Court Opinion

ID: 9492526
Source: CourtListenerOpinion
Date Created: 2023-08-05 14:43:19.477956+00
Date Added: 2024-06-11T17:55:21.094265
License: Public Domain

POSNER, Chief Judge,
dissenting.
I regret my inability to agree with the court’s disposition of the case, because it is the right disposition from the standpoint of substantive justice. Mr. Barton is an adult of sound mind who made an unequivocal promise, for which he was doubtless adequately compensated, not to compete with his employer within 25 miles for a year after he ceased being employed. He quit of his own volition — quit in fact to set up in competition with his employer. And all the customers whom he obtained for his new company, before the preliminary injunction which the court affirms today put him temporarily out of business, were customers of his former employer. So he broke his contract. But Illinois law, to which we must of course bow in this diversity suit, is hostile to covenants not to compete found in employment contracts. An Illinois court would not enforce this covenant.
There is no longer any good reason for such hostility, though it is nothing either new or limited to Illinois. The English common law called such covenants “restraints of trade” and refused to enforce them unless they were adjudged “reasonable” in time and geographical scope. Mitchel v. Reynolds, 1 P. Wms. 181, 24 Eng. Rep. 347 (K.B.1711); Horner v. Graves, 7 Bing. 735, 743, 131 Eng. Rep. 284, 287 (C.P.1831); E. Allan Farnsworth, Contracts § 5.3 (3d ed.1999). The original rationale had nothing to do with restraint of trade in its modern, antitrust sense. It was paternalism in a culture of poverty, restricted employment, and an exiguous social safety net. The fear behind it was that workers would be tricked into agreeing to covenants that would, if enforced, propel them into destitution. Mitchel v. Reynolds, supra, 1 P. Wms. at 193-94, 24 Eng. Rep. at 351; Arthur Murray Dance Studios of Cleveland, Inc. v. Witter, 105 N.E.2d 685, 704 (Ohio Com.Pl.1952); Har*670lan M. Blake, “Employee Agreements Not to Compete,” 73 Harv. L.Rev. 625, 632-37 (1960). This fear, though it continues to be cited, e.g., Weaver v. Ritchie, 197 W.Va. 690, 478 S.E.2d 363, 368 (1996), has no basis in current American conditions.
Later, however, the focus of concern shifted to whether a covenant not to compete might have anticompetitive consequences, since the covenant would eliminate the covenantor as a potential competitor of the covenantee within the area covered by, and during the term of, the covenant. E.g., Russell v. Jim Russell Supply, Inc., 200 Ill.App.3d 855, 146 Ill.Dec. 152, 558 N.E.2d 115, 123 (1990); JAK Productions, Inc. v. Wiza, 986 F.2d 1080, 1085-86 (7th Cir.1993) (interpreting Indiana law); Wilson v. Gamble, 180 Miss. 499, 177 So. 363, 365-66 (1937); Wells v. Wells, 9 Mass.App.Ct. 321, 400 N.E.2d 1317, 1319 (1980). This concern never had much basis, as recognized in Consultants & Designers, Inc. v. Butler Service Group, Inc., 720 F.2d 1553, 1562-64 (11th Cir.1983), especially when the covenant was found in an employment contract. It would be unlikely for the vitality of competition to depend on the ability of a former employee to compete with his former employer. So unlikely that it would make little sense to place a cloud of suspicion over such covenants, rather than considering competitive effects on a case by case basis.
At the same time that the concerns behind judicial hostility to covenants not to compete have waned, recognition of their social value has grown. The clearest case for such a covenant is where the employee’s work gives him access to the employer’s trade secrets. The employer could include in the employment contract a clause forbidding the employee to take any of the employer’s trade secrets with him when he left the employment, 765 ILCS 1065/8(b)(1); Abbott-Interfast Corp. v. Harkabus, 250 Ill.App.3d 13, 189 Ill.Dec. 288, 619 N.E.2d 1337, 1344 (1993), as in fact the employer did in this case. Such clauses are difficult to enforce, however, as it is often difficult to determine whether the former employee is using his former employer’s trade secrets or using either ideas of his own invention or ideas that are in the public domain. Nalco Chemical Co. v. Hydro Technologies, Inc., 984 F.2d 801, 804 (7th Cir.1993); Eden Hannon & Co. v. Sumitomo Trust & Banking Co., 914 F.2d 556, 561-62 (4th Cir.1990). A covenant not to compete is much easier to enforce, id. at 562, and to the extent enforced prevents the employee, during the time and within the geographical scope of the covenant, from using his former employer’s trade secrets.
