Illinois law and enforceability of postemployment restrictive covenants

Every business in this, the Information Age, is highly dependent on confidential and proprietary information.  As many design and creative professionals know, a design business is often based on intimate, personal relationships with clients. As a result,  relationships are built upon a high degree of trust and the professional reputation of the designer.  In addition, the designer brings a host of regular vendors and proprietary skills, knowledge, experience, including private and confidential information about clients, used for operating the Business.  It is not surprising that businesses will seek to prevent disclosure of business, technical and financial information (including information relating to clients, employees and vendors, as well information an employee learns during her employment.

Do I need a Non-solicitation agreement for my Design Business?

Increasingly, I am being asked by clients to prevent departing employees from using proprietary and confidential information and form poaching clients and employees.  These non-disclosure or non-solicitation provisions seek to prevent an employee from encouraging or soliciting any client, employee, vendor, or contractor to leave. Unfortunately,

Restrictive Covenants Are Hard to Enforce!

Post-employment restrictive covenants are carefully scrutinized by Illinois courts because they operate as partial restrictions on trade. Fifieldv. Premier Dealer Services, Inc., 2013 IL App (1st) 993 N.E.2d 938 (citing Cambridge Engineering, Inc. v. Mercury Partners90 BI, Inc., 378 Ill.App.3d 437, 447 (2007) ). In order for a restrictive covenant to be valid and enforceable, the terms of the covenant must be reasonable. It is established in Illinois that a restrictive covenant is reasonable only if the covenant (1) is no greater than is required for the protection of a legitimate business interest of the employer, (2) does not impose undue hardship on the employee, and (3) is not injurious to the public. Reliable Fire Equipment Co. v. Arredondo, 965 N.E.2d 393 (2011). The courts consider the unique factors and circumstances of the case when determining the reasonableness of a restrictive covenant. Millard Maintenance Service Co. v. Bernero, 566 N.E.2d 379 (1990). However, before even considering whether a restrictive covenant is reasonable, the court must make two determinations: (1) whether the restrictive covenant is ancillary to a valid contract; and (2) whether the restrictive covenant is supported by adequate consideration. Fifield, 993 N.E.2d 938. Absent adequate consideration, a covenant, though otherwise reasonable, is not enforceable. Id. ¶ 14 (citing Brown & Brown, Inc. v. Mudron, 887 N.E.2d 437 (2008) ); see also Millard, 566 N.E.2d 379.

For most businesses, enforceability of such covenants turns on the concept of “consideration.” The current Illinois authority on “consideration” is Fifieldv. Premier Dealer Services, Inc., 2013 IL App (1st) 120327. In Fifield, the Illinois appellate court noted that Illinois courts have repeatedly held that there must be at least two years or more of continued employment to constitute “adequate consideration” in support of a restrictive covenant.  The court also clarified the process by adding that “Fifield [did not overrule or modify] Brown, which engaged in a fact-specific approach in determining consideration.

As a general rule, courts do not inquire into the adequacy of consideration. However, postemployment restrictive covenants are excepted from this general rule because “a promise of continued employment may be an illusory benefit where the employment is at-will.”  Most design businesses have at-will employees.

Fifield is equally important for both what it says and for what it does not. Clearly employment alone – any less than two years duration – is  NOT adequate consideration. However, the Fifieldcourt also stated that there could be other or additional factors such as an “added bonus in exchange for this restrictive covenant, more sick days, some incentives, [or] some kind of newfangled compensation,” that could be considered additional compensation that could support enforcement of the covenant.

Despite the recognition that the bar is set high for the amount of consideration necessary to enforce restrictive covenants, it makes sense to include them in your agreements with those who work for you.

In addition to the non-solicitation language, one should create a strong and broad definition of protectable proprietary and confidential information.  While it may not always be possible to stop a former employee from directly competing against you, it is possible to prevent said employee from using your own proprietary and confidential information against you.

