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Illinois Supreme Court adds clarity to state’s non-compete law

If you have ever tried to enforce a restrictive covenant agreement in Illinois, you know that enforcing that agreement under Illinois law can be a real pain. In Reliable Fire Equipment Co. v. Arredondo, the Illinois Supreme Court finally took a giant step toward clarifying Illinois’ restrictive covenant law. This case is in line with a recent trend in Wisconsin, and to an extent, nationally, to strengthen the enforcement of restrictive covenant agreements and to provide clearer guidance on these matters. Click here for more on how restrictive covenant law has recently evolved in Wisconsin.

Illinois courts generally enforce restrictive covenant agreements if they: (1) are necessary to protect the legitimate interest of the employer; (2) do not impose a hardship on the employee or the public; and (3) are otherwise reasonable. Although this three-pronged test seems simple enough, the case law that has emerged from it has been anything but helpful.

Despite the Illinois Supreme Court’s consistent application of this three-pronged test, recent Illinois Court of Appeals cases muddied the waters. In one case, Sunbelt Rentals, Inc. v. Ehlers, the court of appeals held that courts only need to examine the time and territory restrictions in the agreement to determine its enforceability –- determining whether the employer has a legitimate business interest is unnecessary.

To make matters worse, the court of appeals developed tests within the three-pronged test to determine whether the employer had a legitimate business interest. Over time, courts began to look at these factors as conclusive. InNationwide Advertising Service, Inc. v. Kola, the court of appeals held that an employer’s interest in preventing competition was only protectable if the employee learned confidential information from his employment and then tried to use that information for his own benefit. Additionally, an employer’s interest in its customers could only be protected if the customer relationship was near-permanent and if the employee would not have had contact with the customers were it not for his employment. After Nationwide, the court of appeals once again created opposing standards to evaluate “near-permanence.” Some courts analyzed seven objective factors, while others analyzed the relationship using a “nature of the business” test.

Given this web of tests and factors, enforcement of restrictive covenant agreements became so convoluted that even the court of appeals panel in the Reliable Fire case could not agree on which standard to apply and how. The majority upheld the circuit court’s decision that Reliable did not have a legitimate business interest, while the special concurrence agreed with the circuit court’s conclusion but disagreed with the reasoning of the majority. The dissent, however, agreed with the reasoning of the special concurrence but would have reversed and remanded based on that reasoning.

Ultimately, the Illinois Supreme Court held that only the three-prong test applies to determine whether a restrictive covenant is enforceable. Courts may consider a variety of factors, such as the near-permanence of customer relationships, whether the employee acquired confidential information during employment or time and place restrictions, to determine whether the employer has a legitimate business interest. Any factors considered, however, are only “non-conclusive aids.”

A legitimate business interest, however, is only one component of the three-pronged rule of reason, which requires courts to analyze the totality of the circumstances. In the end, each case must rest on its own facts. Further, the importance of any such factor will vary based on the facts and circumstances of each case.

So, although the Illinois Supreme Court has not provided a crystal ball for restrictive covenant agreements, at least you will know what to look for the next time you need a restrictive covenant agreement governed by Illinois law. More importantly, should you need to enforce or defend that agreement in court, you will know what the courts will look for to determine enforceability.

February 20, 2012

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