To what extent are compensation forfeiture provisions adjudicated under non-compete standards?
This is a question that has vexed Illinois courts - state and federal - for many years, and the case precedents yield no clear answer. Jurisdictions are split on whether forfeiture-for-competition provisions should be analyzed as a de facto restraint of trade or under ordinary freedom of contract principles.
Recently, a case involving a high-profile athlete has shed new light on how courts view forfeiture clauses. Kelly Bires is a successful NASCAR driver who previously signed a "Driver Agreement" with WalTom (since sold to TD Racing Development). Among other provisions, Bires agreed to pay a 25% royalty on future race-related earnings to WalTom for a period of ten years following the time in which he ceased driving on the WalTom team.
Bires, in a wide-ranging dispute, challenged the royalty provision as an unenforceable restraint of trade under Illinois law. Bires just recently inked a new deal with JR Motorsports, which is managed by the Earnhardt family. A federal court in Chicago agreed with him and granted him a judgment declaring the royalty provision unenforceable.
The court relied on a 1973 precedent from the Appellate Court of Illinois, which involved a true forfeiture-for-competition clause in the insurance industry to conclude that a provision which is not a restraint in the actual sense (that is, WalTom could not prevent or enjoin Bires from competing for another racing team) can be considered one if the intent of the clause is to discourage competition. The court examined WalTom's statement that it expected to earn close to $7 million from the royalty provision and had little trouble concluding that the contract had to be examined under the strict scrutiny standard applicable to non-compete agreements.
Under that analysis, the court's task seemed fairly simple. The royalty provision had no geographic term, but the court rightfully downplayed this as a significant factor. (NASCAR competes everywhere, so a geographic term would have little meaning). However, the ten-year post-affiliation royalty provision was overbroad - as was the definition of "race-related earnings" to which the royalty rate attached. It included virtually any income derived from any entertainment medium, extending well beyond true race earnings.
Court: United States District Court for the Northern District of Illinois
Opinion Date: 9/23/09
Cite: Bires v. WalTom, LLC, 662 F. Supp. 2d 1019 (N.D. Ill. 2009)