Illinois and Missouri are among 45 states which have adopted the UTSA. Although certain provisions of the UTSA vary from state to state, all versions share three common elements: (1) the definition of a “trade secret”; (2) the type of the conduct that violates the Act; and (3) the general legal remedies available to a business which suffers harm as a result of the violation.

The UTSA defines “trade secret” broadly. Information need not approach the value of Coke’s secret formula to merit protection. Instead, the UTSA protects all information that satisfies two general criteria. First, the information must have competitive value because it is not generally known or readily ascertainable by third parties. Second, the owner of the information must use reasonable measures to keep it confidential.

The type of information the UTSA protects ranges from the mundane too the arcane. Examples include marketing plans (Bruswick Corp. v. Jones, 784 F.2d 271 (7th Cir. 1986)); customer lists (Stampede Tool Warehouse, Inc. v. May, 272 Ill. App. 3d 580 (3d Dist. 1995)); and profit data for construction projects (Brestron v. Warmann, 190 Ill. App. 3d 87 (3d Dist. 1989)). On the other hand, a customer list that can be compiled easily from public sources is not a trade secret. (Carbonic Fire Extinguishers, Inc.; 190 Ill. App. 3d 948 (1st Dist. 1989).

As these examples illustrate, virtually every business compiles and uses valuable information that may qualify for protection under the UTSA. But competitive value alone will not suffice; a business must also take reasonable measures to protect its confidential information. The necessary steps run the gamut from a locked file cabinet to sophisticated computer password protection. The greater the efforts to maintain confidentiality, the more likely the information will be regarded as a trade secret.

What procedures should your business employ? The answer depends on the nature of the business and the type of information. For instance, a verbal warning to newly-hired employees and a closed file drawer may be enough to protect the customer list of a “mom and pop” business. Elmer Miller, Inc. v. Landis, 253 Ill. App. 3d 129 (4th Dist. 1993). On the other hand, a larger, more sophisticated business must exercise greater precaution than a generic confidentiality statement in an employee manual. Gillis Associated Industries, Inc. v. Cari-All, Inc., 206 Ill. App. 3d 184 (1st Dist. 1990). And even the use of signed confidentiality agreements will not suffice where an employer routinely distributes confidential information to trainees before they sign the agreements. George May International, Inc. v. International Profit Association, 256 Ill. App. 3d 779 (1st Dist. 193).

The most prudent course of action is to require employees to sign confidentiality agreements, adopt common-sense policies for storage and retrieval of confidential information and, most important, follow those policies. A business which follows these guidelines will likely qualify for protection under the UTSA. And the UTSA offers significant protections: if a court finds that a trade secret has been misappropriated, it can prohibit disclosure, award damages—including punitive damages—and reimburse a successful litigant for legal costs, including attorney fees.

Misappropriation means any unauthorized use or disclosure. For instance, an employee who discloses confidential information in violation of a confidentiality agreement is guilty of misappropriation and will be subject to liability under the UTSA. Misappropriation may also occur even if there is no confidentiality agreement. Every employee owes his employer a general fiduciary duty of loyalty. An employee violates this duty—and is guilty of misappropriation under the UTSA—if removes or reveals confidential information without his employer’s authorization. RKI v. Grimes, R.K.I., Inc. v. Grimes, 177 F. Supp. 2d 876 (N.D. Ill. 2001).

Every business—large or small—should take advantage of the benefits and protections offered by the UTSA. The first step is to identify the information that gives you a competitive edge. The next step is to implement reasonable, common sense procedures to keep this information confidential. These simple steps will give a small business the level of legal protection for confidential information that the Coca Cola’s of the world enjoy.

If you have a question about trade secrets or any Business and Commercial Law topic, contact David Antognoli.

Until Sunbelt, the LBI Test served as the threshold test for enforcement of post-employment restrictions on an employee. If an employer failed the LBI Test, a former employee could ignore a post-employment “non-compete” contract. And passing the test is no mean task. The employer has to establish that restrictions on an employee’s post-employment activities further one of two, recognized business interests: (1) “near-permanent” customer or client relationships; and (2) protection of trade secrets or other confidential information. Steam Sales Corp. v. Summers, 405 Ill. App. 3d 42, 937 N.E.2d 715, 728-29 (2nd Dist. 2010). If the employer passes the LBI Test, the court will enforce a post-employment restraint that is reasonable in scope and duration. Id. Conversely, if the employer fails the LBI Test, the restriction likewise fails. Id.

