March 16, 2010Client Alert

What’s Missing From Your Illinois Restrictive Covenant?

At the end of February 2010, the Illinois Appellate Court, in the case of Citadel Investment Group, LLC v. Teza Technologies LLC, held that, when a former employee breaches a restrictive covenant, the court may grant an injunction only for the original restricted time period, unless the covenant specifically provides that the period may be extended in the event of a breach.

In Citadel, two individual defendants (the “Former Employees”) were subject to restrictive covenants that prohibited them from competing with their former employer, Citadel, for a nine month period. The Former Employees resigned on February 16, 2009, and thus were prevented from competing until November 12, 2009. The Former Employees began violating their restrictive covenants almost immediately.

On July 6, 2009, Citadel learned of the violations of the restrictive covenants. Three days later, Citadel filed a complaint seeking, among other things, a preliminary injunction. After an evidentiary hearing, the lower court issued an Order on October 16, 2009, granting Citadel a preliminary injunction, but limiting the injunction time period to the original nine month period in the restrictive covenant. Thus, Citadel was awarded a 27 day preliminary injunction, from October 16, 2009 (the date of the Court’s Order) through the last day of the restrictive period, November 12, 2009.

Citadel appealed claiming error for the lower court having ruled that the restrictive period commenced at the time of the Former Employees’ resignation as distinguished from the time that the lower court granted the preliminary injunction.

On appeal, the Appellate Court reviewed settled law on the granting of a preliminary injunction and held that the lower court’s determination would not be disturbed absent an abuse of discretion and a finding that it was contrary to the manifest weight of the evidence. Citadel, on appeal, argued that not enjoining the Former Employees for the full nine month period commencing on the date the lower court granted the preliminary injunction was inconsistent with Illinois precedent and “equity, common sense and good public policy.”

The Appellate Court declined to extend the length of the contract period and found that the lower court’s decision was not contrary to Illinois precedent and that the subject factual scenario was similar to the case of Stenstrom Petroleum Services Group, Inc. v. Mesch, 375 Ill. App. 3rd 1077 (2007). There, the trial court enjoined the defendant for six months after the plaintiff left his employment pursuant to the terms of a restrictive covenant.

The plaintiff contended, similar to Citadel, that the restrictive period should have commenced as of the date of the preliminary injunction. The Stenstrom court relied upon the case of Prairie Eye Center, Ltd. v. Butler, 329 Ill. App. 3d 293 (2002), a case which held that the Court had not erred in extending the restrictive period because the language of the covenant, itself, provided for an extension of the period on proof of its breach.

Thus, the Appellate Court found that Citadel had opted for a nine month restrictive period and that the plain language of the covenant caused the restrictive period to end nine months from separation of employment. Citadel’s agreements with the Former Employees contained no provision allowing for an extension of time or modification of the commencement date and gave the parties the benefit of their bargain holding that the conclusion was reinforced by the established rule that restrictive covenants are to be strictly construed. The Appellate Court affirmed, concluding that the trial court’s ruling was not against the manifest weight of the evidence and no extension of the injunction period was warranted.

It would be wise for Illinois employers to review their restrictive covenants to ensure they contain a tolling agreement or similar contractual language to make certain that following a breach, the employer receives the appropriate amount of restricted time agreed to by the parties.

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