Non-Compete Agreements Explained
This is the first in our 3-article series on restrictive covenants. Read our second article on Non-Solicits here, and read our third article on Non-Disclosures here.
If you are an employer, you have probably asked your employees to sign an agreement containing a non-compete clause.
If you are an employee, you have likely signed an agreement containing a non-compete clause.
However, just because someone signed a Non-Competition clause doesn’t mean the non-compete provision is enforceable. Non-Compete agreements must meet certain legal requirements to be binding.
Is My Non-Compete Provision Enforceable?
The law generally disfavors restrictions on commerce. Covenants not to compete (or “Non-Competes” for short) are restrictions on commerce. Therefore, courts carefully scrutinize Non-Competes to ensure they meet particular requirements and limitations. Specifically, Non-Competes must (1) be ancillary to a valid contract, (2) be supported by adequate consideration, (3) serve a legitimate business interest, (4) be limited in time and geographical scope, and (5) only restrict those activities that an individual performed while employed. Absent one of these requirements, a non-compete agreement or provision may be unenforceable.
1. Ancillary to a Valid Contract
First, a Non-Compete must be ancillary to a valid contract such as a written or oral employment agreement. While a Non-Compete does not necessarily have to be included in an employment agreement and can instead be executed sometime after employment commences, the timing and language of an after-the-fact Non-Compete will dictate whether it is “ancillary” to a valid contract.
Under Illinois law, sufficient consideration for a Non-Compete may take the form of (i) additional pay, (ii) special benefits, or (iii) continued employment for a substantial period of time.
Typically, the additional pay or special benefits must be in addition to what the employee would have received for his or her employment. Some courts apply a bright-line rule; others consider factors such as the circumstances surrounding the employee’s signing of the covenant, the conditions of the continued employment, and the termination of the employment relationship.
3. Legitimate Business Interest
A Non-Compete must also serve a legitimate business interest. Illinois generally recognizes that employers often have a legitimate business interest in protecting confidential information and trade secrets, its employees, and its customers.
Generally, in Illinois, such confidential information does not include the skills acquired by the ex-employee. Still, it does protect against the use and disclosure of particularized information disclosed to the employee during the employer-employee relationship. This information is typically unknown to others in the industry and gives the employer advantage over its competitors. Common examples of this protected information are customer lists, sensitive client information, and company processes.
“Confidential information” includes, but is not limited to, trade secrets.
In Illinois, an employer may have a protectable interest in existing customer relationships, but such relationships generally must be “near-permanent customer relationships.” To determine if such a relationship exists, courts normally consider factors such as (i) the length of time required to develop the clientele; (ii) the amount of money invested to acquire clients; (iii) the degree of difficulty in acquiring clients; (iv) the extent of personal customer contact by the employee; (v) the extent of the employer’s knowledge of its clients; (vi) the duration of the customer’s association with the employer; and (vii) the continuity of the employer-customer relationships.
Notably, there are several requirements and exceptions to each of these potential protectable interests, and so it is best to consult an attorney when reviewing a Non-Compete.
4. Limited Time and Geographic Scope
A Non-Compete must also be limited in both time and geographic scope. Specifically, a Non-Complete can only restrict an ex-employee from competing with his or her employer for a limited length of time and only in the areas in which the employer operates. For example, an employer may be able to bar an employee from competing with its business for one year in the cities of Chicago, L.A., and New York—but usually only if the business operates in Chicago, L.A., and New York. On the other hand, a business probably could not restrict an ex-employee or ex-partner from competing in London if it has no international presence. It is best to consult an attorney because there is no per se rule regarding either geography or duration.
5. Limited Activities
Finally, a Non-Complete cannot absolutely restrain an individual from working for a competitive business. That is, a Non-Compete must be limited to the kinds of activities the employee performed while working for his employer. For example, a business that sells software typically cannot stop its sales manager from working for a competing software company as a janitor.
Employers must take care in drafting, and employees must exercise care in agreeing to non-compete agreements.
It is best to consult an attorney before drafting or signing a non-compete agreement, or when determining whether or not one is enforceable.
Saper Law helps both businesses and employees negotiate restrictive covenants. Contact Saper Law at 312-527-4100 or book a consultation here.