STAFFING FIRM’S NON-COMPETE AGREEMENTS HELD UNENFORCEABLE

The Seventh Circuit affirmed that a Chicago-based information technology staffing firm’s non-compete agreements were unenforceable.  The Company, Instant Technology LLC, sued four former employees and its former Vice President for Sales and Operations, Elizabeth DeFazio, for joining a competitor firm, Connect Search LLC, which she was co-founding.  Connect Search also won business from Instant Technology’s recent clients.  Instant Technology brought suit against these former employees for poaching employees, soliciting clients and divulging proprietary information to Connect Search.  The district court found that there was no evidence showing that defendants misused proprietary information.  Although the Defendants admitted breaching the covenants not to solicit and not to recruit, the district court held that those provisions in Instant Technology’s agreement were unreasonable and unenforceable under the Illinois Supreme Court case, Reliable Fire Equipment v. Arredondo, which held that a restrictive covenant is only valid if it serves a legitimate business interest.  The district court ruled that the covenants did not service a legitimate business interest because Instant Technology did not have permanent relationships with its customers and the former employees did not acquire confidential information during their employment.

Instant Technology argued before the Seventh Circuit that the district court used the wrong analysis, and that a “totality of circumstances” analysis should have been used to determine whether the covenants were unreasonable.  However, the Seventh Circuit rejected that argument.  The Court reasoned, “[Instant Technology] thinks “totality of the circumstances” means “all of the circumstances”…That’s an understandable reading given the slippery formulation, but it cannot be correct. ‘All’ circumstances is a lot of circumstances—indeed, infinitely many. Few matter to the question whether a restrictive covenant is reasonable, and even fewer matter enough that it would be a reversible error for the district court to omit them from its findings. The court didn’t discuss the price of eggs in Guatemala, but that does not require a remand.”

The Court further stated that if the validity of restrictive covenants, like non-compete agreements, depended on the “totality of the circumstances” then it would be hard to predict what covenants would be enforceable, which in turn, may cause both employers and employees to be worse off.

The full decision can be read here.

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