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Lawyers get lots of calls from clients with emergencies. That little tidbit should not surprise anyone. After all, when a situation first arises, most business people would rather negotiate a solution than ask someone to help them. Therefore, almost anytime someone calls an attorney about a potential litigation matter, they have often exhausted all of their other options.
Many of the so called emergencies, however, are entirely preventable. A typical scenario is that a small company, Smallco, hires a contractor, Con, to do a job. The job can be almost anything – the graphics design for a brochure, broker a deal to sell company real estate, develop a smart phone app, or even conduct an Internet marketing campaign. Everything goes well for a while; Smallco cuts checks, and Con appears to do the work. But, somewhere along the way, Smallco asks Con how the project is coming along, and when it will be done? All of a sudden, Con starts making additional demands: “I’m not turning over my valuable intellectual property until I get the payment that we agreed on!” And naturally, Smallco never agreed to the deal that Con is attempting to “enforce.”
Smallco tries to work something out with Con, but Con is adamant. No work product until he receives the “agreed” payment. And, naturally, there is no contract and only a few scant emails to prove that anything was agreed to, and naturally, the key terms are never mentioned anywhere. That’s when a lawyer gets a call, and that’s when the bad news come out. The case can be litigated, and probably even won – after all, juries are known for their ability to see through complicated situations and find the truth. But, it will be expensive – in many cases, a lot more than the case is worth. Then the lawyer steps in and attempts to negotiate a resolution. Under the obvious threat of litigation, sometimes Con backs off, and sometimes the whole mess ends up in court.
No doubt, every Smallco runs into its fair share of Cons. However, many of these run-ins can be avoided. Following the steps below can help your company steer clear of at least a few Cons.
1. Seek Out Someone Highly Recommended: The Internet is more than just a way to find a great new restaurant. See if there is a site that specializes in providing ratings for the type of person you seek to hire. If you are looking to hire an attorney, look on Avvo. Freelancer, elance, and odesk have ratings for software developers and web developers – as well as lots of other types of professionals. And, of course, you should look over your prospective contractor’s LinkedIn page. A professional with no client recommendations or endorsements indicates a person who 1) does not care about the Internet (there are a few still out there), or more likely 2) is too green to have garnered any recommendations or endorsements or 3) is not worthy of recommendations or endorsements.
As powerful as ratings services and resume services (like LinkedIn) are, and we wholeheartedly endorse their use, there is no replacement for working your own network. Do you know other business owners that have hired someone for the same type of job that you are about to hire someone for? Ask them! Even direct competitors will usually give honest advice about contractors they have worked with. And a business person that is likely to do business with you again is not going to give a recommendation for someone they really do not believe in.
2. Get a Resume and Contact Prior Employers: This step, which is recommended by every reputable HR professional, entails asking your potential contractor for his resume (or portfolio, or curriculum vitae), going down the list of previous jobs, projects, engagements, etc., and contacting everyone on it. Some of the contractors prior engagements will likely be willing to speak with you, and you should listen to what they say very carefully. If the feedback comes back mostly negative, then your potential contractor is likely a bad apple. Congratulate yourself – you just dodged a potential “Con” situation, like the one discussed above. In addition, you can verify that your contractor actually has done what he said he did; i.e., did Joe Smith hold the title of Executive Vice President when he worked for you? No – he actually worked as a sales representative on the East Coast? Very good to know.
If your contractor gets good recommendations, and his resume checks out, then you are probably dealing with a trustworthy person. If you restrict your dealings to only trustworthy people, the probability that you will run into a Con drops to extremely low levels, and the probability that you will experience a blowup like the Smallco fiasco described above is very small. However, to guard against honest misunderstandings (which do happen), you can take the additional step of memorializing your agreement into a contract as set forth below to ensure that misunderstandings are kept to a minimum. However, if you are dealing with an untrustworthy person, you should realize that any contract will be extremely difficult to enforce. Therefore, the steps required to determine that a person is trustworthy are essential before you consider entering into a contract. Again, a contract is an important step, and you should not skip it. But dealing with a trustworthy person is just as important.
