The Continuing Goofiness of Illinois Non-Compete Law

This is a terrific opinion by an Illinois intermediate appellate court that is well worth reading to get an understanding of the Grand Canyon-like fracture in Illinois noncompete agreements, and how courts are dealing with it.

The opinion lays out the application of what has recently been Illinois state courts' approach to the problem of adequate consideration for noncompete agreements, namely that an employee must be employed for at least two years after the effective date of the noncompete in order for there to be a valid contract.  The dissent, brilliantly in my opinion, reviews the entire history of this odd, bright line requirement, and notes the fact that federal courts in Illinois, with one notable exception, have consistently refused to enforce this two-year requirement.

Thus, the fracture. If you are an employee seeking to avoid the consequences of signing a noncompete agreement, and you haven't been employed for two years from the date of the agreement (and you didn't receive some other form of equivalent compensation to two years of employment), then you need to make a beeline for state court to file a claim for declaratory relief.  This type of claim allows the court to determine whether your noncompete is valid, and it's important that you, the employee, file before your employer figures out what's going on and files a breach of contract claim in federal court (assuming federal jurisdiction is available).  Illinois state courts will almost certainly enforce the two-year bright line test; if your employer can get to federal court first, then it will likely find a judge who will refuse to enforce the standard.

This is obviously intolerable.  But here in Illinois we specialize in working with the intolerable. There is a chance this divide will get fixed when the Seventh Circuit issues an opinion on a non-compete case later this year.  But there's also a chance the appeals court will kick the issue over to the Illinois Supreme Court for an advisory opinion, further delaying resolution.

In the meantime, non-compete clauses require some careful thought about enforcement.  I would tell employers to incorporate some type of declining bonus payout that erodes as the employee remains on the active rolls as consideration for any noncompete clause; if the employee leaves early, she gets a larger payout to support the non-compete agreement.  I think this will pass muster, based on this opinion, and others like it.

UPDATE:  While we wait for this all to sort out, here's a nice analysis of Illinois law regarding assessing the business interest protected by a non-compete, from the Seventh Circuit.

Overreaching Dooms Noncompetes

A recent case out of the Virginia Supreme Court shows how important it is for employers to pay attention to the post-employment conduct they are trying to limit when drafting a noncompete agreement. In fact, I frequently tell clients when they are putting these agreements together to be as specific as possible with respect to the position the employee is working now, and use that description as the basis for limiting any future employment with a competitor. Otherwise, the former employer runs the distinct risk of having the noncompete voided by a reviewing court.

In almost every state where they are enforceable (they are not in California) noncompetes are viewed with disfavor. That's because they limit the ability of former employees to find jobs, and are viewed as a type of restraint of trade by the judges who are usually charged with enforcing the agreements. Courts will typically look for reasons to void noncompete agreements rather than enforce them. As a result, the smart employer drafts a noncompete that does not overreach, and does not create any more of an obstacle to future employment than is necessary to protect specific employer interests. Noncompete clauses that seek to restrict a former employee's ability to work anywhere, at any time, for any current or potential competitor or customer, are almost always struck down as being overbroad. The smarter course, as is clearly demonstrated in the Virginia case, is to draft the noncompete clause to limit a former employee from performing the same types of services for a competitor or customer that she performed for the former employer.

Regardless of the actual description of the limitation, the company must also be able to articulate the legitimate business interest justifying any type of noncompetition clause.

For purposes of enforceability, it's frequently best to provide a brief job description, or a limiting paragraph relating to job duties, so that a reviewing court has a clear picture of just how far the employer seeks to extend its reach with a former employee. The old adage that "less is more" is nowhere more true than in the drafting of these types of agreements.