IL Appellate Court Rejects 30-Year-Old Noncompete Analysis

The Fourth District Court of Appeals in Illinois has broken from the rest of the State and done away with a 30-year-old test used to analyze noncompete agreements.

A little background on noncompetes before we go any farther.  A noncompete, of course, is an agreement between an employee and a company that the employee won’t compete directly with the employer if he quits.  Usually, the agreement is limited to a certain geographic area, a certain amount of time, or both.

Okay, so here’s where things get interesting:

The Il-Legitimate “Business Interest Test”?

For a long time, Illinois appellate courts have used two tests for determining whether a noncompete was overly limiting. The first test – the “Time-and-Territory” test – is sort of the industry standard. The court determines (based on prior cases) whether or not the time and distance limitations included in the agreement are a reasonable restraint of trade. If so, then the agreement is valid. If they are found to be unreasonable, then the court may either void the agreement or adjust it to make it palatable.

The second test, however – the “Legitimate Business Interest” test – makes the court’s process a little more complicated. Under this test, a covenant not to compete will be enforced if (1) the employee acquired confidential information through his employment and then attempted to use it for his own benefit; or (2) if, by the nature of the business, the customer relationship is near-permanent and the employee would never have had contact with the customers but for his employment with the company. In other words, under the Legitimate Business Interest test, noncompetes are only valid if some trade secret violation occurred on top of any violation of the agreement itself.

Making matters worse, the use of the tests has not been mutually exclusive: some decisions only refer to one or the other, and some reference both.

The Sunbelt Rentals Decision

On September 23, 2009, the Fourth District Appellate Court issued an opinion in Sunbelt Rentals, Inc. v. Ehlers discussing the two tests. In this case, Sunbelt, an equipment leasing company, sued its main competitor, and one of its former employees (Ehlers) who had recently tried to move his efforts over to the competitor. Sunbelt argued that Ehlers had violated the restrictive covenant in his employment contract which forbade him to work in direct competition with Sunbelt, soliciting its customers or renting similar equipment within a 50-mile radius of his former store. Ehlers and his new employer countered that, because Ehlers did not take any proprietary information with him when he left Sunbelt, his former company had no “Legitimate Business Interest” sufficient to enforce the noncompete agreement.

In rejecting Ehlers’ argument, the Sunbelt Court held that the Legitimate Business Interest Test was created “out of whole cloth” by the Appellate Courts, and that it should no longer be used to determine the validity of noncompetes. The Court noted that the Illinois Supreme Court had never used the “Test”, even though it had decided plenty of noncompete cases since the test was introduced 30 years ago.

Going back to the origin of the Legitimate Business Interest Test, the Sunbelt Court concluded that the so-called “test” had been mashed together from multiple, unrelated Supreme Court opinions, and did not actually constitute a legal test at all. The Court further noted that both the earliest and most recent Illinois Supreme Court cases use only the Time-and-Territory Test to determine whether restrictive covenants were valid. The lesson from these cases, the Court said,

…is that courts at any level, when presented with the issue of whether a restrictive covenant should be enforced, should evaluate only the time-and-territory restrictions contained therein. If the court determines that they are not unreasonable, then the restrictive covenant should be enforced.

Because both the time and territory restrictions in the Sunbelt agreement were valid, the Court held, the agreement itself was valid, and Sunbelt was entitled to damages from both Ehlers (for breaching his agreement) and his new employer (for interfering with Sunbelt’s contract).

The Takeaway

With the elimination of the Legitimate Business Interest Test, the Fourth District has made it much easier and clearer to enforce an otherwise-valid restrictive covenant in Illinois. Under the Sunbelt decision, all an employer must do is ensure that its restrictions on time and distance are reasonable, and the court will not stand in the way of the company and employee’s freedom to contract.  If you’re the hiring company, however (or the employee), a major arrow in your quiver has been taken away.

The Sunbelt opinion was issued by the Fourth District Appellate Court, which means it is controlling law only for the middle of the State.1 It will be very interesting to see if any other Appellate courts latch onto the Fourth District’s thinking.  I doubt all of them will.  Eventually (finally, maybe), this issue has to make its way to Springfield.

In the meantime, however, where your noncompete lawsuit is filed in Illinois suddenly makes quite a difference.

1. See here for a map of the Illinois appellate districts [↩]