Restrictive Covenants in Employment Relationships

Employers may require employees to execute contracts in connection with their employment. Sometimes, the contracts contain restrictive covenants which operate to restrict the employee from working upon the employee’s termination or resignation. “[C]ontracts in general restraint of trade are ordinarily held to be void” and accordingly, a restrictive covenant is unenforceable when its sole purpose is to restrict competition. Canfield v. Spear, 44 Ill.2d 49, 50 (Ill. 1969). Restrictive “covenants operate at least as partial restraints of trade,” and accordingly, “they are scrutinized carefully by the courts to ensure that their intended effect is not the prevention of competition per se.” Instrumentalist Co v. Band, Inc., 134 Ill. App. 3d 884, 891 (1st Dist. 1985).

“The question of whether a restrictive covenant is enforceable is one of law and depends upon the reasonableness of its terms.” McRand, Inc. v. Van Beelen, 138 Ill. App. 3d 1045, 1051 (1st Dist. 1985) (finding a restrictive covenant enforceable because employee was only restricted from selling certain products of employer while the rest of the field remained open to employee to compete); Tower Oil & Technology Co. v. Buckley, 99 Ill. App. 3d 637, 642 (1st Dist. 1981). “The basic test is whether the covenant is reasonably necessary to protect the interests of the employer. This is a determination which depends on the facts and circumstances of each case.” McRand, 138 Ill. App. 3d at 1051 (internal citations omitted); J.D. Marshall International, Inc. v. Fradkin, 87 Ill. App. 3d 118, 122 (1st Dist. 1980). “Courts also consider the unique facts and circumstances of the case when determining the reasonableness of a restrictive covenant.” Milliard, 207 Ill. App. 3d at 744.

“A restrictive covenant in an employment agreement is generally held to be enforceable if it is reasonable in geographical and temporal scope and it is necessary to protect a legitimate business interest of the employer.” Milliard, 207 Ill. App. 3d at 744; Preferred, 199 Ill. App. 3d at 719; Instrumentalist, 134 Ill. App. 3d at 892; see also House of Vision, Inc. v. Hiyane, 37 Ill.2d 32, 38-39 (Ill. 1967) (holding a restrictive covenant unenforceable because it would require the employee to move a considerable distance in order to work and the restrictive covenant was more restrictive than necessary to protect employer’s interests creating an undue burden on employee).

“With respect to geographic area, the courts particularly look to whether the restricted area is co-extensive with that in which the covenantee is doing business.” Delaney, 72 Ill. App. 3d at 293-94. “Illinois courts have found covenants containing no geographic limitation to be valid if their purpose is to protect an employer from losing clients to a former employee who gains special knowledge of the client’s needs while employed.” McRand, 138 Ill. App. 3d at 1057; J.D., 87 Ill. App. 3d at 122; Wolf & Co v. Waldron, 51 Ill. App. 3d 239, 242 (1st Dist. 1977).

With respect to the requirement that the covenant be necessary to protect a legitimate interests of the employer, “a restrictive covenant is enforceable if either (1) the employer has a near-permanent relationship with its customers; and, but for the employment, the employee would not have had contact with the customers, or (2) the employee has acquired confidential information in the course of his employment.” Preferred, 199 Ill. App. 3d at 719 (internal citations omitted); McRand, 138 Ill. App. 3d at 1050; Donald McElroy, Inc. v. Delaney, 72 Ill. App. 3d 285, 292 (1st Dist. 1979).

“The reasonableness [of the restrictive covenant] is measured by its injurious effect on the general public and the extent of the hardship on the defendant.” McRand, 138 Ill. App. 3d at 1056. There is no injury to the public when other companies exist similar to the employer’s business that can provide the services to members of the public. Id.; Shorr Paper Products, Inc. v. Frary, 74 Ill. App. 3d 498, 505-07 (2d Dist. 1979).

If you have executed a contract with your employer that contains a restrictive covenant or you are an employer who would like to enforce a contract containing a restrictive covenant, please contact Jennifer Burt at Lavelle Law, Ltd. at 312-888-4111 or jburt@lavellelaw.com.