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Illinois Supreme Court Clarifies Employer’s Proof Required to Enforce Non-Compete Agreements

By Michael A. Kraft

In a 2009 Quinn Quarterly issue, we included an article regarding an Illinois Appellate Court, Fourth District, decision in which the Fourth District upheld an employer’s covenant not to compete against a former sales employee. In that case, Sunbelt Rentals, Inc. v. Ehlers, the terms of the covenant not to compete included a one-year time period and a prohibited geographic area within 50 miles of each of the employer’s store sites.

In the Sunbelt Rentals case, the former employee unsuccessfully argued that in order for there to be a valid restrictive covenant, the employer was required to prove that a legitimate business interest was being advanced through the enforcement of the covenant not to compete. Contrary to other Appellate Court Districts in Illinois, the Illinois Appellate Court, Fourth District, held in Sunbelt Rentals that an employer does not need to prove a legitimate business interest in enforcing a covenant not to compete. Instead, the court merely analyzed the reasonableness of the scope of the covenant not to compete without considering whether the employer was protecting a legitimate business interest.

However, we noted in our prior Quinn Quarterly article that since the Sunbelt Rentals decision was in conflict with various other Appellate Court Districts, the issue was likely to be decided for the entire State of Illinois on an appeal to the Illinois Supreme Court. As predicted, on December 1, 2011, the Illinois Supreme Court issued its decision in Reliable Fire Equipment Company v. Arredondo addressing this issue.

In Reliable Fire Equipment Company v. Arredondo, the employer filed suit to enforce covenants not to compete in contracts with two former employees who had left the employer’s company and formed their own new competing business. The Court expressly overruled Sunbelt Rentals, holding that an employer must prove the protection of a legitimate business interest in order for a covenant not to compete to be reasonable and enforceable. The Court clarified that Illinois courts will apply a three-pronged test to determine the reasonableness and enforceability of a covenant not to compete. Specifically, in order for a restrictive covenant to be reasonable and enforceable, the covenant (1) must not be greater than is required for the protection of a legitimate business interest of the employer, (2) must not impose undue hardship on the employee, and (3) must not be injurious to the public.

The Court further addressed how Illinois courts should analyze whether an employer can prove a legitimate protectable business interest. In the past, many courts have held that an employer could prove the existence of a legitimate protectable business interest if the employee was privy to confidential trade information and/or the employee was competing for business from clients of the employer which had near permanent customer relationships with the employer. Unfortunately, this decision “muddies the water” on this issue in holding that neither of these factors, by itself, is conclusive in determining an employer’s legitimate protectable business interest.

Instead, each case must be determined on its own particular facts. Reasonableness is gauged not just by some, but by all, of the circumstances involved in a case. Further, the same identical contract and restraint may be reasonable and valid under one set of circumstances, and unreasonable and invalid under another set of circumstances. Thus, prior court decisions involving the same contractual language and/or similar facts will now be deemed inconclusive precedent for future cases.

Unfortunately, this decision increases the uncertainty for both employers and employees in litigating the reasonableness and validity of restrictive covenants in the State of Illinois. It now will likely become more difficult for attorneys and their clients to predict a court’s determination of this issue in litigation.

Originally published in the Winter 2011 edition of Quinn Quarterly.