Effect of Termination on Enforceability of Non-Compete Agreements

Restrictive covenants, such as non-compete agreements, rarely condition their enforceability on the method of separation. The reason for this is simple: most non-compete agreements are drafted by the employer who wants them to be enforceable regardless of the circumstances under which an employee leaves. After all, the rationale for using a covenant not to compete—to keep valuable proprietary information out of the hands of competitors—exists whether the employee resigns or is terminated. It is the latter circumstances that Illinois courts have found can affect the enforceability of a restrictive covenant.

From Peter’s interview for the Masters of the Courtroom series on ReelLawyers.com.

In Illinois, non-compete agreements are generally enforceable so long as they are necessary to protect a legitimate business interest and are reasonable in scope. Additionally, Illinois requires a non-compete agreement to be supported by adequate consideration to be enforceable. Assuming these requirements are met, courts will consider a number of factors when considering whether an employer may enforce a non-compete agreement against a terminated employee including the employee’s employment status at the time of termination, the circumstances surrounding the termination, and the language of the restrictive covenant itself.

The most common type of employment relationship in Illinois is at-will employment. At-will employment means that an employer can terminate an employee for any nondiscriminatory reason. While at-will employment gives the employer great discretion in terminating an at-will employee, how the employer uses that discretion can have a great impact on the enforceability of a non-compete agreement. The Seventh Circuit Federal Appellate Court examined this impact in the case of Rao v. Rao. In Rao, the court held that an employer cannot enforce a restrictive covenant where it terminates an employee (1) in bad faith and (2) without good cause. The court based its decision on two premises: the purpose of restrictive covenants and fundamental principles of contract law.

In considering the first premise, the Seventh Circuit explained that the purpose of restrictive covenants was to protect the goodwill of the employer. Enforcing a restrictive covenant against an employee terminated without good cause was not necessary to achieve this purpose, the court concluded. It reasoned that an employer could protect its goodwill simply by continuing the employee’s employment. In considering the second premise, the court turned its attention to the implied covenant of good faith and fair dealing present in every contract under Illinois law. Where an employer terminates an employee in bad faith—such as to prevent the employee from exercising a contractual right to purchase an interest in the business, as was the case in Rao—it has breached this implied covenant, the court found. Illinois law prevents a breaching party from enforcing the contract. Arguably the Rao court’s second conclusion would apply equally to contract employees (also known as “for cause” employees) to prevent enforcement of a restrictive covenant where such employees are terminated without cause.

Illinois courts have taken the Rao court’s holding one step further by removing the bad faith requirement. In Bishop v. Lakeland Animal Hospital, the Illinois Second District Appellate Court held that “in order for a noncompetition clause to be enforceable, first, the employee must have been terminated for cause or by his own accord.”

However, some Illinois courts have pointed out that the Bishop court’s primary holding was that the language of the noncompetition agreement itself made termination for cause a condition of its enforcement. Accordingly, the court in American Pest Control, Inc. v. Rakers speculated that with the right drafting an employer could create a non-compete agreement that would be enforceable even in the event of a termination without cause. The Illinois Supreme Court has not clarified the issue.

In sum, several factors come into play when determining if an employee is still bound by his or her restrictive covenants following termination. For this reason, it is important to consult a knowledgeable non-compete agreement attorney who is knowledgeable of the many factors courts consider and recent changes in this area of law.

The Chicago restrictive covenant attorneys at Lubin Austermuehle, P.C. have decades of experience drafting, negotiating, and litigating restrictive covenants including non-compete agreements, non-solicitation agreements, and non-disclosure agreements. Our business attorneys are conveniently located in Chicago and DuPage County and represent employees and employers throughout the Midwest region, including Illinois, Indiana and Wisconsin. Whether you are an employee who has been terminated or an employer seeking to determine if your restrictive covenants are enforceable, we can help. Contact us today online or by phone at 630-333-0333 to schedule a confidential consultation with a restrictive covenant enforceability lawyer in Chicago or Elmhurst, Illinois.