A U. S. District Court recently enunciated guiding principles in assessing non-competition provisions. When the parties have contractually selected Illinois law, the question of whether a restrictive covenant is enforceable is a question of law. Under Illinois law, non-competition clauses are disfavored. As a result, courts will not enforce a non-competition clause merely because the parties agreed to such an arrangement.
In determining the enforceability of non-competition provisions, courts first consider whether they are ancillary to a valid transaction, such that the non-competition covenant is subordinate to the main purpose of the transaction. If that prerequisite is met, courts then consider whether the scope of the non-competition provision is reasonable, a determination which is based on the facts and circumstances of the particular case.
For the non-competition restriction to be reasonable, it must not impose restrictions that are greater than those necessary to protect a company’s legitimate interests; it must not be oppressive to the employee; and it must not be injurious to the general public. In assessing the reasonableness of the restrictions, courts consider the interests that the company seeks to protect by the restrictions; the duration and geographical scope of the restrictions; and the activities that are sought to be restrained.
Parties often agree by contract that if the non-competition provisions are held to be unenforceable by reason of scope in terms of area, business activity prohibited and/or length of time, but could be enforceable by reducing any or all of these elements, the non-competition covenant will be enforced to the fullest extent permissible. That provision comports with Illinois law, but only to a point.
Under Illinois law, the fairness of the restraint initially imposed is a relevant consideration to a court of equity in determining whether the restraints may be enforced as modified. Accordingly, while Illinois law allows a court to modify a restrictive covenant, and even where the parties have incorporated this principle into their agreement through the use of express language allowing modification, a court will refuse to modify an unreasonable restrictive covenant, not merely because it is unreasonable, but where the degree of unreasonableness renders it unfair. Unrealistic boundaries in time and geographical territory have been the primary reasons courts have eliminated rather than modified restrictive covenants.
Please do not hesitate to contact us if you have any questions about the enforceability of restrictive covenants including non-competition provisions.