Business owners often want their employment contracts to contain the most restrictive covenants. Yet, overzealous restrictive covenants may backfire if deemed overly restrictive, unreasonable, and going further than necessary to protect the “legitimate business interests,” which is an elusive concept.
A restrictive covenant is a type of contractual arrangement. It is a clause in an employment agreement that limits the former employee’s ability to work for competitor(s), solicit other current or former employees, or take business away from the former employer.
Court have been struggling to reach a balance between the former employers’ legitimate business interests to protect their competitive advantage and their former employees’ need to earn leaving and put food on the table. One of the recent sevenths circuit court cases evaluated the legitimacy of restrictive covenants in the information technology staffing field.
Courts Rule in Favor of Employees with Restrictive Covenants
On July 14, 2015, the United States Court of Appeals 7th Circuit, in Instant Technology LLC v. Elizabeth DeFazio et al, has found that the former employees of an information technology staffing firm were not liable for violation of their restrictive covenants.
The case was brought by the defendants’ former employer, an information technology staffing firm, Instant Technology LLC (the “Instant Technology”). The firm alleged that Elizabeth DeFazio, a former Vice President of Sales and Operations, along with other former employees, violated their restrictive covenants when they started a new information technology staffing firm approximately 2.5 month after separation. The firm alleged that Elizabeth DeFazio violated her restrictive covenants by:
- Soliciting and recruiting other employees from Instant Technology to her new firm;
- Soliciting business from Instant Technology’s client base; and
- Using Instant Technology’s confidential pool of candidates to gain market advantage.
Although defendants admitted breaching their covenants not to solicit and not to recruit employees of their former employer, the court found that those provisions were unreasonable and unenforceable under Illinois law. In Illinois, a restrictive covenant in an employment agreement is valid only if it serves a “legitimate business interest.” Reliable Fire Equipment Co. v. Arredondo, 2011 IL 111871 ¶ 17, 358 Ill. Dec. 322, 965 N.E.2d 393 (2011).
In this case, upon examination of the information technology staffing business, the court concluded that Instant Technology had no legitimate business interest to protect. The technology staffing firms do not build relationships with their clients that would justify restricting their former employees from setting out on their own. In fact, the court found that their clients seldom show any loyalty to the staffing firms; larger organizations routinely request services from five to ten firms simultaneously, and the staffing firms typically expect compensation only in one out of ten engagements. Typically, employees of technology staffing firms are not exposed to important private information and firms do not keep data about qualified candidates. To the contrary, the court found that anybody can access the qualified candidates’ information with little efforts as it is publicly available on the social media sites, such as Linked-in. Given that most good candidates find jobs quickly, the lists of active candidates have short shelf lives. Similarly, Instant Technologies could seek to protect its interest in “stable workforce” as it had over 38% annual turn-over rate.
Steps to Drafting a Restrictive Covenant
As this case demonstrates, although the restrictive covenants are often included in the executive employment agreements of many industries, they need to be drafted carefully. Before including restrictive covenants into your employment agreements, consider the following:
- Draft restrictive covenants specific to your business industry as well as each employee’s exact job responsibilities in the company.
- Draft restrictive covenants as narrow as possible to protect your company’s legitimate business interests, which actually reflect your specific industry.
- Include provision covering changes-in-control situations.
- Be sure to review the restrictive covenants provisions regularly.
- If an employee is promoted, make sure that the agreement covers such employee’s new role and responsibilities.
- If your company expands its region of business or starts operating in other fields, revise your restrictive covenants to incorporate such regions and business fields.
- Seek local legal counsel to effectively draft restrictive covenants that would protect your business interests; laws applicable to restrictive covenants vary by state so forms available on internet or provided through paid subscriptions may work well in some states, but not in your local jurisdiction.
Obviously, there are no guarantees that your restrictive covenants will be upheld. However, following above tips will get you a step closer.
This article is intended to serve as a general summary of the issues outlined therein. While this article may include general guidance, it is not intended as, nor is it a substitute for, a qualified legal advice. Your receipt of this article from Lexern Law Group, Ltd. (the “LLG”) or any of its attorneys does not create an attorney-client relationship between you and the LLG. The opinions expressed in this articles are those of the authors of the article and does not reflect the opinion of the LLG.