumstances on a regular basis that must be investigated effectively to avoid significant legal liability.

Of course, this begs the question of when an employer needs to investigate. The simplest answer is when the employer has knowledge of misconduct. Misconduct can include a breach of an employer policy, violation of a drug or alcohol policy, theft or other criminal activity, or even misuse of company property. Employers should not, however, too narrowly construe what constitutes “knowledge,” which can include formal and informal complaints, information obtained during exit interviews, anonymous tips and third-party information.

Employers should also keep in mind that an internal investigation may become your defense in any subsequent litigation and therefore may be subject to significant scrutiny by the plaintiff, the plaintiff’s lawyer and possibly a jury. For example, in a sexual harassment lawsuit, the employer’s investigation is what typically shows that the employer exercised reasonable care to prevent and correct any harassing behavior. Another defense used by employers in wrongful termination lawsuits is the “honest belief” rule. Specifically, if the employer can show that it reasonably relied on the particularized facts that were before it at the time the decision was made, it can potentially avoid liability over a challenged decision. The investigation does not need to be perfect, but the employer must make a reasonably informed decision before taking an adverse employment action.

As a result, conducting an effective internal investigation is critically important. Every investigation comes with a unique set of facts and challenges, but the following 10 principles serve as a guide for conducting an effective investigation.

1. Determine the objectives and strategy for the investigation.

At the outset, employers must establish the objectives of the investigation. Questions that should be addressed include:

Are you trying to develop a complete record to justify a decision?
Are you attempting to avoid litigation?
What are your legal obligations?
Do you need an attorney involved?

Evaluating the answers to these questions will allow you to tailor your investigation.

2. Maintain confidentiality.

A guiding principle in any investigation is confidentiality, which employers should maintain to the extent possible. However, don’t promise what you can’t deliver. Absolute confidentiality when employees will be interviewed is virtually impossible. Also, employers need to be vigilant when it comes to thoroughness and promptness. For example, if you had to answer questions one year later in a deposition, can you give a reasonable explanation of why it took the amount of time it did to complete the investigation?

3. Determine if immediate actions need to take place to protect the workforce.

Based on what you know at the time the investigation begins, you may need to take immediate steps to protect the complaining party, alleged victim or the workforce in general. For example, an accused harasser may be put on a paid or unpaid leave, supervisory responsibilities could be changed or an employee could be temporarily transferred pending an investigation, but in no case should an employer penalize the alleged victim.

4. Review company policies.

Take an inventory of employer policies that may impact the investigation process. For example, a collective bargaining agreement may provide an employee the right to have a representative present at any interview.

5. Conduct a preliminary search of available records.

This includes reviewing personnel files and any documents relating to the misconduct. Act quickly to retrieve what electronic information is still available, including emails and text messages.

6. Select the appropriate personnel to conduct the investigation.

Investigators should be unbiased and unprejudiced — and perceived as such. Good investigators are skilled at setting people at ease and drawing out reticent witnesses in order to collect facts. They also need knowledge of company policies and procedures, the ability to maintain confidentiality and a level of authority consistent with the significance of the matter being investigated.

7. Control the interview process.

Obtaining detailed statements from interviews with the complaining party and the accused are a critical part of any investigation. Documentation should include the facts, not legal conclusions, or your interpretations and assumptions. Give witnesses ground rules: No conclusion has been reached, no reprisal will be taken, and no discussions about the interview are allowed with anyone.

8. Communicate throughout the process.

Many employers launch an investigation, only to fail to keep the complainant reasonably informed during the process. Unfortunately, this results in the complaining party believing their complaint was ignored, which may prompt them to involve an attorney.

9. Close the investigation properly.

Having invested the time and cost associated with the investigation, protect your investment by properly closing out the investigation. Make a decision, communicate the decision and document the process.

10. Ensure against retaliation.

Employees who make complaints may be legally protected from experiencing an adverse employment action. This includes complaints involving discrimination, harassment, safety violations, wage and hour violations and more. Do ensure against retaliation by continuing to monitor the situation.

As seen in the December 9th issue of Business Lexington.

Personnel Season: West Virginia's Open Governmental Proceedings Act

Recently posted in the National Law Review an article by Jason S. Long and Denise M. Spatafore of Dinsmore & Shohl LLP regarding the listing of individual employee names on county board of education agendas:

Does your County’s Personnel Agenda Comply?

As we begin prepare for another busy personnel season, a question that seems to come up often concerns the listing of individual employee names on county board of education agendas. Many administrators are, understandably, concerned about revealing the names of employees who are recommended for various personnel actions, such as reductions in force (“RIF”) and transfers, while still complying with the West Virginia Open Governmental Proceedings Act (“Act”). And, many have concerns of prejudgment by the board of education if individual names are placed on the agenda.

As we all know, the RIF and transfer process in particular is a difficult and scary experience for many employees, and publicizing it, even if legally required, may seem to add insult to injury for some. In order to spare their employees the embarrassment associated with some personnel actions, many boards provide employees’ names only to board members, with the public board agenda only stating the actions recommended, minus individual names.

