Steven Gillman is a Partner in our Chicago office
The Illinois Supreme Court has clarified the test for deciding whether a noncompetition agreement is enforceable. In The Reliable Fire Equipment Company v. Arredondo, et al., 2011 IL 111871 (Dec. 1, 2011), the court rejected the body of cases that have mechanically or rigidly applied the legitimate business interest test and the other factors a court usually considers. Instead, it held that each case should be analyzed based upon the "totality of the circumstances" in deciding whether the noncompete restriction is "reasonable."
Background
The case involved two sales representatives for Reliable Fire Equipment Co., a company that designs and sells fire alarm and fire suppression systems. The salesmen signed agreements in which they promised not to compete with Reliable during their employment – and for one year after their termination from employment – in Illinois, Indiana or Wisconsin. They further promised not to solicit any sales or referrals from Reliable customers or referral sources, or to solicit Reliable employees to leave their employment with Reliable.
The representatives left their employment with Reliable and started a competing business that designed and engineered fire alarm systems. Reliable sued, asking the circuit court to enforce the non-competition agreement and prohibit the two from competing. Both the trial judge and the appellate court found that Reliable failed to prove the existence of a legitimate business interest that justified enforcement of the noncompetition agreement.
The Illinois Supreme Court's More Flexible Test
The Illinois Supreme Court reversed and remanded the case to the circuit court to apply a different legal standard to the facts of the case. It noted that some Illinois courts had ruled that an employer does not need to prove the existence of a legitimate business interest to enforce a non-competition agreement, but rather need only prove that the competition restriction was reasonable in time and geographic scope. It overruled such decisions, finding that they misapplied well-settled Illinois law.1 The court confirmed that, fundamentally, a noncompete agreement is reasonable only if the restriction is: 1) no greater than what is required for the protection of a legitimate business interest of the employer; 2) does not impose undue hardship upon the employee; and 3) is not injurious to the public. The high court stated that this three-dimensional rule of reason is well established Illinois law.
But the court also pointedly rejected the numerous Illinois state and federal cases that have rigidly required a "legitimate business interest" to justify enforcement of a non-competition agreement, i.e., the existence of a trade secret or confidential information, or "near-permanent" customer relationships, narrowly defined. Relying upon cases from across the country, the court rejected use of an inflexible formula. Rather, it stated that whether an employer has a legitimate protectable business interest is based on all the facts of the case, writing:
According to the court, Illinois decisions holding that a non-competition agreement is enforceable only if the employer proves the employee possess specific confidential information or that the employer has specifically defined "near-permanment" customer relationships are not grounded in the "true considerations" of a given case.
What The Ruling Means
The Illinois Supreme Court's decision makes clear that the cases that have focused predominately on one factor, such as whether the enforcement of the covenant was justified because the employee was privy to trade secrets, have not applied the right test. The court requires a fact-intensive analysis that considers all factors: the duties and responsibilities of the employee in his prior employment; the employee's access to trade secrets and truly confidential information; the employee's contact with longstanding customers; whether the noncompete language is narrowly drawn; the position the employee assumes in his or her new employment; any facts indicating the employee has or intends to use or disclose sensitive information; the territorial limit and time limit included in the restriction; and other factors implicating the public interest and hardship on the parties.
Each factor takes on more or less significance depending upon the specific circumstances of the individual case. Fundamentally, the touchstone is whether the noncompete restriction is reasonable and affords fair protection to the interest of the employer.
Endnote
1 The court overruled the decisions in Sunbelt Rentals, Inc. v. Ehlers, 394 Ill. App. 3d 241 (2009) and Esteem Sales Corp. v. Summers, 405 Ill. App. 3d 442 (2010). It ruled that these courts improperly focused only on whether the non-competition agreement's time and territory restrictions were reasonable, and improperly failed to determine whether there was a protectable or legitimate interest at stake as required by prior Illinois Supreme Court precedent.
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