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Looking at Illinois Court's Ruling on Non-Compete Clause

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I'm hiring a new employee and want to have a non-compete/non-solicitation clause in his employment contract. I've been told, however, that these are not valid in Illinois. Can you provide any details?

-R.P., Illinois

In December 2011, the Illinois Supreme Court decided the case of Reliable Fire Equipment Comp. v. Arnold Arredondo and overturned a 4th District Court of Appeals decision from 2009 that had muddied the waters on the issue of the validity of non-compete agreements in the state. Before the decision in Reliable, Illinois courts were split on whether or not an employer had to prove that the non-compete agreement protected a legitimate business interest to be enforceable. The appeals court had ruled that a non-compete only had to be reasonable in its time and geographic restrictions. Other courts had ruled that the only question was whether enforcing the agreement would be "injurious to the public" or impose undue burden on the employee, and whether the restraint imposed was greater than necessary to protect the employer. Still other courts in the state had held that there were only two legitimate protectable interests: confidential information and an employer's near-permanent relationship with its customers. The Reliable case has put all that confusion to rest with the Illinois Supreme Court holding that employers seeking to enforce a non-compete must demonstrate a "legitimate business interest" beyond merely objecting to the competition. The court ruled that there has to be a protectable interest at stake to prevent someone from pursuing a job. The court said it "emphatically" disagreed with the appeals court. It also found that legitimate business interests can extend beyond customer relationships and confidential information. In determining whether a protected interest exists, the court said judges should consider "the totality of the facts and circumstances of the individual case." While this broadens the definition in some respects, it also will require employers to provide more evidence and make enforcement of non-competes more difficult. Nevertheless, non-competes are still valid in Illinois.

I've been told that we must provide a statement when we directly debit our advisory fees from a client's account, and that the statement our custodian sends to clients is not sufficient. Is this right?

-P. J., Michigan

On December 30, 2009, the SEC released its final amendments to Rule 206(4)-2 of the Investment Advisers Act of 1940 (the "Custody Rule"). Under the amended rule, an advisor is defined to have custody of client assets if a related person of the advisor holds, directly or indirectly, client funds, or has the authority to obtain possession of them, in connection with services provided by the advisor. The ability to directly debit your fees therefore, gives you a form of "custody." But, most states recognize that this limited form of custody does not have the same risks for abuse as what would typically be thought of as custody, and provide exemptions from the custody rule requirements if the advisor complies with certain restrictions. One of those is that the advisor send out a notification or statement to their clients at the same time that they deduct their fees. This gives the client additional notice and also allows them the opportunity to compare the advisor's statement with the statements they receive from the custodian. Note that SEC registered advisory firms are exempt from this requirement.

Alan J. Foxman is an attorney with the law offices of Rita G. Dew, P.A.
and a senior consultant with National Compliance Services, Inc.
in Delray Beach, Fla. He can be contacted at: 
this email address.

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