A related function of such a covenant is to protect the employer’s investment in the employee’s “human capital,” or earning capacity. Curtis 1000, Inc. v. Suess, 24 F.3d 941, 947 (7th Cir.1994); Reddy v. Community Health Foundation, 171 W.Va. 368, 298 S.E.2d 906, 917 (1982); Paul H. Rubin & Peter Shedd, “Human Capital and Covenants Not to Compete,” 10 J. Legal Stud. 93, 96-97 (1981). The employer may give the employee training that the employee could use to compete against the employer. If covenants not to compete are forbidden, the employer will pay a lower wage, in effect charging the employee for the training. There is no reason why the law should prefer this method of protecting the employer’s investment to a covenant not to compete.
I can see no reason in today’s America for judicial hostility to covenants not to compete. It is possible to imagine situations in which the device might be abused, Watson v. Waffle House, Inc., 253 Ga. 671, 324 S.E.2d 175, 177 (1985); Farnsworth, supra, § 5.3, p. 334, but the doctrines of fraud, duress, and unconscionability are available to deal with such situations. Hilb, Rogal & Hamilton Agency of Dayton, Inc. v. Reynolds, 81 Ohio App.3d 330, 610 N.E.2d 1102, 1107 (1992). A covenant’s reasonableness in terms of duration and geographical scope is merely a consideration bearing on such defenses (“in a *671great many instances, [particular covenants not to compete] can be of no use to the obligee; which holds in all cases of a general restraint throughout England; for what does it signify to a tradesman in London, what another does at Newcastle?”, Mitchel v. Reynolds, supra, 1 P. Wms. at 190-91, 124 Eng. Rep. at 350). Had Barton signed a covenant in which he agreed that if he ever left the employ of Outsource he would never again work in the business of providing temporary industrial labor anywhere in the world, there would be at least a suspicion that he had been forced or tricked into signing the covenant and therefore that it should not be enforced. There is no suggestion of that here, and so if I were writing on a clean slate I would agree wholeheartedly with the district court’s granting a preliminary injunction against Barton’s violating the covenant.
But the Illinois courts approach covenants not to compete in a different way, not radically different perhaps but different enough to require a reversal in this case. Their view is that a covenant not to compete that is contained in an employment contract is enforceable in only two circumstances — either where the covenant protects a “near permanent” relationship between the former employer and his customers, or where it protects “confidential information” (that is, trade secrets) of the former employer. Lawrence & Allen, Inc. v. Cambridge Human Resource Group, Inc., 292 Ill.App.3d 131, 226 Ill.Dec. 331, 685 N.E.2d 434, 443 (1997); Curtis 1000, Inc. v. Suess, supra, 24 F.3d at 947 (applying Illinois law); A.J. Dralle, Inc. v. Air Technologies, Inc., 255 Ill.App.3d 982, 194 Ill.Dec. 353, 627 N.E.2d 690, 696-97 (1994); Springfield Rare Coin Galleries, Inc. v. Mileham, 250 Ill.App.3d 922, 189 Ill.Dec. 511, 620 N.E.2d 479, 485 (1993). The latter circumstance is straightforward; as I noted earlier, a covenant not to compete is easier to enforce than a covenant that forbids the former employee to use confidential information.
The reason given for protecting “near permanent relationships” between the former employer and its customers is that if the customer was locked into its relationship with the former employer, the former employee could not have enticed the customer away without using skills or contacts that he had obtained in the course of his employment. E.g., Lawrence & Allen, Inc. v. Cambridge Human Resource Group, Inc., supra, 226 Ill.Dec. 331, 685 N.E.2d at 444; Audio Properties, Inc. v. Kovach, 275 Ill.App.3d 145, 211 Ill.Dec. 651, 655 N.E.2d 1034, 1039 (1995); Springfield Rare Coin Galleries, Inc. v. Mileham, supra, 189 Ill.Dec. 511, 620 N.E.2d at 488. This is welcome recognition that a covenant not to compete can be a proper method of protecting an employer’s investment in the employee’s human capital. The significance of “near” permanent may be to make clear that if the employer and the customer have an actual contract which the employee induces the customer to break, and thus a relationship that is “permanent” for the duration of the contract, the covenant not to compete would be academic; the employee would be liable in tort for inducing the breach of a contract. HPI Health Care Services, Inc. v. Mt. Vernon Hospital, Inc., 131 Ill.2d 145, 137 Ill.Dec. 19, 545 N.E.2d 672, 676 (1989); Lama Holding Co. v. Smith Barney Inc., 88 N.Y.2d 413, 646 N.Y.S.2d 76, 668 N.E.2d 1370, 1375 (1996). Without either a contract with the customer or.a covenant with the employee, the employee’s action in “stealing” the customer would be privileged unless the employee used independently tortious means, such as a violation of fiduciary duty, to accomplish the “theft.” Speakers of Sport, Inc. v. ProServ, Inc., 178 F.3d 862, 865-66 (7th Cir.1999).
