Opinion ID: 2439739
Heading Depth: 1
Heading Rank: 5

Heading: The Three Basic Components of Reasonableness

Text: ¶ 15 Two panels of our appellate court have questioned whether Illinois recognizes the legitimate business interest of the promisee as a requirement of an enforceable restrictive covenant. We now take the opportunity to correct this misconception. ¶ 16 This court long ago explained that a contract in total and general restraint of trade was undoubtedly void because it necessarily injures the public at large and the individual promisor. Such a contract deprives the public of the industry of the promisor, and deprives the promisor of the opportunity to pursue an occupation and thereby support his or her family. Hursen v. Gavin, 162 Ill. 377, 379-80, 44 N.E. 735 (1896). However, it is equally established that a restrictive covenant will be upheld if it contains a reasonable restraint and the agreement is supported by consideration. Storer v. Brock, 351 Ill. 643, 647, 184 N.E. 868 (1933) (collecting cases); accord 6 Richard A. Lord, Williston on Contracts § 13:1, at 7-11 (4th ed.2009); Restatement (Second) of Contracts § 186 & cmt. a (1981). ¶ 17 The modern, prevailing common-law standard of reasonableness for employee agreements not to compete applies a three-pronged test. BDO Seidman v. Hirshberg, 93 N.Y.2d 382, 690 N.Y.S.2d 854, 712 N.E.2d 1220, 1223 (1999). A restrictive covenant, assuming it is ancillary to a valid employment relationship, is reasonable only if the covenant: (1) is no greater than is required for the protection of a legitimate business interest of the employer-promisee; (2) does not impose undue hardship on the employee-promisor, and (3) is not injurious to the public. Id.; Restatement (Second) of Contracts § 187 cmt. b, § 188(1) & cmts. a, b, c (1981). [2] Further, the extent of the employer's legitimate business interest may be limited by type of activity, geographical area, and time. Restatement (Second) of Contracts § 188 cmt. d (1981). This court long ago established the three-dimensional rule of reason in Illinois and has repeatedly acknowledged the requirement of the promisee's legitimate business interest down to the present day. ¶ 18 In Hursen v. Gavin, 162 Ill. 377, 44 N.E. 735 (1896), after reciting the general principle that contracts in total and general restraint of trade are void as against public policy, this court stated: But a contract, which is only in partial restraint of trade, is valid, provided it is reasonable and has a consideration to support it. [Citations.] The restraint is reasonable, when it is such only as to afford a fair protection to the interests of the party, in whose favor it is imposed. If the restraint goes beyond such fair protection, it is oppressive to the other party and injurious to the interests of the public, and, consequently, void upon the ground of public policy.  (Emphasis added.) Id. at 380, 44 N.E. 735. This court held that the restrictive covenant was valid, explaining: One element of the value of the business transferred by appellant to appellee was the probability, that the customers of the former would continue to trade with the latter   .    The limitation here did not go beyond what was necessary for the protection of appellee in the prosecution of the business purchased by him, and was, therefore, reasonable. Id. at 382, 44 N.E. 735. In Hursen, as in a prior case, Linn v. Sigsbee, 67 Ill. 75 (1873), this court applied what came to be the Restatement's three-component test of reasonableness: given that the restrictive covenant was ancillary to the sale of the business, (1) the restraint was necessary to protect the legitimate interest of the promisee; (2) the restraint did not impose a hardship on the promisor or the public; and (3) the extent or scope of the restraint was otherwise reasonable. ¶ 19 In Bauer v. Sawyer, 8 Ill.2d 351, 134 N.E.2d 329 (1956), several physicians were members of a Kankakee medical partnership. The partnership agreement provided in pertinent part that if a member withdrew or terminated association with the partnership, that person would not practice medicine within a 25-mile radius of Kankakee for five years. Id. at 353-54, 134 N.E.2d 329. This court held that an injunction should issue against a physician who left the partnership. This court recited the general principles that were well established by that time: In determining whether a restraint is reasonable it is necessary to consider whether enforcement will [1] be injurious to the public or [2] cause undue hardship to the promisor, and [3] whether the restraint imposed is greater than is necessary to protect the promisee. [Citations.] Id. at 355, 134 N.E.2d 329. In addition, the time and territory limitations must be reasonable. Id. This court considered each of the three recognized elements of reasonableness. In so doing, the court carefully and specifically examined the interest of the partnership-promisee. The court agreed with the principle that members of a partnership have a legitimate business interest in protecting themselves against the competition of an outgoing partner, and that a restrictive covenant to that effect is not opposed to public policy. Id. at 356-57, 134 N.E.2d 329 (collecting authorities). ¶ 20 In House of Vision, Inc. v. Hiyane, 37 Ill.2d 32, 225 N.E.2d 21 (1967), an employer brought an action to enforce an employee's covenant not to compete. This court began its analysis of the restrictive covenant by discussing the employer's legitimate business interest:  Here the interest to be protected was the interest of the plaintiff in its customers.  (Emphasis added.) Id. at 37-38, 225 N.E.2d 21. Only after this court articulated the employer's legitimate business interest did it consider the reasonableness of the time and territory limitations, or the lack thereof. Id. at 38-39, 225 N.E.2d 21. ¶ 21 In Cockerill v. Wilson, 51 Ill.2d 179, 281 N.E.2d 648 (1972), the narrow issue presented was whether the time and territory limitations of the restrictive covenant were greater than necessary to protect the plaintiff. Id. at 183, 281 N.E.2d 648. This court began its analysis of the provision by reciting the three components of reasonableness: injury to the public; undue hardship on the promisor; and the need for the protection of the limitation by the promisee. This court recognized that the interest plaintiff sought to protect by the covenant was his interest in his clients. Id. at 184, 281 N.E.2d 648. ¶ 22 In Mohanty v. St. John Heart Clinic, S.C., 225 Ill.2d 52, 310 Ill.Dec. 274, 866 N.E.2d 85 (2006), plaintiff-physicians sought a declaratory judgment that the restrictive covenants in their employment agreements were void. Defendants, the employer-clinic and its owner, counterclaimed for declaratory, injunctive, and other relief. The circuit court concluded that the geographic restriction was reasonable, but that the activity restriction  the practice of medicine  was greater than necessary to protect the defendants' interests, which was cardiology. The appellate court reversed, concluding that the activity restriction, within the narrowly drawn geographic limits, would not cause undue hardship and was not greater than necessary to protect the defendants' interests. Id. at 61-62, 310 Ill.Dec. 274, 866 N.E.2d 85. ¶ 23 Before this court, plaintiffs contended, inter alia, that their restrictive covenants were unreasonably overbroad in their time and activity restrictions. Id. at 75, 310 Ill.Dec. 274, 866 N.E.2d 85. In upholding the restrictive covenants, this court expressly repeated the three established components of reasonableness: [T]his court has a long tradition of upholding covenants not to compete in employment contracts involving the performance of professional services when the limitations as to time and territory are not unreasonable. [Citations.] In determining whether a restraint is reasonable it is necessary to consider whether enforcement will be injurious to the public or cause undue hardship to the promisor, and whether the restraint imposed is greater than is necessary to protect the promisee. [Citation.] (Internal quotation marks omitted.) (Emphasis added.) Id. at 76, 310 Ill.Dec. 274, 866 N.E.2d 85. In upholding the restrictive covenant, this court stated:  Thus, we find that the restraint on the practice of medicine, here, was not greater than necessary to protect the defendants' interests. This is particularly so because the restriction on plaintiffs is in effect only within a narrowly circumscribed area of a large metropolitan area. (Emphasis added.) Id. at 77, 310 Ill.Dec. 274, 866 N.E.2d 85. ¶ 24 This discussion shows that this court, from as far back as Linn and Hursen, through cases such as Bauer and House of Vision, and down to the present day in Mohanty, has repeatedly recognized the three-dimensional rule of reason, specifically including the element of the legitimate business interest of the promisee. However, in Sunbelt Rentals, Inc. v. Ehlers, 394 Ill.App.3d 421, 333 Ill.Dec. 791, 915 N.E.2d 862 (2009), a panel of our appellate court concluded that the test of reasonableness of a restrictive covenant is something other than the prevalent three-prong inquiry long established by this court. ¶ 25 In Sunbelt, Ehlers was a sales representative for Sunbelt. He had entered into an employment agreement containing a restrictive covenant providing that he would not compete with Sunbelt within a 50-mile radius of any of Sunbelt's stores for one year after the date of the expiration or termination of his employment. Ehlers resigned from Sunbelt and, within the one-year restriction, accepted a position with one of Sunbelt's competitors. Sunbelt sued Ehlers and his new employer, seeking injunctive relief. Sunbelt, 394 Ill.App.3d at 423-25, 333 Ill.Dec. 791, 915 N.E.2d 862. ¶ 26 The circuit court enforced the restrictive covenant, finding that the time and territory limitations of the restrictive covenant were reasonable, but did not apply the legitimate business interest test as interpreted by the appellate court. Id. at 425, 333 Ill.Dec. 791, 915 N.E.2d 862. The