December Advisory

On December 1, 2011, the Illinois Supreme Court issued a watershed opinion on the enforceability of restrictive covenants (non-compete, non-solicit, non-disclosure and no-hire agreements) in the employment context, Reliable Fire Equipment v. Arredondo et al. Prior to this point, the court had only rarely spoken on the subject, and never definitively. This lack of input from the state’s high court resulted in some ambiguities and inconsistencies among Illinois’ appellate court decisions in the area. The Reliable Fire Equipment decision, however, has now clarified the legal standards applicable to restrictive covenants and likely made it significantly easier for employers to enforce post-employment restrictive covenants governed by Illinois law -- particularly in cases predicated on an employer’s interest in its customers.

The Former Legal Landscape
The majority of Illinois appellate courts would enforce post-employment restrictive covenants only when they: (1) did not impose an undue hardship on the former employee (e.g. completely preclude him/her from making a living); (2) were not injurious to the public interests; (3) were related to an employer’s “legitimate business interest;” and (4) reasonable in terms of time, activity and geographic area restricted vis-à-vis that business interest. Although this legal standard is close to those used by most other states, Illinois appellate courts have significantly limited the number and type of business interests compelling enough to justify enforcing restrictive covenants in the employment setting.

Specifically, most Illinois courts held that only two business interests would suffice: “near-permanent” customer relationships or confidential information/ trade secrets. Regarding the former, the factors/test employed by the courts to determine the existence of the near-permanent customer interest were rigid and difficult for employers to meet. Some courts looked at a variety of objective factors like whether the relationship was exclusive or long-standing (5 or more years), whether the employer spent significant time and money to obtain the customers; etc; other courts merely held that there could be no near-permanent relationships in “ordinary sale” businesses ( as opposed to professional services)). Thus, in Illinois, it has traditionally been difficult for employers to consistently enforce non-compete and non-solicitation agreements predicated on their relationships with customers.

On the other hand, and as discussed in our November 2009 update, one Illinois appellate court rejected altogether the requirement that an employer demonstrate a legitimate business interest before enforcing any restrictive covenant, regardless of its scope. This case, Sunbelt Rentals, Inc. v. Ehler, stated that because the Illinois Supreme Court had never imposed the legitimate business interest requirement, an employer merely had to show that its restriction was reasonable in time and territory for it to be enforced. The legal alternatives available to the supreme court in Reliable Fire Equipment thus appeared to be: the inflexible, limited and fairly pro-employee tests used by the majority of appellate courts versus the extremely liberal, pro-employer test used by the Sun Belt Rentals court.

The Reliable Fire Equipment Decision
Reliable Fire Equipment involved an employer’s one-year, post-employment restrictions on competition, customer solicitation, and employee solicitation. The trial and appellate courts found the restrictions unenforceable; the supreme court’s decision, however, largely avoided any analysis of the particular facts of the case. Instead, the court looked at the legal test applied by the prior appellate court, namely the “majority rule” that an employer could only establish a legitimate business interest by showing either that : (1) a former employee acquired confidential information or trade secrets as a result of his employment and subsequently tried to use it/them for his own benefit; or (2) the employer had a near-permanent relationship with its customers and that but for the employee’s employment with plaintiff, the employee would never had come into contact with those customers.

The supreme court first reviewed its prior decisions in the area, stating that it had always recognized a “three-pronged inquiry” into the reasonableness/enforceability of restrictive covenants in the employment context: (1) whether enforcement of the restrictions would visit undue hardship on the employee against whom it was to be enforced; (2) whether enforcement of the restrictions would be injurious to the public interest; and (3) whether the restraint imposed were greater than necessary to protect the legitimate business interests of the employer. In so doing, it explicitly rejected the holding of Sunbelt Rentals, i.e. an employer need not show a legitimate business interest prior to enforcing any post-employment restrictive covenant.

The meat of the Reliable Fire Equipment opinion, however, is in its explanation of just how the lower courts are to determine whether an employer has established the legitimate business interests that are a prerequisite to enforcement of restrictive covenants. Specifically, the court emphatically stated that there was no mathematical formula for determining whether a legitimate business interest exists or whether the particular restrictions go further than needed to promote those interests.

Instead, the lower courts must look at the “totality of the circumstances” to determine those questions, rather than just the factors listed in the prior near-permanent customer or the confidential information/trade secret tests. Such tests are no longer “conclusive.” Thus, in cases where post-employment restrictions are predicated on an employer’s interest in its customers, a court may consider the near-permanence of an employer’s relationship with its customer, but the length of the relationship will no longer be determinative. Nor does a court have to give that factor any more weight than any other factor; instead, the particular context of the facts should determine their weight.

Ramifications of Reliable Fire Equipment
Reliable Fire Equipment represents a very significant change in Illinois law on restrictive covenants. Employers are now free to use a much broader variety of facts and arguments to establish the legitimate business required to enforce such restrictions, instead of having to meet the rigid and difficult near-permanent customer relationship or confidential information/trade secret tests. That should make it easier for employers to enforce restrictive covenants, particularly given the high bars set by the prior tests. Of course, litigants will continue to highlight the existence of factors mentioned in the old tests, as they will continue to be relevant, but failure to meet the tests will no longer be fatal. Additionally, employers may point to other relevant factors, such as the extraordinary training an employer had given a departing employee, the amount of money invested by the employer in the employee, and the length of time and means by which the employer supported the employee in his/her customer development efforts.

