Friday, December 10, 2010

Part I: The Majority's Holding in Reliable Fire Equipment

This is Part I in a series discussing the recent case of Reliable Fire Equipment v. Arredondo. Please scroll down for my initial post concerning this case.

What is most notable about the majority opinion in Reliable Fire Equipment v. Arredondo is its length and depth of analysis. Keep in mind the backstory, here. Illinois Appellate Courts, for years, have failed to examine the precedents of the Supreme Court of Illinois when examining covenants not to compete.

This may sound unusual, and it its, but pick a random, garden-variety covenants case from the last 30 years and any citation to any Supreme Court precedent will be extremely difficult to find.

Lawyers have known this for quite sometime, that the two appellate branches of our courts seem to treat the other as if it does not exist. Because the Supreme Court has taken so few covenants cases - and almost no true employee cases - it was just assumed that you would cite to the appellate courts and nothing else.

That changed a few years ago when Justice Steigmann of the Fourth District had his ear bent by a well-known Chicago lawyer and began looking into historical precedent more carefully. He eventually unwound the legitimate business interest test in Sunbelt Rentals v. Ehlers, a case that focused the analysis of non-compete agreements on whether the time, territory and scope of the covenant was reasonable. Put another way, the gloss of whether a covenant supported a "legitimate business interest" was stripped away as being inconsistent with years of Supreme Court precedent. Justice Steigmann traced the Court history and commented that the interest test was created by Appellate Courts out of whole cloth.

After Sunbelt Rentals was decided, I noted that Justice Steigmann's holding was a bit incomplete because it failed to address one critical case, House of Vision v. Hiyane. In particular, House of Vision discussed an employer's interest in protecting customer relationships. While it is true the Court did not formulate the legitimate business interest test as the Appellate Courts have since classified it, it clearly recognized that reasonableness was not to be viewed in a "scope, time and territory" vacuum.

Reliable Fire Equipment takes much the same approach. After a careful analysis of the Supreme Court's prior cases - including a critical and extended discussion of House of Vision - the Appellate Court concluded that it was essential for the promisee (i.e., the employer or one receiving the benefit of the covenant) to demonstrate an interest worthy of protection.

Here's where the court's holding becomes more interesting and esoteric. It seems to portend a clear departure from what attorneys have always believed to be a two-part inquiry into what actually constitutes a "legitimate business interest." As readers of this blog know, in Illinois courts have recognized the following as protectable employer interests:

(1) "near-permanent" customer relationships the employee would not have had but for his or her relationship with the employer; and

(2) access to, and an attempt to use, confidential information or trade secrets of the employer.

The court is somewhat vague on whether the legitimate business interest test is so limited, obliquely saying that the test "need not be inflexible if broadly construed." I'm not sure what this means. Later, the court stated that "[o]ther criteria may exist that warrant protection under the law beyond those enumerated in the two traditional prongs of the...test."

More on this when I discuss the impact of Reliable Fire Equipment, but it is fair to say for now that lawyers have some room to argue that other interests worthy of protection - special training, unique services - may support a non-compete agreement.

On Monday, I'll discuss the application of the legitimate business interest test to the facts of Reliable Fire Equipment.

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