Justia.com Opinion Summary: Plaintiff sells, installs, and services fire extinguishers and fire suppression and fire alarm systems, which it designs for commercial customers. Defendant Garcia, hired as a systems technician in 1992, became a sales person. In 1997 he signed a noncompetition agreement. Defendant Arredondo, a salesperson, signed a noncompetition agreement about a week after being hired in 1998. The agreement prohibited competition during their employment and for one year after termination in Illinois, Indiana, or Wisconsin and prohibited solicitation of plaintiff's customers, referral sources, and employees. In 2004 defendants formed a competing company; Arredondo resigned, Garcia was fired. The trial court found the covenants unenforceable and a divided appellate court affirmed. The Illinois Supreme Court remanded. Assessment of a covenant includes analysis of the employer's legitimate business interest, based on the totality of the circumstances.Factors include, but are not limited to, the near-permanence of customer relationships, the employee’s acquisition of confidential information through his employment, and time and place restrictions. No factor carries any more weight than any other,
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2011 IL 111871
IN THE
SUPREME COURT
OF
THE STATE OF ILLINOIS
(Docket No. 111871)
RELIABLE FIRE EQUIPMENT COMPANY, Appellant, v.
ARNOLD ARREDONDO et al., Appellees.
Opinion filed December 1, 2011.
JUSTICE FREEMAN delivered the judgment of the court, with
opinion.
Chief Justice Kilbride and Justices Thomas, Garman, Karmeier,
Burke, and Theis concurred in the judgment and opinion.
OPINION
¶1
Plaintiff, Reliable Fire Equipment Company (Reliable), filed a
complaint in the circuit court of Du Page County against defendants
Arnold Arredondo, Rene Garcia, and High Rise Security Systems,
LLC (High Rise). Reliable claimed, inter alia, a breach of a
noncompetition restrictive covenant. At the close of a bench trial on
this claim, the circuit court ruled that the covenant was unenforceable.
A divided panel of the appellate court upheld the circuit court’s order.
405 Ill. App. 3d 708. We allowed Reliable’s petition for leave to
appeal. Ill. S. Ct. R. 315 (eff. Feb. 26, 2010). We now reverse the
judgment of the appellate court and the order of the circuit court, and
remand the cause to the circuit court for further proceedings.
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I. BACKGROUND
Founded in 1955, Reliable sells, installs, and services portable fire
extinguishers and a variety of fire suppression and fire alarm systems.
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Reliable designs or engineers the systems to fit the needs of
industrial, commercial, and retail businesses; hospitals and schools;
and all manner of nonresidential buildings. Reliable has
approximately 100 employees, including salespersons, installers, and
service technicians. Reliable does the majority of its business in the
Chicago metropolitan area, northern Indiana, and southern Wisconsin.
In April 1992, Reliable hired Garcia as a systems technician and,
approximately one year later, offered Garcia a sales position, which
he accepted. Sometime in 1997, Reliable required all employees to
sign noncompetition restrictive covenants. In November 1997 Garcia
signed his noncompetition agreement. In November 1998, Reliable
hired Arredondo as a salesperson. Approximately one week later,
Arredondo signed his noncompetition agreement. In their agreements,
Arredondo and Garcia each promised, inter alia, not to compete with
Reliable during their employment and for one year after their
termination from employment in Illinois, Indiana, or Wisconsin.
Arredondo and Garcia further promised not to solicit any sales or
referrals from Reliable customers or referral sources, or to solicit
Reliable employees to leave their employment with Reliable.
High Rise’s stated purpose was to supply engineered fire alarm
and related auxiliary systems throughout the Chicago metropolitan
area. In March 2004, Arredondo was seeking financing for High Rise.
In April 2004, High Rise was formed as a limited liability
corporation. High Rise’s managers included Arredondo and Garcia.
On August 17, 2004, they signed an operating agreement for High
Rise.
In August 2004, Ernest Horvath, Reliable’s founder and chairman
of the board, became concerned that Arredondo and Garcia were
planning to compete with Reliable. He asked them and another
employee whether they were going to start their own business, and
each denied it. On September 1, 2004, Arredondo resigned from
Reliable effective September 15. On October 1, 2004, Reliable fired
Garcia on suspicion of competition.
