This is Part V, the final installment, in a series discussing the holding in Reliable Fire Equipment v. Arredondo. Please scroll down for further discussion of this case.
Over the past several days, I have discussed the impact and meaning of Reliable Fire Equipment, the most recent of three appellate cases that directly address the viability of the so-called "legitimate business interest" test under Illinois non-compete law. The case is obviously important because it portends a shift in how courts will analyze non-compete agreements. But it is far from perfect and it means that the real answers to big questions will be provided in the next covenants case to hit the appellate courts.
Today, I want to tie this up and discuss where courts in Illinois are likely to head next.
In the short term, it is clear that courts will start to discard and move away from the rigid two-part legitimate business interest test that has been used by Illinois courts to examine the validity of non-compete agreements. That test served a gatekeeper role that demanded employers establish either that the ex-employee had access to near-permanent customer relationships or attempted to use confidential information when competing. Absent a showing of one of those two interests, the court did not need to consider whether the covenant was reasonable.
After Reliable Fire Equipment, courts will be inclined to examine whether an employer had other protectable interests if it cannot establish either of these two traditional business justifications for enforcing a covenant.
In that respect, courts will need to consider the parameters of what a protectable interest is. Does it include mere "access" to confidential information, rather than an attempt to use it? Similarly, can true sales-oriented businesses rely on covenants or will courts continue to find that those businesses by definition have more fleeting, tenuous relationships that cannot be restrained?
What about goodwill, unique services and special training? In many states, these are recognized as protectable employer interests. Courts in Illinois have had little to say about them. For high-level executives, these interests alone could support a non-compete regardless of whether the executive attempts to use confidential information to compete.
A couple of other related questions loom. How will courts examine non-solicitation agreements? Do the same protectable interests apply to both? Since they are less restrictive and more readily enforced, will courts be more lenient in finding the presence of a legitimate employer interest? Again, courts in Illinois have mixed the two analyses up on many occasions and have not reached consistent results.
Eventually, though, courts will need to formulate an actual, usable test. Illinois has cobbled it together over time, and even the most recent cases are not exactly clear on what an employer must show to demonstrate enforceability.
There is plenty of good law to draw upon. Assuming courts in Illinois will require an employer to demonstrate some protectable interest, then a model for courts to consider will be the old balancing test used in Iowa and other states.
That test requires a showing that: (a) the covenant is no more extensive than reasonably necessary to protect the employer's business interest; (b) the covenant does not impose an undue hardship on the employee; and (c) the covenant does not prejudice the public interest.
Importantly, the concept of "reasonableness" fits within both categories (a) and (b). Because it is not overly formulaic, a court could still uphold a covenant that is broader in scope but narrower in time. The way the current law reads, an employee could make a good faith argument that a covenant must be reasonable in each of time, territory and scope. A more robust, big-picture analysis seems more logical.
This test also links the notion of reasonableness and a protectable interest. As I wrote when assessing Sunbelt Rentals and Steam Sales, the two concepts are completely interrelated. It makes no sense to analyze whether a covenant is reasonable without assessing what it is the employer is seeking to protect.
All of these questions need to get answered by the Supreme Court, which has been less than helpful in clarifying the law of restrictive covenants. There is an upside to all the recent confusion in the Illinois cases. The Supreme Court may have no choice but to step in and provide answers to these and other important questions.