Legitimate Business Interest
A restrictive covenant, such as a non-compete agreement, will only be enforceable if the employer can identify a legitimate business interest that the restrictive covenant seeks to protect. Courts use the “totality of circumstances” test to determine if the employer has identified a valid, protectable business interest. Identifying a legitimate business interest is only one component of the court’s analysis.
A restrictive covenant must also be reasonable meaning it is no broader than necessary to protect the employer’s legitimate business interest. It cannot impose an undue burden on the employee or public. This determination is also made by examining the “totality of circumstances.” The line between protectable and unprotectable business interests and reasonable and unreasonable restrictive covenants is a fine and, unfortunately for employers and employees alike, indistinctly drawn line. Courts have consistently dropped the ball when presented with the opportunity to provide guidance and specificity in this area only. Such complexity and imprecision makes it crucial to hire attorneys with extensive experience drafting and litigating restrictive covenants.
One area the courts have been clear in defining is not a legitimate business interest. The term does not include merely protecting the employer from general competition. Employers do not have an interest in preventing employees from competing through the use of general knowledge, skill, or facility acquired by the employee through training or experience during employment. Consequently, a restrictive covenant prohibiting use of general knowledge or skills acquired while working for a former employer is generally not enforceable.
In 2011, the Illinois Supreme Court altered the standard for analyzing whether a covenant not to compete is enforceable to protect a legitimate business interest. In Reliable Fire Equipment Co. v. Arredondo, 2011 IL 111871, the Illinois Supreme Court overturned a long line of appellate decisions limiting the analysis of a “legitimate business interest” to a two-factor test (1) whether the employer enjoyed a “near-permanent customer relationship” and 2) whether the employee “had acquired confidential information during his employment and subsequently attempted to use it for his own benefit”). The Court decided that instead of using a rigid, two-factor test, courts must consider “the totality of circumstances” in determining what constitutes a “legitimate business interest.” Courts can still consider the two factors previously used but only as part of a larger analysis that includes whatever other factors a court deems relevant.
In certain respects, this change benefits employers who can now argue that they who have a legitimate business interest even if they do not have a “near permanent customer base” or “confidential information.” Conversely, employees can now argue that even if the employer has near permanent customers or confidential information, the totalities of circumstances militates against finding a legitimate business interest exists.
The attorneys at DiTommaso have decades of experience negotiating and litigating restrictive covenants including non-solicitation agreements for employers and employees alike in Chicago, Wheaton, Oak Brook, Deer Park, and the surrounding areas. Contact us online or give us a call at 630-333-0000.