In December 2004, Reliable filed its original, multiple-count
complaint against defendants. In count III of its second amended
complaint, Reliable alleged as follows. The company had entered into
valid and enforceable employment agreements with Arredondo and
Garcia. In violation of the restrictive covenants contained therein,
Arredondo and Garcia engaged in sales activities and provided
services to Reliable customers, and solicited referrals from Reliable’s
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referral sources. Also, Arredondo and Garcia solicited several named
Reliable employees to leave their employment with Reliable. As a
result of their breach of contract, Reliable alleged damages in excess
of $400,000.
Defendants filed a first amended counterclaim that sought, inter
alia, a declaration that the restrictive covenants were unenforceable.
In November 2007, the circuit court held a bench trial on defendants’
declaratory judgment action. At the close of the evidence, the court
ruled that the restrictive covenants were unenforceable. The court
concluded that Reliable failed to prove the existence of a legitimate
business interest that justified enforcement of the covenants.1
A sharply divided panel of the appellate court affirmed. 405 Ill.
App. 3d 708. The lead opinion upheld the circuit court’s conclusion
that Reliable did not have a legitimate business interest that justified
the enforcement of the restrictive covenants. 405 Ill. App. 3d at 74348. The special concurrence agreed that the circuit court’s conclusion
should be upheld, but disagreed with the reasoning of the lead
opinion. 405 Ill. App. 3d at 748 (Hudson, J., specially concurring).
The dissent agreed with the reasoning of the special concurrence and,
based thereon, would reverse and remand for further proceedings. 405
Ill. App. 3d at 753, 759 (O’Malley, J., dissenting). Reliable now
appeals.
II. ANALYSIS
A. Standard of Review
Initially, Reliable observes that Illinois courts have described
different standards of review in restrictive covenant cases. It is
traditionally stated that the enforceability of a restrictive covenant is
a question of law, the determination of which is reviewed de novo
(Mohanty v. St. John Heart Clinic, S.C., 225 Ill. 2d 52, 63 (2006)),
based on the facts in each particular case. See Tarr v. Stearman, 264
Ill. 110, 118-19 (1914); Lanzit v. J.W. Sefton Manufacturing Co., 184
Ill. 326, 330 (1900). In the case at bar, the circuit court held a bench
trial to determine the enforceability of the postemployment restrictive
1
The circuit court conducted a jury trial on Reliable’s remaining
claims. At the close of Reliable’s case in chief, the court granted
defendants’ motion for a directed verdict, and defendants voluntarily
dismissed their counterclaim.
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covenant. Generally, the standard of review in a bench trial is whether
the order or judgment is against the manifest weight of the evidence.
Eychaner v. Gross, 202 Ill. 2d 228, 251 (2002); Kalata v. AnheuserBusch Cos., 144 Ill. 2d 425, 433 (1991).
However, the case at bar calls for only one standard of review.
The issue presented for review is not whether the circuit court’s order
is supported by sufficient evidence, thereby necessitating the manifest
weight of the evidence standard with its attendant deference. See
Schulenburg v. Signatrol, Inc., 37 Ill. 2d 352, 356 (1967). Rather, the
issue here is whether the circuit court applied the correct legal test to
the evidence presented. This is a question of law which is reviewed
de novo. In re A.H., 207 Ill. 2d 590, 593 (2003).
B. The Three Basic Components of Reasonableness
Two panels of our appellate court have questioned whether
Illinois recognizes the legitimate business interest of the promisee as
a requirement of an enforceable restrictive covenant. We now take the
opportunity to correct this misconception.
This court long ago explained that a contract in total and general
restraint of trade was “undoubtedly” void because it “necessarily”
injures the public at large and the individual promisor. Such a
contract deprives the public of the industry of the promisor, and
deprives the promisor of the opportunity to pursue an occupation and
thereby support his or her family. Hursen v. Gavin, 162 Ill. 377, 37980 (1896). However, it is equally established that a restrictive
covenant will be upheld if it contains a reasonable restraint and the
agreement is supported by consideration. Storer v. Brock, 351 Ill. 643,
647 (1933) (collecting cases); accord 6 Richard A. Lord, Williston on
Contracts § 13:1, at 7-11 (4th ed. 2009); Restatement (Second) of
Contracts § 186 & cmt. a (1981).
