Limited by Industry
Whether a restrictive covenant is “limited by industry” can be crucial to whether a court will enforce a post-employment non-compete or non-solicitation provision. When drafting or later litigating a non-competition provision or broader non-competition agreement, it is crucial to determine if the scope of the restrictive provision goes beyond the industry in which the putative or actual former employee will have worked during the period of actual employment.
Generally, a covenant not to compete that imposes unreasonable restrictions upon an employee, if enforced at all, will be enforced only to the extent necessary to protect the employer's legitimate business interests. Our discussion of legitimate business interest is here. A covenant restraining an employee from competing with his or her former employer upon termination of employment is likely reasonable if it is no more restrictive than is required for the protection of the employer. But it must not impose undue hardship on the employee, and cannot be not injurious to the public. Our discussion of other factors, e.g., geographic or duration elements, which courts analyze in determining whether to enforce a non-competition agreement or non-solicitation agreement is here.
The element or issue of “limited by industry” can be dispositive for a court in determining whether the restrictive covenant in an employment agreement could be invalid, i.e., if not sufficiently limited by industry, a court could determine it is over broad and not enforceable.
A simple example of drafting can make or break this issue. A restrictive covenant may define the employer to include all of its affiliates or subsidiaries, etc. More specifically, suppose a non-solicitation provision in a restrictive covenant as drafted attempts to prohibit the former employer from doing business with any customer or prospect of the employer that the former employee, directly or indirectly, serviced, developed relationships with or acquired information about during his or her employment, such as selling products or services “in competition with” the employer. But who in this scenario is “the employer?”
It would be reasonable for the former employee to argue that because the employer is defined to include all of its affiliates—including those affiliates that do not have anything to do with the sale of services or goods the employee sold for his former employer, that the non-solicitation provision bars him or her from soliciting clients to provide goods or services from a prohibitively and therefore overly restrictive variety of industries that are irrelevant from and have nothing to do with the work performed for the employer. Likewise as a non-competition provision, which prevents the former employer from engaging in competition with the employer either directly or indirectly. Accordingly, the former employee will predictably argue this provision or the entire agreement prevents him or her from working in industries that have little, if any, relation to his work for the employer.
A court could be inclined to refuse enforcement because such a definition renders the entire agreement over broad and thus excessively burdens the former employer’s ability to find work while offering little benefit to the former employer.
On the potentially thornier problem of whether as an equitable remedy a court facing a “limited by industry” problem in a restrictive covenant would reform the contract to limit the industry and then enforce the agreement or provision.
The attorneys at Lubin Austermuehle have over thirty years of experience defending and prosecuting non-compete, trade secret and restrictive covenant lawsuits. We are committed to fighting for our clients' rights in the courtroom and at the negotiating table. Conveniently located in Chicago and Elmhurst, Illinois, we have successfully litigated non-compete and trade secret and covenant not to compete cases for clients all over the Chicago area. To schedule a consultation with one of our skilled attorneys, you can contact us online or give us a call at 630-333-0333.