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Inconsistency in Illinois Adoption Law: Adoption Agencies' Uncertain Duty to Disclose, Investigate, and Inquire

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Loyola University Chicago Law Journal Volume 39 Issue 4 Summer 2008 Article Inconsistency in Illinois Adoption Law: Adoption Agencies' Uncertain Duty to Disclose, Investigate, and Inquire Steve
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Loyola University Chicago Law Journal Volume 39 Issue 4 Summer 2008 Article Inconsistency in Illinois Adoption Law: Adoption Agencies' Uncertain Duty to Disclose, Investigate, and Inquire Steve Mulligan Follow this and additional works at: Part of the Family Law Commons Recommended Citation Steve Mulligan, Inconsistency in Illinois Adoption Law: Adoption Agencies' Uncertain Duty to Disclose, Investigate, and Inquire, 39 Loy. U. Chi. L. J. 799 (2008). Available at: This Mentorship Article is brought to you for free and open access by LAW ecommons. It has been accepted for inclusion in Loyola University Chicago Law Journal by an authorized administrator of LAW ecommons. For more information, please contact A Lower Level of Scrutiny? New Alternatives for an Effective Restraint on Competitive Activity Daniel J. Raker* For decades, courts in Illinois and all over the country have struggled with the enforcement of contractual terms that forbid an employee from competing with a former employer. Courts must weigh an employer's right to protect its interests against the employee's ability to earn a livelihood. This analysis often leads to unpredictable results and makes it difficult for employers to predict whether particular contractual restrictions will be enforced by a reviewing court. 1 Despite this uncertainty, there are measures that employers can take to make results more predictable. For example, several decisions have embraced the idea of forfeiture-for-competition clauses that condition an employee's receipt of certain benefits on that employee's promise not to compete with the former employer. If the employee competes, he or she will not be entitled to the benefit. Importantly, these forfeiturefor-competition clauses have been subjected to a lower level of scrutiny than traditional non-competition clauses. Additionally, recent decisions suggest that courts are more likely to enforce a restriction provision where the company alleviates the effect of the former employee's loss of livelihood by paying the former employee during the non-compete period. These developments suggest that courts may be willing to enforce an arrangement that has developed in the United Kingdom, termed garden * Mr. Raker is an in-house attorney for Argonne National Laboratory specializing in labor and employment issues. He would particularly like to thank Sean Nash of Winston & Strawn LLP for his contributions to this article. 1. See Greg T. Lembrich, Note, Garden Leave: A Possible Solution to the Uncertain Enforceability of Restrictive Employment Covenants, 102 COLUM. L. REV. 2291, 2291 (2002) ( Restrictions such as non-competition and non-solicitation agreements have long been present in many American employment contracts. Courts, however, have historically been skeptical of such provisions and often refused to issue injunctions to enforce them. The resulting uncertainty has proven to be a major problem for employers in many industries, who are left with no reliable means of keeping their key employees from joining a competitor or competing themselves. ). Loyola University Chicago Law Journal [Vol. 39 leave. Garden leave refers to a situation where an employee submits a date certain for resignation in the future and thereafter receives a paycheck while not performing any duties whatsoever for the employer. The notice period under the contract essentially acts as the time period that the employee's competitive activities will be restrained. This Article reviews these legal alternatives and ultimately suggests that arrangements requiring payment and retention of employee status during a restricted time period may be subjected to a lower level of scrutiny than traditional non-competition agreements. If this is true, employers would be well-advised to enter into such arrangements with important employees to ensure greater predictability of court review and ultimately greater protection of their valuable business interests. I. TRADITIONAL ANALYSIS OF NON-COMPETITION AGREEMENTS AS RESTRAINTS OF TRADE Under Illinois law, a restrictive covenant will be closely scrutinized and only enforced if the party seeking to enforce the covenant can prove that it has a protectable interest and that the terms of the restrictive covenant are reasonable and necessary to protect that legitimate interest. 