Illinois Non-competition Agreement Law

posted by Neil Klingshirn  |  Nov 4, 2009 4:21 PM [EST]  |  applies to Ohio

Illinois courts are reluctant to enforce restrictive covenants and scrutinize them carefully. Nevertheless, Illinois courts will enforce a restrictive covenant if it is ancillary to another transaction or relationship and its terms are reasonable and necessary to protect a legitimate business interest of the employer. A restrictive covenant's reasonableness is measured by its hardship to the employee, its effect upon the general public, and the reasonableness of the time, territory, and activity restrictions.

Ancillary to a Transaction or Relationship

To be enforceable, a covenant not to compete must be ancillary to either a transaction (an otherwise valid contract), or a valid relationship. However, an at-will employment agreement, even though terminable at will, is nonetheless a contract and a relationship. Therefore, non-competition agreements “entered into by an at-will employee, whether the employee is employed under a written or oral agreement, complies with the requirement of ancillarity.” Abel v. Fox, 274 Ill. App. 3d 811, 821 (Ill. App. Ct. 4th Dist. 1995).

Consideration Required for Illinois Non-competition Agreements

An Illinois employer must pay adequate consideration for a covenant not to compete. This does not mean, however, that the non-competition agreement must be entered into prior to the commencement of employment.  Instead, Illinois courts have ruled that continued employment for a substantial period of time is sufficient consideration to support the employment agreement. McRand, Inc. v. Van Beelen, 138 Ill. App. 3d 1045, 1055 (Ill. App. Ct. 1st Dist. 1985).  See also Office Electronics, Inc. v. Grafic Forms, Inc. (1978), 56 Ill. App. 3d 395, 372 N.E.2d 125 (agreement entered into 12 years after employment began is enforceable where employee continued working  for over four years"); Smithereen Co. v. Renfroe (1945), 325 Ill. App. 229, 59 N.E.2d 545 (agreement entered into three years after employment began is enforceable where the employee’s employment continued for five more years).

Protectible Employer Business Interests

Illinois courts recognize two situations in which a legitimate interest will exist:

Illinois courts have also enforced non-competition agreements to protect supplier relationships and, in the case of a covenant against pirating employees, to maintain a stable work force. Illinois courts will not, however, enforce non-competition agreements whose only purpose is to eliminate ordinary competition.

A near-permanent relationship with clients is inherent in the provision of professional services. Conversely, a near-permanent relationship with customers is generally absent from businesses engaged in sales. Moreover, a near-permanent relationship is not generally present in a business that does not engender customer loyalty by providing a unique product or personal service, and customers of the business utilize many suppliers simultaneously to meet their needs.
 
To determine whether an employer has a near permanent relationship with a customer or client, a court will look at:
Springfield Rare Coin Galleries v. Mileham, 620 N.E.2d 479 (Ill. App. Ct. 4th Dist. 1993).

Reasonable and Necessary Restrictions

Even if an Illinois employer has a protectible interest, an Illinois court will nonetheless decline to enforce restrictions that go beyond those that are reasonable and necessary to protect that interest. A restrictive covenant's reasonableness is measued by:
Abbott-Interfast Corp. v. Harkabus, 250 Ill. App. 3d 13, 17, 189 Ill. Dec. 288, 619 N.E.2d 1337 (1993).

The employer must also prove that the duration and geographic scope of the restriction are necessary to protect the employer's legitimate business interests. As a general rule, Illinois courts look to whether the restricted area is co-extensive with the area in which the employer is doing business. Illinois courts have not enforced non-competition agreements where:

• the non-competition agreement that lacked any geographic boundaries, even though the employer has customers and competitors globally.  in Del Monte Fresh Produce, N.A., Inc. v. Chiquita Brands Int'l Inc., 616 F. Supp. 2d 805, 819 (N.D. Ill. 2009);
  
• the non-competition agreement effectively precluded an employee from engaging in his occupation in any part of the world was an unreasonable restraint on trade and was therefore invalid Hay Group, Inc. v. Bassick, No. 02 C 8194, 2005 U.S. Dist. LEXIS 22095, at *11 (N.D. Ill. Sept. 29, 2005).
  
• a restrictive covenant prevented employees from working in states in which they never worked for their employer George S. May Int'l Co. v. International Profit Assocs., 256 Ill. App. 3d 779, 628 N.E. 2d 647, 655, 195 Ill. Dec. 183 (Ill. App. Ct. 1993).
• an agreement prohibited activities so broad that “the agreement would preclude (the employee) from working as a competitor's janitor.Telxon Corp. v. Hoffman, 720 F. Supp. 657, 665 (N.D. Ill. 1989).
• restrictive covenant prohibited the employee from associating with any competitor in any capacity whatsoever, even if (his) job were merely menial and he had absolutely nothing to do with sales or purchasing. North American Paper Co. v. Unterberger, 172 Ill. App. 3d 410, 413,(Ill. App. Ct. 1988.

Judicial Modification

Illinois courts have the discretion to refuse to sever, modify or “blue pencil” non-competition provisions that are too broad or far-reaching. See, e.g., Trailer Leasing Co., 1996 U.S. Dist. LEXIS 9654, at * 12 ("While this court has the option of blue-penciling the covenant, it declines to do so since substantial modification/deletions to the covenant would be required."); Bassick, 2005 U.S. Dist. LEXIS 22095, at *11 (“Where as here, the restraint is patently ‘unfair because of its over breadth,’ courts will refuse to modify the agreement, even  in the presence of a severability clause.”); Del Monte Fresh Produce, N.A., Inc. v. Chiquita Brands Int'l Inc., 616 F. Supp. 2d 805, 819 (N.D. Ill. 2009).

External Links

Links to external sites with additional information about this topic.

• Are Executive Non-compete Agreements Enforceable, by Much Shelist
  

posted by Neil Klingshirn  |  Nov 4, 2009 4:21 PM [EST]  |  applies to Ohio