A pertinent provision of the Act, West Virginia Code 6-9A-8(a), provides:

Except as otherwise expressly provided by law, the members of a public agency may not deliberate, vote, or otherwise take official action upon any matter by reference to a letter, number or other designation or other secret device or method, which may render it difficult for persons attending a meeting of the public agency to understand what is being deliberated, voted or acted upon. However, this subsection does not prohibit a public agency from deliberating, voting or otherwise taking action by reference to an agenda, if copies of the agenda, sufficiently worded to enable the public to understand what is being deliberated, voted or acted upon, are available for public inspection at the meeting.

The West Virginia Ethics Commission has advised by opinion that a county board of education does not have the authority to conceal the identity of persons being recommended by the superintendent for any type of personnel action. The basis for the opinion is simple in that there is no statutory provision which precludes the public from knowing the identity of the person the superintendent is recommending to hire, transfer, grant of a leave of absence, or acceptance of a resignation or application to retire. Therefore, a county board has two options in order to comply with the Act, especially as it relates to the upcoming personnel season.

It may publish an agenda that states the names of individuals and the recommended personnel action; OR it may publish a listing of proposed personnel actions, without individual names, but the names of each person recommended must be announced in open session BEFORE any board vote.

As it relates to cases that disciplinary matter, such as dismissal or suspension for cause, which may be discussed in executive session, the meeting agenda provided to the public may exclude the person’s name, unless the employee requests an open meeting. This issue was addressed in the November 2010 Education Law Alert.

USCIS Introduces Redesigned Employment Authorization Document: Form I-766

Recently posted in the National Law Review an article by attorneys Eric S. Bord , A. James Vázquez-Azpiri , Lance Director Nagel, Lisa Stephanian Burton of Morgan, Lewis & Bockius LLP regarding a redesigned Form I-766, Employment Authorization Document:

U.S. Citizenship and Immigration Services (USCIS) has released a redesigned Form I-766, Employment Authorization Document, commonly referred to as an “EAD card.” Part of USCIS’s larger effort to eliminate document fraud, the redesign enhances the card’s security features to discourage tampering and misuse. The enhanced security measures include optically variable ink along the top of the card and a holographic image on the front of the card.

How does the redesigned EAD card affect employers’ Form I-9 compliance obligations?

The redesigned EAD card serves the same purpose as the prior version and will remain a “List A” document for employment verification purposes. “List A” documents establish a worker’s identity as well as his or her authorization to work in the United States.

An applicant for employment may still present a valid and unexpired prior version of Form I-766/EAD card to satisfy Form I-9 document requirements. The redesigned Form I-766 will be phased in incrementally. Foreign nationals in possession of the prior version will only receive the redesigned EAD card to replace a lost or stolen card or upon a card’s expiration. A foreign national can apply for a new card no more than 120 days prior to expiration date.

Turning eDiscovery Strategies into Practical Applications for Your Business

The National Law Review wants to remind you of the upcoming conference Turning eDiscovery Strategies into Practical Applications for Your Business held on December 14th-16th, 2011 in Sentry Center, New York, NY.

Navigating New eDiscovery Challenges and Achieving Records Management Excellence in a Digital Environment

eDiscovery is a maturing discipline in the legal technology field. In many respects, however, emergent technology and legal considerations in eDiscovery create uncertainty and risk more commonly found in a truly emergent field. Indeed the past year in the eDiscovery field has been distinguished by volatility and change as several key players have merged and entered this space.

Across all industries corporations are experiencing exponential growth in the data volumes that must be collected reviewed, and in some cases, produced in litigation. This broadening digital platform implicates new risks and opportunities for your organizations of all sizes in litigation and day-to-day records management. IQPC has paid particular attention to these dynamics in crafting this year’s program. You will benefit from an unparalleled mix of thought leaders and industry movers who will shape the future of eDiscovery for years to come.

This is a must attend event to keep your organization abreast of the developments and new horizons in this critical field.

eDiscovery Resource Center

Video

Case in Point: Causal Elements in the Evolution of eDiscovery

Podcast

TransCanada Advice on Choosing the Right eDiscovery Vendor

Articles

Q&As

Walking the Lines of Transparency and Attorney-Client Privilege for Electronically Stored Information

Early Confirmed Speakers:

Clinton Field
Records Management Specialist
American Eagle Outfitters, Inc.

Lucas G. Paglia
Vice President-Deputy General Counsel
American Eagle Outfitters, Inc.

Kathrin-D Fischer
Legal, Risk & Capital Management
Deutsche Bank AG, Filiale New York

Andrew Stemmer
Legal Department
Deutsche Bank AG

Eric M. Albert
Director & Senior Counsel
Deutsche Bank AG, New York

Stephen Shine
Chief Regulatory Counsel
Prudential Financial

Ronald Hedges
Special eDiscovery Master

Hon. Richard Kramer
Superior Court Judge
District of California

Dave Shonka
Principal Deputy General Counsel
Federal Trade Commission

» View more speakers

Talent Shortage: A Top Risk Facing Businesses

Recently Posted in the National Law Review an article by Emily Holbrook of Risk and Insurance Management Society, Inc. (RIMS) about the shortage of talent and skills in hiring:

No, it’s not the credit crisis or the looming threat of cyber crime or business continuity during a natural disaster or the overall state of the national economy that keeps American business owners awake at night. It is, according to most, the shortage of talent and skills.

