Court Upholds Broad No-Recruit Provision Barring Solicitation of “Any” Employee

A recent federal court decision is good news for Illinois companies looking to use a “no-recruit” agreement to prevent employees from soliciting co-workers to join a competitor.

Employees have challenged such no-recruit clauses as unenforceable if they prohibit the employee from soliciting “any” company employee rather than just employees he or she worked with. The court in Guaranteed Rate, Inc. v. Wilson[1] rejected this argument, holding that a restriction that covers any employee is not per se overly broad and unenforceable.

Defendant Solicits Co-Workers While Still Working For Plaintiff

Defendant worked for plaintiff Guaranteed Rate as a vice president of mortgage lending at one of the company’s branch offices in Oregon. The agreement Defendant signed when he began employment in January 2019 contained a no-recruit clause in which he agreed not to “hire, solicit, or encourage any Person employed by the Company … to end their employment ….” The agreement specified that Illinois law would govern.

According to the complaint, after working for Guaranteed Rate for just under two years, Defendant took a job with a competitor. In his resignation meeting, he told Guaranteed Rate he was taking four co-workers with him. Defendant asked for permission to take the co-workers, but Guaranteed Rate refused the request.

Although not absolutely clear from the court’s opinion, it appears Defendant headed the branch office for Guaranteed Rate and the co-workers reported to him. The complaint alleges that Defendant and the four others now work on the same team for the competitor.

Court Denies Motion to Dismiss, Finding No-Recruit Covering “Any” Employee Not Per Se Overbroad

In February 2020, Guaranteed Rate filed a complaint against Defendant in federal court in Chicago alleging two causes of action: (1) breach of the no-recruit provision and (2) breach of fiduciary duty.

Defendant moved to dismiss the complaint on the grounds it failed to state a claim under Illinois law. According to Defendant, the no-recruit provision in his employment agreement was unenforceable because it was overly broad and not supported by adequate consideration.

The court rejected both arguments. The fact that the no-recruit provision applied to “any” Guaranteed Rate employee – rather than just employees Defendant worked with – did not render it invalid as a matter of law. Instead, the court stated it would allow Guaranteed Rate to present evidence that the provision was not overly broad.

The court noted that a no-recruit provision does not have the same impact as an agreement not to solicit customers or compete, “both of which would create a significant barrier on trade.” As such, the court found that Illinois case law refusing to enforce no-solicit agreements that cover “all” customers was distinguishable.

The court likewise rejected Defendant’s argument that his employment agreement was not supported by adequate consideration in the form of continued employment since he worked for Guaranteed Rate for less than two years. In doing so, Judge Coleman joined other federal district court judges in Illinois in rejecting a bright-line requirement of a minimum of two-years’ continued employment as the minimum consideration for enforcement of a no-solicit restriction.

Finally, the court rejected Defendant’s argument that he did not have a fiduciary duty to Guaranteed Rate since he was not an officer or director. Employees – not just officers — have a duty of loyalty under Illinois law.

Federal Court Reaches Opposite Conclusion From Indiana Court

In a Blog post from earlier this year, we highlighted an Indiana Supreme Court decision reaching the opposite conclusion and refusing to enforce a virtually identical no-recruit provision because it covered all employees. Why the difference?

The Illinois federal court may have been influenced by the blatancy of the breach alleged. Defendant allegedly solicited his co-workers WHILE still working for Guaranteed Rate. The court may not have reached the same result if he had waited to contact the co-workers until after he resigned.

Despite Win, Still Important to Use the Narrowest Provision Possible

Many no-recruit provisions are worded like the ones in this case and the Indiana Supreme Court case – meaning they prohibit recruitment of “any” employee of the company, rather than just co-workers the employee worked with or supervised.

That might not matter in a small firm. But it is a meaningful distinction in a large company like Guaranteed Rate with offices throughout the country. What real basis does a company have for prohibiting a salesperson in Kansas from recruiting an IT specialist in Florida that she never interacted with?

As we noted in our Blog post on the Indiana case, “the lesson, of course, is to draft a reasonable clause.” Had Guaranteed Rate’s no-recruit provision covered only employees Defendant worked with or supervised, it might not have faced a motion to dismiss that could have ended its case.

[1] Case No. 20-cv-1663 9 (August 14, 2020).

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