On February 3, 2012, the Appellate Court of Illinois, Second District reversed and remanded the Winnebago County Circuit Court’s decision in Hafferkamp v. Llorca in a significant unpublished non-compete decision. The Second District held that the trial court failed to properly apply the Illinois Supreme Court’s standard set in Reliable Fire Equipment v. Arredondo to determine whether the non-compete agreement was valid.
The defendant in this case, Leah Llorca, worked at a hair salon owned by the plaintiff, Mary Hafferkamp. As part of the terms of her employment, Llorca signed a non-compete agreement. Llorca later left Hafferkamp’s hair salon, and joined a competing business, located in the geographic area excluded by the non-compete agreement. Hafferkamp sued to enforce the contract, and the trial court held the agreement unenforceable. The trial court’s holding was based on LSBZ, Inc. v. Brokis, 237 Ill. App. 3d 415 (1992), which provided the correct enforceability test at the time of the trial court’s ruling. The LSBZ test required the court to determine whether the promisee had a legitimate business interest in enforcing the agreement, and found that such an interest only existed in two cases: when the employee acquired confidential information from the employer, or where the employer had near permanent customer relations. The court here found that neither criteria was met, and thus the agreement was found unenforceable. Hafferkamp then appealed the case to the Second District.
After the trial court’s decision in Hafferkamp v. Llorca was made, but prior to the Second District’s ruling, the Illinois Supreme Court issued a significant ruling on non-compete agreements. This decision, in the case of Reliable Fire, clarified the standard for determining the enforceability of non-compete agreements. According to the Supreme Court, for an agreement to be enforceable, it must be analyzed under a three-pronged rule of reason test. The covenant would only be enforced if doing so was (1) not greater than necessary to protect a legitimate business interest of the promisee, (2) would not be “injurious to the public,” and (3) would not cause “undue hardship to the promisor.” Reliable Fire, 2011 IL 111871 at ¶ 17. Additionally, the court found that whether an interest was considered a “legitimate business interest” needed to be determined based on the totality of the circumstances. Id.
Basing its holding on the Illinois Supreme Court’s decision, the Second District reversed and remanded Hafferkamp v. Llorca for the Reliable Fire test to be applied. By using the LSBZ holding as the basis for its decision, the trial court had not considered the totality of circumstances in determining whether Hafferkamp’s business interests were legitimate, and thus, the Second District chose to remand the case.
According to the Second District, the “decision in Reliable Fire should apply both retroactively and proactively, since the Supreme Court “did not expressly limit the application. . . to prospective cases only.” Hafferkamp v. Llorca, 2011 IL App (2d) 100353 at ¶17. The court’s reasoning for this was that Reliable Fire did not create a new test, but simply clarified a convoluted test to prevent misapplication. Additionally, the court found that failing to implement Reliable Fire retroactively could lead to inconsistent rulings depending on the filing date of the case, even if the facts of the case did not warrant such rulings.
The Second District’s ruling is of note for future Illinois cases, in that it suggests that Reliable Fire’s test for the enforceability of a non-compete clause applies to cases filed prior to the date on which Reliable Fire was decided.
One legal commentator, Kenneth Vanko of non-competes.com, has remarked that the Second District’s ruling is consistent with Reliable Fire because the Illinois Supreme Court “really did nothing to change the law but only rejected the appellate courts’ gloss on the applicable non-compete test.”