Lawyers Should Reevaluate Advice to Clients Regarding the Enforceability of Restrictive Covenants in Light of New Illinois Supreme Court Case

By: Joseph R. Marconi and Victor J. Pioli

Ever since the Fourth District Appellate Court’s opinion in Sunbelt Rentals, Inc. v. Ehlers, 394 Ill.App.3d 421, 915 N.E.2d 862 (4^th Dist. 2009), uncertainty has been pervasive regarding what factors a court should consider and what test(s) a court should apply in determining the enforceability of a restrictive covenant under Illinois law. On December 1, 2011, the Illinois Supreme Court rendered its opinion in Reliable Fire Equip. Co. v. Arredondo, 2011 Ill. LEXIS 1836 (Ill. Dec. 1, 2011) to lend some clarity to the issues.

For years, Illinois appellate courts employed a “legitimate business interest” test to determine whether restrictive covenants signed by employees are enforceable. Under the “legitimate business interest” test, a court would only enforce an employee non-compete agreement if the employer can demonstrate a “legitimate business interest” – defined by the Illinois appellate courts to exist where: (1) the employer’s customer relationships are near permanent; or (2) the former employee had access to confidential information through his employment. The court in Sunbelt Rentals rejected the “legitimate business interest” test as something “the Illinois Appellate Court appears to have created ‘out of whole clothe’” and held that a court should only evaluate time and territory restrictions in determining whether a restrictive covenant is reasonable and should be enforced.

In Arredondo, the Illinois Supreme Court overruled Sunbelt Rentals because it failed to consider an employer’s legitimate business interest in determining the enforceability of a covenant. The Supreme Court recounted its past decisions addressing the enforceability of restrictive covenants and ruled that a restrictive covenant will be deemed reasonable and enforced only if the covenant: (1) is no greater than is required for the protection of a legitimate business interest of the employer; (2) does not impose undue hardship on the employee; and (3) is not injurious to the public.

Most interesting in Arredondo, the Illinois Supreme Court was critical of past Illinois appellate court decisions beginning with Nationwide Adver. Serv. v. Kolar, 14 Ill.App.3d 522 (1973) that sought to reduce the circumstances under which a “legitimate business interest” will exist to a precise test or formula. The Supreme Court rejected such an approach, but stopped short of overruling all of the appellate court precedent set over the past 30 years. Instead, that precedent “remains intact, but only as nonconclusive examples of applying the promisee’s legitimate business interest, as a component of the three-prong rule of reason, and not as establishing inflexible rules beyond the general and established three-prong rule of reason.”

Going forward, a court considering the enforceability of a restrictive covenant must consider whether a legitimate business interest exists “based on the totality of the facts and circumstances of the individual case.” These circumstances include, but are not limited to, “the near permanence of customer relationships, the employee’s acquisition of confidential information through his employment, and time and place restrictions.” Most importantly, no one factor carries any more weight than any other, “but rather its importance will depend on the specific facts and circumstances of the individual case.”

Obviously, given the Supreme Court’s rejection of the often times rigid “tests” and “formulas” previously employed by the appellate courts in determining when a legitimate business interest will arise, lawyers should reconsider prior opinions provided to clients (employees and employers alike) regarding whether a given covenant is enforceable. The Supreme Court’s approach announced in Arredondo is very fact specific and each client’s individual circumstances need to be carefully considered in determining the enforceability of a covenant.

Does a statutory limitations period stated in calendar years end on the anniversary date or the day before the anniversary date? Two recent cases, one withdrawn and one with an Illinois Supreme Court Justice’s pointed dissent, indicate that the answer you have been counting on may be subject to challenge.

Lawyers understand that every right, no matter how important, can be summarily extinguished if papers are not timely filed. The statutory timeliness of many key filings (such as a complaint) is set forth in terms of calendar years— i.e., the filing must occur “within one/two/three/ten years” of a “triggering event” (such as an injury or a contract breach).  One important statutory deadline is the time within which to file a petition to vacate a judgment.  The applicable deadline is found at 735 ILCS 5/2-1401(c) (“Section 1401(c)”), “the petition must be filed not later than two (2) years after the entry of the order or judgment.”

Section 1401(c) identifies a clear triggering event—“entry of the order or judgment”—which is easily and unmistakably determinable. It also provides a clear time period within which to file—two years— a factor which is also easily and unmistakably determinable.  The only possible variable is when to start counting down the two years—either on the day of the triggering event, or the day after the triggering event. If one starts counting on the day of the triggering event, then filing on the (second) anniversary date is one day too late, and thus, untimely.  However, if one starts counting on the day after the triggering event, then filing on the second anniversary date is timely.

So, the question is, “Do you count the day of the triggering event or not?” Many attorneys act with the understanding that the counting begins on the day after the triggering event per the eponymously titled, “Statute on Statutes”, 5 ILCS 70/1.11:

The time within which any act provided by law is to be done shall be computed by excluding the first day and including the last, unless the last day is Saturday or Sunday or is a holiday as defined or fixed in any statute now or hereafter in force in this State, and then it shall also be excluded…

The answer appears straightforward. Recently, the First and Fifth Districts of the Illinois Appellate Court examined cases with the same timing facts and came to the same conclusion. Yet, an original but withdrawn opinion by the First District and the dissent of an Illinois Supreme Court justice indicate that the answer is not necessarily as straightforward as it might first appear.

In Parker v. Murdock, No. 101645, 2011 Ill. App. Lexis 1101 (1st Dist. 10/18/11), the First District Appellate Court addressed whether a petition to vacate a judgment was filed outside the two-year time frame allowed in section 2-1401(c). On October 13, 2004, plaintiff tenants obtained an ex parte default judgment against defendant landlord Murdock. On October 13, 2006, the two year anniversary of the judgment, Murdock filed a section 2-1401 petition to vacate the default judgment. The circuit court granted Murdock’s petition and vacated the judgment. Parker, 2011 Ill. App. Lexis 1101 at *3-4. Years later, plaintiffs filed a section 2-1401(f) motion[2] alleging that the vacating order was void because Murdock failed to file his petition within two years of the default judgment. Id., at *5. The circuit court denied plaintiffs’ section 2-1401(f) petition and plaintiffs appealed.

