As discussed in our March 9th and 17th postings, Illinois Senate Bill SB 2149 seeks to dramatically alter the landscape of trade secret enforcement and litigation in Illinois by, among other things, (a) requiring disclosure of trade secrets before a party issues written or oral discovery; (b) awarding attorneys’ fees to the prevailing party in a trade secrets case; and (c) mandating that a court enter an attorneys’ fees award against any party that subsequently amends its initial trade secret disclosure. Apparently not to be outdone, the Illinois House of Representatives is considering whether to enact a statute that would dramatically limit an employer’s ability to enforce non-competition agreements, and change the way restrictive covenant cases are handled in Illinois.
Currently, non-competition/restrictive covenant enforcement is governed by Illinois case, as opposed to statutory, law. Illinois case law does not limit the type or category of employee who can be subject to a restrictive covenant. Instead, the court examines the covenant to determine if the covenant is reasonably written (i.e. reasonable in both temporal and geographic scope) to protect a “legitimate business interest.” A “legitimate business interest” exists if the employer demonstrates (1) near-permanent customer relationships that the employee would not know about but for his employment or (2) that the employee acquired trade secrets or other confidential information during his employment and subsequently tried to use the trade secrets for his own benefit. Lawrence & Allen, Inc. v. Cambridge Human Resource Group, Inc., 226 Ill. Dec. 331, 340, 685 N.E. 2d 434, 443 (2nd Dist. 1997).
In contrast, House Bill HB 4040 limits non-compete enforcement to employees or independent contractors who:
• have substantial involvement in the executive management of the employer’s business;
• have direct and substantial contact with the employer’s customers;
• possess knowledge of the employer’s trade secrets and/or proprietary information;
• possess such unique skills that they have achieved “a high degree of public or industry notoriety, fame, or reputation as a representative of the employer,” or
• are among the highest paid 5% of the employer’s work force for the year immediately preceding the separation.
HB 4040 also changes Illinois law so that an employer loses the right to enforce a non-competition covenant if the employer fails to notify the new employee two weeks prior to the first day of his employment that a covenant not to compete is required, or if the covenant is not accompanied by a “material” advancement, promotion, bonus or compensation increase. In addition, HB 4040 alters the court’s ability to determine whether a non-competition covenant is reasonable in temporal and geographic scope (an analysis that is done on a case-by-case basis) by creating a rebuttable presumption that a non-competition covenant is invalid if:
• the covenant exceeds one year;
• the geographic restrictions in the covenant cover areas beyond which the former employee provided services “during the one year preceding his termination;”
• the covenant concerns personal services activities that the employee did not perform during the “one year preceding termination of the employment.”
One of the few similarities between HB 4040 and Illinois case law is that HB 4040 does allow the court to modify a non-competition covenant to “make the covenant reasonable under the circumstances.” However, HB 4040 goes on to state that, if a court chooses to modify the covenant, then the court cannot impose a damages award for the employee’s original breach of the covenant. Instead, the court can award damages only for conduct that occurs after the modification. Finally, HB 4040 instructs a court to interpret any attorneys’ fees provision found in a non-competition covenant as allowing either the employer or the employee to recover their attorneys’ fees; and further empowers the court to award attorneys’ fees to the employee if, through a declaratory judgment action brought by the employee, the court declares the non-competition covenant unenforceable.
We will continue to monitor HB 4040’s progress through the Illinois House of Representatives.