Restrictive Covenants – Carefully Scrutinized
Again, as a general rule, restrictive covenants, such as noncompete agreements, are disfavored because they constrain competition in the marketplace and prevent individuals from working in their chosen fields of expertise or starting his or her own business that would be competitive. Remember, the concept of fostering strong competition in the marketplace is a good thing. Courts therefore carefully scrutinize restrictive covenants, and traditionally will enforce them in only two situations:
When the restrictive covenant is contained within an employment agreement, and
When the restrictive covenant is ancillary to the sale of a business
The distinction between restrictive covenants connected with employment agreement or the sale of a business is significant because Illinois courts apply a stricter standard to employment agreements than they do to covenants ancillary to the sale of a business. The rationale behind the different standards is that “a purchaser in the sale of a business context holds more bargaining power than an ordinary employee in an employment context.” Thus, if a restrictive covenant not to compete is ancillary to the sale of a business, then the covenant must only be reasonable as to time, geographical area and the scope of the prohibited business activity. If the restrictive covenant is included in an employment agreement, however, the party seeking to enforce the restrictive covenant must show additional circumstances, such as a near-permanent relationship with his employee’s customers and that, but for his association with the employer, the former employee would not have had contact with the customers, customer lists, trade secrets or other confidential information.