When non-compete agreements can and cannot be used?
One of outgoing attorney general Lisa Madigan’s final acts was to settle a lawsuit the Attorney General’s office had brought against one of the nation’s largest payday lenders Check Into Cash alleging that the lender’s use of non-compete agreements ran afoul of Illinois law.
Illinois is one of a growing number of states cracking down on the widespread, indiscriminate use of non-compete agreements, particularly with low-skill or low-wage employees. Many employers who use non-compete agreement do not use them for their intended purpose–to protect an employer’s proprietary and valuable information–but instead, use them to prevent employees from leaving and to reduce the available workforce for competitors. It is this practice many states are seeking to curb.
States are also targeting another group of employers: those who attempt to use non-competition agreements for their intended purpose but do so using overly broad, poorly worded agreements. Courts have grown increasingly hostile to such agreements, opting to throw out the entire agreements rather than reign in or rework them (sometimes called blue penciling).
Three things are certain in the area of non-compete agreements (also referred to as restrictive covenants): (1) the agreement must be narrowly tailored so that it protects the employer’s legitimate business interest but does not unnecessarily go beyond that; (2) a poorly worded non-compete agreement is worse than no agreement as it provides a false sense of security but will likely not be enforced by a court (a fact an employer will learn only after lengthy, costly litigation); and (3) a non-compete agreement is not the type of agreement you can set and forget.
Non-compete law, perhaps more than any other area of law, is constantly changing and evolving. A do-it-yourself non-compete agreement or one drafted years ago likely will not hold up in court today. It is wise to have an attorney experienced in non-compete agreement law review and update your non-compete agreement every few years. The money spent now will more than pay off later when you are relying on that agreement to prevent an employee from walking out the door and taking your valuable, proprietary information to a competitor.
What non-compete agreements are and are not.
A non-compete agreement is a contract (or a provision in a contract) between an employer and an employee that prohibits the employee from performing certain activities within a specified geographic area for a set amount of time. The purpose of non-compete agreements is to protect an employer’s proprietary and valuable information. An employer who invests time and money in training an employee and discloses valuable information that the employer has developed at great expense wants protection from that employee leaving and using that information to directly compete with the employer. Examples of the type of information an employer might want to protect include customer lists, vendor lists, pricing lists, methods and procedures, and client renewal dates (for insurance brokers). Employers often use non-compete agreements in conjunction with non-solicitation agreements to further protect them from the impact of losing an employee.
Non-compete agreements are not a mechanism for retaining employees by eliminating all alternative employment opportunities. They also are not a mechanism for preventing competitors from being able to find workers for open positions. If there is evidence that an employer has used non-compete agreements for these prohibited purposes, a court will not enforce the agreement.
The first thing an employer must understand is when a non-compete (or non-solicitation) agreement can and cannot be used. As the Check Into Cash lawsuit demonstrates, non-compete agreements are not appropriate for all employees. The Illinois Freedom to Work Act, 820 ILCS 90/1 et seq., prohibits the use of non-compete agreements for employees whose earnings do not exceed the greater of minimum wage or $13 per hour.
The Check Into Cash lawsuit demonstrated another common pitfall of non-compete agreements: they are often overly broad and overly aggressive instead of being narrowly tailored. Under Illinois law, non-compete agreements may only be used to protect a legitimate business interest and must be appropriately limited in time, geographic scope, and activity. In the Check Into Cash lawsuit, the AG’s office alleged that Check Into Cash’s non-compete agreement violated these requirements. It alleged that the agreements were overly broad in that they precluded too many different employment options and placed too many limitations on the location of future employment.
The non-compete agreements at issue precluded former employees from engaging in any “consumer lending” or “other money transmission services” within 15 miles of a Check Into Cash location, which with Check Into Cash’s more than 1,000 locations in 28 states covers a large area. Madigan summed up what was wrong with this practice in a statement saying: “Check Into Cash inappropriately tries to retain low-income workers by requiring them to sign unfair non-compete agreements that attempt to prevent workers from getting better jobs elsewhere.”
Whether you are an employee being asked to sign a non-compete agreement or an employer needing a non-compete agreement or needing to see if your existing agreement is still valid, it is important to speak with an experienced non-compete attorney. It is no less important to have a skilled non-compete attorney at your side if you find yourself in litigation to enforce a non-compete agreement.
Super Lawyers named Illinois commercial law trial attorney Peter Lubin a Super Lawyer and Illinois business dispute attorney Patrick Austermuehle a Rising Star in the Categories of Class Action, Business Litigation, and Consumer Rights Litigation. Lubin Austermuehle’s Illinois business trial lawyers have over thirty years of experience in litigating complex class action, copyright, noncompete agreement, trademark and libel suits, consumer rights and many different types of business and commercial litigation disputes. Our Deerfield and Highland Park business dispute lawyers, civil litigation lawyers and copyright attorneys handle emergency business lawsuits involving copyrights, trademarks, injunctions, and TROS, covenant not to compete, franchise, distributor and dealer wrongful termination and trade secret lawsuits and many different kinds of business disputes involving shareholders, partnerships, closely held businesses and employee breaches of fiduciary duty. We also assist Chicago and Oak Brook area businesses and business owners who are victims of fraud. You can contact us by calling (630) 333-0333 or our toll-free number (833) 306-4933. You can also contact us online here.