Stuck in between the investigation phase and the litigation phase, conciliation of a discrimination charge pending before the EEOC is akin to a middle child - often overlooked - but just as important as the other children.  The recent decision in EEOC v. Supervalu, Inc., 2009 U.S. Dist. LEXIS 116718 (Dec. 15, 2009)  demonstrates that conciliation should be given the same rigorous attention that defense counsel give to the investigation and ensuing litigation of an EEOC charge.  Further, if an employer is going to allege that the EEOC failed to conciliate in good faith, that employer must be ready to prove that it approached the conciliation process with a seriousness and good faith that was lacking from the EEOC.

           In Supervalu, Inc. the EEOC brought suit against Supervalu and Jewel-Osco alleging that they failed to provide their employee, Patricia Shied, with a reasonable accommodation in violation of the Title I of the Americans with Disabilities Act of 1990 (”ADA”), 42 U.S.C. § 12101 et seq. and Title I of the Civil Rights Act of 1991, 42 U.S.C. § 1981a.  Before any substantive issues were decided in the case, Supervalu and Jewel-Osco filed a Motion to Dismiss under the Federal Rules of Civil Procedure  on the grounds that the EEOC failed to make a sufficient effort to resolve the parties dispute through informal conciliatory means prior to filing suit.  The EEOC must attempt conciliation with employers when it finds reasonable cause to believe that the have engaged in discrimination under the ADA,  the ADEA,  and Title VII.  See 42 U.S.C. § 200e-5(b).

            U.S. District Judge Elaine E. Bucklo  rejected Supervalu’s argument that the EEOC failed to conciliate in good faith.  In particular, she identified three deficiencies with Supervalu’s position.  First, Judge Bucklo noted that the record before her was factually inadequate so there was no way she could determine whether the EEOC made a good faith effort to conciliate or not.  Second, based on the scant record before her, Judge Bucklo noted that the EEOC invited Supervalu to submit a settlement offer on December 13, 2007, yet Supervalu did not respond to this invitation until nearly two years later on March 17, 2009.

             Finally, Judge Bucklo held that the EEOC was entitled to conclude that further conciliation efforts would be futile since Supervalu’s settlement offer was $10,000 with no equitable relief.  In closing, Judge Bucklo stated: 

Under these circumstances, I cannot say that the EEOC failed to carry out its obligation to engage in good-faith conciliation efforts.  The EEOC invited the defendants to engage in the conciliation process.  However, the defendants responded long after the deadline indicated by the Commission.  And when the defendants finally did respond, their offer was underwhelming.

The takeaway from the Supervalu decision is clear.  If an employer is going to make the argument that the EEOC did not approach conciliation in good faith, it must present the court with: 1) a complete record, 2) evidence that the employer timely responded to the EEOC’s invitation to conciliate, and 3) evidence that any settlement offer made by the employer accounts for non-monetary or “equitable” forms of relief along with monetary relief.  Put another way, before an employer seeks to dismiss or stay a federal case based on the EEOC’s failure to conciliate in good faith, that employer better be able to prove that it approached the process in good faith.

The Wall Street Journal reports that Exxon-Mobil’s recent $31 billion purchase of natural gas exploration firm XTO Energy confirms a recovery of merger and acquisition activity over the past 2 months. It reports that November and December had the most M&A activity since the summer of 2008, with values 4 times greater than a year ago. Also leading this charge were Warren Buffet’s largest ever $26 billion investment in the railroad industry, and the $4.6 billion merger of Stanley Works and Black & Decker. November alone saw the announcement of 41 U.S. deals worth a combined total of approximately $47.5 billion, benefiting mostly large Wall Street banks and boutique financial firms. Sources within the chemical industry also expect a 2010 rally in the number of deals.

Many experts believe these increases in M&A activity signal good news for the health of the broader economy in 2010. Indeed, the recent surge seems to be the result of increased access to capital markets, the stagnation of which has been cited repeatedly as the cause of the continued lagging of a broader recovery. Accompanying these positive indicators are the apparent stabilizing of economies world-wide, financing becoming more available in the broader spectrum, and the narrowing of the gap in price expectations between buyers and sellers. Consistently, a large regional bank representative recently said at a lunch meeting that their bankers have been directed to increase lending dramatically in 2010 as underwriters loosen standards for loan approval.

Until recently, any positive indicators of recovery always have seemed to accompany at least as many negative ones. As 2009 ends, however, the negative indicators appear to be waning strongly in favor of the positive. Also, while many experts claim, perhaps too definitively, that this recession is over, others hinge their disagreement mostly on lagging unemployment data. Yet unemployment typically is the last area to improve after a recession as companies tend to wait until they clearly are understaffed before resuming hiring. Moreover, early 2010 should provide great opportunities for companies to contact their previously obstinate bankers again to seek (or refinance) lines of credit and other financing.

