The Journal of The DuPage County Bar Association

Back Issues > Vol. 22 (2009-10)

Fourth District’s “Lack of Interest” Makes Non-Competition Agreements Easier to Enforce
By Alexis Costello

America purports to be the land of opportunity, where workers are free to move about the workforce as they desire in order to seize opportunities that offer bigger and better positions. Unfortunately for some contract employees, mobility in the workforce may not be so easy, and the difficulty likely stems from a provision in the employment contract that the employee signed at the start of his job. In the flurry of overwhelming paperwork and information that is placed before the employee, he or she may not fully realize the consequences of "signing by the x," until he eventually leaves that job for a new one. If the new job is in a similar line of work or in a similar location to his previous employment, the employee may find himself a defendant in a lawsuit for a breach of contract claim brought by the former employer whose contract with the employee included a non-competition agreement. Many employment contracts include a non-competition agreement in which the employer limits where the employee can work once he is no longer employed by that employer. Luckily for employers, and quite the opposite for employees, Illinois courts uphold such agreements as long as they are reasonable and are not used solely to eliminate competition.1

For over thirty years, the district courts of Illinois have tested the validity of non-competition agreements by determining whether the agreement is necessary to protect a legitimate business interest of the employer.2 In Sunbelt Rentals v. Ehlers, a recent decision by the fourth district, the legitimate business interest test was rejected.3 This article will argue that the Fourth District’s decision was erroneous, and should not be followed by the other Illinois courts outside of the Fourth District.

The decision in Sunbelt changed the focus of the analysis in reviewing non-competition agreements, and essentially abolished the detailed approach that had been used by all of the Illinois district courts to look for one of the two recognized legitimate business interests, a near permanent relationship or confidential information that requires protection.4 In Sunbelt, the employee, Neil Ehlers, III, was employed as a sales representative with Sunbelt from 2003 until 2009.5 In his capacity as a sales representative, Ehlers was responsible for developing and maintaining a customer base, and was also involved in all aspects of the client relationship such as negotiations and billing.6 When Ehlers left the company to take a position with one of Sunbelt’s competitors, Midwest Aerials and Equipment, Inc., Sunbelt filed suit seeking a preliminary injunction alleging that Ehlers breached his post-employment agreement with Sunbelt—an agreement he signed when he commenced his employment with the company.7 The post-employment agreement contained provisions that prohibited Ehlers from soliciting Sunbelt’s customers, competing with Sunbelt by working in the same or a similar business, or working for, or owning, a competing business for a period of one year after his departure from Sunbelt and within fifty miles of any Sunbelt store where he had worked.8 In upholding the circuit court’s finding that the agreement was enforceable because the time-and-territory terms of the agreement were reasonable, the district court rejected the widely recognized legitimate business interest test.9

Prior to Sunbelt, the appellate courts in Illinois applied the legitimate business interest test to ensure that the purpose of a non-competition agreement was not simply the employer’s way of preventing competition.10 Generally, the courts look with disfavor upon covenants not to compete because the agreements act as a restraint on trade, and consequently are viewed as a violation of public policy.11 In Illinois, however, certain interests of the employer are deemed protectable; therefore, if the agreement to protect those interests is reasonable, the non-competition agreement will likely be upheld.12 Nevertheless, when the agreements are challenged, they are analyzed with careful scrutiny to determine their validity.13

For the last three decades, the validity of such agreements has been determined by asking the question, is there a legitimate business interest that the employer is seeking to protect?14 Typically, a legitimate business interest can be found in one of two situations.15 The first is if the employer has a near permanent relationship with its customers such that the employee would not have had contact with the customers but for working for the employer.16 The second situation is when the employee acquired, and subsequently attempted to use for his own benefit, information through his employment that was deemed confidential.17

In order to find a near permanent relationship, the courts often employ one of two tests. The first test analyzes a number of factors.18 Those factors include the length of time and amount of money required to acquire the clients, how difficult it was for the employer to obtain the clients, the amount of personal contact the employee had with the customer, the extent of the employer’s knowledge of its clients, how long the customer has been associated with the employer, and the continuity of employer-customer relationships.19 The second test used is the "nature of the business test."20 Under this test, those engaged in providing professional services or selling unique products will have an easier time establishing a near permanent relationship;21 whereas such a relationship is often absent from businesses engaged in sales.22 Based on these factors, accountants23 and employers who sell their customers a unique product have been able to establish a near permanent relationship with their customers.24 However, employers who operate hair salons25 and those in office support positions have been unable to establish a near permanent relationship.26

