Class 5: Competition and Employee Loyalty (Including Non-Competes, Non-Solicitations, Confidentiality, Restrictive Covenants) 

Topics Overview:

• Duties of Loyalty and Trade Secrets: Employees owe a duty of loyalty to their employer while employed – they shouldn’t steal business opportunities or trade secrets, or actively compete with their employer during employment. We examine what this duty entails and its limits (e.g., preparing to compete after leaving is generally allowed, outright competing while still on payroll is not). We’ll discuss trade secret law, including the federal Defend Trade Secrets Act and Illinois’s Trade Secrets Act, which give employers civil remedies if an employee misappropriates confidential business information. Examples: taking client lists, product formulas, or proprietary data to a new job – these can lead to lawsuits and even injunctions.
• Non-Compete Agreements: Contractual covenants not to compete that restrict a former employee from working in a competing business for a certain time/geography. We cover the enforceability tests – generally, to be enforceable in Illinois (and most states), a non-compete must be reasonable in duration, geographic scope, and scope of activity, and necessary to protect legitimate business interests. We highlight Illinois’s Freedom to Work Act which prohibits non-competes for employees earning below $75,000/year and non-solicitation covenants below $45,000, and requires other procedural protections (like 14-day review period) for valid agreements. This is a big Illinois-law development that students should know. We also mention prior Federal Trade Commission proposed rule that would ban most non-competes nationwide – not law yet (and likely never with Trump in office), but part of the policy conversation.
• Non-Solicitation and Other Restrictive Covenants: Agreements not to solicit clients or coworkers after leaving, and confidentiality agreements. These are generally viewed slightly more leniently than full non-competes but still must be reasonable in scope. Illinois treats non-solicitation covenants similarly under the Freedom to Work Act thresholds. We discuss typical durations (6 months to 2 years often upheld for non-solicit) and what constitutes solicitation (if a client moves to you on their own, is it a violation?).
• Tortious Interference and Unfair Competition: If an employee leaves and takes others or a competitor induces employees to breach contracts, there can be tortious interference claims. We outline the elements: a valid contract or business expectancy, knowledge by the defendant, intentional inducement of breach, and damage. Example: Company A poaches a team from Company B who all had non-competes – Company B might sue Company A for tortious interference with those contracts. Another example: when an employee breaches loyalty by diverting a deal to themselves or a new employer, the old employer might sue the new employer for interference or conspiracy. We also mention the concept of “inevitable disclosure”: a doctrine (from the famous PepsiCo v. Redmond case in Illinois) where an employer can sometimes bar a former employee from a new job by arguing they will “inevitably” use trade secrets – effectively a non-compete via trade secret law.
• Whistleblower Protections vs. Loyalty: Sometimes an employee’s duty of loyalty intersects with rights to report wrongdoing. We note that an employee taking company documents to report fraud may technically violate confidentiality, but whistleblower laws may protect them. The class will consider ethical boundaries: loyalty doesn’t require silence about illegal acts.
• Illinois Specifics: Emphasize the new Illinois law on non-competes/non-solicits (discussed above), and mention Illinois common law: e.g., Reliable Fire Equipment v. Arredondo (Ill. 2011) which set the standard that reasonableness of non-compete is based on totality of circumstances and legitimate business interest (overruling earlier bright-line tests). Also, the Illinois Trade Secrets Act largely follows the Uniform Trade Secrets Act.

Required Readings:

• Casebook Chapters on Restrictive Covenants and Trade Secrets:
• Illinois Freedom to Work Act (820 ILCS 90) – excerpt of the statute so students see the income thresholds and requirements (e.g. must advise employee to consult an attorney and provide 14 days to sign).
• DTSA and ITSA excerpts: A summary of what counts as a trade secret and what is misappropriation (e.g., taking files, or memorizing and using confidential info). Perhaps the statute’s definition of “trade secret” and “improper means.”
• Drafting Assignment:  The law school wants to prevent its deans from leaving, recruiting faculty to leave, or teaching at any other law school.  Draft a restrictive covenant for the law school and be ready to discuss the advice you would provide to the law school.