 

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Advanced Issues in Contracts for Interior Designers

Every business transaction is governed by contract law, even if the parties don’t realize it. Despite the overwhelming role it plays in our lives, contract law can be incredibly difficult to understand.

Successful Interior Designers know how to manage the legal needs of the business while bringing a creative vision to life for a client or project. Confusion about rights, obligations, and remedies when things go wrong can strain and even ruin an otherwise promising professional relationship.

This program teaches new designers and entrepreneurs answers to some basic questions, such as:

  • What to do when clients / vendors / contractors don’t pay?
  • How can one use Indemnifications, Disclaimers and Limitations of Liability clauses to balance business risk when the parties may not be economically balanced?
  • What types of remedies are available and what are the limitations in scope for certain types of monetary and “equitable” remedies?

Take a deeper dive into advanced issues for interior design professionals. Learn how contracts can protect your design business and how to safeguard your rights.

Qualifies for .1 CEU credit.

This program was originally delivered on Aug. 17, 2017 at the Design Center at theMART 14th Floor Conference Center, 222 Merchandise Mart Plaza, Chicago, IL 60654

Contract Basics for Interior Designers

Ever had an Interior Design client refuse to pay, not give you credit for your work, or use your design without actually hiring you? As unfair as these situations sound, the truth is they happen often. Poor planning, client management or incomplete contracts account for most of these situations. Get expert legal advice from a Chicago-based lawyer who understands the ins and outs of the design industry and learn how to address some of the biggest risk factors designers face today and how your contract can (and more importantly, should) protect you. Follow the link for access to the free informational prevention about improving your interior design contracts.

presentation-contract-basics-for-interior-designers

Pinterest “Buyable Pins” And Ecommerce Liability

As social media continues its evolution as a transactional medium, Pinterest announced the release of “Buyable Pins” – streamlining the online purchasing process that enables Pinterest users to buy pinned items from several stores without having to leave the Pinterest site or app.  For consumers, Buyable Pins make it easier to move from a Pin to purchase. For businesses, this opens a door to a large new audience who loves to shop.

Here’s everything you need to know about selling on Pinterest and potential areas of Ecommerce liability.

Online Contracts Reduce Merchant Risk. Sometimes.

A substantial number of court opinions in recent years have looked at the validity of various provisions contained in online contracts. The starting point for most analyses is the point of contract formation, because terms of online contracts are enforceable only if the contract was validly formed. Courts have scrutinized ecommerce contracts, primarily in four areas: (a) Terms of Sale; (b) Returns/Exchanges; (c) Governing Law & Venue; and (d) Arbitration. Quite often, courts have refused to enforce such terms, due to deficiencies in the formation of online contracts.

As a general proposition, formation of contracts (offer and acceptance) and enforceability of contractual provisions (choice of governing law) are matters determined by reference to state law. However, in the United States, federal courts are often required to determine matters of state law and most states have relatively uniform requirements with respect to the three principal concepts in the determination of contract enforceability: offer, acceptance and consideration.

With respect to contract law in relation to online commerce (ecommerce), contracts generally take one of two forms: (1) “click-through” or “click-wrap” agreements, and (2) “browse-wrap” agreements, often referred to as Terms of Use or Terms of Service. It is worth noting that a recent Eastern District of New York court decision classified online contracts in four categories (a) browsewrap[sic]; (b) clickwrap[sic]; (c) scrollwrap[sic]; and (d) sign-in-wrap. Berkson v. Gogo, LLC, Case No. 14-CV-1199 (USDC E.D.N.Y. April 9, 2015). Functionally, the last three tend to look substantially similar (e.g. there is some action required to consent to the agreement, see discussion of “consent,” below) and will be treated as such for purposes of this article.

This is particularly important for merchants using “Buyable Pins” on Pinterest. Unless the online terms of the agreement between the merchant and the customer are validly binding and enforceable, many of the protections offered to the merchant in the online contract will not be available.

