Executive Summary: After acquiring 2 companies in 2011 as part of a deal valued at $53 million, AssuredPartners ("AP") required employees of the acquired companies to sign employment agreements that included broad confidentiality, noncompetition and nonsolicitation provisions. One of those employees, William Schmitt, signed a 4-year contract with a guaranteed base salary of $240,000, plus bonus opportunity. When Schmitt resigned in 2013, AP unsuccessfully sought to enforce the restrictive covenants, which the trial court found "unreasonable as a matter of law." On October 26, 2015, the Illinois Appellate Court affirmed the trial court holding that the confidentiality, noncompetition and nonsolicitation provisions of Schmitt's agreement were overly broad. Moreover, the Court declined to modify the restrictions and enforce them as modified. AssuredPartners, Inc. v. William Schmitt, 2015 IL App (1st) 141863, 2015 Ill. App. LEXIS 813 (Ill. App. Ct. 1st Dist. 2015).
Schmitt was a wholesale insurance broker who began working in the insurance industry in the early 1990's. Since 2003, he primarily handled lawyers' professional liability insurance (LPLI). In 2003 to 2006, while working for a company called ProQuest, "he ‘plac[ed] millions of dollars in LPLI with insurers in the United States and also in the United Kingdom.' In addition, during that time, he established ‘contacts with LPLI retail brokers and insurers, which spanned approximately a dozen of the fifty United States as well as the United Kingdom.'"
In 2006, he joined another company, ProAccess, as a senior vice president. He was required to sign an employment agreement that included confidentiality, nonsolicitation and noncompetition restrictions. However, the agreement expressly carved out "any lawyer's professional liability relationship produced in the ProAccess Mid-West office" in "recognition that [Schmitt's] LPLI customers, contacts, and expertise predated [his] work with ProAccess." ProAccess was one of the company's that AP acquired in 2011.
After AP acquired ProAccess, Schmitt signed a Senior Management Agreement ("SMA"), which required him to comply with certain restrictions on his business activities during his employment and for a period of time after his termination. Unlike the ProQuest agreement, there were no exclusions from the restrictions.
Soon after Schmitt resigned, he began "‘broker[ing] wholesale LPLI under the umbrella of a retail insurance brokerage'" and sending his new contact information to the customers named in a ProAccess customer expiration list that he had serviced during his employment. AP filed suit alleging claims for breach of contract, tortious interference with prospective economic advantage, and preliminary and permanent injunctive relief.
In reviewing the enforceability of the noncompetition provision, the Court reiterated the "rule of reasonableness" established by the Illinois Supreme court. A restraint on trade is reasonable only if it: (1) is no greater than is required to protect a legitimate business interest of the employer; (2) does not impose undue hardship on the employee; and (3) is not injurious to the public. Id. Furthermore, the activity, time, and geographic restrictions must be reasonable.
Under this test, the Court held that the noncompetition provision was unreasonable because it prohibited Schmitt from engaging in any "portion of the Restricted Business that relates to professional liability Insurance Products or professional liability Related Services" anywhere in the United States or its territories". Essentially, AP's restrictions acted as a blanket prohibition to bar Schmitt from working as a broker, in any capacity, within the entire universe of professional liability insurance business, which the Court held was unreasonable.
The Court held that the nonsolicitation provision was broader than necessary to protect plaintiffs' interest in preventing Schmitt from exploiting the client relationships he developed and maintained during his employment at ProAccess. "Instead of just protecting those customer and vendor/supplier relationships that Schmitt developed while working for plaintiffs, section 3(b) seeks to prevent Schmitt from gaining business from any ‘Potential Target, customer, supplier, licensee or other business relation'—regardless of whether the entity was involved in the LPLI trade—with whom any of the plaintiff entities and their subsidiaries have interacted."
Finally, the Court found that the confidentiality provision was unreasonable because it prohibited Schmitt from improperly disclosing or using any information he obtained orany observations he made while employed at ProAcess, regardless of whether they were actually confidential. Moreover, the Court refused to modify the overly broad provisions to make them reasonable because doing so would be tantamount to drafting a new agreement.
In this age of job mobility, employers frequently use confidentiality agreements and restrictive covenants to protect their trade secrets and protect against former employees walking away with their customers. In this area of the law, "broader" is not necessarily better. Employers should also keep in mind that whether restrictions are unreasonable or overly broad depends on the particular circumstances. Therefore, there is no single model agreement that all employers can use and employers may even need to modify the terms on an employee-by-employee basis.