Seventh Circuit Questions
Broad Discretion Rule in Reliable
It Leaves both Employers and
Employees Uncertain, Court observes
The Seventh Circuit Court of Appeals earlier this month affirmed Judge Holderman’s ruling in Instant Technology v DeFazio, in which the court after a bench trial ruled that three of the former employees’ covenants not to compete were unenforceable because they each had less than two years of employment after signing the covenants. He also found that the former employer had no protectable interest, given the very fluid nature of customer relationships in the IT placement industry.
The two year minimum rule for what constitutes a “substantial period of employment” as consideration to support a promise not to compete (or solicit) is only recognized by some Illinois courts and some federal judges sitting in Illinois. So observers were curious to learn what the Seventh Circuit was going to do with Instant Technology.
It sidestepped the consideration issue, instead affirming the lower court’s ruling that the former employer had no interest to protect, a key element under Reliable.
But the appeals court clearly is not a fan of Reliable’s “totality of the circumstances” approach and the broad discretion it affords trial judges. Litigants exploit Reliable when seeking to find reversible error in a claimed failure to cover all the bases, including the failure of consideration because of employment for less than two years. This is what the plaintiff attempted to do here, arguing that Judge Holderman had not taken into consideration the “totality of the circumstances.” The Seventh Circuit declared that the “totality of the circumstances” standard does not mean all of them, but instead means that a court has discretion to weigh only those circumstances that bear directly on the issues. And Judge Easterbrook’s reticence about the Illinois Supreme Court’s landmark ruling was deeper; he wondered at the soundness of its holding.
Making validity turn on “the totality of the circumstances”
—which can’t be determined until litigation years after
the events—makes it hard to predict which covenants are
enforceable. If employers can’t predict which covenants
courts will enforce, they will not make investments that may
depend on covenants’ validity, and they will not pay employees
higher wages for agreeing to bear potentially costly
terms. Both employers and employees may be worse off as a
result. Risk-‑averse employees who hope that their covenants
will be unenforceable, but fear that they will be sustained,
may linger in jobs they would be happier (and more productive)
leaving. But our rule of decision comes from state law.
Erie R.R. v. Tompkins, 304 U.S. 64 (1938). Reforming that law,
or trying to undermine it, is beyond our remit.
At p. 5