Covenants not to compete: Recent changes in the law
Many of you may be familiar with covenants not to compete, either as an employer who has placed such language in a contract, or as a physician who has been presented with an employment contract containing such language. Basically, a covenant not to compete is a clause that is put in an employment contract which restricts the employee from practicing in a defined geographical area, for a defined period of time, or from accepting patients from the employer’s practice after the employee leaves the practice situation.
Previously, Illinois law was fairly well settled on what would and would not be acceptable in such employment contracts. However, the Illinois Supreme Court recently issued an opinion (Reliable Fire Equipment Company v. Arredondo) regarding the enforceability of covenants not to compete. This could affect any contract you or your practice may currently have in place. Prior to placing such a clause in your practice’s employment contracts or signing such a clause yourself, you should determine whether such a clause would be valid.
In determining whether a covenant not to compete clause is valid the courts will look to a three-prong test. First, the limitation on the employee must be necessary to protect the legitimate interest of the practice. Second, the limitation would not impose a hardship on the practitioner signing the contract. Third, the scope of the limitation is reasonable.
Significantly, the recent changes address the “legitimate business interest” test. The court will now determine whether a legitimate business interest exists which would support the employer’s right to such a clause based on all of the circumstances in each individual case. Instead of using a strict test, the court will consider various factors which include whether the employee has acquired confidential information that he/she may be taking to new employment; the nature of the customer relationship, for example whether the patient relationship is permanent or transitory; and any time and place of practice restrictions.
While the Illinois courts have upheld covenants not to compete in the past, in making this change, the Illinois Supreme Court has made it easier for employers to enforce the covenant not to compete. A court now has more ability to review the entirety of the situation in order to determine whether such a clause is valid and enforceable. The Court has not yet discussed the ramifications on the issue of patients moving practices due to changes in insurance and how this may affect such covenants. ■