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Include an extension clause in your noncompete agreements

by on
in Employment Law,Human Resources

In the wake of a recent Illinois court decision, employers should rethink their noncompete agreements. Without fine tuning, these contracts may not work as well as they could.

In Citadel Investment Group, LLC v. Teza Technologies LLC (No. 09 CH 22478, Illinois Court of Appeals, 2010), a financial services firm sought—and won—a court order preventing two former employees from competing for a period of nine months pursuant to the terms of noncompetition agreements they had signed.

But the ruling came a day late and a dollar short. Here’s why.

The court ordered the nine-month restrictive period to begin on the employees’ termination dates and not on the date of the court’s order. But by the time the court had ruled, only one month remained under the terms of the noncompete. By the time the appellate court ruled, the restrictive period had long expired.

Unfortunately for the employer, Citadel Investment Group, the agreements failed to include a simple tolling clause that would have reset the noncompete clock, allowing the court to enter a more meaningful injunction to protect against the breach.

The noncompete agreement

Citadel Investment Group is a Chicago-based financial services firm. The former employees, Mikhail Malyshev and Jace Kohlmeier, held important roles in the firm’s high-frequency trading group, a team whose members develop computer codes and programs to gather and analyze a vast collection of historical market data.

As a condition of employment, Malyshev and Kohlmeier were required to sign noncompete agreements in which they agreed not to engage in any competitive activity anywhere in the world for a period of time following the end of their employment. The contract left it up to Citadel to choose the length of the competitive ban: three months, six months or nine months. (It also had the option to waive the restriction entirely.)

The employees resigned in February 2009, and Citadel elected the nine-month restrictive period.

No extension provision

Roughly five months later, Citadel learned that Malyshev and Kohlmeier had formed Teza Technologies, a company engaging in competitive activity in violation of their agreements. Citadel promptly filed an action seeking a preliminary injunction.

After an evidentiary hearing, the court upheld the agreements and enjoined the defendants from engaging in any competitive activity for the nine-month period set forth in their agreements.

The court noted that the agreements didn’t contain provisions for extending the restrictive period based on a violation of their terms. Accordingly, the court ruled that the restrictive period began on the employees’ resignation dates, and that the nine-month period would expire in mid-November 2009, only one month after the court’s ruling.

Appealing the calendar

Citadel appealed, contending that the court was wrong to grant relief only until mid-November. It argued that the court should have extended the restrictive period in the agreements by enjoining the defendants for nine months beginning on the date of the court’s order, which would have enabled Citadel to receive the full nine-month period contemplated by the agreements.

The Illinois Court of Appeals disagreed with Citadel and affirmed the lower court’s ruling.

It said Citadel’s noncompete did not contain a tolling provision that would have extended the nine-month period upon proof of breach. Therefore, Illinois law required the court to enforce the restriction for the period specified in the agreement—and only that period.

Lessons learned

Citadel paid a high price for a lesson that can now benefit all Illinois employers: Your noncompetition agreements should include a tolling provision that allows for extending the restrictive periods in the event of a breach.

Otherwise, it won’t be worth your time (and money) to fight against even the most egregious breach. By the time you discover the breach, file a lawsuit and obtain an injunction, the restrictive periods set out in your noncompetition agreements may already have expired.

Illinois employers that use noncompete agreements should consult with their attorneys to make sure the agreements offer maximum protection against unfair competition.

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