Information contained in this publication is intended for informational purposes only and does not constitute legal advice or opinion, nor is it a substitute for the professional judgment of an attorney.
In Reliable Fire Equipment Company v. Arrendondo [pdf], the Supreme Court of Illinois held that Illinois courts should consider an employer’s legitimate business interest when determining the enforceability of a noncompetition agreement. The Reliable Fire court further rejected the long-standing Illinois precedent holding that the only legitimate business interests protectable under Illinois law were: trade secrets, confidential information, and "near-permanent" customer relationships. This decision will impact employer’s drafting noncompetition agreements and employer’s considering employing individuals who have signed noncompetition agreements with their former employers in Illinois.
The court held that Illinois' three-prong reasonableness test was “unstructured” and that reasonableness must be considered "on an ad hoc basis." The court criticized the structured formula that appellate courts had developed to assess the legitimate business interest of the employer, where some factors were "highly weighted, if not conclusive.” In particular, the court rejected the notion that the only legitimate business interests protectable under Illinois law were: (1) trade secrets; (2) confidential information; and (3) "near-permanent" customer relationships.
The court held that the reasonableness factors, including whether an employer has a legitimate business interest to enforce a noncompetition agreement, must be determined based on the particular facts of each case. The court noted that this case-by-case analysis may result in an identical agreement being found enforceable under one set of circumstances, and unenforceable under another. The court further indicated that the previous appellate cases applying the more limited "legitimate business interest" test may only serve as “nonconclusive examples of applying [an employer’s] legitimate business interest as a component of the three-prong rule of reason, and not as establishing inflexible rules beyond the general and established three-prong rule of reason."
The Reliable Fire decision expands the scope of enforceable noncompetition agreements by rejecting the inflexible requirement that an employer show that a former employee had and used confidential or trade secret information of the employer, or that the employer had near-permanent relationships with its customers. The Reliable Fire court’s holding that non-competition agreements, including the legitimate business interest sought to be protected, must be reviewed on a case-by-case basis, will likely result in more noncompetition agreements being enforced and will make it more difficult for defendants to dispose of noncompetition agreement claims through a motion to dismiss.
For more on Reliable Fire, continue reading at Littler’s ASAP: Illinois Supreme Court Expands Scope of Covenants Not to Compete