Outsource International, Incorporated v. George Barton and Barton's Staffing Solutions, Incorporated

192 F.3d 662, 52 U.S.P.Q. 2d (BNA) 1085, 15 I.E.R. Cas. (BNA) 977, 1999 U.S. App. LEXIS 22445, 140 Lab. Cas. (CCH) 58,818

• Court: Court of Appeals for the Seventh Circuit
• Decided: September 17, 1999
• Docket: 98-2808
• Status: Published

Opinions

BAUER, Circuit Judge.

In May 1998, Outsource International, Inc. (“Outsource,” “OSI,” or the “EMPLOYER”) filed a temporary restraining order (a “TRO”) and preliminary injunction against former OSI employee George Barton and Barton’s Staffing Solutions, Inc. (“BSSI”) (collectively referred to as the “defendants”) based upon Barton’s alleged violations of a confidentiality clause and a non-compete clause in the Employment Agreement between Barton and OSI. The district court granted the TRO, and on June 12, 1998, after a two-day eviden-tiary hearing, the district court entered a modified preliminary injunction against Barton and BSSI. Barton and BSSI appeal from the entry of the modified preliminary injunction order. We affirm.

I. Background

OSI provides temporary industrial staffing and employment consulting services to industrial customers located throughout the United States, including the Chicago suburban area. OSI has been a prominent fixture in the temporary staffing industry for many years and has developed a strong reputation for its quality and dependable services.

Like other businesses in the temporary staffing industry, OSI’s product is temporary workers. OSI attempts to develop and market its product by keeping extensive computerized records on its workers. These records include information such as each worker’s previous work environments, pay rates, billing rates, and worker compensation rates. OSI also attempts to provide superior service to its customers by providing more qualified workers, which in turn, makes its product more reliable throughout the temporary industrial labor staffing industry. OSI puts considerable time into developing its employee files and its customer relations and, therefore, attempts to protect this information from outside competitors. It also requires that its staffing consultants enter into certain restrictive covenants, such as a non-compete clause and a confidential information clause. These restrictive covenants are embodied in each consultant’s Employment Agreement with the company.

In 1992, Barton became a labor staffing consultant at L.M. Investors, Inc. (“LM”). In 1993, Barton signed an Employment Agreement with LM. The Employment Agreement contained confidentiality and non-compete clauses as conditions of his employment. The agreement also provided that these clauses would remain in effect for one year after the termination of his employment with OSI. Specifically, Barton’s Employment Agreement contained the following non-compete clause and confidentiality agreement:

[D]uring the term of the Agreement and for a period of one (1) year immediately following the termination of EMPLOYEE’S employment, for any cause whatsoever, so long as EMPLOYER continues to carry on the same business, said EMPLOYEE shall not, for any reason whatsoever, directly or indirectly, for himself or on behalf of, or in conjunction with, any other person, persons, company, partnership, corporation or business entity:

(i) Call upon, divert, influence or solicit or attempt to call upon, divert, influence or solicit any customer or customers of EMPLOYER;

(ii) Divulge the names and addresses or any information concerning any customer of EMPLOYER;

(iii) Disclose any information or knowledge relating to EMPLOYER, including but not limited to, EMPLOYER’S system or method of conducting business to any person, persons, firms, corporations or other entities unaffiliated with EMPLOYER, for any reason or purpose whatsoever;

(iv) Own, manage, operate, control, be employed by, participate in or be connected in any manner with the ownership, management, operation or control of the same,- similar or related line of business as that carried on by EMPLOYER within a radius of twenty-five (25) miles from EMPLOYEE’S home office or within a radius equivalent to EMPLOYEE’S defined territory, whichever is greater.

By its terms, the Employment Agreement could be enforced only through in-junctive relief. By signing the Employment Agreement, Barton agreed to waive his right to a jury trial if a dispute should arise and he agreed that he would be liable to pay all costs and expenses of the action, including attorney fees.

