A business’ most valuable assets can be intangible assets, not limited to employee relationships, trademarks, service marks, copyrights, trade secrets, know-how and other “intellectual property.” In order to protect intellectual property, businesses should consider implementing restrictive covenant agreements with employees, contractors, investors, potential investors, partners and third parties (or include restrictive covenants in contracts with such parties). Restrictive covenants can help prevent unfair competition, intangible asset misappropriation and protect:
-Customers, client relationships and client lists
-Trade secrets and processes
-Intellectual property and processes
-Other proprietary confidential information
Generally there are four types of restrictive covenants:
Covenants not to Compete which prohibit competition by a current or former employee (or outside third parties, such as the seller of a business, post-sale) in the same or a similar business to that of the former employer or seller;
Non-Solicitation Covenants which prohibit former employees from soliciting customers or employees of the former employer;
Non-Contact Covenants which restrict contact or business with the customers of the former employer, whether those customers were solicited or not; and
Non-Disclosure Covenants which prohibit/restrict the use or disclosure of confidential information of a former employer, such as customer information, client/customer lists and trade secrets. Non-disclosure covenants are particularly important when trade secret information is distributed to third parties who do not otherwise owe any duty to the employer.
Restrictive covenants must be valid contracts generally supported by legal consideration. Well written covenants should also include and/or address:
- Clarity as to the agreement between the parties.
- Identification of jurisdiction and venue for disputes.
- Responsibility for attorneys fees and other costs/fees.
- Calculation of damages upon breach (i.e., liquidated damages).
- Identification that information is “protected” and “confidential” to avoid mistakes.
Restrictive covenants can be included as provisions in employment contracts, employee handbooks, independent contractors’ contracts and third party agreements (i.e., stock purchase, asset sale, joint venture, vendor and supplier, etc.).
Restrictive covenants are generally enforceable contracts between employees and employers (as well as between businesses and outside third parties such as suppliers, investors, joint venture participants, etc.) in Illinois when reasonably limited in duration and geography to protect legitimate business interests.
However, in Illinois, courts scrutinize restrictive covenants between employees and employers more closely than in situations involving the sale of a business. When determining the enforceability of restrictive covenants, Illinois law balances (i) the need for businesses to invest resources to develop assets for the employers/business owners, (ii) the fundamental right of individuals (i.e., employees) to pursue a particular occupation and personal happiness and not be required to move a substantial distance in order to pursue such opportunities, and (iii) the general public’s access to quality products and services. Courts judge restrictive covenants on a “case-by-case” basis, which is sometimes imprecise and always unpredictable. To that end, a “boiler-plate approach” to drafting restrictive covenants may have the covenants be deemed unenforceable. Careful evaluation of the nature, scope and duration must be made when drafting restrictive covenants.