As noted above, courts have frequently refused to enforce provisions around a merchant’s ability to modify some terms post-sale (Terms of Sale), the availability of and methods for returns and exchanges, how and where lawsuits may be filed (Governing Law & Venue), and requirements to submit disputes to arbitration. This presents particular issues for Buyable Pins. Merchants need to think carefully about how a user is presented with the opportunity to accept or reject an online contract, and how the user “manifests consent to the agreement.”

The so-called “click-wrap” agreement is usually the agreement formed when a user purchases goods or services through an ecommerce shopping cart application. A user is presented with the online terms and conditions and must “click-through” as part of the transaction.

Consenting to Online Terms.

“Click-wrap” agreements derive their name from the shrink-wrap agreements that were first incorporated into commercially-distributed software. Users were deemed to have accepted the terms of the agreement by opening the package and installing the software. In ProCD, Inc. v. Zeidenberg, 86 F.3d 1447, 1450 (7th Cir.1996), the court held that a user was bound by the terms and conditions of a software license agreement (contract) included in a users’ manual within the packaging, and which was displayed on a computer screen upon installation and use of the software. Such contracts are enforceable unless their terms are objectionable on grounds applicable to contracts in general (for example, if they violate a rule of positive law, or if they are unconscionable).

Consenting to Arbitration, Choice of Law and Venue.

Another concern is the scope of the terms and conditions applicable to the contracts, and whether additional terms may be incorporated by reference or presented after the transaction has been processed. Courts have been severely reluctant to enforce additional contract terms that would affect a user’s rights, such as the user’s ability to enforce the contract, including arbitration provisions, choice of law, and choice of venue provisions in online contracts, especially where such terms were communicated after-the-fact. This issue was addressed by a federal court in Schnabel v. Trilegiant. 697 F. 3d 110 (2nd Cir.2012)

Consenting to Changes in Price.

A very recent case involving Safeway grocery stores challenged a merchant’s practice of charging slightly different (and higher) prices for items ordered online than those purchased in-store. The in-store prices varied day-to-day. Typically, after a customer placed an online order, the items were actually selected from a physical store and delivered to the customer. At issue was the enforceability of Safeway’s “amend-at-will-without-notice” clause contained in the online terms.

Finding the clause unenforceable, the court reasoned “beyond the impracticality of expecting consumers to spend time inspecting a contract they have no reason to believe has been changed, the imposition of such an onerous requirement on consumers would be particularly lopsided, as Safeway is aware that it has — or has not — made changes to the Terms and is the party to the contract that wishes for the new terms to govern.” Rodman v. Safeway Inc., 2014 WL 6984703 (N.D. Cal. Dec. 10, 2014)

Best Practices For Merchants.

“Buyable Pins” highlight the legal risks inherent in ecommerce contracts. Seamlessly moving form Pin to purchase will no doubt increase sales and customers and reduce abandoned virtual shopping carts. However, merchants need to be mindful that the risk of losing a lawsuit because of an unenforceable contract is greater than the risk of losing a sale because a customer had to objectively consent to that contract.

Here are six “best practices” to ensure that the online contract formation process is bullet-proof: 1) use a multi-step account activation (or transaction confirmation) process where the user is shown the contract (can be in a separate “pop-out” window); 2) use a notice appearing in bold print stating, “Carefully read the following terms and conditions. If you agree with these terms, indicate your assent below;” 3) present the terms and conditions in a new window, with a scroll bar that allows the user to scroll down and read the entire contract (the Berkson “scrollwrap” agreement; 4) link to a printer-friendly version to read the contract printed on paper or view it on a full-screen; 5) display a box and the words, “Yes, I agree to the above terms and conditions” viewable without scrolling; and 6) have a functional requirement that the user click the box in order to proceed to the next step.

