ILLINOIS SUPREME COURT OPINES ON LAW OF COVENANT NOT TO COMPETE

Illinois Supreme Court

Justice Charles E. Freeman

On December 1, 2011, the Illinois Supreme Court handed down a decision on covenants not to compete (Reliable Fire Equipment Company v. Arnold Arredondo et al.). Justice Charles E. Freeman wrote the judicial opinion.  This decision generated a lot of discussion not only among legal commentators but also by business reporters in Crain’s Chicago Business and the Chicago Tribune.

Covenants not to compete are permissible in Illinois and many employers use them in employment contracts, separation/severance agreements or in agreements for the sale of a business.  The business community certainly has an obvious interest in the topic and we employment attorneys scrutinize a new case to see how it affects the law of non-competes and its application to our clients’ situations whether they be the promisee or promisor, employer or employee, or selling entity or purchasing entity.

What is all the fuss about?  The court simply sought to re-settle Illinois law after the issuance of couple decisions by appellate courts that muddled it.

Here is what you need to know. The court has reaffirmed the longstanding three-prong inquiry into the   reasonableness of  a restraint on competition: 1) whether enforcement  be will be injurious to the public; 2) whether enforcement will cause undue hardship to the promisor; and 3) whether the restraint imposed is greater than is necessary to protect the promisee,  namely,  the “legitimate business interest” of the promisee. The court stated “we continue to recognize the legitimate business interest of the promisee as a long-established component in the three-prong rule of reason.”

The other major pronouncement of the court is that “whether a legitimate business interest exists is based on the totality of the facts and circumstances of the individual case.”  Courts can still consider such non-exclusive, non-exhaustive factors such as near-permanent customer relationships, employee’s obtaining employer’s confidential information, and time and geography of restrictions.  However, the court makes clear each factor is of equal weight and will be determined by the facts of a particular case.

Accordingly, the decision may give a party more opportunities to argue whether a particular non-compete clause is enforceable.  A party’s having more grounds to argue does not necessarily translate into increased odds of prevailing.  I concur with the school of thought that the decision does not give any particular advantage to a party.

Nevertheless, as I and others have noted, the Court’s holding “whether a legitimate business interest exists is based on the totality of the facts and circumstances of the individual case” will likely result in more parties being willing to roll their dice and litigate, assuming they have the financial wherewithal to do so.

Copyright © 2012 by G. A. Finch, All rights reserved.

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