2 This rule is well-established, but somewhat unpredictable. As this Article's focus is not on the traditional non-compete analysis, this section will merely summarize as background the standards typically applied to non-competition agreements under Illinois law. Because [c]ovenants not to compete are, in effect, restraints on trade, they are rigorously scrutinized by Illinois courts to ensure that their intended effect is not the preclusion of competition per se. 3 Accordingly, in determining the enforceability of a covenant not to compete, the test applied by Illinois courts is whether the terms of the agreement are reasonable and necessary to protect a legitimate business interest of the employer. 4 A legitimate business interest exists in two situations: (1) where the customer relationships are near permanent and, but for his association with the employer, the former 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 Capsonic Group v. Swick, 537 N.E.2d 1378, 1382 (Ill. App. Ct. 1989). 3. Dam, Snell & Taveirne, Ltd. v. Verchota, 754 N.E.2d 464, 468 (Ill. App. Ct. 2001). 4. Id. 5. Id. at 469. 2008] New Alternatives for Effective Restraint Even where a legitimate interest exists, the restriction's reasonableness still must be measured by its hardship to the employee, its effect upon the general public, and the reasonableness of the time, territory, and activity restrictions. 6 This is a rather stringent standard and courts have repeatedly stated that non-competition clauses are disfavored under Illinois law. 7 Illinois courts will not enforce a non-competition clause merely because the parties agreed to such an arrangement. 8 Using a complicated framework with multiple factors to weigh, Illinois courts have arrived at different results in seemingly similar cases. 9 As a result, the current state of the law regarding non-competition agreements forces employers to blindly place their faith in a reviewing court's hands to determine whether the business interest is indeed legitimate and whether the restrictions contained in the covenant are reasonable. The level of predictability presents a complicated quandary for employers who have crafted post-employment restrictions to protect what they believe are important business interests. II. FORFEITURE-FOR-COMPETITION AGREEMENTS Because of the high level of scrutiny courts give to post-employment restrictions, employers have begun to seek alternatives to protect their business interests with a greater level of certainty. One alternative method some employers use to attempt to lower the level of scrutiny applied to post-employment restrictions is to insert forfeiture-forcompetition provisions in stock incentives or other types of compensation arrangements. 10 Essentially, under a forfeiture-forcompetition clause, a former employee receives some form of payment (usually stock options or some other form of deferred compensation) in exchange for the employee's agreement not to compete with the former employer for a specified period of time. 11 If the former employee wishes to compete with the former employer during the relevant time 6. Lawrence & Allen, Inc. v. Cambridge Human Res. Group, Inc., 685 N.E.2d 434, 441 (Il1. App. Ct. 1997). 7. Sarnoff v. Am. Home Prods. Corp., 607 F. Supp. 77, 79 (N.D. I ), aff'd and rev'd in part on other grounds, 798 F.2d 1075 (7th Cir. 1986). 8. Advent Elec., Inc. v. Buckman, 112 F.3d 267, 274 (7th Cir. 1997). 9. Compare Unisource Worldwide, Inc. v. Carrara, 244 F. Supp. 2d 977, 982 (C.D. II ) (providing that a two-year restriction would be unreasonable), with Millard Maint. Serv. Co. v. Bemero, 566 N.E.2d 379, (I11. App. Ct. 1990) (finding a two-year time restriction in a non-competition covenant reasonable). 10. James V. Garvey & Frederic T. Knape, Employee Stock Forfeiture Provisions-A Different Breed of Restrictive Covenant, 94 ILL. B.J. 376, (2006). 11. Id. 754 Loyola University Chicago Law Journal [Vol. 39 period, the employer simply refuses to confer the deferred benefit on the former employee-it is forfeited because of the former employee's competition. 12 In Tatom v. Ameritech Corp., a leading case in the Seventh Circuit, the court held that a forfeiture-for-competition agreement is subject to less scrutiny than a traditional non-compete agreement.' 3 Tatom involved a former executive of Ameritech who left the company to work for a competitor. 14 The former executive, Tatom, had entered into a forfeiture-for-competition agreement with Ameritech whereby he forfeited his stock options if he competed with Ameritech. 15 Tatom argued that the forfeiture clause was an unreasonable, anti-competitive restraint on his ability to obtain subsequent employment. ' 16 In analyzing the forfeiture-for-competition clause at issue in Tatom, the Seventh Circuit first noted that Illinois disfavors non-compete provisions in employee contracts. 17 The court went on to reason: This is not a case that involves a facially anti-competitive provision; nothing in the agreements at issue actually restricted Tatom's ability to work for Ameritech's competitors. Federal cases draw a distinction between provisions that prevent an employee from working for a competitor and those that call for a forfeiture of certain benefits should he do so... An anti-competitive clause, if that is what the forfeiture provision here is, may still be enforced in Illinois as long as it is reasonable. A provision that calls for the forfeiture of a bonus in the form of stock options does not strike us as an unreasonable restraint on competition. 