Wednesday, December 7, 2011

When is an Employee's Covenant Not to Compete Enforceable

The Illinois Supreme Court has clarified when an employee’s promise not to compete with his/her employer is enforceable.

Reliable Fire Equipment Company sued two of its salesmen for violating employment agreements which included covenants not to compete. The salesmen had started their own company which provided services to some of Reliable’s customers. The circuit court found the covenants unenforceable and the appellate court agreed. Reliable appealed.

The Supreme Court begins its analysis by explaining that an employment contract that totally restrains trade is void because it “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” but that a covenant not to compete “will be upheld if it contains a reasonable restraint and the agreement is supported by consideration.”

Recognizing that Illinois courts have failed to consistently apply a three-prong analysis that the Court traces back to 1896, the Court explains that a restraint is reasonable if it 1) is no greater than is required to protect a legitimate business interest of the employer, 2) does not impose undue hardship on the employee, and 3) does not injure the public.

Because lower courts have had the most trouble with the first prong - whether the employer has a legitimate business interest needing protection - the Court examines the many factors on which jurists have relied before holding that such factors are “only nonconclusive aids in determining the promisee’s legitimate business interest” and that the proper test is to consider “the totality of the facts and circumstances of the individual case.” The Court then identifies several important factors to consider including “the near-permanence of the customer relationships, the employee’s acquisition of confidential information through his employment, and time and place restrictions” and explains that no factor is determinative; its importance depends on the facts and circumstances in a given case.

Because the case “was tried under an incorrect theory of law” the Court reversed the judgment and remanded the case for a new trial.

Reliable Fire Equipment Company vs. Arnold Arredondo, 2011 IL 111871

Submitted by Brian D. Moore, Class of ’92.

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