If the information sought to be kept confidential rises to the level of a trade secret, it will likely be protected as a legitimate business interest.27 The factors considered in establishing a trade secret include the extent to which the information is known outside of the employer’s business, and to what extent the employees have access to that information, the value of the information to the employer and its competitors, the amount of money and time spent developing the information, and the ease or difficulty with which the information could be properly acquired or duplicated by others.28 Therefore, a customer list is not a protectable interest if the information can be easily obtained in a telephone directory or otherwise readily available to competitors through normal competitive means.29

The Fourth District’s decision is somewhat troubling because it overlooks the recognized importance of the legitimate business interest test. Although the court in Sunbelt points out that the Illinois Supreme Court has never expressly accepted the legitimate business interest test,30 what the Fourth District failed to also recognize is that the Illinois Supreme Court has never expressly rejected the test. In fact, most of the restrictive covenant cases involving non-competition agreements in employment contracts that have been decided by the Supreme Court have been in context of the medical profession.31 In many of those cases, the court indicated that there is a presumption that the profession is a legitimate business interest requiring protection.32 Consequently, there is no need to establish a near permanent relationship, nor is there a need to analyze whether there is confidential information involved. The medical profession has an inherent near-permanent relationship with clients,33 such that the professional’s medical practices is a protectible business interest.34 Thus, only the time and territory restrictions must be assessed for reasonableness.35

Unlike cases involving professional services, in cases where the employers are engaged in the business of sales, "a near-permanent relationship with customers is generally absent" because the products are not necessarily unique and the customers often use a variety of suppliers to meet their needs.36 Often times, employers whose business is sales will not be able to meet the requirements to establish a near permanent relationship, and thus, the only way to uphold non-competition agreements in this context may be to determine whether a legitimate business interest can be found in the realm of trade secrets.37

The Sunbelt court stated that in Mohanty v. St. John Heart Clinic the Illinois Supreme Court "made no mention" of the test, and based on that, the fourth district believed that the Supreme Court thereby implicitly rejected the test. 38 A further analysis of the Mohanty decision, however, suggests that the court recognized the already stated presumption that physicians have a legitimate business interest that needs to be protected, namely their practice; therefore, if the time and territory restrictions are reasonable, the agreement will likely be upheld.39 Thus, because the Mohanty case involved a professional service, there was no need to employ the additional factors of the legitimate business interest test.40 Consequently, in situations where professional services are not involved, for example, the Sunbelt case, the initial inquiry to determine exactly what the employer is seeking to protect should first be conducted.

Further, it is important not to simply assume that analyzing the time and territory restrictions will be sufficient to uphold the non-competition agreement. There is no set formula to determine what constitutes a reasonable time or a reasonable territory restriction because the facts of each individual case heavily determine the reasonableness of these two factors.41 Thus, in some cases a three year restriction is permissible,42 while other times only a one year restriction is allowed.43 Additionally, there may be cases in which a twenty mile territorial restriction is seen as reasonable,44 and other times when an unlimited territory restraint is acceptable.45 Thus, the legitimate business interest test instills an objective set of criteria that can be applied to all cases that must decide the legitimacy of an agreement not to compete before then deciding whether the subjective time and territory restrictions are reasonable.