Initially, the First District, in a withdrawn decision, reversed. See Parker v. Murdock, 2011 Ill. App. Lexis 993 (1st Dist. 9/13/11). In that withdrawn decision, the appellate court did not mention the computation method stated in 5 ILCS 70/1.11. It instead relied on a vintage 1918 appellate court decision holding that the counting begins on the day of the triggering event. Id., at *11, citing Irving v. Irving, 209 Ill. App. 318, 320 (1st Dist. 1918):

This court has held that ‘in computing time by the calendar year, days are not counted, but the calendar is examined and the day numerically corresponding to that day in the following year is ascertained, and the calendar year expires on that day, less one.’

2011 Ill. App. Lexis 993 at *11 (emphasis added).

On October 18, 2011, the First District replaced the withdrawn decision, rejecting the rationale of the 1918 decision and adopting the computation method set forth in section 70/1.11. Thus, filing the petition on the two year anniversary date was timely. Parker, 2011 Ill. App. Lexis 1101 at *11-12.

Coincidentally, the Fifth District Appellate Court also confronted the issue of the timeliness of a section 2-1401. Price v. Philip Morris, Inc., No. 0089, 2011 Ill. App. Unpub. Lexis 186 (5th Dist. 2/24/11).[3] In Price, one affirmative defense was based on federal preemption, which the trial court rejected. Defendant filed a direct appeal to the Illinois Supreme Court. On December 15, 2005, the Illinois Supreme Court reversed and remanded with directions to dismiss the case based on the preemption defense. A little over a year later, on December 18, 2006, the trial court dismissed plaintiffs’ case.[4]

On December 15, 2008, the U.S. Supreme Court, in an unrelated case, issued an opinion that rejected essentially the same preemption defense that caused Price to be dismissed. On December 18, 2008, plaintiffs filed a section 2-1401 petition to vacate the trial court’s December 18, 2006 judgment. Defendant Philip Morris opposed the petition as untimely. However, Philip Morris’ argument did not rest on the rationale in Irving; rather, both Philip Morris and the Fifth District focused on identifying the appropriate “triggering event.” Philip Morris argued that it was the Illinois Supreme Court’s December 15, 2005 reversal and remand order, which was issued three years and three days before the filing of plaintiffs’ petition.

The trial court agreed with Philip Morris that the December 15, 2005 remand was the triggering event, not the trial court’s December 18, 2006 entry of judgment. Plaintiffs appealed. The Fifth District Appellate Court, also focusing on the triggering event rather than the manner of computing time, reversed, and held that the section 2-1401 petition was triggered by the trial court’s entry of judgment on remand and was therefore timely filed. Price, 2011 Ill. App. Unpub. Lexis 186 at *18. Because the petition was filed on the two-year anniversary of the trial court’s entry of judgment on remand, the ruling necessarily, though not explicitly, found that the counting of the two years begins on the day after the triggering event, as set forth in section 70/1.11.

With a $10.1 billion Sword of Damocles dangling above its head, Philip Morris sought leave to appeal to the Illinois Supreme Court. On September 30, 2011, over the dissent of Justice Garman, the Illinois Supreme Court denied defendant’s petition for leave to appeal. Thus, the appellate court’s conclusion that plaintiffs’ section 2-1401 petition filed on the anniversary date was timely stands by default. Price v. Philip Morris Inc., No. 112067, 2011 Ill. Lexis 1410 (9/28/11).

Without reference to section 70/1.11, Justice Garman noted in her dissent that section 70/1.10 (Statute on Statutes) defines the word “year” as a “calendar year unless otherwise expressed.” 5 ILCS 70/1.10. 2011 Ill. Lexis 1821 at *5. Justice Garman also noted that old case law, though not directly on point, also interpreted a “year” as expiring the day before the anniversary of the triggering event — contrary to section 70/1.11. 2011 Ill. Lexis 1821 at *5-6. Thus, Justice Garman would have accepted Philip Morris’ appeal to answer the question whether the count of the two years starts on the day of the triggering event or the day after. 2011 Ill. Lexis 1821 at *4-5.

However, the inconsistency between the Irving line of cases (and section 70/1.10) and the result reached in Parker and Price may be rationalized upon a close reading of the earlier case law. Those cases cited by Justice Garman present factual distinctions between limitation periods that are prohibitory and those that are not. In other words, a prohibitory time limit in which proscribed acts are precluded (i.e., a non-compete contract clause limited for a period of calendar years; or, the term of an office holder who cannot be replaced until the completion of his term) will count the day of the triggering event. Thus the prohibition (or the term of office) ends on the day before the anniversary date. Conversely, a time limit which requires that an act be done within the time frame (i.e., section 2-1401(c) or the filing of a complaint) will not count the day of the triggering event, and thus the time for performing the act extends to and including the anniversary date. See Seaman v. Poorman, 272 Ill. App. 264 (3^rd Dist. 1933). Whether this distinction will stand upon further review remains to be seen.

By itself, section 2-1401(c) does not identify which day is Day 1 for counting—that of the triggering event or the day after. As it stands now, the First District expressly applies section 1.11 to compute the time for filing a section 2-1401 petition, so that counting begins on the day after the triggering event and expires on the anniversary date. The Fifth District implicitly agrees with the First District. The Illinois Supreme Court also implicitly agrees with the First and Fifth Districts. At least one Illinois Supreme Court Justice is concerned enough with the issue that further review is likely.

The wise practitioner does not take any chances waiting until the anniversary date to file within a statutory deadline– despite section 1.11. The best practice is to file no later than the day before the anniversary date. That is one practice tip you can count on.

Effective September 1, 2011, the Illinois Supreme Court has amended Rule 1.15 of the Illinois Rules of Professional Conduct respecting the safekeeping of client funds deposited in trust accounts. As professional fiduciaries, attorneys have long been required to keep their clients’ funds separate from their own. Now, the Supreme Court has limited the options for accounts to hold client funds, imposed new record keeping requirements on attorneys, and now requires banks to notify the ARDC when client accounts are overdrawn.

