Legal Update - November - 2005
Non-Competition and Non-Solicitation Agreements: An Overview and Steps for Employers to Take to Maximize Their Effectiveness

Requiring employees to sign non-competition or non-solicitation agreements can be an effective tool for employers seeking to protect their businesses. Without such agreements, an employer may be more vulnerable to the increasingly common situation where an employee leaves to join a competitor or to start a competing business and takes his former employer's clients and its confidential information, with potentially devastating consequences. While non-competition and non-solicitation agreements offer critical protections to employers, courts nonetheless may be reluctant to enforce them because of the burden they may impose on the ex-employee. As a result, if an employer fails to take proper care in drafting these agreements, they may not be worth the paper on which they are written. This newsletter will provide an overview of the factors that courts frequently use to determine whether non-competition or non-solicitation agreements are enforceable and suggest steps that employers may take to maximize the effectiveness of their non-competition or non-solicitation agreements.

An Overview

A non-competition agreement is a covenant by an employee that, upon the termination of the employment relationship, the employee will not engage in specific activities competitive with the employer's business for a given time period within a specified geographic area. Similarly, a non-solicitation agreement is a contract in which the employee agrees not to solicit or do business with the employer's customers for a certain period of time after his or her employment terminates. Often, non-solicitation agreements will cover only those customers who the employee met and worked with during the employment relationship. Moreover, both non-competition and non-solicitation agreements usually also contain covenants not to disclose the employer's confidential information. It is often advisable for an employer to also include an invention assignment agreement, particularly where the employee is or may become involved with product or technology research and development.

In deciding whether to enforce non-competition and non-solicitation agreements, courts balance the employer's interest in protecting its business with the employee's right to pursue a career in his or her chosen profession. In Illinois and many other states, courts will not enforce either a non-competition or a non-solicitation agreement against an employee unless it is reasonable in both duration and geographic scope and necessary to protect a legitimate business interest of the employer. The mere desire to prevent competition from an ex-employee is not a legitimate business interest. The two interests that may be protected through a restrictive covenant under Illinois law are (1) "near permanent" customer relationships where the employee has no previous business relationship with the employer's customers, and (2) an employer's confidential information that the employee acquires in the course of his employment. Restrictive covenants must be carefully drafted to protect one or both of these interests or they will not be enforceable. Whether an employer has a near-permanent relationship with its customers depends on factors such as how much effort and expense the employer has incurred to obtain and keep the customers, the length of the relationship, and the personal contact required between a company's employees and the customer.

In determining whether the duration and geographic scope of a restrictive covenant are reasonable, courts will consider both what is necessary to protect the employer's interests and how burdensome the restriction is on the employee. These determinations are very fact specific and depend on factors such as the nature of the employer and the employer's industry and the skill level and job description of the employee. For example, in some industries a one-year non-competition agreement is reasonable, whereas in other industries, where information changes rapidly, only a one-month period would be reasonable. Similarly, for a national firm a geographic scope of the entire United States may be reasonable, whereas for a local company it is possible that only a 10 or 15 mile radius around a city would be deemed reasonable.

When a court finds that an agreement is unreasonably restrictive, it is permitted in certain circumstances to "blue pencil" the agreement, or to rewrite or carve-out the unreasonable term, to make it enforceable rather than refusing to enforce the agreement in its entirety. For example, if a court found that a two-year non-competition agreement was unreasonable, it might choose to enforce the agreement for only a one-year term, if the court believed that this would be reasonable, rather than not enforcing it at all. Courts are, however, becoming much more reluctant to blue pencil. If any part of a non-competition or non-solicitation agreement is overbroad, a court may well refuse to enforce the entire agreement. Therefore, many employers' non-competition and non-solicitation agreements may not provide the critical protections on which employers rely because they are overbroad and unenforceable as drafted.

Steps Employers May Take to Help Maximize the Enforceability of Their Agreements

The enforceability of a non-solicitation or non-competition agreement is a highly fact-specific determination and subject to the inherent unpredictability of litigation; therefore, an employer cannot definitively know beforehand whether its non-solicitation or non-competition agreement will hold up in court. That said, it is all the more important for employers to do what they can before a dispute arises to help increase the odds that their non-competition and non-solicitation agreements will be enforceable. Below are a few steps that employers may take.

Make Sure That the Employee Receives Consideration

An agreement not to compete or not to solicit is enforceable only if "consideration" is given to the employee in exchange for signing the agreement. Under Illinois law, sufficient consideration exists if the employee signs the agreement at the beginning of the employment relationship. If, however, an at-will employee signs the agreement after he or she has already begun working for the employer, continued employment alone is not sufficient consideration if the employment ends after a short duration, even if the employee is the one who decides to terminate the relationship. Since employers cannot predict when an at-will employee's employment will terminate, continued employment is not a reliable way to establish consideration. Thus, employers should have employees sign the agreement when the employment relationship begins. If the employer wants an existing employee to sign such an agreement, to help ensure its enforceability, the employer should offer the existing employee a bonus or some other compensation or benefit that would not otherwise be due the employee in exchange for signing the agreement.

Narrowly Tailor the Restrictions to Protect the Employer's Critical Interests

Employers may think that a ten-year non-compete is better for the employer than a one-year non-compete. But, as explained above, such a strategy is likely to backfire in the context of restrictive covenants because if an agreement limits an employee's post-termination rights unreasonably, a court may refuse to enforce the agreement in its entirety. As a result, employers should both carefully consider what critical business interests they are seeking to protect and weigh the possible risks and benefits of pursuing unnecessarily aggressive restrictions. Often, it is advisable to only include those restrictions that are truly necessary to protect the employer. For example, if what chiefly concerns an employer is the possibility that an employee will quit and attempt to take the employer's customers, the employer should consider using a narrow non-solicitation agreement, rather than a broad non-competition agreement, to increase the chances that the agreement will be enforced while still protecting the employer's legitimate business interests.

Customize and Keep Agreements up to Date

Rather than using one agreement for all employees, employers should customize agreements for each type of employee. For example, a non-solicitation agreement is often sufficient protection regarding sales employees, but a non-competition agreement may be required for senior managers. Customizing the relevant restrictions for each type of employee helps achieve the appropriate balance of maximizing the protections provided to the employer while keeping the burden on the employee reasonable so that a court will be likely to enforce the agreement. Given the legal uncertainties and complexities that are involved in such agreements, employers should rely on counsel to help properly tailor and customize their agreements.

Employers should review their non-competition and non-solicitation agreements periodically to determine whether the agreements' restrictions still make sense given changes in the employer or the marketplace. In addition, experienced legal counsel should be used to determine whether existing agreements are likely to be held enforceable before any disputes arise over departing employees and, if necessary, to modify such agreements or draft new agreements to increase the likelihood that they will be enforced.

FVLD publishes updates on legal issues and summaries of legal topics for its clients and friends solely for general informational purposes. They do not constitute legal advice, nor are they intended as a substitute for obtaining legal or other professional advice based upon specific factual circumstances or issues. We welcome comments or questions. If we can be of assistance, please call or write Jon Vegosen, 312.701.6860, jvegosen@fvldlaw.com, Glenn Rice, 312.701.6895, grice@fvldlaw.com, Dan Hinkle, 312.701.6873, dhinkle@fvldlaw.com, or consult with your regular FVLD contact.

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