Non-Competition Covenants: It Does Not Matter Who Ends The Relationship

         A recently-fired employee was heard to say that the good news of his situation was that his covenant not to compete was unenforceable because he had not resigned but had been fired. He is mistaken about that. The enforceability of a covenant not to compete does not depend on whether the employment relationship is ended by the employer (i.e., a firing) or by the employee (i.e., a voluntary resignation).

           All contracts require consideration to be enforceable. Covenants not to compete are no exception. Promises of employment can be lawful consideration, and a mere offer of employment might suffice for a covenant that is made at the start of an employment relationship (though there is now some doubt about that in Illinois law). But it takes more than a mere offer of continued employment to support a non-competition covenant that is made after the start of the employment relationship. In that case, employment must continue “for a substantial period of time.” As a practical matter, two years of continued employment is deemed the minimum to qualify as a “substantial period of time.” Otherwise there is a risk of illusory consideration: The work-at-will rule would permit an employer to fire an employee immediately after locking the employee into a covenant not to compete. The two-year rule applies whether the employment relationship is terminated by the employer or by the employee. The chap who declared his covenant unenforceable because the employer fired him is mistaken, unless, of course, there is something peculiar to his agreement that so provides (e.g., a clause to the effect that the covenant would be unenforceable if the employee were fired without cause).

             Doubt about the adequacy of consideration can be removed by supplying consideration in a form other than employment itself, for example, money, an extra sum of money specifically earmarked as consideration for a covenant not to compete. The question whether a covenant not to compete is or is not supported by consideration is not the only question relevant to enforceability but only the first question. Or to put it another way, consideration is a necessary but not sufficient for enforceability. The absence of consideration is fatal but its presence is not sufficient of itself to render the covenant enforceable. It must also be reasonable in its terms and reasonably necessary to protect legitimate business interests of the employer lest it be a mere restraint on trade.

A LEGITIMATE BUSINESS INTEREST ON THE PART OF AN EMPLOYER IS A PREREQUISITE FOR ENFORCEMENT OF A COVENANT NOT TO COMPETE AFTER ALL.

An employer who would enforce a covenant not to compete must establish that enforcement is necessary to protect a legitimate business interest. That has been the law in this State for a long time. But there had been some doubt about it since 2009, when the appellate court in Sangamon County held that all that mattered was that the covenant be reasonable in time and area. (Sunbelt Rentals Inc. v. Ehlers, 394 Ill.App.3d 421 (4th Dist. 2009)). The Illinois Supreme Court has just set the record straight about that. (Reliable Fire Equipment Company v. Arredondo et al., Docket No. 111871).

In so doing, the Court announced a totality-of-circumstances doctrine: The enforceability of a covenant not to compete must henceforth be determined on a case by case basis evaluating the totality of circumstances in the given case. The presence or absence of a legitimate business interest had hitherto turned on two questions: One, was there a misuse of confidential information? Two, was there a "near permanent" relationship between the employer and the customer?

The answer to both those questions was "no" when the Reliable Fire case was in the trial court (DuPage County) and the Appellate Court (Second District). So both of those courts refused to enforce the pertinent covenants not to compete.
Why, then, a different result in the Supreme Court? Because the Illinois Supreme Court may ignore its own precedents but our lower courts may not. Although there were no trade secrets and no "near permanent" customer relationships in the case, there was flagrant competition on the part of the defendants: While they were still in the employ of the plaintiff-employer, they were using company time and company resources to sell competing product to their employer's customers for their own account.

IT IS BECOMING EVER EASIER TO ENFORCE NON-COMPETE AGREEMENTS.

by David McCarthy

It has long been my position that an attorney preoccupied with his/ her win-loss record would rather oppose a non-competition agreement than attempt to enforce it. They have been difficult to enforce in Illinois, and for good reason: They are a restraint on trade.

But the worm is turning. First, the "blue pencil rule" has gained some traction in Illinois. There was a time when our courts would withhold enforcement of a non-competition agreement if they determined that it was unduly broad in time or area, even if the agreement included a "blue pencil" clause.

