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State Supreme Court affirms business-interest test for noncompetes

by on
in Employment Law,Human Resources

For many years, Illinois courts assessing the enforceability of noncompete agreements required employers to demonstrate that they had a legitimate business interest before deciding whether the agreement was reasonable.

That view was challenged in Sunbelt Rentals, Inc. v. Ehlers, 394 Ill. App. 3d 421 (4th Dist., 2009), when an appellate court rejected the legitimate business-interest test, finding that the only relevant considerations in determining the validity of a noncompete agreement are the reasonableness of the time and territory restrictions.

As a result, a question arose concerning whether Illinois recognizes the legitimate business interest as a requirement of an enforceable re­­stric­­tive covenant. The stage was set for an Illinois Supreme Court challenge.  

Smoldering dispute

On Dec. 1, 2011, a unanimous Illinois Supreme Court issued its decision in Reliable Fire Equipment Co. v. Arredondo et al. (2011 IL 11871, Il. Sup. Ct., 2011), reaffirming that an enforceable noncompete agreement must be supported by a legitimate business interest.

Arnold Arredondo and Rene Garcia worked in sales positions for Reliable, a company that sells and services fire extin­guishers and fire suppression and fire alarm sys­­­­tems. The company does business pri­mar­ily in the Chicago metropolitan area, northern Indiana and southern Wisconsin.

Arredondo and Garcia were re­­quired to sign agreements in which they prom­ised not to compete with Reliable during their employment and for one year after termination in Illinois, Indiana or Wisconsin. They also promised not to solicit sales or referrals from Reliable customers or to solicit Reli­­able employees to leave the com­pany’s employment.

Jumping ship

While Arredondo and Garcia were employed by Reliable, a new company, High Rise Security Systems, entered the market, supplying fire alarm and related systems throughout the Chi­­cago area. Arredondo and Garcia both left Reliable to become managers for High Rise.  

Reliable sued Arredondo, Garcia and High Rise, claiming they violated their noncompete agreements.  

The circuit court ruled that the covenant was unenforceable because Reliable did not prove the existence of a legitimate business interest to justify the enforcement of the agreements. After an appellate court affirmed the lower court’s decision, Reliable appealed to the Illinois Supreme Court, which reversed and remanded the case.

Supreme Court’s decision

The Illinois Supreme Court held that a valid and enforceable noncompete agreement must be ancillary to an otherwise valid employment agreement and must also meet the three-pronged test of reasonableness. Specifically, 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.

The court then analyzed how an employer can prove it has a legitimate business interest. The Illinois Supreme Court held that whether a legitimate business interest exists is based on the totality of the facts and circumstances of the individual case.  

A court may consider the near-permanence of customer relationships, the employee’s acquisition of confidential information through his employment and time-and-place restrictions, in addition to any other factors. The court emphasized that no factor carries more weight than any other factor. Rather, its importance will depend on the specific facts and circumstances of each case.

As a result, the same agreement and restraint may be reasonable and valid under one set of circumstances, but not under another set of circumstances.   

What employers can do

Reliable establishes once and for all that a legitimate business interest is required in order to enforce a noncompete agreement. Because this decision allows a variety of factors to be considered in determining the enforceability of a noncompete agreement, it may allow employers to en­­force their noncompete agreements in a broader range of situations.  

As a result, employers may be able to formulate innovative arguments as to what legitimate business interests should be considered.

In light of this decision, employers should have an attorney review their noncompete agreements and—if necessary—revise them to ensure their enforceability under the employer’s specific business circumstances.

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