We are all familiar with the problems surrounding various non-compete agreements between employers and employees. The standard concerns include:
- Is the time overly restrictive?
- Is it more than 12 months?
- Do the geographic restrictions reach too far?
However, in a recent case, just decided by the 7th Circuit Court of Appeals, “Instant Technology LLC vs. DeFazio”, a whole new set of concerns have been established.
Instant Technology recruits and then seeks to place I.T. workers at companies in need for such workers. DeFazio was a V.P. of Sales and Operations at Instant Technology. She was terminated, opened a competing business, and solicited away several of her former colleagues from Instant Technology. They began seeking to place candidates at companies with which they had done business at Instant Technology, and some of the candidates they were trying to place were candidates who were in Instant Technology’s database. All of the defendants had signed restrictive covenant agreements at Instant Technology in which they had promised not to recruit Instant Technology employees to leave Instant Technology, not to solicit business from Instant Technology’s clients, and not to disclose Instant Technology’s confidential information. Instant Technology sued the defendants for breach of each of these contractual promises.
The initial lawsuit ruled in favor of the defendant, DeFazio, because:
- There was no evidence the defendants took information from Instant Technology, or that they did not obtain it themselves from public sources, or from cold calls. The defendants testified that they found the candidates on LinkedIn and other social media sources; and
- The no-solicitation of employees and client restrictions was unenforceable.
Instant Technology argued there were three legitimate business interests which the no-solicitation restrictions were designed to protect: confidential information, client relationship, and workforce stability. But it was not enough to simply identify the legitimate interests. Instant Technology was required to prove they existed. The courts ruled it had not done so.
First, the court reiterated that there was no confidential information at issue, as the defendants appeared to have obtained the information on candidates from public sources and cold calls. So this purported interest did not exist.
Second, the asserted interest in protecting client relationships was not valid because Instant Technology’s clients were not loyal to it. The evidence demonstrated that the larger clients requested candidates from 5 to 10 staffing agencies at once. Moreover, Instant Technology placed only about 10% of the candidates it pitched to the clients. Thus, there were no protectable client relationships to support the no-solicitation-of-clients restriction.
Third, the asserted interest in workforce stability also was belied by the evidence. Of the employee complement that existed two years prior to trial, 77% had left Instant Technology by the time of trial. Thus, there was not a stable workforce that could be protected by the no-solicitation-of-employees restriction.
The takeaway here is that it is not enough merely to proclaim the existence of legitimate business interests that underpin restrictive covenants. One must be able to prove them. When deciding to put together a non-compete agreement with your employees, make sure the business reasons for doing so do truly exist and can be proven, otherwise you may find yourself spending a pile of money to no avail!