Once you determine the person is trustworthy, and is skilled enough to take on your job, the last step is:
3. Memorialize the Agreement: This is the first and only step for which you will need to engage an attorney. The attorney will need to capture the actual agreement of the parties, and ensure that your interests are protected.
It goes without saying that a trustworthy person will have no problem actually signing a document that memorializes what she agreed to do. A few things to keep in mind, especially with software and web developers, is to address intellectual property. For example, the Agreement should set forth that a web developer is entitled to use trademarks and copyrights of your company only while performing work for you, etc.
If the value of the Agreement is substantial, such as $1,000,000 or more, you should consider an arbitration clause as part of the agreement. There are a lot of advantages to arbitration – in particular, arbitration provides privacy, greater certainty (as you can restrict appeal), and the knowledge that your case will be decided by experts in the field you are operating in. However, the parties must pay the arbitrators, which can easily run $90,000 or more.
Finally, in appropriate circumstances a fee-shifting provision can be useful as well. However, there are many cases where a fee-shifting provision actually benefits the other party far more, so take care with this. It should also be noted that in many jurisdictions one-way fee shifting provisions are automatically applied bi-laterally. See, for example, First Citizens Bank v. Reikow, 177 Wn. App. 787, 799 (2nd Div. 2013). In other jurisdictions, a reasonableness standard is applied.
Even if you follow all of the above, you will not eliminate emergencies entirely. Legitimate disputes will still occur. However, if you limit your dealings to trustworthy persons, and you use a contract to ensure that everyone is actually agreeing to the same thing, the likelihood that any particular engagement will devolve to an emergency is extremely low.
In late 2011, the Illinois Supreme Court decided the Reliable Fire case, and upended long-standing case law surrounding the enforcement of restrictive covenants in Illinois. In particular, while the Court reaffirmed that restrictive covenants, including noncompete agreements, are enforceable, and that they must be reasonable, meaning that they must be tied to a legitimate business interest of the employer. However, the Court rejected that the legitimate business interest must be tied to a) confidential information, or b) near permanent customer relationships of the employer. Rather, the Court embraced a “totality of the circumstances” test. The language of the case makes clear that the limitations placed on an employee can be no greater than that which is necessary to protect the legitimate business interest of the employer.
The Reliable Fire case posed a lot of new questions. If a legitimate business interest could encompass more than confidential information or near permanent customer relationships of the employer, what kinds of employees would be subject to a non-compete, and how far would courts go to enforce those non-competes?
Saddler’s Row v. Dainton, helped to answer both of those questions. In particular, in this case, the 2nd District Appellate Court determined that a non-compete could be enforced against a Master Saddler to prevent him from working for a close by competitor based solely on his access to the customers of Saddler’s Row. This determination was made even though Mr. Dainton did not acquire his “Master Saddler” through Saddler’s Row or at their expense. Further, this decision was made was despite the trial court determining that the agreement was overreaching in claiming a 75 mile geographic radius from the employer. Saddler’s Row will undoubtedly be cited by many employers in the future seeking to enforce restrictive covenant’s against other professionals, much as the Total Health Physicians case is presently cited. It will also be cited as an example of an appellate court requiring a trial court to apply a “blue pencil” to modify an overbroad restrictive covenant.
Similarly, several cases illustrated that traditional defenses to non-competes are alive and well. For example, Fisher/Unitech v. Computer Aided Technology demonstrated that generalized knowledge and experience acquired through employment – even if it was acquired solely through contact with the employer – cannot comprise confidential information sufficient to enforce a non-compete.
Marketing Werks v. Fox, Case No. 13-7256 (N.D. Ill. Oct. 11, 2013)(Judge Kendall)
Marketing Werks was denied a TRO against a former employee that started a competing company and attempted to procure the client that he was primarily responsible for working with while at Marketing Werks.
Fox had worked for Marketing Werks as a senior account executive and was primarily responsible for the Indy Racing League (“IRL”) account. In this role, he was privy to Marketing Werks’ strategic plans for the IRL account. Fox then left Marketing Werks and started his own company, in which he immediately bid for the IRL account.
