March 18, 2010

The November and December 2009 issues of the Litigation & Counseling Alert addressed the enforceability of non-compete and non-solicitation agreements and the potential impact of the late 2009 decision in Sunbelt Rentals, Inc. v. Ehlers. Discarding three decades of precedent, a Fourth District Illinois appellate court did away with the "legitimate business interest test" in which Illinois employers seeking to enforce a non-compete or non-solicitation agreement first had to establish that the agreement was necessary to protect either confidential information or a near permanent customer relationship. If accepted by other districts or the Illinois Supreme Court, Sunbelt has the potential to make Illinois one of the easiest states in which to enforce these kinds of agreements. Moreover, without a "legitimate business interest test," an employer could, in theory, bind even low-level employees as long as the time and territory restrictions are reasonable.

Although no one knows yet if Sunbelt is an anomaly or an omen, we thought it was time to offer a snapshot of the decision's impact over the past several months. So far, the Illinois courts have not dealt with many non-compete cases and as a result, in the enduring words of William Shakespeare, Sunbelt has so far been "much ado about nothing."

Northern District of Illinois Explicitly Rejects Sunbelt

A few months after Sunbelt was decided, the Northern District of Illinois expressly rejected the decision. Applying Illinois law in Aspen Marketing Services, Inc. v. Russell, U.S. District Court Judge Robert W. Gettleman applied the "legitimate business interest test" in determining that a non-compete agreement was enforceable. While he acknowledged in a footnote that the Sunbelt decision had done away with the "legitimate business interest test," he also found that the Fourth District was simply wrong. According to Judge Gettleman, the Illinois Supreme Court, the Seventh Circuit, and the Northern District of Illinois never rejected the application of the "legitimate business interest test." Although the Aspen Marketing Systems case represents only one decision, such a holding by a respected federal judge is significant and may be a precursor of things to come.

First District Illinois Appellate Court Ignores Sunbelt

In February 2010, an Illinois appellate court had the opportunity to address the Sunbelt decision, even though the exact point was not at issue. In Citadel Investment Group, LLC v. Teza Technologies LLC, the trial court acknowledged that a non-compete included language indicating that the employer had a "legitimate business interest" in the agreement. At issue on appeal was whether the trial court had the right to extend preliminary relief past the restricted period outlined in the contract (a topic for our April 2010 Labor & Employment Client Alert). Either the appellant or the court could have raised a Sunbelt enforceability issue, but both instead chose to ignore the case altogether.

Bottom Line

Despite the possible ramifications of Sunbelt, many thought that the Illinois Supreme Court would step in to clarify the law or that other appellate cases would render Sunbelt an anomaly. Six months later, we still do not know for sure what its impact will be. Because the parties settled, the Illinois Supreme Court never had the chance to review Sunbelt. Furthermore, only a couple of cases have been decided since then that even address the topic. But if those decisions are any indication, it appears that Sunbelt is not causing a sun storm in the non-compete area and may instead be slowly fading into the sunset. Only time will tell.

Much Shelist will continue to monitor the impact of the Sunbelt decision and bring new developments to your attention as they occur.

This article contains material of general interest and should not be construed as legal advice or a legal opinion on any specific facts or circumstances. Under applicable rules of professional conduct, this content may be regarded as attorney advertising.