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Reliable Fire Re-establishes the Three Prong Test of Reasonableness for Non-Competes

Dec 8, 2011 | jonadmin | bLAWg | No Comments

A Brief Explanation of Reliable Fire Equipment Co. v. Arnold Arredondo, 2011 IL 111871 (2011).

For years, there have been different standards for the enforceability of non-compete clauses put forth by various appellate courts in Illinois.  The recent Illinois Supreme Court opinion in Reliable Fire cleared up these murky waters, but in doing so, made it clear that the totality of the circumstances based upon very fact specific analysis on a case by case basis.  In short, we now have a test, but the test gives little specific guidance.

 Facts

Reliable Fire’s facts weren’t that much different from most non-compete clause cases.  Two employees sign non-compete clauses during employment and one-year after for the area of Illinois, Indiana, and Wisconsin.  Employees start a competing business, are fired, and sued.  Whoosh, here they are at the Supreme Court of Illinois and an opinion issued.

Before Reliable Fire

Many accepted that so long as a restrictive covenant was ancilliary to an employment relationship, it would be held as reasonable and enforceable if it (1) is no greater than needed to protect the legitimate business interest of the business, (2) doesn’t impose undue hardship on the employee, and (3) doesn’t injure the public.  This is the so-called three prong test, but is really 4 pronged, as it assumes ancilliarity.

However, in Sunbelt Rentals, Inc. v. Ehlers, 394 Ill. App. 3d 421 (2009) an the court concluded that reasonableness was not tested by the three prong test.  Of course, this led to a great deal of confusion as to what the actual test was.  Sunbelt misread the previous law which the Supreme Court, in the Reliable Fire case, “emphatically disagree[d] with,” stating that “[e]ven a cursory review [of the case cited in the Sunbelt opinion] refutes this reasoning.” The Supreme Court in discussing the erroneous opinion points out that error was propagated further by Steam Sales Corp. v. Summers, 405 Ill. App. 3d 442 (2010).

Reliable Fire Brings Us Back

Reliable Fire emphatically proclaimed that the three prong test was the test to use in restrictive covenant matters.  In addition, all the factors that had been created over time, and disseminated by appellate court opinions, including but not limited to

Acquiring of confidential information;

Nature of the business; and

Customer-relationship permanency,

were held contrary to the test “to the extent [they] are conclusive,” to the . . . general principles pertaining to . . . the totality of the circumstances of a particular case.  Why bring this up?  Because factors are okay, but they are not conclusive, none have more weight than others, and in the end, the Court held “that such factors are only nonconclusive aids in determining the promisee’s legitimate business interest, which in turn is but one component of the three prong rule of reason, grounded in the totality of the circumstances.”  In short, feel free to consider them, but they don’t mean jack in the end.

Reliable screams, use the three-prong test and don’t get hung up on factors, because it is all about the totality of the circumstances.

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