What is an Illinois Non-Compete Agreement?
What is a non-compete agreement? In Illinois, a non-compete can be used in any contract. So while the name is used to describe a non-compete, it also can refer to agreements such as a non-solicit, non-poach or confidentiality/invention assignment. For the sake of simplicity we will focus on an employee non-compete to keep it simple and avoid constant additional explanations about how these other agreements are different.
A non-compete agreement is a legal contract between an employer and their employee, or sometimes independent contractor or seller, that prohibits the employee from performing certain competitive activities after their employment ends. These restrictions usually involve not competing with the company for a certain period of time following their termination, not recruiting employees away from their company for a certain period of time and/or not taking on any other employees who may leave the company.
Under Illinois law, a non-compete may not be unreasonable in time, territory or scope. In a small town or small industry an off-limit period of 6 months might be considered unreasonable, whereas that same period of time may be reasonable if you’re talking about Chicago and the financial industries.
In Chicago for the financial industries, a two year non-compete is very common. Sometimes they want even longer than that . And even if it seems long and you’re worried about it, there is almost nothing you can do until your boss FINDS OUT that you violated the non-compete. All you really can do, if they have a strict enforcement policy, is not leave work to go start a store or go work for their competitor. Otherwise, it’s hard to get a non-compete blocked in court before it’s enforced.
A company would need a non-compete if they conducted a lot of secretive business. It’s like a non-disclosure pact, or agreement, but one step further because it prevents you from working in the same industry. If they have some super secret business strategy, even more than they want to keep secret, a non-compete prevents your ex-employer from going to their closest competitor and giving advice on how to put the plan into action.
The idea behind a non-compete is that a company needs to protect their secrets to have longevity in their industry. It’s not fair for one business to struggle because of another business winning clients or having an advantage on products when the skills of the companies are similar and can be traded back and forth. The non-compete keeps everyone on their own side of the field so to speak and prevents someone from job-hopping back and forth between two competitive businesses over and over.
But just like with anything, there are exceptions.
Statutory & Caselaw in Illinois
There are a number of laws and legal doctrines that govern non-compete agreements in Illinois. The most important statute, which governs the enforceability of restrictive covenants under Illinois common law (as opposed to situations covered by the federal Defend Trade Secrets Act which only applies for non-competes involving trade secret information), is the Illinois Freedom to Work Act, 820 ILCS 90/1, et seq. This relatively new, one page law was designed to prevent low-paid employees from being forced to sign non-compete agreements.
Specifically, this new law states: "No employer shall enter into, or otherwise attempt to impose a covenant-not-to-compete on any low-paid employee". A "covenant-not-to-compete" means any covenant, contract, agreement or clause that is contained in any employment contract wherein an employee or prospective employee agrees not to compete with an employer’s business, not to work for a competitor or not to become employed in other specified types of businesses after the employment relationship ends. A "low-paid employee" means one whose earnings are at or below the applicable minimum wage rate under the Wage Payment and Collection Act. If an employer enters into or attempts to impose a covenant-not-to-compete upon a high-paid employee, unless that employer provides adequate and valuable consideration to the employee, such agreement shall be illegal and void.
You may think, "Gosh, there goes the ’employer losing in Illinois theme we’ve got going in these blog posts already". Not necessarily, as the law specifically states that it only applies to "low-paid" employees. That’s the catch, because non-compete agreements signed by employees who are eligible to collect tips can be enforced, even if they make less than $13.00 per hour. So, your bar-tenders non-compete agreement would still be valid even though their wages fluctuate from week to week depending on how many tips they receive. The entire statute is actually rather short and should be read by all Illinois employers who have low-paid employees who are frequently asked to sign non-compete agreements.
There is some bad news for Illinois non-compete agreement enthusiasts however, as a pair of Illinois cases restricts the circumstances under which non-compete agreements are enforceable further. First, for a non-compete agreement to be enforceable in Illinois the courts require the employer to show that it has a protectable interests in enforcing the non-compete against the employee. This is important because recently there have been a number of lawsuits brought by former employees to challenge the enforceability of the non-compete agreement. Most of the time, these former employees are part of losing business ventures (e.g. a restaurant that goes out of business after two years) and clam that the employer did not have a protectable interest to enforce the non-compete against the CEO of the company because (1) the business never made a profit and (2) the employer did not make an investment to create a valuable business in the first place. These cases show that Illinois courts will prevent self-serving companies from enforcing non-competes if they do not have a protectable interest to do so.
Second, Illinois courts require a "covenant(s)" not simply a statement that "we’re not going to let you compete". Specifically, they require an agreement to have (1) a defined duration and (2) a geographical scope or limit. In a recent case, an employer agreed to pay the employees who were dismissed with notice not to compete with the company if they were later denied bonuses. The employer then terminated its employee with notice and refused to pay his bonuses. The employee then began working for a competitor, and the employer sought to enforce the non-compete agreement during the period before the dispute over the bonuses were resolved. The court refused to do so, finding that the employee had to be paid the bonuses specified in the agreement before the employer would be able to enforce the non-compete agreement.
