Non-Compete Agreements: A Brave New World in Illinois
On Thursday, December 1, 2011, the Illinois Supreme Court dramatically changed state law regarding non-compete and non-solicitation agreements. In Reliable Fire Equipment Company v. Arredondo, the court adopted a new test for determining the enforceability of an employee restrictive covenant.
For the last 30 or so years, Illinois courts have generally held that there were essentially only two "legitimate business interests" that could support a restrictive covenant in the employment context: (1) a company's confidential information or (2) near-permanent relationships with customers. As we have discussed in previous articles, the Fourth District rejected this test in Sunbelt Rentals, Inc. v. Ehlers, holding that a restrictive covenant could be upheld regardless of the existence of a legitimate business interest—provided that the scope of the covenant was reasonable. The Second District rejected Sunbelt in the Reliable case but held open the possibility that there could be more than the two traditional legitimate business interests. In the Second District Court's decision, the concurring opinion felt that the test should be based on the totality of the circumstances involved in each particular case. It was this position that the Illinois Supreme Court adopted in its December 1 opinion.
According to the Illinois Supreme Court, for an employee restrictive covenant to be enforceable, its restrictions must be "(1) 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." That has been pretty much the law for the last 30 years. But the important portion of the Reliable decision relates to the test for determining whether a legitimate business interest exists. It is here that the Illinois Supreme Court has created a brave new world.
According to the Reliable court, "[W]hether a legitimate business interest exists is based on the totality of the facts and circumstances of the individual case." In reviewing that totality, a court is to consider various factors, including but not limited to "the near-permanence of customer relationships, the employee's acquisition of confidential information through his [or her] employment, and time and place restrictions." But the Illinois Supreme Court made it clear that these factors are not exclusive. Moreover, "[N]o factor carries any more weight than any other, but rather its importance will depend on the specific facts and circumstances of the individual case."
So what does all this mean? Well, we now have a clear statement, articulated by the state's highest court, of the test for enforceability. But what we do not have is certainty. Under this "totality of the circumstances" test, it will be very difficult to determine whether a particular restrictive covenant will be enforceable or not. As these cases are litigated over time, more certainty will undoubtedly arise. As of now, however, we can only speculate about what additional factors will be important. Goodwill is likely to be one. So might an employee's unique value.
What is a business to do in the wake of the Reliable decision? First and foremost, all existing restrictive covenants should be reviewed to determine, under the particular set of facts applicable to your business, what might be enforceable. Although there is no certainty, there are drafting measures that can and should be taken to help make your agreements fit into this brave new world.