Articles Posted in Non-Compete Agreement / Covenant Not to Compete

The Illinois Appellate recently affirmed a two-year bright-line continued employment rule for adequate consideration in non-compete cases if the only consideration is continued employment. Many, but not all, of the federal district courts in Illinois, do not follow this bright-line rule predicting that the Illinois Supreme Court will not follow it.  The Illinois Supreme Court has not yet addressed the issue. You can read the most recent Illinois Appellate decision here.  You can also listen below to the oral argument held in the Appellate Court before it reached this decision:

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New Washington Law Makes Sweeping Changes to Non-Compete Agreement Law 

Non-compete law in the state of Washington underwent sweeping changes last week with the signing into law of HB1450 (“Washington Non-Compete Act”) which targets the use of restrictive covenants within the state. The new law regulates the use and scope of non-competition agreements with both employees and independent contractors and restricts the use of non-poaching agreements in franchise agreements as well as policies against moonlighting. The new law takes effect on January 1, 2020.

Under the new law, a non-competition covenant will be void and unenforceable unless the following criteria are met:

  1. If the covenant is entered into at the commencement of employment, it must be disclosed in writing to the employee by no later than the date of the employee’s acceptance of the offer of employment;
  1. If the covenant is entered into at the outset of employment but will not take effect until a later date due to a foreseeable change in the employee’s compensation, the agreement must specifically disclose that it may be enforceable at a future time;
  1. If the covenant is entered into after the commencement of employment, it must be supported by additional consideration;
  1. The worker’s annual earnings must exceed $100,000 (in the case of an employee) or $250,000 (in the case of an independent contractor)based upon the income reflected in Box 1 of an employee’s IRS Form W-2 or an independent contractor’s IRS Form 1099; and
  1. The post-separation duration of the non-compete must last no longer than 18 months unless the employer can show by clear and convincing evidence that a longer duration is necessary to protect its business or goodwill.

The new law defines the term “non-competition covenant” to expressly carve out certain types of restrictive covenants such as employee and customer non-solicitation covenants, confidentiality/non-disclosure covenants, and covenants relating to the purchase or sale of a business or franchise. Continue reading ›

Employers across a wide variety of industries include non-compete clauses in their employment agreements. This practice has come under increasing fire in recent years. The latest being a petition filed by the AFL-CIO, Service Employees International Union, and a number of other labor and public interest groups with the U.S. Federal Trade Commission (FTC) calling for the FTC to its rulemaking power to issue a federal rule banning the use of non-compete agreements nationwide.

According to the petition, it is estimated that one out of every five U.S. workers — or about 30 million — is bound by a non-compete agreement. The petition seeks implementation of a new rule prohibiting employers across all industries from requiring workers sign agreements limiting their ability to work for a competitor. The petition does not distinguish between employees and independent contractors but calls for a ban on the use of non-compete agreements for both types of workers. According to these groups, non-compete agreements suppress the ability for employees to negotiate for raises, escape from undesirable work environments, or taking their experience and putting it to work by starting competing businesses of their own. If the FTC, which has a mandate to enforce antitrust and consumer protection laws, issues a rule banning non-compete agreements as is being requested, it would make companies that violate the rule subject to FTC enforcement and could cause such companies to incur liability.

The petition calls out by name companies such as Amazon, which the petition claims required temporary warehouse workers to agree to broad non-compete clauses and fast-food chain Jimmy John’s, which, prior to its 2016 settlement with the Illinois Attorney General, the petition claims restricted new hires from working for any competing restaurant within three miles.