18 The Seventh Circuit in Tatom also found relevant that the compensation at issue was stock options. 19 The court reasoned that because stock options allow the employee to acquire an ownership interest in the company, the options may legally be forfeited if the 12. Id. at 377; see also John Fellas, Garden Leave: A New Weapon Against a Departing Employee, N.Y. L. J., May 29, 1997, at 34 (discussing New York cases indicative of a judicial willingness to enjoin an employee from working for a competitor when the former employer has agreed to pay the employee for the period she is out of work ). 13. Tatom v. Ameritech Corp., 305 F.3d 737, (7th Cir. 2002). 14. Id. at Id. at Id. at Id. 18. Id. at (citations omitted). 19. Id. at 745. 2008] New Alternatives for Effective Restraint holder of the options goes to work for a competitor. 20 The Seventh Circuit did not explicitly consider the impact of the forfeiture-forcompetition arrangement on Tatom's ability to make a living, but the court noted that a forfeiture provision that directly affected a person's livelihood would be more strictly scrutinized. 21 Although Tatom is the Seventh Circuit's most recent pronouncement on the subject of forfeiture-for-competition clauses, it is not the first. The seminal Seventh Circuit case addressing such clauses is Schlumberger Technology Co. v. Blaker. 22 Schlumberger is important because it delves deeply into the subject of forfeiture-for-competition clauses and examines the policy rationales for enforcing them. 23 Judge Easterbrook's insightful opinion endorsing forfeiture-for-compensation clauses explains that the key to a successful provision is that it not threaten an employee's economic livelihood: Forfeiture contracts leave the ex-employee free to make a living as he chooses. The former employee accepts the money (and refrains from competition) only when the total income from the package plus noncompetitive employment exceeds the income he could earn from competitive employment. Having such a choice does not threaten loss of livelihood, so New York and the majority of other states that have considered the question enforce these agreements. 24 A subsequent case in the Northern District of Illinois followed this reasoning. In Spitz v. Berlin Industries, Inc., Judge Kocoras properly observed that in Schlumberger, the Seventh Circuit simply applied an economic analysis to determine whether the forfeiture-for-competition clause should be enforceable. 25 Further, he noted that forfeiture provisions, unlike covenants not to compete, do not threaten one's ability to earn a livelihood. For that reason, forfeiture provisions need not be analyzed like covenants not to compete. 26 Schlumberger and Spitz provide clear precedent that the most significant factor in favor of enforcing forfeiture-for-competition clauses is that they do not threaten the affected employee's ability to earn a livelihood. 27 This rationale has been accepted in other 20. Id. 21. Id. at Schlumberger Tech. Corp. v. Blaker, 859 F.2d 512, 516 (7th Cir. 1988). 23. Id. 24. Id. 25. Spitz v. Berlin Indus., Inc., No. 93 C 6355, 1994 WL , at *3 (N.D. Ill. May 13, 1994). 26. Id. (citing Schlumberger Tech. Corp. v. Blaker, 859 F.2d 512, 516 (7th Cir. 1988)). 27. Spitz, 1994 WL , at *3; Schlumberger, 859 F.2d at 516. Loyola University Chicago Law Journal [Vol. 39 jurisdictions as well. 28 As will be discussed later, this economic rationale for enforcement provides an excellent basis for applying a similar analysis to slightly different restrictions on future employment. 29 The forfeiture-for-competition line of cases is extraordinarily significant because it allows a post-employment restriction to escape the higher level of scrutiny Illinois courts typically place on restrictive covenants. This lower level of scrutiny allows employers to place broad restrictions on post-employment activity that a reviewing court will only refuse to uphold if the restriction is found unreasonable. Prior precedent has somewhat eliminated a portion of the reasonableness analysis, holding that such clauses generally do not have the same hardship to the employee or effect on the general public as restrictive covenants. This is a far cry from the exacting and unpredictable standards found in Illinois precedent that require the covenant to be reasonable and necessary to protect a legitimate business interest of the employer. Although Seventh Circuit precedent provides an excellent rationale for subjecting a post-employment restriction to a lower level of scrutiny, the forfeiture-for-competition clause still presents problems in terms of employers' protection of interests. First and foremost, under a forfeiture-for-competition arrangement, the former employer cannot obtain an injunction to prevent the former employee from competing. 