cases, commentary and news related to restrictive covenants
Wednesday, October 13, 2010
An Illinois Court Finally Address Sunbelt Rentals (Steam Sales v. Summers)
It took a while...but we finally have a follow-up to the important Sunbelt Rentals case that the Appellate Court of Illinois issued in 2009. As readers may recall, that decision by the Fourth District held that employers need not demonstrate that a restrictive covenant be supported by a "legitimate business interest". Rather, the employer only needed to establish the reasonableness of the covenant in terms of time, territory and scope.
In the intervening months, commentators - including this one - had a lot to say about Sunbelt Rentals, but few courts even addressed the decision. The few that did were federal district court opinions that dealt with Sunbelt Rentals in an oblique way - acknowledging its existence, but treating it as an interesting anomaly.
My take on Sunbelt Rentals was, I think, fairly reasonable. I indicated that I was not sure how a court could assess the "reasonableness" of a non-compete restriction without identifying what it is the employer sought to protect - that is, the so-called "legitimate business interest." Here is a fragment of what I wrote when Sunbelt Rentals was decided:
"It's hard to see, though, how a court can determine whether a covenant is "no greater than is necessary for its protection" without analyzing what business interest it seeks to protect in the first place. The legitimate business interest test fills that vacuum and allows a court to fashion an appropriate restraint, or strike one entirely if the employer can't articulate the need for a restriction."
In that sense, I thought Sunbelt Rentals was interesting and somewhat well-reasoned - I still do - but perhaps a bit narrow and incomplete. I was looking for some acknowledgment that a court can't entirely divorce the reason for the covenant from its terms.
The Second District case of Steam Sales Corp. v. Summers discusses Sunbelt Rentals but is careful not to adopt or reject the rationale of that case. It leaves us wanting a bit more clarification, but the gist of what the Second District held is right in line with the issue I noted after Sunbelt Rentals came out.
Steam Sales acknowledges a tension that exists in that if an employer does not satisfy Illinois' wounded "legitimate business interest" test by showing that the covenant protects either near-permanent customer relationships or confidential business information, then the employer cannot enforce a perfectly drafted covenant. To try and resolve the tension, Steam Sales states that the "reasonableness of time and territory should still be evaluated in relation to a protectable interest." Note the court did not use the term "legitimate business interest", but rather a broader term - "protectable interest." The court does not adopt or reject Sunbelt Rentals, but it tries to build upon its strengths and correct its limitations.
The court does not come out and say what I would like it to - that there are other protectable interests out there (think goodwill and special training for starters) which can support a covenant. But it comes quite close and certainly hints at it. By suggesting that reasonableness must be examined in light of what it is the employer is trying to protect, the court seems open to a more modern, malleable definition of "protectable interest" that can fit the facts of a particular covenant case.
In my opinion, courts here are ready to dispatch the legitimate business interest test that was created out of whole cloth by the appellate courts and just adopted wholesale throughout the state for decades. I think it is almost inevitable that courts build upon Steam Sales and hold that reasonableness must be examined in light of an asserted protectable interest. That there is no particular limitation on what that means seems inevitable.
Court: Appellate Court of Illinois, Second District
Opinion Date: 10/4/10
Cite: Steam Sales Corp. v. Summers, 405 Ill. App. 3d 442 (1st Dist. 2010)
Subscribe to: Post Comments (Atom)
Post a Comment