lllinois Chamber of Commerce HR Illinois Blog

By Brian K. LaFratta and Joel W. Rice, Fisher & Phillips

A landmark Illinois Appellate Court decision was recently issued making restrictive covenants substantially easier to enforce, at least in central Illinois.  In this article, the prevailing party’s attorneys explain the implications of the decision, as well as the circumstances that led to this significant change in the law.

For years, many Illinois businesses have used restrictive covenants (or covenants not to compete) to protect their customer relationships and confidential information.  Such covenants, which are typically part of employment agreements, provide that employees cannot solicit the company’s customers or otherwise compete with the company after the termination of their employment.  Recognizing that such covenants are a restraint of trade and detrimental to employees’ job prospects, Illinois courts have historically not looked favorably on them and have imposed strict requirements that must be met in order for the covenants to be enforceable.

For the past several decades, Illinois courts have held that in order to be enforceable, restrictive covenants must (1) be reasonable in scope, and (2) protect a legitimate business interest.  The reasonable scope requirement is generally easy to meet: the employer essentially has to include time and territory limits that are rational.  Thus, courts frequently uphold restrictive covenants prohibiting competition within a 50- mile radius of the company for one year.

With respect to the legitimate business interest requirement, Courts have recognized two legitimate business interests: protection of confidential information, and protection of near-permanent customer relationships.  The legitimate business interest test has proven to be a difficult obstacle for enforcement of restrictive covenants.  First, courts have construed the near-permanent customer relationship requirement narrowly and do not often find that such relationships exist.  Second, courts have similarly taken a strict view of what information will be considered truly confidential.  Generally speaking, in order to meet the legitimate business interest test, the information at issue will have to be trade secrets, or other valuable business information which the company has truly kept secret, such as customer information or pricing methodologies which have been kept under lock and key.

Because the reasonable scope requirement is relatively easy to meet, the enforceability of restrictive covenants often turns on whether the company can meet the legitimate business interest test.  However, given the rigid requirements of the legitimate business test, employers seeking to enforce such covenants often face an uphill battle, and courts frequently find that restrictive covenants do no satisfy this test.  As a pure business issue, this means that companies who use (and rely on) restrictive covenants often have no idea whether they will be found enforceable.  This in turn means that, for a company seeking to enforce a restrictive covenant against a former employee who is in breach, going to court is often a gamble.  Compounding this risk is that litigating such cases is especially expensive, as companies typically seek emergency injunctive relief at the outset of the case.  The end result is that companies are often faced with the unpleasant choice of allowing the former employee to breach the agreement, or incurring significant legal fees in an unpredictable legal proceeding.

It is with this backdrop that the Fourth District of the Illinois Appellate Court issued its decision in Sunbelt Rentals, Inc. v. Ehlers.  The case began as a relatively routine restrictive covenant dispute.  Ehlers was hired as a salesman for Sunbelt and was required to sign a restrictive covenant as a condition of his employment.  He worked for the company for several years at its Bloomington and Champaign branches.  In January 2009, he resigned his employment and began working for Midwest Aerials, a Sunbelt competitor.  After informal efforts to have him abide by his agreement were unsuccessful, Sunbelt filed suit against Ehlers and Midwest for violation of the terms of the restrictive covenant, and sought emergency injunctive relief.  Following a hearing, the trial court ruled in Sunbelt’s favor and entered an order enjoining Ehlers and Midwest from violating the restrictive covenant.  The defendants appealed.

On appeal, Sunbelt argued that the trial court’s ruling should be affirmed because the agreement was reasonable in scope and met the legitimate business interest test.  At oral argument, however, Justice Steigmann (one of the judges on the panel) focused the questioning on whether the legitimate business interest test was a necessary requirement for enforcement of a restrictive covenant.  Sunbelt’s attorney, who was prepared for this possibility since Justice Steigmann had recently authored a concurring opinion questioning the validity of the legitimate business interest test, of course argued that Justice Steigmann’s position was correct.  Several months later, the court’s opinion, authored by Justice Steigmann, was issued.  The opinion, departing from 30 years of precedent, held that the legitimate business interest test was not a necessary requirement for enforcement of a restrictive covenant.  In a nutshell, the court held that, despite numerous Illinois Appellate court decisions following the legitimate business interest test, a survey of Illinois Supreme Court opinions revealed that the Supreme Court had never held that the test was necessary, including a case decided as recently as 2006.  Because the Supreme Court has the final say in these matters, Justice Steigmann reasoned that the legitimate business interest test had apparently been “created out of whole cloth” and therefore was invalid.  Thus, the court held, a company was only required to show that the agreement was reasonable in scope, which Sunbelt was able to do.  The court therefore affirmed the trial court’s ruling in favor of Sunbelt.

The Fourth District Appellate Court encompasses most of central Illinois, and its decisions are binding on the trial courts there.  Thus, the immediate impact of this decision is that companies are much more likely to be able to enforce restrictive covenants in the courts of central Illinois.  Businesses in this area therefore should be able to have greater confidence in their contractual relations with their employees, and far less uncertainty when they choose to go to court to enforce their restrictive covenants.  It remains to be seen whether courts in the other four appellate districts will follow the Sunbelt v. Ehlers decision or continue to apply the legitimate business interest test, as the trial courts tend to follow the decisions of the branch of the appellate court that oversees their district.  Ultimately, this is an issue that will likely find its way to the Illinois Supreme Court for the final say.  In the meantime, though, businesses in central Illinois should be encouraged that their efforts to protect their customer relationships and confidential relationships are more likely to be successful.

Brian K. LaFratta is a member of the Illinois Chamber of Commerce HR Illinois Advisory Board.  He is an attorney with the Chicago office of the national labor and employment law firm Fisher & Phillips LLP.  He represents employers in all areas of employment law. He may be contacted at (312) 346-8061 or blafratta@laborlawyers.com.

Joel W. Rice is also an attorney with the Chicago Office of Fisher & Phillips LLP. He too represents employers in all areas of employment law. He may be contacted at (312) 346-8061 or jrice@laborlawyers.com.

Tags: Appellate Court, Restrictive Covenant Law

This entry was posted on Tuesday, February 2nd, 2010 at 4:15 pm and is filed under Labor Law. You can follow any responses to this entry through the RSS 2.0 feed. Both comments and pings are currently closed.