Specifically, Rule 1.15(a) limits the type of accounts in which client funds can be deposited to two kinds. The first is an Interest on Lawyers Trust Account (IOLTA).  IOLTAs are pooled trust accounts that bear interest or dividends on nominal or short-term client funds—those funds advanced for costs or which belong in part to a client and “presently or potentially” to the lawyer.  The interest or dividends is paid to the Lawyers Trust Fund of Illinois (LTF) which donates the funds to organizations providing legal services to the poor.[2] An attorney or law firm can establish an IOLTA account by:

• Contacting an eligible financial institution (a list is available on the LTF website at http://www.ltf.org/eligibleinstitutions/eligiblebanks.html#eligible_banks);
• Identifying the account as a client trust account;
• Using the TIN of the LTF  (available on request from LTF);
• Downloading, completing and submitting the first page of the  Notice to Financial Institution/Notice of Enrollment Form (available on the LTF website) to the bank and the  second page and return it to the Lawyers Trust Fund.

The second option, non-IOLTA trust accounts, are to be used for the funds of a specific client or third party designated as the trust beneficiary. The account must bear interest for the benefit of the client and cannot be pooled with others’ money. Client funds “shall not be deposited in a non-interest bearing or non-dividend bearing account.” Ill. Rule of Prof. Conduct, 1.15(a).

Additionally, the amended rule now imposes substantial record keeping duties on the attorney. Records must be kept for seven years. These include maintaining:

• a receipt and disbursement journal for all accounts that identifies the date, source and description of each deposit and disbursement;
• contemporaneous ledgers for each account listing the source of all deposits, dates, descriptions and amounts charged or disbursed;
• copies of accountings to make available to beneficiaries “along with…portions of those clients’ files that are reasonably necessary for a complete understanding of the financial transactions pertaining to them”;
• all checkbook registers, check stubs, bank statements, records of deposit, and checks or other records of debits;
• all retainer and compensation agreements;
• all bills for legal services;
• reconciliation reports of all trust accounts on a quarterly basis;
• arrangements for retaining the records in the event of the closing, sale, dissolution or merger of a law practice.

Ill. Rule of Prof. Conduct 1.15(a)(1-8).

Finally, the amendments now require that the “eligible financial institution” holding an IOLTA or non-IOLTA trust account quickly report any overdraft, whether the instrument was honored or not, to the ARDC. Attorneys licensed in Illinois are deemed to consent to such disclosure and in order to be eligible, a bank must have a modified overdraft disclosure agreement with both the ARDC and the firm establishing the account.  Ill. Rule of Prof. Conduct 1.15(h)(1-4).  While such overdrafts rarely result in any attorney discipline, they are a sign of potential improprieties. This reporting requirement is an attempt to nip such improprieties in the bud.

For more information, the ARDC has a free online resource, the “Client Trust Account Handbook” available at http://www.iardc.org/toc_main.html. Additionally, the LTF’s helpful website is found at http://www.ltf.org/index.html.

Lawyers Are Increasingly The Targets Of Email/Fraudulent Check Schemes That May Easily Be Avoided Through Simple Measures

By: Joseph R. Marconi and Victor J. Pioli

The scenario is a familiar one by now for many lawyers.  There are variations, but it generally unfolds something like this:

• A lawyer receives an email from a new potential foreign client looking to collect an outstanding debt from a customer in the lawyer’s jurisdiction.

• The lawyer – always anxious for new business – agrees to represent the new client and collect the debt.

• Shortly thereafter, the client informs the lawyer that its customer has agreed to voluntarily pay the outstanding debt and that the customer will shortly be forwarding a check to the lawyer.  The client further asks that the lawyer deposit the check into his account and after confirming that the check has cleared wire the funds to the client after deducting the lawyer’s fees.

• Sure enough, a check soon arrives from the customer.  The lawyer deposits the check, waits for it to clear, and then wires the money to the client.

Sounds like a great way to build your practice, right?  Think again.  Invariably, lawyers who respond to these sorts of email solicitations and engage in the above described scenario are receiving calls from their banks informing them that the checks they deposited in their accounts are counterfeit and demanding immediate reimbursement from the lawyers.  And the banks are perfectly within their rights to do so!

The mistake most lawyers make is that they assume that once they hear from their bank that the deposited check has “cleared” and the funds are available there is no risk in wiring those funds.  This is simply not true.

The Expedited Funds Availability Act, 12 U.S.C. 4001, et seq., requires banks to disclose when deposited funds will be made available.  However, a bank’s making funds available is only provisional until the check is actually paid by the payor bank (i.e., final settlement).  UCC § 4-201 provides that prior to final settlement, the depositor’s bank merely acts as the customer’s agent for collection of the check and any advancement of funds by the depositor’s bank is provisional.  UCC § 4-214 further provides that if there is no final settlement (i.e., the payor bank does not pay the check), the depositor’s bank may charge back the sum of any provisional advancement of funds or demand a refund from the customer.

As applied to our illustration above, this means that the attorney who deposits the check and wires the funds to his “client” once the check clears may ultimately be liable to the bank for the amount of the fraudulent check.  The bank may either charge the lawyer’s account if sufficient funds are available in the lawyer’s account or demand a refund and pursue legal action against the lawyer for the amount of the check.

Lawyers can take some steps to avoid being victims of these fraudulent check schemes.  First, be extremely wary of taking on any representation from a foreign client who contacts you only via email.  As with any new client, a lawyer should investigate the client thoroughly.  This includes determining the actual existence of the client and the validity of its operations.  A diligent lawyer should call references for the client, check public records, and obtain supporting documentation of the alleged debt that it owed to the client.

Second, never assume that simply because a check has cleared and funds are available that a check has been paid by a payor bank.  Upon receiving a check from a suspicious client, a diligent lawyer should call the payor bank to verify the account and determine if the check is a forgery.  A lawyer should also not draw on deposited funds from a suspicious client until he or she receives confirmation from the bank that there has been a “final settlement” and the deposited check has actually been paid by the payor bank.