Sunbelt surveys the LBI Test’s three decade long reign in the Illinois courts and concludes that it was all a big mistake. Id. at 915 N.E.2d 870. According to the Fourth District, “(1) the Supreme Court of Illinois has never embraced the ‘legitimate-business-interest’ test and (2) its application is inconsistent with the Supreme Court’s long history of analysis in restrictive covenant cases….” Id.

Putting aside its contribution to legal scholarship, Sunbelt has a significant practical benefit: it simplifies analysis by focusing solely on the scope and duration of the non-compete clause. “Where restrictive covenants are ancillary to valid contracts supported by adequate consideration and are reasonable in their terms as to time and territory, such covenants will be enforced by the courts and relief by injunction is customary and proper.” Id. at 870 (citation and internal quotes omitted). The LBI Test, which is multi-factored, complex and often difficult to apply, is irrelevant under Sunbelt.

The Appellate Court for the Second District rejects Sunbelt’s analysis. Reliable Fire Equipment Co. v. Arredondo, 940 N.E.2d 153, 164 (2d Dist. 2010). Arredondo questions both the judicial scholarship and the public policy implications of abandoning the LBI Test. Arredondo, like Sunbelt, undertakes reviews of the history and development of the LBI Test, but reads Supreme Court precedent differently than the Fourth District. Arredondo also questions the policy implications of Sunbelt. Citing the well-established judicial aversion to restraints of trade, Arredondo concludes that abrogating the LBI Test would stifle competition and unfairly limit employee mobility. The point is well-taken. Employees with jobs that have never been regarded as compatible with non-competition clauses — truck drivers or sales clerks, for instance — would be subject to boilerplate non-compete clauses were it not for the LBI Test.

Few lawyers in private practice have the time or inclination to evaluate the judicial scholarship of the conflicting Arredondo and Sunbelt decisions. Counsel representing employers, of course, will hail the Sunbelt case as a landmark decision. And, if nothing else, Sunbelt would simplify non-compete cases by eliminating the often complicated LBI Test. On the other hand, counsel representing employees will praise Arredondo for preserving job mobility and fostering competition. In the meantime, uncertainty will reign in this already complex practice area until the Supreme Court weighs in and resolves the conflict.

Have a question regarding your business or commercial law issues? Please contact us.

A charging order is a collection remedy with two unique features: (1) it applies only to a limited category of assets (i.e., LLC and partnership interests); and (2) it is the exclusive means to enforce a judgment against a debtor’s interest in an LLC or partnership. The remedy is designed to minimize disruption of an LLC’s business operations when a creditor of an individual member seeks to enforce a judgment against his LLC interest. A charging order gives the creditor the right to receive any distribution from the LLC that the debtor-member would otherwise be entitled to receive. However, the credit does not obtain the debtor-member’s voting rights or any other right to participate in management of the company.

A variety of practical issues detract from the efficacy of a charging order. Unless the LLC authorizes a distribution, the creditor receives nothing. And the creditor has no voice in the LLC’s decision whether to authorize a distribution. Although the court may order a foreclosure sale of interest subject to the charging order, bidders will be few and far between. Even after the creditor acquires the interest at foreclosure, he remains unable to participate in the LLC’s management and, therefore, may be at the mercy of management. Nonetheless, the charging order is the only method available to collect a judgment from a debtor-member’s LLC interest.

The LLC is rapidly becoming the business entity of choice among real estate developers and investors. Illinois first recognized this form of business entity in the mid-1980s. It gradually increased in popularity during the 1990s. Now our real estate clients now overwhelmingly favor the LLC over any other form of business entity. LLCs not only offer asset protection but also tremendous flexibility and avoid “double” income taxation associated with conventional business corporations.

A number of high-flying investors and developers who rode the real estate boom have crashed. Their creditors are struggling to find assets to satisfy tremendous liabilities. Since many of these debtors own membership interests in LLCs, their creditors must resort to the charging order remedy. As the demand for this remedy increases, it will emerge from obscurity. As resort to the charging order expands, a variety of unanswered legal issues will also emerge.

Some of these unanswered issues surfaced in the case described above, which involved multiple creditors competing for the same LLC interests. Creditor A used conventional collection methods and obtained a citation lien against the debtor’s LLC interest but never obtained a charging order. Creditor B obtained a charging order, but only after Creditor C had obtained a pre-judgment attachment. When Creditor C reduced its claim to judgment, it obtained a charging order, but its charging order came later than Creditor B’s. The trial court struggled with the tangled issue of priority for months, doubtless as a result of the striking lack of precedent in Illinois case law. Ultimately, the trial court ruled in favor of Creditor B. The Appellate Court has the case under advisement.

To discuss this or any legal issue related to Commercial Law or Real Estate Law, please contact the author, David Antognoli.