Supplemental Materials:

• FTC Proposed Rule Summary: An op-ed I wrote is available here. My position sent to the FTC is available here.
• Illinois’ approach to inevitable disclosure: Not all states accept it, but Illinois (via PepsiCo case) does. Supplemental reading might note that some states (like California) outright ban non-competes and even frown on inevitable disclosure, whereas Illinois still allows non-competes with restrictions – framing Illinois as moderate.
• Law Firm Lawsuit

Hypothetical Questions & Model Responses:

Hypothetical: Emily works as a sales representative for a Chicago-based software firm and had to sign a 2-year non-compete agreement barring her from “directly or indirectly engaging in any business that competes with [Employer] in the United States” after leaving. She quits and joins a startup software company in Chicago that targets some of the same clients. Her old employer sues to enforce the non-compete. What factors will the court consider, and is the non-compete likely enforceable under Illinois law?

Model Response: The court will scrutinize the non-compete for reasonableness in scope, duration, and geography, and whether it protects a legitimate business interest of the employer. Key factors include: (1) Duration: 2 years is on the longer side but not unheard of – courts have enforced 1-year and sometimes 2-year restrictions if other factors justify it. (2) Geographic scope: “United States” is very broad, especially if the company only truly competes in certain regions. If Emily’s firm mainly had Midwest clients, a nationwide ban might be seen as overbroad. (3) Scope of activity: “Engaging in any business that competes” could effectively bar her from any role (even unrelated) at a competing company – that breadth might be too much and violate the so-called “janitor rule”. Illinois courts want covenants narrowly tailored to the employee’s role; a clause should ideally specify that she can’t sell similar software products to the same customer market or something more limited. (4) Legitimate interest: Did Emily have access to trade secrets or near-permanent customer relationships? If she was the face to certain clients or had deep knowledge of confidential pricing, the employer has an interest in preventing her from exploiting that at a competitor. If she was a general salesperson without unique relationships (customers may buy based on product rather than salesperson), the employer’s interest is weaker. Also consider undue hardship on Emily (it significantly limits her employment opportunities, given her field, for 2 years) versus benefit to public (the public has interest in competition and mobility). Given Illinois law and the recent Freedom to Work Act, one must also check her income: If Emily’s earnings were below $75k, the non-compete is void by statute – assuming she’s a well-paid software sales rep, she might exceed that threshold. If the threshold is met, the statute also requires that she was given 14 days to review and perhaps some benefit for signing; if the employer didn’t meet those procedural requirements, that could invalidate it. Assuming the procedure was fine, the clause as written (“any business in the U.S.”) is likely too broad. An Illinois court might either refuse to enforce it or blue-pencil it (modify it) to a reasonable scope, such as limiting it to the firm’s specific niche and maybe a Midwest region. Outcome: the employer has some case if Emily is approaching the exact clients with a direct competitor’s similar product – the court might enforce a narrower version of the non-compete to prevent her from soliciting those clients for, say, one year. But the full 2-year nationwide ban on any competitive employment is probably unenforceable as written. Emily’s best defense is to show the restriction far exceeds what’s needed to protect any legitimate interest (for instance, the startup has its own product and she isn’t using any secret info, or that her old clients chose to follow her because they like her, not due to any confidential info – although that can cut both ways, as strong client relationships can justify enforcement!). In sum, under Illinois law the non-compete as phrased is overly broad and likely will be trimmed or not enforced – especially given Illinois’ recent public policy to limit non-competes.

Hypothetical: While still employed at Alpha Corp, Brian secretly starts a side business that sells a similar product and quietly solicits a few Alpha Corp customers to move to his new company. Alpha Corp discovers this after Brian resigns and takes those customers with him. What legal claims can Alpha Corp pursue?

Model Response: Alpha Corp can pursue several claims arising from Brian’s breach of loyalty and theft of business:

• Breach of Fiduciary Duty/Duty of Loyalty: As an employee (particularly if Brian was in a position of trust like a salesperson or manager), Brian owed a duty to act in Alpha’s best interest. Actively soliciting Alpha’s customers for his own venture while still employed is a clear breach of that duty. Alpha could sue for damages (lost profits from those customers) and possibly disgorge any profits Brian earned from his disloyal conduct during the period of employment. Illinois courts have held that employees may prepare to compete after leaving, but they cannot solicit customers or do competitive business while on the payroll. Depending on what state’s law applies, Brian’s actions cross the line.
• Trade Secret Misappropriation: If Brian took Alpha’s customer lists, pricing info, or other confidential data to help his new business, that could violate the Illinois Trade Secrets Act. Alpha would need to show the information qualifies as a trade secret (e.g., not publicly known, efforts to keep it secret, etc.) and that Brian acquired/used it through improper means. Customer lists can be trade secrets if they are not readily ascertainable and involve unique effort. If so, Alpha could get an injunction barring Brian from using that info and potentially damages (and even attorney fees if the misappropriation was willful). Even if the info doesn’t rise to trade secret, it could be confidential under Brian’s employment agreement (if he had one) – breach of a confidentiality agreement could be claimed.
• Tortious Interference (with contract or business expectancy): Alpha might also sue Brian’s new company (if it’s a separate entity or has partners) for tortious interference, alleging that the new business induced Brian (and maybe the customers) to breach their agreements or relationships with Alpha. If the customers had contracts, interference with those contracts could be claimed. If at-will, it’s interference with business expectancy – still actionable if malicious and without justification. However, since Brian himself orchestrated it and he was the insider, the more straightforward claims are breach of loyalty and trade secret theft. The new company (if essentially Brian himself) might just be jointly liable under those claims anyway.

