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Can You Stop Your Top Sales Person From Competing Against You?

Thadford A. FeltonARNSTEIN & LEHR LLP

120 SOUTH RIVERSIDE PLAZA | SUITE 1200CHICAGO, ILLINOIS 60606

P 312.876.6934 | F 312.876.0288tafelton@arnstein.com

You have hired a sales person that you think has great potential. You mentor this sales person. You teach this sales person about your products, how to sell, the customers you service in the market place and

the needs of each of your customers. Over the years this sales person becomes your most successful sales person wins your top awards and the rest of your sales force looks up to this sales person. Then, for some reason, your star sales person abruptly leaves and joins a competitor. In addition, that sales person starts contacting the other “stars” in your sales force to solicit them to leave you and join your competitor. Some of your other “stars” also leave and your company is suddenly in jeopardy. What steps could you have taken to prevent this scenario from happening?

This article will discuss two of the simple measures that you can undertake to reduce the chances of the above scenario occurring to you and your company. As a prudent business person, you have employment agreements with all of your sales force. Sometimes those employment agreements are long and detailed and sometimes they are short and general. Regardless, it is important for you to make sure that those employment agreements include clauses that restrict your sales person (1) from competing with you in your geographic market area for a certain number of years and (2) from soliciting your sales force and other employees to leave your company and join a competitor after the sales person has left your company.

When evaluating restrictions on competition or solicitation, the courts will generally interpret the restrictions narrowly so that they protect only against activities that threaten your, the employer’s, interests. Thus, the “key” to the enforceability of these clauses is that the restrictions be reasonable, i.e., are the clauses necessary in scope to protect the employer’s legitimate business interest. How reasonable a restriction is depends on several factors, including its hardship to the employee, its effect upon the general public, and the reasonableness of the time, territory and activity restrictions in the employment agreement. Many times the mere presence of these restrictions in an employment agreement are enough to stop your sales person from acting against your interest. But sometimes you need to go to court to stop your sales person from competing against you or soliciting your sales force and employees. If a court finds that the terms of the restriction are not reasonable, the courts have the option of either rewriting the restriction to make it more reasonable, or, as is more likely these days, the courts may not enforce the restrictive covenant. So it is in your interest to draft the restrictions in any employment agreement so that they are as “reasonable” as possible.

What is reasonable is highly subjective and depends on your particular business. What might be reasonable for one business may not necessarily be reasonable for another business. With regard to the geographic scope of a covenant not to compete, reasonableness is usually viewed in the context of whether the

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restricted area is the same as where the employer is doing business and where the employee is conducting business for the employer. What is reasonable for a company that sells to customers on a nationwide basis will be different than one that sells to customers on a state wide or regional basis. Similarly, the types of products your company sells can effect the determination of reasonableness. For example, if your company sells several products and your sales force is allocated to sell specific products to specific accounts, it is probably not reasonable to restrict a member of that sales force from competing with you in the future where that person is selling a product for a competitor that he or she did not sell for you or to customers that he did not call on for you.

You have a better chance of having your non-competition restriction upheld if the area in which your sales person is restricted from doing business in the future is the same as the area in which the sales person or your company conducts business. If your company conducts business only in the Chicagoland area, then a clause that restricts the sales person from working in a competing business nationwide or even statewide, is probably not enforceable. Conversely, if your company conducts business on a nationwide basis, then a clause that restricts an employee from working in a competing business nationwide which has the same customers is probably enforceable.

What is reasonable in terms of the duration of the restriction is subject to the considerations set forth above as well. In determining the reasonableness of time restrictions, one of the factors that courts look to is the time it takes your company to acquire and maintain clients. This will depend in large part on the nature of the industry. Thus, the longer it takes for you to develop customer relationships, the better chance you have of a longer time restriction being found to be reasonable. That being said, courts are generally reluctant to uphold time limitations of more than three years.

While many employment agreements contain restrictions against the solicitation of sales people after that sales person has left, there are very few instances in Illinois in which courts have directly addressed the enforceability of such restrictions. In those instances where such restrictions have been addressed, the focus of the inquiry has been whether the restriction was reasonably calculated to protect the employer’s interest in maintaining a stable work force. Some of the factors that assist in showing an interest in maintaining a stable work force may include (1) whether your business is relationship based, (2) the number of sales persons you employ and (3) your turn over rate for sales people.

In short, the inquiry into the reasonableness of any restrictive covenant is highly fact intensive. The courts conduct a detailed examination into the wording of the restrictive covenant and the employment agreement; the nature of your business and customer relationships; the area in which you conduct business; the responsibilities of your sales person while employed by you; the customers your sales person serviced while in your employ; the nature of your sales person’s new business and its customers; and the area within which your competitor conducts business. In addition, courts want to foster competition, not stifle it. So while no one can guarantee how a court will uphold or interpret the restrictions in any employment agreement, you can increase the chances of such restrictions being enforced by ensuring that such restrictions are appropriately drafted in each employment agreement.

Many times when an employer finds out that a former sales person has gone into competition against that employer, the employer wants to rush into court and obtain a temporary restraining order and/or preliminary injunction to stop this competition. There is already enough uncertainty with the outcome of a case once you go to court and the more effort you put into tailoring appropriate restrictions in an employment agreement, the more you increase your chances of success when you do go to court. Before you find yourself rushing to court, consult with a legal advisor and make sure that you have done everything that you can do to prevent your sales force from becoming your competition.