Illinois Supreme Court Decision Gives Employers More Leeway In Demonstrating Enforceability of Non-Compete Agreements

Contributed by Jeff Glass

On December 1, 2011, the Illinois Supreme Court issued a much-anticipated decision that broadened the factors that a court may consider when deciding whether to enforce a non-competition agreement. Reliable Fire Equipment Co. v. Arredondo, et al. (No. 111871) (Dec. 1, 2011). 

Prior to Reliable, a split had developed among the districts of the Illinois Appellate Court as to the “legitimate business interest” test.  It had been long-held in Illinois that, in order to enforce a non-compete contract, an employer must establish a “legitimate business interest” in the form of confidential information or “near-permanent” customer relationships.  The rationale was that this threshold test protected against such contracts being used to merely restrain lawful competition.  Despite that worthy goal, it was a problem for companies who could not show either of these particular interests, but still had good reasons for wanting to enforce the contracts.  Moreover, it was viewed by some as unfair, because it let some employees breach contracts that they voluntarily signed. Due in part to these concerns, the Appellate Court for the Fourth District in 2009 questioned whether a legitimate interest needed to be shown at all (Sunbelt Rentals, Inc. v. Ehlers, 394 Ill.App.3d 421 (2009)).  

Reliable was decided against this backdrop. Reliable sold fire extinguishers and alarms.  It sued two sales agents who signed non-compete contracts and then joined a startup firm.  The trial court declined to enforce the contracts on the grounds that Reliable failed to prove a “legitimate business interest” in the form of confidential information or “near-permanent” customer relationships.  The Appellate Court for the Second District affirmed, in the process rejecting the Fourth District’s opinion in Sunbelt Rentals.

Due to the split among the circuits, the Illinois Supreme Court took the case. It ruled that the legitimate business interest test still applies, but that the test should be expanded to encompass “the totality of the facts and circumstances of the individual case.” Accordingly, it reversed the appellate court’s decision, which limited its analysis to the near-permanence of customer relationships and the employee’s acquisition of confidential information. 

Reliable was a welcome development for me. The case will allow employer’s counsel to draw on a wider range of factors when arguing why non-compete agreements should be enforced. Moreover, a relative weakness in the areas of confidential information and/or near permanent customer relationships is no longer an automatic “deal-breaker” in a case to enforce the contract.  In fact, since Reliable has been decided, my firm has relied on Reliable to obtain a TRO for one client, and also to defeat a motion to dismiss in another non-compete case. Reliable also underscores the importance of reviewing existing employment contracts to make sure they are drafted in a way that will maximize the likelihood of their being enforced in light of the new, employer-friendly standard announced in Reliable.