Severance/Non-Compete Agreements

Severance Agreements:

A severance agreement/separation agreement is a contract between an employer and an employee who has been terminated or laid off in which the employer typically agrees to pay the outgoing employee money and/or benefits and the employee usually agrees to give up his or her legal rights to sue the employer for any legal claims. Under Illinois law, businesses are generally not required to provide severance to employees that are terminated or laid off. Despite this, many businesses have implemented severance polices that award employees for their length of service while securing a release of claims from an employee.  People often ask:  what is a fair severance?

We offer a special program on behalf of employees to review and advise them regarding their severance agreements and we regularly draft severance agreements for employers.  The fairness of a severance agreement in Illinois often depends on the nature of an employee’s termination.   For example, if there was something improper about the termination, an employee may not want to give up their legal rights or may want to negotiate better severance agreement benefits.

Severance packages often include one or more of the following: (1) severance pay based on the employee’s wages, (2) continuation of health insurance and other benefits at the employer’s expense; and (3)  out-placement services. Severance packages are sometimes offered in terms of weeks based on the length of the employee’s employment. Of course, each employer will differ in its offer, and employees should be prepared for an offer that may differ from that discussed here. Further, employees should keep in mind that unless the employee has a written employment agreement that provides for a severance upon termination, the employee has no specific right to a severance payment and may not be offered any severance at all.

In offering a severance agreement, the goal of the employer is often to prevent a possible lawsuit as a result of the termination. For the employee, the goals are likely to maximize the amount of money obtained as part of the severance, obtain all of the benefits that she or he is entitled to and ensure that his or her subsequent job search is not hampered by having been terminated. The ultimate goal for both parties, however, should be to reach a fair and equitable agreement that offers adequate protection for both sides.

An employee who is offered a severance package should be prepared to address the following:

• Severance Amount: As discussed above, the amount offered as severance may be based on the length of years an employee has worked at their employment. The amount of a severance can vary greatly between companies depending on the company’s individual policy.

• Health Insurance: The Severance Agreement should detail the continuation of health insurance benefits, how long such benefits will last, and due dates of any payments the terminated employee must make payments by.

• Restrictions/Waivers:  Severance Agreements sometimes contain oppressive and illegal terms that are not standard.

• Re-Employment: The Agreement should set forth terms relating to whether the employee is eligible for re-employment, when they may be considered for such re-employment, and how they may apply for such re-employment.

• Non-Disparagement Clause: A non-disparagement clause provides that neither party to the agreement may speak negatively of the other to third parties. In Severance Agreements, a non-disparagement clause will help employees because their employer cannot make unfavorable comments about them to prospective employers. On the other hand, a non-disparagement clause will help employers because their employee cannot make unfavorable comments to other employees, clients, or customers.

• Release of Claims: A severance Agreement will likely contain a comprehensive list of the types of claims and lawsuits the employee agrees to give up upon execution of the agreement. Typically, this claim list will be very comprehensive and will contain almost every conceivable claim with the exception of those claims that cannot be waived in a general release.

Sometimes, a severance agreement will also contain a non-compete agreement, which restricts the employee from working a company in the same or similar industry within a geographic area for a specified period of time. A non-compete agreement can greatly restrict an employee’s ability to find a new job.

 

Our employment law firm has extensive experience in assisting clients in drafting, reviewing, and negotiating severance agreements from both the employee’s and the employer’s position. Our firm will assist clients in ensuring the severance agreements are reasonable and sufficient.

 

Non-Compete Agreements:

We regularly review and advise regarding non-compete agreements.  Here is an article that we co-authorized regarding whether non-compete agreements are enforceable in Illinois:

ILLINOIS SUPREME COURT ISSUES PRO-BUSINESS RULING REGARDING NON-COMPETE AGREEMENTS.