From 1993 until April 7, 1998, Barton was the exclusive staffing consultant for LM in his territory. In February 1998, OSI acquired LM. On April 7, 1998, Barton resigned from OSI. At the time of his resignation, he was the staffing consultant for four of OSI’s Illinois offices: Aurora East, Aurora West, Joliet, and University Park. Barton’s home base was the Aurora East office.

Immediately after Barton resigned from OSI, he opened BSSI, a temporary industrial labor staffing company, in West Chicago, Illinois. BSSI’s office is approximately 12 miles from OSI’s Aurora East office. To staff BSSI, Barton hired former OSI employees that had worked with him while he was at OSI. Within weeks after starting his business, Barton and BSSI had acquired twelve former OSI customers that Barton had serviced while he was employed at OSI.

OSI filed an action against Barton and BSSI seeking immediate temporary and preliminary injunctive relief based on Barton’s breach of the non-compete and confidentiality clauses in his Employment Agreement. After a two-day evidentiary hearing on the matter, the district court found that OSI had stated a prima facie case for a preliminary injunction.

On appeal, the defendants admit that Barton violated the restrictive covenant in his Employment Agreement; they argue, however, that the restrictions are unenforceable and, therefore, that the district court erred in entering the preliminary injunction order. They also challenge the scope of the injunction.

II. Discussion

A. Standard of Review

Under Illinois law, a preliminary injunction will be granted if the plaintiff can show that: (1) he possesses a clear right or interest that needs protection; (2) an inadequate remedy at law exists; (3) irreparable harm will result if it is not granted; and (4) there is a reasonable likelihood of success on the merits. Office Mates 5, North Shore, Inc. v. Hazen, 234 Ill.App.3d 557, 175 Ill.Dec. 58, 599 N.E.2d 1072, 1079 (1992) (citations omitted). On appeal, a district court decision preserving the status quo may be overturned only upon a clear showing of an abuse of discretion. VMS Ltd. Partnership Sec. Litig. v. Prudential Sec. Inc., 103 F.3d 1317, 1323 (7th Cir.1996). A review of the district court’s decision requires a re-examination of the court’s findings on each of the four relevant considerations. However, the likelihood of success on the merits often serves as a threshold requirement for entitlement to preliminary relief. Reinders Bros., Inc. v. Rain Bird E. Sales Corp., 627 F.2d 44, 49 (7th Cir.1980). “Nonetheless, in applying the abuse of discretion standard, we do not give equal deference to every aspect of a court’s decision. The abuse of discretion standard is used to evaluate the ... court’s application of the facts to the appropriate legal standard, and the factual findings and legal conclusions underlying such decisions are evaluated under the clearly erroneous and de novo standards, respectfully.” VMS Ltd. Partnership, 103 F.3d at 1323.

B. The Non-Compete Agreement

The basic test applied by Illinois courts in determining the enforceability of restrictive covenants is “whether the terms of the agreement are reasonable and necessary to protect a legitimate business interest of the employer.” Office Mates 5, 175 Ill.Dec. 58, 599 N.E.2d at 1080 (citations omitted). This determination “necessarily turns on the facts and circumstances of each case.” Id. Illinois courts long have recognized two situations in which an employer has a legitimate business interest to justify enforcement of a covenant not to compete: (1) where the customer relationships are near-permanent and but for the employee’s association with the employer the employee would not have had contact with the customers; and (2) where the former employee acquired trade secrets or other confidential information through his employment and subsequently tried to use it for his own benefit. Lawrence and Allen, Inc. v. Cambridge Human Resource Group, Inc., 292 Ill.App.3d 131, 226 Ill.Dec. 331, 685 N.E.2d 434, 443 (1997); Springfield Rare Coin Galleries, Inc. v. Mileham, 250 Ill.App.3d 922, 189 Ill.Dec. 511, 620 N.E.2d 479, 485, 488 (1993); Office Mates 5, 175 Ill.Dec. 58, 599 N.E.2d at 1080. Here, the district court applied both tests and determined that they were alternative grounds that supported its decision to grant a preliminary injunction. We will affirm the district court’s decision if we find that either of the two alternative grounds was sufficient to enforce the covenant not to compete.