Hypothetical: Sara signs a non-solicitation agreement with her employer, Beta Inc., agreeing not to solicit Beta’s customers for one year after leaving. She leaves Beta and joins a competitor. She doesn’t reach out to any Beta clients, but one of her long-time customers calls her at the new company and expresses interest in switching to her because of their relationship. If Sara accepts business from this client, has she violated the non-solicit?

Model Response: It depends on the precise wording of the non-solicitation clause and how “solicit” is defined. Typically, “non-solicitation of customers” means you cannot initiate contact or actively ask former customers to move their business. If the client independently contacts Sara without any prompting, Sara arguably is not “soliciting” – she’s the passive recipient of an inquiry. Many agreements (or case law) make this distinction: non-solicit prevents initiating or encouraging, but responding to an unsolicited request may not breach it. However, some agreements are written broadly to also prevent “accepting business” or doing any business with former clients, whether or not solicitation occurred. If Sara’s agreement is written that broadly (a non-dealing provision), then even though she didn’t initiate, doing business with that client could violate it. Illinois courts generally interpret ambiguities in favor of the employee’s right to work. If the contract says “solicit or attempt to solicit,” merely accepting an incoming request might not qualify as an “attempt to solicit.”

To be safe, some companies instruct ex-employees to even refuse business from former clients during the non-solicit period. If Beta sues, it might have to show Sara somehow encouraged it (maybe she let the client know she was leaving and where she’d be – if done while at Beta, that could be seen as a solicitation). If she had no contact until they called her, she’s in a better legal position. Illinois would likely interpret “solicit” narrowly absent clear language otherwise. So, assuming a standard clause, Sara likely did not violate it by accepting an unsolicited order. But she should document that she did not solicit the client (e.g., keep any emails or call logs showing the client initiated). Beta might still attempt an injunction, so the court would examine evidence. It’s a gray area that highlights why agreements sometimes explicitly address whether merely doing business with former customers counts as solicitation. In sum, if Sara’s contract only bans her from soliciting, she can service the customer who proactively reaches out. If it bans doing any business with them, then she technically shouldn’t, or she risks breach. Clarity in contract terms is crucial here.

Jimmy John’s Non-Compete Controversy: A few years ago, the sandwich chain Jimmy John’s faced backlash for having low-wage sandwich makers sign non-competes banning them from working at any sandwich shop within 2 miles of any JJ location. Illinois’ Attorney General investigated, calling it overbroad and unconscionable. Under pressure (and later under the 2017 Freedom to Work Act which initially banned non-competes for low-wage workers), Jimmy John’s dropped those covenants. This real-world incident helped prompt Illinois to enact reforms. It highlights that non-competes for low-wage jobs are frowned upon and now unlawful in Illinois, aligning with a broader trend to limit such agreements for workers who don’t truly pose a competitive threat. It’s a practical example of public policy reacting to abuse of non-competes.

Federal vs. Illinois Law:

Restrictive covenants are primarily governed by state law (contract law). Illinois has specific statutes now (Freedom to Work Act). Federal law currently has no blanket non-compete regulation, though the FTC’s proposal was under consideration.  Had it been adopted, it could preempt state law and ban most non-competes nationwide. Until then, it’s state-by-state. Notably, some states like California ban non-competes outright (except in narrow circumstances like sale of business). Illinois allows them but regulates them. On trade secrets, there is both federal (DTSA) and state (ITSA) law; they coexist. 

Employee mobility vs. employer interests is also a federal policy question: the NLRA (a federal law) gives employees rights to discuss wages and conditions – if a non-compete or non-solicit interferes with labor rights (say, a clause not to solicit employees could conflict with an employee’s right to discuss unionizing with coworkers), there could be federal preemption issues. Generally though, non-competes are outside NLRA scope unless used to retaliate for union activity.
Another federal aspect: antitrust law. The DOJ has occasionally viewed widespread non-competes (especially no-poach agreements between companies) as potentially anti-competitive. There’s guidance that naked no-poach agreements between separate companies (like, “I won’t hire your employees, you won’t hire mine”) can violate antitrust laws. That’s a different context but related to competition for labor. Illinois doesn’t have a separate stance on that beyond federal antitrust.

