There's Something Happening Here (What It Is Ain't Exactly Clear)1: Is Illinois Non-Compete Law Changing?
For years, Illinois law regarding restrictive covenants, including both non-compete and non-solicitation agreements, has been relatively stable. Although the application of the law to particular facts was often difficult—and the results in court could vary wildly from one case to the next—the legal principles were well settled, well known and fairly easy to articulate. Most everybody knew that a court would enforce restrictive covenants only when they were reasonable in scope (i.e., time and geography) so as to protect a "legitimate business interest" of the employer.
In Illinois, only two types of legitimate business interests have been generally recognized: (1) near permanent relationships (a legal term of art) with customers/clients; and (2) trade secrets or other similar confidential information. Thus, if an employer did not have truly confidential information to protect or near permanent relationships with its customers, then it would not be able to enforce a restrictive covenant no matter how much that covenant was limited in scope.
In late 2009, however, along came Sunbelt Rentals, Inc. v. Ehlers. In Sunbelt, the Fourth District Appellate Court decided that, when determining the enforceability of restrictive covenants, courts should disregard the legitimate business interest test entirely and look only to the reasonableness of the provision's scope. In so doing, however, the Appellate Court did not provide a particularly good explanation as to how a trial court would determine whether the time and geography involved were reasonable. Nevertheless, the Fourth District held that reasonableness was the only appropriate issue regarding enforceability, despite 30 previous years of law to the contrary.
Sunbelt caused much controversy, although most practitioners believed it would prove to be an anomaly, and no other Illinois Appellate Court has yet embraced Sunbelt's rationale. Having said that, two recent Second District cases have analyzed Sunbelt and prior decisions, and appear to be laying the groundwork for a real change in Illinois law. The November 2010 issue of the Litigation & Counseling Alert included a discussion of the first case, in which the Second District criticized the Sunbelt holding but acknowledged that its re-evaluation of the legitimate business interest test needed further examination.
That examination happened very recently in Reliable Fire Equipment Company v. Arredondo. Interestingly, this December 2010 case engendered separate and somewhat lengthy opinions from each member of the three-judge panel. While all three indicated that Sunbelt should not be followed in its entirety, the analysis by the dissenting judge came very close to doing just that. The other two judges, however, more clearly rejected Sunbelt, but at the same time they both essentially reinterpreted the legitimate business interest test.
According to the lead opinion, this test should not be applied mechanically. Rather, it is more flexible and could, in certain circumstances, encompass more than trade secrets and near permanent relationships. The concurring opinion agreed:
It would appear, however, that a careful reading of the three opinions in this case makes clear that this district is no longer committed to a strict application of the two restrictive prongs of the legitimate business interest test.
In other words, a court has the right to determine if there are other protectable interests involved in a particular case that could support a restrictive covenant. One such interest could be the goodwill between an employer and its customers/clients. Although it is certainly at the root of all near permanent relationships, goodwill was never viewed in the employment situation as protectable in and of itself. By opening the door to this consideration, Reliable Fire Equipment has at least made it potentially easier to enforce certain restrictive covenants.
While we still do not know where this is all going, the concurring opinion in Reliable Fire Equipment could be the beginning of a trend in Illinois that ultimately becomes the law. Under that reinterpreted test, a court would have to consider the existence of a protectable interest "in light of the totality of the circumstances," recognizing that "there may be other interests that are comparable to the two [previously] identified in the legitimate business interest test." Ultimately, the Illinois Supreme Court will have the final word.
In the meantime, businesses in Illinois should consider drafting language in their agreements that recognizes other potential interests as the bases for their restrictive covenants—in addition to the two well-recognized prongs. As Buffalo Springfield might say, what these other interests are "ain't exactly clear" at the moment, but they should at least include goodwill.
1From "For What It's Worth," performed by Buffalo Springfield.