appellate court briefly surveyed only some of the above-discussed cases from this court and concluded: Accordingly, because (1) the Supreme Court of Illinois has never embraced the `legitimate-business-interest' test and (2) its application is inconsistent with the supreme court's long history of analysis in restrictive covenant cases, we reject the `legitimate-business-interest' test. Id. at 431, 333 Ill.Dec. 791, 915 N.E.2d 862. The Sunbelt court prescribed that a court, when presented with the issue of whether a restrictive covenant should be enforced, should evaluate its reasonableness based only on its time and territory restrictions. Thus, this court need not engage in an additional discussion regarding the application of the `legitimate-business-interest' test because that test constitutes nothing more than a judicial gloss incorrectly applied to this area of law by the appellate court. Id. ¶ 27 In the present case, while the appellate court justices disagreed amongst themselves concerning the proper application of the legitimate business interest component of the rule of reason, each member of the panel rejected the conclusions of Sunbelt, 405 Ill.App.3d at 723, 346 Ill.Dec. 153, 940 N.E.2d 153; Id. at 749, 346 Ill.Dec. 153, 940 N.E.2d 153 (Hudson, J., specially concurring); Id. at 755, 346 Ill.Dec. 153, 940 N.E.2d 153 (O'Malley, J., dissenting). We do likewise. Sunbelt overlooked or misapprehended this court's above-discussed case law that established the three-prong inquiry into the reasonableness of restrictive covenants. Contrary to this authority, Sunbelt disallows inquiry into whether the employer has an interest other than suppression of ordinary competition. Id. at 723, 346 Ill.Dec. 153, 940 N.E.2d 153 (lead op.).  Sunbelt seems to say that the employer's legitimate interest is whatever the parties agree to in the contract. [Citation.] If the employer's legitimate interest is a matter of contract only, then the quoted language in the above supreme court cases would be superfluous. Id. at 733, 346 Ill.Dec. 153, 940 N.E.2d 153. ¶ 28 Specifically, the appellate court in Sunbelt misread this court's Mohanty decision in support of its erroneous conclusion. The appellate court discussed Mohanty and even quoted Mohanty 's recitation of the three-prong rule of reason. Sunbelt, 394 Ill.App.3d at 430, 333 Ill.Dec. 791, 915 N.E.2d 862 (quoting Mohanty, 225 Ill.2d at 76, 310 Ill.Dec. 274, 866 N.E.2d 85). However, the appellate court observed that the Mohanty court did not mention the employer's legitimate business interest in upholding that restrictive covenant. Therefore, the appellate court concluded that the legitimate business interest component of the three-prong rule of reason was no longer valid in Illinois, if it ever was. Sunbelt, 394 Ill.App.3d at 430-31, 333 Ill.Dec. 791, 915 N.E.2d 862. ¶ 29 We emphatically disagree. Even a cursory review of Mohanty refutes this reasoning. The plaintiff-physicians contended that the restrictive covenants were unreasonable only because their activity and temporal restrictions were overbroad. Mohanty, 225 Ill.2d at 64, 310 Ill.Dec. 274, 866 N.E.2d 85. They never challenged the defendant-employers' legitimate business interest, thereby conceding the point. Further, this court expressly recited the legitimate interest of the promisee as a component of the three-prong rule of reason. Indeed, Mohanty 's recognition of the legitimate business interest of the promisee was unanimous. The special concurrence observed that plaintiffs did not dispute that defendants had a clearly ascertainable right in need of protection. Id. at 80, 310 Ill.Dec. 274, 866 N.E.2d 85 (Karmeier, J., specially concurring, joined by Garman, J.). Even the dissent recognized the legitimate business interests that employers such as defendants wish to protect. Id. at 93, 310 Ill.Dec. 274, 866 N.E.2d 85 (Freeman, J., dissenting). Lastly, in upholding the restrictive covenant, this court stated:  Thus, we find that the restraint on the practice of medicine, here, was not greater than necessary to protect defendants' interests.  (Emphasis added.) Id. at 77, 310 Ill.Dec. 274, 866 N.E.2d 85 (majority op.). Sunbelt is hereby overruled. ¶ 30 Further, in Steam Sales Corp. v. Summers, 405 Ill.App.3d 442, 344 Ill. Dec. 692, 937 N.E.2d 715 (2010), the appellate court propagated Sunbelt 's error: As opposed to the legitimate-business-interest test, Sunbelt cites the two-prong reasonableness test appearing in Mohanty, the most recent supreme court case addressing restrictive covenants. Id. at 457, 344 Ill.Dec. 692, 937 N.E.2d 715. The court in Steam Sales goes on to discuss  Mohanty 's reasonableness test versus the legitimate-business-interest test. Id. To the extent that Steam Sales characterizes Mohanty as deviating from the above-described general three-prong rule of reason, Steam Sales is hereby overruled. Based on this court's extensive precedent, we continue to recognize the legitimate business interest of the promisee as a long-established component in the three-prong rule of reason.