Non-competition provisions in employment contracts are not favored under Illinois law and are not always enforced. An employer seeking to enforce a competition restriction to preclude an employee from engaging in competitive activities must demonstrate the reasonableness of the restriction. Factors to consider include the hardship caused to the employee, the effect upon the general public, the geographic and temporal scope of the restrictions, as well as the activities restricted. Typically, cases involving restraint of competition arise in the context of an employment contract that completely prohibits the employee from engaging in competition with his or her former employer within a designated area for a specified period of time.
In a case decided on February 26, 2010, a Federal Court ruled that, under Illinois law, a bonus plan restriction which resulted in the forfeiture of a bonus already paid to an employee because of the employee’s engagement in post-employment competitive activities was not an unreasonable restraint of competition and was enforceable.
In 1997, Viad Corp. ("Viad"), a Delaware corporation, hired Defendant Anne Houghton ("Houghton"), an Illinois resident, as a senior designer in the exhibit and events portion of the exposition industry. She was technically employed by Exhibitgroup, an affiliate of Viad. Exhibitgroup’s business ranges from servicing exhibitors at a trade show (or entities that have a private function in relation to a trade show) to providing design services for private corporate functions.
Exhibitgroup paid Houghton a base salary of $175,000. In addition to her base salary, Houghton was eligible to participate in Viad's voluntary Management Incentive Plan (the "Plan"). The Plan's stated purpose was to provide key executives with an incentive to achieve goals set forth under the Plan. The company-wide performance goals were tied to overall company performance and included targets for pre-tax income, value added measurement, cash flow, revenue, and other performance measures.
Paragraph VA of the Plan provided, in pertinent part:
In order to better protect the goodwill of Viad and its Affiliates * * * and to prevent the disclosure of Viad's or its Affiliates' trade secrets and confidential information * * *, each participant in this Plan, without prior written consent of Viad, will not engage in any activity or provide any services, whether as a director, manager, supervisor, employee * * *, for a period of two (2) years following the date of such participant's termination of employment with Viad or any of its Affiliates, in connection with the manufacture, development, advertising, promotion, design, or sale of any service or products which is the same as or similar to or competitive with any services or products of Viad or its Affiliates * * *:
(a) with respect to which such participant's work has been directly concerned at any time during the two (2) years preceding termination of employment with Viad or one of its Affiliates, or
(b) with respect to which during that period of time such participant, as a consequence of participant's job performance and duties, acquired knowledge of trade secrets or other confidential information of Viad or its Affiliates.
The Plan also required the repayment of payments made under the Plan in the following circumstances:
If, at any time within two (2) years following the date of a participant's termination of employment with Viad or any of its Affiliates, such participant engages in any conduct agreed to be avoided in accordance with paragraph VA, then all bonuses paid under this Plan to such participant during the last 12 months of employment shall be returned or otherwise repaid by such participant to Viad.
After reviewing the terms of the Plan, Houghton elected to participate in the Plan. In March 2008, Houghton received a bonus payout of $102,000 under the Plan.
Houghton resigned from Viad effective September 26, 2008, and began working for The Freeman Companies ("Freeman"), a competitor. On October 3, 2008, Viad demanded repayment of the $102,000 bonus payment made to Houghton under the Plan on the basis that she went to work for a competitor. Houghton refused to repay the bonus. On November 21, 2008, Viad filed a complaint against Houghton for breach of contract. Because Viad was a Delaware corporation and Houghton was an Illinois resident, the case was filed in the United States District Court for the Northen District of Illinois ("Court").
After taking the deposition of Houghton, Viad filed a motion for summary judgment. The Court agreed that the services that Houghton provided to Freeman were "directly concerned" with what she did at Exhibitgroup, and ruled that Houghton thus violated the Plan's competitive activities provision.
The Court then addressed whether Illinois courts would enforce the repayment provision on the basis that it was a reasonable restriction. The Court noted that Viad was not seeking to enforce the forfeiture clause as an outright prohibition on competition, it was simply seeking to cause Houghton to repay the bonus, that Federal courts, including the Seventh Circuit (where Illinois is located), draw a distinction between provisions that prevent an employee from working for a competitor and those that call for a forfeiture of certain benefits should she do so. A non-competition forfeiture clause in a pension plan as an example, will not be subjected to the same level of scrutiny as a non-competition agreement in an employment contract, which could have the effect of unreasonably restraining trade or endangering the employee’s livelihood. An agreement provision under which an employee who joins a competitor forfeits a bonus does not have the makings of a traditional, disfavored covenant not to compete, because it does not prevent post-termination employment, but only discourages it by working a forfeiture of an economic advantage.
The Court stated that, while the Illinois Supreme Court has not yet determined the enforceability of a forfeiture provision related to a bonus payment in a case like this, the majority of states enforce clauses in an employment contract calling for the forfeiture of benefits, such as severance pay, stock options, bonuses, pensions, and the like, in the event of competition, without regard to the reasonableness of the restraint on the former employee.
This Court referred to another Seventh Circuit case which held that the forfeiture of a bonus in the form of stock options was not an unreasonable restraint on competition. Although the Court recognized the difference between forfeiture of wages or commissions that might affect an employee’s livelihood and a bonus provision that was in addition to regular compensation, the Court still applied a reasonableness test.
Accordingly, applying a similar "reasonableness" test to the restrictive provision in this case, the Court found the clause in the Viad Plan – whether deemed to be an "anti-competitive clause" or a "forfeiture provision" – to be reasonable. Participation in the Plan was voluntary, i. e., it was not a condition of Houghton’s initial or continued employment with Exhibitgroup. Instead, participation was offered to select employees serving in executive roles who possessed key information about the business and made strategic decisions effecting the company's performance.
The forfeiture clause in this case left Houghton free to make a living as she chose. The Court stated: "She accepts the money and refrains from competition or she negotiates a salary and bonuses with the competitor to exceed the loss that she takes in abiding by the forfeiture clause. Such a choice does not appear to threaten loss of livelihood."
Because the clause at issue did not appear to be an unreasonable restraint on competition, the Court concluded that the Illinois courts would have enforced the terms of the Plan had Viad’s complaint been filed in state court.
The take-away from this case: Illinois employers can effectively discourage post-employment competitive activities by including forfeiture provisions in their supplementary compensation plans.
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