Hamer Holding Group, Inc. v. Elmore
202 Ill. App. 3d 994, 560 N.E.2d 907 (1990)
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Rule of Law:
A restrictive covenant not to compete, executed as a condition precedent to the sale of a business, is ancillary to the sale of the business and is enforceable if reasonable in terms of time, geographical area, and scope, without requiring additional special circumstances. A customer list does not qualify as a trade secret under the Illinois Trade Secrets Act if the information contained therein can be readily duplicated from public sources without considerable time, effort, or expense.
Facts:
- In 1979, Stephen C. Elmore (Elmore) founded and was the sole owner of AMCO Realty and Management Company (AMCO), which managed condominium and homeowner associations.
- On March 15, 1984, Elmore, as president of AMCO, signed an 'Acquisition Agreement' to sell all of AMCO's assets, including customer lists and goodwill, to First Eagle Holding Company, Inc.
- The acquisition agreement explicitly stipulated that Elmore must execute an employment agreement, including a covenant not to compete, as a 'Condition Precedent' for the sale to close.
- On March 30, 1984, Elmore entered into an employment agreement with First United ICI, Inc. (an assignee of First Eagle Holding Co.), which contained a three-year covenant not to compete within a 75-mile radius of downtown Chicago, and confidentiality clauses.
- Elmore continued to manage condominium and homeowner associations for First United ICI, Inc. until he voluntarily terminated his employment on March 1, 1988.
- On October 31, 1988, First United ICI, Inc. sold its business and assets, including Elmore's employment agreement, to Studio 2, Inc. (which later became First United Property Management, Inc. or First United II).
- In November 1988, Elmore informed the president of First United II of his intent to start a competing real estate management business in an area covered by his covenant not to compete.
- In late November 1988, Elmore directly solicited Cress Creek Condominium Association, a client he personally managed both for AMCO and First United ICI, Inc., to take over its management, and Cress Creek accepted his proposal, terminating services with First United II.
Procedural Posture:
- First United Property Management, Inc. (First United II), along with its predecessors First Eagle Holding Company and First United ICI, Inc., filed a complaint in the circuit court (trial court) seeking a preliminary injunction and permanent injunctive relief to enforce Elmore's restrictive covenant and prevent misappropriation of trade secrets.
- The circuit court conducted a three-day evidentiary hearing on the motion for a preliminary injunction.
- During the hearing, Elmore moved to dismiss all plaintiffs for lack of standing, which the circuit court granted for First Eagle Holding Company and First United ICI, Inc., but denied for First United Property Management, Inc. (First United II).
- The circuit court found Elmore's restrictive covenant clear and reasonable in time and area but held it was not ancillary to the sale of Elmore's business, applying a stricter enforceability test.
- The circuit court also found the covenant unenforceable as ancillary to an employment agreement, ruling that First United II failed to establish near-permanent customer relationships or the existence of trade secrets (customer relationships were transitory, and the customer list was not a trade secret).
- On December 30, 1988, the circuit court denied First United Property Management, Inc.'s motion for a preliminary injunction.
- On January 6, 1989, First United Property Management, Inc. filed an interlocutory appeal to the Appellate Court of Illinois, First District.
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Issue:
1. Does a restrictive covenant not to compete, executed as a condition precedent to the sale of a business, qualify as ancillary to the sale of a business, thereby subject to a less restrictive enforceability test, even if the acquisition agreement assigns a disproportionately low value to goodwill and the employment agreement is executed separately? 2. Does a customer list, compiled from publicly available information with some additional effort, qualify as a trade secret under the Illinois Trade Secrets Act if it can be easily duplicated by others without considerable time, effort, or expense?
Opinions:
Majority - Justice Scariano
1. Yes, a restrictive covenant executed as a condition precedent to the sale of a business is ancillary to the sale of a business and subject to the less restrictive test for enforceability, regardless of the value assigned to goodwill or the timing of the employment agreement's execution, because the intent of the parties clearly linked the covenant to the sale's integrity. The court found that the acquisition agreement's requirement for Elmore's employment agreement as a 'Condition Precedent to Obligations of the Parties' demonstrated its supreme importance to the sale, ensuring the buyer received not just assets but also protection of the acquired goodwill. The court stated that generally, the adequacy of consideration for bargained-for assets would not be inquired into, especially given Elmore's business acumen. The trial court's finding that the 3-year, 75-mile restriction was reasonable in geographical area and duration was affirmed. However, the court remanded the case for the trial court to determine the specific nature and scope of the plaintiff's business at the time Elmore left, to assess the reasonableness of the restriction on Elmore's activity. 2. No, a customer list easily duplicable from public information does not qualify as a trade secret under the Illinois Trade Secrets Act, even if efforts are made to protect its confidentiality. The court, citing Service Centers of Chicago, Inc. v. Minogue, emphasized that the core focus of the Act is the 'secrecy of the information.' While First United II expended effort and money to 'distill' customer information from publicly available lists (from the Secretary of State) and add contact details (from public telephone directories), the court concluded that anyone could easily duplicate this process without considerable time, effort, or expense. The court clarified that the key to 'secrecy' under the Act is the ease with which information can be developed through other proper means; if easily duplicated, it is not secret. Therefore, the customer list did not meet the statutory definition of a trade secret, despite efforts to maintain its confidentiality.
Analysis:
This case significantly clarifies the distinction between restrictive covenants ancillary to the sale of a business and those ancillary to employment contracts, applying a less stringent enforceability standard when tied to a business sale, even if the consideration for goodwill seems low. It emphasizes the intent of the parties in structuring the transaction. Furthermore, the ruling sets a high bar for what constitutes a 'trade secret' under the Illinois Trade Secrets Act, specifically regarding customer lists, by prioritizing whether the information is genuinely not generally known and not easily ascertainable through legitimate means, rather than merely the effort expended in compilation. This impacts businesses seeking to protect client data, compelling them to ensure such data is truly proprietary and not just publicly derivable.