Finally, lawyers should be cognizant that any check they receive may ultimately be dishonored and they may be liable if they draw upon any provisional funds supplied by the depositor bank.  Prudent practice dictates that an attorney ensure that is “final settlement” on retainer checks from clients and settlement checks from opposing parties and attorneys before disbursing funds from those checks.

Defense counsel engaged by ISBA Mutual Insurance Company (ISBAMIC)[2] recently obtained a highly favorable interpretation of the repose provision contained within Illinois Code of Civil Procedure, §735 ILCS 5/13-214.3 (legal malpractice) on behalf of one of its insureds.  In Snyder v. Heidelberger, 2011 Ill. LEXIS 1097 (Ill. June 16, 2011), the Illinois Supreme Court reversed a Second District Appellate Court decision that had reinstated a plaintiff’s legal malpractice claim originally dismissed by the trial court, per the repose provision in that limitations statute.

Under §735 ILCS 5/13-214.3(b), a malpractice action “must be commenced within 2 years from the time the person bringing the action knew or reasonably should have known of the injury for which damages are sought.” However, section 214.3(c) provides an outside limit, or repose period, such that an action “may not be commenced in any event more than 6 years after the date on which the act or omission occurred.” In situations involving the representation of a decedent, Section 214.3(d) provides an alternative time frame, such that “When the injury caused by the act or omission does not occur until the death of the [client]…the action may be commenced within 2 years after the date of the person’s death.”[3]

Thus, in cases involving alleged malpractice in the drafting of documents meant to convey or dispose of the decedents’ estate, the application of Subsection (d) “turns on whether the injury occurred upon the death of the client.” Id. at *9.  If the injury occurred prior to the decedent’s death, Subsections (b) and (c) apply.  Enter Snyder.

In Snyder, plaintiff alleged that her decedent retained Defendant Attorney to draft conveyance documents granting plaintiff, decedent’s wife (“Plaintiff”), a joint tenancy with rights of survivorship in the couple’s residence. Defendant prepared and had recorded a quit claim deed to that effect in May 1997.  Unfortunately, the quit claim deed did not effectively create a joint tenancy because the decedent did not actually have title to the property. Rather, decedent merely possessed the beneficial interest in a land trust that was the real owner. In a separate amendment to the land trust executed even earlier, in June 1980, the decedent granted his son (Plaintiff’s stepson, hereinafter “Stepson”) ownership of its beneficial interest upon his death.

The decedent passed on December 26, 2007, over ten years after the defendant attorney’s work. In February 2008, the Stepson sued to evict Plaintiff and take possession of the residence as owner of the land trust’s beneficial interest. In January 2009, Stepson was granted possession of the residence instead of Plaintiff, whose conveyance as joint tenant with right of survivorship was deemed a nullity due to the errant conveyance.  Plaintiff then sued the attorney for malpractice and sought a constructive trust to hold the disputed property.

Defendant argued that Plaintiff’s injury occurred as of the time of the original conveyance pursuant to the invalid joint tenancy, more than ten years prior, thus triggering the 6 year repose limitation of Subsection (b). Plaintiff argued that she suffered a distinguishable injury (her dispossession) that did not occur until the decedent’s death, thus triggering application of the exception found in Subsection (d).

Plaintiff conceded, and a part of the Second District Appellate Court (in a divided opinion) agreed, that she had indeed first suffered an injury “when [Defendant Attorney] failed to presently transfer the initial interest in the property…and would be barred by the [6 year] statute of repose because the quitclaim deed was supposed to take effect at the time of its execution.” Snyder v. Heidelberger, 403 Ill. App. 3d 974, 979 (2^nd Dist. 2010), (reversed, 2011 Ill. Lexis 1097, supra). However, the majority of the Appellate Court agreed with Plaintiff that she suffered a second successive injury when she was dispossessed of the residence by the Stepson’s unlawful detainer action, and that her suit within two years of that judgment fell inside the exception found in Subsection (d), per Wackrow v. Niemi, 231 Ill. 2nd 418 (2008).   Id., at 979.

It is the concept of a “second successive injury” that the Illinois Supreme Court rejected.  The Court first distinguished Wackrow by noting that the erroneous conveyance was only meant to take effect after the decedent’s death, and that corrective measures could have been taken before plaintiff incurred any injury whatsoever. Conversely, in Snyder, “The right of survivorship is thus a present interest that is created by the conveyance of the property into joint tenancy. Accordingly, the failure of the deed drafted by [Attorney Defendant] here to create a joint tenancy in [decedent] and Plaintiff caused a present injury that occurred at the time the quitclaim deed was prepared.”
Snyder, 2011 Ill. Lexis at *11.

The Court undertook a statutory construction of Subsection (d) and found that the Illinois legislature’s reference to “the injury” meant that it did not intend for the limitations period to run on successive or multiple injuries. Id., at **12-14.  Having rejected the “successive injury” rationale, the Court concluded:

The period of repose in a legal malpractice case begins to run on the last date on which the attorney performs the work involved in the alleged negligence [citations omitted] Here, the record shows the last act of defendant’s representation of [decedent] in this matter took place on June 25, 1997, when defendant mailed the original recorded quitclaim deed to [decedent]. Thus, the statute of repose expired several years before Plaintiff filed her malpractice action.

Id., at *14.

Thus, neither the Plaintiff’s failure (reasonable or not) to learn of the injury, nor the fact that her actual injury manifested after the death of the decedent, served to trigger Subsection (d)’s exception to the 6 year repose period.

Attorneys routinely communicate with clients using email and assume that such communications are privileged.  Most prudent lawyers advise their individual clients to not use work email accounts when communicating with them in order to preserve the privileged nature of their communications.  But what if an individual client (employee) communicates with a lawyer using a personal web-based email account (e.g., yahoo, gmail, etc.) on a work computer?

