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Good News for Illinois Employers: It Is Getting Easier for an Employer to Have an Enforceable Non-Compete Agreement!

August 2012

By: Nancy E. Joerg, Esq.

The Illinois Supreme Court took a significant step when it decided Reliable Fire Equip. Co. v. Arredondo , 965 N.E.2d 393 (Ill. 2011). At that time, I wrote an article explaining why the Reliable Fire decision was good news for employers who want enforceable non-compete agreements.

In Reliable Fire, a new "three dimensional rule of reason test" was unveiled by the Illinois Supreme Court. Under the Reliable Fire analysis, Illinois courts now must look at:

1) whether the non-compete agreement is no greater than required to protect the employer's legitimate business interest,

2) whether the non-compete agreement imposes undue hardship on the employee, and

3) whether enforcing the non-compete agreement would prove harmful to the public.

The Reliable Fire Illinois Supreme Court decision noted that the totality of the circumstanceswill be considered in balancing the legal factors (in order for an Illinois court to decide the enforceability of the non-compete agreement).

Two more important Illinois cases concerning non-compete agreements and their enforceability have recently been decided:

Case 1: Insureone Indep. Ins. Agency, LLC v. Hallberg, 2012 Ill. App. LEXIS 521, 2012 IL App (1st) 92385, 2012 WL 2459145 (Ill. App. Ct. 1st Dist. 2012)

On June 27, 2012, the Illinois Appellate Court for the First District, announced that, as in Reliable Fire, all the facts and circumstances of the case must be considered (in order to decide if a non-compete agreement is enforceable under Illinois law). Good news for Illinois employers-the Illinois Appellate Court for the First District decided in the Insureone case (cited directly above) that even if there was not a near permanent customer relationship, the non-compete agreement could still be enforceable where the party accused of breaching the non-compete agreement used the Plaintiff's confidential information.

So even if the customer relationships being presented under the non-compete agreement are not "long term," a non-compete agreement in Illinois can still be enforced if the employee allegedly breaching the non-compete agreement has confidential information (information that will help the employee unfairly compete against the company being protected by the non-compete agreement).

Case 2: Zabaneh Franchises, LLC v. Walker, 2012 Ill. App. LEXIS 579 (Ill. App. Ct. 4th Dist. 2012)

On July 17, 2012, another case, Zabaneh, favorable to employers hoping to enforce non-compete agreements, was decided by the Illinois Appellate Court for the Fourth District. In the Zabanehcase, a tax preparer was being restricted by a non-compete agreement. Happily for the Illinois employer, the Illinois Appellate Court for the Fourth District upheld the enforceability of the non-compete agreement using the three-part Reliable Fire test (considering the totality of the circumstances analysis).

In Zabaneh, the non-compete agreement only restricted the ex-employee under the non-compete agreement from working with clients whom the tax preparer had serviced herself when she was an employee of the prior company. So, the Court ruled that this one year non-compete agreement was reasonable in its limited restriction and therefore did not unduly burden the employee. Significantly, the Illinois Appellate Court for the Fourth District also ruled that the lack of a geographic scope in the non-compete agreement at issue was not problematic-the agreement was still reasonable and enforceable.

The Zabaneh Court noted that: "She (the tax preparer being restricted by the non-compete agreement) is only prohibited from serving those clients she serviced while employed by plaintiff (i.e., the Company). This limited restriction reasonably balances defendant's (i.e., the ex-employee) right to earn a living with plaintiff's right to protect its customer relationships and its investment in developing defendant's skills." [Clarification added]

The Zabaneh Court also noted that: "There does not seem to be a restriction on the geographical scope of the covenants in the Agreement; however, we find such a restriction unnecessary due to the restriction regarding the limited prohibited customer base. Because the Agreement identifies which customers are considered off-limits to defendant (i.e., ex-employee) for two years, a prohibited geographical area is unnecessary." [Clarification and emphasis added]

Illinois employers who wish to have enforceable non-compete agreements should be very much heartened by these three recent legal decisions, Reliable Fire, Insureone, and Zabaneh. These decisions indicate that Illinois courts will carefully evaluate and balance the totality of circumstances in cases involving the enforceability of a non-compete agreement.

If you have any questions or if you wish a legal review of your non-compete agreement or would like one drafted, call Attorney Nancy E. Joerg of Wessels Sherman's St. Charles, Illinois office: 630-377-1554 or email her at najoerg@wesselssherman.com.