Glenn L. Udell, Partner, BUPD Law Ltd.

2017 has been an important year for Illinois employment law, especially as it relates to the drafting and enforcement of non-compete agreements. While much of the attention has been focused on Governor Rauner’s signing of the Illinois Freedom to Work Act and the Jimmy John’s settlement with the State of Illinois, the attorneys at Brown, Udell, Pomerantz and Delrahim have been focused on an unusual discrepancy between the Illinois Circuit and Northern District of Illinois Federal Courts.

Jimmy John’s, Low Wage Workers, and Non-Compete Agreements

The Jimmy John’s non-compete agreement for drivers and sandwich makers highlights what happens when well-intentioned corporate lawyers become too enamored with legal craft, ignoring real-world realities and a changing political and legal landscape.

Like many fast-food operations, Jimmy John’s distributes to its franchisees a fairly extensive employment agreement that most workers must sign as a condition of their employment. Part of the Jimmy John’s franchise package in Illinois was a non-compete agreement that prohibited many of its employees from working at any establishment that (1) earned 10% of its sales from selling “submarine, hero-type, deli-style, pita, and/or wrapped or rolled sandwiches,” and (2) was located within three miles from the Jimmy John’s store in which they were employed. The non-compete agreement was for a period of two years.

Jimmy John’s was not alone in such practices as even Amazon, until 2015, required full-time and seasonal warehouse workers to sign extensive non-compete agreement as a requirement of employment.

Pushback against Low Wage Non-Competition Agreements at both the Federal and State Levels

In response to the perceived overreach of companies requiring low-wage employees to sign non-compete agreements, federal and state governments, including Illinois, stepped in with legislation.

In our state, the Illinois Freedom to Work Act was passed, prohibiting private employers from restricting low-wage employees via a “covenant not to compete” from:

• working for another employer for a specified period of time
• working in a specified geographical area
• working for another employer with similar job duties.

The law defines a “low-wage employee” as one who earns the greater of the hourly rate equal to the minimum wage required by Federal, State or local minimum wage law or $13.00 per hour.

While the Jimmy John’s settlement with the State of Illinois garnered media attention in 2017, in the past few years there have been a number of cases in Illinois that have signaled the Illinois Court’s movement towards restricting non-compete agreements.

The Arredondo and Fifield Decision Impact Non-Compete Agreements in Illinois

Prior to the 2011 Illinois Supreme Court case, Reliable Fire Equipment Co. v. Arredondo, the enforceability of non-compete agreements in Illinois Courts was dependent on the somewhat vague tenants of:

• The non-compete agreement being ancillary to a valid contract or relationship
• Adequate consideration being offered in return for the agreement not to compete
• The non-compete being deemed a reasonable and necessary step to protect the legitimate business interests of the employer

With the Arredondo decision, the Illinois Supreme Court attempted to clarify the standards that should be applied in determining the reasonableness of a non-compete agreement. The court clarified that employment agreements in Illinois are enforceable if:

• Appropriate consideration supports the non-compete agreement
• The restraints of the non-compete are a reasonable protection of legitimate business interests
• The totality of the circumstances of the individual case are considered

Two years later, the Illinois First District Appellate Court raised the bar for enforcing non-compete agreements in Illinois State Courts with the Fifield v. Premier Dealer Services, Inc. decision. The Illinois Appellate Court took the position that absent other compensation, two years of continued employment was required to constitute adequate consideration, regardless of the circumstances of the employee’s leaving the company.

The Federal Courts in Illinois Take a Different View on Non-Compete Agreements

Of course, decisions in the Illinois State Courts do not occur in a vacuum, and in the past two years it has become clear that the Federal Courts in the state do not feel bound by the two-year employment requirement established by the Illinois Court.

Brown, Udell, Pomerantz and Delrahim has been party to a practical example of this inter-court dissonance with our participation in the case, Victory Propane, LLC v. Joseph R. Vella. In this March, 2017 case our client, Victory Propane, brought suit against its former employee, Joseph Vella, seeking preliminary injunctive relief against Vella’s purported ongoing breach of a May, 2015 employment agreement.

Our cause to bring action in the Federal Court on behalf of Victory Propane was the Defend Trade Secrets Act of 2016, 18 U.S.C 1836(b), that allows a plaintiff to bring a civil action in Federal Court for the misappropriation of trade secrets.

Of particular note in our case is that Vella, the employee, did not meet the two year employment threshold that Illinois State Courts have recognized as a requirement for validating non-compete agreements.

Focusing on the facts of the case, we suggested to the Federal Court that the defendant had misappropriated trade secrets and had used proprietary information to solicit, among others, the Plaintiff’s clients in contravention of his employment agreement.