What many clients (and lawyers) do not realize is that copies of nearly every web page they visit on their employer’s computer (including those pages containing their personal emails) are saved on a cache folder of temporary internet files that can later be retrieved.  Particularly in the context of employment litigation, employers routinely conduct forensic imaging and analysis of their former employees’ computers and are many times able to access email communications between their former employees and their attorneys.  The question has arisen: Are these email communications between an employee and his or her attorney on an employer-issued computer using a web-based account privileged?

The Supreme Court of New Jersey recently analyzed this issue in Stengart v. Loving Care Agency, Inc., 990 A.2d 650 (N.J. Sup. Ct. 2010) and concluded that such communications are privileged.  In Stengart, the plaintiff was a former employee who sued Loving Care for employment discrimination.  Prior to leaving Loving Care, the plaintiff accessed her web-based email account on yahoo.com using her company-issued computer and exchanged emails with her attorney.  After the plaintiff left Loving Care, the company hired an expert to create a forensic image of the computer’s hard drive (including temporary internet folders) and discovered the contents of seven or eight emails between the plaintiff and her lawyer.  The plaintiff filed a motion seeking the return of the emails that the trial court denied because it concluded that the attorney-client privilege was waived by sending the emails on a company computer.  The appellate division reversed that decision and the New Jersey Supreme Court affirmed the appellate division’s ruling.

The court in Stengart initially discounted Loving Care’s claim that their Electronic Communications Policy contained in their Employee Handbook prevented any claim or expectation of privacy regarding the plaintiff’s emails with her lawyer.  The court noted that the policy prohibited certain uses of “the email system” and did not address personal email accounts.  Nor did the policy warn employees that the contents of personal emails are stored on their computer’s hard drives and may be forensically retrieved by Loving Care.  The court thus concluded that the policy was ambiguous and not “entirely clear.”  The court also noted that the emails from the plaintiff’s attorney contained a standard warning that their contents are personal and confidential and may constitute attorney-client communications.  Based upon these facts and the facts that the plaintiff used a “personal, password-protected e-mail account instead of her company e-mail address and did not save the accounts password on her computer,” the plaintiff had a subjective expectation and an objectively reasonable expectation of privacy concerning her communications with her attorney.

Interestingly, although not presented in the case before it, the court went on to state later in its opinion that “even a more clearly written company manual—that is, a policy that banned all personal computer use and provided unambiguous notice that an employer could retrieve and read an employee’s attorney-client communications, if accessed on a personal, password-protected email account using the company’s computer system—would not be enforceable” given the important public policy concerns underlying the attorney-client privilege.  The court did state, however, that a company could still employ and enforce policies to discipline employees.  The court noted as an example that “an employee who spends long stretches of the workday getting personal, confidential legal advice from a private lawyer may be disciplined for violating a policy permitting only occasional personal use of the internet…but employers have no need or basis to read the specific contents of personal, privileged, attorney-client communications in order to enforce corporate policy.”

Of course, the court’s decision in Stengart is limited to communications between an employee and his or her attorney using a web-based email account.  As other courts have ruled, an employee who uses his or her company email account to communicate with his or her attorney almost certainly forfeits any claim to privilege concerning those communications.

For companies and attorneys who view arbitration as the solution to the costs and time expenditure of litigation, the Illinois Appellate Court puts you on notice that mandatory arbitration clauses are only effectual if the designated arbitrators agree to accept the matter when referred.  In other words, a party is not obligated to arbitrate a claim even if it is covered by the arbitration clause if the designated arbitrators are unable or unwilling to engage the matter.  Picking an unwilling or incapable arbitrator while failing to provide for the arbitrator’s unavailability can render the arbitration clause null and void.

In Quickclick Loans v. Russell, 2011 Ill. App. LEXIS 63 (1^st Dist. 2011) the Court found that Counter-Plaintiff Melody Russell (“Russell”) obtained a personal consumer loan from Quickclick Loans. After default, Quickclick filed suit. Russell counterclaimed, alleging a class action for violation of various statutes.

Quickclick, eager to foreclose any class-based action, gave Russell notice that it had selected AAA as the arbitrator and moved to compel arbitration, citing, inter alia, this clause in the loan agreement:

[t]he party requiring arbitration must choose . . . as the Administrator: American Arbitration Association (‘AAA’) or National Arbitration Forum (‘NAF’). . . If for any reason the chosen organization is unable or unwilling or ceases to serve as the Administrator, the party requiring arbitration will have 20 days to choose a different Administrator consistent with the requirements of this [Agreement].

However, a year later in 2009, the NAF ceased administering consumer arbitrations and obtained a consent judgment with the State of Minnesota to divest itself of the business of arbitrating consumer disputes.  Around that same time, the AAA posted on its website a moratorium notice on consumer debt collection arbitrations “when the company is the filing party and the consumer has not agreed to arbitrate at the time of the dispute…”

Russell asserted that the withdrawal of AAA from arbitrating the type of disputes at issue rendered performance under the arbitration clause impossible; that the clause cannot be re-written so as to include default provisions contained in the Federal Arbitration Act (“FAA”); and, that Quickclick’s selection of AAA constituted a waiver of its ability to select any other arbitrating person or entity.

Consequently, the trial court denied Quickclick’s motion to compel arbitration and the Appellate Court affirmed. The Appellate Court agreed that the subject claims were covered by the arbitration clause. However, it found that the clear, unambiguous language of the Agreement allowed only the NAF or the AAA to administer the claim; and, that neither of them was able to arbitrate the claim.

The Appellate Court next found that the AAA moratorium applied to the claims because Quickclick was the filing party for both the arbitration and the initial claim—that is, a company filing a claim against a consumer who does not agree to arbitrate at the time of the dispute.  In other words, non-party AAA’s self-established limits on arbitration, regardless of the terms of the Agreement and intent of the parties, trumped Russell’s obligation to submit her claims to arbitration that she made at the time of contracting. In doing so, the Appellate Court relied on Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth, Inc., 473 U.S. 614, 628 (1985), to the effect that, “legal constraints external to the parties’ agreement foreclosed the arbitration of those claims.” [emphasis added]

Second, the court stated that although § 5 of the FAA allowed a substitute arbitrator to be appointed where there is a “lapse in the naming of an arbitrator”, § 5 will apply where a party’s arbitral forum fails, “unless the designation of the arbitral forum is integral to the parties’ agreement to arbitrate.”  Carr v. Gateway, Inc., 2011 Ill. LEXIS 424, at *4 (Ill. Feb. 3, 2011). Applying the “must choose” language in the Agreement, the Court interpreted the designation of the NAF or the AAA as an integral part of the agreement and, thus, § 5 could not apply.

