The Illinois General Assembly recently approved House of Representatives Amendment 1 to Senate Bill (SB) 672, which would significantly reform noncompete and nonsolicitation law in Illinois. The bill will now go to Governor JB Pritzker, who is expected to sign the bill into law.
The bill would impose limitations on noncompete and nonsolicitation agreements, and it aims to provide employers with more clarity about their enforceability. The bill has a January 1, 2022, effective date.
Highlights of SB 672 House Amendment 1: Noncompete and Nonsolicitation Limitations
SB 672 would:
- require an employer to provide an employee at least 14 calendar days to review the agreement and “advise[] the employee in writing to consult with an attorney” before signing the agreement;
- ban noncompete agreements for employees making $75,000 per year or less (the salary threshold would increase by $5,000 every five years until reaching $90,000);
- ban customer and coworker nonsolicitation agreements for employees making $45,000 per year or less (the salary threshold would increase by $2,500 every five years until reaching $52,500);
- authorize an employee to recover attorneys’ fees and costs if the employee prevails in a lawsuit brought by the employer seeking to enforce a noncompete or nonsolicitation agreement;
- authorize the Illinois attorney general to initiate or intervene in litigation and initiate investigations of potential violations; and
- prohibit employers from enforcing restrictive covenants with employees who are separated due to COVID-19 or “circumstances that are similar to the COVID-19 pandemic, unless enforcement of the covenant not to compete includes compensation equivalent to the employee’s base salary at the time of termination for the period of enforcement minus compensation earned through subsequent employment during the period of enforcement.”
The bill would exclude from the definition of “covenants not to compete” the following:
- nonsolicitation agreements;
- confidentiality agreements;
- trade-secret and invention-assignment agreements;
- agreements entered into in connection with the acquisition or disposition of an ownership interest in a business;
- agreements “requiring advance notice of termination of employment, during which notice period the employee remains employed by the employer and receives compensation” (i.e., “garden-leave clauses”); and
- agreements that “the employee agrees not to reapply for employment to the same employer after termination” (i.e., “no-reapplication clauses”).
The bill would also codify rules set forth in Illinois case law regarding noncompete and nonsolication provisions. Specifically, the bill would codify the rule set in Reliable Fire Equipment Co. v. Arredondo (965 N.E.2d 393 (Ill. 2011)) that the “legitimate business interest of the employer” is a totality-of-circumstances test that should evaluate factors such as scope of restrictions and “the employee’s exposure to the employer’s customer relationships.”
The bill would also materially codify the rule set forth in Fifield v. Premier Dealer Services (2013 IL App (1st) 120327) by defining “adequate consideration” as either (a) two years of continuous employment after signing the agreement; or (b) alternative consideration, such as “a period of employment plus additional professional or financial benefits or merely professional or financial benefits adequate by themselves.”
In addition, the bill would allow courts to reform noncompete and nonsolicitation agreements, rather than hold them unenforceable.
Key Takeaways
In light of SB 672, employers with employees in Illinois may want to review their existing agreements with employees. While existing noncompete and nonsolicitation agreements would not be impacted by this legislation, as the bill does not apply retroactively, employers may take this as an opportunity to update existing agreements before the effective date. Additionally, employers may want to become familiar with changes that will impact the enforceability of these agreements after January 1, 2022.
Ogletree Deakins will continue to monitor and report developments with respect to SB 672 and will post updates on the firm’s Illinois and Unfair Competition and Trade Secrets blogs.
