Non-Compete Agreements and Legitimate Business Interests: The Illinois Supreme Court Weighs In

On December 1, 2011, the Illinois Supreme Court issued its opinion on the proper standard by which courts determine whether employee non-competition agreements are enforceable under Illinois law.

In Reliable Fire Equipment Company v. Arredondo, the former employer, Reliable Fire Equipment Company, filed suit against two former employees and their new company to enforce non-competition agreements. The agreements stated that the now-former employees would not compete with Reliable for one year after leaving the company in Illinois, Indiana, or Wisconsin, would not solicit any sales or referrals from Reliable's customers or referral sources, and would not solicit other Reliable employees to leave their employment. Reliable alleged that both employees had violated these agreements by starting their own company that provided services to Reliable's customers, that used its referral sources, and that solicited its employees to leave. After a bench trial, the circuit court held that the agreements were not enforceable as Reliable had failed to prove the existence of a legitimate business interest that justified their enforcement. The court of appeals upheld the decision.

A restrictive covenant will be upheld by Illinois courts if it contains a reasonable restraint and if the agreement is supported by consideration. Clearing up confusion among Illinois courts, the Illinois Supreme Court held that the appropriate test to determine if a restrictive covenant is reasonable includes three-prongs: (1) the restrictive covenant is no greater than is required for the protection of a legitimate business interest of the employer; (2) the restrictive covenant does not impose undue hardship on the employee; and (3) the restrictive covenant is not injurious to the public. Recent appellate court decisions disregarded the legitimate business interest portion of the reasonableness test. The Illinois Supreme Court's decision overruled these appellate court decisions by holding that it continued to recognize the legitimate business interest of the employer as a long-established component in the three-prong rule of reasonableness.

Another portion of the Court's decision creates a new standard. In determining whether an employer has a legitimate business interest, the Court found that a legitimate business interest is not limited to the two protectable interests identified in over thirty years of precedent: (1) near permanent customer relationships; and (2) trade secrets or confidential information. Instead, the Court stated that courts must look at the totality of the circumstances surrounding the employer's legitimate business interest in a particular case. The Court noted that factors to be considered in that analysis included, but were not limited to, the near-permanence of customer relationships, the employee's acquisition of confidential information through his or her employment, and the time and place restrictions. "No factor carries any more weight than any other factor, but rather its importance will depend on the specific facts and circumstances of the individual case."

If you have any questions about this decision or non-competition agreements in Illinois, we encourage you to consult with legal counsel.