A. INTRODUCTION

Although Illinois was recently ranked among the worst states in which to do business, on December 1, 2011, our Supreme Court issued a pro-business ruling in Reliable Fire Equipment Company v. Arredondo, No. 111871, 2011 WL 6000743 (Dec. 1, 2011). Reliable Fire clarified the proper standard to determine whether non-competition agreements are enforceable under Illinois law. In doing so, the decision has shined some light on what is required for an enforceable non-compete agreement–an issue of which is of paramount importance to Illinois transactional and litigation attorneys.

While the Reliable Fire Equipment Company case helped clarify the law, we continue to believe that there are three critical issues that dictate the outcome of many non-compete disputes: (1) the particular chancery judge who hears a case because there is vast discretion afforded to a judge in a court of equity who reviews the enforceability of non-compete agreements, (2) the scope of an employee’s responsibilities (i.e., whether the employee is given access to confidential information) for the employer, and (3) the relative resources of the parties (i.e., whether the employee can afford to light).

Below, we provide some practice pointers to consider both for the employee and the employer when faced with non-compete issues.

B. APPELLATE COURT SPLIT

For many years, Illinois law regarding non-compete covenants had been relatively well settled. In general, it was understood that a court would enforce non-compete agreements if they were both reasonable in scope; that is, reasonable in constraining time and geographical location, and were to protect a “legitimate business interest” of the employer. Under Illinois law, a legitimate business interest existed when the former employee possessed and used trade secret or confidential information belonging to the employer, or when the employer had near-permanent relationships with its customers that it needed to protect.

Yet, in 2009, the Fourth District Appellate Court decided Sunbelt Rentals, Inc. v. Ehlers, 394 Ill. App. 3d 421 (4th Dist. 2009), which seemed to alter the legal test for enforceability of non-compete agreements. In Sunbelt, the Fourth District held that courts, of all levels, should evaluate the issue of whether a restrictive covenant should be enforced only by looking at the time-and-territory restrictions contained in the agreement. Id. at 431. If a court were to find that those two prongs were met, it should not look to whether the employer has a legitimate business interest. Id. In doing so, the Sunbelt court stated that the Supreme Court of Illinois had never embraced the “legitimate-business-interest” test and that it constituted “nothing more than a judicial gloss incorrectly applied to this area of law by the appellate court.” Id.

Next, in 2010, the Second District Appellate Court issued its opinion in Reliable Fire Equipment Co. v. Arredondo, 405 Ill. App. 3d 708, 723 (2d Dist. 2010) (triggering the appeal to the Illinois Supreme Court), which rejected the test laid out in Sunbelt and instead upheld the protectable business interest requirement. The Reliable Fire court declared that the elimination of the legitimate business interest prong was contrary to the “historical evolution of the law of restrictive covenants” and would lead to a public policy favoring restraint on trade. Id. at 723. However, this Reliable Fire decision called into question how that test should be employed. The majority used the, up to that point, standard formula including the need for a “legitimate business interest” of the employer, which could generally only be shown if the employer had near-permanent customers or trade secrets were involved. The concurrence, on the other hand, declared a “totality of the circumstances” test should be used to determine whether there was a legitimate business interests. The concurrence stated that the test used to assess restrictive agreements should be more flexible than used by courts in the past and analyzed with reference to the totality of the circumstances to determine whether the employer had a legitimate business interest to protect. These decisions created confusion as to what an employer must show to enforce a non-compete agreement in Illinois; after all an agreement litigated in one Illinois county could be deemed enforceable under one standard and rejected in another county under a different standard.

ILLINOIS SUPREME COURT’S DECISION

In Reliable Fire, an employer filed suit against two former employees for allegedly breaching noncompetition agreements by forming their own competing corporation during their employment. Reliable sells, installs, and services portable fire extinguishers along with a variety of related equipment. 2011 WL 6000743, at *1. Arnold Arredondo and Rene Garcia were employed as salespersons for Reliable. Each of these sales people had signed a non-compete agreement in which they were prohibited from competing with Reliable during their employment and for one year following their termination from employment in the states of Illinois, Indiana, and Wisconsin. Reliable Fire, 2011 WL 6000743, at *1. While they were still employed by Reliable, Arredondo and Garcia formed a new corporation named High Rise Security Systems, which offered competitive services to Reliable. Id. Subsequently, Arredondo resigned from Reliable and the next month Mr. Garcia was terminated due to suspected competitive activities. Id. Reliable then filed a complaint against Arredondo, Garcia, and High Rise alleging breaches of the non-compete agreement. Id. at *2. The parties disputed whether the non-compete agreement was enforceable. Id. At issue, among other things, was whether Reliable had shown a protectable interest that was necessary to support the restrictive agreement. Id.