On the other hand, departing employees and their new employers will likely find it much more difficult to get rid of expensive lawsuits at the earlier stages of litigation through motions to dismiss and motions for summary judgment. Given that the “totality of the circumstances” is what counts, litigants will be forced to engage in extensive and expensive fact discovery to establish those circumstances. Indeed, restrictive covenants cases governed by Reliable Fire Equipment may prove even weaker candidates for resolution at the summary judgment (post-discovery, pre-trial) stage than “likelihood of confusion” trademark cases; federal courts in trademark cases have explicitly held that likelihood of confusion is an issue “ rarely amenable to summary judgment,” yet that issue typically looks at only 6-7 factors, some of which are given much more weight than the others. As a corollary, both sides’ legal counsel will likely find it more difficult to accurately predict results in restrictive covenant cases after Reliable Fire Equipment.

Reliable Fire Equipment also strongly suggests that employers quickly consider the following: (1) employers who have not previously utilized restrictive covenants should seriously consider retaining competent counsel to draft them for maximum enforceability; (2) employers with existing restrictive covenants should consider revising them to ensure that the legitimate business interests they articulate, if any, are sufficiently broad; (3) employers with existing covenants should ensure that they contain (a) one-way attorneys’ fees provisions (in favor of the employer) and (b) injunction without bond provisions given the likely increase in litigation costs; and (4) employers who are contemplating hiring others’ employees should (a) inquire as to and carefully review any restrictions the prospect may be under, and (b) compel incoming employees to sign non-obligation and other agreements to lower the likelihood of lawsuits.
For more information on Lowis & Gellen LLP’s employment law practice, please contact Partner Rob Smeltzer @ (312)456-7952 or rsmeltzer@lowis-gellen.com.

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On September 21, 2011, the IRS announced called the Voluntary Classification Settlement Program (VCSP), which enables businesses that have been improperly designating their employees as independent contractors to reclassify workers and make only a small payment to cover past payroll taxes.

April Advisory

Supreme Court Issues Pro-Employee Decision on FLSA Retaliation

Kasten v. Saint-Gobain Performance Plastics Corp., No. 09-834,
Argued October 13, 2011, Decided March 22, 2011

This case involved an employee who alleged that he was discharged as a result of oral complaints to his employer about the placement of its timeclocks. Overturning the Seventh Circuit's judgment that oral complaints are not protected, the Supreme Court held that oral complaints are covered by the FLSA's anti-retaliation provision when they provide the employer with fair notice under an objective standard.

Kasten was an employee of Saint-Gobain who complained about it placing its time clock in a place where employees put on (“donning”) and took off (“doffing”) protective gear, allegedly resulting in employees not being paid for donning and doffing time in violation of the FLSA. Kasten said he made multiple complaints about the timeclocks to Saint-Gobain's management team, beginning with his immediate supervisor and working up to the Operations Manager and Human Resources Manager. In those complaints, Kasten alleged that he specifically stated that he believed the location of the timeclocks was illegal and that he was thinking about filing a lawsuit to challenge the practice. Kasten never complained in writing or initiated a charge or lawsuit while employed.

Kasten brought suit against Saint-Gobain, alleging that it retaliated against him for this complaints by suspending and then firing him. The Seventh Circuit upheld the District Court’s grant of summary judgment for Saint-Gobain, holding that only retaliation in response to a written complaint, which could be filed with the employer, was unlawful under Section 215(a)(3), which prohibits retaliating against an employee for “filing any complaint.” 570 F. 3d 834 (7th Cir. 2009). In this regard, the FLSA requires more than "opposing any [unlawful] practice," which is the standard applied to retaliation cases under Title VII. See, e.g., 42 U.S.C. § 2000e–3(a).

The Supreme Court reversed the Seventh Circuit, holding that the oral complaints to an employer could also be protected, although filing a complaint contemplates adegree of formality. In so doing, the Court effectively adopted an objective standard of actual notice to the employer, finding that any complaint that is "sufficiently clear and detailed for a reasonable employer to understand it, in light of both content and context, as an assertion of rights protected by the statute and a call for their protection" will trigger the anti-retaliation provisions.

After Kasten, it is clear that internal oral complaints may be protected activity under the FLSA, as they certainly are under Title VII. Employers must therefore train management and human resources personnel on how to appropriately respond to employee complaints, including emphasizing the employer’s policies prohibiting retaliation for good-faith complaints, whether oral or written, and promptly documenting and thoroughly investigating employee complaints.

Supreme Court Issues Opinion on Cat’s Paw Liability

Under the so-called cat's-paw theory of liability, an employee may establish unlawful employment discrimination when a biased non-decisionmaker (the monkey) influences an unbiased decisionmaker (the cat) to take action that he or she otherwise would not take. Although cat's-paw liability has long been recognized by lower courts (using divergent standards of proof), the U.S. Supreme Court had not previously weighed in on the issue. On March 1, 2011, however, the Court announced its decision in Staub v. Proctor Hospital. In a unanimous (8-0) decision authored by Justice Scalia, the Court for the first time recognized the cat's-paw theory of liability and announced a broad framework to be applied in such cases.