Regardless of whether an employer has an employee sign a non-compete agreement when they start working or at a later date, they should make certain to use very clear language within the agreement to demonstrate that the agreement has a period and geographical scope or limitation.
Enforceability Factors
As in other states, Illinois courts look to a number of factors in determining whether or not a valid non-compete exists. Consideration is given to the duration and scope of the agreement, as well as the business interests, if any, that the employer has in preventing the employee’s post-employment competition.
In Jacobs, Visconsi & Jacobs Co., A.I., v. City of Lawrence, 202 Ill.App.3d 1084, 589 N.E.2d 114 (Ill App. 1 Dist. 1992), the court found that 15 months was an unreasonable duration for a non-competition agreement. Although not dispositive, Illinois courts consider the duration of the non-competition covenant. In that case the employee was not a high level employee, nor did he have any proprietary information. The only purpose served by the non-competition agreement in that case could be to protect the business of the employer from competition.
The geographic scope delineated in a non-competition agreement is also provided considerable attention by courts. In one suit, a non-competition agreement with no geographic limitation was held to be unreasonable because it had no "demarcation line." See in re C.C. Eastern, Inc., 185 B.R. 463 (Bankr. E.D La. 1995). Under Illinois law, agreements not tied to a particular geographical limitation are subject to a "reasonableness" test, which considers the direct competition between the former employer and the employee’s new employer. See SI Handling Systems, Inc., v. Heisley, 953 F.2d 935 (6th Cir. 1992).
Illinois courts have found a non-competition agreement to be enforceable where the employee’s job was found to be a competitive position. In Technology Mfg., 2013 Il App (1st) 1113517 (1st Dist. 2nd Div. 2013), the Court held that the non-competition agreement signed at the time the employee was hired was enforceable, even though the employee later gave his notices that he would no longer agree to the non-competition agreement. In Technology Mfg., the circumstances of the employee’s change in position caused the company to view the employee as a competitor with a potential for substantial harm to the business.
Common Issues and Controversies
One of the common issues in non-compete disputes is fluctuating financial performance, which can raise concerns about whether there has been a sufficient economic benefit. Employers are generally barred from having a formal role with a company until the agreement terminates. This can become particularly problematic from a business perspective, specifically if the employee’s non-compete applies during the company’s busiest time of the year. Alternatively, if the employer and employee share clients, especially when these clients hold annual contracts, approving new contracts from the competitor may be difficult if the employee tries to take his or her clients in the first months of the non-compete.
Competition to secure the next job also creates disputes. If the previous employer has filed a complaint against a former employee, it is important to include an injunction in the order to ensure competition during the case, preventing the new employer from hiring the former employee. New employers are often encouraged to offset this effect by hiring people on contingency until their non-compete expires or until the injunction is lifted.
Of course, the greatest challenge can be the competitive product or service offered by the new employer. Even if a former employee is breaking his or her non-compete, he or she may not be competing with the extent required to justify the injunction. This is particularly true if the former employee is competing with the company but not for the same customers or a competing product. Establishing the likelihood that a customer will buy products or services from the competitor is the closest resolution that allows the court to clarify and interpret the Agreement.
If the client is a new customer, it is easier to prove that the former employee or competitor will steal clients or contacts. However, if the employee or customer already knows the client and customer, proving that the Agreement is being violated becomes more difficult.
Another common scenario is if a former employee is openly violating the Agreement, particularly if he or she approaches someone they know previously obtained their product. If a former employee or competitor is not fighting back, for example by defending against the injunction or filing a motion to dismiss, the court is more likely to uphold the injunction and the client will be unable to hire him or her. If there is no likelihood of violation, the employee can oftentimes start selling again within a few months.
Another factor that will influence the enforcement of an Agreement is how well the parties get along. A court may not issue an injunction if the parties have a cordial relationship and do not get along well. If a new employer is not handing out sales accounts properly, he or she could be accused of an unfair advantage and may therefore not be granted the temporary restraint.
Another issue is whether a new hire was actually hired for his or her background or for his or her connections. If the hiring process is quick, a new employee may find it difficult to prove that he or she was hired based on skill rather than for the prior relationships they had.
Employer & Employee Considerations
Employers Perspective
As with many employment law issues, the perspective of non-compete agreements has many sides…. or more accurately an employer side and an employee side. From an employer’s perspective, non-compete agreements are useful tools for companies. These agreements are drafted in a way that controls how, when, and where an employee may work after leaving the employment of the company. In this regard, non-compete agreements are similar to a form of insurance to protect the company from an employee’s actions after his or her departure. While the use of non-compete agreements can be very helpful to a company, they are not without their faults. That is, employers have to think about how the use of a non-compete agreement can impact the company as a whole. For instance, if a company relies on a non-compete agreement to protect its business interests, then it must make sure that it follows through on the agreement and enforces it. This may include an expedited court action, and injunctive relief, for example , against a former employee who takes a job with a competitor. If the company fails to do so, it risks looking weak and invites future abuses.