“The modern, prevailing common-law standard of reasonableness
for employee agreements not to compete applies a three-pronged
test.” BDO Seidman v. Hirshberg, 712 N.E.2d 1220, 1223 (N.Y.
1999). A restrictive covenant, assuming it is ancillary to a valid
employment relationship, is reasonable only if the covenant: (1) is no
greater than is required for the protection of a legitimate business
interest of the employer-promisee; (2) does not impose undue
hardship on the employee-promisor, and (3) is not injurious to the
public. Id.; Restatement (Second) of Contracts § 187 cmt. b, § 188(1)
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& cmts. a, b, c (1981).2 Further, the extent of the employer’s
legitimate business interest may be limited by type of activity,
geographical area, and time. Restatement (Second) of Contracts § 188
cmt. d (1981). This court long ago established the three-dimensional
rule of reason in Illinois and has repeatedly acknowledged the
requirement of the promisee’s legitimate business interest down to the
present day.
In Hursen v. Gavin, 162 Ill. 377 (1896), after reciting the general
principle that contracts in total and general restraint of trade are void
as against public policy, this court stated:
“But a contract, which is only in partial restraint of trade,
is valid, provided it is reasonable and has a consideration to
support it. [Citations.] The restraint is reasonable, when it is
such only as to afford a fair protection to the interests of the
party, in whose favor it is imposed. If the restraint goes
beyond such fair protection, it is oppressive to the other party
and injurious to the interests of the public, and, consequently,
void upon the ground of public policy.” (Emphasis added.) Id.
at 380.
This court held that the restrictive covenant was valid, explaining:
“One element of the value of the business transferred by appellant to
appellee was the probability, that the customers of the former would
continue to trade with the latter ***. *** The limitation here did not
go beyond what was necessary for the protection of appellee in the
prosecution of the business purchased by him, and was, therefore,
reasonable.” Id. at 382. In Hursen, as in a prior case, Linn v. Sigsbee,
67 Ill. 75 (1873), this court applied what came to be the
Restatement’s three-component test of reasonableness: given that the
restrictive covenant was ancillary to the sale of the business, (1) the
restraint was necessary to protect the legitimate interest of the
promisee; (2) the restraint did not impose a hardship on the promisor
or the public; and (3) the extent or scope of the restraint was
otherwise reasonable.
In Bauer v. Sawyer, 8 Ill. 2d 351 (1956), several physicians were
members of a Kankakee medical partnership. The partnership
2
Since ancillarity is required, one may describe the test of
reasonableness as having four elements, expressly listing ancillarity,
instead of three elements, which assumes ancillarity. See 15 Grace McLane
Giesel, Corbin on Contracts § 80.6, at 69 (rev. ed. 2003).
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agreement provided in pertinent part that if a member withdrew or
terminated association with the partnership, that person would not
practice medicine within a 25-mile radius of Kankakee for five years.
Id. at 353-54. This court held that an injunction should issue against
a physician who left the partnership. This court recited the general
principles that were well established by that time: “In determining
whether a restraint is reasonable it is necessary to consider whether
enforcement will [1] be injurious to the public or [2] cause undue
hardship to the promisor, and [3] whether the restraint imposed is
greater than is necessary to protect the promisee. [Citations.]” Id. at
355. In addition, the time and territory limitations must be reasonable.
Id. This court considered each of the three recognized elements of
reasonableness. In so doing, the court carefully and specifically
examined the interest of the partnership-promisee. The court agreed
with the principle that members of a partnership have a legitimate
business interest in protecting themselves against the competition of
an outgoing partner, and that a restrictive covenant to that effect is not
opposed to public policy. Id. at 356-57 (collecting authorities).