The trial court ruled that the restrictive agreement was unenforceable on the basis that Reliable did not satisfy its threshold obligation to establish it had a legitimate business interest in enforcing the agreement because Reliable could not demonstrate that it had near-permanent customers or that trade secrets or confidential information was involved. Reliable Fire, 2011 WL 6000743, at *2. The Second District Court affirmed the decision; the majority doing so on the same basis and the concurrence doing so on a “totality of the circumstances” test. Id. at *2.

The Illinois Supreme Court began its analysis of the Reliable Fire case by reviewing over 100 years of Illinois precedence pertaining to non-compete agreements finding that the legitimate business interest prong has historically been embraced. Id. at *3-5. Next, it emphatically overruled the Sunbelt decision and upheld the previously well settled upon reasonableness test, including the requirement that an employer demonstrate a legitimate business interest. Id. at *6. The Illinois Supreme Court in Reliable Fire articulated that a non-compete covenant will be reasonable if it is: (1) no greater than is required for the protection of a legitimate business interest of the employer-promisee; (2) not impose an undue hardship on the employee-promisor; and (3) not be injurious to the public. Further, the Reliable Fire court clarified that the non-compete agreement must be ancillary to a valid employment relationship. Id. at *10.

Next, the Illinois Supreme Court created a new standard for determining what constitutes a legitimate business interest by adopting the test put forth by the concurrence in the underlying Reliable Fire case that triggered this appeal. Specifically, the Illinois Supreme Court rejected the inflexible test of requiring trade secrets or near-permanent customer relationships as the sole criteria for deciding that a business interests was legitimate. Instead, the Court noted that those factors are merely “nonconclusive aids” that are one component to be used in conjunction with the three-prong rule of reason to determine whether the employer’s business interest is legitimate. Id. at *10. The Illinois Supreme Court in Reliable Fire, declared: “[w]e expressly observe that appellate court precedent for the past three decades remains intact, but only as nonconclusive examples of applying the promisee’s legitimate business interest, as a component of the three-prong rule of reason, and not as establishing inflexible rules beyond the general and established three-prong rule of reason. Id.

In other words, those factors may be considered in an analysis of a legitimate business interest but an analysis was not to be limited to only those factors. Reliable Fire, 2011 WL 6000743, at *10. Further, the Court declared, “[n]o factor carries any more weight than any other factor, but rather its importance will depend on the specific facts and circumstances of the individual case.” Id. Accordingly, courts, at all levels, are now required to look at the totality of the circumstances involved with deciding whether an employer has a legitimate business interest on a case-by-case basis.

PRACTICAL BOTTOM LINE OF THIS DECISION

After the Reliable Fire decision, a non-compete covenant will be reasonable if it is ancillary to a valid employment contract, and: (1) is no greater than is required for the protection of a legitimate business interest of the employer-promisee; (2) not impose an undue hardship on the employee-promisor; and (3) not be injurious to the public. From a practical standpoint, judges may now be less likely to grant a motion to dismiss; instead allowing a non-compete dispute to proceed to discovery because of the Supreme Court’s mandate that courts look at the totality of the facts and circumstances of each individual case. In a dispute between a well-funded employer and an employee without sufficient resources, the prospect of protracted litigation can result in the employer getting the result it wants. Likewise, by doing away with the rigid formula previously used in case law, a more favorable environment for employers who are attempting to enforce non-compete agreements now exists because employers may demonstrate that they have other types of “legitimate business interests” that support the enforcing of a non-compete agreement. On the other hand, however, employers will need to be ready to demonstrate that their non-compete agreements are reasonable and are tailored to the particular facts and circumstances of the business interest they seek to protect.

