Companies often require their employees to sign restrictive covenant agreements that include noncompete, nonsolicitation, and confidentiality clauses. A noncompete prohibits a former employee from working for a competitor, while a nonsolicit typically prohibits a former employee from soliciting customers and employees. Relying on survey data, the Obama administration estimated that about 18 percent of American workers are covered by a noncompete agreement, about 37 percent of American workers have worked under such an agreement at some point in their careers, and about 14 percent of American workers making less than $40,000 a year are subject to a noncompete. Until recently, the fast food company Jimmy John’s included a noncompete clause in its agreements with its employees, prohibiting its sandwich makers from working for a competitor located within two miles of a Jimmy John’s for two years.
Each state has its own, unique laws regarding restrictive covenants. Some states, like California, will generally not enforce a noncompete agreement. Other states, like Illinois, will enforce a restrictive covenant if the employer provided adequate consideration to the employee for the covenant and the covenant is necessary to protect a company’s legitimate business interests. See generally Reliable Fire Equipment Co. v. Arredondo, 2011 IL 111871. In general, courts will not enforce a covenant that is a complete restraint on trade. See Brown & Brown, Inc. v. Mudron, 379 Ill. App. 3d 724, 728 (3d Dist. 2008) (explaining that, “as a matter of fundamental public policy, Illinois has chosen to provide its workers greater protection from the negative effects of restrictive covenants”).
Over the past few years, courts have become less likely to enforce restrictive covenants, and several states have passed laws regarding noncompete agreements. Often, a key factor when evaluating a restrictive covenant is determining what state law will apply.
In Illinois, state courts have repeatedly held that an employee must work for at least two years for an employer to receive adequate consideration for a noncompete. See, e.g., McInnis v. OAG Motorcycle Ventures, Inc., 2015 Ill. App. 142644, ¶ 27 (collecting cases); Prairie Rheumatology Assocs., S.C. v. Francis, 2014 Ill. App. 3d 140338, ¶¶ 15–16 (collecting cases). Illinois courts want to avoid a situation in which an employee starts a new job, signs a noncompete agreement, works for a small period of time, and then cannot work due to the noncompete. See Diederich Ins. Agency, LLC, 2011 Ill. App. 5th 100048, ¶¶ 13–15.
Partially in reaction to the former policy of Jimmy John’s, Illinois passed a law in 2016 (which became effective last January) prohibiting enforcement of noncompete agreements against low-wage employees. See generally 820 Ill. Comp. Stat. 90/1. Recently, Illinois’s attorney general, Lisa Madigan, sued a company for violating the new law. Madigan explained,
I want to ensure that Illinois workers have the freedom to change jobs and seek better wages. . . . And what we have found is that the use of unfair noncompete agreements have scared a lot of low-income workers into staying in low-paying jobs when they could, based on their experience, get better pay.
Perhaps taking a cue from Illinois, New York’s attorney general, Eric T. Schneiderman, is seeking to prohibit noncompete agreements with low-wage employees. Furthermore, his proposed legislation will require employers who do have employees sign noncompetes pay those employees for the noncompetes. Schneiderman has announced agreements with companies in which the companies agreed to stop using noncompetes with certain employees.
Utah passed a creative bill in 2016 to limit the use of noncompete agreements. According to the new law, noncompete agreements cannot exceed one year after the employee’s termination. If an employer attempts to enforce a noncompete but a court rules that it is unenforceable, then the employer must pay the employee’s litigation expenses. This is notable because even if a noncompete clause is unenforceable due to its broad scope, employees often cannot afford the litigation expenses to successfully defend themselves. Indeed, many noncompete agreements contain attorney fee provisions that only allow the employer (and not the employee) to recover attorney fees for enforcing a noncompete.
Nevada also recently passed a new law, primarily in the wake of a state supreme court ruling. In 2016, the Nevada Supreme Court held that agreements “extend[ing] beyond what is necessary” to protect an employer’s interests are unenforceable. Golden Road Motor Inn, Inc. v. Islam, 376 P.3d 151, 153 (Nev. 2016). The supreme court also held it would no longer “blue-pencil,” or rewrite, broad noncompete clauses. Id. at 156–60. In response, the Nevada legislature passed a law that a noncompete is void unless there is adequate consideration, it does not impose an undue hardship for employees, and the covenant only imposes reasonable restrictions. Under the new law, noncompetes additionally cannot prohibit an employee from providing services to former customers if the employee does not solicit the customers, the customers voluntarily left, and the employee complies with the other limitations in the noncompete. But the law does allow Nevada courts to modify broad clauses.
Unlike these states, Idaho passed a law in 2016 to protect businesses and strengthen the enforcement of noncompete agreements. Under Idaho’s new law, if a key employee violates a noncompete, courts will presume that the violation causes irreparable harm to the former employer. The former employee will then have the burden to overcome the presumption by establishing that the former employee could not negatively impact the former employer’s legitimate business interests. Proponents of the law argue that it is necessary to protect the assets of companies and that the law only applies to “key employees.”
Monitoring state law changes to the enforceability of noncompete agreements will be critical because such legal issues are determined on a state-by-state basis.
Amit Bindra is partner at the Prinz Law Firm, P.C., in Chicago, Illinois.
Copyright © 2018, American Bar Association. All rights reserved. This information or any portion thereof may not be copied or disseminated in any form or by any means or downloaded or stored in an electronic database or retrieval system without the express written consent of the American Bar Association. The views expressed in this article are those of the author(s) and do not necessarily reflect the positions or policies of the American Bar Association, the Section of Litigation, this committee, or the employer(s) of the author(s).