Illinois may not get a resolution any time soon to whether an employer is required to prove that a non-compete covenant must support a recognized, legitimate business interest. By now, lawyers and commentators are fully aware of the Fourth District’s ruling in Sunbelt Rentals, Inc. v. Ehlers and its repudiation of a decades-long test used to determine the validity of non-competes. Though that test had a somewhat bizarre development, courts throughout Illinois recognized it.

Applying the test in practice perversely has made litigation more expensive for employees, as cases frequently devolved into lengthy discovery disputes over the so-called protectable interest and whether it was threatened. Often times the concept of “reasonableness” gets lost in the shuffle. Still, many employers lost cases after failing to prove a legitimate business interest was at stake.

But Ehlers settled his case with Sunbelt Rentals, and so there won’t be a decision from the Illinois Supreme Court any time soon on the inter-district conflict. For now, that means that outside of the Fourth District, courts are still applying the legitimate business interest test. District Judge Gettleman recognized as such this week in Aspen Marketing Services v. Russell, when he denied a motion to dismiss a non-compete suit. Gettleman expressly noted the ruling in Sunbelt Rentals and declined to apply it, noting that the Illinois Supreme Court and other Illinois courts outside the Fourth District haven’t weighed in.

On a separate note, the idea of challenging the validity of a non-compete on a motion to dismiss is rarely a good one. Almost invariably, this results in an early loss for the defendant, since the concept of “reasonableness” cannot be examined under the pleadings alone. Unless there is some obvious defect (such as a nationwide covenant when the contract specifies a very limited area of responsibility), lawyers ought not to count on dismissal of a non-compete claim until at least summary judgment.

Stanford Law professor Michael McConnell thinks so.  From today’s Wall Street Journal:  “As part of the hastily enacted and seldom-read legislation establishing the Troubled Asset Relief Program (TARP), Congress authorized the Secretary of the Treasury to “require each TARP recipient to meet appropriate standards for executive compensation.” To carry out this task, last June the Treasury promulgated an emergency “Interim Final Rule,” waiving ordinary requirements for a public comment period.

As part of this emergency rule, Treasury Secretary Timothy Geithner created the office of “Special Master” for compensation, delegated his TARP authority to set compensation standards to this officer, and appointed Mr. Feinberg (a lawyer and mediator) to this position, without obtaining Senate confirmation.

Therein lies the problem. The Appointments clause of the Constitution, Article II, section 2, provides that all “Officers of the United States” must be appointed by the president “by and with the Advice and Consent of the Senate.” This means subject to confirmation, except that “the Congress may by Law vest the Appointment” of “inferior Officers, as they think proper, in the President alone, in the Courts of Law, or in the Heads of Departments.”

The Chicago Tribune’s business reporter, Ameet Sachdev, writes this morning on the hotly contested dispute between Kathleen Lawlor and North American Corp. of Illinois, a case recently tried to judgment in the Circuit Court of Cook County.

The dispute touches on a number of hair-trigger employment law issues, including rights to privacy, unpaid commissions, theft of confidential information and threats to steal customers. It also makes an oblique reference to another issue that always underscores the difficulty of employment litigation: Lawlor’s attorneys’ fees have approached $1 million.

The case involves the marketing services industry, and the dispute arose right after Lawlor, a successful salesperson, left in 2005. She claimed she was owed accrued commissions, and her employer feared she would steal customers. It also had her followed by a somewhat amateur gumshoe, a fact that would later prove to be damaging to North American.

There was no hint in Sachdev’s article that Lawlor was bound by a non-compete contract, so North American was left to pursue common-law remedies. It found potential smoking guns when a North American consutant swore out an affidavit that Lawlor offered to introduce him to a competitor before she quit, and when Lawlor disclosed historical sales and margin data to a competitor on a job interview.

This conduct directly implicated Lawlor’s duty of loyalty to her then-employer. That duty prohibits an employee from disclosing confidential information, facilitating a mass exodus of co-workers, and diverting business opportunities away from the employer. Employees must take this duty seriously - a violation can result in salary forfeiture during a period of disloyalty, an injunction against competitive conduct (even in the absence of a non-compete agreement), and punitive damages.

At trial, the parties appeared to split their claims against one another. Lawlor ended up prevailing on her invasion of privacy claim, after North American’s overzealous investigators improperly obtained Lawlor’s phone records and gave them to the company. North American, on the other hand, was able to obtain some measure of compensation forfeiture, presumably based on Lawlor’s pre-termination activity with existing customers or improper disclosure of North American financial data. Despite relatively low actual damages ($78,781), the trial judge imposed punitive damages of $551,467 - a multiple of seven.

