How Valuable is Your Customer List?

Asset Protection For Small Business Owners: Protecting Your Customer List From Former Employees

Restrictive covenants not to compete are often part of employment contracts or contracts for the sale of business. Each one is considered different under Illinois law.

The purpose of a restrictive covenant that is part of an employment contract is to shield the employer from the possibility of losing the employer’s customers to an employee who appropriates proprietary customer information for the employee’s own benefit and also to shield the employer from the possibility of losing customers with whom the employer enjoys a near permanent relationship.

The general rule is that every employer has a right not to have its customers appropriated by current or former employees.

Employment contracts often contain covenants restricting the employee’s right to pursue similar employment or solicit the former employer’s customers or employees after employment termination. Such restrictive covenants are usually found in employment contracts with sales representatives and service-orientated professionals because employers have, or believe that they have, a great interest in guarding their clientele from competition. These restrictive covenants attempt to restrain former employees from cultivating the former employer’s customers for another employer or for themselves. Many employers often contend that they have an interest in protecting the resources invested in training the employee and in developing solicitation techniques and sales methods. If you have any questions, contact the Chicago business attorneys at Bellas & Wachowski for further guidance.

In Illinois, the basic test is whether the restrictive covenant in an employment contract is reasonably necessary to protect the employer from improper or unfair competition, depending on the facts of each case. Illinois courts will prohibit employees who have signed a restrictive covenant from using confidential information, such as customer lists or customer information, or trade secrets, to gain a competitive edge over the former employer. However, Illinois courts will also consider fairness to the former employee by requiring that the restrictive covenant be reasonable in duration and geographical scope and that the employer have a protectable interest in restrictive information or activity.

In addition to a reasonable duration and geographical area, any restrictive covenant in an employment contract must be related to a protectable business interest. The basic test is whether the covenant is necessary to protect the employer from unfair or improper competition.

In Illinois there are only two areas in which an employer has a protectable business interest for which restrictive covenants not to compete will be enforced and protection given:

  1. near permanent customer relationships; and,
  2. confidential or trade secrets.

The question of whether an employer’s interest in its customer lists is protectable has become increasingly important in our service-intensive economy. Generally, an employer has no proprietary interest in its customers. However, Illinois courts have recognized the need to protect the time, effort and resources invested by the employer in developing an established clientele and to protect the employer’s clientele from solicitation by their former employee.

In order to have a protectable interest in your customer list, the business must have a customer list that is a “near-permanent” relationship with the customer. The courts will look to seven factors to determine whether a protectable near-permanent relationship exist:

  • the number of years required to develop the clientele;

  • the amount of money invested to acquire the clientele;

  • the degree of difficulty in acquiring clients;

  • the extent of personal contact with clients by the employee;

  • the extent of the employer’s knowledge of its clients;

  • the duration of the customer’s association with the employer; and

  • continuity of employer-customer relationships in similar fields.

Generally, the courts will ask the question of whether the former employee could have had contact with the potential client “but for” the permanent relationship. Our business law attorneys at the Chicago firm of Bellas & Wachowski are available to help you with any questions you may have regarding Asset Protection For Small Business Owners.

If you believe that your customer list should be protected from former employees, you should consult with an attorney experienced in this field. Contact George Bellas at 847.823.9030 Ext: 219 or george@bellas-wachowski.com for more information.