Post-Employment Restrictive Covenants – Illinois Law Basics

In Northwest Podiatry Center, Ltd. v. Ochwat (2013 IL App (1st) 120458), the First District reversed key elements of a trial court’s preliminary injunction order in a lawsuit filed by a podiatry center against two former doctor employees.  The plaintiffs – the podiatry firm and its founder – sued two former podiatrists who left to form a competing firm and who took some employees with them and tampered with an exclusive contract between plaintiffs and one of their key referral sources.

The trial court granted the plaintiff’s preliminary injunction petition and enforced the non-competes against the two doctor defendants. ¶¶ 13-14.  The doctors appealed.

The First District gutted much of the trial court’s injunction. In doing so, the Court applied the main rules that control when a post-employment non-compete is enforceable:

– A restrictive covenant must be reasonable and necessary to protect a legitimate employer business;


– The factors considered include: (a) hardship to employee; (b) effect on general public; (c) geographic (distance) and temporal (duration) scope and (d) activities restricted;


– Non-compete provisions are strictly construed and any ambiguities are resolved in the employee’s favor;


– A restrictive covenant ancillary to an employment contract must be reasonable;


– A non-compete is reasonable where (i) its scope is no greater than necessary to protect the employer’s interest; (ii) it doesn’t impose an undue hardship on the employee; and (iii) the non-compete is not injurious to the public;


– the party seeking to enforce a restrictive covenant must show the restriction is necessary to protect its business needs;


– restrictive covenants should be narrowly tailored to only curtail employee conduct that threatens the employer’s interests;


– a court can “blue pencil” a restrictive covenant: if the restriction is too broad, the court can narrow it.
¶¶ 38-39, 46, 56.

Applying these rules, the First District held: (1) the trial court’s “privileges restriction” injunction (requiring one doctor to cede many of his hospital privileges) was overbroad as it lacked any temporal limit; (2) the injunction activity restriction was too broad because it enjoined defendants from conduct that was never agreed to in the employment contracts; and (3) the trial court properly enjoined  defendants from doing business with plaintiffs’ main referral source since Plaintiff had an issue exclusive contractual relationship with it and defendants clearly tampered with that arrangement.

The Court also weighed in on what a departing employee can and can’t do in connection with laying the ground-work to outfit and join a competitor.  Employees can plan, form and equip a competing corporation while working for their employment, but may not begin competition.

Employees can also freely compete with a former employer and solicit former customers of the employer as long as they wait until after they’ve stopped working for the employer and don’t violate a valid non-compete or steal a customer list. ¶ 60.  Corporate officers, though, are held to a higher standard: they owe fiduciary duties of loyalty to their employer and can be held liable for transactions that began, or for information learned while the officer was still with the employer.

The Court upheld the trial court’s finding that one of the defendants breached his fiduciary duties by actively exploiting the maniaged care firm (plaintiffs’ exclusive referral partner) for his personal gain by undercutting plaintiffs’ pricing. ¶¶ 61-62.

Conclusion:

As employment law practitioners know well, careful drafting of employment contract restrictive covenants is paramount.  Non-compete provisions should be reasonable in terms of time and space, and non-disclosure and non-solicitation clauses should be specific and clear.  Northwest Podiatry provides a good summary of Illinois law governing injunctions, the enforceability of employment restrictive covenants, and a corporate officer’s fiduciary duties to a former corporate employer.