Aside from the enormous fees generated in this case, the litigation serves as a reminder that the absence of a non-compete agreement does not - by any stretch - sanitize an employee’s conduct on the way out the door. Breach of the common law duty of loyalty provides for extensive legal and equitable remedies. Proving such a claim can be difficult for an employer, but if the employer is able to marshall evidence of improper pre-termination activity (often learned through a forensic examination of the ex-employee’s computer), it may be able to put a halt to anti-competitive conduct and obtain significant monetary relief.

One of the most high-profile non-compete disputes in the Chicago area has resulted in a victory for Citadel Investment Group and a set-back for two executives who defected to start their own high-frequency trading firm.

In a 36-page memorandum opinion and order Judge Mary K. Rochford enjoined Mikhail Malyshev and Jace Kohlmeier from violating non-compete restrictions contained in their Citadel employment agreements for the balance of the nine-month term. Effectively, this means that both Malyshev and Kohlmeier may be free to compete as soon as February of 2010, since the court refused to extend the non-compete term on an equitable basis for the period in which the defendants were in breach.

The case involves a shadowy, but highly profitable, business known as high-frequency trading (HFT). In essence, HFT relies on powerful computers to enter trade orders (often without human intervention), with algorithms deciding on specific aspects of the trade such as how much to buy, when, and at what price. HFT is a relatively new phenomenon, but it yields enormous profits. A disproportionate amount of equity trading volume is conducted by HFT firms.

Citadel itself invested heavily in HFT. It paid off - Citadel’s HFT unit reaped earnings of $1.15 billion in 2008. Malyshev and Kohlmeier were instrumental, key employees for Citadel’s HFT group. Neither had HFT experience prior to joining Citadel. For quite some time, each considered leaving to start his own proprietary trading firm. And each had a non-compete agreement, barring employment with a “Competitive Enterprise” for a period to be selected by Citadel upon departure, ranging from 0 to 9 months.

Upon their departure, Citadel elected the maximum 9-month period and paid Malyshev and Kohlmeier to sit on the sidelines. No surprise, there, given their access to proprietary information and involvement in recruiting R&D talent to Citadel. However, both ex-employees formed Teza Technologies and hired 15 employees, essentially daring Citadel to file suit.

It did. Citadel pursued each aggressively and sought preliminary injunctive relief. The court dispatched with a number of the arguments raised by the defense. Given that one of the defendants deleted a fair amount of Citadel information (despite a court order not to do so), the court really did not have to address whether a legitimate business interest supported the non-compete. The adverse inference it could draw about the document deletion was more than enough to demonstrate the defendants had access to and attempted to use Citadel’s confidential information.

The defendants also seemed to challenge the non-compete due to the fact that they really weren’t actively trading, but merely preparing the firm’s trading infrastructure to compete eventually. However, nothing in the non-compete allowed the defendants to wash their hands of liability based on this “preparing to compete” theory, and the theory itself ignored the fact that HFT firms depend heavily on building infrastructure. By getting a headstart in developing a trading platform, the defendants were essentially entering the market much faster than they agreed to under their employment contracts.

The most important feature of the decision, though, concerned the length of the injunction. And it is here where the defendants probably were able to take some solace in defeat. The court refused to extend, or equitably toll, the non-compete period for the time in which the defendants were in breach. The court looked at the Second District Appellate Court’s decision from two years ago to hold that, under Illinois law, a contract must specifically provide for an equitable tolling, or extension, remedy. Otherwise, the court will not imply the term under the contract.

This, of course, does nothing to mitigate the defendants’ damages during the non-compete period. But it does serve as a cautionary tale for counsel in drafting non-compete clauses. Unless an equitable tolling remedy is clearly contained in the contract, the court will not agree to extend it even if the defendants were in breach leading up to the injunction order.

The Fourth District Appellate Court of Illinois has just made it substantially more difficult for employees to break their non-compete agreements.

Justice Steigmann authored an opinion that built upon his special concurrence two years ago in Lifetec, Inc. v. Edwards, a case where he called into question the applicability of the so-called “legitimate business interest” test used by Illinois courts to analyze restrictive covenants. This time around, Steigmann succeeded in convincing his robed colleagues to abandon the test altogether, overturning a number of Fourth District cases in the process. The decision does nothing to alter the test in other districts, and each of those still uses the test which is widely believed to be employee friendly.

By way of brief background, Illinois courts have essentially used a two-part analysis to determine whether a non-compete agreement is valid. First, it must be reasonable in scope. Second, it must protect a legitimate business interest. The second part of the test demanded an employer show that it had an interest in misuse of confidential information or near-permanent customer relationships acquired through the employee’s association with the employer. This is not a marked departure from what other states require, though some would argue Illinois is fairly narrow in not recognizing other types of business interests, such as special training. However, Justice Steigmann could not find Illinois Supreme Court authority for part two of the test.

