Illinois Supreme Court Extends Factors to Consider when Determining Enforceability of Restrictive Covenants

Illinois Supreme Court's Factors for Enforceability of Restrictive Covenants

On December 2, 2011, the Illinois Supreme Court ruled in an unanimous decision in  Reliable Fire Equipment Company v. Arnold Arredono  ( 2011 IL 111871 ) that there are additional factors that courts should consider when determining the protectability of a  legitimate business interest  and the subsequent enforceability of restrictive convents. The common-law standard as to the reasonableness of a restrictive covenant and its enforceability hinges on a three (3) prong test. The restrictive covenant is enforceable if (1) it is no greater than is required for the protection of a legitimate business interest of the employer; (2) it does not impose undue hardship on the employee; and (3) it is not injurious to the public.

The Illinois Supreme Court’s decision in  Reliable Fire  focuses on the legitimate business interestaspect. Prior to the  Reliable Fire  decision, there was a division among Illinois Appellate Courts as to the approach used when determining whether an employer has a legitimate business interest worthy of the protection of a restrictive covenant.  One panel of Illinois Appellate Courts have ruled that only “trade secrets” and “near-permanent customer relationships” establish a legitimate business interestsufficient enough to warrant protection of restrictive covenants. Another panel of Illinois Appellate Courts, however, have ruled differently using a much more flexible approach which utilizes seven (7) factors to determine whether an employer has a legitimate business interest worthy of protection.

Those seven (7) factors that should be considered are: (1) the number of years required to develop the customer; (2) the degree of difficulty in acquiring customers;t (3) he extent of personal customer contact by the employer; (4) the amount of money invested to acquire customers; (5) the extent of the employer’s knowledge of its customers; (6) the intent to retain employer-customer relations; and (7) the duration of customer association with the employer.

In  Reliable Fire , the Illinois Supreme Court opined that whether an employer has trade secrets and/or near-permanent customer relationships are not the only factors to consider when assessing a legitimate business interest in relation to the enforceability of a restrictive covenant. The Illinois Supreme Court stated that the lower courts must consider “the totality of the facts and circumstances of the individual case” when assessing whether a “legitimate business interest exists.”

According to the Illinois Supreme Court, the “totality of the facts and circumstances” can include, but is not limited to the following: (1) an evaluation of near-permanent customer relationships; (2) the former employee’s access to confidential information; (3) the original seven factors currently utilized by some Illinois Appellate Courts illustrated above; (4) and anything else found in the common law.

The Illinois Supreme Court opined that no one of the factors listed above is more important than any of the others when determining whether a protectable legitimate business interest exists and to place any weight on the possible “facts and circumstances” that could create a legitimate business interestwould be improper as “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.”

As the Illinois Supreme Court stated, “the legitimate business interest test is still a viable test to be employed as part of the three-pronged rule of reason to determine the enforceability of a restrictive covenant not to compete. However the two-factor test, in which a near-permanent customer relationship and the employee’s acquisition of confidential information through his employment are determinative is no longer valid. Rather, we adopt the position which is: wither a legitimate business interest exists is based on the totality of the facts and circumstances of the individual case.  Factors to be considered in this analysis include, but are not limited to, the near-permanence of customer relationships, the employee’s acquisition of confidential information through his employment, and time and place restrictions. No factors carries any more weight than any other, but rather its importance will depend on the specific facts and circumstances of the individual case.”

Ultimately, the  Reliable Fire  decision gives employers more ammunition to present to the court when attempting to establish the existence of a legitimate business interest such that a restrictive covenant should be enforceable.  In  Reliable Fire , the Illinois Supreme Court gives Illinois courts significant discretion when deciding what factors establish a legitimate business interest, the weight to be given to each factor actually considered and whether to enforce a restrictive covenant if the sufficiency of a legitimate business interest has been established.

Reliable Fire Equipment Co. v. Arnold Arredondo