Although there has not been an outright acceptance of the legitimate business interest test by the Illinois Supreme Court, the court’s decisions in this area indicate that only after a legitimate business interest has been established should the analysis turn to the reasonableness of the time and territory restrictions.46 In House of Vision, Inc. v. Hiyane, the Illinois Supreme Court used language implicitly recognizing that employers have certain interests that deserve protection.47 In House of Vision, the employee, Hiyane, allegedly violated a covenant not to compete when he left his job as a contact lens fitter with the plaintiff in order to work for a competitor of the plaintiff at a location 150 feet away from the former employer’s office.48 The court noted that "where specialized knowledge, such as secret processes . . . are involved, restraints may protect against the competition resulting from disclosure or appropriation."49 This language is strikingly similar to what has become the test for determining whether or not a trade secret exists. The court then continued by saying that in the case before it, "the interest to be protected was the interest of the plaintiff in its customers."50 The court went on to find that the contact that the employee had with the customers was of an "intimate and highly personal character . . . [he] was the principal, if not the only point of contact between the plaintiff and its customers."51 Therefore, a near-permanent relationship with the customers was the interest that the employer sought to protect; however, the geographic scope of the restriction, thirty miles from any office of the employer, was far too great to protect that interest.52

Nevertheless, like the district courts have done for the last thirty years, the court first looked for and recognized a legitimate business interest, and only after the interest was established, did the court move on to determine whether the time and territory restrictions were reasonable to protect the near permanent relationship.53 Thus, the fourth district’s finding that the legitimate business interest test is inconsistent with Illinois Supreme Court’s reasoning is not necessarily accurate because as House of Vision demonstrates, the court has in fact discussed whether the employer has a business interest that must be protected.

Without finding a legitimate business interest, employers may be able to manipulate a non-competition agreement such that it looks reasonable in time and territory, yet the true purpose of the non-competition agreement may be nothing more than an attempt to avoid competition. Further, courts may lose sight of the level of scrutiny necessary to enforce these types of agreements if the objective part of the analysis is rejected and replaced with only a subjective review of the reasonableness of the time and territory restrictions. If judges deem the time and territory restrictions of a post-employment agreement too restrictive, they may simply modify the agreement without first ensuring that the employer actually has a legitimate reason for including the restriction.54

In an economy where jobs are scarce and layoffs are plenty, the decision in Sunbelt is sure to alert employees, particularly those located in the fourth district, that without the added level of scrutiny afforded by the legitimate business interest test, they may have a far more difficult time proving the unenforceability of the non-competition agreement they signed at the start of their employment. The future of the analysis of post-employment restrictive agreements remains to be seen, but ultimately, the Illinois courts, outside the Fourth District, should not follow the unclear reasoning provided by the court in Sunbelt. The courts are not so hostile to these restrictive covenants as to place an outright ban on non-competition agreements;55 however, the level of scrutiny in analyzing such restraints must remain high in order to protect employees. Consequently, the Illinois courts should continue to ensure that the employer bears the burden of "demonstrating that the full extent of the restraint is necessary for protecting its interests."56

1 See Cambridge Eng’g, Inc. v. Mercury Partners 90 BI, Inc., 378 Ill. App. 3d 437, 447, 879 N.E.2d 512, 522 (2007).

2 Baird & Warner Residential Sales, Inc. v. Mazzone, 384 Ill. App. 3d 586, 590, 893 N.E.2d 1010, 1014 (1st Dist. 2008); Lawrence & Allen, Inc. v. Cambridge Human Res. Group, 292 Ill. App. 3d 131, 139, 685 N.E.2d 434, 441 (2d Dist. 1997).

3 Sunbelt Rentals, Inc. v. Ehlers, 394 Ill. App. 3d 421, 915 N.E.2d 862 (4th Dist. 2009).

4 Hanchett Paper Co. v. Melchiorre, 341 Ill. App. 3d 345, 351, 792 N.E.2d 395, 400 (2d Dist. 2003) (stating that a legitimate interest exists when the employer can show a near permanent relationship with the customers or that the employee acquired confidential information through his employment and later tried to use it for his own benefit).

5 Sunbelt, 915 N.E.2d at 863.

6 Id.

7 Id. at 865.

8 Id. at 863-64.

9 Id. at 866.

10 Woodfield Group, Inc. v. DeLisle, 295 Ill. App. 3d 935, 938, 693 N.E.2d 464, 466 (explaining that a post-employment non-competition agreement will not be enforced if its purpose is solely to restrict competition).

