Opinion ID: 2439739
Heading Depth: 1
Heading Rank: 6

Heading: Application of Employer's Legitimate Business Interest

Text: ¶ 32 Before this court, Reliable contends that the lower courts misapplied the legitimate business interest of the promisee, as a component of the three-prong rule of reason, in assessing the enforceability of the noncompetition agreement. The separate appellate court opinions in the present case debated two approaches to applying this component. We assess these analytical schemes. ¶ 33 Certainly, the prevalent three-prong inquiry fleshes out the legal standard [of reasonableness] a bit. Consultants & Designers, Inc. v. Butler Service Group, Inc., 720 F.2d 1553, 1557 (11th Cir.1983). However, the three-prong test of reasonableness remains unstructured. Reddy v. Community Health Foundation of Man, 171 W.Va. 368, 298 S.E.2d 906, 911 (1982). Notably, [p]recedents are of less than usual value because the question of reasonableness must be decided on an ad hoc basis. There is no inflexible formula. (Internal quotation marks omitted.) Consultants & Designers, Inc., 720 F.2d at 1557; accord Ferrofluidics Corp. v. Advanced Vacuum Components, Inc., 968 F.2d 1463, 1470 (1st Cir.1992) (collecting authorities); Restatement (Second) of Contracts § 188 cmt. a, at 42 (1981) (No mathematical formula can be offered for this process). ¶ 34 Under some circumstances, a promise to refrain from competition is a natural and reasonable means of protecting a legitimate interest of the promisee. Restatement (Second) of Contracts § 188 cmt. b (1981). In the case of a postemployment restraint, where the employer-promisee exacts from the employee a promise not to compete after termination of the employment, the restraint is usually justified on the ground that the employer has a legitimate business interest in restraining the employee from appropriating the employer's (1) confidential trade information, or (2) customer relationships. Included within these precepts are several factors for a court to consider. Id. cmts. b, g; accord Harlan M. Blake, Employee Agreements Not to Compete, 73 Harv. L.Rev. 625, 651-74 (1960). ¶ 35 Beyond this recognized description of the legitimate business interest of the employer, some courts have endeavored to further explain what must be considered. 15 Grace McLane Giesel, Corbin on Contracts § 80.6, at 70 (rev. ed.2003). Such attempts usually collapse into lists of factors. See, e.g., Chambers-Dobson, Inc. v. Squier, 238 Neb. 748, 472 N.W.2d 391, 400 (1991) (and cases cited therein); Arthur Murray Dance Studios of Cleveland, Inc. v. Witter, 105 N.E.2d 685, 694-99 (Ohio C.P.1952) (listing factors). Further, compilers of such lists repeat there is no exact formula required in a court's analysis. The factors or considerations to be used in that balancing test are not weighted; that is, there is no prescribed method by which more or less weight is assigned to each factor to be considered in the balancing test   . Chambers-Dobson, 472 N.W.2d at 400. Also, compilers of such lists repeat that the factors therein are not exclusive. Arthur Murray, 105 N.E.2d at 695. ¶ 36 However, our appellate court did develop a formula for assessing the legitimate business interest of the promisee. Further, some of the factors considered in this formula were highly weighted, if not conclusive. In Nationwide Advertising Service, Inc. v. Kolar, 28 Ill.App.3d 671, 329 N.E.2d 300 (1975), plaintiff advertising agency sought to enforce a restrictive covenant against its former employee and appealed the denial of enforcement. Plaintiff contended that under Illinois law an employer such as it had a legitimate business interest in its customers which was subject to protection through enforcement of an employee's covenant not to compete. Id. at 673, 329 N.E.2d 300. ¶ 37 In summarizing the principles on which the court based its earlier analysis in the same case ( Nationwide Advertising Service, Inc. v. Kolar, 14 Ill.App.3d 522, 302 N.E.2d 734 (1973)), the Kolar court wrote as follows: [A]n employer's business interest in customers is not always subject to protection through enforcement of an employee's covenant not to compete. Such interest is deemed proprietary and protectable only if certain factors are shown. A covenant not to compete will be enforced if [1] the employee acquired confidential information through his employment and subsequently attempted to use it for his own benefit. [Citation.] An employer's interest in its customers also is deemed proprietary if, [2] by the nature of the business, the customer relationship is near-permanent and but for his association with plaintiff, defendant would never have had contact with the clients in question. ( Cockerill v. Wilson (1972), 51 Ill.2d 179 [281 N.E.2d 648]; Canfield v. Spear (1969), 44 Ill.2d 49 [254 N.E.2d 433].) Conversely, a protectable interest in customers is not recognized where the customer list is not secret ( House of Vision, Inc. v. Hiyane (1967), 37 Ill.2d 32 [225 N.E.2d 21]), or where the customer relationship is short-term and no specialized knowledge or trade secrets are involved. Kolar, 28 Ill.App.3d at 673, 329 N.E.2d 300. Although the Kolar court cited this court's decisions in Cockerill, House of Vision, and Canfield as authority for this formulation of a legitimate business interest test, none of those cases used that test in their respective analyses. Rather, each decision was based on the totality of its own facts. ¶ 38 During the 36 years subsequent to Kolar, our appellate court has variously set forth this test as the sine qua non for the enforcement of a covenant not to compete. See, e.g., Hanchett Paper Co. v. Melchiorre, 341 Ill.App.3d 345, 351, 275 Ill.Dec. 