Breaking Down Non-Compete Provisions
Recent court decisions have had an impact on the enforcement of employee non-compete agreements.
The issue of the validity of non-compete provisions in employee contracts can arise in a variety of circumstances. An employer may desire to impose non-compete covenants when hiring a new employee. If that employee leaves to go work for a competitor, the employer may then seek to enforce those non-compete provisions. Additionally, an employer may desire to hire a new employee who is subject to a non-compete agreement with his or her former employer. In each of these circumstances, the employer should have a basic knowledge of the enforcement of non-compete agreements in the State of Illinois. As detailed below, some recent court decisions could have an impact on such enforcement.
Non-compete agreements with employees typically include several types of restrictions. First, non-compete provisions should at a minimum prohibit an employee from becoming employed by or holding any interest in a competitor. In addition, the restrictions should specify the prohibited employment activities, the time period of such restrictions, and the geographic area of such restrictions. Further, a more comprehensive non-compete agreement should include provisions which prohibit the employee from soliciting the employer’s customers or employees. Finally, the agreement should prohibit the employee from disclosing any of the employer’s confidential or trade secret information.
As some employers undoubtedly know from experience, non-compete agreements are generally disfavored by Illinois courts. Even if an employer and employee reach an arm’s length agreement, Illinois courts often find them to be unlawful as an unfair restraint on trade. In determining whether a non-compete agreement is valid and enforceable, Illinois courts have historically considered the following questions:
- Is the agreement supported by adequate consideration?
- Is it ancillary to a valid employment contract relationship?
- Does it protect a legitimate business interest?
- Does the agreement impose reasonable restrictions?
Length of Employment & the Bright Line Test
Two recent cases have addressed the first question. Specifically, these decisions analyze what constitutes adequate consideration to support non-compete agreements between an employer and an at-will employee. Since an at-will employee can generally be terminated by the employer at any time, with or without cause, Illinois courts have considered continued employment as consideration to potentially support non-compete agreements with at-will employees. Obviously, it would be unfair for an employer to hire an employee, have him or her sign a non-compete agreement, terminate the employment relationship shortly thereafter, and then enforce such non-compete agreement provisions against the terminated employee. To avoid this result, courts have often been required to determine what length of employment is adequate consideration for the enforcement of restrictive covenants.
In a recent case decided by the Illinois Appellate Court, First District (Chicago area), the court created a “bright line test” which requires an employee to have at least two years of continued employment to constitute adequate consideration to support non-compete provisions. Since the Illinois Supreme Court subsequently refused to hear this decision on appeal, this decision remains the law in the First District.
However, a federal court in Chicago soon thereafter rejected this two-year “bright line test” and upheld a finding of adequate consideration where an employee worked for his employer for only 15 months. Thus, there is currently conflicting authority on this issue, none of which is binding on the courts in central and southern Illinois. While it’s unclear whether the courts south of Chicago will adopt a two-year “bright line test”, employers must anticipate that possibility.
To avoid having restrictive covenants being invalidated for former at-will employees due to an insufficient length of employment, an employer may provide an employee with separate consideration, specifically provided to the employee when signing the non-compete agreement. To be adequate, the consideration must be something the employee would not otherwise be entitled to if he or she did not sign the agreement. A separate bonus or extra benefits may constitute adequate consideration, but forcing an employee to sign under the threat of being terminated, or not hired, will not.
Determining a Legitimate Business Interest
A second question that Illinois courts will consider is whether the non-compete provisions protect a legitimate business interest. This issue was addressed a few years ago in an appellate court decision arising out of McLean County. On appeal, the appellate court essentially disregarded this issue and held that an employer was under no obligation to prove that its restrictive covenants protected a legitimate business interest in order to enforce them against the employee. This created a split of opinion on this issue between appellate courts in Illinois.
The Illinois Supreme Court thereafter overturned that decision and confirmed that Illinois law does require an employer to prove a legitimate business interest to enforce a non-compete agreement. But in that same decision, the Supreme Court also held that a court must look at the totality of the facts and circumstances of each individual case to determine if there is a legitimate business interest being protected. This “totality of the circumstances” test has unfortunately created more uncertainty as to whether specific non-compete agreement provisions are enforceable.
Factors utilized in the past by Illinois courts to analyze legitimate business interests include whether a “near-permanent” relationship exists with the employer’s customers, the nature of the business (specialized versus commodity services or products), and the nature and scope of trade secrets or confidential information acquired by the employee during employment. But with this Supreme Court decision imposing a “totality of the circumstances” test, courts are no longer limited to analyzing these “traditional” factors; hence, uncertainty as to the enforcement of non-compete provisions has increased. At minimum, employers should make sure the restrictions included in any non-compete agreements are reasonably necessary to protect their claimed legitimate business interest, as well as being as narrowly tailored as possible to provide such protection.
To help reduce the uncertainty of enforcement, employers should seek counsel on non-compete agreements before they are drafted and signed, as opposed to waiting until an event triggers the employer’s desire to enforce them against a former employee. iBi
Michael A. Kraft is a partner in the firm Quinn, Johnston, Henderson, Pretorius & Cerulo. For more information, visit qjhp.com.