In House of Vision, Inc. v. Hiyane, 37 Ill. 2d 32 (1967), an
employer brought an action to enforce an employee’s covenant not to
compete. This court began its analysis of the restrictive covenant by
discussing the employer’s legitimate business interest: “Here the
interest to be protected was the interest of the plaintiff in its
customers.” (Emphasis added.) Id. at 37-38. Only after this court
articulated the employer’s legitimate business interest did it consider
the reasonableness of the time and territory limitations, or the lack
thereof. Id. at 38-39.
In Cockerill v. Wilson, 51 Ill. 2d 179 (1972), the narrow issue
presented was whether the time and territory limitations of the
restrictive covenant were greater than necessary to protect the
plaintiff. Id. at 183. This court began its analysis of the provision by
reciting the three components of reasonableness: injury to the public;
undue hardship on the promisor; and the need for the protection of the
limitation by the promisee. This court recognized that “the interest
plaintiff sought to protect by the covenant was his interest in his
clients.” Id. at 184.
In Mohanty v. St. John Heart Clinic, S.C., 225 Ill. 2d 52 (2006),
plaintiff-physicians sought a declaratory judgment that the restrictive
covenants in their employment agreements were void. Defendants,
the employer-clinic and its owner, counterclaimed for declaratory,
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injunctive, and other relief. The circuit court concluded that the
geographic restriction was reasonable, but that the activity
restriction–the practice of medicine–was greater than necessary to
protect the defendants’ interests, which was cardiology. The appellate
court reversed, concluding that the activity restriction, within the
narrowly drawn geographic limits, would not cause undue hardship
and was not greater than necessary to protect the defendants’
interests. Id. at 61-62.
Before this court, plaintiffs contended, inter alia, that their
restrictive covenants were unreasonably overbroad in their time and
activity restrictions. Id. at 75. In upholding the restrictive covenants,
this court expressly repeated the three established components of
reasonableness:
“[T]his court has a long tradition of upholding covenants not
to compete in employment contracts involving the
performance of professional services when the limitations as
to time and territory are not unreasonable. [Citations.] In
determining whether a restraint is reasonable it is necessary to
consider whether enforcement will be injurious to the public
or cause undue hardship to the promisor, and whether the
restraint imposed is greater than is necessary to protect the
promisee. [Citation.]” (Internal quotation marks omitted.)
(Emphasis added.) Id. at 76.
In upholding the restrictive covenant, this court stated: “Thus, we find
that the restraint on the practice of medicine, here, was not greater
than necessary to protect the defendants’ interests. This is
particularly so because the restriction on plaintiffs is in effect only
within a narrowly circumscribed area of a large metropolitan area.”
(Emphasis added.) Id. at 77.
This discussion shows that this court, from as far back as Linn
and Hursen, through cases such as Bauer and House of Vision, and
down to the present day in Mohanty, has repeatedly recognized the
three-dimensional rule of reason, specifically including the element
of the legitimate business interest of the promisee. However, in
Sunbelt Rentals, Inc. v. Ehlers, 394 Ill. App. 3d 421 (2009), a panel
of our appellate court concluded that the test of reasonableness of a
restrictive covenant is something other than the prevalent three-prong
inquiry long established by this court.
In Sunbelt, Ehlers was a sales representative for Sunbelt. He had
entered into an employment agreement containing a restrictive
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covenant providing that he would not compete with Sunbelt within a
50-mile radius of any of Sunbelt’s stores for one year after the date of
the expiration or termination of his employment. Ehlers resigned from
Sunbelt and, within the one-year restriction, accepted a position with
one of Sunbelt’s competitors. Sunbelt sued Ehlers and his new
employer, seeking injunctive relief. Sunbelt, 394 Ill. App. 3d at 42325.
The circuit court enforced the restrictive covenant, finding that the
time and territory limitations of the restrictive covenant were
reasonable, but did not apply the legitimate business interest test as
interpreted by the appellate court. Id. at 425. The appellate court
briefly surveyed only some of the above-discussed cases from this
court and concluded: “Accordingly, because (1) the Supreme Court
of Illinois has never embraced the ‘legitimate-business-interest’ test
and (2) its application is inconsistent with the supreme court’s long
history of analysis in restrictive covenant cases, we reject the
‘legitimate-business-interest’ test.” Id. at 431. The Sunbelt court
prescribed that a court, when presented with the issue of whether a
restrictive covenant should be enforced, should evaluate its
reasonableness based only on its time and territory restrictions. “Thus,
this court need not engage in an additional discussion regarding the
application of the ‘legitimate-business-interest’ test because that test
constitutes nothing more than a judicial gloss incorrectly applied to
this area of law by the appellate court.” Id.
