Employee Non-Competition Agreements
Without the consent of the employer an employee cannot compete with his or her employer because of the fiduciary duty the employee owes to the employer. After the employment ends the employee is free to compete or work for a competitor. Many employees agree not to do so. Whether or not these agreements are enforceable has been constantly litigated.
The starting point is that they are void because an agreement not to compete violates public policy. However, there are many exceptions that have arisen over the years. Now, if the employer has trade secrets that the agreement is designed to protect or if the employer has a protectible interest in its customers these agreements can be enforced, provided they pass certain other tests.
If the object is to protect trade secrets there must actually be secrets and the employer must be able to prove they are treated like secrets. If the information is know outside the employer's business or is easily found out it is not a secret. If the employer does not restrict access to the information to those with a need to know it to do their jobs it will not be considered a secret. Whether or not information about customer needs or prices can be a secret depends on the facts of a particular case and is often litigated. However, courts often conclude anyone could find out about their needs and what the employer charges them by asking them.
The employee involved must have access to the secrets.
When relief is given to protect trade secrets courts will often limit it to the time needed by some third party to independently develop the information rather than the time set forth in the agreement. When a departing employee takes tangible employer property, such as customer lists, documents showing confidential information, or anything else of a physical nature (including computer stored data) courts are very willing to grant relief. In contrast, when the employee takes nothing physical courts often note that the employee is entitled to use the general information and skills the employee acquired while working for the employer in a new employment
A protectible interest in customers has been held to exist where the employer's customer relations are near permanent and where the employee had contact with the customers only because of the employment. Near permanency is established by showing long term exclusive relationships, which were difficult and costly to develop. Sometimes other factors are considered as well. Needless to say, if the employee had contact with the customers before working for the employer, the agreement will not be enforced.
Regardless of whether trade secrets or near permanent customer relationships are present, an employee agreement not to compete will not be enforced unless it is reasonable as to time and area. The restrictions must not be longer or wider than necessary to protect the interest involved. The courts also consider whether the restrictions will keep the employee from getting a new job. If an employer has customers only in the Chicago area, an agreement not to compete within a 500 mile radius of Chicago will probably not be enforced. If an employer is trying to protect customer information that can be independently compiled in 6 months, a 3 year agreement not to compete will probably not be enforced.
Many agreements not to compete contain a severability clause saying that if a particular provision is not enforceable the court shall ignore it and enforce the agreement without it. Such clauses often also say that if a court finds a provision unenforceable, it shall construe the provision so it would enforceable. This gives the court a basis to reduce the geographic area or time period stated in the agreement to what would be enforced and to enforce it as amended. Some courts will do this, many will not.
These agreements are often part of an employment agreement covering other matters as well. That part of the agreement covering post employment non-competition often states that it applies regardless of how the employment ends or whether or not there was cause for a termination allowed by other provisions of the agreement. However, it has been held in many cases that employer breach of the employment contract (such as wrongful termination) renders the agreement not to compete unenforceable.
The usual employment relationship is at will - that is the employer can fire the employee at any time for any reason or no reason or the wrong reason. And the employee may quit at any time. Contracts and agreements require consideration to be enforceable. Many employers ask current employees to sign agreements not to compete. Traditionally the courts held that continued employment was sufficient consideration for the promise not to compete. More recent cases have questioned whether there is consideration here in that the employment is still at will and the employee could be fired the next day. The longer the employment continues, the more likely the agreement will be enforceable.
When these agreements are enforced they are enforced by injunction as well as damages. The court orders the ex-employee not to compete. The court can also order a new employer not to employ the ex-employee. If the employer can prove it lost any money as a result of the breach it can also get an award for damages. Jury trials are usually not available.
There are a variety of statutes and rules that provide special rules for certain businesses and the laws in general on agreements not to compete vary widely from state to state. Since this is a hotly contested area, the law resulting from court decisions is also constantly changing. The agreements usually contain a provision stating what state's law will be applied by the court in interpreting the agreement and these clauses are often enforceable if the facts of the matter have anything to do with the named state, even though the suit is in another state.
The Illinois Supreme Court has recently held that the real test for enforcement is reasonableness of the restraint. The restraint:
The court calls this the legitimate business interest test. The test requiring near permanency of customer relationships and the employee's acquisition of confidential information is no longer valid in that enforcement is no longer limited to those considerations or any other specific items. The test now is one that considers all the facts and circumstances of the individual case, including, but not limited to:
These are the things that had been considered before, but now the inquiry is not limited to these areas and none are determinative. The object is to determine the reasonableness of the restraint in general.
This discussion covers an agreement not to compete by employees. Such agreements exist in other situations. Of course any agreement not to compete starts out with the presumption that it is against public policy. However, in one other area where such agreements are common they are freely enforceable and that is where a business or interest in a business is sold. When you sell a business you are selling its good will and if you continue to compete you are taking back the very thing you sold. The courts adopt this line of reasoning in enforcing agreements not to compete when they are ancillary to a sale of part or all of a business.
The employment and sale of a business areas sometimes coalesce when an employee owns part of a business and is required to sell it to the business or other owners when the employee leaves. It is much easier to enforce that agreement than the agreement of a non-owner employee.
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Chicago Business Law