On September 23, 2009, the Appellate Court of Illinois, Fourth District, issued its Opinion in Sunbelt Rentals v. Ehlers, No. 4-09-0290, 2009 Ill. App. LEXIS 918 (4th Dist.). That opinion turns three decades of court precedent regarding the enforceability of non-compete agreements in Illinois on their collective ear. It rejected the “legitimate business interest” test that had been adopted by each of Illinois’ appellate court districts. That test requires an employer to demonstrate that it has a legitimate business interest worth protecting before a court will move on to determine the reasonableness of the time and territory restrictions contained in the agreement itself. The Sunbelt court, however, found that the legitimate business interest test “is no longer valid, if it ever was.” Instead, the court found that the only consideration that is relevant in determining the validity of a non-compete agreement is whether the time and territory restraints are reasonable. The Sunbelt court is the first court that has actually found, in the majority opinion, that the legitimate business interest test should be put out to pasture.
Sunbelt Rentals v. Ehlers
The defendant in Sunbelt, Neil Ehlers, began working for Sunbelt in 2003 as a sales representative. Near the start of his employment, Ehlers signed a written employment agreement containing various covenants restricting his post-employment activities. The agreement provided that, for one year following his termination of his employment, and within 50 miles of any Sunbelt store where Ehlers had worked, Ehlers would not solicit any Sunbelt customer, compete with Sunbelt in the same or similar business, or work for or own a competing business.
In 2009, Ehlers quit Sunbelt and began working for Midwest Aerials and Equipment, a direct competitor of Sunbelt. Sunbelt sued Ehlers and Midwest, and the trial court granted Sunbelt’s motion for a preliminary injunction. Without specifically applying the legitimate business interest test, the trial court found that the time and territory restraints in the non-compete restriction were reasonable and enforceable. Ehlers and Midwest appealed, claiming that the trial court impermissibly failed to follow controlling precedent and apply the legitimate business interest test. Ehlers also argued that the time and territory restrictions were overbroad.
In affirming the trial court’s entry of a preliminary injunction, the appellate court expressly rejected the consideration of the legitimate business interest test as “inconsistent” with Illinois Supreme Court precedent. The court found that the Illinois Supreme Court has never applied that test (although it has never specifically rejected it either). Looking at historic and recent Illinois Supreme Court decisions, the appellate court reasoned that the legitimate business interest test was never meant to be used in non-compete cases and was created by the Illinois Appellate Courts “out of whole cloth.”
Instead, the Sunbelt court simply looked to the time (one year) and territory (50- mile radius from stores where Ehlers worked) restraints of the non-compete and declared that they were not unreasonable and were in line with previous court decisions upholding such time and territory restraints. Moreover, the court found that any determination of whether the non-compete agreement violated public policy was “incorporated into the restrictive covenant time-and-territory assessments, which this court has concluded are reasonable.” Interestingly, while claiming to be applying the standard espoused by the Illinois Supreme Court in Mohanty v. St. John Heart Clinic, S.C., 225 Ill. 2d 52 (2006) (stating that a restraint contained in a restrictive covenant must be no greater than necessary to protect the employer), the Sunbelt court never considered whether the restraints imposed by the non-compete agreement were greater than necessary to protect the employer.
It is important to realize that Sunbelt is simply the opinion of one of Illinois’ appellate court districts. While all five districts technically are the same court, it remains to be seen how the other four appellate districts will treat the Sunbelt holding. Arguments can be made that the portion of the Mohanty decision that was disregarded by the Sunbelt court was the very impetus of the legitimate business interest test in the first place—that the legitimate business interest test simply gives meaning to what is “necessary to protect.”
Unfortunately, while the enforceability of, and litigation over, non-compete agreements have always been somewhat unpredictable, the Sunbelt decision has added yet another layer of uncertainty—in one area of the non-compete analysis that had been somewhat settled for more than 30 years. Employers should keep a watchful eye on the legacy of Sunbelt because if in fact the protectable interest test is no longer viable, non-compete agreements will be easier and less burdensome to enforce.