Earlier today, the Illinois Supreme Court issued a much-anticipated ruling in Reliable Fire Equipment v. Arredondo, Illinois Supreme Court, Case No. 111871 (Dec. 1, 2011), holding that Illinois trial courts are required to determine whether a legitimate business interest exists based on the totality of the facts and circumstances of each individual case.
In Reliable Fire Equipment, the trial court found the two non-competes before it to be unenforceable because the employer had failed to prove the existence of a legitimate business interest in support of the two non-competes. In what the Illinois Supreme Court described as a sharply divided panel, the appellate court nevertheless affirmed that decision.
According to the Legal Developments in Non-Competes blog by Illinois lawyer Kenneth Vanko, a three-way split had developed among Illinois Appellate District courts on how a legitimate business interest was to be analyzed. One line of cases had applied a categorical test that limited legitimate interests to customer relationships and confidential information, another had apparently questioned whether that requirement was even necessary, and the third had applied a fact-based analysis based on the circumstances of each case. Kenneth predicted, correctly it turns out, that the Illinois Supreme Court would adopt the fact-based analysis for determining business interests.
The Illinois Supreme Court reiterated that proof of a legitimate business interest was still required and that a covenant not to compete would only be enforced as reasonable if (1) it was no greater than required to protect the legitimate business interest of the employer; (2) did not impose an undue hardship on the employee; and (3) was not injurious to the public. In so doing, the Supreme Court explicitly rejected the holding of Sunbelt Rentals, Inc. v. Ehlers, 394 Ill.App.3d 421 (2009), which had held that an employer did not need to demonstrate a legitimate business interest when it sought to enforce a restrictive covenant. This came as no great surprise as the Sunbelt decision has been criticized and a number of Illinois appellate courts had declined to follow it.
Instead, the Illinois Supreme Court concluded that there must be an examination of the underlying business interest, focusing on the totality of the facts and circumstances of each individual case. Factors such as the near-permanence of the customer relationships to be protected, the employee’s acquisition of trade secrets or confidential information through his employment, and the time and place restrictions within the covenant are all to be considered and weighed.
The takeaway? Illinois trial courts are now indisputably vested with tremendous discretion to determine what qualifies as a legitimate business interest. While this ruling will lead to less certainty (something that is always good for lawyers, less so for their clients), one can hope it will lead to more equitable and practical results.