In the present case, while the appellate court justices disagreed
amongst themselves concerning the proper application of the
legitimate business interest component of the rule of reason, each
member of the panel rejected the conclusions of Sunbelt. 405 Ill. App.
3d at 723; Id. at 749 (Hudson, J., specially concurring); Id. at 755
(O’Malley, J., dissenting). We do likewise. Sunbelt overlooked or
misapprehended this court’s above-discussed case law that
established the three-prong inquiry into the reasonableness of
restrictive covenants. Contrary to this authority, Sunbelt “disallows
inquiry into whether the employer has an interest other than
suppression of ordinary competition.” Id. at 723 (lead op.). “Sunbelt
seems to say that the employer’s legitimate interest is whatever the
parties agree to in the contract. [Citation.] If the employer’s legitimate
interest is a matter of contract only, then the quoted language in the
above supreme court cases would be superfluous.” Id. at 733.
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Specifically, the appellate court in Sunbelt misread this court’s
Mohanty decision in support of its erroneous conclusion. The
appellate court discussed Mohanty and even quoted Mohanty’s
recitation of the three-prong rule of reason. Sunbelt, 394 Ill. App. 3d
at 430 (quoting Mohanty, 225 Ill. 2d at 76). However, the appellate
court observed that the Mohanty court did not mention the employer’s
legitimate business interest in upholding that restrictive covenant.
Therefore, the appellate court concluded that the legitimate business
interest component of the three-prong rule of reason was no longer
valid in Illinois, if it ever was. Sunbelt, 394 Ill. App. 3d at 430-31.
We emphatically disagree. Even a cursory review of Mohanty
refutes this reasoning. The plaintiff-physicians contended that the
restrictive covenants were unreasonable only because their activity
and temporal restrictions were overbroad. Mohanty, 225 Ill. 2d at 64.
They never challenged the defendant-employers’ legitimate business
interest, thereby conceding the point. Further, this court expressly
recited the legitimate interest of the promisee as a component of the
three-prong rule of reason. Indeed, Mohanty’s recognition of the
legitimate business interest of the promisee was unanimous. The
special concurrence observed that plaintiffs did not dispute that
defendants had “a clearly ascertainable right in need of protection.”
Id. at 80 (Karmeier, J., specially concurring, joined by Garman, J.).
Even the dissent recognized “the legitimate business interests that
employers such as defendants wish to protect.” Id. at 93 (Freeman, J.,
dissenting). Lastly, in upholding the restrictive covenant, this court
stated: “Thus, we find that the restraint on the practice of medicine,
here, was not greater than necessary to protect defendants’
interests.” (Emphasis added.) Id. at 77 (majority op.). Sunbelt is
hereby overruled.
Further, in Steam Sales Corp. v. Summers, 405 Ill. App. 3d 442
(2010), the appellate court propagated Sunbelt’s error: “As opposed
to the legitimate-business-interest test, Sunbelt cites the two-prong
reasonableness test appearing in Mohanty, the most recent supreme
court case addressing restrictive covenants.” Id. at 457. The court in
Steam Sales goes on to discuss “Mohanty’s reasonableness test versus
the legitimate-business-interest test.” Id. To the extent that Steam
Sales characterizes Mohanty as deviating from the above-described
general three-prong rule of reason, Steam Sales is hereby overruled.
Based on this court’s extensive precedent, we continue to recognize
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the legitimate business interest of the promisee as a long-established
component in the three-prong rule of reason.
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C. Application of Employer’s Legitimate Business Interest
Before this court, Reliable contends that the lower courts
misapplied the legitimate business interest of the promisee, as a
component of the three-prong rule of reason, in assessing the
enforceability of the noncompetition agreement. The separate
appellate court opinions in the present case debated two approaches
to applying this component. We assess these analytical schemes.
