Using An Overbroad Confidentiality, Non-Compete And Non-Solicit Agreement To Scare Employees Can Seriously Backfire 

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Professionals

Most employers know that Illinois law requires them to narrowly tailor restrictive covenants in employment agreements to the specific interest(s) that the employer seeks to protect (i.e., proprietary customer information and the actual customers that the employee worked with). Employers, however, often tell counsel that they do not want to pay an attorney to “narrowly tailor” but want generic agreements with “broad” restrictions to “scare employees.”

While such broad language has always been dangerous, particularly with “key” employees that the employer entrusts with important, confidential client information, taking this course of action just became a lot more perilous after the Illinois Appellate Court, in AssuredPartners, Inc. v. Schmitt, rendered on October 27, 2015. In this case, the court refused to enforce non-competition, non-solicitation, and confidentiality provisions in an employment agreement between an insurance broker and one of its sales managers, even though the employee allegedly stole the employer’s “customer expiration list,” which included allegedly confidential expiration dates of the customers’ insurance policies. Affirming summary judgment in favor of the employee, the court held that the non-competition, non-solicitation, and confidentiality provisions were unenforceable as overbroad and refused to modify the restrictions even though the agreement contained a “judicial modification” provision. 

The court’s ruling was based in large part on the unique facts of this case. The employee had been in the professional insurance business since 1999 and since 2003 had “specialized” in the niche field of “lawyers professional liability insurance” (“LPLI”). In 2011, the employee signed a “senior management agreement” that restricted the employee from: (1) working for a competitor of the employer in the United States; (2) soliciting any customer or potential customer of the employer; or (3) disclosing any information concerning the employer or its subsidiaries and affiliates.

Non-Competition Provision

The employer contended that the non-competition provision was valid because it protected a legitimate business interest — the employer’s “customer expiration list,” which the employee allegedly stole and used to solicit customers after he resigned.  Rejecting this contention, the appellate court held this provision overbroad because it was not narrowly tailored to the “specific kind of professional liability insurance practice [the employee] developed during his employment.”  Instead, this clause broadly prohibited the employee from working with all types of professional liability insurance, not just his specialty of LPLI. As a result, this provision “clearly exceeded that which is necessary to protect…the customer expiration list.” The court also noted that the geographic and temporal scope — the entire United States for 28 months — was overbroad given that the employee only worked for 20 months under the agreement in question.

Non-Solicitation Clause

The court also held the customer non-solicitation provision overbroad because it precluded the employee from soliciting any customers or potential customers of the employer regardless of whether they worked with the employee in the LPLI business. In so holding, the court noted that this was broader than necessary to protect “those customers and vendor/supplier relationships that [the employee] developed while working for [the employer].” As a result, this provision would preclude the employee from working with customers that the employee did not work with during his employment. This was significant because the employer engaged in 47 insurance related businesses covering over 30,000 customers. The employee, however, only worked in one line of business (the LPLI) with far fewer than the 30,000 customers and “only had access to confidential information related to clients he serviced while with [the employer].” [Emphasis in original.]

Confidentiality Provision

Even though the employer alleged that the employee stole confidential information (the customer expiration list), the court refused to rein in this conduct using the confidentiality provision because the court found this clause to be overbroad. This provision precluded the employee from “the use or disclosure of any information, observations and data (including trade secrets) obtained by [the employee] during the course of [] employment . . . concerning the business or affairs of [the employer] and [its] respective Subsidiaries and Affiliates.” The court found this provision “patently overbroad” because it covered “almost all information” the employee became aware of during his employment, regardless of whether the information was confidential or proprietary in nature, or even whether he obtained the information from a source other than his employment, i.e., customer and other information that the employee developed in the years before his employment with the employer.  The court found that this overbroad confidentiality provision limited the employee’s “ability to work in the insurance industry by preventing [the employee] from using any knowledge that he gained while in plaintiff’s employ, regardless of whether he gained such knowledge, directly or indirectly, as a result of his employment.” [Emphasis in original.]

No Judicial Modification

Also, despite an explicit clause in the agreement that “consented to judicial modification” in the event any provision was deemed overbroad, the court refused to narrow the above provisions even though the employer sought to enforce restrictions less onerous than provided for in the agreement. In so holding, the court noted that to do so would discourage employers from “narrow and precise draftsmanship.” Thus, the burden is on employers to narrowly tailor restrictive covenants.

What Employers Can Do To Protect Themselves

If you have questions or would like to discuss your company’s restrictive covenants, please contact Aaron Stanton at 312/840-7078 or astanton@burkelaw.com.

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