The New Year Is A Good Time To Review The Enforceability Of Restrictive Covenants

Arnstein & Lehr attorney Thadford A. Felton

Thadford A. Felton

The Second District Appellate Court in Illinois recently published an extensive opinion that summarized and provided the historical background of the state of Illinois law regarding the enforceability of restrictive covenants. While the decision did not make any new law in this area, the decision does provide a reminder that restrictive covenants are a restraint of trade that will only be enforced by courts if the restraint protects a legitimate business interest and is reasonable in both time and geographic scope.

There are two general situations in which courts will generally find a legitimate business interest to exist. The first is where the employer’s customer relationships are “near permanent” and, but for the employee’s association with the employer, the employee would not have had contact with the employer’s customers. The second situation is where the employee acquired trade secrets or other confidential information through his or her employment.

With regard to analyzing whether a customer relationship is near “permanent,” Illinois courts use the “Seven Factor Test” and/or the “Nature of the Business Test.” Under the “Seven Factor Test,” the court considers the following factors:

  1. The length of time required to develop the clientele;
  2. The amount of money invested to acquire clients;
  3. The degree of difficulty in acquiring clients;
  4. The extent of personal customer contact by the employee;
  5. The extent of the employer’s knowledge of its clients;
  6. The duration of the customer’s association with the employer; and
  7. The continuity of the employer-customer relationships.

Under the “Nature Of The Business Test,” the court looks at the type of industry the business is in. Where the nature of the business is typified by a highly competitive industry in which customers, through cross purchasing or competitive purchasing, satisfy their buying needs, and businesses rely heavily on their sales forces and utilize basic sales techniques such as cold calls to make sales and/or identify customers through telephone or professional directories or the internet, the customer relationships are generally found not to be “near permanent.” On the other hand, where the nature of the business is typified by long term customer relationships of several years, near exclusive customer relationships and/or by spending significant sums of money to identify, develop and maintain the customer relationship, the customer relationships will generally be found to be “near permanent.”

As courts look at restrictive covenants with greater scrutiny and continue to narrow the types of activities that can be restrained, employers need to take a more active role in protecting their customer relationships and other assets. The first step is to make sure that your restrictive covenants are narrowly tailored and enforceable. If you have not had your employment agreement reviewed in the last couple of years, you should do so. In addition, you should put into place safeguards to prevent unauthorized access and theft of your confidential information. As the courts look to what safeguards an employer had in place when evaluating whether information is really “confidential,” employers should contact their attorneys to have a confidential information/trade secret audit performed to insure that the employer is taking the necessary steps to protect and safeguard its customer relationships and other valuable assets.