Another Restrictive Covenant Upheld By Applying the Reliable Fire Analysis

Contributed by Jeff Glass

Another restrictive covenant has been upheld by applying the Reliable Fire decision. On July 17, 2012, the Illinois Appellate Court for the Fourth District issued its opinion in Zabaneh Franchises, LLC v. Walker, 2012 Ill.App. Lexis 579.  This is the second published  decision of an Illinois Appellate Court in the wake of Reliable Fire Equipment Co. v. Arrendondo, 2011 Ill. 111871 (December 2011). For our analysis of the first decision on the subject, the Insureone decision, please see our firm’s prior blog post.

In Zabaneh, the defendant was a tax preparer who worked for H&R Block. Every tax season, she signed an employment agreement that included a restrictive covenant barring her for two years from doing any tax preparation work for clients she had serviced while with H&R Block. Plaintiff Zabaneh acquired the H&R Block franchise including the rights under the employment agreement. In the trial court, the plaintiff filed a motion for temporary restraining order (TRO). The trial court denied the motion for TRO and also dismissed the complaint on the grounds that the restrictive covenant was a “contract of adhesion,” i.e., one which the plaintiff was required to sign as a condition of her employment and whose terms she had no opportunity to negotiate.

On appeal the appellate court, applying the Reliable Fire analysis, held that the enforceability of the restrictive covenant should be determined under a “three dimensional rule of reason” which requires analysis of (1) whether the restriction is no greater than required to protect the employer’s legitimate business interest; (2) whether it imposes undue hardship on the employee; and (3) whether it injures the public.  All underlying facts and particular circumstances are to be considered in balancing these factors.

Applying this analysis, the court reversed the trial court and found that the two-year prohibition on competition, which was limited to clients of the company whom the defendant herself had serviced, was a reasonable restriction which did not unduly burden the employee. The court further held that the lack of a geographic scope was not problematic. The court also held that the one year restriction on hiring plaintiff’s employees was reasonable. The court then remanded the case to the trial court for a hearing on whether the plaintiff was entitled to injunctive relief. 

The Zabaneh Franchises decision, when considered with the First District’s decision in InsureOne, is a favorable development for employer-side clientele.  It further clarifies that Reliable Fire requires courts to conduct a broad fact-based inquiry into the totality of the circumstances before ruling on the enforceability of a restrictive covenant. As a practical matter, this gives the employer more “ammunition” to use, and also makes it more difficult for an employee to obtain a quick legal ruling that a restrictive covenant cannot be enforced.

Please continue to check this blog for further developments in the law of restrictive covenants and unfair competition.