Information contained in this publication is intended for informational purposes only and does not constitute legal advice or opinion, nor is it a substitute for the professional judgment of an attorney.
Earlier this year, the Illinois legislature revived efforts to enact the Illinois Covenants Not to Compete Act, which sets statutory standards and guidance for the drafting and enforcement of covenants not to compete. House Bill 16, introduced on January 12, 2011, replaces House Bill 4040, a similar bill which has sat dormant since its introduction in March of 2009.
Currently, courts have to look to case law to determine whether covenants not to compete are enforceable, often leading to drastically different results depending upon the venue and even the judge assigned to the case. As such, whether a court will enforce a restrictive covenant against a former employee is often rife with uncertainty. While the new bill seeks to reduce that uncertainty by establishing criteria for enforcement, these changes do not come without a cost to employers.
First, the bill limits enforcement of covenants not to compete to employees classified as “key employees” or “key independent contractors.” While these terms are relatively broadly defined under the bill, this is a limitation that doesn’t currently exist under the case law. The bill also seeks to impose the following restrictions: requiring two weeks prior notice to new employees or contractors of the need to execute such a covenant, eliminating continued employment as possible consideration for a covenant, and the creation of a rebuttable presumption that covenants will be presumed invalid if they are (a) in excess of one year, (b) extend beyond where the promising party provided services in the last year of employment or engagement; or (c) extend beyond the type of work performed by the promising party in the year prior to termination.
On the flip side, the bill expands upon the definition of “legitimate business interest” by adding business goodwill to the list of legitimate interests recognizable for enforcement of a covenant not to compete, which has not regularly been identified as such by Illinois courts.
Procedurally, the bill would automatically make any one-way fee-shifting provisions applicable to both parties, and would allow employees to seek declaratory judgments on the enforceability of an agreement, and receive fees and costs if successful. Both of these items would clearly serve as detriments to drafting or seeking to enforce overly broad covenants, though it is unclear how either would be applied in conjunction with the court’s authority to modify overly broad covenants, an authority that would remain unchanged by the new bill.
So would this bill require employers to tear up all of their existing agreements and completely overhaul all restrictive covenants? The answer depends on what types of agreements the employer currently uses. The bill does not apply to non-solicitation agreements covering employees, vendors or customers; confidentiality agreements; agreements between a corporation, partnership or limited liability company and its shareholders, partners or members; or agreements whereby an employee is required to forfeit incentive compensation in the event of competition. Therefore, if an employer’s restrictive covenant agreements only restrict solicitation of customers or employees, without prohibiting who a former employee can work for in the future, this bill would have no effect. It is only where the agreement restricts an employee’s future work prospects that the employer will be impacted.
That being said, there is no guarantee that House Bill 16 will fare better than its predecessor bills. However, the new bill appears to be getting more attention than its predecessor, as shown by the fact that this new bill has been amended to exclude certain media outlets. Employers should be attuned to this possible overhaul in the covenants not to compete arena.