Illinois courts have traditionally followed the three pronged rule of reasonableness test when determining whether to enforce a restrictive covenant:
a. is the restriction no greater than what is required to protect the
legitimate business interest of the employer;
b. does the restriction impose undue hardship on the employee;
c. is the restriction injurious to the public.
However, on September 23, 2009, the Illinois Fourth District Appellate Court, in Sunbelt Rentals, Inc. v. Ehlers, 394 Ill.App.3d 421, held that a court need not consider the first prong of the rule of reasonableness test, an employer’s legitimate business interest, when determining whether to enforce a restrictive covenant. We previously blogged on this decision. The Sunbelt decision has been widely criticized since its publication and Illinois’ four other Appellate districts have declined to follow it.
Today, the Illinois Supreme Court effectively reversed, and ended all further discussion on Sunbelt in Reliable Fire Equipment Co., v. Arredondo, 2011 IL 111871 (December 1, 2011). While writing that it “emphatically disagreed” with the Sunbelt decision, the Illinois Supreme Court scolded the Fourth District Appellate Court for “overlooking or misapprehending” Illinois Supreme Court precedent that calls for a court to consider all three prongs of the rule of reasonableness test, including an employer’s legitimate business interest, when determining whether to enforce a restrictive covenant.
The Reliable Fire decision also resolves another dispute that has been raging in the Illinois Appellate Courts for sometime; what is the proper test for assessing whether an employer has a business interest worthy of restrictive covenant enforcement/protection. Some Illinois Appellate courts have ruled that only “trade secrets” and “near permanent customer relationships” establish a legitimate business interest. Other Illinois Appellate courts have taken a more flexible approach, and look at the following seven factors when assessing whether an employer has a legitimate business interest:
1) the number of years required to develop the customer;
2) the amount of money invested to acquire customers;
3) the degree of difficulty in acquiring customers;
4) the extent of personal customer contact by the employer;
5) the extent of the employer’s knowledge of its customers;
6) the duration of customer association with the employer; and
7) the intent to retain employer-customer relations.
In Reliable Fire, the Illinois Supreme Court sides with the more flexible approach. Specifically, the Illinois Supreme Court informs its lower courts that only considering whether an employer has trade secrets and/or near permanent customer relationships is insufficient when assessing a legitimate business interest. Rather, Illinois Courts are to consider “the totality of the facts and circumstances of the individual case” when assessing whether a “legitimate business interest exists.” The “totality of the facts and circumstances” can include, but is not limited to, an evaluation of near permanent customer relationships, the former employee’s access to confidential information, the seven factors identified above, and/or anything else found in the common law. Moreover, the Reliable Fire decision declines to place any weight on the possible “facts and circumstances” that could create a legitimate business interest because “the same identical contract and restraints may be reasonable and valid under one set of circumstances, and unreasonable and invalid under another set of circumstances.”
Thus, Reliable Fire appears to expand what an employer can state/argue is a legitimate business interest, and gives the trial court significant discretion when deciding what factors establish a legitimate business interest and whether to enforce a restrictive covenant. We will continue to monitor Illinois courts to see if the Reliable Fire holding leads to any changes in how trial courts assess and enforce restrictive coventants.