As previously noted in our October 7, 2009 Management Alert, in Sunbelt Rentals v. Ehlers, 394 Ill. App. 3d 421 (4th Dist. 2009), the Illinois Appellate Court for the Fourth District called into question three decades of Illinois court precedent regarding the enforceability of non-compete agreements by rejecting the “legitimate business interest” test. The Sunbelt court has been the only court that has actually found, in the majority opinion, that the “legitimate business interest” test should be discarded. But the conventional wisdom that the Sunbelt decision was an anomaly was bolstered by Aspen Marketing Services, Inc. v. Russell and Eventnext Marketing, Inc., 2009 WL 4674061 (N.D. Ill. Dec. 3, 2009), in which a federal court in Chicago opted not to follow Sunbelt and held that the “legitimate business interest” test is alive and well in Illinois.
The “Legitimate Business Interest” Test and the Sunbelt Decision
Since as early as 1975, Illinois appellate courts have required an employer to demonstrate that it has a protectable “legitimate business interest” before enforcing a non-compete agreement against that employer’s departing employees. Specifically, courts found a “legitimate business interest” when: (1) because of the nature of the business, the employer’s relationship with the customer is near-permanent and the employee would not have had contact with the customer absent the employee’s employment; or (2) the employee gained confidential information through his employment that he attempted to use for his own benefit at his new employer. Only after the employer demonstrated such a protectable interest would a court move on to determine the reasonableness of the time and territory restrictions contained in the agreement itself.
While a handful of court decisions had previously questioned the validity of the “legitimate business interest” test, the Sunbelt court was the first court to reject the test outright. Stating that the “legitimate business interest” test was “inconsistent” with Illinois Supreme Court precedent, the Sunbelt court concluded that the only consideration that was relevant in determining the validity of a non-compete agreement was whether the time and territory restraints were reasonable.
The Aspen Decision
Recently, however, the federal court for the Northern District of Illinois refused to follow the Sunbelt decision and confirmed the validity of the “legitimate business interest” test. See Aspen Marketing Services, Inc. v. Russell and Eventnext Marketing, Inc., 2009 WL 4674061 (N.D. Ill. Dec. 3, 2009). In Aspen, the defendant entered into a confidentiality agreement with his employer. The defendant left the employer in June 2007 to start his own competing business. Upon discovering that one of its clients had transferred its business to the defendant’s new company, the employer sued the defendant for breach of the confidentiality agreement.
In addressing the enforceability of the non-compete covenant appearing in the agreement, the district court applied the “legitimate business interest” test. Acknowledging the Sunbelt court’s rejection of the test, the district court concluded that “[t]he Illinois Supreme Court, the United States Court of Appeals for the Seventh Circuit and this court, however, have not rejected the application of the legitimate business interest test.” The district court then applied the test and found the non-compete covenant to be enforceable.
While the Sunbelt decision is technically binding on state trial courts (but not necessarily federal trial courts) in Illinois, the Aspen court’s refusal to part with the “legitimate business interest” test indicates that a definite response in this area of the non-compete analysis has yet to come. Employers must therefore remain vigilant in monitoring the developments in non-competition law. We at Neal, Gerber & Eisenberg LLP believe that this issue – the validity of the “legitimate business interest” test – will be addressed and definitively decided by the Illinois Supreme Court in the next few years.