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High Court's Decision Modifies Non-Compete Rules

Attorney James M. Witz said a decision this month by the Illinois Supreme Court regarding noncompete clauses in employee contracts makes litigation more likely — and more unpredictable.

"This ruling left the law in a somewhat wide open area," said Witz, head of the non-competition and trade secrets practice at Freeborn & Peters LLP. "It's like the Wild West ... ."

Some lawyers agreed that the decision creates uncertainty around the enforceability of noncompete clauses because it strips the court of established guidelines in favor of a standard that looks at "the totality of circumstances" in each case. That standard might cause more litigation while lower courts decide what it exactly means.

On Dec. 1, the Illinois Supreme Court reversed a 4th District Appellate decision involving noncompete clauses, which keep employees from working for a competitor, in a case called Reliable Fire Equipment Company v. Arnold Arredondo.

The appellate court ruling bucked a long-standing rule that made employers show a "legitimate business interest" in order to enforce a noncompete clause.

"If that case had become law in Illinois it would have given employers a much better chance to enforce their noncompete agreements," Witz said.

Prior to the Reliable Fire ruling, courts established only two legitimate business interests that allowed a company to enforce a noncompete clause: Protecting confidential information or protecting near-permanent relationships with business partners.

The Supreme Court ruled that a legitimate business interest must be shown to enforce a noncompete clause, but that protecting confidential information or near-permanent business relationships do not make up the entire list of what can be considered a legitimate business interest.

Rather, courts will now need to weigh a variety of factors that "include, but are not limited to, near-permanence of customer relationships, the employee's acquisition of confidential information through his employment and time and place restrictions," the high court said.

In addition, the Supreme Court said a noncompete can be ruled enforceable if it "does not impose undue hardship on the employee, and is not injurious to the public."

Eric J. Dorkin, a senior attorney in the litigation practice at Clark, Hill PLC, said the "totality of circumstances" standard makes the judge in a noncompete case even more important than before.

"I think it's going to bring in more room for a judge's discretion than ever before," Dorkin said. "The Supreme Court doesn't even make an attempt to tell you what the other factors (that create a legitimate business interest) might be. In that regard there's very little guidance."

Witz agreed that trial courts now receive more discretion in ruling on these cases, noting that it seemed ironic because the different interpretations of the standards led the Supreme Court to get involved in the first place.

Dorkin said because trial courts will rule on the facts of the case, the possibility of an appeal might become more rare.

"I think appellate review is almost impossible now," Dorkin said. "What's an appellate court going to review? It's not going to have any prior precedent as to what should be weighed as more important."

He also said this Supreme Court decision might open the door for employees to succeed more often in arguing that a noncompete clause hinders their ability to make a living.

Beau T. Greiman, a partner who represents companies and employees in noncompete cases at Greiman, Rome & Griesmeyer LLC, said this new situation will make it harder for employees to win these cases.

“The person who has a really tough time is the employee ... (who) has to bankroll their own litigation,” Greiman said. “If you tell that person that we need to look at the totality of the circumstances, he doesn't have the kind of money to do that type of litigation. He needs bright lines.”

Greiman said, unlike in the past, companies hiring a new employee now seem less willing to pay for that employee to get out of a non-compete clause.

“In 2008 for the first time with the economy going sour, I saw a couple of instances where employers walked away from a new employee,” he said. “That had been unthinkable.”

Eric H. Rumbaugh, a labor and employment partner at Michael, Best & Friedrich LLP, said the ruling makes Illinois law more in line with other states and will limit litigation by getting rid of nuances in Illinois' laws.

Rumbaugh said other states take a more generous approach to acknowledging the presence of a legitimate business interest.

"This gets Illinois into the mainstream," Rumbaugh said. "Illinois had a distinction that created litigation and was unnecessary. I think medium term this will result in less litigation, and the reason for that is because it will be more predictable."

Unlike Illinois, Rumbaugh said, other states acknowledge "good will" between a client and a company as a legitimate business interest.

Good will is a less strict measure of the relationship with a client than the near permanent relationship necessary to enforce a noncompete in prior Illinois law, Rumbaugh said.

"Your business owns all of your good will" and has the right to stop an ex-employee from capitalizing on it for a certain amount of time, Rumbaugh said.

Acknowledging good will as a legitimate business interest will extend the enforceability of noncompetes in Illinois, Rumbaugh said.

That will help companies that do a lot of one-time business with clients, he said.

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