164, 792 N.E.2d 395 (2003); Dam, Snell & Taveirne, Ltd. v. Verchota, 324 Ill.App.3d 146, 151-52, 257 Ill.Dec. 806, 754 N.E.2d 464 (2001); Carter-Shields v. Alton Health Institute, 317 Ill.App.3d 260, 268, 250 Ill.Dec. 806, 739 N.E.2d 569 (2000); Springfield Rare Coin Galleries, Inc. v. Mileham, 250 Ill.App.3d 922, 929-30, 189 Ill.Dec. 511, 620 N.E.2d 479 (1993); A.B. Dick Co. v. American Pro-Tech, 159 Ill.App.3d 786, 792-93, 112 Ill.Dec. 649, 514 N.E.2d 45 (1987); Reinhardt Printing Co. v. Feld, 142 Ill.App.3d 9, 15-16, 96 Ill.Dec. 97, 490 N.E.2d 1302 (1986); see also Outsource International, Inc. v. Barton, 192 F.3d 662, 666 (7th Cir.1999) (applying Illinois law); Curtis 1000, Inc. v. Suess, 24 F.3d 941, 947 (7th Cir.1994) (But Illinois, unlike Delaware, limits the interests that a covenant not to compete may protect to trade secrets, confidential information, and relations with `near-permanent' customers of the employer). Even further, and exemplary of this erroneous proliferation of templates, our appellate court has developed two alternative tests to determine its near-permanence prong of its conclusive two-prong test for a promisee's legitimate business interest. Some courts analyze the near-permanent relationship according to seven objective factors. See, e.g., Hanchett Paper, 341 Ill.App.3d at 352, 275 Ill.Dec. 164, 792 N.E.2d 395 (quoting Audio Properties, Inc. v. Kovach, 275 Ill.App.3d 145, 148-49, 211 Ill.Dec. 651, 655 N.E.2d 1034 (1995)); Office Mates 5, North Shore, Inc. v. Hazen, 234 Ill.App.3d 557, 572-73, 175 Ill.Dec. 58, 599 N.E.2d 1072 (1992). In contrast, other courts follow a nature of the business test. See, e.g., Lawrence & Allen, Inc. v. Cambridge Human Resource Group, Inc., 292 Ill.App.3d 131, 142, 226 Ill.Dec. 331, 685 N.E.2d 434 (1997) (collecting cases). ¶ 39 In the present case, the lead opinion in the appellate court applied these tests in upholding the circuit court's ruling that the noncompetition restrictive covenant was unenforceable. 405 Ill.App.3d at 743-48, 346 Ill.Dec. 153, 940 N.E.2d 153. The specially concurring justice agreed with the circuit court's result, but based on the totality of the circumstances presented in the record. He stated: Analyzing such covenants with reference to the totality of the circumstances to determine if an employer has a protectable interest, as opposed to utilizing the typical rigid version of the legitimate-business-interest test, will lead to results more grounded in the true considerations of a given case. Id. at 751, 346 Ill.Dec. 153, 940 N.E.2d 153 (Hudson, J., specially concurring). [3] We agree. ¶ 40 To the extent the appellate court's tests are conclusive, they are plainly contrary to the above-described general principles pertaining to the promisee's legitimate business interest based on the totality of the circumstances of the particular case. The understandable temptation is to view exemplary facts presented in particular cases as the outermost boundary of the inquiry. Thus, precedent is set to guide future cases. However, if it were possible to make a complete list today, human ingenuity would render the list obsolete tomorrow. Arthur Murray, 105 N.E.2d at 695. ¶ 41 Parties have long turned to the common law to argue for or against the enforceability of noncompetition agreements. There is, therefore, an especially well-developed and significant body of judicial decisions applying the general rule of reason    to such promises. Restatement (Second) of Contracts § 187 cmt. a (1981). The common law, based on reason and experience, has recognized several factors and subfactors within the component of the promisee's legitimate business interest. ¶ 42 However, we hold that such factors are only nonconclusive aids in determining the promisee's legitimate business interest, which in turn is but one component in the three-prong rule of reason, grounded in the totality of the circumstances. Each case must be determined on its own particular facts. [Citations.] Reasonableness is gauged not just by some but by all of the circumstances. [Citations.] The same identical contract and restraint may be reasonable and valid under one set of circumstances, and unreasonable and invalid under another set of circumstances. (Emphasis in original.) Arthur Murray, 105 N.E.2d at 692-93. Accord Restatement (Second) of Contracts § 186 cmt. a, § 188 cmt. g. We expressly observe that appellate court precedent for the past three decades remains intact, but only as nonconclusive examples of applying the promisee's legitimate business interest, as a component of the three-prong rule of reason, and not as establishing inflexible rules beyond the general and established three-prong rule of reason. ¶ 43 In sum, the legitimate business interest test is still a viable test to be employed as part of the three-prong rule of reason to determine the enforceability of a restrictive covenant not to compete. However, the two-factor test created in Kolar, in which a near-permanent customer relationship and the employee's acquisition of confidential information through his employment are determinative, is no longer valid. Rather, we adopt the position of Justice Hudson's special concurrence, which is: whether a legitimate business interest exists is based on the totality of the facts and circumstances of the individual case. Factors to be considered in this analysis include, but are not limited to, the near-permanence of customer relationships, the employee's acquisition of confidential information through his employment, and time and place restrictions. No factor carries any more weight than any other, but rather its importance will depend on the specific facts and circumstances of the individual case.