Illinois House Proposes New Covenants Not to Compete Act

The “Illinois Covenants Not to Compete Act” proposes to limit the enforceability and scope of non-compete agreements but, at the same time, the bill may actually make such agreements easier to enforce provided the stringent requirements are met.

Most significantly, the bill proposes that non-compete agreements should only be enforceable as to “Key employees” who:

1. Have substantial involvement in executive management; 
2. Have direct and substantial contact with customers of the employer; 
3. Have knowledge of bona fide trade secrets or other proprietary information of the employer;
4. Have such unique skills that employee has achieved a high degree of public or industry recognition; or
5. Is among the highest paid 5% of the employer’s employees.

In addition, and much like a similar statute governing non-competes in Oregon, the employer may only enforce a non-compete agreement if it (i) informs the “Key employee” in a written offer at least two weeks before the first day of employment that a non-compete is required as a condition of employment; or (ii) enters into the non-compete with the “Key employee” upon a material advancement or promotion of the “Key employee” or payment of a material bonus or increase in compensation.  Thus, mere continued employment would no longer be sufficient consideration for a non-compete agreement.

The bill also proposes the following rebuttable presumptions that a non-compete shall not be enforceable to the extent:

• Its duration of restrictive period exceeds one year;
• Its geographic scope extends beyond any region in which the “Key employee” provided employment for the employer during the one year preceding termination; or
• The type of personal services activity subject to the non-compete extends beyond the nature of work the “Key employee” provided to the employer during the one year preceding termination.

The bill would statutorily provide for courts to be able to “blue pencil” restrictive covenants.  In other words, the court would be given discretion to modify covenants to the extent they fail to meet the criteria of the Illinois Covenants Not to Compete Act in order to make them reasonable under the circumstances and the bill.

To avoid frivolous litigation the bill proposes that, to the extent a non-compete agreement provides for attorneys’ fees and costs to the employer from the employee, such provisions would be construed to provide the “Key employee” with the same mutual entitlement to attorneys’ fees and costs should the employee be the prevailing party against the employer.

Similar to other state’s legislation in this area, the Illinois Covenants Not to Compete Act provides for a number of exceptions including: 

1. Non-solicitation provisions as to employees, vendors and customer provisions;
2. Confidentiality agreements; and
3. “Employee choice” clauses in incentive compensation programs (requiring the forfeiture of incentive compensation in the event an individual engages in prohibited conduct).

The bill would also make it easier for an employee to challenge a non-compete agreement as it statutorily provides for the ability of an employee to bring a declaratory judgment action to challenge the enforceability of the non-compete.  The current wording of the bill suggests that if such a challenge by the employee is successful, the employer would have to pay the employee’s attorneys’ fees and costs for bringing such declaratory action.

Although the bill makes it much riskier for employers to try to enforce non-compete agreements, the bill actually makes carefully drafted agreements more enforceable and easier to establish a legitimate business interest sufficient to substantiate a non-compete agreement, which is otherwise a high threshold under current Illinois law.  Should this bill pass, employers will want to review their existing restrictive covenants and modify them to ensure such agreements will pass the revised requirements set forth above.  By passage of this proposed legislation, Illinois would join a host of other states that statutorily provide for the requirements of enforceable non-compete agreements.

The bill as proposed would take effect January 1, 2011.  The same bill was introduced in 2009 and failed to gain any momentum.  McDonald Hopkins will continue to monitor the progress of this proposed bill.  Now, more than ever, it is critical to audit your current agreements to ensure that they are both enforceable and effective, and act swiftly should a violation occur.  McDonald Hopkins' Trade Secret, Non-Compete and Unfair Competition Practice has a 3 step process to securing your company's assets, which includes:

1. Reviewing your business to determine the protectable business assets and information;
2. Drafting restrictive agreements tailored for each level of employee on a national basis, customized for industries and states with special nuances; and
3. Enforcing your agreements across the country at a moment's notice.

McDonald Hopkins counsels and advocates on behalf of clients in labor and employment matters.  If you have any questions regarding this Alert, please contact:

James J. Boutrous II

248.220.1355 

jboutrous@mcdonaldhopkins.com

James J. Giszczak

248.220.1354

jgiszczak@mcdonaldhopkins.com

Dominic A. Paluzzi

248.220.1356

dpaluzzi@mcdonaldhopkins.com