Tuesday, March 12, 2013

A Brief Commentary on Illinois' Proposed Noncompete Agreement Act

As readers of this blog may know, a few years ago I drafted Illinois' proposed Covenants Not to Compete Act.

Several legislators had determined, at that time, that a bill was necessary to regulate the use and enforcement of employment-based non-competes. One of the primary drivers of that legislation was the perception that employees should have advanced notice of covenants before starting work, and that broad non-competes should not be enforced against employees discharged without cause. I don't believe it was a reflection of my drafting efforts, but the legislation didn't advance very far.

Fast-forward to 2013, and Rep. Thomas Morrison has introduced HB 2782 (text below), the Employment Noncompete Agreement Act, which I was not involved with. The bill is generally more employer-friendly in some respects, but it also would fail to protect companies in others.

The highlights:

(1) The bill would provide that "all employers" have vested interests in protecting their client bases through the use of non-compete agreements.

(2) Noncompetes would be valid if they meet three general criteria: (a) the contract must be in writing signed by both parties; (b) it may limit the solictation of an employer's existing customers, "identified prospective customers", or employees during the term; and (c) it must be time-limited between 6 and 18 months, depending on the annualized compensation the employee earns before termination.

(3) The bill would entitle a prevailing party to attorneys' fees and expenses, and it would require a subsequent employer to honor the agreement.

(4) The bill would apply to agreements entered into on or after its effective date.

My thoughts:

(1) By implication, it seems the bill would ban general non-compete arrangements, along the lines of the California statute or the proposed Minnesota bill. The interesting twist is that HB 2782 is written in reverse - it defines what's permitted, not what's banned.

(2) I've written before that true non-competes serve as an intellectual property protection device and a prophylactic means to avoid the potential disclosure of trade secrets. A non-compete, therefore, is more suitable for technical employees, product developers, those with highly unique skill-sets, and high-level management, while a non-solicitation covenant (the type of agreement HB 2782 would allow) are really more appropriate for sales employees.

(3) The bill does not differentiate between employees who are terminated and those who voluntarily leave their employment. Nor does it govern non-competes contained in independent contractor arrangements, partnership or LLC agreements, or a sale-of-business contract.

(4) Passage of the bill could discourage companies from auditing or updating their agreements. Contracts that were signed before passage would be governed under the common law rules set forth in Reliable Fire Equipment Co. v. Arredondo. Employers who have broader non-competes would be less inclined to amend those agreements, because any new contract would be subject to new rules.

(5) Courts would have to apply different rules for employees depending on when their contracts were signed. This could cause some judges to interpret the common-law, or apply it to a given set of facts, in a way that is consistent with the language of the new legislation. It's generally not good for similarly situated employees to have different outcomes in litigation, all other things being equal.

(6) The legislation removes a powerful argument in an employee's arsenal - that a covenant does not protect a legitimate business interest. You see employees advance this argument by claiming customers are fluid, switch companies with relative ease, or can be ascertained through public sources. Though not entirely clear, this bill would foreclose that inquiry and focus only the terms of the agreement - something that a few Illinois courts moved towards before Reliable Fire case reversed that trend. I am one who firmly believes that while the legitimate business interest inquiry is a strong tool for employees to use in defense, it often results in more expensive litigation. In that regard, the increased fees associated with litigating the issue hinder settlement talks and prolongs the suit.

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