In October 2009 we reported on the Illinois Appellate Court’s rejection of the "legitimate business interest" test in connection with its analysis of the enforceability of a post-employment restrictive covenant. The Illinois Appellate Court then held, in Sunbelt Rentals v. Ehlers, the "legitimate business interest" test was not a valid consideration when determining whether a restrictive covenant was enforceable. In Sunbelt, the courts applied a pure reasonableness standard and enforced the restrictive covenant.
Since then, another case involving the issue of the enforceability of post-employment restrictive covenants has made its way through the courts. In Reliable Fire Equipment Company v. Arrendondo, the trial court and the Illinois Appellate Court both held that an employer who sold, installed and serviced portable fire extinguishers did not show it had a "legitimate business interest." Therefore, the Courts ruled Reliable could not enforce its restrictive covenant against its two former salesmen who formed a competitive business and solicited Reliable’s employees to join them and its customers to buy from them.
On December 1, 2011, the Illinois Supreme Court reversed the trial court and Appellate Court and ruled that the "legitimate business interest" test is, indeed, a viable test which must be employed as part of the three-pronged rule of reason to determine the enforceability of a restrictive covenant not to compete.
The three-pronged rule of reason test is that a restrictive covenant is reasonable only if the covenant is ancillary to a valid employment relationship and 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. When determining whether a "legitimate business interest" exists, the Illinois Supreme Court held courts must consider the totality of the facts and circumstances of the individual case:
Factors to be considered in this analysis include, but are not limited to, the near permanence of customer relationships, the employee’s acquisition of confidential information through his employment, and time and place restrictions. No factor carries any more weight than any other, but rather its importance will depend upon the specified facts and circumstances of the individual case.
Henceforth, courts considering cases involving the enforcement of restrictive covenants must employ the three-pronged test. In some cases, an employer’s business interest in its customers is not subject to protection through a covenant not to compete, such as, where the customer list is not secret or where the customer relationship is short term and no specialized knowledge or trade secrets are involved. Each case must be decided through an analysis of the totality of its own facts. Reasonableness is gauged not just by some but by all of the surrounding circumstances. The Court, therefore, remanded the Reliable case back to the trial court for the court to apply the correct test.
*****