Tuesday, March 31, 2009, 9:03 AM

Adult Showclub Claims “Near Permanent” Relationships with VIP Room Customers Are Exposed to Interference by Competing Former Employee

A pending case in Illinois is providing an interesting context for the analysis of the nature of customer relationships required to establish the protectable business interest necessary to support a non-compete agreement.

The Penthouse Club is an “adult showclub” in Sauget, Illinois. Penthouse filed suit on March 10, 2009 in federal court in the Southern District of Illinois seeking an injunction against its former Director, Michael McLean. Penthouse seeks to prohibit violation of his non-compete agreement and interference with the club’s customer relationships.

According to the complaint, the Penthouse Club operates a “VIP Room” that is open only to members who have to pay initiation and yearly membership fees. As the club’s director, Mr. McLean gained valuable inside knowledge about the VIP Room members, the names of the club’s entertainers and their working preferences, planned promotions, and the club’s specialized and unique training programs to increase business.

The lawsuit arose after Mr. McLean was fired from the club and went to work for a competing adult showclub. The Penthouse Club claimed that this violated his non-compete agreement, which prohibits Mr. McLean from working at an adult club within a 25-mile radius of the Penthouse Club.

The Penthouse Club has moved for a preliminary injunction. In arguing that it is likely to succeed on the merits of the case, Penthouse must show that the non-compete protects a legitimate business interest. That interest, according to Penthouse, is the “near permanent customer relationships with many of its members in its VIP Room.” In its motion, Penthouse contends that it “has spent a significant amount of money to build its clientele in the VIP Room.” Citing its “exclusive nature,” Penthouse claims that “finding and maintaining the clientele willing to become members and maintain his membership is difficult.” Because of his employment, Mr. McLean gained extensive knowledge about those members, and Penthouse believes that he will inevitably disclose that knowledge in his competing employment.

Under Illinois law, among the factors considered on the customer relationship issue are the time required to develop the customer relationships, the amount of money spent to do so, the employee’s personal contact and knowledge of those customers, and the length of the customer relationship.

The injunction motion is set to be heard next month. It will be interesting to watch how the court handles the argument about whether “near permanent relationships” with customers has been established. Given the current economy, there are doubtless many businesses in many industries that could make a similar argument premised upon the contention that finding customers who are “willing to become and remain” customers requires a significant investment of time and resources.

The case is IRC, LP v. McLean, Case No. 3:09-cv-00189, pending in the U.S. District Court, Southern District of Illinois.


Blogger robert said...

Interesting. If a customer list ever were to fit into the category of a trade secret, I would have to think this is the case.

May 4, 2009 at 2:06 PM  

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