Illinois Employer-Employee Non-Compete Agreements Judged By The Totality Of The Circumstances

Up until 2009, the prevailing law was that employer-employee non-compete agreements were reasonable only if they: (1) were no greater than is required for the protection of a legitimate business interest of the employer; (2) do not impose undue hardship on the employee; and (3) do not harm the public. Non-compete agreements were also subject to limitations on the activities prohibited, geographical area and time. These rules were established as far back as 1896.

In 2009, however, one Appellate Court rejected the long-standing three-prong “legitimate business interest” test for the reasonableness of a non-compete agreement. In that case, the appellate court upheld a non-compete agreement because it found the time and territory restrictions to be reasonable. It found that it did not need to apply the “legitimate business interest” test because the Illinois Supreme Court had never “embraced” the test and the test’s application was inconsistent with Illinois Supreme Court precedent. It went so far as to declare that the test was “judicial gloss” incorrectly applied by appellate courts.

In 2011, the Illinois Supreme Court found that the wayward appellate court had “misread” a prior case to support its “erroneous” decision. The Supreme Court had expressly recited the interests of the employer as a component of the three-prong rule or reasonableness. And Illinois continues to require businesses to demonstrate they have a legitimate business interest in order to enforce a non-compete agreement.

The Illinois Supreme Court went on to discuss the various approaches appellate courts had used to determine whether an employer had met the “legitimate business interest” test. It found that the approaches usually collapsed into differing lists of factors. As a result, the appellate courts had not found an exact formula for courts to apply. Essentially, each decision was based on the totality of its own facts.

The Illinois Supreme Court held that the factors applied in various prior cases are only “nonconclusive aids” in determining the employer’s legitimate business interest in any future case. “Each case must be determined on its own particular facts. Reasonableness is gauged not just by some but by <em>all</em> of the circumstances. The same identical contract and restraint may be reasonable and valid under one set of circumstances, and unreasonable and invalid under another set of circumstances.”

“Whether a legitimate business interest exists is based upon 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 factor carries any more weight than any other, but rather its importance will depend on the specific facts and circumstances of the individual case.”

Reliable Fire Equipment Co. v. Arredondo, 2011 IL 111871.

The material on this blog is provided for informational purposes only and does not constitute legal advice. Nor is the material promised or guaranteed to be current, complete, or up-to-date. If you have any questions, please contact Lance R. Minor.