Plaintiff Staub, a technologist in the Diagnostic Imaging Department of Proctor Hospital ("Proctor") and a member of the United States Army Reserve, filed suit against Proctor, alleging that he was terminated from employment in violation of the Uniformed Services Employment and Reemployment Rights Act ("USERRA"). It is undisputed that Proctor's Vice-President of Human Resources, Linda Buck, made the decision to terminate Staub's employment and that Buck harbored no discriminatory animus toward Staub on account of his military status. Staub contends, however, that under the "cat's paw" theory of liability, the anti-military bias of his supervisors, Janice Mulally and Michael Korenchuk, influenced Buck's decision to terminate his employment, thus violating USERRA. Specifically at issue is section 4311(c) of 38 U.S.C., which provides that an employer engages in unlawful discrimination when the employee's military status is a "motivating factor" in an adverse employment action taken by the employer.
After a jury decided in Staub's favor the District Court denied Proctor's renewed motion for judgment as a matter of law, holding that Staub proved that his military status was a "motivating factor" in the decision to discharge him, and that Proctor failed to show that Staub would have been discharged regardless of his military status. No. 04-1219, 2008 WL 2001935 (C.D.Ill., May 7, 2008).
Proctor appealed, arguing that under Seventh Circuit precedent, Staub failed to demonstrate sufficient evidence to invoke the cat's paw theory. Specifically, Proctor argued that Staub failed to show that the supervisors' bias singularly influenced the decisionmaker. The Court of Appeals for the Seventh Circuit reversed, finding that Proctor was absolved of liability because it demonstrated that Buck did not base her decision solely on the input of the supervisors and that she exercised independent judgment after conducting her own investigation into the facts relevant to the decision. 560 F.3d 647 (C.D.Ill. 2009). The Seventh Circuit found that the trial court should have made an independent determination that the biased supervisors had "singular influence" over Buck, the ultimate decisionmaker, before admitting evidence supporting the cat's paw theory and submitting the theory to the jury. Id. at 658.

The Court considered "[t]he central difficulty in this case" to be "construing the phrase 'motivating factor in the employer's action,'" which is a provision in USERRA that mirrors Title VII. Specifically, the Court noted that a problem arises when "the company official who makes the decision to take an adverse employment action" "has no discriminatory animus but is influenced by previous company action that is the product of a like animus in someone else."
The Court applied tort law to resolve the problem. In an intentional tort the actor must intend the consequences of the act, rather than the act itself. In this case, the Court found that Mulally and Korenchuk were motivated by antimilitary animus and intended their actions to cause Staub to suffer an adverse employment action. The fact that they did not make the decision to fire Staub was immaterial: the Court found that their actions were a proximate cause of Buck's decision to terminate Staub's employment. The Court held that "if a supervisor performs an act motivated by antimilitary animus that is intended by the supervisors to cause an adverse employment action, and if that act is a proximate cause of the ultimate employment action, then the employer is liable under USERRA."
The Court rejected Proctor's argument that because Buck conducted her own investigation before deciding to fire Staub, Mulally's and Korenchuk's actions were not proximate causes of the termination, writing that "[w]e are aware of no principle in tort or agency law under which an employer's mere conduct of an independent investigation has a claim-preclusive effect." The Court held that "if the employer's investigation results in an adverse action for reasons unrelated to the supervisor's original biased action . . . then the employer will not be liable. But the supervisor's biased report may remain a causal factor if the independent investigation takes it into account without determining that the adverse action was, apart from the supervisor's recommendation, entirely justified."
The Court's decision in Staub prevents employers from insulating themselves against liability for discrimination by inserting an extra layer of decisionmakers between biased supervisors and ultimate adverse actions. Biased supervisors can pepper an employee's record with unfair criticisms, discipline, and other black marks that may cause another, unbiased person who reviews that record to conclude that the employee should be fired. In those circumstances the employer should be liable for discrimination and the victimized employee should be safe from adverse employment actions resulting from the discrimination, and that is the effect of the ruling in Staub.
The unresolved question that the Supreme Court sought to answer in Staub was just how much influence a biased supervisor had to have over the ultimate decisionmaker in order to render the employer liable for discrimination under the "cat's paw" doctrine. The Seventh Circuit had ruled that Staub must show that Mulally and Korenchuk had "singular influence" over Buck in order to invoke the cat's paw doctrine. The Supreme Court rejected that excessively demanding standard, replacing it instead with the "motivating factor" statutory language and applying it to the actions of the biased supervisors rather than to the ultimate adverse employment action: "if a supervisor performs an act motivated by antimilitary animus that is intended by the supervisor to cause an adverse employment action, and if that act is a proximate cause of the ultimate employment action, then the employer is liable under USERRA." (Emphasis removed.) This principle should apply equally to claims under Title VII, which also incorporates the "motivating factor" principle.