While I cannot guarantee that using these techniques will ensure that your online contracts will be fully-enforceable 100% of the time, it will make it exceptionally hard for a potential plaintiff to argue that there was no enforceable contract.

When it comes to addressing emerging ecommerce legal risks, it is often difficult to determine whether you should slow down, change course, signal for help, or simply muddle through. Often, companies need to quickly identify potential issues, assess the risk, and implement controls to steer clear of unneeded exposure. The professionals at the Adler Law Group can help you review, enhance and adopt standardized contracts and implement methodologies for approaching these challenges by setting objectives, determining scope, allocating resources, and developing agreements that will efficiently and effective manage risks, while keeping pace with the business.

Focus | Vision | Perspective | Passion

Executives face a confusing and dynamic set of challenges ensuring their business remains legally compliant. Yet few can afford the highly-qualified and versatile legal staff needed to deal with today’s complex legal & regulatory environment. Adler Law Group was created to provide clients with a competitive advantage by enabling them to leverage their intangible assets and creative content in a way that drives innovation and increases the overall value of the business.

For a FREE, no-obligation 1 hour consultation to learn the best ways to identify, protect and leverage your ideas, please call: (866) 734-2568, click: http://www.adler-law.com, or write: David @ adler-law.com.

Adler Law Group – Providing innovative legal counsel that elevates aspirations to achievements.™

Three Idea & Design Protection Tips For Interior Designers Ping® July 2015

Interior Design can be a competitive business. It is no secret that one designer may begin a project, only to have it completed by another, including a former employee. As a result, Designers need to be vigilant about protecting both their designs and relationships. The case of Hunn v. Dan Wilson Homes, Inc., 13-11297, 14-10365, 114 qUSPQ2d 2002 (5th Cir 2015) offers several lessons for Designers.

Synopsis.

Ben Lack, who was employed as a draftsman at the Plaintiff architectural design firm Marshal Hunn Designs (HD), resigned from his job while in the middle of a project for the firm’s client, Dan Wilson Homes, Inc. (DWH). After Lack’s resignation, Lack was hired by DWH to complete the project. HD sued Lack and DWH alleging that they secretly agreed in advance with DWH to cut HD out of the business. The court ruled in favor of Lack (and DWH) finding they never entered into any “secret agreement” and there was no merit to the eight other legal claims, including copyright infringement and false designation of origin under the Lanham Act.

Facts.

DWH is a custom home construction company. DWH contracted with HD to produce plans for four (4) custom homes. DWH wanted the plans drafted by Lack. Lack was the only HD employee who worked on the four custom homes for DWH and HD’s only representative at all weekly meetings with respective homeowners.

While the home construction projects were still underway, Lack informed HD of his desire to resign. Lack also requested by email that a friend of his convert some of the project files into AutoCAD versions. This conversion was required because Lack maintained his own copy of AutoCAD software on his home computer.

HD permitted draftsman to take home files because they often worked on projects on their own home computers as well as work computers. Lack had permission to work on the files at home.

After Lack’s employment ended, HD ask Lack to return physical files related to the project, but not the AutoCAD files.

The relationship between DWH and HD deteriorated. DWH offered to pay HD a prorated amount for the work completed up to the date of termination of Lack. HD refused. DWH later tendered payment for the full contract price, even covering items and services that had not been completed.

HD declined to accept payment and responded by filing a complaint alleging eight causes of action: 1) copyright infringement, false designation of origin under the Lanham Act, 3) breach of contract, 4) breach of fiduciary duty, 5) breach of covenant not to solicit, 6) tortious interference, 7) violation of the computer fraud and abuse act, and 8) conspiracy.

During his deposition, Lack indicated that he believed he would have had at least two more weeks of employment after tendering his notice of resignation, and that he would be able to complete the plans. DWH also believed that Lack would complete the plans under the employment of HD.

The District Court granted summary judgment in favor of the defendants Lack and DWH on all claims. HD appealed the judgment. The appellate court affirmed the District Court’s decision.

