Think twice before requiring at-will, low-wage workers to sign noncompetes

On June 8, the Illinois attorney general filed a lawsuit in Cook County (Illinois) Circuit Court against two Jimmy John’s entities: franchisor Jimmy John’s Franchise LLC and an LLC owning eight Jimmy John’s sandwich shops, Jimmy John’s Enterprises LLC. The lawsuit alleges the sandwich chain engaged in unfair and deceptive acts or practices unlawful under the Consumer Fraud and Deceptive Practices Act. The lawsuit seeks to stop the allegedly unlawful use of noncompetition agreements on at-will, low-wage employees and to ensure that current and former employees are informed that the noncompetition agreements they signed are unenforceable.

The suit alleges that the Jimmy John’s operations manual provides franchisees with expectations and recommendations for the operations of the stores, including a recommended noncompetition agreement for all store employees, regardless of title or job function.

Jimmy John’s Enterprises, as well as many franchisees using the recommended Jimmy John’s form, require all employees to sign the noncompetition agreements as a condition of employment. The requirement extends to sandwich makers, bike delivery drivers and assistant managers. The noncompetition agreements prohibit the employee — during his or her employment and for the two years following— from having any role, including manager, owner, or employee, in any business that earns more than 10 percent of its revenue from selling sandwiches. The limitation applied to any business within either two or three miles of the store where the employee worked or any other Jimmy John’s sandwich shop in the country. There were over 2,400 Jimmy John’s sandwich shops at the end of 2015.

Although Jimmy John’s Enterprises purportedly changed its policy in April 2015 to no longer require store employees to sign non-competition agreements after that date, and represented it no longer included the non-competition agreement in its new hire packets, it subsequently advised the attorney general that it never implemented the change in policy. As a result, many employees hired after April 2015 continued to sign noncompetition agreements. Jimmy John’s also represented to the attorney general that it had no intention of enforcing the noncompetition agreements. However, those non-binding intentions were never communicated to current or former employees.

‘No legitimate business interest’

The attorney general seeks a declaratory judgment that the noncompetition agreements are unenforceable. She alleges that Jimmy John’s has no legitimate business interest to justify the use of noncompetition agreements against store employees.

The suit further alleges that the noncompetition agreements contain unfair and onerous terms because the temporal restrictions of two years post-employment is not objectively reasonable, and the geographic scope is unreasonable, unconscionable, unenforceable and an improper restraint of trade under Illinois laws. The attorney general seeks to assess the maximum applicable civil penalty, including a penalty of $50,000 per violation if the court determines that Jimmy John’s has engaged in acts or practices declared unlawful with the intent to defraud.

The lawsuit follows an April 2015 dismissal by the U.S. District Court for the Northern District of Illinois of claims for injunctive and declaratory relief against Jimmy John’s to determine the validity and enforceability of confidentiality and noncompetition agreements. The court held that plaintiffs had not alleged a sufficient injury and did not have standing to bring suit and, even if they had alleged a sufficient injury to confer standing, they could not overcome Jimmy John’s and the franchisee defendants’ sworn intention not to enforce the agreements, thus mooting the claim. These claims were part of the allegations in a putative national class action against Jimmy’s John’s and some franchisees for alleged violations of the Fair Labor Standards Act and Illinois Minimum Wage Law, raising joint employer issues. (Brunner v. Liautaud, N.D. Ill. April 8, 2015).

Illinois is not the first state to investigate Jimmy John’s noncompetition agreements. CNBC reported that, in 2014, U.S. Congressional Democrats asked the U.S. Department of Labor and other agencies to investigate Jimmy John’s noncompetition agreements. In late 2014, news reports stated the New York Attorney General Eric Schneiderman initiated an investigation into, and requested information from, Jimmy John’s and a number of its New York franchisees regarding the noncompetition agreements. He has not yet announced any action.

What this means for franchisors

While most franchisors likely do not require all employees of their franchisees to enter into noncompetiton agreements, protecting the trade secrets and confidential information of the franchise system is at the heart of each system. That said, franchisors should be aware that the forms of agreements they recommend to their franchisees could result in liability to the franchisor.

In some cases a confidentiality agreement may be more appropriate than a noncompetition agreement. Franchisors and franchisees should review their noncompetition agreements to ensure they are reasonable both in time and geographic scope. Furthermore, they should ensure that only those managerial or other employees with access to proprietary information and/or who maintain customer relationships are required to sign the noncompetition agreements.

The case is People v. Jimmy John’s Enterprises, No. 2016-CH-07746 (Ill. Cir. Ct. Jun. 8, 2016).