Impacts on Employers and Employees:

• For Employers: Employers should carefully consider whether and how to use restrictive covenants. In Illinois, they must now ensure non-competes/non-solicits are used only for employees above the salary thresholds and that they provide the mandatory notice and consideration. Overusing these agreements (for low-level staff) can backfire legally and reputationally. If protecting trade secrets or customer relationships is crucial, a well-tailored covenant (short duration, limited scope) is more likely to be enforced than an overbroad one.  I like to say, hogs eat well and pigs get slaughtered.  Employers should also invest in other protections: robust confidentiality agreements (almost universally enforceable if reasonable), and possibly “garden leave” or deferred compensation that incentivizes employees not to compete. When an employee resigns, enforce covenants consistently – selective enforcement can undermine them. Also, monitor departing employees: conduct exit interviews, remind them of obligations, and retrieve company data/devices. If a key person is leaving for a competitor, be prepared to send a polite but firm letter to the new employer putting them on notice of any covenants or trade secret rights – that can prevent misappropriation or at least establish good faith in protecting secrets. On the hiring side, if you’re hiring someone with a non-compete, consult legal counsel – unwittingly inducing a breach can expose the company to litigation (tortious interference). Some employers structure roles for a period to avoid violation (e.g., assign the person to a different territory until the covenant expires). And importantly, maintain good confidentiality practices internally: a company that fails to mark documents as confidential or to limit access may lose trade secret protection.
• For Employees: Employees, especially those in high-skill jobs, should be aware of what they sign. Before signing a non-compete or non-solicit, they can try to negotiate scope or at least understand it. Remember, Illinois now mandates that employers give 14 days to review – use that time to consult a lawyer or at least consider the impact. If you sign, keep a copy. When planning a move, be mindful of any restrictions: maybe wait out the period if possible, or discuss with the new employer – some might accommodate or even help in any legal fight. Don’t take company data on your way out – that’s a big no-no both legally and ethically. If customers or coworkers reach out to join you, tread carefully if you had covenants. Generally, it’s safer to let the former employer initiate contact about business rather than you initiating. If you’re unsure, a declaratory judgment action is an option – you can preemptively ask a court to rule a covenant unenforceable rather than waiting to be sued. Illinois law also now protects you if you were low-wage; know that such covenants are void, and you can mention the Freedom to Work Act to an overreaching employer. And note, even without a non-compete, you can’t take trade secrets – that’s independent. So if you leave, rely on your general skills, not proprietary info from the old job. Another tip: maintain professional, non-incendiary communications – no bragging on LinkedIn “I’m coming after my old company’s clients!” That could be used as evidence of solicitation or malice. And if you feel a covenant you signed is too broad, Illinois law might be on your side – consider negotiating an exit where the employer waives it (sometimes employers will waive a non-compete in exchange for something, like a signed release or agreement not to poach certain key clients). Knowing your rights (like the income thresholds or that 2 years of at-will employment is needed for consideration if you signed mid-job) can give you leverage in discussions.

Additional Commentary & Resources:

• Alternate Tools: Employers have alternatives to non-competes: Garden leave (paying employees during a post-employment restricted period, common in finance industry), or forfeiture-for-competition clauses (employee loses stock options or deferred comp if they compete). Some of these are viewed more favorably by courts because the employee isn’t left high and dry – they are compensated for the non-compete period. 
• Trade Secret Protection Programs: It’s worth noting the existence of programs like the FBI’s outreach to companies about trade secret theft (particularly with international aspects – e.g., theft benefiting foreign companies or governments is a big issue). The federal Economic Espionage Act even criminalizes certain trade secret theft. While beyond the civil scope of our class, it underscores how seriously trade secrets are taken – and employees should absolutely avoid any hint of such wrongdoing (it can lead to prison). Companies should educate employees on these lines too.
• Social Media and Non-solicit: A contemporary issue: If an ex-employee posts a generic LinkedIn update “I’ve started a new role at Company Y – contact me for any needs,” is that solicitation of former clients? Some courts have found a general announcement is not a solicitation, but a targeted message to individual former clients would be. Guidance on this for modern communications can be an interesting aside.