As a part of our series on trade secret employee contract clauses, we have surveyed the Seventh Circuit for updates on  the law pertaining to Restrictive Covenants. Each state’s laws are set forth below. But generally in the Seventh Circuit, states focus on reasonableness, geographic, and income restraints in restrictive covenant agreements. Indiana applies a reasonableness-standard common law approach to enforcing covenants, strictly construed against the employer. Wisconsin’s restrictive covenant statute also focuses on reasonableness restraints, and will void all parts of the covenant even if remaining portions are reasonable. Illinois recently passed a restrictive covenant statute in 2021, the Illinois Freedom to Work Act, which codifies the state’s longstanding common law, adding provisions restricting covenants against certain incomes and professions.

State
Source of law governing restrictive covenants
Enforcement
Wisconsin

Wis. Stat. § 103.465

Manitowoc Co. v. Lanning, 2018 WI 6, 379 Wis. 2d 189, 906 N.W.2d 130.

 

A covenant by an assistant, servant or agent not to compete with his or her employer or principal during the term of the employment or agency, or after the termination of that employment or agency, within a specified territory and during a specified time is lawful and enforceable only if: the restrictions imposed are reasonably necessary for the protection of the employer or principal.

Any covenant imposing an unreasonable restraint is illegal, void and unenforceable even as to any part of the covenant or performance that would be a reasonable restraint.

The Wisconsin Supreme Court has interpreted the statute as establishing five prerequisites that a restrictive covenant must meet in order to be enforceable.

The restraint must

  • (1) be necessary for the protection of the employer, that is, the employer must have a protectable interest justifying the restriction imposed on the activity of the employee;
  • (2) provide a reasonable time limit;
  • (3) provide a reasonable territorial limit;
  • (4) not be harsh or oppressive as to the employee; and
  • (5) not be contrary to public policy.
Indiana

Common Law

Carroll v. Long Tail Corp., 167 N.E.3d 750 (Ind. Ct. App. 2021); Vukovich v. Coleman, 789 N.E.2d 520 (Ind. Ct. App. 2003).

In Indiana, noncompetition agreements are strictly construed against the employer and are enforced only if reasonable with respect to the legitimate interests of the employer, restrictions on the employee, and the public interest.

To determine the reasonableness of a covenant, the court determines whether:

  • The employer has asserted a legitimate interest that may be protected by a covenant.
  • The scope of the agreement is reasonable in terms of time, geography, and types of activity prohibited.
  • The former employee has gained a unique competitive advantage or ability to harm the employer.

The employer bears the burden of showing that the covenant is reasonable and necessary in light of the circumstances.

A covenant not to compete that contains no geographic limitation is presumptively void.
Illinois 820 Ill. Comp. Stat. 90/10  – “Prohibiting covenants not to compete and covenants not to solicit.”
  1. No employer shall enter into a covenant not to compete with any employee unless the employee’s actual or expected annualized rate of earnings exceeds $75,000 per year. (This amount increases in 2027).
  2. No employer shall enter into a covenant not to solicit with any employee unless the employee’s actual or expected annualized rate of earnings exceeds $45,000 per year. (This amount increases in 2027).
  3. No employer shall enter into a covenant not to compete or a covenant not to solicit with any employee who an employer terminates or furloughs or lays off as the result of business circumstances or governmental orders related to the COVID-19 pandemic[.]
  4. A covenant not to compete is void and illegal with respect to individuals covered by a collective bargaining agreement under the Illinois Public Labor Relations Act, the Illinois Educational Labor Relations Act, and individuals employed in construction.Violating this statute renders the covenant void and unenforceable.