Employees Perspective
From the point of view of the employee, non-compete agreements can be both a source of burden and an opportunity. For example, the restrictions placed upon an employee can be burdensome if after years of hard work and devotion to his or her career, the terms of a non-compete agreement impacts what the employee can do next in his or her career. Many employees receive their first major assignments with a company, and have to start their careers somewhere. An employee with a five year non-compete agreement will face significant challenges if the company places a restriction upon where the employee can work. Often, the area or industry that the company serves is so specialized that the non-compete agreement will prevent the employee from working for any other company. Conversely, it may be an opportunity for the employee if the non-compete agreement had a relatively short duration and prohibited competition only in a local geographic area.
Recent Trending Case Law
The enforceability of non-compete agreements in Illinois has been the subject of litigation for many years. In the recent case of Fifield v. Premier Dealer Services, Inc., 2013 IL App (1st) 110197, 2013 WL 2760667, the Illinois Supreme Court Court of Appeals heard a case involving an employee who was hired by the defendant as a salesman in August of 2008 for a salary of $55,000 per year. In April of 2009, however, Plaintiff was promoted to business analyst and his salary increased to $75,000. In May of 2010, plaintiff had a conversation with his supervisor regarding the amount of commission he was permitted to count towards his $75,000 salary. The supervisor allegedly told him that "If I fire you today I owe you $88,000 in commissions." On April 16, 2011, he turned in two weeks’ notice to his supervisor. He then filed suit seeking to have the non-competition clause of his contract declared unenforceable. The trial court declined to rule on Plaintiff’s request and entered a verdict in favor of Defendants, upholding the non-competition agreement. The court of Appeals reversed the decision, ruling that the employee was not required to show that the employer offered an additional "benefit" other than continued employment to support the enforcement of a non-competition clause, but rather that the employment contract itself must be supported by adequate consideration.
However, in the closely watched case of Rolling Meadows Surgical Ctr., LLC v. Robbins, 2013 Il App (1st) 113264, the Illinois Supreme Court ruled that simply because a non-compete agreement is unsophisticatedly drafted, it does not necessarily render the entire agreement unenforceable. In this case, Plaintiff sought to enforce a covenant not to compete against six former employees of the defendants who had signed a non-compete clause containing the same restrictive period, geographic scope, and post-employment compensation. The clause stated that the defendants "will never use for themselves or others, nor will they ever reveal to anyone, any private or confidential information belonging to the Company without the Company’s express written consent." There was no specific limitation in terms of date or geographic scope. The Court held that the trial court improperly refused to enforce the agreement where there was a 2-year time provision and a 5-mile geographic limitation. The Court noted that such limitations were reasonable and that the non-compete agreement should not be rendered unenforceable due to unnecessary "puffery" over "proprietary and confidential information" for an unsophisticated company. The Court also held that the non-compete clause was enforceable in part because it was enforceable as to five of the defendants who signed the agreement, even though it was unenforceable as to one defendant who did not do so.
In yet another representative case, Orange v. Lithuanian Health and Communities Life Foundation, 2013 Il App (1st) 120973, 2013 WL 5653745, the Illinois Appellate Court upheld the judgment of the trial court while deciding that the Plaintiff had failed to prove that the non-compete agreement signed by him was unenforceable. Plaintiff worked as Director of the Human Resources of the company. Plaintiff claims that his termination from employment with the company was improper and that his non-competition clause was unenforceable. However, since his duties remain the same for one employer to another, the court held that his claims could not stand and his non-compete clause could not be unenforceable.
Illinois Non-Competes FAQ
What is a non-compete agreement?
A non-compete agreement is a contract between an employee and employer that restricts the employee’s ability to open a competing business for a specified period of time after the employment relationship ends.
Are non-compete agreements enforceable in Illinois?
In general, Illinois courts enforce non-compete agreements provided they are reasonable in scope and duration. Courts will not enforce non-compete agreements that impose undue hardship on the employee or are harmful to the public. Where the agreement is overbroad – such as, for example, where it contains no geographic limitations – a court will revise the agreement to render it enforceable.
Are there exceptions to the rule that non-compete agreements are enforceable?
There are two exceptions to the general rule that non-compete agreements are enforceable. First, non-compete agreements between physicians and physicians, holders of MD and DO licenses, or holders of a license as a physician’s assistant, are unenforceable . Second, non-compete agreements between employers and employees who are non-exempt under the Fair Labor Standards Act (i.e., employees who are paid hourly wages and do not receive a "salary" that satisfies the tests for exemption from overtime requirements) are unenforceable.
How long should a non-compete agreement be?
The length of time of the restrictions can vary widely. One researcher reported 90 days to be the most common restriction in one study, but many restrictions are relatively longer, sometimes running for years rather than months.
How much geographical territory should a non-compete agreement cover?
Generally, the geographical territory covered by non-compete restrictions is somewhere in the range of 50 miles to 100 miles, although there certainly are non-compete agreements that cover fewer miles than that and some that cover more miles than that.