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How Do I Keep My Employee From Competing Against Me?

Thadford A. FeltonARNSTEIN & LEHR LLP

120 SOUTH RIVERSIDE PLAZA | SUITE 1200CHICAGO, ILLINOIS 60606

P 312.876.6934 | F 312.876.0288tafelton@arnstein.com

You have successfully built your business over the years. You have hired and trained your employees and expanded your customer base multiple times. In short, your business is going well. Then, one of your

employees leaves, starts his own business competing against you in the same area and begins to take away your clients. Could you have prevented this from happening?

The most effective way to prevent an employee from competing against you is to have your employee enter into a written non-competition agreement in which that employee agrees not to compete against you in a defined territory for a certain length of time after that employee leaves your employment. The non-competition agreement can either be part of a larger employment agreement or a separate agreement. You do not need to have a different non-competition agreement for each employee, but you want to tailor your non-competition agreement to use with different kinds of employees. For example, you may want to use broader agreements for your officers and managers, but for low-level sales people and technicians, you may want a non-competition agreement that is tied to their particular territory, activities and/or customers.

When you enter into a non-competition agreement, you must be sure that your employee receives “consideration” or something of value in return for his or her agreement not to compete against you. Courts will usually find sufficient value if the employee signs a non-competition agreement at the start of employment. However, if the employee is asked to sign a non-competition agreement after the employee has been employed for some period of time, the agreement should clearly state that continued employment is based upon the employee agreeing not to compete after departure from the company. Finally, a pay raise, bonus or other benefit given to the employee upon the signing of a non-competition agreement can also been seen as value.

While entering into a written non-competition agreement will often prevent your employee from later competing against you, courts are extremely reluctant to enforce agreements that prohibit ordinary competition. Instead, the courts look to whether the restrictions in the non-competition agreement are reasonably necessary to protect your legitimate business interest and whether the restrictions are reasonable in terms of their length and geographic scope. The legitimate business interests that Illinois courts will protect through non-competition agreements include confidential information and near permanent customer relationships. Confidential information constitutes information that the company has devoted time, money and effort to develop such as pricing structures, marketing plans, customer lists and computer databases, provided that this information has been kept in a confidential manner by the company and is not known outside of the company. However,

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information that is conveyed to customers or other third parties will not be considered confidential or protectable. Whether a customer relationship is protectable will depend on a variety of factors, including: the industry involved; the time, cost and difficulty involved in the development and maintenance of a customer base; the customer’s intention to remain affiliated into the future; and the length of the customer relationship. The enforcement of the non-competition agreement also depends on the reasonableness of the duration of the restriction and the territory in which the employee is prohibited from competing. The reasonableness of the time restriction is evaluated by determining how long it takes for your company to acquire and maintain clients. In other words, how long would it take for someone starting from scratch to develop a client base of their own? Time restrictions of one to two years have generally been found to be reasonable, but where customers come and go, and confidential information quickly becomes stale, only shorter time restrictions will be enforceable. The reasonableness of the territory restrictions depends in large part on whether the restricted area is the same or similar to the area in which the employee did business for your company. If the restricted territory is larger than the area in which your company does business or if you try to keep the ex-employee away from customers or areas in which the ex-employee never worked for you, the restriction is probably unreasonable. As noted above, many times, having an employee enter into a written non-competition agreement will prevent future competition. However, if your company is required to seek court enforcement of a non-competition agreement, the more specific and narrow it is, the more likely it is to be enforced.