This may seem strange, seeing as were are still experiencing record unemployment numbers — meaning the pool of seemingly qualified employees should be vast to say the least. But in fact, the 2011 Lloyd’s Risk Index found that talent and skills shortage ranked as the number two risk facing American business leaders — shooting up from the number 22 spot in 2009.

“These findings show that talent is now firmly part of the risk lexicon — high levels of unemployment have boosted the quantity of candidates, but employers are still wrestling with the quality. Our own Global Talent Index echoed these concerns and highlighted two factors underscoring this risk: population demographics and skills gaps,” said Kevin Kelly, CEO of Heidrick & Struggles the leadership advisory firm providing executive search and leadership consulting services worldwide.

Are business leaders prepared to handle not only the number two risk on the list, but all 50 in the index? Apparently they are. Respondents said they are more than adequately prepared for 48 out of the 50 risks listed. That is in comparison to 2009, when leaders said they were not adequately prepared for eight of the 40 listed risks. Leaders cited “boosting talent retention” as one of the most overall effective risk management actions taken over the last three years, showing how eager businesses are to retain the staff they have.

Speaking of risk management, when respondents were asked to identify the most effective risk management action their organization had taken over the last three years, they cited the introduction of formal risk management strategies and systems, stating that “risk management is now one of the most important roles in the business community.”

Finally.

It may have taken the collapse of the U.S. housing market, a worldwide recession and the continuous uncovering of massive fraud to push the idea of risk management to the forefront of global business programs, but at least the discipline is now moving to where it belongs.

And it is apparently now focused on retaining the talent and skills that are greatly needed in a business world full of continuously evolving risks.

Non-Compete Agreements: A Brave New World in Illinois

Posted on December 8th in the National Law Review an article by attorney Anthony C. Valiulis of Much Shelist Denenberg Ament & Rubenstein P.C. regarding Illinois Supreme Court’s recent changes regarding non-compete & non-solicitation agreements:

On Thursday, December 1, 2011, the Illinois Supreme Court dramatically changed state law regarding non-compete and non-solicitation agreements. In Reliable Fire Equipment Company v. Arredondo, the court adopted a new test for determining the enforceability of an employee restrictive covenant.

For the last 30 or so years, Illinois courts have generally held that there were essentially only two “legitimate business interests” that could support a restrictive covenant in the employment context: (1) a company’s confidential information or (2) near-permanent relationships with customers. As we have discussed in previous articles, the Fourth District rejected this test in Sunbelt Rentals, Inc. v. Ehlers, holding that a restrictive covenant could be upheld regardless of the existence of a legitimate business interest—provided that the scope of the covenant was reasonable. The Second District rejected Sunbelt in the Reliablecase but held open the possibility that there could be more than the two traditional legitimate business interests. In the Second District Court’s decision, the concurring opinion felt that the test should be based on the totality of the circumstances involved in each particular case. It was this position that the Illinois Supreme Court adopted in its December 1 opinion.

According to the Illinois Supreme Court, for an employee restrictive covenant to be enforceable, its restrictions must be “(1) no greater than is 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.” That has been pretty much the law for the last 30 years. But the important portion of the Reliable decision relates to the test for determining whether a legitimate business interest exists. It is here that the Illinois Supreme Court has created a brave new world.

According to the Reliable court, “[W]hether a legitimate business interest exists is based on the totality of the facts and circumstances of the individual case.” In reviewing that totality, a court is to consider various factors, including but not limited to “the near-permanence of customer relationships, the employee’s acquisition of confidential information through his [or her] employment, and time and place restrictions.” But the Illinois Supreme Court made it clear that these factors are not exclusive. Moreover, “[N]o factor carries any more weight than any other, but rather its importance will depend on the specific facts and circumstances of the individual case.”

So what does all this mean? Well, we now have a clear statement, articulated by the state’s highest court, of the test for enforceability. But what we do not have is certainty. Under this “totality of the circumstances” test, it will be very difficult to determine whether a particular restrictive covenant will be enforceable or not. As these cases are litigated over time, more certainty will undoubtedly arise. As of now, however, we can only speculate about what additional factors will be important. Goodwill is likely to be one. So might an employee’s unique value.

What is a business to do in the wake of the Reliable decision? First and foremost, all existing restrictive covenants should be reviewed to determine, under the particular set of facts applicable to your business, what might be enforceable. Although there is no certainty, there are drafting measures that can and should be taken to help make your agreements fit into this brave new world.

The National Law Forum

Illinois Supreme Court Establishes A New Test To Determine Whether Non-Compete Agreements Are Enforceable

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The Credit Mark Predicament: A Bank Recapitalization Hurdle

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Cherchez les Catalogues Raisonné

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Beware of Online Applications and Background Check Authorizations

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10 Tips for Conducting an Internal Investigation

Recently posted in the National Law Review an article by Catherine Salmen Wright of Dinsmore & Shohl LLP regarding conducting an internal investigation: