Non-Compete and Non-Solicitation Agreements: It All Begins in the Drafting, Especially If You Expect to Enforce the Full Length of the Restrictive Period

Much Shelist has distributed a number of alerts addressing the enforceability of non-compete and non-solicitation agreements. (Click here for a complete list.) In all of these articles, two major themes emerge.

First, the broader and more restrictive the non-compete provision is, the harder it will be to enforce. So a prohibition on competing for a year in the city in which an employee lives will be easier to enforce than one that restricts competition for 10 years anywhere in the country.

Second, and perhaps most important, a company cannot underestimate the value of a well-drafted document. Or, as the familiar expression goes: garbage in, garbage out. Boilerplate, off-the-shelf non-compete and non-solicitation agreements simply will not suffice if you are serious about enforcing your restrictions. And this applies whether you are a small entrepreneur, a fortune 100 company, a butcher, a baker or a candlestick maker.

Citadel Case Underscores the Importance of Language

A telling example of the value of a well-drafted non-compete agreement can be seen in the recent Illinois case of Citadel Investment Group, LLC v. Teza Technologies, LLC, decided in February 2010. This was a typical non-compete case, involving so-called high-frequency electronic trading, that garnered a significant amount of publicity and involved some high-priced legal talent on both sides. After an evidentiary hearing that lasted several days, the trial court entered a preliminary injunction in favor of Citadel. The order prevented the defendants from, among other things, competing with Citadel for a period of time ending at the termination of the restrictive period set forth in their non-competition agreements. Citadel appealed that order, asking the First District Illinois Appellate Court to extend the injunction to include any additional time during which the court found that the defendants had been in violation of the non-compete. Although this type of request is typical and has often been granted in the past by the trial courts, it was denied in Citadel’s case because the contract (the restrictive covenant at issue) did not allow for such an extension.

The First District denied Citadel's request and affirmed the lower court's decision. In so doing, it held that, absent contractual language providing for such an extension, the trial court was within its discretion in denying such relief. In this ruling, the First District was following similar decisions by other Illinois appellate courts, including the Second District's 2007 ruling in Stenstrom Petroleum Services Group, Inc. v. Mesch.

The Citadel case points out just how critical the language is in a company's non-compete and non-solicitation agreements. As the First District said in Citadel, if those agreements do not contain language providing for an extension of the restricted period, then it is unlikely that the courts will grant such relief, even if the court finds you are entitled to enforce the non-compete. In other words, if an employee violates a two-year non-compete provision for one year and six months before you find out about the breach, you may only be able to obtain a preliminary injunction prohibiting competition for the remaining six months. That is, unless you have the appropriate language in your agreement.

Other Considerations

There are other requirements for an effective non-compete or non-solicitation agreement that seem obvious, yet are often missing from an employer's documents. For example, do your agreements have geographical restrictions when necessary? Are the geographical restrictions appropriate to your business? Are the time limits appropriate?

Although Illinois courts have the power to modify an unreasonable provision, that power is discretionary and not always used. For example, in Lee v. O’Keefe Ins. Agency, the court found a restriction on competition "within 100 miles of Springfield, Illinois" to be overly broad. The court refused to modify the geographic scope, however, finding that to do so would have been "tantamount to drafting a new agreement." As evidenced from that case, if a court believes a company is overreaching, it can simply refuse to enforce the agreement instead of modifying it. Therefore, it is important to make sure that your agreements, even if you want them to be as broad as possible, are not too broad or too overreaching.

It is always wise to do conduct regular evaluations of your important contracts. This is especially true with respect to non-compete and non-solicitation agreements. When is the last time you had your attorneys review these documents? Unless your answer is "within the past few months," now is a good time to do so.