Legitimate Business Interest

Legitimate Business Interest for Enforcement of Non-Competition Agreements

Business people and companies that find themselves threatened with or actually in litigation to enforce post-employment non-competition agreements, and their close cousins, non-solicitation agreements, should make every possible effort to settle matters before litigation ensues or progresses.

Illinois law on the enforceability of post-employment restraints makes it extremely difficult if not impossible for a defendant to prevail on a motion to dismiss a case like this at an early stage in the case. It is almost impossible to prove at an early stage in a such a case that a post-employment restraint is categorically (per se) unreasonable as a matter of law. Applicable Illinois law says that resolving whether a post-employment restraint is reasonable and thus enforceable, depends on the specific facts and circumstances of each individual case, and the specific facts of any such case invariably must be developed in pre-trial discovery, which requires time and money.

Often the determination of reasonableness and enforceability turn on whether an employer has a “legitimate business interest” in enforcing a post-employment restraint on a former employee. One effective way to view the concept of legitimate business interest is in an extreme scenario that might presumably be viewed as per se unreasonable. However, that is not the approach Illinois courts take to determine a legitimate business interest.

Extreme Facts to Illustrate Legitimate Business Interest Analysis

Frequently, in litigation involving non-solicitation agreements or such clauses in broader non-competition agreements, a common defense if supported by these extreme facts will be that the agreement lacks any geographic limitations or any limitations on the customers to which it applies, and therefore, the defense as articulated will be that the agreement or clause is a per se unreasonable activity restraint. Suppose such a contractual provision arises in a case where a former employer is accused of having misappropriated a trade secret, where the stakes are high but the contractual clause appears to be extremely unreasonable as a restraint on trade.

And, indeed, Illinois courts do hesitate to enforce non-competition agreements that prohibit employees from soliciting or servicing not only customers with whom they had direct contact, but also customers they never solicited or had contact with while employed. While courts’ underlying concerns are generally whether a post-employment restrictive covenant is reasonable in geographic and temporal scope, the overriding concern is if the restraint is necessary to protect a legitimate business interest of the employer.

The Illinois Supreme Court’s test for reasonableness rejects any per se rules in favor of a totality-of-the-circumstances analysis and applies a three-pronged test (assuming the restrictive covenant is not simply a naked restraint on trade, i.e., it is ancillary to a valid employment relationship). The three prongs ask whether the restraint is:

1. No greater than required to protect a legitimate business interest of the employer. The extent of the employer’s legitimate business interest may be limited by type of activity, geographical area, and time. Other factors may, but need not be, the near-permanence of customer relationships, the employee’s acquisition of confidential information through his employment, and time and place restrictions – if any. No single factor carries any more weight than any other, but their respective importance depend on the specific facts and circumstances of the individual case.

2. Does or does not impose undue hardship on the employee; and

3. Injurious to the public.

Under this three-prong analysis to determine what is reasonable in this extreme situation, the lack of geographic limitations are relevant, but only if they are considerations that can impact the first of the three reasonableness factors: whether the employer has a “legitimate business interest” for instituting a given post-employment restriction.

No single factor is dispositive of whether a restrictive covenant is reasonable, because whether a legitimate business interest exists is based on the totality of the facts and circumstances of the individual case. Accordingly, an extreme restraint like a non-solicitation provision that lacks any geographical limitations or any limitations on the customers to which it applies, does not render it per se unreasonable.

The attorneys at Lubin Austermuehle have over thirty years of experience defending and prosecuting non-compete, trade secret and restrictive covenant lawsuits. We are committed to fighting for our clients’ rights in the courtroom and at the negotiating table. Conveniently located in Chicago and Elmhurst, Illinois, we have successfully litigated non-compete and trade secret and covenant not to compete cases for clients all over the Chicago area. To schedule a consultation with one of our skilled attorneys, you can contact us online or give us a call at 630-333-0333.