Opinion ID: 1294109
Heading Depth: 1
Heading Rank: 2

Heading: Enforceability of 1983 Supplementary Compensation Agreement

Text: Plaintiff next contends that the Court of Appeals erred in holding that the 1983 contract was unenforceable under Illinois law. We agree with plaintiff and reverse the Court of Appeals. In Illinois, whether covenants not to compete are enforceable is a question of law for the courts. See The Instrumentalist Co. v. Band, Inc., 134 Ill.App.3d 884, 89 Ill.Dec. 530, 480 N.E.2d 1273 (1985). Because these restrictive covenants partially restrain trade, they are scrutinized carefully by the courts to ensure that their intended effect is not the prevention of competition per se.  Id. at 891, 89 Ill.Dec. at 536, 480 N.E.2d at 1279. In determining whether non-competition covenants are enforceable, the courts consider whether the employee has received benefits in exchange for his agreement not to compete with his employer upon termination of employment, whether the time and territory restrictions are reasonable, and the effect these covenants have upon the parties and the public. Id. The question becomes whether the covenant is reasonably necessary to protect the employer from improper or unfair competition. Id. The general rule in Illinois is that an employer has no proprietary interest in his customers. See The Packaging House, Inc. v. Hoffman, 114 Ill.App.3d 284, 70 Ill.Dec. 69, 448 N.E.2d 947 (1983). However, there are two situations in which this general rule is inapplicable: (1) where the former employee acquired confidential information through his employment and subsequently attempted to use it for his own benefit, and (2) where, by nature of the business, the customer relationship is near-permanent and, but for his association with plaintiff, [the employee] would not have had contact with the customers in question. The Instrumentalist Co. v. Band, Inc., 134 Ill.App.3d 884, 892, 89 Ill.Dec. 530, 536, 480 N.E.2d 1273, 1279. In the first situation, in which by the nature of his employment an employee has acquired confidential information concerning an employer's business operations or customer requirements, Illinois courts have not hesitated to find that the employer has a protectable business interest. See Donald McElroy, Inc. v. Delaney, 72 Ill.App.3d 285, 27 Ill.Dec. 892, 389 N.E.2d 1300 (1979); Wessel Co. v. Busa, 28 Ill.App.3d 686, 329 N.E.2d 414 (1975). Illinois recognizes the fact that an employee, having such confidential information, is in a position to misappropriate and misuse this information upon employment termination to convert his former employer's business to his own the precise situation that the employer sought to avoid when it entered into the covenant with the employee. See Smithereen Co. v. Renfroe, 325 Ill.App. 229, 59 N.E.2d 545 (1945). In the second situation, the employer has a protectable business interest in its customers if these customers were long-standing, near-permanent customers with whom the employee had, over many years of employment, developed a closeness and good will, and but for the employee's association with his employer, the employee would not have had contact with these customers. Morrison Metalweld Process Corp. v. Valent, 97 Ill.App.3d 373, 52 Ill.Dec. 825, 422 N.E.2d 1034 (1981). The Illinois courts recognize that because of this personal contact with customers who have continuously dealt with a business through an employee over a long period of time, the employee, upon employment termination, could successfully solicit his former employer's customers for his own. See The Instrumentalist Co. v. Band, Inc., 134 Ill.App.3d 884, 89 Ill.Dec. 530, 480 N.E.2d 1273. Moreover, it is not necessary that an employer's customers deal with him exclusively in order for that employer to show that his customers are near-permanent. Id. On appeal to the Court of Appeals, defendants contended that the trial court erred in upholding the 1983 covenant and argued that plaintiff failed to establish the existence of a legitimate business interest in need of protection by a covenant. In the alternative, even if there is a protectable business interest, defendants contended that the time and territory restrictions are not reasonable. The Court of Appeals agreed with defendants that plaintiff does not have a legitimate protectable business interest, and, therefore, did not reach the question concerning the reasonableness of the time and territory restrictions. The Court of Appeals, in determining whether plaintiff has a legitimate business interest protectable by the agreement, recognized the two situations in which a legitimate business interest arises under Illinois law in the employer-employee relationship. It held, however, that plaintiff failed to show a legitimate protectable business interest. First, the Court of Appeals held that the evidence showed that plaintiff did not enjoy a near-permanent relationship with its customers since these customers would buy from more than one chemical company at the same time, that the chemical industry was highly competitive, and that a sales representative for any chemical company could easily determine the names of potential customers from telephone directories. Second, the