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Another Illinois Appellate Court Shows Greater Receptivity Toward No-Competes In Illinois

Readers of this blog know that, in October 2009, in Sunbelt Rentals, Inc. v. Ehlers, 333 Ill.Dec. 791, 915 N.E.2d 862 (Ill. App. Ct. 2009), an Illinois appellate court reexamined and rejected over thirty years of well-established precedent regarding the enforceability of restrictive covenants. Specifically, it rejected the “legitimate business interest” test long applied as a threshold issue by Illinois courts when deciding the enforceability of a restrictive covenant (i.e., before an Illinois court will address the reasonableness of a restrictive covenant, the employer must first establish that it is supported by a “legitimate business interest” – a tall order given how that term is defined in Illinois).

Since then, we have been closely following Illinois state and federal no-compete cases to monitor the impact of Sunbelt Rentals. To date, its holding remains limited to Illinois’ Fourth District Court of Appeals (i.e., central Illinois, but not Chicago or any of its suburbs) as no court in Illinois has followed its reasoning in a published decision. (One federal district court in Indiana did apply Sunbelt Rentals, in CDW LLC et al. v. Netech Corporation, 2010 WL 2710626 at * 7 (S.D.Ind. July 7, 2010), but it did so without acknowledging or analyzing the split of authority on the issue.)

Last week, in Steam Sales Corporation v. Brian Summers, the first Illinois Appellate District other than the Fourth District re-visited the issue of whether the “legitimate business interest” still applied. While the Court in Steam Sales noted that Sunbelt Rentals’ “rejection of [the “legitimate business interest”] test does merit some consideration,” the Court did not rule on the issue because even under the “legitimate business interest” test, the restrictive covenant at issue was enforceable.

Notwithstanding its failure to address the crux of Sunbelt Rentals, certain aspects of Steam Sales may signal a thawing of judicial attitudes in Illinois toward no-competes.

First, the Court held that the reason why the employer had a legitimate business interest sufficient to support the no-compete was because it has “near permanent customer relationships.” Showing that an employer has “near permanent customer relationships” is one of the two established means in Illinois of establishing a legitimate business interest, but it “is generally absent from businesses engaged in sales.” Lawrence and Allen, Inc. v. Cambridge Human Resource Group, Inc., 292 Ill.App.3d 131, 142 (Ill. App. Ct. 1997). Rather, “near permanent customer relationships” are more typically found in professional services businesses. The employer in Steam Sales sold and maintained boilers. Because boilers are a long-term investment and because long-standing relationships are required to service the equipment and sell new equipment, the Court held that even though the employer was engaged in sales, it had “near permanent customer relationships” and therefore had a legitimate business interest sufficient to support the no-compete at issue.

Second, in Steam Sales, the Court upheld a two-year no-compete. While there is precedent to support a no-compete of such length, many employers today shy away from two-year restrictions out of concern that a Court will find them too long.

Finally, while Illinois courts have sometimes been seen as somewhat hostile to no-competes in employment contracts, the Steam Sales opinion is notably unsympathetic to the employee. Indeed, the Court stated that “[r]egardless of which party initiated the agreement, [the employee] had the option of either not signing it or asking [the employer] to modify the terms of the restrictive covenant. . . . As in Sunbelt Rentals, [the employee] risked the enforcement of the restrictive covenant after he chose to sign it.”

Hence, while Steam Sales did not follow the holding of Sunbelt Rentals with respect to the continuing validity of the “legitimate business interest test,” it nevertheless may signal a thaw in judicial attitudes toward no-competes in Illinois.

As for the long-term impact of Sunbelt Rentals . . . stay tuned.