They say “an ounce of prevention is worth a pound of cure” and that old adage recently held true in Illinois when the Appellate Court, in Reed v. Getco, LLC, 2016 IL App (1st) 151801, upheld an award of $1,000,000 for Zachariah Reed against his former employer, Getco, LLC, pursuant to the terms of that company’s non-compete agreement. While the agreement required Getco to pay Reed $1,000,000 in exchange for a six month post-employment non-competition period, the agreement also stated elsewhere that Getco, under certain circumstances, had the “sole and absolute discretion” to modify these same provisions. Here, following Reed’s resignation, Getco stated that it did not intend to enforce any non-competition restrictions and that Reed was free to work for any new employer immediately and without limitation. As a result, Getco also informed Reed that there would be no non-compete payment made to him. Clearly, the Appellate Court’s decision to uphold the $1,000,000 award against Getco under these circumstances was not the company’s intention. What caused this unintended windfall to Reed? A simple defect in the language of Getco’s non-compete agreement, which could have easily been avoided with proper drafting.
Non-compete Agreements: A Brief Overview
Entrepreneurs and business owners heavily invest their time and resources into starting, growing and maintaining their businesses and so it is understandable why they would want to protect all of that hard work. A commonplace way to protect those efforts is to have employees sign non-compete agreements as a condition of employment. In determining whether to uphold such agreements, Illinois courts will analyze whether the scope, duration and geographical restrictions are reasonably formulated to protect a former employer’s legitimate business interests.
One mechanism that can go a long way to satisfy a court’s potential reservations concerning such agreements is for the employer to pay a former employee to stay out of the marketplace for the length of time the employer believes is sufficient to protect its business interests. The reasoning behind this approach is to eliminate the employee’s claim of damages due to restrictions on post-termination employment and the ability to earn a living, since the employee is paid an amount equal to at least the amount of money he or she would have earned during that same time period if the employment relationship had not been terminated. This goal was Getco’s presumed intention for paying Reed $1,000,000 to stay out of the marketplace for six months under the agreement.
Reed v. Getco
While Reed received many offers from Getco’s competitors following his resignation, he voluntarily elected not to accept any offers until the six-month restriction period had expired. As a result, Reed argued, he had upheld his end of the bargain and was automatically entitled to the $1,000,000 payment. Both the lower court and the Appellate Court agreed with Reed based on the plain construction and express language of the agreement, as drafted by Getco.
Specifically, the agreement clearly required payment of the $1,000,000 in exchange for Reed not working for a competitor for six months. It was uncontested that Reed did not accept any employment offers until after the restriction period had expired. Under the agreement, Getco could stop the payment to Reed if he was in violation of the agreement, which Reed was not. Getco also had the “sole and absolute discretion” to modify the restrictions in the event that Reed requested an accommodation to ease those restrictions in light of prospective new employment. Reed made no such request. While the agreement did allow for a waiver or modification of its terms, no such waiver or modification was effective “unless made pursuant to a writing signed by the party against whom the waiver or modification is enforced (i.e. Reed).” Here, Getco’s desire to waive the restrictive period and the $1,000,000 payment was to no effect because Reed had never agreed to waive them in writing, as required by the agreement’s express language. The Appellate Court recognized that it could not cherry pick certain provisions of the agreement but, rather, was obligated to read the entire agreement as a whole and as written. Unfortunately for Getco, the non-compete agreement had not been carefully drafted to give the company the unrestricted, unilateral ability to waive the non-compete restrictions without Reed’s written agreement. As a result, Getco owed its former employee the $1,000,000 payment.
This case is a stark reminder that careful, competent drafting of non-compete agreements can go a long way in protecting your business while avoiding unintended and expensive consequences. For more information about creating, reviewing, or updating your company’s non-compete agreements or other protective measures, please contact Genevieve Daniels at (312) 980-3865 or email@example.com.