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Enforceability of Non-Compete Agreements in Illinois is a Case-by-Case Decision

13

August

2014

A hot topic in commercial litigation these days in Illinois and across the country is the enforceability of non-compete agreements, or “restrictive covenants.”

These are agreements that employees sign in which they typically promise not to compete with their employer for a certain amount of time within a specific geographic area after the employment ends. They have become increasingly used in the sales, technology and medical sectors.

In some states, like Massachusetts, non-competes are regulated by statute. (In that state, interestingly, a controversial bill was floated this summer to cap the post-employment, non-compete period in such agreements at six months. As the Boston Business Journal reports, the bill stalled out.)

In Illinois, there is no statutory regulation of non-compete agreements. However, several court decisions have spelled out what non-competes can be enforced.

Generally, a non-compete agreement will be enforced in Illinois if it contains two elements:

  • A “reasonable restraint” and
  • Adequate consideration in support of the agreement.

However, as you will see, the determination is not an easy one. It basically boils down to the specific facts of a case.

Does the Non-Compete Agreement Contain a ‘Reasonable Restraint?’

What constitutes a “reasonable restraint” is often the subject of litigation in Illinois. The common scenario: An employee leaves his or her job. The employer sues to enforce the non-compete. The employee responds by asserting that the agreement’s restraint is unreasonable and should be declared void.

In a 2012 decision, Reliable Fire Equipment Co. v. Arredondo, the Illinois Supreme Court provided some guidance on this issue. The Court held that a restraint is “reasonable” as long as it meets a three-prong test. The restraint must:

  • Be no greater than what is required to protect the legitimate business interests of the employer;
  • Not impose any undue hardship on the employee; and
  • Not be injurious to the public.

What is a “legitimate business interest?” This is where the issue gets a little murky.

The Court in Reliable rejected any one-size-fits-all test. Instead, the Court said that the determination must be based on “the totality of the circumstances of the individual case.”

The Court said that several factors could be considered, including:

  • The near-permanence of customer relationships
  • The employee’s acquisition of confidential information through the employment
  • Time and place restrictions.

However, the Court said, no single factor should be given more weight than another. Instead, the weight will depend on the facts of a case.

So, for example, a non-compete that prohibits a computer sales person from competing against his former employer for one year after his departure within the three-state region in which the employer does business may be enforceable. However, an agreement that prohibits a neurosurgeon from practicing medicine within a three-state region for one year may not be enforceable.

Here’s another possible post-Reliable scenario: A company makes every employee sign a two-year non-compete. A court may find that the agreement protects a legitimate business interest and is enforceable as it is applied to some employees – those who work directly with clients, for instance – but not as it is applied to other employees such as those who carry out less-skilled tasks.

Is the Non-Compete Agreement Supported by Adequate ‘Consideration’?

What constitutes adequate “consideration” can also lead to litigation in Illinois.

In the past, it was generally understood that giving an employee a job upon their signing of a non-compete agreement would pass this part of the test. However, a 2013 Illinois Supreme Court decision, Fifield v. Premier Dealer Services, Inc., cast that notion aside.

In Fifield, the Court held that merely giving a person a job is not enough. Instead, the employer would need to provide employment for at least two years or longer or give some additional consideration, such as a signing bonus, in order for the consideration to be deemed adequate.

So, practically speaking, if an employee left or was fired after only a few months on the job, the non-compete agreement would likely not be supported by adequate consideration and could not be enforced.

Questions? A Commercial Litigation Attorney Can Help You

As you can see, the enforceability of non-compete agreements in Illinois can vary from case to case. Each agreement, and the circumstances surrounding it, must be closely examined.

In fact, after the Reliable and Fifield decisions, some agreements that were drafted in the past years may no longer be enforceable and need to be updated.

If you are an employer or an employee who is trying to determine whether a non-compete can be enforced, an attorney’s guidance can be crucial – perhaps now more than ever.

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