Therefore, because neither of the required organizations under the agreement was able to arbitrate the dispute, external events to the parties agreement foreclosed the arbitration of the parties’ claims and the circuit court could not enforce the arbitration agreement.

In 1995, Illinois was one of the first states out of the starting gate to recognize the impending flood of electronic data discovery (“e-discovery”), by amending Illinois Supreme Court Rules 201 and 214 to acknowledge “electronically stored” materials. However, in the intervening decade and a half, virtually nothing further has been codified in this area and the Illinois appellate courts have little guidance on many difficult issues.  This article summarizes the state of existing state rules and holdings..

Much of the development of e-discovery rules has occurred on the federal level, including the Northern District Court of Illinois that initiated an “Electronic Discovery Pilot Program” and recently concluded “Phase One.”  The Program established a set of guiding principles for managing e-discovery and presented a (proposed) Standing Order Relating To The Discovery of Electronically Stored Information.  This initiative, Chaired by  Chief Judge James Holderman, should facilitate more efficient e-discovery and forestall a lot of expensive and time consuming motion practice regarding this process.

However, at the state level, Illinois lags behind in developing either a statutory or common law body of rules specific to issues that arise in e-discovery. These issues include:

• Exchanging e-data in “native format”;
• Using independent IT experts to assist with discovery plans and requests;
• Resolving inadvertent disclosures of confidential materials (both from a professional conduct and litigation rule aspect);
• Allocating costs of e-document productions and reviews between parties;
• Employing special masters to specially handle e-discovery disputes;
• Authenticating e-documents for use as evidence;
• Clarifying the duty to preserve e-documents both before and after the prospect of litigation or receipt of a “litigation hold” notice;
• Establishing “safe harbors” for companies which innocently destroy e-documents as part of a regular document management program;
• Determining the discoverability of “deleted” e-documents, “meta-data”, and e-documents not readily retrievable or searchable (i.e. disaster recovery tapes).

Yet, a review of Illinois case law, court rules and statutes shows only the barest guidance for e-discovery.  Even the recently activated (as of the first of this year) Illinois Rules of Evidence contains no treatment whatsoever of authenticity, hearsay, or other rules affecting the admissibility of electronic records.

That body of rules, as best as we can determine, is set forth below:

SCOPE

Ill. Sup. Ct., R 201 (b) Scope of Discovery.

(1) Full Disclosure Required. Except as provided in these rules, a party may obtain by discovery full disclosure regarding any matter relevant to the subject matter involved in the pending action, whether it relates to the claim or defense of the party seeking disclosure or of any other party, including the existence, description, nature, custody, condition, and location of any documents or tangible things, and the identity and location of persons having knowledge of relevant facts. The word “documents,” as used in these rules, includes, but is not limited to, papers, photographs, films, recordings, memoranda, books, records, accounts, communications and all retrievable information in computer storage.

Rule 214.  Discovery of Documents, Objects, and Tangible Things; Inspection of Real Estate

Any party may by written request direct any other party to produce for inspection, copying, reproduction, photographing, testing or sampling specified documents…A party served with the written request shall (1) produce the requested documents as they are kept in the usual course of business or organized and labeled to correspond with the categories in the request, and all retrievable information in computer storage in printed form…

The first paragraph of Rule 214 was amended in 1995 to require a producing party to provide all computer-stored responsive information in printed form. According to the Committee Comments, this change was intended to prevent parties from “producing information from computer storage on storage disks or in any other manner which tends to frustrate the party requesting discovery from being able to access the information produced.” Committee Comments, S.Ct. Rule 214 (June 1, 1995).

COST/PROPORTIONALITY

As of yet, there is a dearth of appellate decisions in Illinois evaluating the proper scope and breadth of e-discovery requests in civil discovery. The most extensive discussion of cost shifting or sharing with requests for “computer tapes” has been in the highly limited and statute-based cost provisions of the Illinois Freedom of Information Act.  American Federation of State, County & Municipal Employees (AFSCME) v. County of Cook, 136 Ill. 2d 334, 341; 555 N.E.2d 361, 363 (Ill. 1990).

In the only case involving allegedly oppressive e-discovery requests, the Illinois Appellate Court merely reaffirmed, with little guidance, that it is an abuse of discretion to sanction a party for failing to comply with an “oppressive” e-discovery request. Leeson v. State Farm Mutual Automobile Insurance Co., 190 Ill.App.3d 359, 546 N.E.2d 782 (1st Dist. 1989 (“When an electronic discovery request is found oppressive in nature, courts have decided against sanctioning the producing party for noncompliance.”).

INADVERTENT DISCLOSURES

ETHICS:

“Generally, inadvertent disclosure of confidential metadata [hidden electronic data contained within electronic documents] can be viewed ethically and legally in the same manner as any other inadvertently disclosed confidential information…” Joseph R. Marconi, Electronic Discovery: Dealing with Disclosure of Metadata, 97 Ill. Bar J 25, (2009). In Illinois, if inadvertently disclosed confidential information is received,  the receiving attorney must notify opposing counsel, but no automatic duty to return; if disclosed, the sending attorney must notify client. Illinois Ethics Opinion 98-04 (1999).

WAIVER:

Illinois, though not completely settled, tends toward the “balancing test” that looks to five factors to determine if waiver has occurred: 1) the reasonableness of the precautions taken to protect the document; 2) the time taken to rectify the error; 3) the scope of discovery; 4) the extent of the disclosure; and 5) the overriding issue of fairness. Urban Outfitters, Inc. v. DPIC Cos., 203 F.R.D. 376, 380 (N.D. Ill. 2001) [citing Illinois law].

