A federal judge in Illinois recently held that a contractual requirement that a professional race car driver pay post-employment royalties to his former employer is unenforceable.
The case arose from a colorful set of facts. Specifically, a young race car driver who the judge described as “not educated or skilled in any profession other than racing,” signed an agreement with his then employer (a racing team) providing that for ten years after he stopped driving for that team, he was to pay royalties to that team of 25% of his future race-related earnings. After he stopped racing for the team, the driver challenged the enforceability of the royalty provision, arguing, among other things, that it was an unenforceable post-employment restraint of trade. In contrast, the team argued that the royalty provision did not constitute an activity restriction and therefore was not a restraint of trade.
Addressing what is apparently a question of first impression under Illinois law, the court held that even though the royalty provision did not expressly restrict the driver’s post-employment activities, because it constituted “a sufficient penalty,” it should be analyzed as though it was a covenant not to compete. The court therefore applied Illinois’ analytical framework for no-competes and concluded that the royalty provision was unenforceable. As a threshold matter, the court held that the team did not establish that it had a legitimate protectable interest sufficient to justify the post-employment restriction (i.e., the protection of “near permanent” customer relationships or trade secrets or other confidential information). Thus, the team’s position could not even make it over the starting line. Alternatively, the court held that even if the team had a legitimate protectable interest, the royalty provision would still be unenforceable because its 10-year term was too long and because it lacked a geographic restriction.