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A nightmare for business owners is an employee, who you spent a lot of time and money training, leaves to work for a competitor. One way to reduce the risk of that nightmare becoming reality is to have employees sign non-compete agreements.
Sounds great in theory, but are they practical in Illinois. A recent Illinois Appellate Court decision discussed two tests Illinois courts have used to determine whether an employee non-compete agreement is valid. One makes non-compete agreements difficult to enforce. The second and newer test makes non-compete agreements easier to enforce, hence more practical.
The court in the case Steam Sales Corporation v. Brian Summers stated that the new test, which it referred to as the “reasonableness test” was the correct standard Unfortunately, the court applied the older and narrower “legitimate business interest” test. The facts in the case were so egregious that the employee would have lost under either test.
What are these two tests and what is their effect on employee compete agreements? To answer these questions you have to look at both tests.
The first test is the legitimate business interest test. Under the legitimate business interest test, the business must be one where its relationships with the business’ customers are near permanent and the employer would not have had contact with the customers if it had not been an employee. This test can also be satisfied if the employee gained confidential information through his employment that he attempted to use for his own benefit. Most businesses are not able to demonstrate that they have a “near permanent” relationship with their customers. So, it is very difficult to enforce a non-compete agreement if the court applies the legitimate business interest test.
The second test is the reasonableness test. Under the reasonableness test, the court looks at whether the terms of the non-compete will be injurious to the public (the customers) or cause undue hardship to the employee and whether the restriction on the employee is greater than necessary to protect the employer. This test is much easier for an employer to meet.
There are other factors in determining whether an employee non-compete will be enforceable. One such factor is whether the employee received any meaningful consideration for signing it. This is easy to show for brand new employees since the job offer can be conditioned upon signing a non-compete agreement.
Illinois courts applying a reasonableness test should allow employers to sleep a little more peacefully knowing that it is easier to have an effective employee non-compete agreement.
Sounds great in theory, but are they practical in Illinois. A recent Illinois Appellate Court decision discussed two tests Illinois courts have used to determine whether an employee non-compete agreement is valid. One makes non-compete agreements difficult to enforce. The second and newer test makes non-compete agreements easier to enforce, hence more practical.
The court in the case Steam Sales Corporation v. Brian Summers stated that the new test, which it referred to as the “reasonableness test” was the correct standard Unfortunately, the court applied the older and narrower “legitimate business interest” test. The facts in the case were so egregious that the employee would have lost under either test.
What are these two tests and what is their effect on employee compete agreements? To answer these questions you have to look at both tests.
The first test is the legitimate business interest test. Under the legitimate business interest test, the business must be one where its relationships with the business’ customers are near permanent and the employer would not have had contact with the customers if it had not been an employee. This test can also be satisfied if the employee gained confidential information through his employment that he attempted to use for his own benefit. Most businesses are not able to demonstrate that they have a “near permanent” relationship with their customers. So, it is very difficult to enforce a non-compete agreement if the court applies the legitimate business interest test.
The second test is the reasonableness test. Under the reasonableness test, the court looks at whether the terms of the non-compete will be injurious to the public (the customers) or cause undue hardship to the employee and whether the restriction on the employee is greater than necessary to protect the employer. This test is much easier for an employer to meet.
There are other factors in determining whether an employee non-compete will be enforceable. One such factor is whether the employee received any meaningful consideration for signing it. This is easy to show for brand new employees since the job offer can be conditioned upon signing a non-compete agreement.
Illinois courts applying a reasonableness test should allow employers to sleep a little more peacefully knowing that it is easier to have an effective employee non-compete agreement.
