Outsource Int'l v. Barton's Staffing Solutions

Decision Date17 September 1999
Docket NumberNo. 98-2808,98-2808
Citation192 F.3d 662
Parties(7th Cir. 1999) Outsource International, Incorporated, Plaintiff-Appellee, v. George Barton and Barton's Staffing Solutions, Incorporated, Defendants-Appellants
CourtU.S. Court of Appeals — Seventh Circuit

Appeal from the United States District Court for the Northern District of Illinois, Eastern Division. No. 98 C 2972--James B. Zagel, Judge. [Copyrighted Material Omitted] Before Posner, Chief Judge, and Bauer, and Kanne, Circuit Judges.

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 evidentiary 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 injunctive 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, 599 N.E.2d 1072, 1079 (Ill. App. Ct. 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. Reinder 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, 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., 685 N.E.2d 434, 443 (Ill. App. Ct. 1997); Springfield Rare Coin Galleries, Inc. v. Mileham, 620 N.E.2d 479, 485, 488 (Ill. App. Ct. 1993); Office Mates 5, 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, 557 N.E.2d 357 (Ill. App. Ct. 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 ...

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