Fourth District Discredits 30-Year 'Legitimate-Business-Interest' Test and Ignores Own Ruling for Restrictive Covenants

By George Bellas; Bellas & Wachowski, Chicago

Creating a district split, the Illinois Fourth District Appellate Court, in an opinion authored by Justice Steigmann, disregarded its own precedent and declared the “legitimate-business-interest” test “no longer valid, if it ever was.” Sunbelt Rentals, Inc. v. Ehlers, No. 4-09-0290, 2009 WL 3052369 (Ill.App. 9/23/2009) (“Ehlers”).

The “legitimate-business-interest” test requires an employer seeking to enforce a covenant not to compete to show that the employee’s association with clients created an interest in protecting either client confidences or “near-permanent” client relationships. Acknowledging the three-decade jurisprudence utilizing the test in “all the districts of the Illinois Appellate Court, including this one,” the Ehlers court nevertheless decreed the test invalid on grounds that the Illinois Supreme Court has never adopted the test and that the test is at odds with recent Illinois Supreme Court decisions on covenants not to compete.

Remarkably, the opinion cites in support a seminal 1972 Supreme Court ruling that essentially relied on the test. After citing the rule under the doctrine of stare decisis that a trial court must follow binding precedence from its own appellate court, the Ehlers court affirmed the trial court for failing to do just that.

Now businesses seeking to enforce covenants not to compete against former employees can argue that the permanence of the relationships they seek to protect, as well as confidences shared with the employees, are irrelevant so long as the time-and-territory scope of the covenant is reasonable.

Background of the Case

In May of 2003, Ehlers accepted a sales position with Sunbelt Rentals, Inc. (“Sunbelt”), a corporation engaged in the business of equipment rental and sales nationwide, including Bloomington and Champaign. Ehlers’ duties entailed developing and maintaining a customer base of agricultural, construction and industrial clients, and all the support functions of such relationships, including rental, sales, negotiations, scheduling, delivery, and billing. In June 2003, Ehlers entered into a written employment agreement with Sunbelt containing restrictive covenants.

These covenants forbade Ehlers from providing services and products similar to Sunbelt’s or soliciting provision of same to anyone within the “territory” who purchased or leased Sunbelt products or services in the 12-month period prior to Ehlers’ departure from Sunbelt and for or with whom Ehlers had “contact, responsibility[,] or access to [c] onfidential [i]nformation related to such person or entity[. ]” Under the agreement the “territory” was defined as within a 50-mile radius of any Sunbelt store or office Ehlers worked or performed at or was responsible for performing services at in the preceding 12-month period. In the event of a breach or threatened breach by Ehlers, the covenants provided, in addition to other rights and remedies, injunctive relief for Sunbelt. In January of 2009, Ehlers responded to an advertisement from Midwest Aerials & Equipment, Inc. (“Midwest”), an outfit that rents and sells aerial work platforms to the industrial and construction sector. Shortly afterward, Ehlers went to work for Midwest as a sales rep in its Bloomington office. On January 16, 2009, Ehlers resigned from Sunbelt in writing and Sunbelt accepted.

On January 20, 2009, Sunbelt determined Ehlers was working for Midwest and sent a cease-and-desist letter through counsel to Ehlers for violating his covenants with Sunbelt and also wrote to Midwest, which Sunbelt considered a direct competitor. Shortly after this, a Sunbelt branch manager saw Ehlers delivering industrial equipment on Midwest’s behalf to a Sunbelt client.

Sunbelt brought claims for preliminary and permanent injunctive relief as well as a temporary restraining order (“TRO”) under 735 ILCS 5/11-101, seeking to enjoin Ehlers from violating the restrictive covenants and to enjoin Midwest from tortiously interfering with Sunbelt’s employment agreement with Ehlers.

The Trial Court’s Ruling

The trial court had consent from the parties to treat Sunbelt’s motion for a TRO as a motion for a preliminary injunction. Relying on the Illinois Supreme Court’s decision in Mohanty v. St. John Heart Clinic, S.C., 225 Ill.2d 52 (Ill. 2006), the trial court found the time-and-territory terms of the restrictive covenants were reasonable, and enjoined Ehlers and Midwest from violating the Sunbelt covenants. The court acknowledged the “legitimate-business-interest” test under the Fourth District’s Springfield Rare Coin Galleries, Inc. v. Mileham, 250 Ill.App.3d 922, 929-30 (4th Dist. 1993). However, it declined to apply that test because it concluded that the test had been subsumed by the time-and-territory reasonableness test recently employed in Mohanty.

