A covenant not to compete is an agreement between an employee and an employer that applies during and after the employment relationship terminates. Covenants not to compete, also known as non-compete agreements, prohibit employees from competing with their employer, both during and after their employment. Competing includes working for a direct competitor or starting a company that competes with the employer for the same customers.
A non-compete covenant can be a clause in an employment contract or be drafted as an entirely separate document. Both parties will need to sign the agreement. In Illinois, courts will enforce these covenants if they are valid after careful analysis. Enforceability will depend on the text of the agreement and each situation.
A covenant not to compete typically includes 3 main elements, including:
- Limitations on the work that the employee may pursue
- A definite period
- A definite geographical area
Typically, the time and geographical restrictions are fairly straightforward. The limitations on work, however, may be more complex.
Companies and businesses that commonly use covenants not to compete include those that handle:
- Highly confidential materials
- Client demographic or information databases that an employee can access
- Businesses with a direct competitor
- Trade secrets
- Trademarks and copyrights
In an employment contract, a non-compete clause usually limits the employee’s ability to use the resources from the current employer to benefit a future employer. For example, a non-compete clause can prevent a consultant from bringing her current clients to a new consulting firm.
What Are the Requirements of a Valid Covenant?
In Illinois, a covenant not to compete is considered to be valid if the following requirements are met:
- The covenant is supported by adequate consideration. Consideration can be in the form of money or employment benefits, usually given either at the beginning of the employment relationship or at the end. If there is no consideration, Illinois courts have found that two years of employment with the company will allow enforcement of the agreement. However, federal courts have questioned this finding.
- The covenant must protect a legitimate business interest, such as confidential information, trade secrets, or customer relationships. A legitimate business interest cannot include the employer’s desire to prevent normal competition where disclosure of confidential business information is not at risk.
- The covenant not to compete must be reasonable. Illinois courts have determined that the reasonableness standard will generally be met if the following factors are satisfied:
- It is restrained to a specific geographical region
- The enforcement time frame is not excessive
- The agreement centers around a valid employment relationship
- There will not be an undue hardship on the employee if the agreement is enforced
- The terms of the agreement only protect legitimate business interests
- The agreement will not harm the public or otherwise be against public policy
If the above elements are present, an Illinois court will likely enforce the covenant not to compete. It is very important to note, however, that at the end 2024, a new federal law, the Non-Compete Clause Rule, will govern all non-compete agreements across the country, including in Illinois.
This law places a ban on the majority of non-compete agreements, with one exception. A discussion of this rule will be provided at the end of this article.
What Are the Limitations of a Covenant Not to Compete?
There are limitations to the enforceability of these covenants. Blanket agreements severely restricting a former employee’s ability to find future employment will likely be struck down by the courts.
In 2018, a federal court in Illinois decided to take a less liberal approach to covenants not to compete. This court ruled that a covenant is not enforceable if the agreement prohibits the employee from taking any position at another company in the same industry. The court concluded that this would place an undue hardship on the employee.
For a covenant not to compete to be enforceable, a court will typically require that the covenant not to compete is reasonable. The covenant not to compete will be considered unreasonable or not enforceable if:
- It lasts for too long
- The geographic area it covers is too large
- The types of business the covenant includes are too far-reaching
- The employer has no legitimate business interest in enforcing the covenant not to compete.
Overbroad covenants will be held unenforceable in most circumstances. However, if the covenant only prohibits the employee from seeking certain positions within a company in the same industry that directly relate to the work the employee performed for their former employer, the covenant will likely be enforceable if all the other requirements are met.
How Have Illinois Courts Handled Enforcement of Covenants Not to Compete?
Illinois courts have a longstanding tradition of supporting business interests by upholding covenants not to compete.
In a case involving a group of physicians who contested their covenants not to compete, the Illinois Supreme Court strengthened its policy of upholding reasonably drafted covenants not to compete. The Court found that the covenants prohibiting the doctors from working within a five-mile radius of the clinic were not overly restrictive because Chicago was a large metropolitan area where other hospitals and employment opportunities for doctors could readily be found. The Court also held that a five-year time restriction was reasonable.
What Are the Consequences of Breaching a Covenant Not to Compete?