Our arguments were persuasive to the Federal Court, and our client, Victory Propane, was granted preliminary injunctive relief from further action by the defendant. Had we not considered the divergent opinions between the state and federal courts, and had brought suit in the Illinois State Courts, our client might not have prevailed.

As with any ecosystem that is out of balance, it’s likely that the Illinois State and Federal Court positions on the two-year employment rule for non-compete agreements will converge. However, until that occurs employers would be wise to adopt employment agreements that focus on defensible criteria that can brought to the Federal, not State courts.

A residential construction boom is under way in the City of Chicago.  All one needs to do is to look across the skyline of cranes to grasp the magnitude of the market. While not quite the condo construction frenzy of 2003 to 2008, few would dispute that multi-family construction is occurring at a dizzying pace.

As inevitable as the cranes are across the skyline today, so too are the lawsuits that follow years after the construction is complete and homeowners have taken possession. Most of the time developers, architects, contractors and the trades do their job and a condo or rental building is built to last far into the future. However, there are times many years after the keys are passed on to owners that latent, building-wide defects are revealed. The resulting lawsuits are often a sticky mess not only on the facts of design and construction, but also with respect to legal standing because of the amount of time that has passed.

Recently, Brown, Udell, Pomerantz & Delrahim attorney Shelly Smith and I represented Mesirow Financial and the South Campus Development in defense of a multi-million dollar construction defect lawsuit that was filed in Cook County by 15th Place Condominium Association.

In 15th Place, the South Campus Development Team, LLC., a developer of two condominium towers, contracted with Linn-Mathes, Inc. to work as the general contractor.  The contract between them included an express indemnity clause.  After the condominium project was completed in 2004, the developer turned over control of the project to 15th Place Condominium Association.

In 2008, the association sued the developer for breach of the implied warranty of fitness and habitability, breach of fiduciary duty, and negligence, alleging that it had discovered latent design and construction defects in the condominium towers.  The association alleged that there was a construction defect in the design of, among other things, the pitch on the outdoor balconies of the units in the building.  They further alleged that as a result, water would leak back inward towards units in the building causing water damage inside homeowner’s units.

In 2011, the developer filed a third-party complaint against the general contractor alleging breach of express indemnity.  The general contractor prevailed on its motion to dismiss, arguing that the developer’s breach of express indemnity claim was filed more than four years after substantial completion of the condominium project, and thus was barred by the four-year statute of limitations for construction-related claims.

When a developer is sued in a construction defects, in this case by a homeowner’s association, it is typical for the developer to bring a third party complaint against those involved in the project. The developer is likely to claim that defects may be the responsibility of the GC and others, all of whom have entered into contracts with the original developer.  Since each individual contract may have its own stipulated limitations period, and homeowner’s associations sometimes sue after those negotiated periods have expired, the timing may not always line up.

In the case of 15^th Place, control of the building was handed over by the development company to the homeowner’s association in 2004.  In 2008 the 15^th Place Condominium Association filed suit against the developer, four years after the transfer.  In 2011, the developer filed a third-party complaint against, Linn-Mathes, Inc., the general contractor, alleging that there was a breach of express indemnity.

The primary point is that the 2011 third party claim brought by the developer against the general contractor for breach of an express indemnity clause in their contract was three years after the four-year statute of limitations for construction-related claims had expired.  When Linn-Mathes asked in XXXXX court for a dismissal of the case based on this expiration, they initially prevailed.

BUPD, representing the developer and the developer’s insurance company, appealed the trial court’s decision claiming that a breach of an express indemnity clause within a construction agreement was subject to the 10-year statute of limitations for written contracts rather than the four-year statute of limitations for construction related claims.

Without wading too deeply into the legal weeds, when one party agrees to an express indemnity clause, they are agreeing to indemnify or hold harmless a second party from the legal consequences of the first party’s conduct.

The pertinent Illinois laws applying to the 15^th Place case include:

• Two (2) year statute of limitations (735 ILCS 5/13-204(b)) on implied indemnity claims
• Four (4) year statute of limitations (735 ILCS 5/13-214(a)) on construction related claims
• Ten (10) year statute of limitations (735 ILCS 5/13-206) on generic written contract claims

BUPD appealed the trial court’s dismissal, arguing in part that even though this was a construction contract, the nature of the express indemnity claim was a failure to provide the agreed upon indemnification, suggesting that the 10-year limitations period therefore applied.

BUPD won reversal of the trial court’s dismissal from the First District Appellate Court.  The appellate court’s holding made new law on this issue that had remained unresolved by Illinois Appellate Courts prior to its decision in this case.

The Appellate Court held that the ten-year, rather than the four-year statute of limitations applies to claims to enforce indemnity provisions in written construction contracts.

This holding enabled BUPD’s clients to bring third parties, including the general contractor, back into the lawsuit for indemnity.

In the end, the case was amicably resolved pursuant to a confidential settlement agreement.