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Restrictive covenants in Illinois: baggy style is still in vogue

January 11, 2016

Illinois employers wishing to include an enforceable restrictive covenant into an employment agreement must realize that if these covenants were trousers, Illinois courts would frown upon a tight, slimming number that looks more like a compression stocking.  Rather, they would prefer to see those trousers tailored in a baggy cut.

 

Reasonable restrictive covenants are generally enforceable in Illinois.

 

In 2011, the Illinois Supreme Court held that a reasonable restrictive covenant may be enforceable.  (See Reliable Fire Equipment Co. v. Arredondo, 2011 IL 111871).   According to the court, whether a restrictive covenant is “reasonable” should be a case-by-case, “under the totality of circumstances” application of the following three-prong “rule of reason”.   Under this rule, a restrictive covenant is reasonable only if:

 

(1) it is no greater than is required to protect a legitimate business interest of the employer (such interest may be limited by type of activity, geographical area, and time), and 

(2) it does not impose undue hardship on the employee, and

(3) it is not injurious to the public.

 

A logical question is what constitutes a “legitimate” business interest for the purposes of enforcement of a restrictive covenant.   To answer this question, the Illinois Supreme Court adopted the following approach:

 

“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.” (emphasis added)

 

Duration of employment may affect enforceability of a restrictive covenant.

 

However, even before a court would determine whether a disputed restrictive covenant is reasonable and, thus, enforceable, the court must first decide whether such a covenant is part of a valid contract.  Post-Reliable decisions of Illinois appellate courts have provided an interesting twist to this threshold determination of whether a disputed restrictive covenant is ancillary to a valid contract.

 

Specifically, appellate courts have repeatedly held that when an employer did not offer separate consideration in exchange for the inclusion of the restrictive covenant in the employment agreement, such an employer could not enforce a restrictive covenant against a former employee who had not worked for that employer at least two years consecutive years.  (See Fifield v. Premier Dealer Services, Inc., 2013 IL App (1st) 120327; McInnis v. OAG Motorcycle Ventures, Inc., 2015 IL App (1st) 142644; Prairie Rheumatology Associates, S.C. v. Francis, 2014 IL App (3d) 140338). 

In other words, for a restrictive covenant to be a part of a valid contract (i.e. employment agreement) either one of the two conditions must be met: either a) restrictive covenant must be supported by a separate consideration, or b) the employee must have worked for the employer for at least two consecutive years.  Moreover, it does not matter for this purpose whether the former employee left the employer by will or was fired. (See Brown & Brown, Inc. v. Mudron, 379 Ill. App. 3d 724; Diederich Insurance Agency, LLC v. Smith, 2011 IL App (5th) 100048).

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