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Protect Your Business: Use Restrictive Covenants
By Anne E. Larson (from Much More, Fall 2004)
Your company is in a growth mode. You recently hired new employees and had them sign employment agreements that contain client and employee non-solicitation covenants. But two employees quit, go to work for a competitor and solicit your clients and employees. Your clients, while long-term, are not exclusive. They buy similar financial products and services from competitors, including the competitor for whom your ex-employees are now working. Can you stop these ex-employees from soliciting your clients? Recent Illinois law may help you stop the client solicitation. Stopping the solicitation of your own employees may prove more problematic, however.
Long-standing Illinois law gives employers a "protectible business interest" in their trade secrets and in customers with whom they have a "near-permanent" relationship. This "near-permanent" relationship requirement makes it more difficult for employers to enforce non-solicitation covenants in Illinois than in many other states. A recent Illinois decision, Hanchett Paper Co. v. Melchiorre, however, has made it easier for you to show a near-permanent relationship with your customers and prevent former employees from soliciting them, even if the ex-employee's new employer sells to the same customers.
Hanchett Paper held that the plaintiff company had a "near-permanent" relationship with its customers even though its business was sales, its product was not unique and its customers bought similar products from other companies while plaintiff's customer. Establishing a near-permanent relationship did not require the company to show the relationship was "exclusive," "perpetual" or "indissoluble." Rather, two-thirds of the company's top 300 customers had been customers for at least five years and 90% of the ex-employee's top customers had been the company's customers for five years. The court found it significant that the ex-employee had no prior knowledge of the industry and that the company initially assigned him existing customers and gave him access to its client list. The fact that the ex-employee had been with plaintiff for 12 years when he resigned (and was presumably developing client opportunities at this point in his career) did not affect the court's analysis.
In contrast to Hanchett Paper, a recent federal district court decision, Unisource Worldwide, Inc. v. Carrara, makes enforcing employee non-solicitation covenants more problematic. Unisource held that covenants that preclude employees from soliciting their former co-workers are an "invalid restraint on trade." Under Unisource's analysis, former employees can solicit your current employees, unless you can show that they are doing it to destroy your business or misappropriate your trade secrets. While Unisource is not "binding" on Illinois courts, former employees will cite it as persuasive authority against you in future temporary restraining order ("TRO") and preliminary injunction battles.
What does this mean for your company? Unisource does not mean that you should eliminate employee non-solicitation covenants from your present agreements. However, to lessen Unisource's impact in future TRO battles governed by Illinois law, employers should consider the following when drafting employment agreements:
- Limit restrictive covenants to 12 months. (The Unisource court found "a twelve month restriction would be the outside limit to protect any legitimate interest Unisource may have…[because] internal pricing information is stale after twelve months."
- Limit the scope of customer non-solicitation covenants to those customers with whom an employee dealt or had exposure to by virtue of his/her access to confidential information or trade secrets. (Unisource found a customer non-solicitation covenant is overbroad when it prohibits a former employee from "doing business…with customers and products he never dealt with" at his prior employer's.)
- Add a severability clause so your entire contract is not invalidated. (Because there was a severability provision, "the Court finds it unnecessary to invalidate the entire contract. Rather, the invalid provisions may be severed, leaving the valid provisions intact.")
Anne E. Larson, Chair of the firm’s Labor & Employment practice group, concentrates her practice on management-side labor and employment matters and tries discrimination, wage and non-competition/trade secrets disputes in state and federal courts throughout the country. Business owners depend on Anne for anti-harassment training and cost-conscious advice on their hiring/firing practices, employee handbooks, and disability and leave issues. Executives rely on her negotiating skills for their compensation and severance agreements. Anne can be reached at 312.521.2728 or alarson@muchshelist.com.
If you would like a longer version of this article with citations, please contact Anne.
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