The use of restrictive covenants (e.g. covenants not to compete, non-solicitation agreements, etc.) and other so-called anti-competitive practices by employers have become an increasing focus for labor advocates and public officials, including state attorneys general who have filed an increasing number of suits against fast food franchises and other employers who hire large numbers of low wage workers seeking to end the use of non-compete provisions. Silicon Valley heavy-hitters including Apple, Google, Adobe, and Intel agreed in 2015 to a $415 million settlement to end claims that they conspired together to implement an anti-poaching policy to avoid stealing one another’s employees. The FTC has come under pressure from lawmakers and consumer groups to join these labor groups and attorneys general in by taking a more aggressive approach to antitrust enforcement. Continue reading ›

After signing a non-compete agreement with his employer, president of a consulting firm resigned after less than a year, joined a competitor, and began to solicit his former clients and employees. The consulting firm sued, arguing that the ex-employee was bound by the terms of the non-compete and had breached his employment agreement. The Illinois Appellate Court found that the noncompete clause was unenforceable because the employee had not worked for at least two years after signing it, and the only consideration given in exchange for agreeing to the noncompete was continued employment.

Axion RMS, Ltd. is a company specializing in insurance brokerage and employee benefits consulting services. Michael Booth was hired by Axion in October 2010 as Vice President of Sales. He was later promoted to President of Axion in 2014. Booth and Axion entered into an employment agreement when he was hired, and the agreement included a noncompete clause that restricted Booth from soliciting Axion’s clients or employees during his employment and for a period of two years following termination of his employment.

In December 2015, Booth resigned from Axion in order to begin work with at HUB International Limited, a competitor of Axion. Axion later sued, alleging that, shortly after joining HUB, Booth began directly or indirectly contacting and soliciting Axion’s existing clients and customers, as well as several Axion employees. Booth filed a motion to dismiss the complaint in the circuit court. In his motion, Booth cited several cases from the Illinois Appellate Court which held that, where the only consideration given to an employee in exchange for signing a non-compete agreement is continued employment, the employee must work for at least two years after signing the covenant in order for there to be adequate consideration. Booth argued that, as he had resigned from his position less than a year after agreeing to the non-compete, it was unenforceable. Continue reading ›

Employers in New Jersey must review their current policies and practices to ensure compliance with a new statutory prohibition on the inclusion of non-disclosure provisions in employment contracts or settlements involving discrimination, harassment, or retaliation claims. The new law, signed by New Jersey governor, Phil Murphy, on March 18, 2019, and effective immediately, states that employers cannot insist that employees keep confidential the details of such claims or settlements. The law makes clear though that it should not be construed as prohibiting employers and employees from entering into non-compete agreements and confidentiality agreements relating to proprietary information, such as non-public trade secrets, business plans, or customer lists or information.

The law renders any provision in an employment contract that waives “any substantive or procedural right or remedy relating to a claim of discrimination, retaliation or harassment … against public policy and unenforceable against a current or former employee who is a party to the contract or settlement.” The law also does not permit prospective waivers of any right or remedy under the New Jersey Law Against Discrimination, or any other state statute or case law. The new provisions, however, do not apply to collective bargaining agreements. Continue reading ›

As fewer physicians are forming their own practices, they are finding one potential disadvantage to hospital or physician group employment: non-compete agreements. Physician employment contracts, particularly for specialists, increasingly include non-compete agreements or non-solicitation agreements (sometimes referred to collectively as restrictive covenants). This can lead to expensive, protracted legal disputes when doctors attempt to leave one physician group for another or desire to form their own practices. Further, many patients lose contact with their doctors when they switch practices. In a recent survey of nearly 2,000 primary care doctors in 5 states, 45% of the physicians surveyed had covenants-not-to-compete or other restrictive covenants in their employment agreements.

As large health systems look for ways to remain profitable, many are turning to physician practices to expand specialty offerings and attract new patients (or obviate the need for patients to go to other hospitals or practice groups for different medical needs). From 2015 to 2016, hospitals acquired 5,000 physician practices and employed more than 14,000 physicians, according to a study conducted by the Physician Advocacy Institute. According to the study, between 2012 and 2016, hospital-owned physician practices doubled and there was a 63% increase in hospital-employed doctors. Nothing in recent health care trends indicates an end to this movement. Continue reading ›

Where an employee was free to take the knowledge he had accumulated over his nearly 30-year long career into his next job as a consultant, representing buyers of the products of his former employer.

Archer Daniels Midland is one of the largest manufacturers of corn-based sweeteners in the United States. In its most recent fiscal year, the sweeteners division of ADM realized a profit of $600 million. ADM sells its sweeteners to a few hundred buyers in the United States, including Sensory Effects, Inc. and PMP, Inc.

