FROM ILLINOIS BUSINESS LAW JOURNAL

Non-Compete Agreements: Friend or Foe?

Non-Compete Clauses Generally

A non-compete agreement, also called a non-compete clause, restrictive covenant, or covenant not to compete, is essentially a clause used to restrict what an employee can do once that employee leaves his or her job. [1] The purpose of non-compete agreements is to preserve the interests of the former employer with whom the employee has signed the agreement. [2] "Non-compete clauses are used by establishes businesses to prevent employees from engaging in competition or appropriating confidential information for their own use or use by competitors." [3] They may also be used by start-up companies in order to protect lucrative information used or needed in the start-up of a that business. [4] Non-compete agreements can take the form of a clause in a larger agreement, like an employment contract, or can be a completely separate agreement. [5]

III. History of Non-Compete Agreements

Non-compete agreements have been around since the the 1400's. [6] "The first recorded noncompete case was brought in England in 1414, when a dyer of clothes tried to enjoin a former assistant of his from setting up shop in the same town." [7] However, as the "free transferability of property and goodwill became an important social goal", non-compete agreements were disfavored by courts in this same area. [8] There was a shortage of labor because many workers died from the Bubonic Plague and non-competes were seen as a barrier to craftsmanship and open trade. [9] Legal Scholars opine that courts did not routinely enforce non-compete agreements until the start of the Industrial Revolution. [10]

IV. Legal Implications of Non-Compete Agreements

The validity of non-compete agreements differs from state to state. [11] Some have held that non-competes are completely and always invalid. [12] Others have found that non-competes are enforceable in certain circumstances. [13]

Illinois is among the thirty two states (plus the District of Columbia) that allows non-competes to be enforced. [14] Among the states that allow non-competes to be enforced, there are general rules that courts will follow. Applying the rule of reasonableness and the blue pencil rule are just two common methods employed by courts in determining whether to enforce a non-compete. [15]

The Rule of Reasonableness dictates that a non-compete must be reasonable in order to be enforceable. [16] Employers generally have the upper hand and can control negotiations between the employer a new employee. [17] "Generally, management has much more leverage than employees in negotiating noncompete clauses. Restrictions on future employment usually arise at the beginning of an employment relationship, when employees have little bargaining power to resist these terms Moreover, most employees do not seriously contemplate the possibility of leaving future employment at the outset of the relationship and, therefore are not overly concerned about specific terms that might circumscribe their future employment prospects." [18] Therefore, the courts in states that enforce non-competes have found it imperative to allow the employee to have an out when the agreement or clause itself is unreasonable. [19]

The "blue pencil rule" allows courts to change a non-compete agreement that is too restrictive in its original form. [20] The court may then enforce the modified agreement. [21]

In states where non-competes may be enforced, courts will also look to the face of the agreement. [22] In particular, most well-written non-competes will specify geographic scope of the restriction, scope of services to be restricted, and the duration of time the clause should cover. [23] "Non-compete clauses must protect a legitimate business interest of the employer, such as trade secrets, confidential information, and customer relationships." [24] To also protect the interests of the employee who is in search of employment, these three factors must be reasonable and not- overreaching. [25] Additionally, recent Massachusetts cases have held that a non-compete agreement will be found invalid if the employer has changed job positions, increased salary, or changed bonus eligibility and the language of the agreement does not specify that it will still be valid under such circumstances [26]

Alabama, California, Colorado, Delaware, Massachusetts, and North Dakota Have all held that non-compete agreements are completely and always invalid. [27] California, in particular, has a strong policy in favor of "competition and employee freedom." [28]

The remedy for violation of a non-compete agreement is either damages or an injunction. [29] Additionally, new employers may be held liable for hiring an employee who has signed a non-compete agreement with another employer.