Almost every franchise agreement has—or should have—a provision regarding non-competition covenants. Franchisors need to, first and foremost, protect their brand. Protection includes more than merely safeguarding the goodwill of the brand. Franchises also require protection from unfair competition.
To do this, franchisors require franchisees to execute covenants not to compete ancillary to the franchise agreement in order to protect the legitimate business interests of the franchisor. Why? Franchisees often have access to trade secrets and confidential information, for starters. Additionally, these franchisees also have crucial inside knowledge of business relationships and the operation of the franchise system as a whole, which a franchisor would be remiss not to protect.
An enforceable non-compete covenant requires reasonable limitations, which have been established to protect the franchisor and other current and potential franchisees. Those limitations must be reasonable in terms of specified geographical radius and a specified time period in which the former franchisee cannot operate a competing business. For example, the covenant not to compete in a franchise agreement may state that the franchisee cannot operate a competing business within a two-mile radius of the franchise center for a period of two years after the termination or expiration of the franchise agreement.
While courts will typically enforce a reasonable covenant not to compete, the covenants are generally disfavored. This is because these covenants naturally limit a franchisee’s ability to make a meaningful living using the business knowledge obtained over the term of the franchise agreement. That is, unless the franchisee pursues a new business endeavor that will not equate to a “competing business” of the franchisor. Still, alternative business opportunities do exist for a franchisee even in light of the non-compete covenant. For example, one can pursue a competing business outside of the limitations of the covenant or open a new non-competing business. The aforementioned is why courts will enforce reasonable covenants in light of the balance between the hardship of the franchisees and the business interests of the franchisors.
But what happens when, instead of franchisors requiring franchisees, employers require employees to sign non-compete covenants? Employees may not have any viable or desirable options to make a living if they are forced out of a specific industry and/or a specific location. Thus, legislatures and courts approach the covenants in the employment context with more stringency.
In Illinois, the legislature recently passed the Illinois Freedom to Work Act, effective January 1, 2017.1 In sum, the Act prohibits covenants not to compete between employers and any low-wage employees.2 Low-wage employees in Illinois are currently considered those who earn $13.00 or less per hour or those whose earnings do not exceed the minimum wage requirement, whichever is higher.3 An agreement that restricts a low-wage employee from performing work in a specified geographical area, for another employer for a specified time period, or for another employer that is similar to the employee’s work for the employer enforcing the agreement is considered illegal and void.4 This Act only applies to agreements entered into after the effective date of January 1, 2017 and does not retroactively apply.5
Otherwise, Illinois does not govern non-compete agreements between employers and employees who do not qualify as low-wage employees except as decided by the common law of the courts of Illinois. Typically, non-compete covenants in employment agreements are disfavored as restraints of trade but will be enforced if they are reasonable and supported by adequate consideration.6 What then, is defined as reasonable?
For a non-compete to be reasonable in Illinois, it must not impose undue hardship on the employee and act only as necessary to protect the legitimate business interests of the employer.7 An undue hardship may include the employee’s inability to find similar work in their specialized field without having to relocate and uproot their family or enter into an entirely new field of work in which the employee may not be similarly compensated. Other practical considerations in enforcing a non-compete agreement would include a valid employment relationship, which requires adequate consideration and does not cover independent contractors, and the harm to the public in enforcing it.8 Illinois courts vary on the adequate consideration analysis when it comes to enforcing non-competes. The courts usually focus on the term of employment for finding adequate consideration, which varies on a case-by-case basis.
One day Illinois may prohibit non-compete agreements for all employees, especially since a bill was circulated in early to mid-2017 to prohibit non-compete covenants in all employment contexts. For now Illinois employers can only apply non-compete covenants against employees making more than $13.00 per hour. However, each employer should still evaluate the common law of Illinois to ensure its covenant is reasonable in light of the specific context of employment.
By: Danielle Jenkins
Danielle Jenkins is an attorney in the Firm’s Franchise Law and Construction Law Practice Groups. If you have any questions or concerns about this issue or any other matter, please contact Danielle directly at 813-223-1099.
1 820 Ill. Comp. Stat. Ann. 90/1 (West 2017).
2 820 Ill. Comp. Stat. Ann. 90/5 (West 2017).
4 820 Ill. Comp. Stat. Ann. 90/5, 90/10 (West 2017).
6 See generally Reliable Fire Equip. Co. v. Arredondo, 965 N.E.2d 393 (Ill. 2011).