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Illinois Supreme Court Makes New Rules for Employers Who Use Noncompete Agreements

Labor & Employment Alert E. King Poor

Consider this scenario: One day your two best salespeople walk into your office and hand you their resignations. Immediately you are concerned because these two employees know all of your customers, your pricing strategies, your operating methods, your existing products and even your new products in R&D. They know every detail of your business plan because they helped you develop it. And they tell you they've started up their own business, which will directly compete with you. A couple of weeks later, you learn they have been calling on your customers and soliciting your employees to join them.

Hopefully you protected yourself from this situation with a "noncompete" agreement (or similar "restrictive covenant") that your employees signed when they worked for you promising not to compete with you or solicit your employees for a reasonable time after they left your company. But are your noncompete agreements still enforceable after last week's decision by the Illinois Supreme Court in Reliable Fire Equipment Co. v. Arredondo? The answer might surprise you…

In Reliable Fire (Case No. 2011-IL-111871), the Illinois Supreme Court examined a case nearly identical to the one described above. There, two of Reliable's salespeople signed noncompete agreements during their employment, which prohibited them from competing with Reliable or soliciting its employees in Illinois, Indiana or Wisconsin for one year after their employment ended. After learning that the two former salespeople had started their own competing business and were calling its customers and soliciting its employees, Reliable brought a lawsuit to stop the employees from competing in violation of their agreements. However, instead of validating Reliable's agreements, the lower courts held that Reliable's noncompete agreements were unenforceable, and the former salespeople were allowed to continue competing. Reliable appealed the case all the way up to the Illinois Supreme Court, which issued a landmark opinion that will change the way courts look at noncompete agreements.

In its decision, the Supreme Court made two points that are very important for employers. First, the Court reaffirmed the long-standing principle that for a noncompete agreement to be enforceable, it must be "reasonable," which means that it cannot be more restrictive than necessary to protect the employer's "legitimate business interest." This point is significant because earlier cases had held that courts only needed to consider whether noncompete agreements were reasonable as to time (months/years an employee cannot compete) and territory (area of the state/country where competition is restricted). The Court rejected these earlier decisions and ruled that employers must show that they have a "legitimate business interest" justifying the competition restriction that they seek to impose on their employees, and therefore, more must be considered than just time and territory.

Next, the Court changed how employers must prove that they have a "legitimate business interest." For nearly four decades, courts had looked to whether the restrictions on competition were necessary to prevent employees from appropriating either (a) the employer's confidential information; or (b) its near permanent customer relationships. In Reliable Fire, however, the Court held that it will no longer look at any particular factor as "conclusive" in determining the scope of an employer's legitimate business interest. Instead, now it will consider the "totality of the facts and circumstances," examining each employment situation and noncompete agreement individually. While the factors in the earlier test may still be considered, they are now no more than guides. This new approach relies more on the uniqueness of each business rather than satisfying a particular formula - a fact which the Court seemed to acknowledge when it wrote that "the same identical contract and restraint may be reasonable and valid under one set of circumstances, and unreasonable and invalid under another set of circumstances."

While it remains to be seen exactly how courts will apply the new "totality of the circumstances" test, courts will be looking closely at noncompete agreements to verify that the restrictions on employees are no greater than necessary. Overbroad or outdated agreements that are no longer consistent with an employer's market footprint or an employee's actual access to sensitive information may be deemed unenforceable, leaving employers without any protection against competing employees using the employer's own confidential information. Following the Illinois Supreme Court's decision in Reliable Fire, employers may wish to re-examine their noncompete agreements to ensure the restrictions fall within the scope of their legitimate business interests. For more information on this subject, employers should contact:

E. King Poor is an attorney at Quarles & Brady and practices commercial litigation and chairs the firm's appellate practice group. (Phone: (312) 715-5143; king.poor@quarles.com).