Chicago Business Litigation Lawyer Blog
Many clients come to us with misunderstandings with regard to non-compete agreements which are often called covenants not to compete. Some clients believe because an employee signed the agreement it is an iron glad and enforceable agreement no matter how broad and restrictive the terms of the agreement. Some employees come in with the belief that the agreements can never be enforced against them. So when are these agreements enforceable? It depends on many factors.
Each state has its own set of rules but there are many similarities in those states that enforce such agreement. In California, however, they are invalid and against policy. Illinois courts, on the other hand, enforce such agreements when they are:
- In writing;
- Made part of the employment contract;
- Supported by valid consideration such as two years of employment or other payments;
- Reasonable as to time and territory; and
- Designed to protect the employer’s legitimate business interests.
The first two requirements are fairly self-explanatory. The last three, however, require analysis and review of the facts and circumstances.
Supported by valid consideration:
Consideration is a concept that applies to all kinds contracts, not simply to non-compete agreements. Contracting party must each obtain some consideration or benefit for entering into the contract. The contract must provide to each party a benefit to which that party would not be entitled if the party had not entered into the contract. With non-compete agreements, the affected employee might receive a new job, a promotion, a raise or a bonus for his or her agreement to enter into a non-compete or work for the employer for a significant period such as two years after entering into the agreement. In summary, for an employee to be bound that employee has to obtain some real benefit for entering into the agreement or work a long time for the company after signing the agreement.
Reasonable as to time and territory:
Non-compete agreements cannot usually be unlimited when it comes to time and territory. In other words, a business cannot subject former employees to an agreement with restricts them from competing everywhere, forever. Determining what is reasonable however depends on many circumstances.
Designed to protect the employer’s legitimate business interests:
Courts will only enforce restrictions on an individual’s right to work when the employer can show that those restrictions protect a legitimate business interest. Such interests can be protecting client relationships and confidential or secret information that provides a competitive advantage and was developed at substantial cost. In crafting covenants not to compete, employers should avoid restricting employees more than is needed to protect legitimate interests and the substantial investment they have made in developing competitive advantages for their businesses.
The Takeaway:
The truth is that many courts do not like to enforce covenants not to compete unless they are properly tailored and do like to put people out of work.