Kreisman Law Offices Professional Corporation
Non-competition agreements are usually a part of an employment agreement that the company develops; employees have access to company secrets, trade secrets and customer lists, all of which can be detrimental if known by those outside the company, including competitors. It has long been the case that the traditional non-competition agreements are difficult to enforce. In the case of Reliable Fire Equipment Co. v. Arredondo, 2011 Ill. 111871, the Illinois Supreme Court reaffirmed the three-part rule of reason test courts have used to determine enforceability of an employment-based non-compete clause. In Reliable, it was held that a restrictive covenant is reasonable if it: (1) is not greater than is required for the protection of a legitimate business interest of the promissee (usually an employer); (2) does not impose an undue hardship on the promisor (usually an employee); and (3) does not injure the public.
Illinois courts have held that traditional business interest requires a company to show a support for the non-competition agreement, but that is ill-defined. The test set out in the Reliable Fire case would require that extensive pretrial discovery be conducted in order to know if the employer has the facts to make out a case.
In the Fifield v. Premier Dealer Services case, the First District Illinois Appellate Court added another layer to the enforcement of non-compete clauses. The Fifield case applies to at-will employees.
The Fifield opinion stands for the proposition that an at-will employee has a two-year option to void a non-compete clause in an employment agreement. Reliable Fire makes litigation connected to enforcing non-compete clause very expensive, whereas the Fifield decision means that an employer may not be able to bring a case at all.
Out of the complexity of the cases on non-compete clauses in Illinois comes the idea of “garden-leave.” A garden-leave provision is where an employee promises to give a certain amount of notice to the employer before leaving. For that, the employer does not require that the employee do any work during that stretch of time and gets paid with benefits.
There are two advantages to the garden-leave arrangement. One would be that if the employee does not live up to the garden-leave restrictive covenant clause and competes against it during the contract term, the employee could be held responsible for not only breach of contract, but also the breach of common law duty of loyalty. In a fiduciary breach setting, an employer could recover salary paid during the garden leave. The second advantage to garden-leave agreements has to do with a case of a non-compete clause being violated and an injunction preventing the employee from not only revealing company secrets, but not working. However, in enforcing a garden-leave clause, the court would order the employee to stop competing against the employer while the employee continues to get paid. That would undercut the argument that the injunction would be a significant hardship for the employee. There is very little law on the enforcement of garden-leave agreements.
Another type of contract clause in employment arrangements is the “safety-net” payments clause. The agreement applies to employees after termination. There is no duty of loyalty in these arrangements. However, in a typical safety-net arrangement, the employee receives payment of some reasonable consideration at the time of termination which is the beginning of the safety-net arrangement. Once the payments are received by the employee, the conduct considered competition must stop.
The impact of the Fifield case is that once an employee leaves employment or resigns inside two years of the beginning of the employment arrangement, there really is very little that can be done to enforce covenants found in the employment contract. In order for the Fifield case law to apply, the employee must work two years continuously in order for the non-competition agreement to be enforceable. If the employee is fired or resigns within two years, then the non-competition agreement would not be valid or enforceable.
In the end, non-competition agreements are very difficult to enforce and are expensive if litigated. For employers, the return of investing in preventing a former employee from competing against it because of violation of the agreement may not lead to a favorable result as compared to attorney fees and associated litigation costs.
Fifield and Enterprise Finance Group, Inc. v. Premier Dealer Services, Inc., 2013 IL App. (1st) 120327.
Kreisman Law Offices has been handling business contracts, business and corporate shareholder disputes and commercial litigation for more than 37 years in and around Chicago, Cook County and its surrounding areas, including Chicago (Lincoln Park, Andersonville, Hyde Park, Canaryville), Elmhurst, Plainview, Rolling Meadows, Des Plaines, Calumet City, Joliet, Schaumburg, Naperville, Itasca, Winnetka, Bensenville, Orland Park and Schiller Park, Ill.
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