30 By its very terms, the only remedy for the employer under the forfeiture-for-competition clause is to stop any payment of the forfeited sums. The former employee could, of course, retaliate by filing a lawsuit challenging the forfeiture clause as unreasonable. This would be the worst result for the employer-it leaves the employer (1) without a contractual remedy against the former employee's competitive conduct, and (2) facing a potentially expensive lawsuit defending the legal validity of the forfeiture-for-competition clause. Therefore, although an attractive option for employers, forfeiture-for-competition clauses have serious drawbacks. Wouldn't it be nice to have all of the benefits of a forfeiture-for- 28. See Everett v. Nefco Corp., No. 3:06-cv-00047(VLB), 2007 WL , at *2 (D. Conn. Oct. 9, 2007) (quoting Spitz v. Berlin Indus., Inc., No. 93 C 6355, 1994 WL , at *3 (N.D. 1Il. May 13, 1994)) (noting that forfeiture provisions are distinct from restrictive covenants in that they do not inhibit a person's ability to earn a living). 29. See infra Part IV.C (examining how courts would interpret a garden leave arrangement). 30. Although the employer would be unable to seek an injunction pursuant to the forfeiturefor-competition clause, there may be other grounds for the employer to seek injunctive relief, including a violation of a contractual confidentiality clause, violation of the Illinois Trade Secrets Act, a breach of the duty of loyalty, or a tortious interference claim. 2008] New Alternatives for Effective Restraint competition clause without these potential drawbacks? The remainder of this Article tackles this very question. Il. GARDEN LEAVE A concept somewhat similar to forfeiture-for-competition clauses is an arrangement commonly used in England called garden leave. 3 1 Although garden leave is a well-established practice in the United Kingdom, it is a concept that is relatively foreign to the U.S. courts. Garden leave refers to the situation where an employee submits a certain date for resignation in the future and, thereafter, receives a paycheck while sitting at home tending to his garden. 32 During this period, the person remains an employee collecting a salary, but does not perform any duties whatsoever for the employer. Rather, the employee's only duty during this time is to remain idle and not compete with the employer. The employer's interests are protected in that the employee is not competing, and the employee's interests are protected in that he continues to earn a living by receiving a paycheck from his employer. 33 Assuming a court would enforce a garden leave provision, the advantages to an employer of using garden leave as a restriction on future employment are enormous. For one, the employee remains employed and, therefore, is subject to all of the duties that apply to a current employee-i.e., the duty of loyalty. Further, should an employee attempt to join a competitor during the garden leave period, the original employer will have many weapons to counter that activity, including seeking an injunction to stop the competing employment. This is different than a forfeiture-for-competition clause, which, as discussed earlier, does not in and of itself permit an injunction as a remedy. Under a forfeiture-for-competition clause, the employer merely quits paying the benefit. Under a garden leave arrangement, the employer can file a lawsuit seeking injunctive relief to stop the competing activity. This is an extremely attractive option for employers because it allows for greater protection of important business interests and can halt the employee's competitive activities nearly instantaneously through a temporary restraining order and preliminary injunction. 31. See Lembrich, supra note 1, at 2291 (describing England's solution to non-competition agreements). 32. Id; see also Fellas, supra note 12, at I (explaining the concept of garden leave and the reasons why it is standard in certain types of English contracts). 33. Lembrich, supra note 1, at 2292. 758 Loyola University Chicago Law Journal [Vol. 39 An excellent summary of garden leave and its development in American courts can be found in Greg Lembrich's 2002 Note. 34 As noted by Lembrich, garden leave is a concept that has not received a lot of scholarly attention and has not yet been refined and developed by American courts. 35 There are, however, several key cases applying the general concept of garden leave and suggesting that it may be a viable and enforceable alternative to traditional restrictive covenants under certain circumstances. This Part briefly summarizes the development of this doctrine on the American side of the pond and adds several more recent cases to the developing case law. Most of the cases addressing compensation arrangements with restrictions similar to garden leave have occurred in New York. For example, in Maltby v. Harlow Meyer Savage, Inc., a New York state court upheld a six-month restriction in part because the affected employees would contin
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