Consequently, the key to protecting privileged information from inadvertent disclosure is establishing a systematized procedure that not only includes an ongoing familiarization with a client’s electronic files and the software that manages it, but also in drafting appropriate protective orders which limit the scope of production and provide for a “claw back” of such information. “[T]he resulting anxiety and impact can be substantially limited through the routine employment of technically savvy electronic review and a protective order which anticipates and addresses the virtual inevitability of inadvertent disclosures.”  Joseph R. Marconi, Electronic Discovery: Dealing with Disclosure of Metadata, 97 Ill. Bar J 49, (2009).

SANCTIONS FOR SPOLIATION

Illinois S.Ct. Rule 219 provides additional relief for the complaining party. These include

1.   barring witnesses; 2. monetary fines and interest; and 3. any other “appropriate sanctions” as determined by the court.

In Liebert Corp. v. Mazur, 357 Ill. App. 3d 265; 827 N.E.2d 909 (1st Dist. 2005), a party was subjected to an appropriate sanction in terms of requiring the fact finder to make negative inferences regarding the content of e-documents that were destroyed through “bad faith” spoliation. “We can infer from Mazur’s spoliation of the evidence on the laptop that he destroyed evidence of misappropriation…Where a party has deliberately destroyed evidence, a trial court will indulge  all reasonable presumptions against the party.” Id. at 286.

COST SHIFTING

There is no existing Illinois state case law or statutory basis for shifting the cost of discovery. However, Illinois Supreme Court Rule 201(c) states:

(c) Prevention of Abuse.

(1) Protective Orders. The court may at any time on its own initiative, or on motion of any party or witness, make a protective order as justice requires, denying, limiting, conditioning, or regulating discovery to prevent unreasonable annoyance, expense, embarrassment, disadvantage, or oppression.
(2) Supervision of Discovery. Upon the motion of any party or witness, on notice to all parties, or on its own initiative without notice, the court may supervise all or any part of any discovery procedure.

AUTHENTICATION

E-discovery also raises evidentiary issues such as the authentication of e-documents. Illinois, unlike other states, has not enacted civil procedure rules allowing the fact that a party produced a document in discovery to establish its authenticity (such as Tex. R. Civ. 193.7) or have otherwise adopted the position that production of a document can establish its authenticity. “In the absence of any argument citing such authority, we will not create the rule validating authentication by production in Illinois.”  Complete Conf. Coordinators, Inc. v. Kumon North Am., Inc., 394 Ill. App. 3d 105, 109 (2d Dist. 2009). Thus, along with planning the scope of e-discovery, parties must contemporaneously establish a means of authentication, either by requests to admit, interrogatories or the testimony of people knowledgeable about how such records are created, stored and maintained.

Hearsay exclusions are also an issue when the material presented is information stored in, as opposed to being created by, the computer itself. Illinois courts have recognized a distinction between computer-generated and computer-stored records. Records directly generated by a computer generally are admissible as representing the tangible result of the computer’s internal operations…In contrast, printouts of computer-stored records constitute statements placed into the computer by out-of-court declarants and cannot be tested by cross-examination and, therefore, are inadmissible absent an exception to the hearsay rule. Anderson v. Alberto-Culver USA, Inc., 337 Ill. App. 3d 643, 667 (Ill. App. Ct. 1st Dist. 2003)

CONCLUSION

Court or legislative guidance on these issues would be immensely valuable to attorneys dealing with e-discovery—in other words, virtually every litigator in Illinois and in-house or corporate counsel of companies subject to our jurisdiction.  Such rules would be major factors in conceiving litigation budgets and discovery plans, as well as document requests and responses. Likewise, such guidance will assist attorneys and courts handling motions to compel, privilege issues, and cost sharing.  Ambiguity in the rules of the game means time, and lots of it; and in law,  as we are all painfully aware, time is money.

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Can A Law Firm’s Use Of A Website To Solicit Clients And Locate Witnesses Subject It To Claims Of Defamation?

By: Joseph R. Marconi and Victor J. Pioli

Lawyers should always exercise caution regarding the factual assertions they make including those made on their websites.  The use of websites by lawyers has grown exponentially in recent years.  Many law firms maintain websites that advertise their services.  Law firms also use websites as a litigation tool.  Websites provide a boundless repository of information for clients and prospective clients.  They also provide a convenient means to locate and reach out to potential witnesses and gather information.  But could a law firm’s use of a website for such purposes potentially subject it to a claim for defamation?

For example, if a lawyer announces on a website that it is investigating a “defectively manufactured” product and looking for potential clients and witnesses with information about the product, could the law firm be sued for defamation by the manufacturer of the product for falsely labeling it “defective?”  According to the Tennessee Supreme Court, the answer is no.

In Simpson Strong-Tie Co., Inc. v. Stewart, Estes & Donnell, 232 S.W.3d 18 (Tenn. 2007), the court held that the absolute litigation privilege under Restatements (Second) of Torts § 586 will shield a lawyer from liability under such circumstances.  Section 586 provides that “an attorney at law is absolutely privileged to publish defamatory matter concerning another in communications preliminary to a proposed judicial proceeding, or in the institution of, or during the course and as part of, a judicial proceeding in which he participates as counsel, if it has some relation to the proceeding.”

The plaintiff manufacturer in Simpson tried to argue that § 586 should not protect the website communications at issue because they would be seen by persons not having a potential claim against the manufacturer and the law firm was not free to “indiscriminately circulate them to the entire world.”  The court – while not unsympathetic to the manufacturer’s argument – ultimately rejected it.  The court reasoned that “in some situations, attorneys may have no practical means of discerning in advance whether the recipients of the communication have an interest in the proposed proceeding.  In that event, the attorney can only communicate with those having the ability and desire to join the proposed litigation by publishing the statement to a wider audience, which may include unconnected individuals.”