Marketing Werks asserted a number of counts against Fox, including trade secret misappropriation. The Court found that Marketing Werks was likely to be able to establish both the existence of a trade secret (its strategic plans, for example) and that Marketing Werks would also likely be able to prove that Fox misappropriated the trade secret.
However, the Court denied a TRO because the value of the IRL account could be established based on Marketing Werks with IRL. In addition, the Court questioned the measures that Marketing Werks took to maintain its trade secret. Finally, Marketing Werks did not immediately seek a TRO, which is often fatal.
Garon Foods v. Montieth, Case No. 13-214 (S.D. Ill. July 2, 2013)(Gilbert)
In a well reasoned and balanced opinion, Judge Gilbert of the Southern District of Illinois granted a much limited preliminary injunction in an employment case.
The facts of this case are that Garon is in the business of selling peppers to various cheese manufacturers. It receives all (or nearly all) of its peppers from a single supplier. Montieth had worked for Garon in selling peppers. She then left of her own accord and went to work for the manufacturer. Interestingly, Garon had no non-compete agreement with Montieth, but she did sign an agreement recognizing trade secret protection in the identity of Garon’s supplier, the sales terms that Montieth had negotiated with customers in the past, and other items.
Judge Gilbert granted Garon a limited preliminary injunction prohibiting Montieth from soliciting business from any cheese manufacturer she had attempted to solicit for Garon in the twelve months prior to her leaving Garon, but for a limited period of only 8 additional months. She is also enjoined (apparently permanently) from mentioning to any cheese manufacturer that she knew to be a customer of Garon’s during her employment that her present employer supplies Garon.
Saddlers Row v. Michael Dainton, Case No. 2-12-1941, Slip Op. (Ill. App. 2nd Dist. Apr. 23-2013)(Mullen)
In this case, Saddlers Row had employed Michael Dainton – a master saddler. As a condition of his employment, Dainton executed a non-compete agreement that prohibited him from working for a competitor for two years within 75 miles of Saddlers Row. After working for Saddlers Row for a number of years, Dainton went to work for a competitor a mere 7 miles away. Saddlers Row sued.
The trial court had determined that Saddlers Row had a legitimate business interest in its near permanent relationships with its customers, and that the two year term was reasonable. However, the trial court struck the non-compete due to the 75 mile radius being blatantly excessive. The trial court also refused to modify the non-compete, so as not to encourage employers from attempting to impose overly large areas where employees could not compete in the future. Accordingly, the trial court refused to enter a preliminary injunction.
The appellate court overturned as it determined the trial court abused its discretion in not modifying the geographic area of the non-compete to make it enforceable. On remand, the trial court was ordered to enter a preliminary injunction against Dainton.
One important factor that the appellate court considered was that Dainton understood and had agreed to the provision when he entered Saddlers Row’s employ. In addition, Dainton was not fired, but rather decided to leave Saddlers Row to go work for a competitor that he knew was within the geographic range of his non-compete.
Fisher/Unitech v. Computer Aided Technology et al., 13-CV-2090, Slip Op. (N.D. Ill. Apr. 9, 2013)(Tharp)
In this case, Fisher/Unitech sought to enforce a non-compete agreement against a former salesman who had left to join Computer Aided Technology. The Court ultimately determined that Fisher/Unitech had no legitimate business interest to protect, as all of the allegedly confidential information that it sought to protect from disclosure involved training and experience that its salesman had obtained by working at Fisher/Unitech. As this was “generalized knowledge and experience” it was not actual trade secrets, and could not comprise a legitimate business interest.
Interestingly, the Court also pointed out that the non-compete agreement was “clearly overbroad.” In particular, the Court attacked the geographic restriction, which would have included territory that Fisher/Unitech did not compete in, as well as the fact that it covered “generalized knowledge and expertise.” Also interestingly, the Court did not view the fact that the employee in question apparently admitted to misappropriating true trade secrets as a sufficiently bad act to enforce the non-compete.