11 Lifetec, Inc. v. Edwards, 377 Ill. App. 3d 260, 268, 880 N.E.2d 188, 195 (4th Dist. 2007).

12 Woodfield Group, Inc., 295 Ill. App. 3d at 938.

13 Lifetec, Inc., 377 Ill. App. 3d at 268.

14 See Hanchett Paper Co. v. Melchiorre, 341 Ill. App. 3d 345, 351, 792 N.E.2d 395, 400 (2d Dist. 2003).

15 Id.

16 Id.

17 Id.

18 Id. at 352.

19 Office Mates 5, N. Shore, Inc. v. Hazen, 234 Ill. App. 3d 557, 572, 599 N.E.2d 1072, 1082 (1st Dist. 1992).

20 Hanchett Paper Co., 341 Ill. App. 3d at 401.

21 Id.

22 See e.g., Springfield Rare Coin Galleries, Inc. v. Mileham, 250 Ill. App. 3d 922, 935, 620 N.E.2d 479, 488 (4th Dist. 1993).

23 Dam, Snell & Taveirne, Ltd. v. Verchota, 324 Ill. App. 3d 146, 152-53, 754 N.E.2d 464, 469-70 (2d Dist. 2001).

24 See Hanchett Paper Co., 341 Ill. App. 3d at 352.

25 LSBZ Inc. v. Brokis, 237 Ill. App. 3d 415, 429, 603 N.E.2d 1240, 1250 (2d Dist. 1992).

26 Office Mates 5, N. Shore, Inc., 234 Ill. App. 3d at 572-74.

27 Id. at 574.

28 Id. at 572.

29 Id. at 574-76.

30 Sunbelt, 915 N.E.2d at 867.

31 See Retina Servs., Ltd. V. Garoon, M.D., 182 Ill. App. 851, 856, 538 N.E.2d 651, 653 (1st Dist. 1989).

32 Lawrence & Allen, Inc. v. Cambridge Human Res. Group, Inc., 292 Ill. App. 3d 131, 142, 685 N.E.2d 434, 444 (2d Dist. 1997).

33 Id.

34 See Cockerill v. Wilson, 51 Ill. 2d 179, 281 N.E.2d 648 (1972).

35 See id. at 183-84.

36 Lawrence & Allen, 292 Ill. App. 3d at 142.

37 See Office Mates 5, N. Shore, Inc., 234 Ill. App. 3d at 572.

38 Sunbelt, 915 N.E.2d at 868.

39 Mohanty v. St. John Heart Clinic, S.C., 225 Ill. 2d 52, 76, 866 N.E.2d 85, 98 (2006).

40 See id. at 76.

41 LBSZ, Inc., 237 Ill. App. 3d at 425.

42 See Canfield v. Spear, 44 Ill. 2d 49, 254 N.E.2d 433 (1969).

43 See Midwest Television, Inc. v. Oloffson, 298 Ill. App. 3d 548, 699 N.E.2d 230 (3rd Dist. 1998).

44 See Cockerill, 51 Ill. 2d 179.

45 See Wolf & Co. v. Waldron, 51 Ill. App. 3d 239, 366 N.E.2d 603 (1st Dist. 1977).

46 See e.g., House of Vision, Inc. v. Hiyane, 37 Ill. 2d 32, 38, 225 N.E.2d 21, 24 (1967) (explaining that the employer had an interest that needed to be protected).

47 Id. at 37-38.

48 Id. at 33.

49 Id. at 37-38.

50 Id. at 38.

51 Id.

52 House of Vision, 37 Ill. 2d at 39.

53 See id.

54 See Arpac Corp. v. Murray, 226 Ill. App. 3d 65, 79-80, 589 N.E.2d 640, 652 (1st Dist. 1992).

55 There are some states, such as California, that place a nearly absolute ban on non-competition agreements in employment contracts. See Retirement Group v. Galante, 98 Cal. Rptr. 3d 585 (4th Dist. 2009).

56 Cambridge Eng’g, Inc. v. Mercury Partners 90 BI, Inc., 378 Ill. App. 3d 437, 447, 879 N.E.2d 512, 522 (1st Dist. 2007).

Alexis Costello is a third-year law student at Northern Illinois University. She is a Lead Articles Editor for the Northern Illinois University Law Review and is a graduate assistant in the Law Library’s Reference Department. She received a B.A. in Political Science in June of 2006 from DePaul University.

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