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Litigation: Illinois Supreme Court rejects the “legitimate business interest” test

A timely reminder to refresh your company’s non-compete agreements in accordance with current standards and in anticipation of future litigation

A recent Illinois Supreme Court decision provides corporate counsel with an overdue reminder to re-examine the language and scope of their companies’ non-compete agreements. While non-compete agreements are often swept under the rug when a new employee begins work, the potential outcomes are catastrophic. States can differ on their views of non-compete agreements, so it is crucial to have a hold on how your state treats these restrictive covenants.

In Reliance Fire Equipment Co. v. Arredondo, the Illinois Supreme Court held that a non-compete agreement is valid and reasonable if all three components are met:

  1. It protects, but does not exceed, the legitimate business interests of the employer
  2. There is no undue hardship on the employee
  3. There is no harm to the public

The court went on to eliminate the various “legitimate business interest” tests that have sprung up over the past 36 years and instead chose to determine a legitimate business interest for each case, based on the totality of the circumstances. Therefore, in Illinois, a non-compete agreement must meet the three-pronged test illustrated above before a court will look at the totality of the circumstances to determine whether a legitimate business interest existed.

In New York, the decisions on non-compete agreements follow the same standard. The restrictive covenant is reasonable if the non-compete agreement:

  1.  Is no greater than required for the legitimate interest of the employer
  2.  Does not impose undue hardship on the employee
  3.  Is not injurious to the public

New York courts tend to uphold non-compete agreements when the underlying facts involve trade secrets, confidential customer information, unique employee services, and relations or goodwill between employers and clients.

In somewhat of a contrast to Illinois and New York, California voids all non-compete agreements unless it falls under certain rare exceptions. The California Business and Professions Code states that “every contract by which anyone is restrained from engaging in a lawful profession, trade, or business of any kind is to that extent void.” California strongly supports the public policy behind the right to work for anyone and in the field of one’s choice. It encourages free competition and mobility for employees.

Protect your company by taking a moment to look over your organization’s non-compete agreement. A simple change to the language, timing or geographic area may mean the difference between keeping your clients and helplessly watching business walk out the door.

Contributing Author

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Matthew Walsh

Matthew Walsh is a partner in the Chicago office of Hinshaw & Culbertson LLP and co-leader of the firm's Business Litigation Department. His practice concentrates...

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