iOn December 1, 2011, the Illinois Supreme Court decided Reliable Fire Equip. Co. v. Arredondo, 2011 IL 111871 (Ill. Dec. 1, 2011) clarifying the requirements for an enforceable noncompete agreement in Illinois.
Reliable Fire Equipment Company ("Reliable") sells, installs and services portable fire extinguishers and related equipment. Arnold Arredondo and Rene Garcia were employed as salespersons for Reliable. Each signed a noncompete agreement prohibiting them from competing with Reliable during their employment and for one year after their termination from employment in Illinois, Indiana and Wisconsin, soliciting any sales or referrals from Reliable customers or referral sources, or soliciting Reliable employees to leave their employment with Reliable.
While they were still employed by Reliable, High Rise Security Systems, LLC ("High Rise") was formed. Its managers included Mr. Arredondo and Mr. Garcia. Thereafter, Mr. Arredondo notified Reliable that he was resigning, and the following month Reliable terminated Mr. Garcia due to suspected competitive activities. Reliable filed a complaint against Mr. Arredondo, Mr. Garcia and High Rise alleging, among other things, breaches of the noncompete agreement. The parties disputed whether the noncompete agreement was enforceable. At issue, among other things, was whether Reliable had shown a protectable interest that was necessary to support the restrictive covenant.
The Illinois Supreme Court's holding in Reliable establishes that a valid and enforceable noncompete agreement must be ancillary to an otherwise valid employment agreement, and must also meet three basic components of reasonableness:
"A restrictive covenant ... is reasonable only if the covenant: (1) is no greater than is required for the protection of a legitimate business interest of the employer-promisee; (2) does not impose undue hardship on the employee-promisor, and (3) is not injurious to the public."
In so holding, the court settled an emerging issue in Illinois over the extent to which a protectable interest is required to enforce a noncompete. Historically, it was well established that a plaintiff seeking to enforce a noncompete agreement must show a protectable interest in the form of either confidential information or near-permanent customer relationships. However, in 2009, the Fourth District departed from that framework in Sunbelt Rentals v. Ehlers, holding that a protectable interest is not necessary to enforce a noncompete agreement. Thereafter, the Second District, in its 2010 decision in Reliable Fire Equip. Co. v. Arredondo (prompting the appeal to the Illinois Supreme Court), upheld the protectable interest requirement but called into question how that test was to be applied. These decisions created a growing question regarding what a plaintiff must show to enforce a restrictive covenant in Illinois.
The Illinois Supreme Court makes clear in Reliable that Sunbelt is not the law in Illinois, and expressly holds that an enforceable noncompete agreement must be supported by a protectable interest. The court explained that a protectable interest is not limited to confidential information or near-permanent customer relationships, but rather is to be determined based on the totality of facts and circumstances of the individual case. The court rejected the prior two-prong test for establishing a protectable interest in favor of a totality of the circumstances test, under which confidential information, near-permanent relationships, and temporal and geographic restrictions are three non-exhaustive factors. No factor carries any more weight than any other, and the importance of each depends on the circumstances of the case; the same restriction might be reasonable in one circumstance, and unreasonable in another.
Now more than ever, noncompete agreements must be demonstrably reasonable and individually tailored to the circumstances of the employment.