The Illinois courts appear to place the burden of proving that the covenant meets one of the two criteria of validity on the employer. Lawrence & Allen, Inc. v. Cambridge Human Resource Group, Inc., supra, 226 Ill.Dec. 331, 685 N.E.2d at 444; Audio Properties, Inc. v. Kovach, supra, *672211 Ill.Dec. 651, 655 N.E.2d at 1037; Springfield Rare Coin Galleries, Inc. v. Mileham, supra, 189 Ill.Dec. 511, 620 N.E.2d at 485. In effect Illinois requires the employer to prove that the covenant not to compete serves a social purpose. Such a requirement is inconsistent with the idea of freedom of contract, which animates contract- law and a corollary of which is that courts do not limit the enforcement of contracts to those the social point of which the court can see. They enforce a contract unless there is some reason to think it imposes heavy costs on third parties, offends the moral -code, fails to comply with formal requirements (such as those imposed on some contracts by the statute of frauds), or doesn’t embody an actual deal between competent consenting adults.
Still, we must take the Illinois law as we find it, and apply it as best we can to the facts of the case. Burns Philp Food, Inc. v. Cavalea Continental Freight, Inc., 135 F.3d 526, 529 (7th Cir.1998); Nautilus Ins. Co. v. Zamora, 114 F.3d 536, 538 (5th Cir.1997). Barton was employed by Outsource as a salesman, soliciting orders for temporary industrial workers that Outsource would supply. These are skilled and semi-skilled factory workers — packers, assemblers, fork-lift operators, and the like. They are employed by Outsource and in effect “rented” to industrial firms as temporary workers. Barton had been in the business for many years before his employment by Outsource. Deciding to go out on his own, he quit Outsource and quickly obtained business from a dozen customers of Outsource with whom he had dealt. There is no question that he violated the covenant not to compete in his employment contract, which barred him for one year after his employment ended from competing with Outsource in the Chicago area. But there is no evidence that he stole any of Outsource’s trade secrets. Like the customer lists in A.J. Dralle, Inc. v. Air Technologies, Inc., supra, 194 Ill.Dec. 353, 627 N.E.2d at 697; Springfield Rare Coin Galleries, Inc. v. Mileham, supra, 189 Ill.Dec. 511, 620 N.E.2d at 485, and Curtis 1000, Inc. v. Suess, supra, 24 F.3d at 947-48, Outsource’s customer list, which Barton may have used to get customers for himself, was not secret. Nor is it likely that Barton relied on the list; these were people he had been dealing with for years. The wages that Outsource pays its workers are not secret either. Barton did not take the list of workers on Outsource’s roster, but obtained workers for his customers in the same way that Outsource does, by radio and newspaper advertisements. Many of these workers had been working for Outsource, but that is no surprise; competing local suppliers of temporary labor hire from the same pool, and temporary workers often register with multiple agencies.
Outsource screens the workers whom it hires and sorts them into different job categories so that it knows whom to dispatch when it receives an order from one of its customers. This information — the list of workers screened for reliability and the jobs that they can do — is a genuine trade secret, and so Outsource would have a strong case if Barton had taken this information with him when he quit and set up on his own. But there is no evidence that he did this. Regardless of that, if Outsource does the screening and sorting function better than other suppliers of temporary industrial labor, it may have established “near permanent” relationships with its customers, but of this there is no evidence either. The only users of temp labor who testified at the preliminary injunction hearing agreed that such users have no sense of loyalty to particular suppliers. Both witnesses used multiple agencies. It was feasible for Barton to use standard selling techniques, rather than any techniques that he had learned from Outsource or information that he took with him when he left Outsource, to get customers for his new business.
The district judge said that Barton “gets credibility in terms of the reliability issue *673from the testing, screening and transport services that were provided when he was at Outsource.” I don’t get this. The customers whom Barton obtained when he left Outsource knew that he was no longer with Outsource and that they were dealing not with Outsource but with a start-up. If they trusted him, it was for his personal qualities.