1. Near-Permanent Relationship Test

Illinois courts, have developed two tests for determining whether an employer has a near-permanent relationship with its customers or clients. Some courts analyze the near-permanent relationship according to the seven objective factors set forth in Agrimerica, Inc. v. Mathes, 199 Ill.App.3d 435, 145 Ill.Dec. 587, 557 N.E.2d 357 (1990), while others follow the “nature of the business” test as espoused in Lawrence and Allen or Office Mates 5. In the immediate case, the district court applied the nature of the business test to determine whether OSI had a near-permanent relationship with its customers. Accordingly, we will use the same test in reviewing the district court’s analysis and in making our own determination of whether a near-permanent relationship existed. See Springfield Rare Coin Galleries, 189 Ill.Dec. 511, 620 N.E.2d at 489 (holding that the seven Agrimerica factors need not be applied in every case).

Generally, “the near-permanency test turns in large degree on the nature of the business involved, and certain businesses are just more amenable to success under it.” Lawrence and Allen, 226 Ill.Dec. 331, 685 N.E.2d at 444 (internal citation omitted). For example, “a near-permanent relationship with clients is inherent in the provision of professional services.” Id. (citing Springfield Rare Coin Galleries, 189 Ill.Dec. 511, 620 N.E.2d at 488). On the other hand, a business engaged in ordinary sales generally will not enjoy near-permanent relationships with its customers. Lawrence and Allen, 226 Ill.Dec. 331, 685 N.E.2d at 444 (citing Springfield Rare Coin Galleries, 189 Ill.Dec. 511, 620 N.E.2d at 488). Moreover, “a near-permanent relationship is generally absent where the nature of the plaintiffs business does not engender customer loyalty by providing a unique product or personal service and customers utilize many suppliers simultaneously to meet their needs.” Id. at 444 (citing Office Mates 5, 175 Ill.Dec. 58, 599 N.E.2d at 1081-82). The court in Office Mates 5 noted:

The fact pattern typifying these latter cases is the existence of a highly-eom-petitive industry in which customers, through cross-purchasing, satisfy their buying needs. Plaintiffs in these businesses rely heavily on their sales force, who utilize basic sales techniques such as cold calls to make sales. The identity of customers or clients are known by all in the industry.

Office Mates S, 175 Ill.Dec. 58, 599 N.E.2d at 1082.

In the present case, the district court considered the nature of OSI’s business (the industrial staffing industry) and determined that the customer loyalty OSI enjoyed and the unique product OSI offered in the industry (as opposed to a general sales product) created a near-permanent relationship with its customers. Specifically, the district court stated:

[In this case,] I believe that the existence of multiple suppliers to a single user is not an indication that any one supplier is as good as another. I believe it is because from the user’s perspective the user simply does not wish to be in a position of seeking temporary industrial workers and not having them when and where the user wants them.

And I think that this is a key finding because the courts, as I read the prior cases, deal with prior fact situations in terms of — and I paraphrase — “There are many suppliers; ergo, there is nothing unique or special [about the product or service].”

I do not believe that inference can be drawn here and I do not draw it. It is, in fact, I think difficult to consider that relationships are not near[-]permanent, not only for the above reasons, but for all of the facts which show that the need for reliability is paramount in this particular industry; and common sense would lead one to the conclusion that if any suppliers of temporary industrial workers ha[ve] shown to any buyer of these services that their services are reliable ... [then] the user will continue to go back to that supplier absent some extraordinary incentives in terms of prices.

So I believe that the near[-]permanent relationships do exist. I find that they do exist in this business.

