“Whenever you face a man who’s playing your instrument, there’s a competition.”
Wynton Marsalis, American musician
Just as musicians feel threatened by other musicians who play their instruments, employers feel threatened when former employees work for competitors within the same industry. Accordingly, employers and employees are inevitably engaged in a never-ending battle: an employer’s right to protect its competitive advantage versus an employee’s right to make a living upon separation from employment. States have tried to resolve this dispute by allowing employers to restrict employees’ ability to compete through non-competition agreements, but only if such restrictions are reasonable. State courts generally apply what is known as the “legitimate business interest” test. While Missouri courts have universally agreed with this approach, Illinois courts have been in disagreement over the use of the test.
Missouri and the Legitimate Business Interest Test
In Missouri, the standard formula for determining the reasonableness of a covenant not to compete is to inquire whether it is no more restrictive than is necessary to protect the legitimate interests of the employer. Non-compete agreements are enforceable only to the extent they can be narrowly tailored geographically and temporally. In addition, such restrictions are not enforceable to protect an employer from mere competition. The burden of establishing the validity and reasonableness of a covenant not to compete rests upon the party claiming its benefits.
Under Missouri law, an employer may only fairly require the protection of certain narrowly defined and well-recognized interests against possible appropriation by a former employee. These protectable interests are limited to (1) trade secrets and (2) customer contacts, the latter being essentially the influence an employee acquires over his or her employer’s customers through personal contact. Protection of the employer, not punishment of the employee, is the essence of the law.
Illinois Confusion over the Restrictive Covenant Test
While Missouri courts universally follow the legitimate business interest test, Illinois courts have been inconsistent in their application of the test. Illinois courts first adopted the legitimate business interest test in 1989 and, similar to Missouri, held that there are two general situations in which a legitimate business interest will exist: (1) where the customer relationships are near-permanent and, but for the employee’s association with the former employer, the employee would not have had contact with the customers; and (2) where the former employee acquired trade secrets or other confidential information through his or her employment and subsequently tried to use it for his or her own benefit.
Until September 2009, Illinois courts applied the legitimate business interest test exclusively. However, in Sunbelt Rentals, Inc. v. Ehlers (September 23, 2009), the Illinois Court of Appeals rejected the test on the grounds that the Illinois Supreme Court purportedly never embraced the test and that the test was inconsistent with recent Illinois Supreme Court decisions. The court concluded that the Illinois Supreme Court had approved only a “time and territory” analysis (or “reasonableness test”) to determine the reasonableness of restrictive covenants in employment agreements. The court noted that in utilizing the reasonableness test, it is necessary to consider (1) whether enforcement of the restrictive covenant will be injurious to the public or cause undue hardship to the employee, and (2) whether the restraint imposed is greater than is necessary to protect the employer.
Although some were concerned that the holding in Sunbelt would render the legitimate business interest test obsolete, Illinois courts have been hesitant to follow the decision. For instance, a 2010 holding by the Illinois Court of Appeals, Reliable Fire Equip. Co. v. Arredondo, rejected the decision, noting that it would effectively disallow inquiry into whether the employer has an interest other than suppression of ordinary competition, thereby leading to a public policy favoring restraint of trade. In addition, the court noted that the Illinois Supreme Court has in fact recognized that a distinct element of the analysis in determining the enforceability of a restrictive covenant is whether the restraint protects a legitimate interest of the employer. Thus, the Reliable court found that the legitimate business interest test is consistent with principles embraced by the Illinois Supreme Court.
Another recent Illinois decision, Steam Sales Corp. v. Summers, called into question the scope of the reasonableness test, noting that the reasonableness test and the legitimate business interest test can lead to different results. This is because the legitimate business interest test is outcome-determinative in cases where the employer is unable to establish either a near-permanent relationship or the attainment of confidential information. Since the test contemplates no other means of showing a protectable interest, the employer cannot establish a legitimate business interest unless one of these two criteria is satisfied. The legitimate business interest test therefore presents a greater hurdle for employers to overcome than the reasonableness test. Indeed, a restraint that is reasonable in terms of time and territory will still not be enforceable if the employer is unable to establish a legitimate business interest. The court in Steam Sales Corp. further emphasized that “[d]oing away with the legitimate business interest test would not relieve an employer of demonstrating a protectable interest; it would simply allow for a more contextual approach dependent on the particular facts and circumstances of the case. Therefore, to the extent that Sunbelt can be interpreted to require analysis of only the time and territory aspects of a restraint, we note that the reasonableness of time and territory should still be evaluatedin relation to a protectable interest.”
Although Illinois courts are in a state of confusion over what test should apply in determining the enforceability of restrictive covenants, recent decisions suggest that they are leaning toward a rejection of Sunbelt in favor of the legitimate business interest test. Accordingly, employers seeking to enforce a restrictive covenant should be prepared to establish a near-permanent relationship or the attainment of confidential information by the former employee.
The attorneys at Weiss Attorneys at Law have the knowledge and extensive experience advising both employees and employers on the drafting, construction and enforceability of non-competition and other restrictive agreements. Our attorneys are also prepared to represent our clients either in court or in arbitration or at mediation should an employment dispute arise. To learn more on how we can assist you, please contact the employment law attorneys at Weiss Attorneys at Law at 314-588-9500 or at law@weissandassoc.com.
