After surveying 100 years of Illinois case law relating to restrictive covenants, the Illinois Supreme Court in Reliable Fire Equipment Company v. Arredondo, 2011 IL 111871, clarified the analysis when assessing the enforceability of such agreements. The Court first made clear that, in Illinois, employee agreements not to compete will be upheld only if they are “reasonable.” When determining the “reasonableness” of a noncompetition agreement, Illinois courts must analyze whether (1) the covenant is no greater than is required to protect the legitimate business interest of the employer; (2) no undue hardship is imposed on the employee; and (3) there is any injury to the public.
The key to this analysis lies in the Court’s focus on the first element of this test — the legitimate business interest of the employer — and the need to review this element in light of the totality of circumstances of the facts giving rise to the case. The Court noted that this analysis is and remains “unstructured,” and clarified that there is no particular test or universe of factors to be used in determining what constitutes a “legitimate business interest.” Instead, the various factors considered in prior case law “are only nonconclusive aids in determining the [employer’s] legitimate business interest, which in turn is but one component in the three-prong rule of reason, grounded in the totality of the circumstances.”
In Reliable Fire, the circuit court’s analysis (which was upheld by the appellate court) was deemed by the Supreme Court as “rigid and preclusive” as to the determination of the employer’s legitimate business interests. Based on the Supreme Court’s decision, the circuit court should have looked to the “totality of the facts and circumstances” per the above-noted three-prong test to determine the reasonableness and enforceability of the agreements at issue. Thus, the Supreme Court reversed both the circuit court and the appellate court findings that the underlying restrictive covenants were enforceable, and remanded the case back to the circuit court for additional proceedings consistent with its decision.
As a result, the new approach creates a level of uncertainty going forward in the absence of case law applying it to actual fact patterns. It is therefore highly recommended that companies utilizing noncompetition agreements review all of them immediately in light of Reliable Fire to assess their enforceability going forward.