The Fourth District’s Analysis

Defendants Ehlers and Midwest argued on appeal that the trial court committed an abuse of discretion in granting the preliminary injunction because (1) the court failed to follow binding precedent and (2) Sunbelt did not demonstrate a legitimate business interest warranting the issuance of a preliminary injunction.

In an unusual move, the Ehlers court, rather than taking up the first issue first, which would likely have rendered the analysis of the second issue moot, withheld judgment on the first issue until it had established that the legitimate-business-interest test was invalid, and then decreed the first issue moot.

The Court did this despite its admission in the opening sentence of the very brief space allotted to the first issue that “a trial court is not free to ignore binding precedent from the appellate court in its own district[,]” as established by the Illinois Supreme Court in In re A.A., 181 Ill.2d 32, 36 (Ill. 1998). Instead, the Fourth District court affirmed the trial court’s dismissal of binding Fourth District precedence, holding that the trial court did not commit an abuse of discretion in issuing the preliminary injunction because “[t]he ‘Legitimate-Business-Interest’ Test Is No Longer Valid, If It Ever Was.”

The linchpin of the Ehlers court’s ruling was the supposed absence of any articulated adoption of the legitimate-business-interest test by the Illinois Supreme Court in any of its rulings. In particular the court focused on Mohanty, the most recent Supreme Court ruling on restrictive covenants. There, the Supreme Court expressed only the criteria of time-and-territory reasonableness subject to concerns of injury to the public or undue hardship to the promisor as controlling on the enforceability of covenants not to compete. Thus, the Supreme Court determined that a covenant restraining cardiologists from practicing medicine for three years within a five-mile radius of their former office was not unreasonable, and the Court rendered this opinion without mention of the legitimate-business-interest test.

The Ehlers court’s appraisal of the test’s “flawed” judicial pedigree rests on its conclusion that the First District case which first employed the test, Nationwide Advertising Service, Inc. v. Kolar, 28 Ill.App.3d 671, 673 (1st Dist. 1975), “cited the supreme court’s decisions in Cockerill and Canfield as authority for the ‘legitimate-business interest’ test, [when] neither of those cases used that test in the restrictive-covenant analyses they contained.”

The court was wrong. In Cockerill v. Wilson, 51 Ill.2d 179 (Ill. 1972), it was necessary for the Supreme Court to reverse because the appellate court wrongly construed the covenant to allow the practice of veterinary medicine within the 20-mile territory if done by way of a facility outside the territory. As its rationale for why the appellate court’s construction of the covenant must be overturned, the Cockerill court said:

In considering this issue we must consider that the interest plaintiff sought to protect by the covenant was his interest in his clients. House of Vision, Inc. v. Hiyane (1967), 37 Ill.2d 32, 225 N.E.2d 21). In bringing the defendant into the association plaintiff was thereby bringing him in contact with a clientele which plaintiff had established over a period of years. Plaintiff was naturally interested in protecting his clients from being taken over by defendant as a result of these contacts. The protection of this asset is recognized as a legitimate interest of an employer. See Annot., 43 A.L.R.2d 94, at 117. [. . .] the appellate court’s construction [. . .] would not afford the plaintiff the protection of his interest in his clients which he sought through the use of the restrictive covenant[.] (Emphasis added).

This was the Supreme Court’s entire rationale for overturning the appellate court’s ruling that modified the trial court’s order granting the injunction and enjoining the defendant from practicing veterinary medicine in violation of his agreement. The court’s statement above makes it clear that the plaintiff had an interest in protecting the exclusive relationship he had built up with his clients “over a period of years” (read: “nearpermanent”), which would not have been needed “but for” the plaintiff’s “bringing the defendant into the association.”

By modifying the trial court order to allow the defendant to practice within the 20-mile radius so long as the office was beyond that territory, the appellate court vitiated the protection of the plaintiff ’s legitimate business interests for which the covenant was drafted.

Therefore, incredibly, not only is the Ehlers court’s assertion that the doctrine “never was” valid erroneous, so is its chief rationale that the Supreme Court has never adopted the test.

As of this writing, no petition for leave to appeal to the Illinois Supreme Court has been filed in Ehlers.

The original appeared in the Illinois State Bar Association publication Trial Briefs, the newsletter of the Illinois State Bar Association’s Section of Civil Practice and Procedure, January, 2010, Vol. 55, No. 4 and is reprinted with permission of the Illinois State Bar Association.