Court Opinion

ID: 9861077
Source: CourtListenerOpinion
Date Created: 2023-09-24 23:40:30.602406+00
Date Added: 2024-06-11T11:27:10.162885
License: Public Domain

JUSTICE COOK, specially concurring: Plaintiff corporation was formed in August 1990 by Delich, Fisher, Schroedor, and Mahnke. Each of the four quit his employment with a competing corporation, Water Products, in order to form plaintiff. Delich had been general manager of Water Products; Fisher had been sales representative and one of Water Products’ top salesmen. The contacts with customers established by each of the four shareholders had been developed through his association with Water Products, not through any employment with plaintiff. Plaintiff allowed Mahnke to return to Water Products in August 1991. Fisher left his employment with plaintiff after only a year, in September 1991, and returned to work at Water Products in April 1992. The majority opinion states it must “determine whether the covenant not to compete contained in the shareholders’ agreement is more like a covenant ancillary to the sale of a business or a covenant contained in an employment contract.” (240 Ill. App. 3d at 957.) The majority opinion appropriately decides the covenant cannot be sustained as one ancillary to an employment contract, but goes on to conclude the covenant is therefore “more analogous to a covenant not to compete which is ancillary to the sale of a business.” (240 Ill. App. 3d at 958.) There is a third possibility, that the covenant is not ancillary to anything, and is therefore unenforceable as an unreasonable restraint on competition. Restatement (Second) of Contracts §187 (1981); Marathon Petroleum Co. v. Chronister Oil Co. (C.D. Ill. 1988), 687 F. Supp. 437 (sale of two gas stations did not justify covenant prohibiting seller from opening any other stations). As the majority states, with the sale of a business the interest to be protected is the value of the good will that is purchased; “[a] covenant ancillary to the sale of a business ensures the buyer that the former owner will not walk away from the sale -with the company’s customers and good will, leaving the buyer with an acquisition that turns out to be only chimerical.” (240 Ill. App. 3d at 957.) In this case it is difficult to view plaintiff corporation as purchasing any good will from defendant Fisher or from anyone else. If any right to a relationship with customers or good will existed here, it belonged to Water Products and was never transferred to plaintiff. Plaintiff will be injured if Fisher competes with it, just as Water Products was injured when Fisher and the others left, but mere avoidance of injury is not sufficient justification to enforce a covenant not to compete. All competition is more or less injurious to the participants, but public policy favors competition. The fact that Fisher is a very good salesman and any company losing him will be harmed does not justify enforcing a covenant not to compete in an employment agreement. There must be something in the nature of the business which engenders customer loyalty (Office Mates 5 North Shore, Inc. v. Hazen (1992), 234 Ill. App. 3d 557, 571, 599 N.E.2d 1072, 1082), and there was nothing like that in plaintiff’s business here. Instead of attempting to force this situation into the categories of (1) employment contract or (2) sale of business, we should take a broader view. The reason covenants not to compete are deemed valid only if ancillary to some other transaction is because such covenants will be sustained only where their benefits outweigh their harm. If no other transaction accompanies the covenant there is no benefit to be balanced. A naked covenant against competition is per se invalid. The Restatement recognizes that the two categories discussed in the Illinois cases are not exclusive. (Restatement (Second) of Contracts §188, Comment e, at 43-44 (1981).) The Restatement expressly mentions a third category, that of a promise by a partner not to compete with the partnership. (Restatement (Second) of Contracts §188(2)(c) (1981).) I would be willing to go further, and recognize that a transaction where individuals establish a business in which they will be employed is a sufficient ancillary transaction to support an enforceable covenant not to compete. The question may be asked: “where employees form a business, can they agree to exchange covenants not to compete, if the nature of the business would not otherwise justify a covenant?” I believe the answer is yes. Restrictive covenants are enforced in connection with the sale of a business even if the nature of the business does not engender customer loyalty, that is, even if the business has no confidential information, no near-permanent customers, and provides no special contacts with customers. (See Lee/O’Keefe, 163 Ill. App. 3d at 1004, 516 N.E.2d at 1318.) With the sale of a business, it is only necessary to show that the restriction is reasonable in time, area, and scope. (Hamer, 202 Ill. App. 3d at 1007, 560 N.E.2d at 915; Decker, Berta & Co., 225 Ill. App. 3d at 30, 587 N.E.2d at 75.) A similar view should be taken of partners or others who enter into the formation of a business. The legitimate expectations of the investors are entitled to consideration. They, as well as the purchasers of a business, are entitled to a transaction which is more than “chimerical.” Co-ownership of a business is a tighter bond than employment. It is troublesome that the parties could leave Water Products, where they developed their customer contacts in the first place, and then agree not to return with those contacts to Water Products. Still, whatever rights Water Products may have against other parties will apparently exist even after this decision and should not affect it. Although a court should consider the public interest in evaluating covenants not to compete, the private interests of Water Products do not rise to that level.