As non-compete agreements have become more widely used, they have also come under more scrutiny. Legislative efforts and judicial action in Illinois reflect a growing trend at the state-level to impose limitations on non-competition agreements. The core of the issue remains the extent to which an employee’s post termination employment can be limited for the purpose of protecting the employer’s legitimate business interests, such as pricing, product technology, market strategies, and the like.
In Illinois, lawmakers were concerned with the effect of non-competition agreements on the ability of low wage workers to find gainful employment. In 2016, the Governor of Illinois signed into law the Illinois Freedom to Work Act. The Act, which went into effect January 1, 2017, expressly prohibits private sector employers from requiring non-competition agreements from employees earning the greater of the applicable federal, state, or local minimum wage (currently $7.25 under federal law and $8.25 under Illinois state law) or $13 per hour. Any such agreement is considered on its face to be “illegal and void.”
Ten months after the Act went into effect, the Illinois Attorney General filed a lawsuit against a payday advance service, Check Into Cash, alleging that the company requires all employees at all store locations, including workers who earn less than $13 per hour, to sign a non-compete as a condition for employment. The non-compete at issue restricts employees from working for any business within 15 miles of any office or retail Check Into Cash location that provides consumer lending services. Check Into Cash has 33 locations within the state, and more than 1,000 locations across 32 other states.
Although this is the first lawsuit filed pursuant to the Act, it is not the first Illinois state action involving non-competes. In June 2016, a few months’ prior to the Act’s implementation, the Attorney General filed a lawsuit against Jimmy John’s sandwich chain for requiring all employees to sign non-competition agreements. And a press release about the Check Into Cash lawsuit issued by the Attorney General’s office on October 25, 2017 states that it is “currently investigating other companies that have unlawfully imposed similarly restrictive non-compete agreements on low-wage workers.”
The Illinois state actions are consistent with its courts’ conservative approach on non-competition agreements. For instance, Illinois courts have long required consideration in the form of continued employment for a “substantial period” in order to bind employees to a restrictive covenant. According to the Illinois courts, continued employment may be an illusory benefit where the employment is at-will, and an employee terminated after signing an employment agreement and who has not worked for a “substantial period” of time should not be bound by a non-competition clause. In 2013, an Illinois appellate court ruled in Fifield v. Premier Dealer Services, Inc. that a “substantial period” means two years or more of continued employment. Since that decision, Illinois lower courts have adhered to a bright line 2-year rule for the enforcement of non-competes.
Federal courts, however, have resisted the application of bright line rule in favor of a fact-specific approach. See Allied Waste Services of North America LLC v. Tibble, 177 F. Supp. 3d 1103 (N.D. Ill. 2016) (rejecting bright line rule and favoring fact-specific approach); R.J. O'brien & Assocs., LLC v. Williamson, No. 14 C 2715, 2016 WL 930628, at *3 (N.D. Ill. Mar. 10, 2016) (“Two years may be sufficient to find adequate consideration, but it is not always necessary.”); Cumulus Radio Corp. v. Olson, 80 F. Supp. 3d 900, 907 (C.D. Ill. 2015) (noting that the two-year rule is too rigid). On October 20, 2017, the Northern District of Illinois in Stericycle, Inc. v. Simota, et al., rejected defendants’ argument that a lawsuit for breach of a non-competition agreement should be dismissed because they worked for plaintiff for no more than thirteen months. No. 16 C 4782, 2017 WL 4742197, at *1 (N.D. Ill. Oct. 20, 2017). The court noted that although several Illinois appellate decisions adopted the bright line rule, the Illinois Supreme Court had not addressed the issue, and would likely agree with a fact-specific determination because there is nothing particularly significant about a 24-month period.
Despite the Stericycle court’s advocacy of a fact-specific approach, an Illinois appellate court very shortly after left the 2-year bright line rule undisturbed in Automated Industrial Machinery Inc. v. Christofilis, et al. Though the court noted that the five month employment period at issue in that case would be insufficient regardless of the two year rule, it was also clear the state appellate court rulings were binding on the lower courts until or unless the Illinois Supreme Court holds otherwise. This distinction within Illinois as between the state and the federal courts is an important consideration as to enforcement.
While states vary on what constitutes adequate consideration for a restrictive covenant, it is clear many states are moving towards tightening enforceability. Massachusetts, Maine, and Washington are considering income-based restrictions on non-competition agreements similar to the Illinois law. Other states have introduced legislative reform to limit temporal and geographic scope of non-competes, create exceptions for specific professions, and prohibit the ability of courts to modify or “blue pencil” overly broad provisions.
For employers, the importance of measured, carefully crafted restrictive covenants has never been greater. The trend toward increased regulation reinforces the need for periodic review and evaluation of non-competition and other restrictive language in employee agreements, as well as the scope of their use within the organization. Employers should avoid using boiler plate language across the board for all employees and should assume that the language will be heavily scrutinized by a court. Restrictive covenants are best defensible when reasonable and narrowly tailored in terms of both duration and geographic scope, as well as addressing legitimate and protectable business concerns.