Make Sure Your Non-Competition, Non-Disclosure And Non-Solicitation Agreements Have Extension Clauses.

Appellate Court Ruling

The Illinois Appellate Court for the First District ruling

In order to ensure that an employer gets the full benefit of the restrictive time period in its non-competition, non-disclosure or non-solicitation agreements, employers in Illinois should make sure that such agreements contain “extension clauses.”  An extension clause states that the time period of the restrictive covenant will not start or will be extended for the period in which the ex-employee was breaching in the event that an employer does not discover the former employee’s breach until near the end of the restrictive time period.

The Illinois Appellate Court for the First District (which covers the Chicago metropolitan area) recently addressed the issue of extension clauses in Citadel Investment Group, LLC v. Teza Technologies LLC, et al. In that case, Citadel sought to enforce non-competition agreements that did not contain extension clauses against two former employees who had agreed to refrain from competing against Citadel for nine months following the end of their employment.  Several months into the nine month non-competition period, Citadel discovered that its former employees were competing against it and filed an emergency motion for a preliminary injunction.  The trial court enjoined the employees from engaging in any competitive activity as defined by the non-competition agreements, but only for the few months remaining on the nine month restrictive time period set forth in the non-competition agreements.

On appeal, Citadel argued that its former employees should have been enjoined for a full nine month period as contemplated under the agreement, despite the lack of an extension clause.  However, the First District Appellate Court affirmed because the plain language of Citadel’s restrictive covenants ended the restrictions nine months after termination of employment.  Because the agreements did not contain any provision for allowing for an extension of the restrictive period, the First District refused to read such a provision into the agreements.

This recent decision is in accord with decisions from the Second and Fourth Illinois Appellate Courts.  Employers in Illinois should review their existing non-competition, non-disclosure or non-solicitation agreements to see if they contain an extension clause.  If any of these agreements do not contain extension clauses, Illinois employers should consider revising these agreements to include extension clauses to ensure that in Illinois they get the full benefit of the restrictive time period in these agreements.  (Remember: revising the non-competes of existing employees may require some additional consideration other than merely allowing them to keep their jobs).  Otherwise, by the time that employers realize that ex-employees are breaching their non-competes and run into court, the restrictive periods may be expiring or have expired.

Finally, this decision is applicable only to agreements that are governed by Illinois law.  Employers should be mindful to not use the “one agreement fits all approach” and automatically assume that extension clauses will get the same treatment under the laws of other states.  The law of the particular state at issue should be looked at to see if the use of extension clauses will be beneficial to employers.

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