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Archive                           June 2012


LEGAL ISSUES

The case of reliable fire -- providing clarity for covenants not to compete, or not?


By Randall Green
CIB Contributor
Published: Jun. 2012

The law in Illinois surrounding covenants not to compete between employees and employers has been engulfed in a cloud of uncertainty since a 2009 appellate decision. A recent Illinois Supreme Court case may answer some questions about the enforceability of these agreements. However, in attempting to set the record straight, the decision in Reliable Fire Equipment Co. v. Arredondo (2011) may have inadvertently created further uncertainty for businesses and their employees.

THE HISTORY

Every state has its own laws on the enforceability of restrictive covenants in the employer-employee relationship. State laws attempt to balance the ability of a business to protect its product or service, the freedom of contract between parties and the ability of an individual to pursue gainful employment. It has long been held that a complete restriction on trade is void, while a restrictive covenant is enforceable if the restraint is reasonable and the agreement is supported by consideration.

In Reliable Fire, an employer sought to enforce a covenant not to compete against two former employees for starting a business in direct competition with Reliable Fire's existing business of sales, installation and service of fire suppression and alarm systems. A divided appellate court held that Reliable Fire did not have a legitimate business interest and that the restriction was unenforceable.

Illinois has long considered the business interest an employer is seeking to protect when determining whether a restrictive covenant is reasonable. The modern test for reasonableness is whether the covenant: "(1) is no greater than is required for the protection of a legitimate business interest of the employer; (2) does not impose undue hardship on the employee; and (3) is not injurious to the public."1

THE CONFUSION

Despite the longstanding precedent, in 2009 the appellate court in Sunbelt Rentals Inc. v. Ehlers determined that whether a restrictive covenant was reasonable should be based only on the restrictions on time and territory.

The subsequent case of Steam Sales Corp. v. Summers (2010) referred to the two-prong test of reasonableness (time and territory) as the most recent Supreme Court precedent in Illinois, despite the fact that it appeared to be a misinterpretation by the Sunbelt court.

THE CONCLUSION

In Reliable Fire, the Illinois Supreme Court attempted to set the record straight over what makes a covenant not to compete reasonable in Illinois. In overruling the decisions in Sunbelt and Steam Sales, the Reliable Fire court confirmed the long-established three-prong legitimate-business-interest test.

Now the court had to wrestle with a previous decision in Nationwide Advertising Service Inc. v. Kolar (1973) over what made a business interest legitimate and subject to protection. The Kolar court held that in order for a business interest to be protectable, the employee must receive confidential information and the relationship between the employer and customer is quasi-permanent as opposed to short-term.

The Reliable Fire court held that the determination on what constitutes a legitimate business interest was not as rigid as Kolar would suggest, but instead was fact-specific and depended on the totality of the circumstances.

WHAT'S NEXT

Although businesses and legal practitioners are glad to know what test will be applied when interpreting covenants not to compete, the Illinois Supreme Court has highlighted another element of uncertainty by failing to adopt a clearly defined rule to determine what makes a business interest legitimate and protectable.

Randy Green is an attorney at Meyer Capel, a Professional Corporation. He can be reached at (217) 352-1800 or rgreen@meyercapel.com. This article does not constitute legal advice, nor does it create an attorney-client relationship.

1 Restatement (Second) of Contracts (1981).

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