Analysis.

The District Court found that there was no breach of contract because DWH’s only duty was to pay for the services which he offered to do.

The District Court found there was no breach of fiduciary duty because any duty terminated upon termination of employment, and Lack did not disclose trade secrets or any confidential information. Although HD alleged that the AutoCAD files were confidential and proprietary information, the court held that they were not because HD had disclosed them to Lack without restriction.

The District Court found that there was no violation of the computer fraud and abuse act because Lack never exceeded his authority. HD routinely permitted employees to take files home and put them on their personal computers.

Although Lack had a non-complete clause in his at-will employment agreement, the Court found there was no violation because the clause was unenforceable. The clause states “in the event you leave or are separated from Hunn Designs’ employment, you agreed not to solicit, either directly or indirectly, business from, or undertake with any customers serviced by you while the employment of Hunn Designs, or any other Hunn Designs customers for a period of two years thereafter.”

The District Court held the non-compete clause was unenforceable do to a lack of independent consideration. Continued employment in at-will agreement is illusory.

The District Court ruled that even if the drafts of house designs were copyrightable, there was no violation of copyright because of the existence of an implied license authorizing use of the designs.

The court found particularly interesting “the fact that the home owners themselves essentially came up with their design ideas and sought to have those self designed homes built [after their ideas were] placed into the drafting stage.”

The District Court cited the 7th Circuit case of I.A.E., Inc. v. Shaver 74 F.3d 768 (7th Cir. 1996) for the proposition that an architect in a similar situation had granted an implied license. Even though the architect in Shaver testified that he did not intend for use of the drawings past the drafting stage unless he was the architect on the project, this was not supported by the record.

The court found there was no violation of the Lanham ask prohibition against false designation of origin, because there was no evidence that use of the plans had a substantial economic effect on interstate commerce, as required by the Lanham Act.

Take Aways:

Based on my review of the court’s opinion, there are potentially three (3) things the Plaintiff (Hunn) could have done differently that may have changed the outcome of this case. First, have a clear, written policy in place defining what constitutes trade secrets and other proprietary information and proper methods for handling those. Second, have policies restricting how and when employees may take company property and files home, and addressing storage and return of property and files. Third, create and enforce clear conditions for access, distribution and use of drafts, proposals, files and other works-in-progress to avoid inadvertently granting an implied license to third parties such as contractors, consultants or clients.

*THIS IS NOT LEGAL ADVICE*

*CONSULT A QUALIFIED ATTORNEY ABOUT YOUR SPECIFIC SITUATION*

GEAR UP FOR FALL! Now Is A Good Time To Take A Look At Those Contracts

One of the most important tools to protect your business – your ideas, customer relationships and talent pool – is your written contract. A solid contract is the foundation for a reliable relationship for you, your customers and your employees. More importantly, it helps to prevent misunderstandings and false expectations that can lead to a breakdown in your customer relationship, jeopardize the project and result in litigation.

Many companies start with a model or “form” contract adapted from forms available online or drafted when the business first started. As businesses develop over time, you may have revised your contracts, adding a little here, removing a little there. Maybe you read an article about an important case in your industry and decided to add some text from the contract discussed in the court’s legal opinion. In many cases, over time, the agreements become “Franken-contracts” an odd amalgamation of trade lingo, inconsistent terms and even contradictory conditions. At best these are ambiguous and confusing to read. At worst, they become unenforceable.

At some point, you should review, revise and generally “tighten” existing contracts. You should have your lawyer review them to make sure that there are no mistakes, ambiguities or omissions that could cost you or your customers. I urge clients to have their contract forms reviewed on an annual basis. Depending on changes in the law, changes in the industry or changes in your own business, this process should only take a few hours.

The following are six things to consider as you review your existing contract forms and business practices.

