Remote Work and Noncompetes: Do Geographic Restrictions Still Matter?
Employees often are a nonprofit’s greatest asset. Passionate for the cause, knowledgeable about the organization’s donors and operations, and promoting the mission with loyal dedication, they can be nothing short of invaluable. But what happens if an employee leaves a nonprofit, taking that knowledge and experience elsewhere – perhaps to another nonprofit with a similar mission focus and perhaps even competing financial sources and participant activities? May the first nonprofit employer prohibit the employee from “competing” as part of the person’s new work?
The short answer is yes, this limitation may be legally imposed through a non-competition contract clause (sometimes known as a covenant not to compete, or simply a “noncompete”). To be enforceable, a noncompete must be reasonably restricted in (1) duration (e.g., less than one year), (2) type of work activities, and (3) geographic scope. But now that remote work is commonplace, how are geographic scopes within noncompetes properly understood and applied? Current legal parameters should help nonprofits leaders to astutely navigate employment contracts now and for the future.
THE EMPLOYMENT LANDSCAPE
No doubt, the COVID-19 pandemic and recent economic trends have wrought significant changes for the workforce and work cultures. Many nonprofit operations are still entirely remote and some are now “hybrid” with employees allowed to work both in-person and remotely.[1] Other nonprofit operations necessarily are fully in-person, such as where program participants are served on-site or other activities must happen in person (e.g., sports programs, childcare, homeless shelters).
Worker shortages exist too, with nonprofits vying for talented individuals. They in turn are faced with inflation and other motivating factors to perhaps seek greener pastures through new employment.
Faced with these challenges, prudent employers may decide to impose non-competition restrictions up-front, as a condition of new employment – typically within an employment contract (whether at-will or for a specified term). Alternatively, such restriction may be imposed as part of a severance agreement, upon employment termination. An employer could impose a non-competition restriction mid-stream during employment, but it would not be legally enforceable without a corresponding benefit to the employee in exchange for such concession – e.g., a promotion or a raise. Any such restriction should be in writing, for clarity and otherwise for optimal legal enforceability.
Note too that noncompetes are generally disfavored on public policy grounds of worker freedom, hence the three-part restriction requirement per above. Some states so highly disfavor noncompetes that additional worker protections are given against such them. For example, Illinois recently amended its Freedom to Work Act (“Act”) to prohibit noncompetes for workers who earn $75,000 or less, as well as for employees laid off in relation to COVID-related issues.[2]
WHERE DOES GEOGRAPHY FIT WITHIN REMOTE WORK NONCOMPETES?
For remote arrangements, to what extent can geographic limitations be included in a noncompetition clause (if at all) for the contractual restriction to be legally enforceable? The answer is not yet discernable from court cases, which take time to percolate through judicial processes, and thus precedential rulings addressing specific situations may be even years away.
But legislatively, Illinois’ newly amended Act points the way to the following answer: not necessarily at all! Significantly, the new law affords a court discretion to “reform or sever provisions of a covenant not to compete . . . . rather than hold such covenant unenforceable.” This means where a court may have otherwise declared an insufficiently restricted agreement null and void, the reviewing court may now preserve the agreement with certain modifications. Relevant factors for exercising such discretion include “the fairness of the restraints as originally written, whether the original restriction reflects a good-faith effort to protect a legitimate business interest of the employer, the extent of such reformation, and whether the parties included a clause authorizing such modifications in their agreement.” Such statutory provision is itself a modification of the long established “blue-pencil” judicial prohibition on reforming restrictive covenants.
This result under Illinois law perhaps should apply equally in other states, as a result of new legislation or cases involving remote work arrangement in which it would be nonsensical to require any geographic scope specifications. But in the meantime, the following legal framework should be considered for noncompete clauses.
EVOLVING LEGAL FRAMEWORK
The well-established basic legal test is fact-specific: is the noncompete reasonably necessary in territorial limitations to protect the employer’s legitimate business interests? A two-part evaluation is thus in order: (1) to define the legitimate business interest at stake, and then (2) to consider whether the restrictions imposed exceed the scope of this interest. A court will then balance the employer’s legitimate interest against the potential harm to the promisor-employee and the public.
Again, a fact-specific inquiry is involved here: whether a legitimate business test exists is based on “the totality of the facts and circumstances of the individual case.” Factors that are to be considered include the near permanence of customer relationships, as well as the employee’s acquisition of confidential information. Note too that if an employee is laid off or fired without cause, then the noncompete likely will not be enforceable.