Certainly, the prevalent three-prong inquiry “fleshes out the legal
standard [of reasonableness] a bit.” Consultants & Designers, Inc. v.
Butler Service Group, Inc., 720 F.2d 1553, 1557 (11th Cir. 1983).
However, the three-prong test of reasonableness remains
“unstructured.” Reddy v. Community Health Foundation of Man, 298
S.E.2d 906, 911 (W. Va. 1982). Notably, “[p]recedents are of less
than usual value because the question of reasonableness must be
decided on an ad hoc basis. There is no inflexible formula.” (Internal
quotation marks omitted.) Consultants & Designers, Inc., 720 F.2d
at 1557; accord Ferrofluidics Corp. v. Advanced Vacuum
Components, Inc., 968 F.2d 1463, 1470 (1st Cir. 1992) (collecting
authorities); Restatement (Second) of Contracts § 188 cmt. a, at 42
(1981) (“No mathematical formula can be offered for this process”).
Under some circumstances, “a promise to refrain from
competition is a natural and reasonable means of protecting a
legitimate interest of the promisee.” Restatement (Second) of
Contracts § 188 cmt. b (1981). In the case of a postemployment
restraint, where the employer-promisee exacts from the employee a
promise not to compete after termination of the employment, the
restraint is usually justified on the ground that the employer has a
legitimate business interest in restraining the employee from
appropriating the employer’s (1) confidential trade information, or (2)
customer relationships. Included within these precepts are several
factors for a court to consider. Id. cmts. b, g; accord Harlan M. Blake,
Employee Agreements Not to Compete, 73 Harv. L. Rev. 625, 651-74
(1960).
Beyond this recognized description of the legitimate business
interest of the employer, some courts have endeavored to “further
explain what must be considered.” 15 Grace McLane Giesel, Corbin
on Contracts § 80.6, at 70 (rev. ed. 2003). Such attempts usually
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collapse into lists of factors. See, e.g., Chambers-Dobson, Inc. v.
Squier, 472 N.W.2d 391, 400 (Neb. 1991) (and cases cited therein);
Arthur Murray Dance Studios of Cleveland, Inc. v. Witter, 105
N.E.2d 685, 694-99 (Ohio C.P. 1952) (listing factors). Further,
compilers of such lists repeat there is no exact formula required in a
court’s analysis. “The factors or considerations to be used in that
balancing test are not weighted; that is, there is no prescribed method
by which more or less weight is assigned to each factor to be
considered in the balancing test ***.” Chambers-Dobson, 472
N.W.2d at 400. Also, compilers of such lists repeat that the factors
therein are not exclusive. Arthur Murray, 105 N.E.2d at 695.
However, our appellate court did develop a formula for assessing
the legitimate business interest of the promisee. Further, some of the
factors considered in this formula were highly weighted, if not
conclusive. In Nationwide Advertising Service, Inc. v. Kolar, 28 Ill.
App. 3d 671 (1975), plaintiff advertising agency sought to enforce a
restrictive covenant against its former employee and appealed the
denial of enforcement. Plaintiff contended that “under Illinois law an
employer such as it had a legitimate business interest in its customers
which was subject to protection through enforcement of an
employee’s covenant not to compete.” Id. at 673.
In summarizing the principles on which the court based its earlier
analysis in the same case (Nationwide Advertising Service, Inc. v.
Kolar, 14 Ill. App. 3d 522 (1973)), the Kolar court wrote as follows:
“[A]n employer’s business interest in customers is not always
subject to protection through enforcement of an employee’s
covenant not to compete. Such interest is deemed proprietary
and protectable only if certain factors are shown. A covenant
not to compete will be enforced if [1] the employee acquired
confidential information through his employment and
subsequently attempted to use it for his own benefit.