Court of Appeals held that there was no evidence that defendant Kuykendall acquired any information during his employment that would qualify as trade secrets or confidential information in need of protection since information concerning the customers was neither a trade secret nor confidential in that the customer list could easily be duplicated by reference to telephone directories or trade publications. We disagree with the Court of Appeals' holding that under Illinois law plaintiff has failed to show a legitimate protectable business interest. Whether customers buy from more than one company is not the determining factor in deciding whether a company has a near-permanent relationship with its customers. Instead, the court must determine whether the evidence shows that the employer has had a long-term, continuous relationship with its customers. In the case sub judice, Kuykendall's own testimony revealed that most of the customers he serviced, after leaving plaintiff's employment, were customers who had bought from him continously for many years. Thus, the evidence shows that these customers were not transitory, but were near-permanent customers. In reaching its decision that plaintiff failed to show a protectable business interest in its customers, the Court of Appeals relied exclusively on Reinhardt Printing Co. v. Feld, 142 Ill.App.3d 9, 96 Ill.Dec. 97, 490 N.E.2d 1302 (1986), in which the court held the restrictive covenants unenforceable because plaintiff-employer failed to establish a protectable business interest in its customers. However, we find that case distinguishable on several grounds. First, the evidence in Reinhardt shows that defendant-employee had worked for plaintiff for only two years and the majority of customers serviced by defendant were not regular customers of plaintiff prior to that two-year period. Thus, it is apparent that plaintiff did not enjoy a long-term continuous relationship with these customers. Second, the evidence in Reinhardt showed that defendant, through her former job, had prior contact and business association with many of the customers she subsequently solicited for plaintiff. Finally, because plaintiff, in its advertising brochure, named forty of its customers, the customer list was not confidential. In the case sub judice, defendant worked for plaintiff for approximately fourteen years, and the evidence shows that plaintiff enjoyed a long-term, continuous relationship with its customers. Second, there is no evidence that defendant had any prior contact or business association with these customers before becoming an employee of plaintiff. Finally, there is no evidence that the names of plaintiff's customers were generally known in the industry. Thus, the instant case is not controlled by Reinhardt. We also disagree with the Court of Appeals' conclusion that Kuykendall did not acquire any confidential information while employed by plaintiff. The evidence shows that through his employment, Kuykendall acquired and accumulated information concerning the historical buying habits of the customers, i.e., the requirements of each customer, the cyclical nature of their buying habits, the prices each was willing to pay, and any specialized product formulations. It is this information that was not generally available to plaintiff's competitors. Indeed, the evidence shows that it was this precise information that enabled Kuykendall to readily procure sales for defendant Share Corporation upon leaving the employment of plaintiff. We hold, therefore, that plaintiff did have a near-permanent relationship with its customers and that defendant Kuykendall acquired confidential information concerning plaintiff's customers that, but for his employment, he would not have acquired. Thus, under Illinois law, plaintiff has a legitimate business interest in need of protection. Accordingly, we reverse the Court of Appeals on this issue. Because the Court of Appeals decided that the 1983 contract was unenforceable on the basis that plaintiff failed to show it had a protectable business interest, it was not necessary for that court to determine whether the time and territory restrictions were reasonable. On appeal to this Court, defendants press their contentions that the time and territory restrictions were overly broad and thus unreasonable. In Illinois, in determining whether the time and territory restrictions are reasonable, the court must measure the effect, if any, these restrictions have on the general public, the extent of the hardship imposed thereby on the restricted party and whether they are necessary to protect a legitimate business interest of the former employer. The Instrumentalist Co. v. Band, Inc., 134 Ill.App.3d 884, 895, 89 Ill. Dec. 530, 538, 480 N.E.2d 1273, 1281. If the business of the former employer is highly competitive, i.e., there are other companies from which the public may purchase the merchandise, then the public will not be injured if the restrictions are enforced. McRand, Inc. v. Van Beelen, 138 Ill.App.3d 1045, 1057, 93 Ill.Dec. 471, 479-80, 486 N.E.2d 1306, 1314-15 (1985). A restriction prohibiting a former employee from soliciting customers of his former employer will be upheld if it is reasonably