No Illinois appellate court has been presented with the issue addressed by the court in Simpson – i.e., whether § 586 will protect a law firm’s dissemination of information over a website to locate potential clients and witnesses.  However, Illinois cases have found that the absolute privilege under § 586 protects an attorney’s efforts to gather information and conduct informal discovery not involving a website.  For example, in Potts v. Hilco Trading Co., Inc., 1997 U.S. Dist. LEXIS 16037 (N.D. Ill. 1997), the court found that the absolute privilege under § 586 applied to protect a letter sent by plaintiff’s counsel to ten former employees of defendant in an effort to investigate plaintiff’s claims.  Similarly, in Cahill-Tyron v. Sweeney, 1988 U.S. Dist. LEXIS 4799 (N.D. Ill. 1988), the court held the absolute privilege under § 586 protected letters sent by plaintiff’s counsel to defendant’s clients seeking information and enclosing a copy of the complaint.

Nevertheless, the issue has not been definitively decided under Illinois law and some authority suggests that the absolute litigation privilege under § 586 covers only “out-of-court communications between opposing counsel, attorneys and their clients, and between attorneys representing different plaintiffs in lawsuits against the same defendant” and Illinois “has never extended the privilege to cover out-of-court communications to other persons.”  Kurczaba v. Pollock, 318 Ill.App.3d 686, 704, 742 N.E.2d 425, 440 (1st Dist. 2000).  Of course, Kurczaba was decided before law firms’ uses of websites became as prevalent as they are today and the issue of the use of a website was never presented before the court in Kurczaba.

Lawyers should nonetheless exercise caution regarding what information they post on their websites in their efforts to locate clients and witnesses.  Until the issue is definitively decided by an Illinois appellate court, the application of the absolute privilege under § 586 remains an open issue and no law firm can be guaranteed protection from potential defamation claims based on their website postings.

Lawyers Risk Engaging In The Unauthorized Practice Of Law Through Their Multijurisdictional Practices

By: Joseph R. Marconi and Victor J. Pioli

The realities of a modern practice dictate that a lawyer will almost necessarily travel to states and jurisdictions in which he/she is not licensed.  Most lawyers do so without ever thinking that their conduct may be in violation of ethics rules and regulations.  The reality is that lawyers risk engaging in the unauthorized practice of law when they meet with clients, draft contracts, and participate in alternative dispute resolution procedures in foreign jurisdictions.

Virtually every state has an “unauthorized practice of law” statute that prohibits unlicensed attorneys from practicing law in the state.  In Illinois, the Attorney Act provides that “no person shall be permitted to practice as an attorney or counselor at law within this State without having previously obtained a license for that purpose from the Supreme Court of this State.”  705 ILCS 205/1.

The central inquiry in determining whether an attorney has engaged in the unauthorized practice of law is what constitutes “practicing law.”  In Lozoff v. Shore Heights, Ltd., 35 Ill.App.3d 697, 700, 342 N.E.2d 475, 478 (2nd Dist. 1976), the court noted that “the practice of law [in Illinois] is not limited to court appearances…but includes the giving of advice or the rendition of any service requiring the use of any degree of legal knowledge or skill.”

There is no uniform definition of what constitutes the “unauthorized practice of law.”  The answer to the question may vary widely between jurisdictions.  For example, courts from Illinois and California have reached directly opposite conclusions on the question of whether an out-of-state attorney may participate in an in-state arbitration proceeding without engaging in the unauthorized practice of law.

In Birbrower, Montalbano, Condon & Frank, P.C. v. Superior Court, 949 P.2d 1 (Ca. 1998), the California Supreme Court ruled that a New York law firm could not recover over $1 million in fees for its representation of a California corporation related to a dispute and arbitration proceeding in California because the New York law firm had engaged in the unauthorized practice of law in California.  The court reasoned that the firm’s activities in traveling to California to discuss the matter with the client, negotiating a settlement, and initiating arbitration proceedings in California constituted unauthorized law practice in California.

Interestingly, the Birbrower court also noted that the unauthorized practice of law “does not necessarily depend on or require the unlicensed lawyer’s physical presence in the state.”  Thus, advising a California client on California law by “telephone, fax, computer, or other modern technological means” may subject a lawyer to a claim for the unauthorized practice of law.  It should also be noted that since Birbrower was decided, California has enacted a specific procedure for out-of-state attorneys to represent clients in California arbitrations.  See Cal. Civ. Proc. Code § 1282.4.

The First District Appellate Court of Illinois reached a different conclusion than the Birbrower court in Colmar, Ltd. v. Fremantlemedia North America, Inc., 344 Ill.App.3d 977, 801 N.E.2d 1017 (1st Dist. 2003).  In Colmar, the plaintiff sought to invalidate an arbitration award because the defendant was represented by an out-of-state attorney at the arbitration.  The plaintiff maintained that the arbitration award was void ab initio because the defendant’s attorney had engaged in the unauthorized practice of law in Illinois.

The court in Colmar initially noted that had the matter been litigated in court the defendant’s attorney would have applied for and received pro hac vice admission, but that there was no corresponding pro hac vice admission procedure for arbitrations.  Relying upon the Restatement and the ABA’s Model Rule 5.5, the Colmar court concluded that “an out-of-state attorney’s representation of a client during arbitration does not violate the rules prohibiting the unauthorized practice of law.”  The Colmar court noted that the facts that the attorney’s activities related to the attorney’s “regular representation” of his client out-of-state and that the attorney’s representation “involved issues that were not specific to Illinois law” were factors that weighed in favor of its decision.

As the Birbrower and Colmar cases demonstrate, the definition of what activities constitute the unauthorized practice of law may vary widely among jurisdictions.  Prudent lawyers should undertake to investigate the relevant case law defining the “practice of law” in a jurisdiction before undertaking to represent a client, draft contracts, or advise a client regarding the law of a foreign jurisdiction.  Consulting with and retaining local counsel in a foreign jurisdiction early in a representation is also a sure way to prevent engaging in the unauthorized practice of law.  Engaging local counsel also has the added benefit of ensuring that you will be properly advised regarding relevant procedural and substantive laws of the foreign jurisdiction including issues related to statutes of limitations and filing deadlines.