On January 12, 2011, Representative Jil Tracy introduced HB 0016 to the Illinois General Assembly to create the Illinois Covenants Not To Compete Act (or “Act”). The Act seeks to define statutory criteria for the enforceability of restrictive covenants and to significantly limit the permissible scope and application of such covenants. This is the third attempt to bring the Illinois Covenants Not To Compete Act into law. HB 0016 follows two previous failed proposals on the part of Representative Rosemary Mulligan. (HB 0016 was originally introduced in 2009 as HB 4040 and then again in 2010 as HB 4923).
Under the proposed Act, non-competition clauses would be enforceable only against a company’s key employees, which are defined as: employees substantially involved in executive management; directly involved with customers; possessing knowledge of trade secrets; obtaining unique skills via employment; or the highest paid five percent of employees at a business. Moreover, restrictive covenants would only be enforceable against such key employees if the employer (i) informs the employee of the restrictive covenant at least two weeks prior to the employee’s first day of employment or (ii) enters into the restrictive covenant based on the key employee’s material advancement or promotion or a material bonus or material increase in pay.
Moreover, in order to be enforceable, the noncompetition clause must be “narrowly tailored to support the protection of a legitimate business interest.” In the “Rebuttable Presumptions” section of the Act, the proposal clarifies that a restrictive covenant is not narrowly tailored to promote a legitimate business interest if (i) the covenant’s duration exceeds one year; (ii) the covenant’s geographic area extends beyond any region in which the key employee provides employment services during the one year preceding termination of the employment relationship; or (iii) the type of services covered by the covenant extends beyond the nature of the work performed by the key employee.
If a court finds a noncompetition provision overbroad under the proposed Act, the court would retain discretion to modify the covenant to make the restraint of trade reasonable. However, an employer would not be able to recover any damages for breaches occurring before the court’s modification of the overbroad agreement. Notably, if a restrictive covenant contains a one-way fee shifting provision in which employers are granted attorneys fees in the case of an employee’s breach, the court shall construe the covenant to provide for a two-way shifting provision, so that the losing party pays, regardless of which side prevails.
The proposed Act would not apply to non-solicitation, confidentiality and shareholder agreements, or to any agreement between an employer and an employee “under which an employee receives incentive compensation of any kind, and where the employer is entitled to forfeiture of such compensation for competition.”
The Act has been referred to the Rules Committee. If passed, the Illinois Covenants Not To Compete Act would take effect Jan. 1, 2012.