[Citation.] An employer’s interest in its customers also is
deemed proprietary if, [2] by the nature of the business, the
customer relationship is near-permanent and but for his
association with plaintiff, defendant would never have had
contact with the clients in question. (Cockerill v. Wilson
(1972), 51 Ill. 2d 179 ***; Canfield v. Spear (1969), 44 Ill. 2d
49 ***.) Conversely, a protectable interest in customers is not
recognized where the customer list is not secret (House of
Vision, Inc. v. Hiyane (1967), 37 Ill. 2d 32 ***), or where the
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customer relationship is short-term and no specialized
knowledge or trade secrets are involved.” Kolar, 28 Ill. App.
3d at 673.
Although the Kolar court cited this court’s decisions in Cockerill,
House of Vision, and Canfield as authority for this formulation of a
legitimate business interest “test,” none of those cases used that test
in their respective analyses. Rather, each decision was based on the
totality of its own facts.
During the 36 years subsequent to Kolar, our appellate court has
variously set forth this “test” as the sine qua non for the enforcement
of a covenant not to compete. See, e.g., Hanchett Paper Co. v.
Melchiorre, 341 Ill. App. 3d 345, 351 (2003); Dam, Snell & Taveirne,
Ltd. v. Verchota, 324 Ill. App. 3d 146, 151-52 (2001); Carter-Shields
v. Alton Health Institute, 317 Ill. App. 3d 260, 268 (2000);
Springfield Rare Coin Galleries, Inc. v. Mileham, 250 Ill. App. 3d
922, 929-30 (1993); A.B. Dick Co. v. American Pro-Tech, 159 Ill.
App. 3d 786, 792-93 (1987); Reinhardt Printing Co. v. Feld, 142 Ill.
App. 3d 9, 15-16 (1986); see also Outsource International, Inc. v.
Barton, 192 F.3d 662, 666 (7th Cir. 1999) (applying Illinois law);
Curtis 1000, Inc. v. Suess, 24 F.3d 941, 947 (7th Cir. 1994) (“But
Illinois, unlike Delaware, limits the interests that a covenant not to
compete may protect to trade secrets, confidential information, and
relations with ‘near-permanent’ customers of the employer”). Even
further, and exemplary of this erroneous proliferation of templates,
our appellate court has developed two alternative “tests” to determine
its “near-permanence” prong of its conclusive two-prong test for a
promisee’s legitimate business interest. Some courts analyze the nearpermanent relationship according to seven objective factors. See, e.g.,
Hanchett Paper, 341 Ill. App. 3d at 352 (quoting Audio Properties,
Inc. v. Kovach, 275 Ill. App. 3d 145, 148-49 (1995)); Office Mates 5,
North Shore, Inc. v. Hazen, 234 Ill. App. 3d 557, 572-73 (1992). In
contrast, other courts follow a “nature of the business” test. See, e.g.,
Lawrence & Allen, Inc. v. Cambridge Human Resource Group, Inc.,
292 Ill. App. 3d 131, 142 (1997) (collecting cases).
In the present case, the lead opinion in the appellate court applied
these “tests” in upholding the circuit court’s ruling that the
noncompetition restrictive covenant was unenforceable. 405 Ill. App.
3d at 743-48. The specially concurring justice agreed with the circuit
court’s result, but based on the totality of the circumstances presented
in the record. He stated: “Analyzing such covenants with reference to
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the totality of the circumstances to determine if an employer has a
protectable interest, as opposed to utilizing the typical rigid version
of the legitimate-business-interest test, will lead to results more
grounded in the true considerations of a given case.” Id. at 751
(Hudson, J., specially concurring).3 We agree.
To the extent the appellate court’s “tests” are conclusive, they are
plainly contrary to the above-described general principles pertaining
to the promisee’s legitimate business interest based on the totality of
the circumstances of the particular case. The understandable
temptation is to view exemplary facts presented in particular cases as
the outermost boundary of the inquiry. Thus, precedent is set to guide
future cases. However, “if it were possible to make a complete list
today, human ingenuity would render the list obsolete tomorrow.”
Arthur Murray, 105 N.E.2d at 695.
Parties have long turned to the common law to argue for or
against the enforceability of noncompetition agreements. “There is,
therefore, an especially well-developed and significant body of
judicial decisions applying the general rule of reason *** to such
promises.” Restatement (Second) of Contracts § 187 cmt. a (1981).
