Enforcing Non-Compete Agreements

Clients often ask me if non-compete agreements for employees are ever enforced.  Many business owners believe that courts will not honor them.  Likewise, employees believe that they can sign these agreements because courts will not stop them from going to work for a competitor later on.

Contrary to these beliefs, these agreements are quite valid in Illinois, unlike California and some other states.  The Illinois Supreme Court recently clarified the law and set out what facts courts will examine in order to determine whether or they will enforce such agreements.

In the case, Reliance Fire Equipment Co. v. Arredondo, Reliance included in their contracts a section that the sales staff could not compete with Reliance in Illinois, Indiana, or Wisconsin during their employment and for one year after their termination from employment.  Salespeople further promised not to solicit any sales or referrals from Reliance customers or referral sources, or to solicit Reliance employees to leave their employment with Reliance.  Despite this non-compete agreement, a few salespeople left, started working for a competing business and Reliance sued them.

In their decision, the Illinois Supreme Court upheld the non-compete agreement as valid and reasonable if it met all three parts of the test in this area.  That is, the agreement had to:

  1. Protect, but not exceed, the legitimate business interests of the employer.
  2. Not create an undue hardship on the employee (mainly in terms of geography and duration).
  3. Not harm the public.

The major focus of the court (besides having consideration for the agreement) was on the first of these tests, the legitimate business interest.  The Supreme Court reviewed and disposed of an overabundance of tests which various lower courts had used over the years.  Instead, the court said that it will look at the totality of circumstances to determine whether or not a legitimate business interest existed.

What will the court examine in this process?  The factors making up the “legitimate business interest” will focus on whether the employee had access to trade secrets or confidential customer information.  The court will also ask if the employee provided any unique services or had special relations or goodwill with clients.  Depending on the nature of the business, other factors may also be examined.

If you use or want to use non-compete agreements in your business, the time to examine them is now.  It is far less costly in dollars and time to craft a good non-compete agreement in your contracts before there is a problem than it is to litigate after someone leaves and takes your clients with them.  I will be glad to provide a complimentary review of your contracts to determine if changes should be made.  Save yourself headaches and money and call me today, because:  Sooner or later, you’re going to need Tatar.”

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