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Protecting Your Company's Value
Competition in the marketplace is fierce. As employers struggle to maintain profitability, they also are concerned with protecting their long-term value. The defection of a star salesperson, for example, could damage a business, particularly a small operation trying to get a foothold in an industry.
Employers are responding to this perceived threat by looking to non-competition/non-solicitation agreements as a form of protection. While courts previously waffled when asked to uphold such agreements, a recent ruling has changed the playing field.
In the past, courts were inclined to uphold restrictive agreements in connection with the sale of a business. When considering the employment relationship only, however, courts were not as predictable.
Today, courts are viewing such agreements differently. As a result of a 1996 Illinois Appellate decision, appellate courts in Illinois now unanimously agree that a restrictive covenant signed by an employee that is ancillary to either a written employment agreement or a valid ongoing employment relationship has sufficient consideration to be enforceable. However, continued employment of an existing employee may not be considered sufficient consideration unless the employment continues for a period of more that two years or for a definitive term of employment expressly included in an agreement.
The addition of a raise (even an annual one), bonus, or promotion (even a lateral change with more responsibilities or prestige) as the parties are entering into such an agreement , also has been held to be sufficient consideration.
Although there are other factors the courts consider in deciding whether to enforce a restrictive covenant, at a minimum, employers should consider taking the following steps when creating non-competition/non-solicitation agreements:
- have all new employees sign at start of employment
- have existing employees sign at time of a raise, promotion, or bonus
- incorporate the restrictions into written employment agreements
- Provide reasonable limits on geographical scope and duration
- Provide reasonable limits on prohibited activities
- state clear definitions of prohibited solicitation, for example, define "clients" and "prospective clients."
Employers using non-competition/non-solicitation agreements should also consider including provisions on non-disclosure of "confidential information."