related to the employer's interest in protecting the customer relations that its employees developed as a direct result of the employment. Id. at 1057, 93 Ill.Dec. at 480, 486 N.E.2d at 1315. With respect to the reasonableness of the territorial restrictions, Illinois courts look to see if the restrictive territory is one in which the employer is doing business and the purpose of the restriction was to protect him from losing customers to a former employee who, by virtue of his employment, gained special knowledge and familiarity with the customer's requirements. The Instrumentalist Co. v. Band, Inc., 134 Ill.App.3d 884, 895, 89 Ill.Dec. 530, 538, 480 N.E.2d 1273, 1281. However, Illinois courts are hesitant in enforcing territorial restrictions that preclude former employees from servicing customers they never solicited or had contact with under their former employment. Id. Therefore, if the territorial restrictions merely preclude the former employee from soliciting customers he solicited or had contact with during the former employment, then there is no undue hardship on the employee, since he is not prohibited from practicing his trade. With regard to the time limitation, Illinois courts have held as reasonable time restrictions of two to three years when the employee has maintained personal contact with the customers. See The Instrumentalist Co. v. Band, Inc., 134 Ill.App.3d 884, 89 Ill.Dec. 530, 480 N.E.2d 1273; Donald McElroy, Inc. v. Delaney, 72 Ill.App.3d 285, 27 Ill.Dec. 892, 389 N.E.2d 1300 (1979). In the case sub judice, the 1983 agreement contains a territory-wide restriction that precludes Kuykendall from calling upon any actual or prospective United customers within the territory he was assigned at the time his employment with plaintiff was terminated. This restriction was to last a period of eighteen months from the time he terminated his employment with plaintiff. At the end of the trial, the trial court entered a permanent injunction enjoining defendant Kuykendall from working in the assigned territory he had at the time he terminated his employment with plaintiff. However, the time span of the permanent injunction was limited to nine months from the end of the trial because half of the eighteen-month period called for in the covenant had elapsed. On appeal to this Court, defendants contend that the time restriction of eighteen months was too long in light of plaintiff's established policy which allows its other sales representatives to solicit an exclusive customer if the assigned sales representative fails to make a sale to this customer within nine months. Concerning the territorial restriction, defendants contend it is over-broad since the evidence shows that Kuykendall serviced only 189 accounts in a territory with thousands of potential customers. We do not find persuasive defendants' argument that because plaintiff allows its other sales representatives to contact the exclusive customers of a sales representative who has failed to make a sale to these customers within nine months, that this makes the eighteen-month time restriction unreasonable. First, defendant Kuykendall willingly entered into this supplemental agreement with expectations of reaping the benefits of a profit-sharing pension fund. Second, defendants place Kuykendall on the same level as plaintiff's employees, a position he no longer enjoys. Defendants appear to argue that Kuykendall should have the same advantage as plaintiff's employees. However, this is the very benefit Kuykendall agreed to forego upon termination of his employment. We believe that the Illinois appellate courts would find the eighteen-month restriction to be reasonable. See The Instrumentalist Co. v. Band, 134 Ill.App.3d 884, 89 Ill.Dec. 530, 480 N.E.2d 1273 (two years held reasonable); Donald McElroy, Inc. v. Delaney, 72 Ill.App.3d 285, 27 Ill.Dec. 892, 389 N.E.2d 1300 (three years held reasonable). We hold that the time restriction of eighteen months was reasonable. Regarding whether the territorial restrictions are overbroad, the evidence shows that plaintiff was seeking to protect itself from losing customers to its former employee who, by virtue of his employment, had gained intimate knowledge concerning the requirements of plaintiff's customers whom he had serviced. Moreover, for a period of years Kuykendall was a sales manager for United, a position which enabled him to obtain intimate knowledge, not only of the business operations of plaintiff, but also knowledge concerning customers serviced by other sales representatives of United working in the same territory. Under these circumstances, the territory restrictions precluding Kuykendall from soliciting any customers in the territory he was assigned at the time of employment termination would be reasonable under Illinois law. Because we find the time and territory restrictions reasonable, and because plaintiff had a legitimate business interest protectable by the restrictive covenant, we hold that the 1983 agreement was enforceable. Because the evidence is manifest that defendant Kuykendall breached the 1983 agreement we hold that the trial court properly granted plaintiff's motion for directed verdict against defendant Kuykendall on this issue.