These principles apply equally within the nonprofit context. More specifically, a nonprofit’s donors and program participants may be viewed as their “customers,” and a nonprofit most certainly has “business” interests although they may be nonprofit in nature. Note that non-competition clauses are different from non-solicitation clauses, which prohibit solicitation of former customers or clients (and in the nonprofit context – donors). Significantly, non-solicitation agreements do not necessarily require geographic limitations to be reasonable.[3]
Using Illinois again as an example, courts continue to consider the scope of geographical limitations in determining whether a noncompetition covenant is reasonable. Courts are willing to enforce covenants that are limited to specific parts of the country, states, counties, and specific mile limitations. Note too that often the reasonableness of such geographic limitations depends on the type of activity involved (e.g., certain professional services, number of companies within a certain range). Consequently, and as an overlapping matter, courts have enforced broad nationwide noncompetes if the widespread geographic prohibition is qualified by an “activity restraint.”[4] Courts will also enforce broad geographic covenants without explicit activity restraints if they are related to the employer’s legitimate business interests.[5]
These developments indicate that geographic restrictions matter less legally now than previously, as similarly reflected in Illinois’ newly amended Act. But excessively broad geographic limitations without activity restraints are likely unenforceable in Illinois, such as if they exceed the scope of the employer’s legitimate business interests or impose hardship on the former employer.[6]
BACK TO REMOTE WORK
With Illinois law as a backdrop, it may well be reasonable to conclude that no geographic scope is required for a legally enforceable noncompete clause. But multiple cautions apply. First, the noncompete most certainly should include a robust and sufficiently detailed activity restraint. Second, the noncompete should include a reasonable time restriction too (e.g., one year, or six months). Third, beware of new state laws like the Illinois Act, which provides a wholesale bar to noncompetes for certain categories of employees. Fourth, and focusing particularly on remote work arrangements, be aware that this highly fact-specific legal area is subject to further developments as cases are litigated and resolved. Consequently, it is extremely important to do one’s legal homework on current state law, carefully draft noncompete clauses, and to do so with an eye toward evolving trends in case of later enforceability issues.
[1] For guidance on legal compliance for out-of-state remote workers including state business registrations, payroll, and multi-state compliance for employee handbooks, please see Wagenmaker & Oberly, LLC law firm’s article here.
[2] For more information about this new law, including increasing financial thresholds in future years and a waivable 14-day notice requirement, please see Wagenmaker & Oberly, LLC law firm’s article here.
[3] For example, a non-solicitation covenant without geographic limitations is reasonable when “the purpose of the restriction [is] to protect the employer from losing customers to a former employee who, by virtue of his employment, gained special knowledge and familiarity with the customers’ requirements.” Id. at 41 (quoting Eichmann v. National Hospital & Health Care Services, Inc., 719 N.E.2d 1141, 1147, (Ill. App. Ct. 1999)). Note further that restricting a specific activity is subject to a lower degree of scrutiny than an agreement that prohibits blanket competition. Abbott-Interfast, 619 N.E.2d at 1341. However, non-solicitation agreements may be invalidated as unreasonable when they also bar solicitation of prospective customers of the former employer as these are broader than necessary to protect legitimate business interests.
[4] See HCC Cas. Ins. Servs. v. Day, No. 20 C 760, U.S. Dist. LEXIS 57433, *19 (N.D. Ill. Mar. 26, 2021) (quoting Maximum, 218 F. Supp. 3d at 637-38) (reasoning that a geographical restriction of 180 countries does not automatically invalidate the restriction since there are activity restraints and an incomplete record to determine if the restraint is necessary to protect legitimate business interests). See also Spring (U.S.A) Corp. v. Sikorski, 2019 BL 188838, at *3 (N.D. Ill. May 23, 2019) (finding a one-year noncompete covenant without geographic restrictions barring a former employee from working anywhere where the former employer sold its manufactured equipment to not be patently unreasonable).
[5] See, e.g., Gemshares LLC v. Lipton, No. 17 C 6221, 2019 U.S. Dist. LEXIS 121067, at *7 (N.D. Ill. Jul. 21, 2019) (granting a preliminary injunction against a former employee and finding that the lack of a geographic limitation on a one-year noncompete agreement is still enforceable as long as it is related to the employer’s interest in protecting his own business) (citing Liautaud, 221 F.3d at 987).
[6] See, e.g., Assured Partners, Inc. v. Schmitt, 44 N.E.3d 463 (Ill. App. Ct. 2016) (holding that a 28-month non-competition covenant that barred an employee from engaging in the business of professional liability insurance products or services anywhere in the United States or its territories to be unreasonable as a matter of law). However, there is no per se rule on what is too broad. See, e.g., Sabre Indus. v. Waller, No. 18-CV-2111, 2021 U.S. Dist. LEXIS 248580, at *39 (C.D. Ill. Aug. 12, 2021) (reasoning that a defendant had not met its burden of showing that the covenant apparently covering 24 states is necessary to protect its interests and does not impose an undue hardship).