Many employers use restrictive covenants to protect confidential information and client relationships by preventing former employees from working for competitors. In order to enforce such restrictive covenants, employers must show that a valid restrictive covenant agreement exists and that its terms are enforceable. For over 30 years, employers in Illinois also have been required to demonstrate a “legitimate business interest” supporting the restrictive covenant. The Illinois Fourth District Appellate Court in Sunbelt Rentals, Inc. v. Ehlers, 394 Ill. App. 3d 421 (4th Dist. 2009), recently rejected the “legitimate business interest” test. The Sunbelt decision potentially could make it easier for employers to enforce restrictive covenants.
Legitimate Business Interest Test
For more than three decades, Illinois courts have applied the “legitimate business interest” test in determining whether a restrictive covenant is enforceable. Under the test, a legitimate business interest exists, and a reasonably limited restrictive covenant is enforceable, where: (1) because of the nature of the business, the customers’ relationships with the employer are near-permanent and the employee would not have had contact with the customer absent the employee’s employment; or (2) the employee gained genuinely confidential information through his employment that he then attempted to use it for his own benefit. Nationwide Advertising Service, Inc. v. Kolar, 28 Ill. App. 3d 671, 673 (1st Dist. 1975). The “legitimate business interest” test has been applied by all districts of the Illinois Appellate Court, but never has been adopted by the Illinois Supreme Court.
Sunbelt Rentals v. Ehlers
The defendant employee in Sunbelt, Neil Ehlers, was an industrial equipment salesman who worked for Sunbelt for almost six years. One month after starting employment with Sunbelt, Ehlers signed an employment agreement containing restrictive covenants which prohibited him from soliciting Sunbelt customers or competing with Sunbelt within a 50-mile radius of any Sunbelt store for 12 months after the end of his employment with Sunbelt. In January 2009, Ehlers resigned from Sunbelt and went to work for a competitor, Midwest Aerials & Equipment, (“Midwest”).
In February 2009, Sunbelt sued Ehlers and Midwest, seeking preliminary and permanent injunctions and a temporary restraining order to enforce its restrictive covenants. The trial court granted the injunction, finding that the 12-month/50-mile time and territory terms of the restrictive covenants were reasonable. The trial court mentioned the “legitimate business interest” test, but did not specifically apply it, finding that it was encompassed by the time and territory reasonableness standard recently used by the Illinois Supreme Court in Mohanty v. St. John Heart Clinic, 225 Ill.2d 52 (2006).
On appeal, the Fourth District Appellate Court rejected the “legitimate business interest” test, finding that it “constitutes nothing more than a judicial gloss incorrectly applied to this area of law by the appellate court.” The Court held “courts at any level, when presented with the issue of whether a restrictive covenant should be enforced, should evaluate only the time-and-territory restrictions contained therein. If the court determines that they are not unreasonable, then the restrictive covenant should be enforced.” Id.
Implications For Employers
The Sunbelt decision represents a significant departure from prior Illinois Appellate Court precedent, but its impact remains to be seen. The decision is binding on circuit courts throughout Illinois, but is not binding on other appellate courts. Illinois Emasco Ins. Co. v. Nationwide Mut. Ins. Co., 393 Ill. App. 3d 782 (1st Dist. 2009). Thus far, Sunbelt has been cited only once in a published decision. In that case, the Northern District of Illinois declined to follow Sunbelt’s rejection of the “legitimate business interest” test. Aspen Marketing Services, Inc. v. Russell, No. 09 C 2864, 2009 WL 467406 (N.D.Ill. Dec. 3, 2009). However, if other Illinois courts follow Sunbelt in rejecting the “legitimate business interest” test and focusing only on time-and-territory limitations, reasonably limited restrictive covenants will be easier to enforce.