The common law, based on reason and experience, has recognized
several factors and subfactors within the component of the promisee’s
legitimate business interest.
However, we hold that such factors are only nonconclusive aids
in determining the promisee’s legitimate business interest, which in
turn is but one component in the three-prong rule of reason, grounded
in the totality of the circumstances. “Each case must be determined
on its own particular facts. [Citations.] Reasonableness is gauged not
just by some but by all of the circumstances. [Citations.] The same
identical contract and restraint may be reasonable and valid under one
set of circumstances, and unreasonable and invalid under another set
of circumstances.” (Emphasis in original.) Arthur Murray, 105
N.E.2d at 692-93. Accord Restatement (Second) of Contracts § 186
cmt. a, § 188 cmt. g. We expressly observe that appellate court
3
Another side-by-side comparison of the appellate court’s
application of the legitimate business interest test, with the application of
the promisee’s legitimate business interest as a component of the rule of
reason, is found in the majority opinion and special concurrence in A.B.
Dick, 159 Ill. App. 3d at 792-94; Id. at 795 (Jiganti, J., specially
concurring).
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¶ 43
¶ 44
¶ 45
¶ 46
precedent for the past three decades remains intact, but only as
nonconclusive examples of applying the promisee’s legitimate
business interest, as a component of the three-prong rule of reason,
and not as establishing inflexible rules beyond the general and
established three-prong rule of reason.
In sum, the legitimate business interest test is still a viable test to
be employed as part of the three-prong rule of reason to determine the
enforceability of a restrictive covenant not to compete. However, the
two-factor test created in Kolar, in which a near-permanent customer
relationship and the employee’s acquisition of confidential
information through his employment are determinative, is no longer
valid. Rather, we adopt the position of Justice Hudson’s special
concurrence, which is: whether a legitimate business interest exists
is based on the totality of the facts and circumstances of the
individual case. Factors to be considered in this analysis include, but
are not limited to, the near-permanence of customer relationships, the
employee’s acquisition of confidential information through his
employment, and time and place restrictions. No factor carries any
more weight than any other, but rather its importance will depend on
the specific facts and circumstances of the individual case.
D. Remand
Before this court, Reliable reasons: “If the circuit court applied
the wrong legal standard to the facts of the case, then remand is the
proper remedy to give the court an opportunity to apply the correct
test.” The circuit court ruled that the noncompetition restrictive
covenant was unenforceable. The appellate court special concurrence
agreed with the lead opinion that the circuit court ruling should be
upheld, but based on the totality of the circumstances presented in the
record. 405 Ill. App. 3d at 752 (Hudson, J., specially concurring).
While the dissent agreed with the special concurrence’s view of the
promisee’s legitimate business interest, he would have reversed and
remanded for further proceedings. Id. at 759 (O’Malley, J.,
dissenting).
“When a case is tried under an incorrect theory of law the
appropriate action is to reverse the judgment and remand for a new
trial.” Sparling v. Peabody Coal Co., 59 Ill. 2d 491, 496 (1974). In
the present case, the parties presented their evidence and fashioned
their arguments based on the appellate court’s rigid and preclusive
legitimate business interest test. The circuit court conscientiously
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applied this test in ruling that the noncompetition restrictive covenant
was unenforceable. “Particularly where, as here, the ultimate
issue–the reasonableness of the agreements–turns upon the totality of
the facts and circumstances surrounding them, the parties must be
given a full opportunity to develop the necessary evidentiary record.”
Rollins Burdick Hunter of Wisconsin, Inc. v. Hamilton, 304 N.W.2d
752, 757 (Wis. 1981). We observe that the circuit need not conduct
an entirely new evidentiary hearing, but rather may allow the parties
to supplement the existing record with any additional evidence and
argument pertaining to the totality of the circumstances.
¶ 47
¶ 48
¶ 49
¶ 50
III. CONCLUSION
For the foregoing reasons, the judgment of the appellate court and
the order of the circuit court of Du Page County are reversed, and the
cause remanded to the circuit court for further proceedings consistent
with this opinion.
Judgments reversed;
cause remanded.
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