Non-competition agreements, also known as covenants not to compete or restrictive covenants, are employment contracts used by employers to limit the ability of an employee to compete with the employer by stealing customers or trade secrets. Enforceable agreements must strike a balance between protecting the employer’s legitimate business interests from an unfair competitive advantage with the employee’s right to work in a field for which he or she is trained.  In general, courts decide what is considered reasonable or not reasonable by examining the type and size of the business, how long and over what geographic area the restrictions apply and whether adequate consideration, or benefit, was given the employee at the time the agreement was signed.

The Law In Illinois

Illinois courts have determined that restrictive covenants are enforceable if the terms are reasonable and necessary to protect certain business interests of the employer such as customer relationships or trade secrets. Factors considered when determining reasonableness include the hardship an agreement puts on the former employee, its effect on the general public and the restrictions placed on time, territory and activity of the former employee.

Consideration

With any contractual arrangement, both parties must be giving and receiving something of value, also known as consideration. Illinois courts have determined that the offer of initial employment is sufficient consideration or benefit to the employee in exchange for agreeing to not compete with the employer should the employment relationship terminate. An agreement signed after the employment has begun may also have the requisite consideration if the period of continued employment is “substantial.” In general, courts have determined that two or three years after the signing of the agreement is sufficient.

Reasonableness in Time and Geographic Scope

Agreements may be deemed unenforceable if a court finds that they are unreasonable in terms of duration, geographic scope and the type of employment or line of business being restricted. If a court finds an agreement is unreasonable, it may modify the agreement so that it does not unduly infringe on the former employee’s ability to work.

Examples of non-compete agreements that Illinois courts have found to be reasonable include:

• A 5-year, 5-mile-radius restriction on a cardiologist from practicing any kind of medicine even though the employer’s area of medicine was limited in scope.
• A judicially modified agreement with a certified public accountant who was also a shareholder and officer of the firm, restricting him from working in any county in which the firm maintained an office and lasting as long as the retired shareholder received deferred compensation.
• An agreement prohibiting any kind of law practice by a retiring partner in order to receive retirement benefits.

The courts have found restrictive covenants unreasonable in these situations:

• A restriction on a former employee of a tube maker prohibiting him from working “in any capacity” in the employer’s industry.
• A 2-year restriction on a former salesperson of a printing and imaging supplier because the prices, costs and customer information are so volatile in this industry that anything the former employee knew when he left would be stale after six to 12 months.
• A 1-year customer non-solicitation restriction on a former vice president of a state prescription plan contractor from soliciting any actual or prospective customer of the former employer because the employer did not have a “near permanent” relationship with its customers.  This agreement did not meet the court’s two-part test for non-solicitation agreements which first looks at whether the employer has a near-permanent relationship with the customer and second, the employee would not have had contact with the customer but for the employment.  Because of the nature of the public sector employer’s practice of periodically renewing contracts with its customers, the court determined that it was not “near permanent.”
• A nationwide restriction on the former employee of an outplacement firm from directly or indirectly competing with the former employer.

Employers need to keep these issues in mind when asking employees to sign restrictive covenants. It is also important to know if potential new hires have a non-compete agreement with a former employer. In some cases, the new employer can be liable to the former employer if hiring the employee would put him or her in violation of the agreement. Different rules may apply to situations in which all or part of a business is being sold and a restrictive covenant is agreed to by the buyer and the seller.