A breach of an employment agreement arises when either of the parties fails to perform their duties as outlined in the contract. For example, if an employee failed to pay the employee wages as outlined in the contract or denied providing them benefits they were entitled to.
An employer and an employee may be liable for a breach of the employment contract. However, a breach of a covenant not to compete is typically committed by the former employee.
If an individual violates a valid covenant not to compete, their former employer may pursue legal action against them, which may include:
- An injunction: An injunction may be used to stop a former employee from engaging in certain activities, such as working for a competitor, and direct them to honor the non-compete agreement.
- A lawsuit for monetary damages: A lawsuit may be filed to obtain compensation for monetary damages for actual losses that the employer suffered.
The former employer will likely take legal action to protect its legitimate interests. If a departing employee obtained confidential information during their employment (for example, a trade secret), the employer will want to protect the trade secret from being provided to the individual’s new employer.
In another example, if the employee had contact with the employer’s customers during their employment, the employer would have a legitimate interest in protecting their valuable customer base.
What Is the Most Recent Law Governing Non-Compete Agreements?
A new law, the Final Rule or Non-Compete Clause Rule, was voted on in April of 2024 by the Federal Trade Commission (FTC), that will place a ban on the majority of non-compete agreements. This rule will go into effect 120 days after the Federal Register is published.
This means the Final Rule will most likely go into effect in August of 2024. Once in effect, all employers across the country, including Illinois, will be required to comply with these requirements.
Illinois employers can prepare by meeting with their lawyer or in-house counsel to begin preparing for this new rule as soon as possible. There will be one exception to the ban on non-compete agreements, which is those entered into with senior-level executives.
Illinois employers will have to inform all of their workers that, if they signed a non-compete agreement, it will no longer be enforceable.
How Does this Affect State Laws?
The Final Rule will preempt the current Illinois state laws that allow non-compete agreements that meet the requirements of the state laws. This is because the Final Rule is a federal law.
This change in the law will affect Illinois employers and employees, as all non-compete agreements except for those entered into with senior level employees, will be unenforceable. This change in the law may require an employer to review and revise their current employment contracts.
What if the Final Rule Is Challenged in Court?
The Final Rule is likely to be challenged and undergo changes and interpretations in the future. The rule itself has a severability clause providing that the rest of the rule will be in effect if any portion is deemed unenforceable or invalid.
In addition, this new Final Rule may be entirely struck down in the future. Because of the many different possibilities of changes to this rule, it is essential for employers in Illinois to consult with a lawyer for legal advice on how to prepare and protect their business.
If an Illinois employer or employee is already involved in a case with a non-compete agreement issue, all of the parties should request that their attorneys stay up-to-date on the changes to this rule and how it may affect their case. Being updated on the changes to the rule will allow the parties to make arguments in court to cover all of the possibilities.
Do I Still Need to Know about the Previous Non-Compete Agreement Laws?
Yes, it is essential to be aware of the current Illinois non-compete agreement laws, as they will still be in effect until the Final Rule is enacted. As discussed above, when the Final Rule goes into full force and effect, non-compete agreements, except for those made with senior executives, will not be permitted in the state.
If the Final Rule is invalidated or struck down in the future, the previous Illinois laws will apply. Therefore, it is essential to have an understanding of both sets of laws and how they may affect Illinois businesses.
Illinois businesses may want to include non-compete agreements in their employment contracts, even though they may not be enforceable, in order to ensure they are covered no matter how the law changes. Attorneys can help employers draft and edit employment agreements so that they comply with the Non-Compete Clause Rule and are prepared for the possibilities of changes to the rule.
Should I Consult an Attorney about Issues Surrounding a Covenant Not to Compete?
Before signing a covenant not to compete, you should consider having an Illinois employment contract attorney review the document. An attorney can review the covenant and let you know if its terms are unreasonable or might present a future undue hardship. An attorney can also help you negotiate the terms of a covenant with your employer before signing the agreement.
After your employment relationship has ended, an attorney can also advise you on whether taking a certain job would violate the terms of your covenant. If you believe the agreement is unenforceable, an attorney can help you defend yourself if your former employer sues you.
