On December 1, 2011, the Illinois Supreme Court reaffirmed the legal test for enforceability of noncompete agreements in Illinois. In doing so, the court clarified the proper legal standard for analyzing restrictive covenants. Where a valid employment relationship is preexisting which includes a restrictive covenant not to compete, the Court held that a three-prong test of reasonableness should be applied in determining the validity of the covenant.[1] The three factors for consideration are: (1) whether the restraint imposed protects a legitimate business interest; (2) whether it will cause an undue hardship on the employee; and (3) whether it will injure the public. The decision specifically rejected a 2009 Illinois Appellate Court opinion that applied a two-part test of reasonableness and that did not include a legitimate business interest factor.[2]
Reliable Fire Equipment Company (Reliable) brought suit against former employees for violation of a one-year noncompete provision in their employment agreements after they joined a competing Illinois company. The Reliable employment agreement provided that following the termination of employment, a Reliable employee was not permitted to compete against it in Illinois, Indiana or Wisconsin. At trial, the employees filed a counter claim asking the court to invalidate the Reliable noncompete provision. Following a bench trial, the court applied a two-prong analysis and ruled that the restrictive covenant was unenforceable. The appellate court affirmed the trial court on appeal. The Illinois Supreme Court reversed the appellate court and remanded the case to the trial court for further proceedings.
The Illinois Supreme Court clarified what it called a misconception in the law among Illinois appellate courts. The Court performed a historical review of the leading Illinois opinions on noncompete agreements over several decades. It then addressed the 2009 appellate opinion, Sunbelt Rentals, Inc. v. Ehlers, 394 Ill. App. 3d. 421 (2009), relied upon in the trial court. In Sunbelt, the court held that the validity of a restrictive covenant should be evaluated solely on the reasonableness of time and territory restrictions. The Sunbelt court found that a legitimate and reasonable business purpose was inherent in the agreement between the parties and therefore need not be considered. The Court stated that Sunbelt had overlooked or misapprehended its prior decisions that had established a three-prong inquiry into the reasonableness of restrictive covenants.[3]
The Court emphasized that it had recognized as far back as 1896 a "three-dimensional rule of reason" test that includes a legitimate business interest factor.[4] Whether a legitimate business interest exists is based on the totality of the facts and circumstances of the individual case. The factors to be considered include -- but are not limited to -- the near-permanence of the employer's customer relationships, the employee's acquisition of confidential information through his or her employment and the time and place restrictions. No factor uniformly carries more weight than any other, but rather, its importance will depend on the specific facts and circumstances of the individual case. In short, a court applying the three-prong test of reasonableness should consider these factors in determining a legitimate business interest. Next, the other two prongs of the test should be considered: whether the restriction on competition will cause an undue hardship on the employee and whether it will injure the public.
Illinois employers who seek to enforce noncompete provisions received added firepower from the Illinois Supreme Court in its recent decision in Reliable. The opinion reaffirms and clarifies the three-prong standard in Illinois for the enforceability of restrictive covenants. It further empowers the Illinois trial courts with broad discretion when determining whether a legitimate business interest exists to support a restrictive covenant. Employers should consider the three-prong test when drafting noncompete agreements for their employees.
If you have any questions regarding the material in this alert, or how it may impact your business, please contact any member of Baker Hostetler's Noncompete and Trade Secrets Practice Team.
Authorship Credit: William K. Kane
[1] Reliable Fire Equipment Company v. Arnold Arredondo, et. al., 2011 IL 111871.[2] Sunbelt Rentals, Inc. v. Ehlers, 394 Ill. App. 3d 421 (4th Dist. 2009). [3] Mohanty v. St. John Heart Clinic, S.C., 225 Ill. 2d 52 (2006). [4] Hursen v. Gavin, 162 Ill. 377 (1896).
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