Until recently, most legal practitioners considered Illinois law well established in the area of employee restrictive covenants, including non-compete and non-solicitation agreements. Now, however, things could easily be described as a bit murky because recent decisions have called into question some basic principles of restrictive covenants. One Illinois appellate court, for example, has completely gone its own way, cavalierly jettisoning long-accepted jurisprudence. Another court has been at least willing to consider modifying well-known principles. So, to paraphrase Bob Dylan, are the times a-changin’ in the world of restrictive covenants?
The answer is a resounding, “maybe” because of disagreements among Illinois’ five appellate districts. Such conflicts are usually resolved by the state Supreme Court, and we are heading in that direction.
The current law
Illinois law currently provides that an employee restrictive covenant will be enforced if it is either supported by adequate consideration and is reasonably drawn to protect legitimate business interests. Although the general rule is easy to state, it has proven difficult to apply because the result often depends on specific facts, which typically differ from case to case. As a result, cogent, easy-to-apply rules are elusive.
Recent developments in “Adequate Consideration”
A restrictive covenant is simply a contract between the employee and the employer. Like all contracts, to be enforceable it must be supported by consideration, i.e., something given by the employer in exchange for the employee’s promise upon separation from employment not to compete against the employer or solicit its clients. Thus, under Illinois law an employer must give the employee something of value in return for signing the restrictive covenant. This can be money or additional benefits, but most of the time it is simply employment. Unlike other contracts, however, for restrictive covenants the consideration must be “adequate.” This stipulation raises an important question: What duration of employment is enough to be considered adequate?
Two recent decisions have dealt with this question. In the 2008 case Brown & Brown Inc. v Mudron, the Illinois Third District Court said that seven months is not enough time to merit enforcement of a restrictive covenant, even if the employee quits voluntarily, and two years may be the minimum required to enforce such an agreement, although this was only implied and not stated explicitly.
The second case, Diederich Insurance Agency, LLC v. Smith, a 2011 opinion from the Illinois Fifth District ruled that adequate consideration requires at least two years of continued employment. Diederich also added an unexpected wrinkle because the employee in the case had signed a new non-solicitation agreement that replaced his old agreement and reduced the time restriction from two years to one. When he quit three months later, the employer argued that cutting the restriction in half served as adequate consideration for the new agreement. The court disagreed, holding that there had to be at least two years of continued employment after the new agreement had been signed. This decision could make it much harder to modify existing agreements going forward.
The “Legitimate Business Interests” Test
In 2009, the Illinois Fourth District held in Sunbelt Rentals, Inc. v. Ehlers, that it was no longer necessary to determine whether a non-compete agreement protected a legitimate business interest. Henceforth, Sunbelt said, courts had only to consider whether the agreement was reasonable in scope. In justifying this decision to jettison 30 years of established law, the Fourth District essentially implied that all previous decisions had misinterpreted Illinois Supreme Court precedent.
Later in 2010, in Reliable Fire Equipment Company v. Arredondo, the Second District rejected Sunbelt’s rationale but this time seemed to accept some of its reasoning. For example, although the majority in the 2-1 opinion clearly rejected Sunbelt, the court also expressed a willingness to consider utilizing other business interests to support a restrictive covenant. (Previously only two protectable interests had been recognized: near-permanent customer relationships and trade secrets.) The concurring opinion noted that “this district is no longer committed to a strict application of the two restrictive prongs of the legitimate business interest test.”
Reliable Fire Equipment is now before the Illinois Supreme Court. Thus, we will soon see if Illinois law will continue with the traditional test, adopt Sunbelt’s reasoning, embrace the Reliable compromise or come up with something entirely different.
Where Are We Going?
The recent line of cases on adequate consideration favors the employee by hardening the two-year requirement for continuing employment and showing some hostility towards types of consideration other than money or a long period of continued employment. The line of cases beginning with Sunbelt, on the other hand, strongly favors employers by eliminating or at least modifying the legitimate interest requirement.
Although it is still unclear in what the direction Illinois law is heading, one fact is crystal clear: A great deal is riding on the outcome. Under the settled law in place for 30 years, Illinois is generally considered to have one of the toughest tests nationwide for determining the legitimacy of restrictive covenants. If Sunbelt were to become the statewide standard, however, Illinois would instantly become one of the most employer-friendly states in this regard.
For states beyond Illinois, one unanswered question is whether the Sunbelt decision and others like it signal a willingness in the state courts to reexamine long-established rules on restrictive covenants. Are the courts ready to take a new look at the balance between the needs of an employer to protect its business interests and the needs of an employee to earn a living?
Good News or Bad?
Whether these new developments are good news or bad depends upon where you sit on either side of the restrictive covenant divide. Employers would welcome a potential easing of the rules, while employees would prefer that the courts leave well enough alone. But no matter which side you may be on, the ultimate question remains the same. Is Sunbelt an aberration or a sign of changes to come? Those with a stake in the outcome should not have to wait long for an answer.
Anthony C. Valiulis, a Principal at Chicago-based law firm Much Shelist since 1979 and a current member of the firm’s Management Committee, is a litigator with 37 years of experience in a broad range of state and federal civil trial and appellate matters. Reach him at 312.521.2691 or firstname.lastname@example.org.
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