How recent developments in noncompete agreements could provide employers additional protection Featured

9:01pm EDT September 30, 2011
How recent developments in noncompete agreements could provide employers additional protection

If an employee leaves your company, is there anything you can do to stop that employee from taking your customers to his new employer?

Many business managers already know that a noncompete agreement can help stop that from happening because it can preclude the employee from competing for a period of time after he or she leaves. But new developments in the way courts apply noncompete agreements could change how much protection they afford employers, says Steven Ciszewski, a partner with Novack and Macey LLP.

“In Illinois, courts have typically enforced noncompete agreements only if the employer could establish that it has a legitimate business need for the noncompete agreement,” says Ciszewski. “However, one of our appellate courts recently broke ranks and held that the employer does not have to establish a legitimate business need in order to enforce its noncompete agreement.”

The issue is currently being reviewed by the Illinois Supreme Court, and the analysis provided by that court could dramatically change how noncompete agreements are enforced in Illinois.

Smart Business spoke with Ciszewski about these new developments and the effect that the Illinois Supreme Court’s ruling could have on employers in the future.

What new developments in the law governing noncompete agreements should employers be aware of?

The general rule in Illinois has been that noncompete agreements are enforceable only if there is a legitimate business need to preclude employees from competing freely after they leave the company. To satisfy this requirement, the employer typically had to show that the noncompete agreement was necessary to protect either its near permanent customer relationships or its confidential information or trade secrets.

One of the state’s appellate courts recently ruled that an employer no longer needs to make this showing to enforce its noncompete agreement. This has created a conflict among Illinois courts that the Illinois Supreme Court should resolve in the coming months.

What effect will the Supreme Court’s upcoming ruling have on employers?

There are a number of things that could happen and a number of possible effects. One possibility is that the Supreme Court affirms the general rule that has been in place and requires the employer to continue to show a legitimate business reason for its noncompete agreement.

That outcome would essentially leave the law in Illinois the same as it has been in the past.

A second possibility is that the court will agree with the appellate court’s new way of thinking and determine that the employer does not have to show that its noncompete agreement is necessary to protect near-permanent customer relationships or confidential information/trade secrets. If that happens, noncompete agreements could be more broadly enforceable in Illinois.

Another possibility, although less likely, is that the Supreme Court announces an entirely new way of interpreting noncompete agreements that is more strict or more lenient than anything adopted by our appellate courts in the past.

Will there be restrictions on the enforceability of noncompete agreements if the Supreme Court does adopt the appellate court’s new way of thinking?

In all likelihood, yes. Illinois courts still seem to unanimously hold that, in order to be enforceable, the noncompete agreement has to be reasonable in duration and geographic scope. Generally speaking, noncompete agreements that last up to a couple of years and cover a reasonable geographic territory are enforceable. There is no reason to think that these limitations will change, regardless of how the Supreme Court rules on the case currently before it.  But the Supreme Court can make new law if it wants to, so this could change if the court decides to go in an entirely new direction.

How would employers be affected if noncompete agreements are enforceable in more situations?

The knee-jerk reaction is to think that all employers will be happy because they want their noncompete agreements to be broadly enforced in order to protect their business when their employees leave. In many cases, that might be the right reaction, but it can cut both ways because employers often find themselves on both sides of this issue over the long run.

One year, the employer might want its own noncompete agreement to be enforced because it needs to protect its business when its employee leaves. The next year, the same employer might want to hire an employee from a competitor. In that situation, the employer would want its competitor’s noncompete agreement to not be enforced so that it can improve its business by hiring talent away from that competitor.

A business might have the best legal arguments in the world to win the case it has today, but how might that win impact the situation it faces in a year? From the employer’s standpoint, this tension is present in almost every noncompete case and needs to be thoroughly considered before any type of legal action is initiated.

Steve Ciszewski is a partner with Novack and Macey LLP.  Reach him at (312) 419-6900 or stevec@novackmacey.com.