First, are you using a written contract? Simply having a written agreement in place will help prevent the often difficult, time-consuming and expensive dispute that comes down to a “he said / she said” situation.

Second, make sure that the key terms of your contract are consistent and understandable. Pricing and payment terms, clear descriptions of the services to be performed or the goods to be delivered, as well as due dates and acceptance criteria will go a long way toward preventing breach of contract claims. More importantly, ambiguous and internally-contradictory terms may expose you to fraud claims or claims under an unfair business practices act. These types of claims are typically much more difficult and more expensive to defend against.

Third, create a mechanism for changes in your contract. Circumstances change. When they do, make sure that you document them and that your customer initials and dates any additions or changes to the contract after it is signed.

Fourth, don’t overlook intellectual property (“IP”) rights, Many business relationships involve collaborative sharing or development of knowledge, skills and protectable IP assets such as copyrights, trademarks, patents and trade secrets. Intangible assets are often the most important drivers of revenue creation and value. Overlooking creation, ownership and control of IP rights may result in the loss of these assets.

Fifth, ensure that your contracts are up-to-date with respect to local laws and industry regulations. Recent developments in technology, e.g., BYOD, Social Media, Mobile commerce, and online privacy had produced a raft of state, federal and industry specific laws, rules and regulations. Do you regularly update your forms to make sure they comply with changes to local laws?

Sixth, understand your “escape” options. Not every relationship is meant to last forever. Your contracts should have clear and concise terms for ending the relationship such as failure to perform, failure to pay or adverse business conditions.

To find out more about how the Adler Law Group can help you tighten your contracts, or even draft new ones, contact us for a free, no-obligation consultation.

Launch Designer Workshops By EDITOR-AT-LARGE: Contracts

Contracts for Interior Design Professionals

This crash course on legal contracts is designed for interior designers who are drafting a contract for the first time or wanting to make an existing one airtight.

There’s a reason you became a designer, and it probably didn’t have anything to do with lawyers and contracts.

You’re the expert in color, fabric, floor plans, and furniture schemes, not intellectual property and arbitration provisions. If you’re already confused, don’t fret. This crash course is designed for those drafting a contract for the first time or wanting to make an existing one airtight. Led by David Adler, an actual lawyer who understands the ins and outs of the design industry, this workshop will cover the clauses you need to protect yourself in the unfortunate event that something doesn’t work out as planned. Clients can be difficult enough. Don’t let legal trouble slow you down.

In this class, you will learn how to:

  • Define what you are doing for your client, as well as NOT doing for them
  • Make sure you get paid on time and in full
  • Protect yourself against outside factors that may affect cost and ability to complete a project
  • Give yourself a way to get out of your contract if things aren’t working

By the end of class, you will have:

  • A basic understanding of key contract terms and the reasons as to why they are there
  • A basic client agreement that you can use or customize

The Instructor, David Adler, is an attorney, nationally-recognized speaker, and founder of a boutique law practice focused on serving the needs of creative professionals in the areas of intellectual property, media, and entertainment law. He provides advice on choosing business structures, protecting creative concepts and ideas through copyright, trademark, related intellectual property laws and contracts, and structuring professional relationships. He has 17 years experience practicing law, including drafting and negotiating complex contracts and licenses with Fortune 500 companies, advising on securities laws (fundraising) and corporate governance, prosecuting and defending trademark applications, registrations, oppositions, and cancellations before the US Patent & Trademark Office (USPTO), and managing outside counsel. Currently recognized as an Illinois SuperLawyer® in the areas of Media and Entertainment Law, he was also a “Rising Star” for three years prior. He received his law degree from DePaul University College of Law in 1997 and a double BA in English and History from Indiana University in Bloomington, Indiana. Outside the practice of law, David is an Adjunct Professor of Music Law at DePaul College of Law, formerly chaired the Chicago Bar Association’s Media and Entertainment Law Committee, and is currently a member of the Illinois State Bar Association Intellectual Property Committee.