PARTNERS TREATING EACH OTHER UNFAIRLY MAY LOSE IMPORTANT
PROTECTIONS OF THEIR PARTNERSHIP AGREEMENT
Imagine a partnership in which some of the partners, but not all, hold secret meetings and take secret votes in violation of the express terms of their partnership agreement. One partner is left out and objects to the actions as inappropriate under the firm's partnership agreement, and the objecting partner continues to participate and work for the partnership for a significant time.
Imagine, as well, that the objecting partner, having had enough, leaves the partnership to work on his or her own, but the partnership tries to get tough and insists upon enforcing a covenant not to compete that is contained in the partnership agreement. The covenant not to compete was designed originally to make sure that a departing partner did not leave and compete with the partnership by performing similar services for the partnership's clients or others. Would the partnership be able to enforce the covenant not to compete? Is the partnership agreement, which is a contract between the partners, enforceable even though some of the partners have violated its terms and operated the partnership contrary to the agreement?
In the case of Galesburg Clinic Assoc. v. West, 302 Ill.App.3d 1016 (3d Dist. 1999), the Illinois Appellate Court considered such circumstances and held that when the partnership materially breaches its partnership agreement, the non-breaching partner seeking to go off and practice, even though such practice may be in violation of a covenant not to compete in the partnership's agreement. The breach of the partnership agreement by the remaining partners had the effect of discharging the obligation of the non-breaching partner under the covenant not to compete.
The Court held, further, that continuing to work while protesting the other partners' actions, was not a waiver of the non-breaching partner's right to declare a breach of the partnership agreement, given both the complexity of the agreement and the other partners' breach, the nature of the practice (here, a medical practice), and the personal and professional ramifications of the non-breaching partners' departure from the partnership.
The Galesburg Clinic case is not an isolated opinion.
In a similar case, the Fourth District Appellate Court has held that material breaches of an employment agreement, including changes in pay, work assignments and equipment, rendered an employer's covenant not to compete unenforceable against a departing employee. Center for Sight of Central Illinois I.S.C. v. Deranian, 305 Ill.App.3d 909 (4th Dist. 1999).
The principal of these cases is simple: The courts are finding it difficult to justify holding one party to a harsh term of a contract, when the other party (or parties as the case may be) breaches the contract in a material way. Why should the breaching party be able to obtain the benefit of the contract if they have not performed their obligations under the contract?
Both of these cases send a strong message to employers seeking to enforce covenants not to compete, whether contained in an employment agreement, in a separate restrictive covenant, or in a partnership agreement or corporate shareholder agreement.
Activity restrictions should meet routine standards for enforceability of restrictive covenants. Moreover, employers should be aware that material violation of the agreements established between the parties can have the effect of releasing the employee/partner/shareholder of significant restrictions regarding competition, in the absence of good cause for the breach of the agreement.
These are factual issues, expensive to litigate and substantial in their effect, because other employees or persons affected by the covenants not to compete will be closely monitoring the employer's actions.
Copies of these cases are available upon request from Marc D. Sherman & Associates, P.C. Contact us at info@mshermanlawoffice.com or call Marc Sherman or Scott Sherman at 847-674-8756.
This article is intended to highlight areas of interest for our clients and others. It is not intended to be legal advice and it is not a substitute for advice and consultation with your lawyer.