Saturday, December 11, 2010

Part II: Application of the Legitimate Business Interest Test in Reliable Fire Equipment

This is Part II in a series discussing the recent holding in Reliable Fire Equipment v. Arredondo. Please scroll down for further discussion of this case.

In Reliable Fire Equipment v. Arredondo, the Appellate Court found that the legitimate business interest test had to be applied to determine whether the non-compete agreement was enforceable. Though my prior post noted that the Appellate Court seemed to back away from a rigid two-factor test, it went ahead and applied the same historical test courts previously have used in Illinois. In that respect, the court analyzed whether Reliable Fire Equipment could show the presence of confidential information or near-permanent customer relationships that would allow it to enforce the non-compete.

The discussion on confidential information was fairly brief, and the Appellate Court accepted the trial court's conclusion that much of the relevant data available to the ex-employees - customer lists and pricing information - was easily findable and within the public domain. The Appellate Court was not willing to reverse this conclusion under an exacting standard of review.

The Appellate Court's discussion of customer relationships was more extensive. The court approved the two alternate tests courts have used to determine whether an employer has a legitimate interest in protecting its customer base. It discussed the "seven-factor" approach and the "nature of the business" test. Concluding that Reliable Fire Equipment's business was a sales-driven business, typified by common sales techniques and cross-purchasing by customers, the Appellate Court found that in such a circumstance a "near-permanent" relationship is generally absent. In the court's view, there continues to be a rather significant distinction between a professional services business (such as accounting, consulting, medical practice) and a sales-driven business.

Having concluded that, the court went on to discuss the seven-factor test, which applies various indicators to determine whether a true sales business still can have near-permanent relationships with its customers. The Appellate Court applied those factors and found the trial court's conclusion that Reliable Fire Equipment did not satisfy the test was not erroneous.

In particular, the court noted that buyers of fire alarm systems typically placed a project for bid and accepted the lowest quote. The court also noted that the sales staff had to supply their own computers and cell phones and had a limited entertainment budget. The court further stated that customers were well-known and could be located through access to public directories. Finally, the court determined that the business' relationship with customers was at-will and not exclusive.

The last point the Appellate Court made concerned the reasonableness of the employees' agreements with Reliable Fire Equipment. In particular, the court expressed concern as to the broad scope of the covenant, determining that the restriction prohibiting the employees from working with all customers of their ex-employer was too broad. Under Illinois law, the restriction really should extend to those customers with whom the employee developed a business relationship.

On Monday, I will discuss Justice Hudson's concurring opinion.

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