The September 23, 2009, ruling in the Illinois case Sunbelt Rentals, Inc. v. Ehlers clarifies the standard for determining the enforcibility of restrictive covenants by rejecting the "legitimate-business-interest" test.
The "legitimate-business-interest" test required an employer seeking to enforce a restrictive covenant to establish that it had a legitimate business interest which the restrictive covenant sought to protect. A legitimate business interest exists when: (1) because of the nature of the business, the employer’s customer relationships were near permanent and the employee would not have had contact with the customer absent the employee’s employment; and (2) the employee gained confidential information through his employment that he attempted to use for his own benefit.
In Sunbelt, the Court rejected the "legitimate-business-interest" test, finding that the Illinois Supreme Court never recognized such a test. Instead, the court ruled that if the restrictive covenant did not cause undue hardship to the public or the employee and was not greater than was necessary to protect the employer’s interest, it was enforceable.
Sunbelt Rentals, Inc. ("Sunbelt") was engaged in the business of renting and selling industrial equipment to commercial and residential customers at 400 stores throughout the United States, including Illinois. Neil N. Ehlers ("Ehlers") was employed by Sunbelt as a sales representative responsible for (1) developing and maintaining a customer base with construction, agricultural, and industrial clients and (2) all aspects of the client relationship, including sales, rentals, negotiations, scheduling, delivery, and billing.
When Ehlers began his employment, he entered into a written employment agreement with Sunbelt. The agreement contained a restrictive covenant prohibiting Ehlers from providing or soliciting the provision of products or services similar to those provided by Sunbelt from persons or entities which had purchased products or services from Sunbelt within the 12 calendar months immediately preceding the date Ehlers left his employment and which were located within a 50 mile radius of any Sunbelt store in which Ehlers performed services during such period.
In 2009, Ehlers left his employment with Sunbelt and began working for a Sunbelt competitor. Sunbelt responded by filing suit against Ehlers and his new employer to enforce the restrictive covenant and obtained an injunction preventing them from violating the same. Ehlers and his new employer appealed, arguing, among other things, that the court failed to follow Illinois’ precedent regarding the "legitimate-business-interest" test when granting the injunction.
On appeal, the Appellate Court analyzed the case law discussing the "legitimate-business-interest" test and concluded that the Illinois Supreme Court never embraced the test. Therefore, the test was not a valid consideration when determining whether a restrictive covenant was enforceable. The Appellate Court then found, the appropriate test to determine the enforcibility of a restrictive covenant was: (1) whether enforcement of the restrictive covenant will be injurious to the public or cause undue hardship to the employee and (2) whether the restraint imposed by the restrictive covenant is greater than is necessary to protect the employer.
Applying this test to Ehler’s employment agreement, the Appellate Court determined that the restrictive covenant’s 12 calendar months and 50 mile radius restrictions were reasonable because Ehlers was not caused any undue hardship and the restrictions were not greater than was necessary to protect Sunbelt. In reaching this conclusion, the Appellate Court relied on various Illinois Supreme Court cases which found restrictive covenants reasonable which containied time limitations of 12 calendar months and geographic limitations encompassing a small geographic area in which the person previously worked. Accordingly, the Appellate Court upheld the preliminary injunction entered in favor of Sunbelt and against Ehlers and his new employer preventing them from violating Ehlers employment agreement with Sunbelt.
The ruling in Sunbelt replaces the sometimes nebulous concept of a legitimate business interest and replaces it with a purely reasonableness standard which should result in more easily-resolved disputes between employers and employees.
Please do not hesitate to contact us if you have any questions about the Sunbelt case or any other matter relating to employment law.
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