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Non-Competition Agreements Must Be Narrowly Tailored to be Enforceable

Thadford A. FeltonARNSTEIN & LEHR LLP

120 SOUTH RIVERSIDE PLAZA | SUITE 1200CHICAGO, ILLINOIS 60606

P 312.876.6934 | F 312.876.0288tafelton@arnstein.com

While placing the greatest restrictions on your employee(s) through a non-competition covenant or agreement would seem to be the most logical way to protect your business, over-reaching in these

restrictions can have the opposite effect. The goal of a non-competition covenant or agreement is two-fold: (1) to prevent your employees from competing against you; and (2) to be enforceable. Ensure the enforceability of your non-competition covenants and agreements by making sure that they are tailored to the realities of your business and the position and activities of the employee that you are seeking to restrict. It is also advisable to periodically reassess these covenants as your business changes and the responsibilities of your employees change to ensure that your business is protected, and continues to be protected, to the maximum extent possible.

A recent Illinois Appellate Court decision re-affirmed the need for narrowly tailored non-competition agreements. Cambridge Engineering, Inc. v. Mercury Partners 90 BI, Inc., No. 1-06-0798 (1st Dist. December 7, 2007). In that case, a manufacturing company employed a sales representative whose territory was northern Illinois and Indiana. The sales representative had an employment agreement that contained a non-competition covenant that prevented him from engaging in any activity for or on behalf of his employer’s competitors, or engaging in any business that competes with his employer, anywhere in the United State or Canada for a period of twenty-four (24) months following the termination of his employment. The employment agreement also had a provision that permitted a court to modify any portion of the employment agreement that it found to be unenforceable in order to make it enforceable.

When the sale representative left and went to work for another company, his former employer sought to enforce the non-competition covenant of his employment agreement against his new employer, as his new employer was aware of the non-competition covenant when it hired the sales representative. In determining the enforceability of the non-competition covenant, the court looked at two things:

Whether the terms of the non-competition covenant were reasonable and necessary to protect the 1. legitimate business interests of the former employer; and

Whether the non-competition covenant was broader than necessary to exclude the sales representative 2. from doing business in the territorial zone in which relationships with the former employer’s customers could have been established in ways that could be detrimental in the hands of a competitor.

As the territory of the former sales representative’s was northern Illinois and Indiana and the former employer did not do business in all of the provinces of Canada, the court found that excluding all of Canada

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was broader than necessary as it covered substantial areas in which the former employer did not do business. Thus, the non-competition covenant was broader than necessary to protect the former employer’s legitimate business interests.

Similarly, the court found that the restrictions that the non-competition covenant placed on the sales representative’s post-termination activities were unreasonable. Read literally, the non-competition covenant prohibited the sales representative from engaging in any activity on behalf of a competitor, regardless of whether that activity was directly competitive with the former employer or not. Affirming that restrictions on activities should be narrowly tailored to protect only against activities that threatened the former employer’s interests, the court found that a blanket bar on all activities for competitors was excessive in light of the limited arenas in which the sales representatives’ knowledge would be competitively useful.

Finally, despite the language in the employment agreement, the court refused to modify the non-competition covenant to make it reasonable. The court found that where the terms of the non-competition covenant were so unreasonable, amending the covenant to make it reasonable would give employers incentives to draft such covenants as broadly as possible which would have a chilling effect on employees’ post-termination activities.