December 19, 2011

 

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We have addressed the topic of restrictive covenants in both employment agreements and in buy - sell agreements. I've expressed that such provisions are generally enforceable provided the terms are necessary to protect the employer's [or buyer's] business and not unduly burdensome to the employee's [seller's] ability to earn a living. Rather simple concepts, yet the issue generates lots of confusion and disagreement among the courts.

Confusion seems to plague the courts in Illinois, and now the state's highest court has tried to set the law straight, at least for that state. In a decision decided on December 1, 2011 the Court reviewed the various cases in Illinois, rejected an appellate case that caused confusion, and issued guidelines for the courts in that state. The case involves a fire alarm company suing former employees who set up their own competing business. You can read the case on my web site at https://www.kirschenbaumesq.com/illinois7.htm

I'm not so sure the Court achieved it's goal of making the rule of law clearer or understandable. You can read the case and decide for yourself. There remains a great deal of leeway and discretion. A few things are however clear.

Restrictive covenants are indeed enforceable when properly written and under the right circumstances. Expect poorly written or provisions with unnecessary restrictions to be rejected by the courts.

Below are a few quotes from the case [with some editing and without the legal authority - which I am removing to make it easier for non attorneys to read]:

 

"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 th industry of the promisor, and deprives the promisor of the opportunity to pursue an occupation and thereby support his or her family...... 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. "The modern, prevailing common-law standard of reasonableness for employee agreements not to compete applies a three-pronged test." 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. 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." 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." In Hursen, as in a prior case, ......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.

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I am not so sure that this decision will make these cases easier to analyze or open the flood gates for more litigation. The general rule of thumb I have advised is, I believe, accurate and the restrictive covenants should be enforced under the proper circumstances. Here is how the Illinois Court summed up: "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 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."