ADM categorizes buyers in one of two categories: toll contract or flat rate. Toll contract buyers contract to buy a fixed quantity of sweetener from ADM during a year, with the price fluctuating in response to the price of corn. Toll contracts may be entered into at any time of the year. Flat rate contracts can be entered into only during ADM’s annual contracting season, which lasts 30 to 60 days, beginning in the late summer. Under a flat rate agreement, the buyer agrees to pay a fixed price for a full year’s supply of sweetener.

Lane Sinele worked for ADM from January 1990 until his retirement in August 2018. At his retirement, Sinele was the manager of national accounts for ADM’s sweetener division. Sinele represented ADM, soliciting, procuring, and servicing buyers of sweeteners. Sinele handled the accounts for both Sensory Effects and PMP. As part of his employment, Sinele signed two non-disclosure agreements, though he did not sign either non-compete or non-solicitation agreements. During his career, Sinele had access to ADM’s Tableau system, which contained proprietary information about freight systems, factories, customer orders, manufacturing costs, and margins. Continue reading ›

Massachusetts’ new non-compete agreement statute, The Massachusetts Noncompetition Agreement Act, may provide the blueprint for states like Illinois to follow in codifying the requirements for enforceability of non-competition agreements. Unlike in Massachusetts, much of the current non-compete law in Illinois is not statutory but has been developed at common law by judges over the years in a multitude of judicial opinions. Massachusetts has taken a different approach by choosing to codify its requirements for an enforceable covenant-not-to-compete. In doing so, Massachusetts joins states such as Utah and Idaho who have also recently passed laws regulating non-compete agreements.

The new Massachusetts law went into effect in late 2018 and applies only to non-compete agreements (also known as agreements-not-to-compete or covenants not-to-compete) entered into after October 1, 2018. As a result, its full ramifications have not yet been realized. The new law is an effort to regulate non-compete agreements by limiting their enforceability and codifying express requirements for enforceability. The new law applies not only to agreements with employees but also to agreements with independent contractors. To be enforceable under the new law, a non-compete agreement must (1) be in writing; (2) be signed by the employer and the employee; and (3) expressly state that the employee has the right to consult with counsel prior to signing. In addition, the employer must provide a copy of the non-compete agreement to the employee or independent contractor at the earlier of a formal offer of employment or ten business days before the start of the employment. Finally, non-competes entered during employment must be supported by independent consideration beyond continued employment. Continue reading ›

Where dance academy and employee had an employment contract that specified non-compete provision lasting “not less than five years,” the provision meant five years under Illinois law, and the reasonableness of the restriction was a fact-based question requiring more evidence to determine.

In April 2017, Pam’s Academy of Dance/Forte Arts Center sued Callie Marik, a former employee, seeking monetary damages and injunctive relief. The complaint alleged breach of contract and violation of the Illinois Trade Secrets Act. Pam’s Academy alleged that Marik breached the parties’ non-disclosure and restrictive covenant agreement by opening a dance studio within 25 miles of Pam’s Academy and soliciting students and/or teachers from an improperly obtained customer list.

Marik moved to dismiss the complaint, arguing that all of Pam’s Academy’s claims were defective because the provisions of the contract were invalid and unenforceable under Illinois law, and the complaint failed to allege a plausible basis for the allegation that Marik misappropriated a customer list. After a hearing, the trial court struck paragraph 7 of the original agreement, which banned Marik from soliciting, interfering with, diverting, or otherwise communicating with any customers or employees of the academy for purposes of providing similar services as the academy. The court found that this restriction, having no time limitation, was overly broad. The court then certified two questions for interlocutory review seeking an answer as to whether employment-based restrictive covenants with time periods of not less than five years and not less than three years were enforceable under Illinois law, and whether, in the context of employment-based restrictive covenants, whether the terms “not less than five years” and “not less than three years” meant five and three years, respectively. The Illinois Appellate Court, Third District authorized the appeal. Continue reading ›