The "blue pencil" clause, a staple of non-competition agreements, authorizes a court-ordered narrowing of time and area limitations if those which the agreement recites are deemed too broad. Illinois was slow to accept the "blue pencil rule" on the theory that it amounted to re-making the agreement of the parties. And this spared employers from a sordid temptation to overreach on the front end. After all, why not shoot for the moon -- write in outrageous time and area restrictions -- if, worst case, the court can be counted on to apply the "blue pencil rule" and pare back the time and area restrictions? Nonetheless, over time, the "blue pencil rule" has gained some favor in Illinois.

In September of 2009 one of our Illinois Appellate Courts took an even more dramatic step in favor of the enforceability of non-competition agreements. The Fourth District Appellate Court (central Illinois, including Springfield) held that the "legitimate business interest" prong of the analysis was irrelevant. For ages, the proponent of a non-competition agreement was obliged to establish (i) the reasonableness of the time and area restrictions and (ii) that enforcement (an injunction) was necessary to protect a "legitimate business interest" of the employer (e.g., an interest in preserving confidential information or a "near-permanent" relationship with customers). In today's Fourth District, the proponent need only show that the time and area restrictions are reasonable (and the "blue pencil rule" is often available in aid of that showing).

Does this matter in the real world? You bet it does. Some time ago, we successfully opposed an action to enforce a non-competition agreement on the grounds that the former employer did not have the "legitimate business interest" that was necessary to obtain an injunction. Our client spent all his time at the office of the customer, and the only "confidential information" accessible to him was the customer's information, not the employer's information. Additionally, the customer relied on its own personnel and a number of other outside organizations for the same sorts of services which the employer provided. Finally, despite allegations that "vast sums" had been expended to cultivate the customer, the evidence was to the contrary: All advertising was generic. No advertising was customer-specific. And beyond that the "vast sums" spent to woo the customer consisted of $130.00 doled out to buy lunch on a number of occasions.

All that would be irrelevant in today's Fourth District. Whether the law of the Fourth District will become the law elsewhere in Illinois remains to be seen. There is now a conflict among the districts, and one of the chief functions of the Illinois Supreme Court is to resolve conflicts among the Appellate Courts. Stay tuned.

FIRM NEWS

• $70,000.00 settlement in case with truck company for injuries to motorist who needed no hospitalization and had medical bills under $6,000.00.

• Six years of litigation culminated in settlement for client-contractor who rebuilt flood-damaged mansion. Our client got every dime of the insurance proceeds at stake. The homeowner, our opponent, was represented by a 22-lawyer Chicago firm that is nationally known for representing "victims" of "toxic mold."

• $25,000 settlement for snowboarding injuries suffered in a header off a “rail” at local ski hill.

• The Illinois Tollway Authority demanded $30,000 from our client for unpaid tolls and penalties. Our defense: mistaken identity. One telephone call and one letter resolved the matter. Fines and penalties paid by client: zero.


• We bested the largest law firm in Oak Brook when we successfully defended a young computer consultant from overseas who was sued for violation of a non-compete agreement, unfair competition, and misappropriation of trade secrets by his former employer, a national consulting company. Their application for a preliminary injunction was denied after an evidentiary hearing of several days, which established, among other things, that the "vast sums" allegedly expended to cultivate the pertinent customer amounted to less than $130.00 for a few lunches. They appealed. The trial judge was affirmed. The opponent then threw in the towel and dropped the case.


• We won a trial against a high-brow Chicago firm in the U.S. Bankruptcy Court in Chicago. Our client was the trustee of a $40 million debtor's estate. The defendant-opponent faced a "preference" liability of nearly $400,000.00 and had only one defense worth talking about, i.e., that the trustee had blown the statute of limitations. We established at trial that the trustee's personnel got the suit papers to the courthouse on time, and it was an employee of the court clerk's office who delayed in processing them.