Non-Compete Agreements: Will the Illinois Legislature Finally Act?
From time to time over the past several years, the Illinois legislature has introduced (but not passed) bills to codify state law regarding the enforceability of covenants not to compete. In 2011, legislators are trying once again, with the reintroduction of House Bill 0016, also known as the Illinois Covenants Not to Compete Act. If passed, the act might just make it a bit harder for employers to enforce broad non-competition agreements. (It will not, however, affect pure non-solicitation agreements, confidentiality agreements, agreements regarding the sale of a business or fiduciary agreements.)
Illinois courts have typically not favored covenants restricting post-employment competition and have relied on common law to determine the enforceability of these agreements. Basically, the courts require that a non-competition agreement:
- Be supported by adequate consideration;
- Protect a legitimate business interest; and
- Be reasonable in scope, geography and time.
The Illinois Covenants Not to Compete Act, while leaving intact many of the common law requirements for enforceability, would impose even more stringent standards. It would also expand the legitimate business interests necessary for enforceability.
Attorneys' Fees: A Level Playing Field
Employment agreements usually include a provision entitling an employer to attorneys' fees and costs it may incur to enforce a non-compete clause. The proposed act would offer employees a level playing field with the inclusion of a "prevailing party" provision. In other words, if an employee successfully defends a suit to enforce a non-compete, the employer will be on the hook for the attorneys' fees incurred by the employee.
Likewise, if an employee initiates an action under the Declaratory Judgment Act and is successful, he or she will be entitled to attorneys' fees. A successful employer, however, is not entitled to recover its fees for defending an action under the Act. This non-reciprocal provision of the Illinois Covenants Not to Compete Act is another clear indication that the state discourages restriction on competition.
Employees and Independent Contractors: "Key" Is Key
If passed, the proposed act would limit the enforceability of non-competition covenants to employees or independent contractors who are considered to be "key." Pursuant to the act, a key employee or independent contractor must have at least one of the following characteristics:
- Substantial involvement in the executive management of the employer's business;
- Direct and substantial contact with the employer's customers;
- Knowledge of the employer's bona fide trade secrets or other proprietary information;
- Such "unique skills that the person has achieved a high degree of public or industry notoriety, fame or reputation as a representative of the [employer];" and
- Compensation from the employer that falls within the top 5% of its employees and independent contractors during the year preceding termination.
Legitimate Business Interest: Answering Sunbelt
Under well-established Illinois law, in order to have an enforceable non-compete or non-solicitation agreement, an employer had to demonstrate that the purpose of the agreement was to protect a legitimate business interest. Until now, there were only two “legitimate business interests” available to support a restrictive covenant: confidential information and near-permanent customer relationships. However, a recent court decision by the Fourth District of Illinois, Sunbelt Rentals, Inc. v Ehlers, rejected the legitimate business interest requirement in its entirety, creating much confusion and uncertainty. The proposed act would quell further discussion in this regard by requiring some legitimate business interest, though it would also expand those interests to include goodwill.
Two-Week Pre-Employment Notice: A Requirement with Exceptions
The proposed act would require an employer to inform a potential employee or independent contractor at least two weeks before the first day of employment that a covenant for non-competition is required as a condition of employment. This requirement, however, is not without exception. No notice would be required if the employee or independent contractor enters into the covenant upon a "material advancement or promotion," or receives "a material bonus or material increase in rate of regular competition."
Time and Place Restrictions: Eliminating Uncertainty
Although Illinois courts have previously recognized restrictions on the scope of non-competition agreements, no clear standard has been established. Under the proposed act, however, a non-compete agreement would be presumed reasonable if it extends for no more than a year, thus eliminating any uncertainty once and for all. In addition, the act would limit the geographic scope to the particular region of employment.
It is not clear whether Illinois will finally pass a non-compete law in 2011, but it is likely that similar legislation will eventually be a reality. If the state does adopt the Illinois Covenants Not to Compete Act, employers would be wise to review their employment agreements to evaluate enforceability.