PRACTICE POINTERS

Judges don’t like enforcing non-compete agreements against the average Jane Worker; after all enforcing such an agreement will cause her to lose the job that provides income to support a family. Considering this, here are some practice pointers to consider when representing employees and employers in non-compete disputes:

Representing Employees:

(a) Two Sides to Every Story: Let the employer know, in detail, about any misconduct that may give rise to an unclean hands defense, a claim that the employer acted in violation of the covenant of good faith and fair dealing, or that the employer cannot enforce the agreement because of a material breach. Employers sometimes engage in unethical and/or illegal conduct. For example, was your client forced to leave because the employer overbilled customers, violated safety rules, would not pay your client, etc.? Detailing this misconduct early on may give the employer second thoughts about whether it wants its “dirty laundry” aired in a public courtroom.

(b) Read The Contract: Does the non-compete agreement really prohibit your client from doing what she is doing? There are many form non-compete agreements that are written poorly and, in many occasions, by their plain language do not apply to certain situations. Judges often narrowly construe restrictive covenants; is your client’s conduct even covered by the non-compete?

(c) Overbroad Agreement: Is the non-compete overly broad? Many are overbroad to the point of being unenforceable. In some cases a judge will not rewrite/blue pencil the agreement to make it enforceable.

(d) Was There Consideration: Was there sufficient consideration for the restrictive covenant? For example, there is case law addressing whether continued employment is sufficient consideration when the employee is not employed for a substantial period.

(e) Cost/Benefit: Properly advise your client that being right can be expensive. There seems to be an urban legend among many employees that Illinois is a “right to work” state, meaning that the courts will not enforce non-compete agreements. This is really not the law and the cost to invalidate a non-compete agreement (assuming success) may end up being more than if the client sits on the sidelines during the restricted period.

Representing Employers:

(a) Pigs Are Slaughtered: Employers often want very broadly worded agreements and to provide no consideration in exchange therefore. The risk of being a pig is that a court may find the agreement unenforceable and refuse to rewrite the agreement to narrow it. Likewise, be sure that sufficient consideration supports the non-compete agreement.

(b) Thou Shalt Not Steal: Did the employee take anything that did not belong to her when she left? Many do and when this happen the non-compete agreement will be the icing on the cake of a much stronger case. Have a forensic examination of the employee’s computer/smartphone. Many employees will download, email to themselves, or print proprietary information before leaving. When a judge sees the intentional misappropriation of an employer’s confidential property, preliminary injunctive relief is more likely.

(c) Present Detailed Evidence: Track the case law and provide specific facts about why a court should enforce your non-compete agreement. For example, show how the employer was exposed to confidential information that will inevitably be disclosed to a competitor and why this information is so important to protect the employer.

(d) Attorney Fees: Include an attorney fee provision in non-compete agreements. If an employee is faced with the possibility of paying tens of thousands of dollars, or more, in attorney fees if she violates a contractual provision, she will think twice about doing so.

(e) Third Party Claims: Consider claims against third parties, such as the competitor that hired your client’s former employee. If the competitor induced the employee to breach her non-compete agreement, is benefiting from the disclosure of trade secrets that your employee has taken with her, or appears to be raiding your client’s company in an unlawful manner; there may be a claim against the competitor.

Authors:

David J. Fish is the founder of The Fish Law Firm, P.C., in Naperville, Illinois where he focuses his practice in the area of business litigation. Shannon Barnaby was an associate at The Fish Law Firm, P.C. in Naperville, Illinois where she practiced in the area of business litigation. Note: portions of this non-compete article was published in the Illinois Bar Journal Our Naperville, Illinois law firm represents clients throughout Illinois, including DuPage County, Cook County, Kane County, Will County, Aurora, Oak Brook, Naperville, Joliet, Plainfield, Wheaton, Downers Grove, Chicago, Elgin, and others.