By reviewing Supreme Court precedent, Steigmann is correct in that the Court never formally adopted the test which has been used for years by all five district appellate courts. He casually neglects to mention that in the past 60 years, the Court has taken on a grand total of six non-compete cases, and several of those looked at covenants outside the employment context. His analysis is not entirely accurate because his discussion also neglects to confront one of the Court’s leading precedents, House of Vision v. Hiyane. That case was authored by Justice Schaefer, probably Illinois’ most famous jurist.

In House of Vision, the Court specifically discussed at length the interest of a business in protecting customer relationships. It even distinguished prior precedents (also cited by Justice Steigmann) where the Court noted that in a sale-of-business non-compete, the legitimate interest to be protected concerned intangible goodwill. Covenants ancillary to a sale of a business are always easier to uphold, and it may well be true that a legitimate business interest is virtually presumed in such circumstances. But it seems illogical that the Court would discuss a legitimate business interest in connection with a sale-of-business covenant, and then deem the test inapplicable to more problematic employment covenants. Steigmann has assured us the Court will have to take an employment non-compete case soon to resolve the tension between the Fourth District and the rest of the state’s appellate courts.

Justice Steigmann’s analysis defaults to the reasonablenes test he cites from what he considers binding precedent: an employer must show that the covenant is no greater than is necessary for its protection. As applied to the facts involving Sunbelt Rentals and Neil Ehlers, the court concluded the 50-mile non-compete was reasonable even though the employment agreement also contained a well-drafted client non-solicitation clause.

It’s hard to see, though, how a court can determine whether a covenant is “no greater than is necessary for its protection” without analyzing what business interest it seeks to protect in the first place. The legitimate business interest test fills that vacuum and allows a court to fashion an appropriate restraint, or strike one entirely if the employer can’t articulate the need for a restriction.

One of the most significant risks facing a business seller is the cost associated with educating a potential purchaser in the event a deal falls through. It is standard practice to require any potential acquirer to execute a non-disclosure agreement, but the breadth of that contract can go a long way to mitigating the seller’s risk.

Most buyers will balk at an industry non-compete clause following failed negotiations. Indeed, in most cases, the buyer will already have substantial experience in the seller’s business. But often times, a general non-disclosure clause will not be enough to protect the seller. A recent case out of Alabama serves as a compelling example.

In 2006 and 2007, an entrepreneur named Mark Greenshields became interested in purchasing a video-racking division owned by Movie Gallery US, LLC. This business involves placing movie rentals in racks at consumer locations, such as grocery or convenience stores. The deal fell through in May of 2007, and Greenshields started his own video-racking business shortly thereafter. He hired three former Movie Gallery employees within a few months after the transaction imploded, and the new business eventually took about ten former Movie Gallery customers.

It’s not at all clear that the defendants’ monetary exposure was that great. Movie Gallery itself had been losing money in this business and was trying to jettison the video-racking division to focus on more profitable business segments. However, it sued Greenshields and the entities he formed for breach of the transaction non-disclosure clause.

The court, ruling under Alabama law, found that Movie Gallery failed to prove that the defendants breached any confidentiality obligation. Noting the evidence largely was circumstantial, the court highlighted the following as important flaws in Movie Gallery’s theory of breach:

(1) Less than half of the defendants’ new customers were ex-Movie Gallery customers;
(2) Ten customers was a relatively small number given that three former employees were working full-time in the business;
(3) No profitability analysis was ever conducted on the lost customers, suggesting that there was no evidence defendants targeted profitable, quick-paying accounts;
(4) The supply sources were known by the new employees given their long history in the business;
(5) The customer lease agreements were drafted by defendants’ counsel, and the terms were generally known in the business and ascertainable simply by asking the customers themselves.

The court was unable to make the leap in logic demanded by Movie Gallery: that Greenshields had to be using information disclosed to him during due diligence of the failed transaction. The following summarizes succinctly the quandary faced by the court, which suggests it believed Movie Gallery should have required Greenshields to sign a more extensive non-disclosure agreement:

“The fact that Greenshields may have, through viewing confidential information over the course of several months, become more familiar with the specific accounting and business principles involved in a racking operation surely is not the equivalent of his using specific pieces of confidential information….[The non-disclosure] agreement specifically contemplated that Greenshields may compete, and it is only logical that Movie Gallery could not expect him to rid his mind of general knowledge acquired through his months of studying an industry new to him.”

At a bare minimum, a seller of a business ought to require a buyer not to hire or engage a seller’s employees for a period of time. In a case like Greenshields’, his lack of experience in the business was not a deterrent to opening a competitor rather quickly; he took three long-time employees away from Movie Gallery to do the leg work.

Additionally, sellers need to consider limited customer non-solicitation covenants requiring a purchaser to avoid certain accounts following the termination of a potential deal. Sellers also can line-out customer names until the transaction negotiations reach a certain point, but in many cases this is neither feasible nor acceptable.