Illinois Non-Compete Agreements: A Snapshot of the Current State of the Law
I’ve found that many employers don’t have a good grasp of the basics regarding non-compete agreements, something that’s all the more true due to recent changes in Illinois law on the topic. The new reality is that only under the right set of circumstances will non-compete agreements stand up to Illinois judicial scrutiny. This is a guide for employers who currently use or are looking to use non-compete agreements with their employees.
The utility of non-compete agreements.
Non-compete agreements are agreements between an employer and an employee where the employee agrees not to use information they obtain during their employment in a manner that would directly compete with the employer when used in the employee’s subsequent business endeavors. Such agreements are premised on the idea that there are certain specialized business skillsets, trade secrets, and confidential information attainable only through certain types of employment. The very nature of such work creates the threat of an employer indirectly training its future competitors disguised in employee clothing. Non-compete agreements offer assurances to an employer that they are not unwittingly inviting wolves into the henhouse.
Illinois courts will validate non-compete agreements that are “reasonable” and supported by consideration.
For the most part, Illinois courts validate and are accepting of non-compete agreements, so long as they are both reasonable and supported by consideration. In 2011, the Illinois Supreme Court ruled in a case called Reliable Fire Equipment v. Arredondo that an Illinois non-compete agreement is valid so long as it “contains a reasonable restraint and the agreement is supported by consideration.” Using the wonderfully named “three-dimensional rule of reason,” the Supreme Court determined that a “reasonable” non-compete agreement is one that:
- is no greater than is required for the protection of a legitimate business interest of the employer;
- does not impose undue hardship on the employee; and
- is not against public policy.
The Supreme Court also found that non-compete agreements must be supported by consideration, but offered little guidance as to what that might constitute. Since then, one appellate court attempted to establish a bright-line consideration rule in an often cited 2013 case known as Fifeld v. Premier Dealer Services. It was here that the First District held that two years of continual at-will employment is sufficient consideration to trigger the enforceability of a non-compete agreement, regardless of whether the employee was terminated or resigned on their own.
Rather than unifying the Illinois non-compete legal scene, Fifeld did the opposite and turned the state into the Thunderdome.
Currently it appears that of Illinois’ five Appellate Courts, only the First District, Third District, and Fifth District adhere to a two-year consideration rule. Earlier last year the Second District seemed to be on board as well, but hinted in a recent unpublished opinion that it thinks the Supreme Court would disfavor the two-year rule and is consequently beginning to have second thoughts. Springfield’s own Fourth District has thus far not dealt with the issue of non-compete consideration, so it has remained silent.
On the federal side of things, Illinois’ three U.S. District Courts are very much united in their opposition to the two-year rule. Locally, the Central District of Illinois opined in 2015’s Cumulus Radio Corporation v. Olson that it would be naïve to consider Fifeld’s two-year rule to be a one-size-fits-all for Illinois workers due to the wide diversity of employment in the state. Rather, the Central District feels that adequate consideration should be a “case-by-case, fact specific determination”, with a particular eye towards examining the employer’s business interest in maintaining a level of permanency with its customers. Last summer the Southern District of Illinois declined to strictly apply the two-year rule in a case called Apex Physical Therapy, LLC v. Ball. And in similar fashion, the Northern District of Illinois gave a particularly scathing review of Fifeld this past October in Stericycle, Inc. v. Simota.
The Illinois Freedom to Work Act: the champion of Illinois low-wage workers.
Even though non-compete agreements are by design best utilized on senior executives, highly-compensated professionals, and other top employees, you would be wrong to think that they are only ever used on the upper levels of business organizations.
In 2016, Illinois drew national attention when the Office of the Illinois Attorney General filed suit against a certain Champaign-based sandwich shop for its two-year non-compete agreements that were being required of its sandwich makers and delivery drivers. In no small part because of public outcry against said sandwich shop’s arbitrary practice, the matter was settled out of court and the non-competes were voided. Shortly thereafter, the Illinois Freedom to Work Act was signed by the governor and was formally implemented into law on January 1, 2017.
The Freedom to Work Act outright bans employer non-compete agreements with “low-wage employees,” which the Act defines as private-sector employees whose earnings do not exceed the greater of:
- the hourly rate equal to the minimum wage required by the applicable federal, State, or local minimum wage law; or
- $13.00 per hour.
As the Freedom to Work Act is presently written, any Illinois employer seeking to enforce a low-wage employee non-compete agreement would not only be unsuccessful in any Illinois court, but the employer seeking to enforce could possibly be opening themselves up to much bigger problems because the Act goes so far as to explicitly declare such agreements to be “illegal”.
Recommendations for Illinois employers using non-compete agreements.
Illinois employers using or looking to use non-competes are advised to make sure that any such agreements are specially tailored to protect their own personal business interests, so extra effort should be made to avoid simply copy-and-pasting a form non-compete agreement. In this regard, it is equally important that such agreements are worded in a manner that comports with current Illinois law so that it will stand up in court if a situation arises where litigation becomes necessary.
Under the present state of the law, an Illinois employer looking to enforce a non-compete agreement will probably be successful in state court so long as it can be shown that the non-compete (1) meets the Supreme Court’s “three dimensional rule of reason” test, and (2) the employee was employed for a period of at least two continual years or separate, independent and adequate consideration (e.g. a lump sum payment) was provided the employee. In other words, the mere fact of hiring a new employee (or refraining from firing an existing employee) is likely no longer sufficient consideration to support a non-compete.
Keep in mind that the likelihood of succeeding in such an endeavor will depend largely on where the state action is sought. Attempts made in the Circuit Courts of the First, Third, and Fifth District are going to have the best chance. It looks like there is also a strong likelihood that an employer will prevail in the lower courts of the Second and Fourth District, but employers looking to enforce here should proceed with more caution.
Illinois employers attempting to enforce a non-compete agreement in an Illinois-based federal court should take similar, but slightly different approach. Because a federal judge is going to be bound by the Illinois Supreme Court’s interpretation of its own laws, the “three dimensional rule of reason” criteria should be met as in state court. However, an employer trying to use the two-year rule to show consideration will likely meet some resistance. Rather, because Illinois federal courts are more concerned with examining the particular set of facts on a case-by-case basis, it would be advisable for a federal court-bound employer to focus their case on the specific and unique aspects of their business – such as emphasizing the specialized training of the employee; pointing to the employee’s ability to access confidential business information; and drawing the court’s attention the company’s interest in maintaining relationships with its customers, particularly if they were not easily won over.
Illinois employers who want to take a shot at enforcing non-compete agreements against former low-wage employees should save their money and not waste the effort. Because of the Freedom to Work Act, it is simply not going to work out.