Tuesday, December 14, 2010

Part IV: The Dissenting Opinion in Reliable Fire Equipment v. Arredondo

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

From my vantage point, Justice O'Malley's dissenting opinion in Reliable Fire Equipment is notable in three respects.

First, he articulates that based on the concurring opinion, his dissent and the most recent holdings in other Illinois appellate cases, courts have abandoned the "legitimate business interest" test as it was previously formulated. He argues that because two of the three justices (and perhaps all three) agree that the categorical rule cannot stand, that the legitimate business interest test is no longer the law in Illinois until the Supreme Court steps in. I agree with this. It is clear the test is not really viable any longer, and attorneys should be prepared to analyze an employer's protectable interest in light of each case's facts.

Second, despite his clarification of the current status of what is not the test, he doesn't do much to articulate a usable test. He suggests in sort of a meandering way that the totality of the circumstances must be considered to determine whether there is a legitimate employer interest that would uphold a non-compete clause. But he uses muddled (and loaded) terms like "unfair competition", and "fiercer than ordinary", without really describing the significance of them. The closest he comes to articulating a test is very early on in his opinion by stating that the totality of the circumstances test requires a court to first determine whether a protectable interest is present, followed by an analysis of whether a covenant is reasonable in time, territory and scope of activity. It is unclear why he is equating "protectable interest" with terms like "fiercer than ordinary" competition or "unfair competition." In fact, it's possible he is not equating them at all.

(I am at a complete loss, though, why courts refuse to adopt a clear test like the one Iowa courts use. That three-part test, long advocated by influential scholars, provides that employment non-compete arrangements will be sustained if: (a) they are no more restrictive than reasonably necessary to protect an employer's business interest; (b) they do not impose an undue hardship on the employee; and (c) they are not prejudicial to the public interest. More on this tomorrow.)

Third, he suggests that appellate courts have misapplied the law by holding, as a general rule, that a non-solicitation covenant cannot be enforced it if prohibits a former employee from working with customers that he or she never had contact with while working for the original employer. There is some merit to this. After all, how could a non-compete ever be valid if this were true? By definition, a prohibition on competing means that an employee won't be able to work with any customer in a competing business, whether that customer was one of his former employer's or not. I am not sure his analysis and conclusion on this point are particularly well-developed, for Illinois courts have applied this rule only to customer non-solicitation provisions. I think courts will have to analyze this further, but Justice O'Malley's opinion points out a rather obvious flaw that has been ignored for years.

The dissenting opinion certainly provides some clarity for attorneys, but it does more to highlight what may be on the horizon. Next, I will discuss some longer term implications for Illinois courts following Reliable Fire Equipment.

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