Tuesday, October 14, 2014

A Fast-Food Non-Compete Clause

    What’s the confidential information about a fast-food restaurant franchise that justifies having all its employees sign a non-competition agreement?  Jimmy John’s Sandwich Shops is the restaurant chain—stores nationwide—and the lawsuit is  Brunner v. Jimmy John’s Enterprises, Inc., No. 1:14-cv-05509 (N.D. Ill., filed July 18, 2014).  Although the lawsuit leads with a collective action under the Fair Labor Standards Act, a recent Huffington Post report (followed by the New York Times) points to the plaintiffs’ additional effort to declare void and enjoin enforcement of a Jimmy John’s Employee Confidentiality and Non-Competition Agreement.  See First Am. Compl. ¶ 293. 

    According to that Agreement (¶ 1), under the standard franchise agreement between a franchisee and Jimmy John’s Franchise Inc. (JJF), “all employees” of the franchisee “having access to Confidential Information are required to execute” the Employee Confidentiality and Non-Competition Agreement.  The term “Confidential Information” is quite broadly defined (Agreement ¶ 2(a)).  The Agreement then provides in relevant part:

 Employee covenants and agrees that, during his or her employment with the Employer and for a period of two (2) years after . . . he or she will not have any direct or indirect interest in or perform services for (whether as an owner, partner, investor, director, officer, representative, manager, employee, principal, agent, advisor, or consultant) any business which derives more than ten percent (10%) of its revenue from selling submarine, hero-type, deli-style, pita and/or wrapped or rolled sandwiches and which is located within three (3) miles of either (1) ___________________ [insert address of employment], or (2) any such other JIMMY JOHN’S Sandwich Shop operated by JJF, one of its authorized franchisees,  or any of JJF’s affiliates.

Agreement ¶ 3 (emphasis added).  The Agreement (¶ 6) also gives the employer-franchisee and JJF the right to seek reimbursement for costs and attorney fees incurred to enforce the Agreement against the employee.

 In Brunner, the plaintiffs assert that the above-quoted non-compete clause effectively restricts an employee “from working in an area that is over 6,000 miles large, at innumerable types of business . . . in any capacity, for a period of two years in 44 different states and the District of Columbia.  (First Am. Compl. ¶ 185).  They also argue that the clause is overly broad, because it bans “any and all employment, association, ownership or consultation with any business that derives more than 10% of its revenue from selling a range of sandwiches, pita, wraps or rolls.” (First Am. Compl. ¶ 187).

 The Agreement says it is governed by Illinois law (Agreement ¶ 7).  In Illinois, an employee non-complete clause, to be enforceable, has to be “[1] no greater than is required for the protection of a legitimate business interest of the employer-promisee; (2) does not impose undue hardship on the employee-promisor, and (3) is not injurious to the public.”  Reliable Fire Equipment Co. v. Arredondo, 965 N.E.2d 393, 396 (Ill. 2011).  A “legitimate business interest” can be at stake when, for example, the employee acquires “confidential information through his employment.”  Id. at 403.

 So, what’s that confidential information that Jimmy John’s Franchise, Inc. and its employer-franchisees are trying to protect?  Is it really worth applying the non-compete clause’s time, subject matter, and geography restrictions to all former employees of a Jimmy John’s Sandwich Shop?  Was it reasonable to believe, both when drafted and today, that this non-compete clause would have been enforceable against any former Jimmy John’s Sandwich Shop employee?  It is still early days in the Brunner litigation, so stay tuned.


--Sachin Pandya


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Drat! Beat me to it Sachin. I was planning a post at Faculty Lounge on this exact issue.

Posted by: Brian Clarke | Oct 15, 2014 9:17:36 AM

I wonder if the noncompete is coupled with compulsory employee arbitration of workplace claims.

Posted by: Michael Duff | Oct 16, 2014 5:26:47 AM

You kind of wonder -- hope -- whether the overuse of such clauses might backfire. In other words, in the relatively few positions for which a noncompete might be viable for an employer, whether a judge might conclude that the wildly overinclusive use of them across all or most employees was a reason to strike them down. I once made this argument in the antitrust context (without much effect) but I don't recall any cases in the contract context raising it.

Posted by: CAS | Oct 17, 2014 2:28:21 AM

Between this and firing employees for truthfully publicizing its attendance policies (which have the effect of actively punishing employees for calling in sick), Jimmy John's is not exactly making a case for itself as employer of the year, is it.

This all raises the issue, however, of what to do about unconscionable employment contracts. Even if unenforceable, they have an in terrorem effect on employees who don't know their rights.

If I were a state legislator, I would advocate a law giving the Labor Commissioner (or state equivalent) power to bring an administrative complaint against employers who enter into unconscionable employment contracts, with automatic statutory damages of $5000 per unconscionable contract signed. And any employee who shows, as a defense to enforcement, that his employment contract is unconscionable should not only receive the same $5000 penalty, but attorneys' fees as well.

Posted by: Anon | Oct 20, 2014 8:13:59 PM

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