This morning the Illinois Supreme Court handed down a ruling which tries to clarify what legal test should be used by courts in determining whether “Covenants Not to Compete” are enforceable against a departing employee. This decision could be very important because there was some confusion among the appellate courts, and because I see these types of cases being more and more common.
These “covenants not to compete” are agreements often found in an employee’s contract which restrict where and when he can find work in the same field after quitting the employer. The reasoning is he would be unfairly competing against the old employer, and the question is usually whether such a contract clause is enforceable.
In this particular case, the Plaintiff was Reliable Fire Equipment Company of Alsip, which sells, installs and services portable fire extinguishers and fire suppression and alarm systems. In 2004, one of its salesmen resigned and another was fired. They formed their own company, High Rise Security Systems. Reliable sued them for damages in excess of $400,000. The trial court and the Appellate Court both ruled the Covenant not to Compete was unenforceable.
The Court said the Illinois rule was still that employee agreements not to compete will be upheld if they are “reasonable.” So how do you know what is “reasonable?”
The court said there is a three-part test for reasonableness that asks:
(1) whether the covenant is no greater than is required to protect the “legitimate business interest” of the employer,
(2) whether no undue hardship is imposed on the employee, and
(3) whether there is no injury to the public.
The court then wanted to make this legal rule sound cool, so it called this test a “three dimensional rule of reason.”
The supreme court said that the three-prong test of reasonableness is not rigidly structured, and not an inflexible formula. It said the trial court should have looked to the “totality of the facts and circumstances” to determine the reasonableness of the agreements. 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.
In reversing the lower courts, the Supreme Court noted that some recent Appellate Courts did not use the right test in making their decisions. The most significant aspect of the Supreme Court’s ruling is that it requires courts to take into account the employer’s “legitimate business interest,” whether or not those interests are stated in the contract itself, and to consider this under all the facts and circumstances of each particular case.
The case was sent back to the trial court for additional evidence and argument to be presented.