December 6, 2021

Volume XI, Number 340

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December 03, 2021

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Illinois Supreme Court Establishes A New Test To Determine Whether Non-Compete Agreements Are Enforceable

In a case with favorable implications for employers, in Reliable Fire Equip. Co. v. Arredondo, 2011 IL 111871 (Ill. Dec. 1, 2011), the Illinois Supreme Court clarified the “legitimate business interest test” that Illinois courts must use to determine whether a non-compete agreement or other restrictive covenant is enforceable. BeforeArredondo, appellate courts in Illinois were divided on how to apply this test, which resulted in uncertainty and legal expense for businesses and employees. The Arredondo decision provides clarity and a reasonable rule, both of which should help employers reduce risk and uncertainty.

This dispute began in late 2009, when the Fourth District of the Illinois Appellate Court took the position that an enforceable non-compete agreement only had to be reasonable as to time and geography. In doing so, the Fourth District rejected the legitimate business interest test that required that a former employer establish either that confidential information or near-permanent customer relationships were at risk if the non-compete agreement was not enforced. The legitimate business interest test had been used consistently by Illinois Appellate courts since 1975. However, after the Fourth District’s decision, almost every Illinois appellate court district struggled with the Fourth District’s opinion and, as a result, each district developed its own standards. Thus, employers and employees had to evaluate which district their lawsuit would proceed in before either could figure out whether the non-compete agreement was enforceable. 

Thus, the Illinois Supreme Court agreed to hear Reliable Fire Equip., a very typical non-compete case where Arnold Arredondo (“Arredondo”) and Rene Garcia (“Garcia”) were employed as salespersons for Reliable Fire Equipment Company (“Reliable”). Reliable sells installs and services portable fire extinguishers and related equipment. Both Arredondo and Garcia signed a non-compete agreement prohibiting them from competing with Reliable in Illinois, Indiana and Wisconsin for one year after their termination. When Arredondo and Garcia went to work for a newly formed competitor, Reliable sued to enforce the non-compete agreements.

The Trial Court ruled that the covenant was unenforceable, finding that Reliable had failed to identify a legitimate business interest that needed to be protected by the non-compete agreements. A divided panel of the Appellate Court upheld the Circuit Court’s order, but questioned whether it was applying the appropriate test for non-compete agreements.

The Illinois Supreme Court reversed and remanded the case for further proceedings. In doing so, the Court held that a valid and enforceable non-compete agreement must meet three basic components of reasonableness:

A restrictive covenant, assuming it is ancillary to a valid employment relationship, 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.

However, the Supreme Court then went one step further. Over the last 36 years, the Appellate Court decisions that applied the legitimate business interest test had held that there were only two legitimate business interests that would justify enforcing a non-compete agreement: (1) protecting confidential information; and (2) protecting near-permanent customer relationships.  The Illinois Supreme Court rejected the rigidity of this standard, holding that the Illinois Appellate Court decisions of the last 36 years are “are only nonconclusive aids in determining the promisee’s legitimate business interest.” 

Under Reliable, the new standard for determining whether a legitimate business interest exists is:

[B]ased on the totality of the facts and circumstances of the individual case. Factors to be considered in this analysis include, but are not limited to, the near-permanence of customer relationships, the employee’s acquisition of confidential information through his employment, and time and place restrictions. No factor carries any more weight than any other, but rather its importance will depend on the specific facts and circumstances of the individual case.

Most carefully drafted non-compete agreements for use in Illinois proactively identify confidential information and near-permanent customer relationships as the business interests the employer is trying to protect. Given this ruling, the door is open for employers to enforce restrictive covenants in a broader range of circumstances and even perhaps for the purpose of protecting customer goodwill. Employers should reevaluate their non-compete agreements in light of the decision in Reliable Fire Equip. Co. v. Arredondo to determine whether additional business interests should be identified as protectable business interests and whether additional job positions now warrant non-compete agreements.

©2021 MICHAEL BEST & FRIEDRICH LLPNational Law Review, Volume I, Number 351
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About this Author

Eric Rumbaugh, Michael Best Law Firm, Labor and Employment Attorney
Partner

Eric advises clients in all areas of labor and employment law. With a practice that is national in scope, he is particularly active in litigating matters involving trade secrets, non-competition agreements and related disputes.

Eric has a nationally recognized practice in the area of contingent labor and regularly prepares and reviews policies, procedures and contracts and litigates contested matters for users and providers of temporary employees, consultants, independent contractors and other contingent talent.  Eric also counsels public...

414-225-2742
Brian Paul, Michael Best Law Firm, Labor and Employment Attorney
Partner

Brian brings strategic business vision to his work representing companies engaged in employment-related disputes, both in state and federal courts and before administrative agencies. The focus of Brian’s practice is to deliver positive outcomes in litigation matters, including:

  • Class action discrimination

  • Wage and hour collective actions

  • Harassment and discrimination claims

  • Wrongful termination

  • ...
312-527-6843
Sarah Flotte, labor employment law attorney, Michael best law firm
Partner

Sarah serves as a trusted advisor offering proactive, strategic employment counsel. Representing companies and management exclusively, she works with a diverse range of manufacturing, logistics, government, financial, and higher education clients of all sizes. 

Sarah’s strategic, client-focused practice includes:

  • Litigation involving discrimination, harassment and retaliation claims, non-compete enforcement and defense, employee leave disputes, wage-and-hour claims, and defamation lawsuits

  • ...
312-661-2104
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