#12320 - Employee Duties And Promises - Employment Law

Theory of Trade Secrets and Noncompetition Clauses:

• Employers will tend to pay for firm-specific training, but tend to make employees pay for general training that is valuable to many employers (often in lower wages than there actual contribution would dictate).

• “Restrictions may be justified when employers provide job training that is too expensive for the employee to pay for ahead of time or at the same time the training is being provided. *** If employers could not protect this information or their investments in job training, employers would not invest as much in these valuable activities, or they would have to take inefficient steps to protect the information.

• The task for courts … is to distinguish between (1) restrictions that protect employers when they disclose valuable information to employees or make expensive investments in training; and (2) restrictions that prevent employees from using general on-the-job training that they have already paid for themselves.”

Jet Courier: An employee is subject to a duty of loyalty, which requires him to act solely for the benefit of the employer in all matters connected with employment; this means that the employee has a duty not to compete with his employer.

• Privilege to Prepare for Competition: Courts have recognized “a privilege in favor of employees which enables them to prepare to compete with their employers prior to leaving their employ” without being subject to liability for breach of fiduciary duty.

  • An employee can “advise current customers that he will be leaving his current employment” but cannot solicit their business prior to the termination of his employment

• Solicitation of Other Employees: “A court may find that it is a breach of duty for a number of key officers or employees to agree to leave their employment simultaneously and without giving the employer an opportunity to hire and train replacements,” even if no employee breaches his employment contract (because the contract is at-will).

  • All persons are subject to tort liability for intentional interference with contractual relations; the duty of loyalty must impose additional requirements on current employees.

• Court eschews a bright-line rule – which would look to whether tortious interference with contract occurred – and instead proposes a multi-factor test to determine whether the duty of loyalty has been violated

  • Consider the nature of the employment relationship, the impact or potential impact of the employee’s actions on the employer’s operations, and the extent of any benefits promised or inducements made to co-workers to obtain their services for the new competing enterprise. No single factor is dispositive

  • An employee’s solicitation need not be successful to constitute a breach of the duty of loyalty

• The ultimate question is whether the employee “acted solely for the employer’s benefit in all matters connected with his employment, and whether the employee competed with the employer while still employed.”

• Damages. The general rule is that an employee is not entitled to any compensation for services performed during the period he engaged in activities constituting a breach of his duty of loyalty, even though part of these services may have ben properly performed

  • No quantum meruit – why not?

Pepsico v. Redmond: A plaintiff may prove a claim of trade secret misappropriation by demonstrating that defendant’s new employment will inevitably lead him to rely on the plaintiff’s trade secrets.

• Threatened misappropriation can be enjoyed where there is a high degree of probability of inevitable and immediate use of trade secrets.

  • Actual misappropriation need not be demonstrated to obtain a preliminary injunction

• Marketing strategy can constitute a “trade secret;” more typical examples include customer list or special manufacturing process

REM Metals: Absent special circumstances, general knowledge, skill, or facility acquired through training or experience while working for an employer appertains exclusively to the employee, notwithstanding the existence of a non-compete clause. The employer bears th burden of proof to establish the existence of special circumstances (e.g., trade secrets) justifying the enforcement of a restrictive covenant.

Ingrasci: To advance public policy interests, courts will subject a covenant not to compete to the overriding limitation of reasonableness. Only restrictions that are geographically, temporally, and substantively reasonable will be enforced.

Outsource International: A non-compete agreement will be enforced if it is reasonable and necessary to protect a legitimate business interest. An employer has a legitimate business interest justifying the enforcement of a covenant not to compete where (a) the customer relationships are near-permanent and but for the employee’s association with the employer the employee would not have had contact with the customers; and (b) where the former employee acquired trade secrets or other confidential information.

• DISSENT (Posner): The judicial hostility to non-compete agreements is anachronistic. Covenants not to compete can serve a useful function of preventing an employer from misappropriating trade secrets, and are much more effective for this purpose than prohibitions on misappropriation. Covenants not to compete protect the employer’s investment in the employee’s human capital, and thus may benefit both employer and employee by facilitating this investment.

• Posner: But Illinois law does not see things this way. Illinois reverses the...