The cases in which Illinois courts (or federal courts applying Illinois law in diversity cases) uphold covenants not to compete found in employment contracts are cases in which the former employer was supplying a specialized, complex product or (more usually) service, often a professional service such as veterinary care. See, e.g., Prairie Eye Center, Ltd. v. Butler, 305 Ill.App.3d 442, 239 Ill.Dec. 79, 713 N.E.2d 610, 614 (1999); Office Mates 5, North Shore, Inc. v. Hazen, 234 Ill.App.3d 557, 175 Ill.Dec. 58, 599 N.E.2d 1072, 1081-82 (1992); Lawrence & Allen, Inc. v. Cambridge Human Resource Group, Inc., supra, 226 Ill.Dec. 331, 685 N.E.2d at 444; Springfield Rare Coin Galleries, Inc. v. Mileham, supra, 189 Ill.Dec. 511, 620 N.E.2d at 488 (“a near-permanent relationship with clients is inherent in the provision of professional services”). Those are settings in which the former employee is likely to be using information or training acquired from his former employer. Enforcement is denied when the former employer is supplying a fungible or standardized product or service. As we explained in Curtis 1000, Inc. v. Suess, supra, 24 F.3d at 948 (citations omitted), “the Illinois cases distinguish between sellers of services, especially professional services such as accounting and consulting, and sellers of ordinary goods. In the former class, where the quality of the seller’s service is difficult to determine by simple inspection, customers come to repose trust in a particular seller, and that trust is a valuable business asset, created by years of careful management, that the employee is not allowed to take away with him. In the latter class, involving the sale of goods, the element of trust is attenuated, particularly where ... the good is a simple and common one sold under competitive conditions. In these cases Illinois law does not permit the seller to claim a protectable interest in his relations with his customers.... For here current price and quality, rather than a past investment in meeting customers’ needs, are the decisive factors in the continued success of the firm, and they of course are not appropriated by the departing employee.”
Human beings are not fungible; skilled and semi-skilled workers differ along such dimensions as reliability, experience, know-how, and wage demands. But Barton, who had worked in the business of supplying temporary industrial labor for many years before going to work for Outsource, knew all this. He did not know the specifics about the workers whom Outsource screened and sorted, but he did not take those specifics with him when he left, either. To repeat, as far as this record shows, all he used in signing up customers for his new venture were the standard sales techniques used in this business.
Since the irreparable harm to Barton from the grant of a preliminary injunction to Outsource exceeds the irreparable harm that Outsource would experience from the denial of the injunction (as a start-up, Barton would find it difficult to prove damages from being frozen out of business for a year as a result of the enforcement of the covenant), Outsource must prove not just that it has a better case than Barton but that it has a much better case. Id. at 945; Ty, Inc. v. GMA Accessories, Inc., 132 F.3d 1167, 1172 (7th Cir.1997); Steakhouse, Inc. v. City of Raleigh, 166 F.3d 634, 637 (4th Cir.1999). It has a worse case. As a detail, I note that the court assumes that state rather than federal law governs the standard for the grant or denial of a preliminary injunction. Not so; it is federal law. Southern Milk Sales, Inc. v. Martin, 924 F.2d 98, 101-02 (6th Cir.1991); Ferrero v. Associated Materials Inc., 923 F.2d 1441, 1448 (11th Cir.1991); *674Equifax Services, Inc. v. Hitz, 905 F.2d 1355, 1361 (10th Cir.1990). See generally Mayer v. Gary Partners & Co., 29 F.3d 330 (7th Cir.1994), and cases cited there.
