First District Court of Appeals Teaches Employers Who Over-Reach with Post-Employment Restrictions on Competition and Solicitation a Hard Lesson.

Yesterday, the Illinois Appellate Court in the case of Assured Partners, Inc., et al v. Schmitt, 2015 IL App (1st) 141863 refused to: (1) enforce as written an employment agreement containing overly broad non-competition, non-solicitation and confidentiality provisions; or (2) modify the restrictions to bring them within the confines of the law (called “blue penciling”). Assured Partners stands as a cautionary tale to Illinois employers and arguably reflects a continuing trend on the part of the First District Appellate Court (which encompasses Cook County and Chicago) against the enforcement of restrictive covenants — notwithstanding the 2011 Illinois Supreme Court decision ofReliable Fire Equipment v. Arredondo, which suggested that the kinds of legitimate business interests that employers might use to justify such restrictions were not limited to near-permanent customer relationships and confidential information.

The facts of Assured Partners warrant some discussion. The case involved a former employee, Schmitt, who had worked for a wholesale insurance brokerage, ProAccess (a subsidiary of Assured). ProAccess specialized in professional liability insurance for lawyers, accountants and healthcare professionals, while Schmitt’s business for it “centered” on lawyer’s professional liability insurance (“LPLI”). Although Schmitt worked for ProAccess more than 7 years, he quit only one year after signing a new 2012 employment contract that contained the restrictions at issue. Previously an at-will employee, Schmitt’s new contract with ProAccess guaranteed him four years of employment and a base salary of $240,000. After a dispute over compensation, Schmitt quit, began brokering wholesale LPLI for a competitor and solicited his former customers using a policy expiration list that ProAccess claimed he had taken from it.

ProAccess sued Schmitt and his new employer for breach of contract and intentional interference with business relations, and Schmitt countersued to declare the provisions of his ProAccess employment agreement unenforceable. At the trial court level, the court granted Schmitt summary judgment, holding that:

Schmitt’s noncompete was overbroad because it prevented him from engaging in any business relating to professional liability insurance, not just LPLI;

Schmitt’s nonsolicit was overbroad because it not only kept him from soliciting his old ProAccess’ customers, but also the customers of more than 30 affiliated brokerages in the U.S. and U.K. (and prospective customers of ProAccess and its affiliates); and

Schmitt’s confidentiality provision was overbroad because it applied to all of the information, observations and data he obtained during his ProAccess employment and which was related to its business or affairs.

On appeal, the First District effectively agreed with the trial court, finding that the noncompete was unreasonable as a matter of law because it kept Schmitt from engaging in the brokerage of wholesale professional liability insurance anywhere in the country, when that was not necessary to protect ProAccess’ legitimate business interests. As Schmitt had only specialized in LPLI while employed, the court suggested that ProAccess only had a legitimate interest in protecting that business, and the noncompete was not narrowly tailored to do that. (The court also stated that the noncompete was overly broad relative to ProAccess’ alleged interests in its confidential policy expiration list).

As for the nonsolicitation clause, the First District found it similarly unreasonable because it applied not only to those actual customers Schmitt developed during his employment, but also to customers and potential customers of ProAccess and its affiliates, whether he had contact with them or not by virtue of his employment. The nonsolicit was thus far broader than necessary to protect ProAccess’ interests in the specific client relationships Schmitt had built up while employed.

Notably, when ProAccess asked the appellate court to enforce the nonsolicit only as to those customers Schmitt serviced while employed, it declined, stating: “We decline to rescue a drafter from the risks of crafting a restrictive covenant that is patently overbroad.”

Finally, the First District found the confidentiality provisions of the ProAccess agreement overbroad as well, because they:

applied to all information, observations and data of which he became aware during the time he was employed by ProAccess, regardless of whether it was truly confidential and whether or not he became aware of by virtue of his work with ProAccess; and

prohibited not only Schmitt’s disclosure of such information but its use. According to the court, the latter prohibition would effectively limit his ability to work in the insurance industry.

Notably, the limiting language of the confidentiality clause (stating that it did not apply to information that “becomes generally known to and available for use by the public”) did not save it, because the general public’s ignorance of information is still not enough to render that information truly confidential.

At end then, ProAccess seemingly caught Schmitt red-handed: he was competing in the very LPLI space in which he worked while at ProAccess; he was soliciting his former ProAccess customers; and he was allegedly using a confidential ProAccess document, the policy expiration list, to do so. And although the First District suggested in many cases that ProAccess had a legitimate interest in protecting these customer relationships and this particular information, it awarded ProAccess absolutely nothing because it had overreached in its agreement.

Assured Partners thus stands as a stark reminder of two critical points to bear in mind when drafting restrictive covenants: (1) noncompetes, nonsolicits and nondisclosure agreements must be tied to an employer’s legitimate (and narrowly defined) business interests and the restrictions must be tailored as narrowly as possible to only promote those legitimate interests; and (2) having a “blue penciling” clause in agreement, which typically directs a court to reduce overbroad restrictions and enforce them to the greatest extent permitted by law, is not a surefire way to save otherwise overbroad agreements. Contrary to the Leo Burnett adage then, “reaching for the stars” can indeed have dire consequences, as it did in this case.