Trans, of Preliminary Inj. Proceedings, at 239-40. This finding is supported by record evidence. The record reflects that OSI (and LM, its predecessor company) enjoyed a brand name recognition throughout the industry which gave it a certain level of dependability and prominence. The record also reflects that OSI had strong customer loyalty and that it set itself apart from other staffing businesses in the industry through an elaborate employee screening and customer service system. Thus, the- district court did not abuse its discretion in finding that a near-permanent relationship existed between OSI and its customers.

We also must briefly consider the second part of the near-permanence test— we must determine whether “but for” Barton’s association with OSI, he would not have had contact with the customers that he obtained from OSI after he left its employ. Lawrence and Allen, 226 Ill.Dec. 331, 685 N.E.2d at 443. In concluding that the “but for” element of the near-permanence test was met, the district court held that but for OSI’s good name and substantial resources, Barton could not have “sold” his customers on his industrial staffing services. Specifically, the court held that:

Outsource added substantial value to the product that Barton was selling in several ways, one of which was for potential customers to agree to meet with Barton .... He needed Outsource’s resources, not to consummate sales, but to get to the initial contact stage of his deals with companies in need of temporary services.

This factual finding is supported by record evidence as well. Barton testified that he acquired all twelve of BSSI’s customers by telephoning the primary contacts he had developed while he was working for OSI. Thus, the district court did not abuse its discretion in finding that but for Barton’s association with OSI, he would not have had contact with the customers.

Based on the evidence in the record, the district court’s findings regarding the nature of OSI’s business and its ability to meet the near-permanency test were within the court’s discretion.

2. Confidential Information Test

The defendants also contend that the district court erred in finding that the confidential information test served as a valid basis for enforcing the restrictive covenant. “A restrictive covenant may be enforced if the employee learned trade secrets or other confidential information while in [the] plaintiffs employ and subsequently attempted to use it for his or her own benefit.” Springfield Rare Coin Galleries, Inc. v. Mileham, 250 Ill.App.3d 922, 189 Ill.Dec. 511, 620 N.E.2d 479, 485 (1993). Here, in making its determination, the district court stated:

The value of the confidential information I think is shown by the speed in which Mr. Barton acquired the business of former [OSI] customers. He may have extraordinary power as a salesperson, but it is doubtful to me that extraordinary power could have — in fact, I find that it is really quite incredible that even the most powerful sales person could have acquired that business with the speed with which he acquired it if he were not assisted at least by cost and price figures and such data as the comp rates.

[B]ecause he spent so long with Outsource ... it is impossible to say that any of these clients with which he’s dealing are Barton’s and Barton’s alone.

The record shows that OSI put considerable effort into developing a workforce and keeping data on the workforce secret. Furthermore, OSI maintained classified records on its customers, to which Barton had access. Shortly after Barton left OSI and opened BSSI, most of his staff consisted of former OSI employees. All of BSSI’s clients were OSI clients when Barton was employed by OSI. Thus, the district court did not abuse its discretion in determining that Barton took confidential information while in OSI’s employ and used it for his own benefit.

C. Geographic and Activity Restrictions

The defendants also contend that the geographic and activity restrictions in the restrictive covenant must be modified if we determine that the covenant is enforceable. While we agree with the defendants’ general premise that restrictive covenants should be narrowly tailored so as only to protect a legitimate business interest of the employer, see Lawrence and Allen, 226 Ill.Dec. 331, 685 N.E.2d at 441, in the immediate case, the defendants’ argument is underdeveloped and unsupported by law and, therefore, it is waived. See United States v. Brocksmith, 991 F.2d 1363, 1366 (7th Cir.1993) (“The premise of our adversarial system is that appellate courts do not sit as self-directed boards of legal inquiry and research, but essentially as arbiters of legal questions presented and argued by the parties before them.”).

Conclusion

The district court did not abuse its discretion in entering the preliminary injunction order or in finding that the restrictive covenant was enforceable. We AffiRM.