There is another issue, which the court avoids (through an improper means, as I shall point out), though the issue merits consideration because it comes up a lot and has divided the judges of the district court from which this case comes. Applied Micro, Inc. v. SJI Fulfillment, Inc., 941 F.Supp. 750, 755 (N.D.Ill.1996); Murry v. Sheahan, 991 F.Supp. 1052, 1054 n. 3 (N.D.Ill.1998). It is whether a federal court in a diversity case involving an issue to which the state supreme court has not spoken should consider itself bound by the decisional law of the intermediate state appellate court for the region in which the federal district court is located, even though other regional appellate courts of the state disagree, or instead should try to predict what the state supreme court would do if the conflict were brought before it for resolution. If the former approach is the right one, this might strengthen the case for Barton, who contends that the law of the Illinois Appellate Court for the Second Appellate District, the region in which this suit would have been maintained had it been brought in state court, is particularly hostile to covenants not to compete. I can't really see this; the second and fourth districts prefer what they call a “nature of the business” test, Lawrence & Allen, Inc. v. Cambridge Human Resource Group, Inc., supra, 226 Ill.Dec. 331, 685 N.E.2d at 443-44 (second district); Springfield Rare Coin Galleries, Inc. v. Mileham, supra, 189 Ill.Dec. 511, 620 N.E.2d at 488-89 (fourth), and the first prefers a seven-factor test, e.g., Audio Properties, Inc. v. Kovach, supra, 211 Ill.Dec. 651, 655 N.E.2d at 1037, but whether they differ substantively or are just different ways of making the same point (which I would prefer to see stated in terms of the protection of the employer’s trade secrets or of his investment in the employee’s human capital) is unclear, as implied by both the first and the third districts, which treat the tests as interchangeable. Midwest Television, Inc. v. Oloffson, 298 Ill.App.3d 548, 232 Ill.Dec. 783, 699 N.E.2d 230, 232-34 (1998) (third); Office Mates 5, North Shore, Inc. v. Hazen, supra, 175 Ill.Dec. 58, 599 N.E.2d at 1082-83 (Ill.App.1992) (first). This case is in any event too one-sided to make the difference in formulations outcome-determining, but the issue of whether the federal courts should be bound by the decisions of the intermediate state appellate court to which the case would have been appealed had it been litigated in a state trial court is a recurrent one and we might as well lay it to rest and put the contending district judges out of their misery. Rather than do that, or, alternatively, duck the issue as not necessary to decide in this case, my colleagues on this panel merely defer to the district judge’s choice between the rival tests of the validity, under Illinois law, of covenants not to compete. But we were told in Salve Regina College v. Russell, 499 U.S. 225, 111 S.Ct. 1217, 113 L.Ed.2d 190 (1991), that we are not to defer to district courts’ interpretations of state law.
The argument for the rule urged by Barton that the federal court should be bound by regional precedent is that forum shopping is minimized if the parties know that the law applicable on appeal will be the same whether the suit is litigated in federal court or in state court. Suppose that Barton were suable only in the Second District. If Outsource sued him in state court there, the decisional law of that district would control, while if it sued him in the federal district court, that law would not control if the federal court is not constrained to follow the Second District when there is an interdistrict conflict. This is a good point, but not a decisive one. For suppose that under the Illinois venue rules, see 735 ILCS 5/2-101 et seq., Outsource could sue Barton in state court in either district. Then under Barton’s view if Outsource wanted to be in the First Appellate District it would file suit in the federal district court in Chicago (that is, in *675the eastern division of the Northern District of Illinois), and if it wanted to be in the Second Appellate District it would file suit in DuPage County (in the western division). So there is forum-shopping potential either way.
The argument against Barton’s view is that if the case were litigated in state court, the loser, if he lost because of the regional appellate court’s position in the conflict between regional appellate courts, could ask the state supreme court to resolve the conflict in his favor, and so if the suit is litigated in federal court he should be allowed to ask the federal appellate court to stand in the state supreme court’s shoes and resolve the conflict. Stated differently, an intermediate state appellate court decision is likely to be rather shaky when it is in conflict with the decisions of its sister courts. But this point isn’t compelling either, since Illinois permits this court to certify a question to the Supreme Court of Illinois. ILCS S.Ct. R. 20(a); Todd v. Societe BIC, S.A., 9 F.3d 1216, 1221-22 (7th Cir.1993) (en banc). If a district court felt bound by an intermediate appellate decision that was in conflict with decisions from another appellate district, the losing party could appeal to this court and ask us to certify the issue to the Illinois supreme court, which presumably would be more likely to agree to take the case if there was indeed a conflict at the state intermediate appellate level.
In circumstances of such dubiety, we can do no better than to fall back on the familiar rule, clearly articulated in Commissioner v. Estate of Bosch, 387 U.S. 456, 465, 87 S.Ct. 1776, 18 L.Ed.2d 886 (1967), that decisions by intermediate state appellate courts are not authoritative in federal court. See also Charles Alan Wright, Law of Federal Courts § 58, p. 395 (5th ed.1994). The federal court is to imagine itself the state supreme court rather than an intermediate court of the state. Allen v. Transamerica Ins. Co., 128 F.3d 462, 466-67 (7th Cir.1997); Wood v. Allstate Ins. Co., 21 F.3d 741, 743-44 (7th Cir.1994); First National Bank v. Trans Terra Corp. Int'l, 142 F.3d 802, 806 (5th Cir.1998); 19 Charles Alan Wright, Arthur R. Miller & Edward H. Cooper, Federal Practice and Procedure § 4507, pp. 157-161 (2d ed.1996). We should adhere to that view, since, as I have shown, there is no compelling practical reason to depart from it merely because there is a conflict at the intermediate level.