Protecting Your Customer List
It does not appear on your business balance sheet. Your accountant will never ask you to value it. Banks won’t consider it in evaluating your loan application. But it is part of your business’ good will.
Your customer list and the near permanence of the customer relationships will be an important element of the value of your business. It is an asset that requires protection particularly from former employees, officers or partners.
This is why restrictive covenants or covenants not to compete are an important part of employment contracts or contracts for the sale of business and require consultation with experienced Business Lawyers.Restrictive Covenants
The purpose of a restrictive covenant in an employment contract is to prevent losing customers to a former employee. It is not uncommon to see former employees going to work for a competitor and appropriates proprietary customer information for the employee’s own benefit. A restrictive covenant in an employment agreement shields the employer from the possibility of losing customers to former employees. The law in Illinois protects employers from this theft but it requires the use of a signed employment contract.
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. Restrictive covenants restrain former employees from misappropriating 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.
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:
- near permanent customer relationships; and,
- 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 customer;
- the amount of money invested to acquire the customer;
- the degree of difficulty in acquiring the customers;
- the extent of personal contact with customers by the employee;
- the extent of the employer’s knowledge of its customers;
- 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 customer “but for” the permanent relationship.
The bottom line is that your customer list is a valuable asset worthy of protection and affirmative steps must be taken to protect this asset.
Covenants not to compete are usually part of an employment contract that prohibits former employees from working in a business that competes with your business after the employment relationship ends. We have another web page on the subject of Employment Non-Compete Agreements which discusses this subject in greater detail.
The Chicago business lawyers at Bellas & Wachowski are available to help you with any questions you may have regarding protecting your customer asset and Asset Protection For Small Business Owners in general. This is important to the stability of your business and the protection of your most valuable asset – your business.
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 847.823.9032 or firstname.lastname@example.org to discuss your unique business needs.