Seventh Circuit expresses frustration over Illinois law post-employment restrictions

The tussles over post-employment restrictions in Illinois continue. In its recent decision in Instant Technology LLC v. DeFazio, 2015 WL 4243231 (July 14, 2015), the Seventh Circuit Court of Appeals applied, but expressed frustration with, the state law “totality of the circumstances” test enunciated in by the Illinois Supreme Court in Reliable Fire Equipment Co. v. Arredondo^[i]. That test provides that in evaluating the enforceability of restrictive provisions a court should examine each employment situation and noncompete agreement individually to determine if the agreement protects a “legitimate business interest.” In Instant, the Seventh Circuit opined that the test is bad for the economy as it results in uncertainty between contracting parties. Let’s examine what led to the Seventh Circuit’s virtual punt to the Illinois courts and/or legislature to change the law.

THE FACTS

Instant Technology, a tech-staffing firm, employed Defendant, DeFazio, as its Vice President for Sales and Operations until she was fired in January 2012. DeFazio had signed a non-solicitation of employees and clients when she was first employed. Prior to her termination, DeFazio secured a new position with a competitor in which she was a co-founder. DeFazio started working for a competitor immediately, bringing with her several Instant co-workers. She also wooed several of Instant’s recent clients to join her new company. Instant sued DeFazio for breach of the post-employment covenants. Although DeFazio admitted breaching the covenants, the district court found the covenants unreasonable and unenforceable. The court found that under Illinois law the covenants were unenforceable because they served no “legitimate business interest” under the “totality of the circumstances” test announced in Reliable.^[ii] The district court articulated the following reasoning for its decision:

• Tech-staffing firms do not build relationships with clients to justify post-employment restrictions as clients rarely demonstrate any loyalty;
• Larger clients request temps from five to 10 firms at once and a staffing firm can expect compensation only a 10th of the time it recommends a candidate;
• Employees are not exposed to private information on likely candidates as the candidates’ information is readily available from public sites such as LinkedIn.

Instant appealed and the Seventh Circuit affirmed the district court’s holding finding the post-employment restrictions unenforceable under the “totality of the circumstances” test.^[iii] Rejecting Instant’s argument that the district court had not actually considered all circumstances, the appellate court noted that “totality of the circumstances” does not mean all of the “infinitely many” circumstances. Rather, it essentially means the circumstances important to applying the proper legal analysis.

THE COURT’S FRUSTRATION

While the court found no error in the district court’s application of the “totality of the circumstances” test, the appellate court expressed some frustration with the test itself. In fact, the Seventh Circuit’s opinion cuts to the heart of the problem with the “totality of the circumstances” test: uncertainty in contracting. Judge Easterbrook, writing for the majority, observed that the validity of post-employment covenants under the totality of the circumstances test, “can’t be determined until litigation years after the events-makes it hard to predict which covenants are enforceable.”^[iv] He posited that the resulting uncertainty will lead to employer’s hesitancy to “make investments that may depend on covenants’ validity and they will not pay employees higher wages for agreeing to bear potentially costly terms.” Judge Easterbrook concluded in a parting jab to Reliable:

Both employers and employees may be worse off as a result. Risk-averse employees who hope that their covenants will be unenforceable, but fear that they will be sustained, may linger in jobs they would be happier (and more productive) leaving. But our rule of decision comes from state law. (citations omitted). Reforming that law, or trying to undermine it, is beyond our remit.^[v]

Only time will tell whether the Illinois state courts or legislature will take any action to bring about further clarity and definition as to what discretion a court is afforded when tasked with analyzing the enforceability of post-employment covenants.

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